UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K

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Quepasa Corporation

(Exact (Exact name of registrant as specified in its charter)

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224 Datura Street, Suite 1100

West Palm Beach, Florida 33401

(Address of Principal Executive Office) (Zip Code)

(561) 491-4181

(Registrant’s telephone number, including area code)

N/A

(Former name or former address, if changed since last report)

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i

QUEPASA CORPORATION

INDEX

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PART I

Item 1.

Business

The Company

Quepasa Corporation (“Quepasa” or the “Company”), through its website Quepasa.com, is one of the fastest growing online social communities for young Hispanics.  Quepasa.com provides users with access to an expansive, bilingualmultilingual menu of resources that promote social interaction, information sharing, and other topics of importance to Hispanic users and is dedicated to empowering young Hispanics with the most entertaining online social community.  Quepasa.com is available in Spanish, and English and more recently, in Portuguese to meet the needs of the large population of Brazil. We launched our Brazilian website in late March 2009.Portuguese.

The Company focuses on expanding ourits community of members and is committed to providing a fun, easy-to-use website to enable Hispanics to share their interest, ideas and activities to help them embrace their heritage.  Anyone can join the Quepasa community for free by signing up on our websitewww.Quepasa.com.  Once signed up, a membermembers can create a member profile page and personalize their page with a variety of background designs, photos, slideshows and musical selectionsvideos that allow members to creatively express themselves.  Members can easily upload photos, create slide shows and upload multimedia videos to their member pages.  Whenever in this Report we refer to Hispanics, we also include the large Portuguese speaking population of Brazil unless otherwise clear from the context.

Members may generate interactive community pages, or communities, to create customized pages to share news, pictures, upload videos, create blogs and receive update emails withfrom other Quepasa members. Communities are a central focus for Quepasa.  Over 3,0009,000 communities have been created over the past year and have contributed to Quepasa’s traffic growth.  Additionally, Quepasa believes that building interactive communities will help create an authentic Hispanic experience and help drive traffic to the website, such as:

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the Latinas IllustratedSirena community which featured an internationala Brazilian swimsuit contest in which 12 Latinaswomen were selected to appear in the 2009 Latinas IllustratedSirena’s 2010 Swimsuit Calendar;

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the Dr. Robert Rey health and beauty community which featured the prominent Beverly Hills plastic surgeon providing members unprecedented access to his expert advice on health, beauty and fitness; and

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the Playboy Mexico community – in 2009, we recently launched a model search to find the 2009 Playboy Mexico playmateCyber Girls of the year and provide membersMonth for Playboy Mexico. Each woman chosen as a Cyber Girl appeared in a monthly edition of Playboy Mexico. One of these Cyber Girls will be chosen for the opportunity to vote on the finalists.cover girl for a 2010 edition. We expect to replicate this feature for Playboy Brazil.

We are focused on expanding our communities of users and deepening their engagement on Quepasa by offering compelling Internet services and effectively integrating communities, personalization, and content to create a powerful user experience. We believe that expanding our communities of users will enhance the value of our users to advertisers and lead to increased spending by advertisers on our owned and operated sites and affiliate sites.

Product Development

Quepasa iscontinually enhances, expands, and launches products and features to meet evolving user, advertiser, and publisher needs for technological innovation and a deeper, more integrated experience.  Quepasa finds new and better ways for its members to connect and communicate with family and friends. Quepasa also helps advertisers connect with consumers most likely to be interested in their products, maximizing the advertisers’ marketing and advertising budgets.  We have focused on developing new partnerships to boost overall memberships while enhancing the member experience.overall user experience and retention of our users by developing several new interactive applications.

Most of our software and features are developed internally. However, we purchase technology and license intellectual property rights when the opportunity is strategically aligned, operationally compatible, and economically advantageous. We are focusing our partnership efforts on entertainment, nightlifebelieve that Quepasa is not materially dependent upon licenses and gossip.  other agreements with third parties relating to product development.

Distributed Social Media

Our business strategy is to move towardfocus on a social media platform in order to build ways that a company or fans of a brand can promote itself on our online communities.  We are pursuing media partners that want to engage their users through social features to drive viral consumption.  

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A social media platform is inherently viral through tools such as widgets and social recommendations.  This will result in content that will now be pushed to the social networks where the visitors are.  Thus, marketers and advertisers will be able to advertise where their customers are.

In 2009, we developed the Quepasa Distributed Social Media (“DSM”).  DSM is a viral advertising and contest platform which allows advertisers to have our members spread their message through the Internet, creating word-of-mouth advertising.  This tool allows advertisers and brands to deliver their brand message through a viral contest engine that is shared and spread by users across the most popular social media sites.  This is a highly effective ad service that allows brands to market their products to the broader Latino demographic without requiring the advertiser to have to decide how to allocate its budget amongst numerous websites.   With DSM, advertisers can target Latinos across all social media properties, leveraging the user’s use of viral widgets and sharing tools to spread the brand message.  

The DSM platform measures success by tracking the influential behavior of the contestants throughout the Internet. The virality of each user’s behavior is increased based on their reach and the reach of their friends on Quepasa.com and other networks.  We are in current discussion to enter into partnerships with third parties who have a large number of members or website viewers.  Weexpect that our focus on DSM will provide them a platformsolid revenue stream as the measure of success is based on the volume of activity fostered and spread by brand ambassadors.  Our two initial programs are:

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“Acapulco Revealed” campaign on behalf of the City of Acapulco, Mexico - Quepasa.com users are invited to build their ideal vacation to Acapulco based on Acapulco’s nightlife, beaches, adventure and culture.  Vacation packages will be awarded to those contestants who most effectively share their entry with friends and contacts across the web.  

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The “Summer Look” campaign for Marie Claire Magazine – Visitors to the website Marie Claire will be invited to upload a picture of themselves “that embodies originality, fashion and quality.”  Each week, users will invite their friends and family to the website to vote on their look.  Each week one winner will be awarded a prize with all weekly winners competing for a social network for their viewersgrand prize.

This approach to build private online communities that may interconnect with Quepasa.com communities.  By creating these relationships, Quepasa will be able to increase its trafficbrand messaging and membership.virality ensures better retention among users as the messaging comes from a trusted source

Viral tools may be placed withinVirtual Goods and Currency

In the content to drive traffic back to our partner’s website.  Viral tools, including inviting friends to join the community, voting for a contest and uploading pictures can be provided to members allthird quarter of which will drive more traffic to Quepasa.com.  All contents will be sharable/embeddable in other parts of Quepasa.

Further, iFrames may be placed within our partner’s website to create co-branded channels between our websites.  Quepasa can integrate RSS feeds into Quepasa communities with links back to relevant channels within a partner’s website.

On March 25, 2009, we launched Quepasa in Brazil.  Brazil is distinct from other Latin American countries because it is the only Portuguese speaking countrya dual currency virtual economy to reward usage for activity on our site through retention rewards and commerce via premium virtual gifting offerings. Our users can purchase virtual goods in the Americas.  Quepasa will be workinggift store.  Some goods are purchased with Playboy Mexico and Dr. Rey on marketing the launchQPoints which are earned in a number of Quepasa in Brazil.  Dr. Rey was born and is a well known, idolized figure in Brazil.  Brazil is a very attractive market for Quepasa and can be implemented at a low cost.  Additionally, Brazilian Internet users are estimated to grow to 150 million by the end of 2010 and spend moreways including: spending time on the Internet then users in the United States, United Kingdom and Japan.

Early in 2008, Quepasa focused on creatingwebsite, referring friends or filling out surveys.  Premium gifts can be purchased using QDollars, which can be bought with real money.  Currently, a new email system because major Internet service providers (“ISPs”) and websites providing email were blocking Quepasa’s emails inviting users to join Quepasa.  In order to avoid Quepasa’s invitations going straight to spam, Quepasa obtained a third party service provider to cause Quepasa to be whitelisted; this has dramatically improved email delivery to major ISPs, especially to popular free email services such as Hotmail, Gmail and Yahoo Mail.  As a result, Quepasa immediately saw increased traffic and increases in the number of new members, although the number has decreased since the high in November.

During 2007, Quepasa made a number of strategic changes to the Quepasa website including a redesign of its homepage and site navigation to better align our content delivery to user experience. In addition, we invested in new hardware and systems to provide increased scalability of our offerings to our expanding user base.

During 2008 and 2007, we incurred $1,241,681 and $995,888 in research and development costs, respectively.

Quepasa continually seeks to enhance and expand its existing offerings and develop new offerings to meet evolving user needs for technological innovation and a deeper, more integrated user experience. Quepasa finds new and better ways for its members to connect and communicate with family and friends. Quepasa also helps advertisers connect with customers most likely to be interested in their products, maximizing the advertisers’ marketing investments and providing a better overall user experience.

Although businesses have many online advertising options, we believe that there are only limited opportunities available to effectively reach the rapidly growing Hispanic online population.  We offer online marketing capabilities, which enable marketers to display their advertisements in different formats and in different locations on our website. We work with our advertisers to maximize the effectiveness of their campaigns by optimizing advertisement formats and placement on the website. We also use our targeting capabilities to help advertisers reach their desired audiences by placing contextually relevant advertisements on our pages. To date, our advertising revenues have not been material. We have established a partnership with a third party and are hopeful it will help us increase our advertising revenues. To support its efforts, we recently added a vice president of strategy and business development.

We seek to create innovative and high quality Internet services for users and to provide efficient and effective marketing opportunities for businesses to reach these users. We focus on increasing our user base and enhancing the user experience on our website to broaden the valuesubstantial portion of our user base is actively engaging in virtual gifting with the usage of QPoints. Revenue to advertisersdate on QDollars has not been material.  

Social Applications

As social gaming and other viral applications continue to increase the revenue from these advertisers.  These user relationships andmaintain their hold on the social networking audience, we plan on continuing to develop and partner with social application developers to provide top tier offerings. We have developed social applications to encourage users to return to the site and interact with other members.  The first application is a social flirtation application called “Papacito”. Users browse photos and choose other users they find attractive to create an anonymous flirting environment by trying to guess who in the game actually had an interest in their profile.  Additionally, we have created an application called QTweet that allows our users the ability to interact and communicate through a synchronization tool with the popular Twitter application.

Currently we are developing a feature rich Open Social Platform that allows third-party developers to submit and test their applications on our users. We expect this Open Social Platform will provide a strong foundation for user retention, by allowing a seamless exchange of information between other social networks and sites using the Open Social Platform.  In addition, we have entered into a partnership with SpeakTech, who pioneered development on the Open Social framework, to provide consultation and applications development resources.  Additionally, we have established agreements with key application developers that will allow their catalog to reach our multi-lingual audience.

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We are also focused on an entry into the mobile application marketplace by developing companion applications for Quepasa.com original applications. We expect that the companion applications will be distributed on several major carriers in Latin America and will carry monthly subscription fees.

Community Content/Partnerships

A strong focus is being placed on maintaining and fostering a scaleable platform by providing users with the tools and content needed to fully immersive themselves within the Quepasa experience.  Our community enable uscontent was a large focus in 2009 and we will continue to leverageexpand on the solid foundation already established. We expect that premiere content partnerships with established brands such as the UFC, NBA, Sony Pictures and several Latino musical artists, will drive content consumption and allow Quepasa to be a solid introduction to the Latin web audience for those brands to access the Latin American market. Our focus is on working with our offered forms of online advertising as well as premium services for users.content partners to ensure they have success with our expanding audience. These include a greater focus on site promotions, newsletter alerts and text messaging.

Quepasa will continue to focus on developing new partnerships to boost overall membership while enhancing the member experience.  Specifically, we are focusing our partnership efforts on entertainment, nightlife and gossip.  

Revenue Sources

While most of our services are free to our users, we intend to generate revenue by providing marketing services and advertising opportunities to businesses and by establishing paying relationships with our users for premium services and products.

For advertising services, we can earn revenue as follows:

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DSM campaigns;

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Banner advertising – we can earn revenue when an advertiser purchases advertising space within our website and “impressions” are delivered. An “impression” is delivered when an advertisement appears on our website and the page is viewed by members.  Bulletins allow ads to be posted directly to a user’s profile;

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Other types of display advertising can earn revenue for Quepasa using various business models including cost per click, flat fee, and cost per acquisition; and

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We partner with offline properties and provide the online media component to their sponsorship packages. When the online sponsorship package is sold, Quepasa splitswe split the revenue with the content provider.provider; and

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We work with many of the leading online ad networks who specialize in delivering ads to the Latino audience online.

Membership Base

Our website has experienced rapid growth as reflected in the following table:

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Our membership base consists of Hispanics in the U.S., Mexico, Brazil and other Latin American countries.  In March 2009, we launched Quepasa in Brazil.  Brazil is distinct from other Latin American countries because it is the only Portuguese speaking country in the Americas.  We are working with Playboy Mexico and Dr. Rey on marketing Quepasa in Brazil.  Dr. Rey was born and is a well known, idolized figure in Brazil.  Additionally, Brazilian Internet users are estimated to grow to 150 million by the end of 2010 and spend more time on the Internet than users in other countries, including the United Kingdom and Japan.   

Hispanic Growth and Concentration

According to the United States Census Bureau and published sources, the Hispanic population:

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totaled 45.546.9 million, or 15% of the total U.S. population, as of July 1,^st, 2007, 2008, an increase of approximately 29.3% from 35.21.5 million or 12.5% ofover the total U.S. population in 2000;past year.

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is expected to grow to 132.8 million, or 30% of the total U.S. population, by 2050, an increase of 97.1 million, or 272%, between 2000 and 2050;

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is the fastest growing minority group at 3.3%3.2% in the U.S. by adding more than one inof every two people to the USU.S. population between 2005July 1, 2007 and 2006;July 1, 2008; and

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as of 2008, is relatively young. According to the March 2007 Pew2^nd largest Hispanic Center Study, 63% are aged 18 to 41, much higher than whites (36%) and African Americans (46%)population in the same age range.  As of 2006, US Hispanicsworld.  Only Mexico (110 million) had a median age of 27.4, compared to 36.4 forlarger population than the rest of the population.U.S.

In addition, 16 states have at least 500,000 Hispanic residents and in 20 states Hispanics are the largest minority, which makes Hispanics in the United States an attractive demographic group for advertisers, enabling marketers to deliver messages cost effectively to a highly targeted audience through geographic targeted ad serving.

Hispanic Use of the Internet

The number of Internet users in Latin America is growing quicklyrapidly because of affordable computers, increased broadband availability and interest in applications such as social marketing according to a January 2009 eMarketer article.media.  According to Pyramid Research,Internet World Stats, as of 2008, the projected regional residential basenumber of Internet users would reach 160 million in five years,Latin America was estimated at 179 million.  Latin America has shown an 890% growth in Internet penetration from 2000-2009 and now makes up from 100 million in 2009.10% of the world Internet population.  

According to an eMarketer estimate inScarborough Research Firm, over half (54%) of U.S. Hispanics use the Internet today.  These users download more digital content than the general population, have a higher household income than the average U.S. Hispanic, and make online purchases.  In 2008, 43% of Hispanic users downloaded some form of digital content, such as music, podcasts, video games, etc. compared to 35% of the general population.  The average household income for all U.S. Hispanics represented 10% or 23 million usersis $54,000 compared to $67,000 for the U.S. Hispanic Internet user.  62% of allHispanic Internet users in the United States, or about 52%are online purchasers, spending an average of the total U.S. Hispanic population. This group is expected to grow to 30 million by 2012.  According to an eMarketer article, 95% of surveyed U.S. marketers targeted Hispanics with language and culture specific messages that evolved from their general market campaigns.$762 per person annually.  

Hispanic Purchasing Power

The purchasing power of Hispanic households is rapidly increasing.  A 2008 Research and Markets article stated thatAccording to the Selig Center, U.S. Hispanic purchasing power surged to $870$950 billion in 2008 and is projected to reach as much as $1.3$1.4 trillion by 2015.2013.  During the past decade, the rate of growth was more than two times the overall national rate.

Quepasa is committed to providing a comprehensive set of Internet marketing solutions for advertisers. We believe there is an ongoing growth in the online advertising market and an increasing shift in advertisers’ use of online media as audiences shift toward the Internet from traditional media:

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According to eMarketer, U.S. online spending in 2009 will reach $25.7 billion and by 2013 it will increase to $42.0 billion. The estimated online share of total U.S. media ad spending will grow from 9.3% in 2008 to 13.3% in 2011;

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According to eMarketer, marketers will spend $2.35 billion to advertise on social networks in 2009, a December17% increase from 2008, report, ZenithOptimedia, predicts that Internet advertising will increase 18%and project double digit growth (11%) in 2009;2010, reaching $2.6 billion; and

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A study conducted by comScore World Metrix found that 87% of Internet users in Latin America used social networking sites in 2008.  This was an increase from 78% in 2007.

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Quepasa is committed to capitalizing on this shift to Internet advertising and helping its advertisers create and execute Internet marketing strategies that both encourage its users to interact with our advertisers’ brands as well as provide valuable insights into their customer base.

We offer all of our services in both English, Spanish and Portuguese, which we believe provides great value to advertisers seeking to reach the Hispanic audience. According to published sources, approximately 90% of Hispanic adults in the United StatesU.S. speak Spanish at home.  Moreover, Hispanics in the United StatesU.S. are expected to continue to speak Spanish because:

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Approximately two-thirds were born outside the U.S.;

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Hispanic immigration is continuing;

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Hispanics generally seek to preserve their cultural identity; and

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Hispanic population concentration encourages communication in Spanish.

Corporate History and Acquisitions

Quepasa was incorporated in the State of Nevada in June 1997 under the name Internet Century, Inc. and later changed its name to quepasa.com, Inc. to reflect our decision to operate a Spanish language portal and search engine.  In 2007, Quepasa moved away from being a bilingual search engine into a bilingual portal and Hispanic social network. With the evolution of the website into a Hispanic portal and social network, the products and services provided to businesses transitioned to predominately display advertising. In December 2007, the portal service of Quepasa was discontinued. Quepasa re-launched the site on February 6, 2008, to be solely a Hispanic social network with content provided by the user community. In August 2008, Quepasa again re-launched Quepasa.com with an improved user interface and enhanced technical capabilities.

On February 7, 2007, Quepasa purchased certain assets of corazones.com. The Company acquired all existing registered users, the domains corazones.com and corazonesdemexico.com, the existing operating system including the interface, administrative and billing systems and the related logos and trademarks of the associated properties.

Sales and MarketingAcquiring Members

We sellprimarily rely on viral growth to acquire members.  We encourage our marketing servicesmembers to businesses through direct channels.invite their friends to join to share the Quepasa focuses on selling its marketing services and solutions to leading advertising agencies and marketers in the United States, Mexico and Latin America.

Quepasa employs sales professionals in Miami, Florida. Our sales representatives consult regularly with agencies and advertisers on design and placement of online advertising, and provide customers with measurements and analysis of advertising effectiveness as well as effective consumer insights that can be turned into marketing campaigns.

We recently entered into a partnership with a leading company that focuses on providing advertising solutions to advertisers and Internet websites or publishers that appeal to Hispanics.experience.

With respect to our users, our sales and marketing activities are focused on developing the Quepasa brand within the Hispanic community in order to gain a competitive advantage that will enable us to attract, retain, and more deeply engage users and advertisers. We believe that our ability to obtain and retain users is also related to our ability to provide a fully bilingualtrilingual site.  To date, we do not allocate any budget for the direct marketing efforts to acquire more users.   Our marketing efforts are simply focused on providing great entertainment content to our users and trusting that they will want to share this content with their friends. Our success with user acquisition has been solely dependent on “word of mouth” marketing by the Quepasa user base and our ability to deliver large volumes of email invitations to the contacts of our users.

In 2008, Quepasa focused on creating a new email system because major Internet service providers (“ISPs”) and websites providing email were blocking Quepasa’s emails inviting users to join Quepasa.  In order to avoid Quepasa’s invitations going straight to spam, Quepasa obtained a third party service provider to cause Quepasa to be whitelisted; this has dramatically improved email delivery to major ISPs, especially to popular free email services such as Hotmail, Gmail and Yahoo Mail.  As a result, Quepasa immediately saw increased traffic and increases in the number of new members, every subsequent month thereafter.  In November 2009, we formed a cross functional team dedicated to email management and deliverability.  

Sales and Marketing

We sell our marketing services to businesses through both direct and indirect channels. Our main focus is on selling our marketing services and solutions to leading advertising agencies and marketers in the U.S., Mexico and Latin America.  For the portion of banner advertising inventory that we do not sell direct, we work with the leading ad networks to fill the unused ad inventory with banner advertisement aggregated by those ad network partners.

Quepasa employs sales professionals in Miami, Florida, Mexico City, Mexico (reopened in February 2010) and Sao Paulo, Brazil.Our sales representatives consult regularly with agencies and advertisers on design and placement of online advertising, and provide customers with measurements and analysis of advertising effectiveness as well as effective consumer insights that can be turned into marketing campaigns.

Intellectual Property

We create, own and maintain a wide array of intellectual property that we believe are valuable to the Company. Our intellectual property includes patents and patent applications related to our innovations, products and services; trademarks related to our brands, products and services; copyrights in software and creative content; trade secrets; and other intellectual property rights and licenses of various kinds. We seek to protect our intellectual property assets through, patent, copyright, trade secret, trademark and other laws of the United StatesU.S. and other countries of the world, and through contractual provisions.

We consider the Quepasa trademark and our related trademarks to be valuable to the CompanyQuepasa and we have registered these trademarks in the United StatesU.S. and other countries throughout the world and aggressively seek to protect them. We have licensed in the past, and we may license in the future, certain of our proprietary rights, such as trademark, patent, copyright and trade secret rights to third parties.

In February 2007, we acquired the assets of Corazones.com, a leading bilingual online dating website designed for Hispanic users. As a result of the purchase, we acquired all the related logos and trademarks of the associated properties. Corazones.com offers features to our users that complement our social network suite of products and services.

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Competition

The market forWe operate in the Internet products, services, advertising and commerce is verycontent markets, which are highly competitive and we expect thatcharacterized by rapid change, converging technologies, and increasing competition. Our most significant competition will continuefor users, advertisers, publishers, and developers is from other social networking sites, such as Yahoo!Español, Facebook, MySpace Latino, MySpace, America Online Latin America StarMedia, Hi5, Orkut and Batanga and Terra.com and UOL.com . We also compete with these companies to intensify. We believe that theobtain agreements with software publishers, ISPs, mobile carriers, device manufacturers and others to promote or distribute our services to their users.

The principal competitive factors in these markets are name recognition, distribution arrangements,relating to attracting and retaining users include functionality, performance, ease of use, usefulness, accessibility, integration, and personalization of the number of value-addedonline services and features,that we offer, the overall user experience and quality of support. Our primary competitorssupport on Quepasa properties. The principal competitive factors relating to attracting advertisers and publishers are other companies providing social networking, portalthe reach, effectiveness, and online communityefficiency of our marketing services as well as the creativity of the marketing solutions that we offer. “Reach” is the audience and/or demographic that can be accessed through the Quepasa network. “Effectiveness” for advertisers is delivering against advertisers’ targets, measuring those achievements against those targets and applications, especiallyoptimizing for these across the Quepasa network. “Effectiveness” for publishers is our advertising technology platforms and the monetization we are able to the Spanish-language Internet users. These companies include, but are not limited to, Terra.com, StarMedia, Hi5, Orkut, MySpace Latino, and Batanga.offer through our marketing services.

Many large media companies have developed, or are developing, social networking or social media tools for their web users. As these companies develop such portal or community sites, we could lose a substantial portion of our user traffic.

Most of our existing competitors, as well as new competitors such as Spanish-language media companies, other portals, communities and Internet industry consolidators, have significantly greater financial, technical, and marketing resources. Many of our competitors offer Internet products and services that are superior and achieve greater market acceptance. There can be no assurance that we will be able to compete successfully against current or future competitors or that competition will not have a material adverse affect on our business.

Employees

As of January 27, 2009,March 1, 2010, we employed approximately 7471 employees, 6159 individuals in Sonora,Hermosillo, Mexico and 1312 in the United States none of whom are represented by a labor union. Our future success is substantially dependent on the performance of our senior management and key technical personnel, and our continuing ability to attract and retain highly qualified technical and managerial personnel.

Research and Development Expenses

During 2009 and 2008, we incurred $1,040,022 and $1,241,681 in research and development costs, respectively.

Corporate History

Quepasa was incorporated in the State of Nevada in June 1997 under the name Internet Century, Inc. and later changed its name to quepasa.com, Inc. to reflect our decision to operate a Spanish language portal and search engine.  On August 5, 2003, we changed our name to Quepasa Corporation.  In 2007, Quepasa moved away from being a bilingual search engine into a multilingual portal and Hispanic social network. With the evolution of the website into a Hispanic portal and social network, the products and services provided to businesses transitioned to predominately display advertising. In December 2007, the portal service of Quepasa was discontinued. Quepasa re-launched the site on February 6, 2008, to be solely a Hispanic social network with content provided by the user community. In August 2008, Quepasa again re-launched Quepasa.com with an improved user interface and enhanced technical capabilities.

Government Regulation

Advertising and promotional information presented to visitors on our website and our other marketing activities are subject to federal and state consumer protection laws that regulate unfair and deceptive practices. There are a variety of state and federal restrictions on the marketing activities conducted by email, or over the Internet, including U.S. federal and state privacy laws and the CAN-SPAM Act of 2003 and laws in the various Latin

American countries in which we operate.  The rules and regulations are complex and may be subject to different interpretations by courts or other governmental authorities. We might unintentionally violate such laws, such laws may be modified and new laws may be enacted in the future. Any such developments (or developments stemming from enactment or modification of other laws) or the failure to anticipate accurately the application or interpretation of these laws could create liability to us, result in adverse publicity and negatively affect our businesses.  See our risk factors found elsewhere in this report for further discussion of government regulations.  

Item 1A.

Risk Factors

Not applicable to smaller reporting companies.  However, our principal risk factors are described under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Item 1B.

Unresolved Staff Comments

None.

Item 2.

Properties

Our headquarters are located in West Palm Beach, Florida and consists of approximately 1,800 square feet of office space. The lease expires in March 2010. When this lease expires, we plan on moving offices with a lower rent expense as part of our cost cutting measures. We also lease office space in Scottsdale, Arizona and Los Angeles, California.  Our data centers are operated in Dallas, Texas and Tempe, Arizona and Dallas, Texas.Arizona. Our technical operations are provided in leased offices located in Hermosillo, Mexico. We believe that our existing facilities are adequate to meet current requirements, and that suitable additional or substitute space will be available as needed to accommodate any further physical expansion of operations.

Item 3.

Legal Proceedings

None.

Item 4.

Submission of Matters to a Vote of Security Holders

None.

(Removed and Reserved).

7

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is listedquoted on the Nasdaq Stock MarketOver-the-Counter Bulletin Board (the “Bulletin Board”) under the symbol “QPSA”.  Until June 2009, our common stock was listed on Nasdaq.  The last reported salessale price of our common stock as reported by the Bulletin Board on March 26, 2009,2, 2010 was $1.09$3.90 per share.   As of that date,March 2, 2010, there were 626 record holders. approximately 627 shareholders of record.  

The following table provides the high and low sales pricesbid price information for our common stock for the periods indicated.indicated which reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

Dividend Policy

We have not paid cash dividends on our common stock and do not plan to pay such dividends in the foreseeable future.  Our Board of Directors (“Board”) will determine our future dividend policy on the basis of many factors, including results of operations, capital requirements, and general business conditions.

Equity Compensation Plan Information

Recent Sales of Unregistered Securities

During the past year, weWe have soldgranted rights to securities without registration under the Securities Act of 1933 (the “Securities Act”) in reliance upon the exemption provided in Section 4(2) and Rule 506 thereunder as described below.

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(1)

These warrants/options did not vest and have expired.  We have not included any expense associated with these warrants/options for the period.

Item 6.

Selected Financial Data

Not required for smaller reporting companies.

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Item 7.

Management’s Discussion and Analysis or Planof Financial Condition and Results of Operations

You should read the following discussion in conjunction with our audited historical consolidated financial statements, which are included elsewhere in this Form 10-K. Management’s Discussion and Analysis or Plan of OperationFinancial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions, which are subject to risk, uncertainties and other factors. Actual results may differ materially because of the factors discussed in the subsection titled “Risk Factors,”Factors” which are located inat the end of this Item 7.

Company Overview

In 2007, Quepasa transitioned from being a search engine into a Latino social network. With the evolution of our website into a social network, we expect future revenues will come from predominately our DSM service and display advertising.

Highlights for 20082009 included:

·o

In December 2009, we generated $300,000 in revenue from a single banner campaign.

o

Quepasa DSM – Launched in December 2009, this is a new tool that allows advertisers and brands to deliver their brand message through a viral contest engine that is shared and spread by the users across the most popular social media sites.  We believe this is a highly effective ad product that allows brands to market their products to the broader Latino demographic, without requiring the advertiser to have to decide how to allocate its budget amongst numerous websites.  With Quepasa DSM, brands can target Latinos across all social media properties, leveraging the user’s use of viral widgets and sharing tools to spread the brand message.

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Our membership grew rapidly.  We had 7,675,988 at December 31, 2009 up from 1,914,623 a year earlier.

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the Playboy Mexico community – in 2009, we launched a model search to find Cyber Girls of the Month for Playboy Mexico.  Each woman chosen as a Cyber Girl appeared in a monthly edition of Playboy Mexico.  One of these Cyber Girls will be chosen for the cover girl for a 2010 edition.  We expect to replicate this feature for Playboy Brazil.

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In late January 2008,March 2009, we borrowed $7,000,000, including $5,000,000became the first U.S.-based social networking site targeting Latinos to expand its reach into Latin America by launching our Brazilian website.  According to ComScore (September 2008), 85 percent of Brazilians age 15 and older visit a social networking site.

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In September 2009, we introduced virtual gifting and virtual currency with QDollars and QPoints that can be bought or earned to send a broad range of virtual gifts from the Quepasa storefront.

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In October 2009, we launched the Papacito dating application.  The application allows users to anonymously admire other users by adding them as their “Papacito”.  Users then have a company controlled by onelimited number of our non-employee directors.  The notes are due in 2016;

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On February 6, 2008, we re-launched our website as a Latino social network;

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On June 30, 2008, we terminated the Corporate Sponsorship and Management Services Agreement issuing $2,500,000 of Preferred Stock and recording a one-time non-cash gain of $5,056,052 based upon the difference between the value of the liabilities we eliminated and the value of the Preferred Stock; and

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Our website traffic beganguesses to show significant growth during 2008.  In part, this was due to our improved email technology inviting friends of members to join of Quepasa.choose who selected them.  

Critical Accounting Policies, Judgments and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with Generally Accepted Accounting Principles.Principles (“GAAP”). The preparation of these 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.

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Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors.Board. 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 Companywe adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”),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, 20082009 and 20072008 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”)SEC issued Staff Accounting Bulletin (“SAB”) No. 110. This guidance that 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,GAAP, 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, weWe have continued to use the simplified method to determine the expected option term since the Company’sour stock option exercise experience does not provide a reasonable bas isbasis 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 CompanyQuepasa 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 CompanyQuepasa 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 year ended December 31, 2008,2009, our revenue wasrevenues were generated from twoone principal sources: revenuesource, revenues earned from the sale of banner advertising on our website, and subscription sales.which generated $300,000 in December.

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 84%99% of our revenue came from banner advertising.

Subscription Sales:Subscription sales related to  Consistent with GAAP, the Internet dating service Corazones.com. We have not focused our efforts on marketing this website.  We recognizeCompany recognizes advertising revenue from subscription sales as servicescustomers that are delivered.  During 2009, we intend to merge the dating site into the social network and createadvertising networks, on a dating community with all the functionality ofnet basis, while advertising revenues earned directly from advertisers is recognized on a dating site.  We will no longer charge a subscription fee for this service.gross basis.

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Operating Expenses

Our principal operating expenses are divided into the following categories:

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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.

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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.

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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, accounting and regulatory fees.

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Depreciation and Amortization Expenses:Our depreciation and amortization are non-cash expenses which have consisted primarily of depreciation related to our property and equipment and the amortization pertaining to jet rights acquired in 2006 and disposed in 2008.

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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 (CSMSA)CSMSA and Note Purchase AgreementsNotes Payable discussed in notesNotes 5 and 6.6 of our Consolidated Financial Statements. 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. In the year ended December 31, 2008, we recognized a one-time non-cash gain on extinguishment of debt resulting from termination of the CSMSA.

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Comparison of the year ended December 31, 20082009 with the year endedDecember 31, 20072008

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:

Revenues

Our revenues were $56,006$535,976 for the year ended December 31, 2008, a decrease2009, an increase of 74%$479,970 compared to 2007. In September 2007, we launched$56,006 in 2008 as a new beta version of our website, which experienced technical difficulties and performance issues that adversely affected the amount of traffic visiting our website and related advertising. In late October 2007, a new senior management team was put into place and immediately began to address the performance issues with the website. The bulkresult of the banner advertising campaigns were discontinuedsignificant increase in new members and website traffic during the fourth4^th quarter of 2007, and efforts to generate additional banner advertising campaigns were temporarily put on hold while emphasis was placed on enhancing the functionality and the content of our website, in order to drive sustained traffic to the site.2009. In February 2008, we re-launched our website.website as a Hispanic social network with content provided by the user community. Website traffic has increasedexperienced significant increases since the re-launch.re-launch in February 2008. The site had 4,760,58224,982,695 unique visitors in 2007 and 6,014,8692009, a 315% increase from 6,014,865 unique visitors in 2008 , a 26% increase.2008.  We believe there will be a direct correlation between website traffic and our ability to increase revenue.revenues.

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 oforder to avoid Quepasa’s invitations going straight to spam,  we obtained a third-party consultant, we havethird party service provider to assist Quepasa to be whitelisted; which has dramatically improved email delivery to major ISPs and substantially reducedincreased 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.  Registered users at December 31, 2009 and 2008 were 7,675,988 and 1,914,623, respectively. An increase of over 301% in 2009.

Operating Costs and Expenses

Sales and Marketing:Sales and marketing expenses decreased $778,321,increased $73,234, or 67%19%, to $382,193$455,427 for the year ended December 31, 2009 from $382,193 in 2008. The decrease is primarily attributed toDuring the closingyear ended December 31, 2009, we had increases in commissions of $52,000 resulting from the New York sales officeincrease in revenues and a reduction of our sales force in November 2007, which resulted in a decreaseincreases in salaries of approximately $352,000 versus 2007, and suspension of advertising sales while the site was improved, which resulted in a decrease in advertising of approximately $476,000 versus 2007.$66,000. The decrease wasincreases were partially offset by an increasea decrease of $40,000 due the shutdown of the Mexico City sales office in stock based compensationthe first quarter of $55,000 or 60% to $148,000 for new consultants.2008.

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Product Development and Content:Product development and content expenses decreased $942,116,$961,438, or 20%25%, to $3,831,849$2,870,411 for the year ended December 31, 2009 from 3,831,849 in 2008. This decrease is attributable to a focused effort to reduce costs.costs and focused development effort. During the year ended December 31, 2008,2009, we had decreases in technologyvarious consulting fees of $1.6 million,$187,000, a decrease in stock based compensation of $441,000, a decrease in U.S. salaries within our U.S. operations of $375,000, other professional fees of $164,000$40,000, and content fees of $106,000, partially offset by an increasea decrease in salaries and associated payroll costs of $246,000$202,000 in Mexico due to the favorable 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. The decrease was also partially offset by an increase of $983,000 or 300% to $1,314,000 in stock based compensation attributable to a performance based ince ntive grant made in the third quarter of 2008 and a shift toward issuing stock based compensation to reduce other cash expenses.Mexico.  

General and Administrative:General and administrative expenses decreased $539,336,$662,040, or 7%9%, to $7,289,881,$6,627,841, for the year ended December 31, 2009 from 7,289,881 in 2008. The significant changes consisted of:

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a decrease in professional fees of $1.3 million,$85,000, primarily made up of decreases in accounting fees of $138,000 partially offset by an increase in legal fees of $731,000 and accounting fees of $618,000, due to unusually high activity in 2007;

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a decrease in recruiting fees of $582,000, due to reduced hiring during 2008;$68,000;

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a decrease in travel related expenses of $441,000;$60,000;

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a decrease in stock based compensation of $359,000;

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a decrease in rent expenses of $70,000,$195,000, due to the closing of our Scottsdale, AZ headquarters;

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a decrease in salaries and related payroll costs of $704,000,$93,000, due to a reduction in personnel in our Scottsdale headquarters during the fourth quarter of 2007headcount and a reduction of some salaries in exchange for stock based compensation;

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a decreasepartially offset byan increase in duesmanaged hosting cost of $83,000 for the new data center in Dallas;

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impairment of an intangible asset of $67,000; and subscriptions of $151,000, a decrease in printing and reproduction of $98,000, and a decrease in office supplies and maintenance costs of $56,000 attributable to a focused effort to reduce costs; and

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an increase in stock based compensationInternet reporting fees of $3.1 million or 163% to $5.0 million, attributable to stock options issued to the new senior management team hired during the fourth quarter of 2007 and the first quarter of 2008, a performance based incentive grant made in the third quarter of 2008, and a shift toward issuing stock based compensation to reduce other cash expenses;$50,000.

Stock Based Compensation:Stock based compensation expense, which is included in the other operating expense categories as discussed above, increased $4,121,726decreased $809,634 to $6,436,070$5,626,436 for the year ended December 31, 2009 from $6,436,070 in 2008. This increasedecrease is attributable to stock options issued to the new senior management team hired during the fourth quarter of 2007 and the first quarter of 2008, a performance based incentive grant madereduction in the third quarter of 2008, and a shift toward issuing stock based compensation to reduce other cash expenses.overall headcount. Stock based compensation expense represented 54% and 16% of operating expenses for the years ended December 31, 20082009 and 2007, respectively.2008.  At December 31, 2008,2009, we had $10,233,186$4,314,589 of unrecognized stock based compensation expense, almost all of which we expect to recognize over the next eightthree quarters.

Stock Based Compensationexpense is composed of the following:

The amortization of prepaid expenses includes compensation for professional services in which the professionals vested in stock options prior to the performance of services.  The amount of compensation is being amortized over the lengths of the contracts.

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Depreciation and Amortization:Depreciation and amortization expense increased $16,953,$49,389, or 4%11%, to $463,588$512,977 for the year ended December 31, 2009 from $463,588 in 2008. This increase is primarily attributable to fixed asset additions offset by the termination of the jet rightsto create a primary data center in the first quarter of 2008 andDallas, Texas metropolitan area leaving the reduction of $95,000redundant data center in associated amortization expense.the Phoenix, Arizona metropolitan area as a backup.

Other Income (Expense): Other income increased $4,139,820decreased $5,417,013 to $4,772,186an expense of $644,827 for the year ended December 31, 2009 from other income of $4,772,186 in 2008. The increasedecrease 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 54 of the consolidated financial statements and the reversalstatements.  This decrease is also attributable to a writeoff of contingent invoices totaling $508,610 initially recorded$100,000 of a note receivable as discussed in the third quarter of 2007 for a technical consultant. The Company and the technical consultant entered  into a mutual release of any obligation of the amount recorded as other income. The gains were partially offset by $931,000 of interest expense associated with the CSMSA and the Note Purchase Agreements entered into in the first quarter of 2008 (see note 63 of the consolidated financial statements),statements.  In addition, there was a decreasereduction of $281,000 of$111,000 in interest income associated withdue to lower averageinterest rates and lower cash balances during 2008 versus 2007,balances.  The decrease is partially offset by a reduction in interest expense of $327,000 due to the termination of the CSMSA and a $43,000 loss recorded in the second quarter of 2008$39,000 on the disposal of office furniture and equipment associated with the shutdownclosure of our Scottsdale, AZ headquarters.

Arizona office.

Liquidity and Capital Resources

Cash used in operating activities for the year ended December 31, 2009 is 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 $3,878,474 for the year ended December 31, 2009 compared to $5,332,553 for 2008. For the year ended December 31, 2009, net cash used by operations consisted primarily of a net loss of $10,575,507 less non-cash expenses of $512,977 in depreciation and amortization, $289,397 in non-cash interest, $291,407 in amortization of discounts on notes payable and debt issuance costs, loss of $100,000 on settlement of a receivable, $67,000 for the write-off of an intangible asset and $5,451,691 related to the vesting of stock options, and issuance (cancellation) of comm on stock for compensation and professional services. Additionally, changes in working capital impacted the net cash used in operating activities. These changes included an increase in accounts receivable of $327,320, offset by decreases in other current assets and other assets of $233,104 and increases in accounts payable and accrued expenses of $55,548. Cash used in operating activities for the year ended December 31, 2008 is driven by our net loss, adjusted for non-cash items. Non-cash adjustments include a gain on the extinguishment of debt, 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 $5,332,553 for the year ended December 31, 2008 compared to $10,153,236 for 2007. For the year ended December 31, 2008, net cash used by operations consisted primarily of a net loss of $7,139,319 plus a gain on extinguishment of debt of $5,056,052 and a write-off of invoices totaling $508,610, offset by non-cash expenses of $463,588 in depreciation and amortization,amortizat ion, $641,282 in non-cash interest, $272,246 in amortization of discounts on notes payable and debt issuance costs, $39,134 loss on the disposal of fixed assets, and $6,610,814 related to the vesting of stock options, extension of warrants, and issuance 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 $442,378, offset by decreases in other current assets and other assets of $193,417. Net cash used by operations

Our capital expenditures were $20,483 for the year ended December 31, 2007 consisted2009, compared to capital expenditures of a net loss of $13,358,499 offset by non-cash expenses of $446,635 in depreciation and amortization and $2,314,344 related to the issuance of stock options and warrants$399,954 for compensation. Changes in working capital for the year ended December 31, 2007 included an increase of $390,172 in accounts payable and accrued expenses offset by an increase in other current assets and other assets of $51,764.

2008. Net cash used in investing activities for the year ended December 31, 2008 is primarily attributable to Investment in BRC/La Alianza of $350,000, see note 43 of the condensed consolidated financial statements. Our capital expenditures were $399,954 for

There was no cash flow from financing activities during the year ended December 31, 2008, compared to capital expenditures of $817,812 for the same period in 2007.

2009. Net cash provided by financing activities for the year ended December 31, 2008 came from net proceeds of $6,959,519 from our borrowing in January 2008. See note 6 of the condensed consolidated financial statements. Cash proceeds from the exercise of stock options and warrants was $377,500 for the year ended December 31, 2008, compared2008.

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Quepasa had a positive working capital of $1,050,212 at December 31, 2009 which consists primarily of cash.  

Cash Burn Rate – Non-GAAP Financial Measurement

Management uses a non-GAAP financial measure in evaluating its financial and operational decision making and as a means to $921,150evaluate period-to-period comparison. We believe that both management and shareholders benefit from referring to cash burn rate, a non-GAAP financial measure, in planning, forecasting and analyzing future periods. Additionally, the cash burn rate provides meaningful information about Quepasa’s ability to meet its working capital needs.

We expect a net cash burn rate of approximately $315,000 per month for 2010, excluding any promotional activities and growth of advertising revenues.

We have budgeted capital expenditures of $415,000 for 2010, whichwill allow us to continue to grow the business given our member growth and allow us to be able to run DSM campaigns

As of the date of the filing of this report, we have $419,105 in cash and $605,477 in accounts receivable. Management does not believe that we have sufficient working capital to operate beyond May 31, 2010.  With our net cash burn rate, this forecast assumes that we collect approximately $500,000 in accounts receivables by early April 2010.  Our management has been focused on completing a financing through the sale of equity or debt securities.  To remain operational through December 31, 2010, we will need to raise at least $2,000,000 in net proceeds. The current global recession and volatility of the financial markets could significantly impact our debt or equity.   At the same periodtime that we are seeking to raise capital, we expect that our marketing efforts in 2007.

Mexico will generate a minimum of $3,000,000 in revenues from Mexican government units over the next 12 months including $300,000 of revenues generated in the f ourth quarter of 2009.  Assuming we raise the necessary capital through the sale of equity or equity equivalents and we generate the full $3,000,000 in revenues, we expect that we will have adequate working capital through 2011.  However, any equity financing may be very dilutive to our existing shareholders.

We invest excess cash predominately in liquid marketable securities to support our growing infrastructure needs for operational expansion.  The majority of our cash is concentrated in one large financial institution, JP Morgan Chase.

We have substantial capital resource requirements and have generated significant losses since inception. At December 31, 2008, we had $4,932,629 in cash and cash equivalents compared to $3,673,281 at December 31, 2007, resulting in a net increase in cash and cash equivalents of $1,259,348 for 2008.

The increase in cash for 2008 was primarily attributed to the issuance of subordinated notes payable in the amount of $7,000,000 in January 2008, partially offset by cash used in operating activities of $5,332,553 during 2008.

In October 2007, a new senior management team was put into place. Along with addressing the website performance issues, the management team focused their attention on reducing costs while maintaining the efforts to improve the performance of our websites. In November 2007, the management team terminated the majority of the consulting arrangements, closed the sales office in New York, and significantly reduced the headcount at the corporate headquarters. Based on the reductions initiated in November 2007,the net cash burn rate for 2008 dropped to $417,654 per month, which included a one-time charge of $129,000 associated with the termination of the lease for our Scottsdale headquarters. We expect a net cash burn rate of approximately $310,000 per month for 2009, excluding any promotional activities.

During 2008, we obtained proceeds of $377,500 from the exercise of common stock options and warrants compared to $921,150 from the exercise of stock options and warrants during 2007.

Cash Burn Rate – Non-GAAP

The Company uses non-GAAP financial measures in evaluating its financial and operational decision making and as a means to evaluate period-to-period comparison. The Company believes that both management and shareholders benefit from referring to non-GAAP financial measures such as cash burn rate in planning, forecasting and analyzing future periods. Additionally, cash burn rate provides meaningful information about the Company’s ability to meet its working capital needs.

Based on the reduction of the net cash burn rate, we believe that our current cash balances are sufficient to finance our current level of operations beyond the next 12 months. We expect that by the end of the second quarter we will accelerate our efforts to raise additional capital. We have delayed our capital raising efforts pending the operating results of our business through the second quarter.  Because of the current global recession and the impact on the global credit markets, as well as the weak stock market, any financing, if it occurs, will involve substantial dilution to existing shareholders. We have not budgeted significant capital expenditures for 2009. The capital expenditures for 2008 were primarily 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.

New Accounting Pronouncements

See Note 1 to our consolidated financial statements included in this Reportreport for discussion of recent accounting pronouncements.

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Forward-Looking Statements

The statements in this Reportreport relating to our increasing revenues,future liquidity, our anticipated capital expenditures, our belief that we have sufficient cashbuilding interactive communities will help create an authentic Hispanic experience and drive traffic to finance current level of operations,the website, expectations regarding replicating Cyber Girl Mexico in Brazil, our belief that expanding our communities will lead to increased spending by advertisers on our owned and operated sites and our affiliates’ sites, expected revenue from our DSM service, our plans regarding developing and partnering with social platform developers to provide top tier social media offerings, expectations of raising capital and anyregarding social media, expectations relating to futureregarding companion applications, expectations regarding our premiere content partnerships and the ability of these partnerships to drive content consumption, continuing to develop partnerships to boost overall memberships, our plan to generate revenue by providing marketing ser vices and advertising opportunities to businesses and by establishing paying relationships with our users for premium services and products and our belief that there is a direct correlation between website traffic and our ability to increase revenues, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Additionally, words such as “expects,” “anticipates,” “intends,” “believes,” “will” and similar words are used to identify forward-looking statements.

The results anticipated by any or all of these forward-looking statements might not occur. Important factors, uncertainties and risks that may cause actual results to differ materially from these forward-looking statements are contained in the Risk Factors whichthat follow. For more information regarding some of the ongoing risks and uncertainties of our business, see our other filings with the SEC. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise. For more information regarding some of the ongoing risks and uncertainties of our business, see the Risk Factors and our other filings with the SEC.

RISK FACTORS

An investmentInvesting in our common stock is highly speculative and involves a high degree of risk.  You should carefully consider the following Risk Factors before deciding whether to invest in Quepasa. Additional risks described below, together with the other information contained in this Report, before making an investment decision.and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations or our financial condition. If any of the circumstances describedevents discussed in these risk factors actuallythe Risk Factors below occur, our business, consolidated financial condition, or results of operations or prospects could be materially and adversely affected. In that event,such case, the trading pricevalue and marketability of our sharesthe common stock could decline, and you maymight lose partall or allpart of your investment.

Risks Related to Our CompanyQuepasa

If we do not complete a financing, our ability to continue as a going concern is in substantial doubt.

We incurred net losses of approximately $10.5 million in 2009 and $7.1 million in 2008. We anticipate these losses will continue for the foreseeable future.  We have not reached a profitable level of operations, all of which raise substantial doubt about our ability to continue as a growing concern.  Although substantially higher in 2009 than in 2008, our revenues are not significant.  We believe that our limited working capital will permit us to remain operational only through May 31, 2010.  Accordingly, we must raise at least $2,000,000 to have sufficient working capital through December 31, 2010.  To the extent our revenues increase in 2010, we will be able to remain operational for a longer period.

Because we expect to need additional capital to fund our growing operations, we may not be able to obtain sufficient capital to enable the Companyus to remain as a going concern.operational.

We expect thatBecause of our continuing losses, we will have working capital to permit us to remain in business only through May 31, 2010.  As a result, we are actively seeking to raise working capital infunds through the second halfsale of 2009.equity or debt securities.  Because of the severe impact that the recession has had on the capital and credit markets, we may be adversely affected in our ability to raise the necessary debt or equity.capital. Even if we secure additional working capital, we may not be able to negotiate terms and conditions for receiving the additional capital that are acceptable to us. Any future equity capital investments will dilute existing shareholders. In addition, new equity or convertible debt securities issued by us to obtain financing could have rights, preferences and privileges senior to our common stock. We cannot give you any assurance that any additional financing will be available to us, or if available, will be on terms favorable to us.

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Because of the severity of the global economic recession, advertisers may reduce their spending.

As the global economy continues to deteriorate, we may find that advertisers will reduce Internet advertising which would reduce the potential for future revenues.revenue. Also, Mexico is a very important market for us. The recession has had a severe impact on the Mexican economy, and its currency—the peso—has fallen dramatically against the dollar reflecting its economic weakness. These events will result in a number of adverse effects upon us including increasing our borrowing costs, reducing our gross profit margins, reducing our ability to borrow, and reducing our ability to grow our business.  Also, we may find that advertisers may delay in paying us. These events would have a material and adverse effect upon us.

If we are unable to enter into partnerships with third parties to provide them our social network platforms,platform, we may be unsuccessful in increasing the viewers and members of our website.

In order to increase membership at Quepasa.com, we have entered into discussions with third parties who have a large number of members or website viewers to provide them with a platform to build online communities.  These online communities would interconnect with Quepasa.com’s communities which we expect would increase traffic and membership to Quepasa.  If these discussions are unsuccessful, we may be unable to increase membership which would have a material and adverse affect on our ability to obtain advertising revenue.

If our members do not interact with each other or our viral marketing strategy fails, our ability to attract new members will suffer and our revenue will decrease.  

Part of our success is dependent upon our social networking members interacting with our website and contributing to our viral advertising platform.  If our DSM platform is unsuccessful and our members do not spread our advertisers’ messages throughout the Internet, our operating results will suffer.  

The majority of our members do not visit our website frequently and spend a limited amount of time when they visit.  If we are unable to encourage our members to interact more frequently and to increase the amount of user generated content they provide, our ability to attract new users to our website and our financial results will suffer.

If technologies are developed that block our email invitations to join Quepasa or our advertising displays, we may be unable to obtain additional memberships ore revenues formor revenue from advertisements which would adversely affect our operating results.

We send mass emails to attract users to our website. We believe that our business will continue to rely on this method for attracting users in the foreseeable future. If we are unable to send these advertisements on cost-effective terms, this could limit our ability to attract users cost-effectively.

In early 2008, a large number of our email invitations were going straight into potential members’ spam folders.  We retained a third party service provider, which caused Quepasa to be whitelisted or have major Internet service providers (“ISPs”)ISPs accept delivery of Quepasa emails. This has dramatically improved email delivery to major ISPs. We cannot assure you this will continue.  We recently formed a cross-functional team dedicated to email management and deliverability and hired a Director of Deliverability.  We cannot assure you that this will stop the inconsistent delivery of our emails to potential members.  Additionally, technologies may be developed that can block the display of our ads and hinder our ability to generate revenues.  Unsuccessful email delivery could stunt our ability to monetize our products.  As a result, any email or ad-blocking technology could, in the future, adversely affect our operating results.

We face competition from traditional media companies, and we may not be included in the advertising budgets of large advertisers, which could harm our operating results.

In addition to Internet companies, we face competition from companies that offer traditional media advertising opportunities. Most large advertisers have set advertising budgets, a portion of which is allocated to Internet advertising. We expect that large advertisers will continue to focus most ofincrease their advertising efforts on traditional media.the Internet. If we fail to convince these companies to spend a portion of their advertising budgets with us, our operating results would be harmed.

17

Because we face significant competition from other social networks and companies with greater resources, we may not be able to compete effectively.

We face formidable competition from other companies that seek to connect young Hispanics online.  Our primary competitors are other companies providing portal and online community services, especially to the Spanish-language Internet users, such as Yahoo!Español, Facebook, MySpace Latino, America Online Latin America, andStarMedia, Hi5, Orkut, Batanga, Terra.com and UOL.com in Brazil.UOL.com.  All of these companies have longer operating histories and more established relationships with customers.  They can use their experience and resources against us in a variety of competitive ways, including by making acquisitions, investing more aggressively in research and development and competing more aggressively for advertisers.  Yahoo and America Online also may have a greater ability to attract and retain users than we do because they operate Internet portals with a broad range of content and products and services.

If we are unable to expand the number of users to our website and generate sufficient revenuesrevenue from Internet advertising, your investment may be jeopardized.

In order to operate our website profitably, we must attract sufficient users, including users who regularly visit our website.  Advertisers reply upon various metrics, including the number of unique visitors, the number of unique page views, and the number of repeat visitors.  These metrics help advertisers determine whether or not to advertise on our website and the price which we will receive from them.  If we unable to attract sufficient users, we will not generate sufficient revenuesrevenue and your investment may be jeopardized.

We send mass e-mail advertisements to attract users to our website. We believe that our business will continue to rely on this method for attracting users in the foreseeable future. If we are unable to send these advertisements on cost-effective terms, this could limit our ability to attract users cost-effectively.

If we fail to increase the number of users who regularly visit our website or fail to attract a sufficient number of advertisers, we will not be able to generate substantial revenues.

Advertising is currently a significant part of our business model. The success of our business depends in part on our ability to offer our advertising customers access to a large audience of users. As a result, it is critical to our success that we continually add substantial numbers of new users including many who regularly visit our website. If we are unable to meet these goals, we will not be able to generate substantial revenues.revenue.

If we fail to enhance our existing services and products or develop and introduce new features in a timely manner to meet changing customer requirements, our ability to grow our business will suffer.

Our social network depends in part on rapidly changing technologies, which will impact our capacity to allow multiple users. These market characteristics are heightened by the changing nature of the Internet and the continuing trend of companies from many industries to offer Internet-based applications and services. The widespread adoption of new Internet, networking, streaming media, or telecommunications technologies or other technological changes could require us to incur substantial expenditures to modify or adapt our operating practices or infrastructure. Our future success will depend in large part upon our ability to:

·

identify and respond to emerging technological trends in the market;

·

develop programming that attracts and retains large numbers of unique viewers and visitors;

·

enhance our products by adding innovative features that differentiate our products and services from those of our competitors;

·

acquire and license leading technologies; and

·

respond effectively to new technological changes or new product and services announcements by others.

We will not be competitive unless we continually introduce new services and programs or enhancements to existing services and programs that meet evolving industry standards and user needs.

If our cost reduction initiatives do not yield anticipated benefits or if we do not manage our operating expenses effectively, our business could be affected.

BecauseWe have implemented cost reduction initiatives designed to better align our operating expenses with our revenue projection and working capital, including reducing our headcount, consolidating space and terminating leases. We plan to continue to implement these initiatives and to manage costs to better and more efficiently manage our business. Our cost reduction initiatives, however, might not yield the anticipated benefits. Our operating expenses might also increase, from their reduced levels, as we are requiredexpand our operations in areas of desired growth, continue to raise capital indevelop and extend the future in orderQuepasa brand, and fund product development. In addition, deteriorating economic conditions or other factors could cause our business to meetcontract requiring us to implement additional cost cutting measures. If we do not recognize the requirementsanticipated benefits of our business, such capital may only be available,cost reduction initiatives, our expenses

18

increase at a greater pace than our current cash burn, or we fail to implement additional cost cutting measures, if at all, on unfavorable terms and may be very dilutive torequired, in a timely manner, our existing shareholders.

Our inability to achieve meaningful revenues may cause us to seek new financing.  Our ability to raise future equity or debt capitalcontinue as a going concern will be dependent upon future market conditions as well as our results of operations.  Such capital may be available, if at all, on very unfavorable terms and may be extremely dilutive to existing shareholders. Moreover, our outstanding long-term debt may be an impediment to obtaining additional financing.

Even if we secure additional working capital, we may not be able to negotiate terms and conditions for receiving the additional capital that are acceptable to us. Based on the current condition of the capital markets and the credit markets, as well as our lack of material revenue, any future equity capital investments will substantially dilute existing shareholders. In addition, new equity or convertible debt securities issued by us to obtain financing could have rights, preferences and privileges senior to our common stock. Investors may perceive this event in a negative light and sell our common stock. We cannot give you any assurance that any additional financing will be available to us, or if available, will be on terms favorable to us.  Accordingly, this may cause our future stock price to fall.question.

If we fail to retain our key personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.

Our future depends, in part, on our ability to attract and retain key personnel and the continued contributions of our executive officers, each of whom may be difficult to replace. In particular, John Abbott, Chief Executive Officer, Michael Matte, Chief Financial Officer and Louis Bardov, Chief Technology Officer, and Michael Matte, Chief Financial Officer are important to the management of our business and operations and the development of our strategic direction. The loss of the services of Messrs. Abbott, BardovMatte or MatteBardov and the process to replace any key personnel would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives.

Interruption or failure of our information technology and communications systems could hurt our ability to effectively provide our products and services, which could damage our reputation and harm our operating results.

The availability of our products and services depends on the continuing operation of our information technology and communications systems. Any damage to or failure of our systems could result in interruptions in our service, which could reduce our revenues and profits,revenue, and damage our brand. Our systems are vulnerable to damage or interruption from terrorist attacks, floods, fires, power loss, telecommunications failures, computer viruses, computer denial of service attacks or other attempts to harm our systems. Our data centers located in Arizona and Texas, are subject to break-ins, sabotage and intentional acts of vandalism, and to potential disruptions if the operators of these facilities have financial difficulties. Some of our systems are not fully redundant, and our disaster recovery planning cannot account for all eventualities. The occurrence of a natural disaster, a decision to close a facility we are using without adequate notice f orfor financial reasons, or other unanticipatedunanticipate d problems at our data centers could result in lengthy interruptions in our service.

Our business depends on increasing use of the Internet by advertisers marketing products and services and websites seeking to earn revenue to support their web content. If the Internet infrastructure does not grow and is not maintained to support these activities, our business will be harmed.

Our success will depend on the continued growth and maintenance of the Internet infrastructure. Internet infrastructure may be unable to support the demands placed on it if the number of Internet users continues to increase, or if existing or future Internet users access the Internet more often or increase their bandwidth requirements. In addition, viruses, worms and similar programs may harm the performance of the Internet. The Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure, and could face outages and delays in the future. These outages and delays could reduce the level of Internet usage as well as our ability to provide our solutions.

If we cannot manage our growth effectively, we may not become profitable.

Businesses which grow rapidly often have difficulty managing their growth. If our business continues to grow as rapidly as we anticipate, we will need to expand our management by recruiting and employing experienced executives and key employees capable of providing the necessary support.

We cannot assure you that our management will be able to manage our growth effectively or successfully. Our failure to meet these challenges could cause us to lose money, and your investment could be lost.

If we are unable to protect our intellectual property rights, we may be unable to compete with competitors developing similar technologies.

Our success and ability to compete are often dependent upon internally developed software technology that we developed for our Quepasa.com website. While we rely on copyright, trade secret and trademark law to protect our technology, we believe that factors such as the technological and creative skills of our personnel, new productservice developments, frequent product enhancements or our services and reliable product maintenance are more essential to establishing a technology leadership position. There can be no assurance that others will not develop technologies that are similar or superior to our technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our technology, making it more difficult for us to compete.

BecauseIf Government regulation of improper conduct by users ofthe Internet increases, it may adversely affect our website, we couldbusiness and operating results.

We may be subject to claims and compliance costs.

We are subject to lawsadditional operating restrictions and regulations directly applicablein the future. Companies engaging in online search, commerce and related businesses face uncertainty related to providersfuture government regulation of the Internet. Due to the rapid growth and widespread use of the Internet, services both domesticallyfederal and internationally. The application of existing domesticstate governments are enacting and internationalconsidering various laws and regulations relating to issues such as user privacythe Internet. Furthermore, the application of existing laws and data protection,regulations to Internet companies remains somewhat unclear. Our business and intellectual property ownership and infringement in many instances is unclear or unsettled. In addition, we will alsooperating results may be subject to anynegatively affected by new laws, and such existing or new regulations directly applicablemay expose us to our Internet activities.substantial compliance costs and liabilities and may impede the growth in use of the Internet. Internationally, we may also be subject to domestic laws regulating our activities in foreign countries and to foreign laws and regulations that are inconsistent from country to country. Political factors may cause governments to restrict Internet Social Networking usage as has occurred in Non-Hispanic countries. Other countries, including Venezuela, may begin to restrict the usage of Internet Social Networks.  We may incur substantial liabilities for expenses necessary to comply with these laws and regulations or penalties for any failure to comply. Compliance with

19

The application of these statutes and others to the Internet search industry is not entirely settled. Further, several existing and proposed federal laws and regulations may also cause us to change or limitcould have an impact on our business practices in a manner adverse to our business.business:

·

The Digital Millennium Copyright Act has provisions that limit, but do not necessarily eliminate, ourand its related safe harbors, are intended to reduce the liability of online service providers for listing or linking to third-party web siteswebsites that include materials that infringe copyrights or other rights so long as we comply withof others.

·

The CAN-SPAM Act of 2003 and certain state laws are intended to regulate interstate commerce by imposing limitations and penalties on the statutory requirementstransmission of this act. Portions ofunsolicited commercial electronic mail via the Internet.

·

The Communication Decency Act areis intended to provide statutory protections to online service providers who distribute third party content. In the area of

·

Some data protection many states have passed laws requiring notification tosuch as California’s Information Practices Act require notifying users when there is a security breach forof personal data, such as California’s Information Practices Act. We face similar risks and costs as our products and services are offereddata.

·

There have been several bills introduced in international markets andthe Congress in recent years relating to protecting privacy. As with any change in Presidential administration, especially to one more likely to protect privacy, new legislation in this area may be enacted.

With respect to the subject to additional regulations.  Additionally, becausematter of our international focus,each of these laws, courts may apply these laws in unintended and unexpected ways.  As a company that provides services over the Internet, we may be subject to an action brought under any of these or future laws governing online services. We may also be subject to costs and liabilities with respect to privacy issues.  Several Internet companies have incurred costs and paid penalties for violating their privacy policies.  Further, it is anticipated that new legislation may be adopted by federal and localstate governments with respect to user privacy.  Additionally, foreign governments may pass laws affectingwhich could negatively impact our business or may prosecute us for our products and services based upon existing laws.  The restrictions imposed by and cost of complying with, current and possible future laws and regulations related to our business could harm our business and operating results.

If there are changes in regulations or user concerns regarding privacy and protection of user data, or we fail to comply with such laws, it could adversely affect our business.

Federal, state and international laws and regulations govern the collection, use, retention, sharing and security of data that we receive from and about our users. We have posted on our and many of our affiliates’ websites our own privacy policies and practices concerning the collection, use, and disclosure of user data. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any data-related consent orders, Federal Trade Commission requirements or orders, or other federal, state, or international privacy or consumer protection-related laws, regulations or industry self-regulatory principles could result in proceedings or actions against us by governmental entities or others, which could potentially have an adverse effect on our business.

Further, failure or perceived failure by us to comply with our policies, applicable requirements, or industry self-regulatory principles related to the collection, use, sharing or security of personal information, or other privacy or data protection-related matters could result in a loss of user confidence in us, damage to the Quepasa brand, and ultimately in a loss of users, and advertising partners, or which could adversely affect our business.

In addition, various federal, state and foreign legislative or regulatory bodies may enact new or additional laws and regulations concerning data privacy and retention issues which could adversely impact our business. The interpretation and application of privacy, data protection and data retention laws and regulations are currently unsettled in the U.S. and internationally. These laws may be interpreted and applied inconsistently from country to country and inconsistently with our current data protection policies and practices. Complying with these varying international requirements could cause us to incur substantial costs or require us to modifychange our business meth ods whichpractices in a manner adverse to our business.

If we fail to prevent click fraud or if we choose to manage traffic quality in a way that advertisers find unsatisfactory, our profitability might decline.

A portion of our revenue arises from advertisers that pay for advertising on a price-per-click basis, meaning that the advertisers pay a fee every time a user clicks on their advertising. This pricing model can be costly.vulnerable to

20

so-called “click fraud,” which occurs when clicks are submitted on ads by a user who is motivated by reasons other than genuine interest in the subject of the ad. On Quepasa properties and affiliate sites, we are exposed to the risk of click fraud or other clicks or conversions that advertisers may perceive as undesirable. If fraudulent or other malicious activity is perpetrated by others and we are unable to detect and prevent it, or if we choose to manage traffic quality in a way that advertisers find unsatisfactory, the affected advertisers may experience or perceive a reduced return on their investment in our advertising and marketing programs which could lead the advertisers to become dissatisfied and they might refuse to pay or demand refunds. This could damage our brand and lead to a loss of advertisers and revenue. Advertiser dissatisfaction has led to litigation alleging click fraud and other types of traffic quality-related claims and could potentially lead to further litigation or government regulation of advertising. We may also issue refunds or credits as a result of such activity. Any failureincrease in costs due to any such litigation, government regulation or legislation, refunds or credits could negatively impact our profitability.

If there is new tax treatment of companies engaged in Internet commerce may adversely affect the commercial use of our marketing services and our financial results.

Due to the global nature of the Internet, it is possible that, governments of states or foreign countries might attempt to tax our activities.  As the recession placed budgetary pressures on our partgovernments, it is possible that they may seek to comply with these laws andtax all Internet sales.  New or revised tax regulations may subject us to additional liabilities.sales, income and other taxes. We cannot predict the effect of current attempts to impose sales, income or other taxes on commerce over the Internet. New or revised taxes and, in particular, sales taxes, would likely increase the cost of doing business online, reduce Internet sales and decrease the attractiveness of advertising over the Internet. Any of these events could have an adverse effect on our business and results of operations.

If we cannot address technological change in our industry in a timely fashion and develop new products and services, our future results of operations may be adversely affected.

The Internet and electronic commerce industries are characterized by:

·

rapidly changing technology;

·

evolving industry standards and practices that could render our website and proprietary technology obsolete;

·

changes in Hispanic consumer tastes and demands; and

·

frequent introductions of new services or products that embody new technologies.

Our future performance will depend, in part, on our ability to develop, license or acquire leading technologies and program formats, enhance our existing services and respond to technological advances and consumer tastes and emerging industry standards and practices on a timely and cost-effective basis. Developing website and other proprietary technology involves significant technical and business risks. We also cannot assure you that we will be able to successfully use new technologies or adapt our website and proprietary technology to emerging industry standards. We may not be able to remain competitive or sustain growth if we do not adapt to changing market conditions or customer requirements.

If we are subject to intellectual property infringement claims, it could cause us to incur significant expenses, pay substantial damages and prevent service delivery.

Third parties may claim that our products or services infringe or violate their intellectual property rights. Any such claims could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages and prevent us from using licensed technology that may be fundamental to our business service delivery. Even if we were to prevail, any litigation regarding its intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations. We may also be obligated to indemnify our business partners in any such litigation, which could further exhaust our resources. Furthermore, as a result of an intellectual property challenge, we may be prevented from providing some of our services unless we enter into royalty, license or other agreements. We may not be able to obtain such ag reementsagreements at all or on terms acceptable to us, and as a result, we may be precluded from offering some of our products and services.

21

Because we are pursuing a strategy of seeking to commercialize our services internationally, we are subject to risks frequently associated with international operations, and we may sustain large losses if we cannot deal with these risks.

Our business model is aimed at Spanish and Portuguese speaking persons who live primarily outside the United States as well as Hispanics living in the United States. We also maintain material operations in Mexico.  Because of the diverse number of countries including Mexico and those located in Central and South America, we will be required to focus our business on unique local cultural differences which vary from country to country. If we are able to successfully develop international markets, we would be subject to a number of risks, including:

·

Changes in laws or regulations resulting in more burdensome governmental controls, regulation of the Internet, privacy protection, or restrictions;

·

Being able to attract users from countries with different local cultures;

·

Volatility in currency exchange rates;

·

Political and economic instability;

·

Extended payment terms beyond those customarily offered in the United States;

·

Difficulties in managing sales representatives and employees outside the United States; and

·

Potentially adverse tax consequences.

If we cannot manage these risks, we may sustain large losses.

Risks Relating to Our Common Stock

Because our stock price may be volatile due to factors beyond our control, you may lose all or part of your investment.

Our operating results have been in the past, and in the future are likely to be, subject to quarterly and annual fluctuations as a result of numerous factors, including:

·

changes in the growth rate of our members,

·

changes in the usage of Quepasa.com by our members,

·

independent reports relating to the metrics of our website, including the number of visitors,

·

our failure to generate increases in revenues,revenue,

·

our failure to achieve or maintain profitability,

·

actual or anticipated variations in our quarterly results of operations,

·

announcements by us or our competitors of significant contracts, new products,services, acquisitions, commercial relationships, joint ventures or capital commitments,

·

the loss of significant business relationships,

·

changes in market valuations of similar companies,

·

the loss of major advertisers, or publishers,

·

future acquisitions,

·

the departure of key personnel,

·

short selling activities, or

·

regulatory developments, or

·

independent reports relating to the metrics of our website, including the number of visitors.developments.

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs and divert our management’s time and attention, which would otherwise be used to benefit our business.

Because we are subject to the “penny stock” rules, brokers cannot generally solicit the purchase of our common stock which adversely affects its liquidity and market price.

The Securities and Exchange Commission or SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock has been substantially less than $5.00 per share and therefore we are currently considered a “penny stock” according to SEC rules. This designation requires any broker-dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is

22

reasonably suitable to purchase the securities. These rules limit the ability of broker-dealers to solicit purchases of our common stock and therefore reduce the liquidity of the public market for our shares.

We may issue preferred stock without the approval of our shareholders, which could make it more difficult for a third party to acquire us and could depress our stock price.

Our Board of Directors may issue, without a vote of our shareholders, one or more additional series of preferred stock that have more than one vote per share.  This could permit our Board of Directors to issue preferred stock to investors who support our management and give effective control of our business to our management. Additionally, issuance of preferred stock could block an acquisition resulting in both a drop in our stock price and a decline in interest of our common stock. This could make it more difficult for shareholders to sell their common stock. This could also cause the market price of our common stock shares to drop significantly, even if our business is performing well.

An investment in Quepasa will be diluted in the future as a result of the issuance of additional securities, the exercise of options or warrants or the conversion of outstanding preferred stock.

In order to raise additional capital to fund its strategic plan, we expect to issue additional shares of common stock or securities convertible, exchangeable or exercisable into common stock from time to time, which could result in substantial dilution to investors. If we are successful in raising capital, we expect to issue securities convertible into common stock which would result in substantial dilution to investors. The current condition of the credit markets and the recession combined make it probably that if we are able to raise any working capital, it will be through the issuance of convertible debt which will be very dilutive. We cannot assure you that we will be successful in raising additional capital.

Because our officers and directors do not solely by virtue of their ownership of our common stock control Quepasa, it is possible that third parties could obtain control and change the direction of our business.

Our officers and directors beneficially own 1,308,2881,380,963 shares or 10.8% of our outstanding shares of our common stock or 10.3% of the shares actually outstanding.stock.  By including shares of common stock which are issuable upon exercise of options and warrants held by them, they beneficially own 5,857,2067,736,618 shares or 33.9%40.5%.  If all of our equity equivalents are exercised, we would have 23,832,59824,276,336 shares outstanding.  For that reason, it may be easier for a third party couldto obtain control of the CompanyQuepasa and change the direction of our business.

Because almost all of our outstanding shares are freely tradable, sales of these shares could cause the market price of our common stock to drop significantly, even if our business is performing well.

As of the date of this Report,report, we had outstanding 12,715,41112,747,211 shares of common stock of which our directors and executive officers beneficially own 1,308,2881,380,963 which are subject to the limitations of Rule 144 under the Securities Act of 1933.Act. Most of the remaining outstanding shares, including a substantial amount of shares issuable upon the exercise of warrants and options are and will be freely tradable.

In general, Rule 144 provides that any non-affiliate of the Company,Quepasa, who has held restricted common stock for at least six-months, is entitled to sell their restricted stock freely, provided that we stay current in our SEC filings.  After one year, a non-affiliate may sell without any restrictions.

An affiliate of the Companyours may sell after six months with the following restrictions:

(i)

we are current in our filings,

(ii)

certain manner of sale provisions,

(iii)

filing of Form 144, and

(iv)

volume limitations limiting the sale of shares within any three-month period to a number of shares that does not exceed the greater of 1% of the total number of outstanding shares or, the average weekly trading volume during the four calendar weeks preceding the filing of a notice of sale.shares.

Because almost all of our outstanding shares are freely tradable and a number of shares held by our affiliates may be freely sold (subject to Rule 144 limitation), sales of these shares could cause the market price of our common stock to drop significantly, even if our business is performing well.

Because we may not be able to attract the attention of major brokerage firms, it could have a material impact upon the price of our common stock.

It is not likely that securities analysts of major brokerage firms will provide research coverage for our common stock since the firm itself cannot recommend the purchase of our common stock under the penny stock rules referenced in an earlier risk factor. The absence of such coverage limits the likelihood that an active market will develop for our common stock. It may also make it more difficult for us to attract new investors at times when we acquire additional capital.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

Not required for smaller reporting companies.

Item 8.

Financial Statements and Supplementary Data

See pages F-1 through F-24.F-20.

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Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.

Controls and Procedures

Not applicable for smaller reporting companies.

Item 9A(T).

Controls and Procedures

Disclosure Controls

We carried out an evaluation required by Rule 13a-15(b)13a-15 of the Securities Exchange Act of 1934 or the Exchange Act(the “Exchange Act”) under the supervision and with the participation of our management, including our PrincipalChief Executive Officer and PrincipalChief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.

Disclosure controls and procedures are designed with the objective of ensuring that (i) information required to be disclosed in an issuer's reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) information is accumulated and communicated to management, including our PrincipalChief Executive Officer and PrincipalChief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

The evaluation of our disclosure controls and procedures included a review of our objectives and processes and effect on the information generated for use in this Report.report. This type of evaluation is done quarterly so that the

conclusions concerning the effectiveness of these controls can be reported in our periodic reports filed with the SEC. We intend to maintain these controls as processes that may be appropriately modified as circumstances warrant.

Based on their evaluation, our PrincipalChief Executive Officer and PrincipalChief Financial Officer have concluded that our disclosure controls and procedures are effective in timely alerting them to material information which is required to be included in our periodic reports filed with the SEC as of the filing of this Report.report.

Management’s Report on Internal Control Overover Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 20082009 based on the criteria set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the criteria set forth in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2008.2009.

However, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Management necessarily applied its judgment in assessing the benefits of controls relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and may not be detected.

This Reportreport does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. We wereManagement’s report was not requiredsubject to have, nor have we engagedattestation by our independent registered public accounting firm to perform, an audit on our internal control over financial reporting pursuant to thetemporary rules of the SEC that permit us to provide only management’s report in this Report.  report.

Changes in Internal Control Overover Financial Reporting

There were no changes in our internal control over financial reporting during the fourth quarter of 20082009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART III

Item 10.

Directors, Executive Officers and Corporate Governance

The Board consists of eight members listed in the table above. At the 2007 Annual Meeting, the shareholders of Quepasa approved an amendment to our Articles of Incorporation classifying the Board into three classes of approximately equal size (Class I, Class II and Class III). Each class serves for a period of three years, except the initial Class I directors served a period of one year and the initial Class II directors serve for a period of two years from the date of the Amendment.

John C. Abbotthas been a director and Chief Executive Officer since October 2007.  Since February 25, 2009, Mr. Abbott has served as Chairman of the Board and previously served as Chairman from October 25, 2007 until January 18, 2008. Mr. Abbott has over 15 years of experience in strategic advisory and entrepreneurship. Since 2005, Mr. Abbott has been an advisor to Altos Hornos de Mexico, S.A. de C.V. (“AHMSA”). In addition, over the past two years, Mr. Abbott has led investor groups and has served on the executive committees of two start-up efforts in Brazil, namely Click Filmes (www.clickfilmes.com), Brazil’s first hotel video on demand business and Industria de Entretenimento, an entertainment business that owns the rights to the Pacha brand in Brazil, among others. From 1992 to 2005, Mr. Abbott held several senior positions within JP Morgan Securities, Inc.

Michael D. Matte has served as our Chief Financial Officer, Executive Vice-President and Secretary since October 29, 2007. From July 2006 through October 2007, Mr. Matte served as a director of Quepasa. Mr. Matte served as Chief Financial Officer of Cyberguard Corporation from February 2001 to April 2006. Prior to joining Cyberguard Corporation, Mr. Matte was a senior Audit Manager from 1981 to 1992 for Price Waterhouse. Currently, Mr. Matte serves as a director of Iris International, Inc. and GelTech Solutions, Inc.

Louis D. Bardovhas served as our Chief Technology Officer since January 2008. Mr. Bardov has over 21 years’ experience in software development and technology management. Most recently, he worked for Match.com, a leading Internet dating service from 2000 through early January 2008. Mr. Bardov last served as Match.com’s Senior Vice President of Software Development, Customer Care and Customer Retention and previously as the Vice President of Development.

Alonso Ancira has been a director since November 2006. He has served as Chairman of the Board of AHMSA, one of Mexico’s most prestigious industrial consortiums since April 2004. He is also Chairman of the Board of Mexicans & Americans Trading Together, Inc. (“MATT, Inc.”), a wholly-owned subsidiary of AHMSA. From 1991 until April 2004, Mr. Ancira was Vice-Chairman and Chief Executive Officer of AHMSA. He is currently President of Mexico’s Chamber of Iron and Steel, a position he held from 1993 to 1995, and again from 2003 to 2004.

Ernesto Cruz has been a director since November 13, 2007 and is the Chairman of the Audit Committee. Since October 2007, Mr. Cruz has served as the managing partner of Advanzer de Mexico S.A. de C.V. a consulting and audit firm. From March 2002 until October 2007, he was the Managing Partner for the Monterrey and Northeast Mexican offices of Deloitte & Touche, a big four international accounting firm. Mr. Cruz served as the Managing Partner for the Monterrey and Northeast Mexican offices of Arthur Anderson from April 1997 through March 2002. Mr. Cruz is a Certified Public Accountant in Mexico.

James S. Ferris has been a director since July 18, 2008.  Since January 2008, Mr. Ferris has been a Sr. Global Brand Manager at EA Games a division of Electronic Arts, Inc.  From December 2006 until December 2007, Mr. Ferris was a Global Brand Manager at Electronic Arts.  From 2003 to 2006, Mr. Ferris was a Product Manager at EA Sports also a division of Electronic Arts.  Prior to his employment at Electronic Arts, Mr. Ferris was a Product Manager at Hasbro, Inc.

Malcolm Jozoff has been a director since January 2007. Since 2004, Mr. Jozoff has been serving as a corporate advisor to Otsuka Pharmaceutical Co., Ltd., a pharmaceutical and consumer health products company, based in Tokyo, Japan.  From July 1996 to August 2000, Mr. Jozoff was Chairman of the Board of Directors and President and Chief Executive Officer of The Dial Corporation, which markets Dial soaps, Purex laundry detergents, Renuzit air fresheners, and Armour Star canned meats.

Lionel Sosahas been a director since January 2007. Since 2008, Mr. Sosa has been a marketing consultant with Sosa Consultation and Design a position he previously held from 2000 until 2005. From 2005 until 2007, Mr. Sosa also served as executive director of Mexicans & Americans Thinking Together Foundation, Inc. (“MATTF”), a non-profit organization focused on encouraging bicultural relations between Mexicans and Americans.

Dr. Jill Syverson-Stork has been a director since September 2006 and a member of the Audit, Compensation and Standards Committees since 2006. Additionally, she is Chairman of the Standards Committee. She has been a Professor at Wellesley College from September 1989 to the present, and is the Coordinator of Intermediate Spanish and the Director of the Spanish Language House and Cultural Center.

Jeffrey Valdez has been a director since January 18, 2008 and previously served as Chairman of the Board from January 18, 2008 until February 25, 2009.  Since January 2008, Mr. Valdez has served as the Co-Chairman of Maya Entertainment, a film releasing company focusing on the 12-24 Latino demographic. Also in 2007, Mr. Valdez partnered with David Zucker of Zucker Brothers Productions and formed Sandbox Entertainment. From 2003 to 2006, Mr. Valdez launched the Si TV channel, a Latino themed cable channel, which is currently in over 17 million households and has served on its Board since 2003. In 1997, Mr. Valdez co-founded Sí TV Productions, a producer of Latino-themed, English-language programming. Among Mr. Valdez’s many honors, CNN has named him one of the “Top 50 People Who Matter” and Advertising Age has named him one of the “Top 50 Marketers in America.” Mr. Valdez was appointed by President Clinton to the Advisory Committee on the Arts to the John F. Kennedy Center for the Performing Arts.

There are no family relationships between any of our directors and/or executive officers.

Corporate Governance

Board Responsibilities and Structure

The Board oversees, counsels, and directs management in the long-term interest of the Company and shareholders. The Board’s responsibilities include:

·

Establishing broad corporate policies, and

·

Reviewing the overall performance of Quepasa.

Board Committees and Charters

The Board and its committees meet throughout the year on a set schedule, hold special meetings, and act by written consent from time to time as appropriate.

The Board delegates various responsibilities and authority to different Board committees. Committees regularly report on their activities and actions to the Board. The Board currently has, and appoints the members of: (i) the Audit Committee, and (ii) the Compensation and Nominating Committee. The Board has determined that each member of the Audit and Compensation and Nominating Committee is an independent director in accordance with the Nasdaq Stock Market standards. Additionally, the Board has determined that of the eight board members, five of them are independent. Messrs. Ancira, Cruz, Ferris and Jozoff and Dr. Syverson-Stork are the independent directors.

Each committee has a written charter approved by the Board. We post each charter on our website at www.quepasacorp.com. The following table identifies the independent and non-independent current Board and committee members:

The Board held six meetings in 2008 and all of the directors attended over 75% of the combined number of Board and committee meetings, except for Alonso Ancira who attended four of the six Board meetings.  Quepasa does not have a policy with regard to directors’ attendance at the Annual Meeting. At the 2008, Annual Meeting, none of our directors was in attendance.

Audit Committee

The Audit Committee assists the Board in its general oversight of our financial reporting, internal control, and audit functions, and is responsible for the appointment, retention, compensation, and oversight of the work of our independent registered public accounting firm. The Audit Committee also has responsibility for corporate governance. The Board has determined that Mr. Cruz is qualified as an “audit committee financial expert,” as that term is defined by the rules of the Securities and Exchange Commission’s (“SEC”) and in compliance with the Sarbanes-Oxley Act of 2002.  This designation does not impose any duties, obligations or liabilities that are greater than the duties, obligations and liabilities imposed by being a member of the Audit Committee or of the Board. The Board determined that each Audit Committee member has sufficient knowledge in reading and understanding the Company’s financial statements to serve on the Audit Committee. The responsibilities and activities of the Audit Committee are described below in detail in the “Report of the Audit Committee.”  The Board has determined that each of the members of the Audit Committee, Messrs. Cruz and Jozoff and Dr. Syverson-Stork are independent.

Compensation and Nominating Committee

The Compensation and Nominating Committee is primarily responsible for assisting the Board in discharging its duties with respect to the compensation of the Company’s directors and executive officers. The Compensation and Nominating Committee reviews the performance of the Company’s directors and executive officers in achieving corporate goals and objectives and seeks to ensure that the directors and officers are compensated appropriately in a manner consistent with the Company’s business strategies, competitive practices and the requirements of applicable regulatory authorities.

The purpose and responsibilities of the Compensation and Nominating Committee include the identification of individuals qualified to become Board members, the selection or recommendation to the Board of nominees to stand for election as directors, the oversight of the selection and composition of committees of the Board, and the oversight of the evaluations of the Board and management. The Compensation and Nominating Committee will consider persons recommended by shareholders for inclusion as nominees for election to our Board if the names, biographical data, and qualifications of such persons are submitted in writing in a timely manner addressed and delivered to our Company’s Secretary at our Florida offices, 224 Datura Street, Suite 1100, West Palm Beach, Florida 33401. The Compensation and Nominating Committee identifies and evaluates nominees for our Board, including nominees recommended by shareholders, based on numerous factors it considers appropriate, some of which may include strength of character, mature judgment, career specialization, relevant technical skills, diversity, and the extent to which the nominee would fill a present need on our Board.

The Compensation and Nominating Committee may, by majority vote of its full membership, create one or more subcommittees comprised of members of the Compensation and Nominating Committee, and may vest any such subcommittee with full authority with respect to the specific matters delegated to such committee.

Shareholder Communications

Although we do not have a formal policy regarding communications with the Board, shareholders may communicate with the Board by writing to us at Quepasa Corporation, Attention: Michael D. Matte, 224 Datura Street, Suite 1100, West Palm Beach, Florida 33401, or by visiting the Company’s website at www.quepasacorp.com.  Shareholders who would like their submission directed to a member of the Board may so specify, and the communication will be forwarded, as appropriate.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who beneficially own more than 10% of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and the other equity securities of Quepasa. Officers, directors and persons who beneficially own more than 10% of a registered class of our equity securities areinformation required by the regulations of the SEC to furnish us with copies of all Section 16(a) forms they file.

Based solely on a review of the copies of the forms furnished to us, we believe that all filing requirements applicable tothis Item is incorporated by reference in our officers, directors and 10% beneficial owners were complied with during fiscal year 2008 except as follows:2010 Proxy Statement.

———————

(1)

Represents stock option grants vesting subject to performance milestones.  On July 24, 2008, the directors filed Form 4s reflecting these grants but inadvertently did not file additional Form 4s to report the vesting of the options.  

Code of Ethics

Quepasa has adopted a Code of Ethics that applies to its Principal Executive Officer, Principal Financial Officer, and Principal Accounting Officer. To see a copy of the Code of Ethics, please go to the Quepasa website at www.quepasacorp.com.

Item 11.

Executive Compensation

The following information is related to the compensation paid, distributed or accrued by us for 2008 and 2007 to our Chief Executive Officer (principal executive officer) and the two other most highly compensated executive officers serving at the end of the last fiscal year whose compensation exceeded $100,000 (the “Named Executive Officers”).

2008 Summary Compensation Table

———————

(1)

This column shows the dollar amounts recognized in the Company’s year-end 2008 financial statements for reporting purposes in accordance with SFAS 123(R).  Amounts shown cover awards granted in 2008 and in prior years.  The amounts represent the compensation costs of awards that are paid in options and shares of the Company’s common stock (the amounts do not reflect the actual amounts that may be realized by the directors).  A discussion of the assumptions used in calculating these values may be found in Note 9 to the consolidated audited financial statements.

(2)

In lieu of $80,000 salary for 2008, Mr. Abbott elected to receive vested stock options.  Of the options: (i) 54,237 vested immediately.  All of these options are exercisable at $2.43 per share.

(3)

Includes payments for service as a director.

(4)

In lieu of $75,000 bonus, Mr. Matte elected to receive 50,847 fully vested 10-year stock options exercisable at $2.43 per share.

(5)

Mr. Bardov began serving as Chief Technology Officer in January 2008.

Outstanding Equity Awards at Fiscal Year End

Listed below is information with respect to unexercised options that have not vested, and equity incentive plan awards for each Named Executive Officer outstanding as of December 31, 2008:

_______________________

(1)

Subject to meeting performance milestones.  

See the discussion below of the Named Executive Officers’ employment agreements and payments provided to them upon a change of control of the company.

John C. Abbott Employment Agreement

On October 30, 2007, Quepasa entered into an employment agreement with its Chief Executive Officer, John C. Abbott. Pursuant to the terms of the employment agreement, Mr. Abbott receives an annual base salary of $80,000 and received options to purchase 1,897,492 shares of common stock, exercisable at $3.05 per share under the 2006 Plan. One-third of the shares vest October 25, 2008 and the remaining shares vest in 24 equal monthly installments over the following two years, subject to remaining employed on each applicable vesting date. Additionally, Mr. AbbottThe information required by this Item is eligible to participateincorporated by reference in our discretionary management bonus program with one-half based upon cost reductions and one-half based upon increases in cash flow. The three levels are 50%, 150% and a target bonus 300% of base salary.

Effective November 1, 2008, Mr. Abbott waived $80,000 in salary due to him for fiscal 2008 in exchange for 54,237 10-year fully vested stock options. Additionally, Mr. Abbott waived his 2009 cash compensation and was granted 54,237 10-year stock options in lieu of $80,000 cash compensation for 2009, which options vest in equal increments at the end of each month commencing November 1, 2008 through October 31, 2009, subject to his continued employment with the Company on the applicable vesting dates. All of the stock options are exercisable at $2.43 per share.

Michael D. Matte Employment Agreement

On October 30, 2007, Quepasa entered into an employment agreement with its new Chief Financial Officer, Michael D. Matte. In accordance with the agreement, Mr. Matte received an annual base salary of $100,000 per year, which was increased to $250,000 (discussed below), and received options to purchase 1,475,827 shares, exercisable at $3.25 per share under the 2006 Plan. One-third of the shares vest on October 29, 2008 and the remaining shares vest in 24 equal monthly installments over the following two years, subject to remaining employed on each applicable vesting date. Mr. Matte was reimbursed for relocation expenses. Additionally, he is eligible to participate in our discretionary management bonus program with one-half based upon cost reductions and one-half based upon increases in cash flow. The three levels of the target bonus are 50%, 150% and 300% of base salary.

Amendment to Abbott and Matte Agreements

Effective as of March 27, 2008, the Compensation Committee approved amendments to the employment agreements with John C. Abbott and Michael D. Matte, the Company’s Chief Executive Officer and Chief Financial Officer, respectively. The amendments provide for immediate vesting of their stock options following a change of control of Quepasa. Additionally, they will have the right to exercise these stock options for a period of two years after they are terminated.

Effective November 1, 2008, Mr. Matte’s salary was increased to $250,000; however, he waived $100,000 of the increase in exchange for 67,797 10-year stock options exercisable at $2.43 per share.  The options vest monthly from November 30, 2009 through October 31, 2009, subject to continued employment with the Company on each applicable vesting date.   Mr. Matte’s base salary is now $150,000 per year.

Louis D. Bardov Employment Agreement

Effective as of January 20, 2008, Quepasa entered into an employment agreement with its new Chief Technology Officer, Louis D. Bardov. Mr. Bardov receives an annual base salary of $160,000 per year. He also received 10-year options to purchase 500,000 shares of common stock, exercisable at $2.49 per share. The options vest in equal annual increments on January 18, 2009, 2010 and 2011, subject to Mr. Bardov remaining as an employee on each applicable vesting date. Additionally, he is eligible to participate in our discretionary management bonus program with an initial target bonus of $100,000 of base salary.Proxy Statement.

Severance Provision

Messrs. Abbott and Matte are entitled to severance in the event that they are dismissed without cause or they resign for good reason, including upon a change of control. In any of such events, they will receive two years base salary, two times the highest target or bonus for that year, their stock options vest and they will have two years to exercise their options post termination. If Mr. Bardov is terminated without cause, he is entitled to six months base salary, his stock options will vest and he will have three months to exercise his options post-termination. If his employment is terminated following a change of control, he will receive six months’ severance.

Compensation of Directors

We do not pay cash compensation to our directors for service on our Board of Directors. Non-employee members of our Board of Directors were compensated with restricted common stock and stock options in 2008 for services as a director.

2008 Director Compensation

———————

(1)

This column shows the dollar amounts recognized in the Company’s year-end 2008 financial statements for reporting purposes in accordance with SFAS 123(R).  Amounts shown cover awards granted in 2008 and in prior years.  The amounts represent the compensation costs of awards that are paid in options and shares of the Company’s common stock (the amounts do not reflect the actual amounts that may be realized by the directors).  A discussion of the assumptions used in calculating these values may be found in Note 9 to the consolidated audited financial statements.

(2)

Excluding Mr. Ferris, each director received 3,500 shares of common stock and 12,500 stock options exercisable at $2.49 per share for their service as directors; all of these options vested on December 31, 2008.  Mr. Ferris was appointed on July 18, 2008 and was granted 1,750 shares of common stock and 6,250 10-year stock options exercisable at $2.07 per share of which 2,604 were vested at December 31, 2008. Additionally, committee chairpersons were granted 1,600 shares of common stock.

(3)

Under a consulting agreement, Mr. Valdez was granted 210,000 10-year stock options exercisable at $2.49 per share subject to vesting.  See Item 13. Certain Relationships and Related Transactions, and Director Independence.

We have not made any decisions with respect to 2009 director compensation.

Equity Compensation Plan Information

The following represent the number of options and weighted average exercise price for grants under our equity compensation plans as of December 31, 2008:

At the 2008 Annual Meeting, the shareholders amended the Company’s 2006 Stock Incentive Plan (the “2006 Plan”) to increase the number of shares from 4,141,925 to 6,141,925. In the following paragraphs we provide a summary of the terms of the 2006 Plan. The following summary is qualified in its entirety by the provisions of the 2006 Plan which is available to any shareholder upon request of Quepasa.

Shareholder Protections

The 2006 Plan contains the following features, among others, designed to protect shareholders from certain perceived abuses:

·

all options and stock appreciation rights (“SARs”) are required to be issued at a price that is not less than the underlying common stock’s fair market value as of the date of grant;

·

neither the Board nor any committee of the Board may reprice awards or amend the 2006 Plan to permit a repricing without shareholder approval;

·

the exercise of a stock-settled SAR or a net-cashless exercise of an option will reduce the number of shares available to be issued under the 2006 Plan by the entire number of shares subject to that SAR or option, even though a smaller number of shares will be issued upon such an exercise; and

·

shares tendered to pay the exercise price of an option or to satisfy a tax withholding obligation arising in connection with an award will not be available for grant under the 2006 Plan.  

Administration

The Board or the Compensation and Nominating Committee (either, the “Administrator”) of the Board has the exclusive authority to administer the 2006 Plan. The Compensation and Nominating Committee (the “Compensation Committee”) must consist of at least two directors, each of whom qualifies as a “non-employee director” as defined in Rule 16b-3(b)(3) of the Securities Exchange Act of 1934 (the “Exchange Act”), and an “outside director” under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). The Administrator will have the power to determine eligibility to receive an award, the amount and type of award, and the terms and conditions of any award. The Administrator may delegate some or all of its authority to issue options or other rights under the 2006 Plan to the Company’s Chief Executive Officer, subject to limitations as determined by the Adm inistrator. The Administrator may revoke this delegation at any time.

Eligibility

Persons eligible to participate in the 2006 Plan include present and future employees and Board members of, and consultants and advisors to, the Company and its subsidiaries, as determined by the Administrator. Awards made to a prospective member of the Board, employee, officer, consultant, or advisor must specifically provide that no portion of the award will vest, become exercisable, or be issued prior to the date on which the individual begins providing services to the Company or its subsidiaries.

Limitation on Awards

For incentive stock options, as defined by the Code, we may only issue 200,000 options. The number of shares reserved for grant pursuant to the 2006 Plan is subject to adjustment in the event of certain events including any stock dividend or reverse stock split.

The exercise of a stock-settled SAR or net-cashless exercise of an option (or a portion thereof) will reduce the number of shares of stock available for issuance under the 2006 Plan by the entire number of shares of stock subject to that SAR or option (or applicable portion thereof), even though a smaller number of shares of stock will be issued upon such an exercise. Also, shares of stock tendered to pay the exercise price of an option or tendered or withheld to satisfy a tax withholding obligation arising in connection with an award will not become available for grant or sale under the 2006 Plan. The Board or the Compensation Committee may adopt such other reasonable rules and procedures as it deems to be appropriate for purposes of determining the number of shares of stock that are available for awards under the 2006 Plan.

No more than 200,000 shares of common stock may be granted to any one participant during a calendar year. The maximum performance-based award payable to any one participant during a performance period is 200,000 shares of stock or the cash equivalent.

Awards

The following types of incentive awards may be granted under the 2006 Plan: incentive stock options, non-qualified stock options, SARs, restricted common stock, common stock, performance shares and performance-based shares.

Stock options. The Board or the Compensation Committee may grant incentive stock options and non-qualified stock options under the 2006 Plan. Incentive stock options may be granted only to participants who are employees. The exercise price of all stock options must be at least 100% of the fair market value of the stock on the date that the option is granted. Stock options may be exercised as determined by the committee provided that the term of any option granted under the 2006 Plan may not exceed 10 years. The Board or the Compensation Committee will determine the methods by which the exercise price of an option may be paid and the methods by which shares of stock may be delivered to participants. The Board or the Compensation Committee may not reprice options previously granted under the 2006 Plan.

Stock appreciation rights. The Board or the Compensation Committee may grant SARs under the 2006 Plan. An SAR entitles the participant to receive the appreciation on one share of common stock from the date of grant to the date of exercise of the SAR. Appreciation is calculated as the excess of (i) the fair market value on the date of exercise over (ii) the base value of the SAR, as determined by the Administrator, which may not be less than the fair market value of the stock on the date of grant. The terms and conditions of any SAR will be determined by the Administrator at the time of the grant.

Restricted stock. The Board or the Compensation Committee may grant restricted stock under the 2006 Plan. A restricted stock award gives the participant the right to receive a specified number of shares of stock at a price determined by the Compensation Committee (including zero). Restrictions may limit transferability and subject the stock to a substantial risk of forfeiture until specific conditions or goals are met. During the restriction period, if permitted by the Administrator, participants holding shares of restricted stock may be entitled to full voting and dividend rights with respect to the restricted shares. The restrictions will lapse in accordance with a schedule or other conditions as determined by the Administrator. As a general rule, if a participant terminates employment when the stock is subject to restrictions, the participant forfeits the unvested restricted stock. The Board or the Compensation Committee may, in its discretion, waive the restrictions in whole or in part.

Common stock. The Administrator may grant unrestricted common stock (or sell such shares) which means the shares are not subject to future vesting and may be immediately sold assuming compliance with applicable securities laws.

Performance share awards. The Board or the Compensation and Nominating Committees may grant performance share awards under the 2006 Plan. A performance share award gives the participant the right to receive stock if certain performance criteria or goals are satisfied. Performance may be measured on a specific date or dates or over any period or periods as determined by the Administrator.

Performance-based awards. Under the 2006 Plan, restricted stock and performance shares may be designated as performance-based awards. Performance-based pay awards are not subject to the $1,000,000 limitation on deductible compensation pursuant to Section 162(m) of the Code. Performance-based awards are subject to additional requirements, some of which are described below, which are required in order to be treated as “performance-based compensation” under Section 162(m) of the Code. The deductibility of these awards is preserved for federal income tax purposes. Because Section 162(m) of the Code only applies to “covered employees,” as defined in Section 162(m), only covered employees will receive awards that will be classified as performance-based awards.

Pre-established performance criteria must be met before a participant is eligible to receive payment for a performance-based award. Pre-established performance criteria must be based on one or more of the following: pre- or after-tax net earnings, earnings before interest expense (including interest amortized to cost of sales) and income taxes; earnings before interest expense (including interest amortized to cost of sales); income taxes; depreciation and amortization; revenue growth; operating income; operating cash flow; return on net assets; return on shareholders’ equity; return on assets; return on capital; share price growth; shareholder returns; gross or net profit margin; earnings per share; price per share; and market share; any of which may be measured either in absolute terms or as compared to any incremental increase or as compared to results of a peer group. The compensation committee has

discretion to select the length of the performance period, the type of performance-based awards, and the criteria or goals used to measure the performance.

The performance criteria and other related aspects of the 2006 Plan will be subject to shareholder approval again in 2011 if shareholder approval is then required to maintain the tax-deductible nature of performance-based compensation under the 2006 Plan.

Amendment and Termination

The Compensation Committee, with the Board’s approval, may terminate, amend, or modify the 2006 Plan at any time, except where shareholder approval for an amendment is required by applicable law, regulation, or stock exchange rule. The 2006 Plan may not be amended to (i) permit a repricing, (ii) increase the number of shares available, (iii) permit the Administrator to grant options with an exercise price below fair market value, or (iv) permit the Administrator to extend the exercise period for an option beyond 10 years from the date of grant without shareholder approval. As a general rule, the Compensation Committee cannot terminate, amend, or modify the 2006 Plan in a way that has a material adverse effect on any participant’s outstanding award without the participant’s consent.

The 2006 Plan will terminate on June 27, 2017. In no event may an award be granted under the 2006 Plan on or after June 27, 2017. Awards outstanding on the termination date will not be affected by the termination.

Federal Income Tax Consequences

The following is a summary of the principal federal income tax consequences of the 2006 Plan. State, local, and foreign income taxes may also be applicable.

With the exception of a stock grant, a participant will not recognize taxable income at the time of grant.

Upon exercise of a non-qualified stock option, the lapse of restrictions on restricted stock, or upon the payment of SARs, stock grants, or performance shares, the participant will recognize ordinary taxable income in an amount equal to the difference between the amount paid for the award, if any, and the fair market value of the stock or amount received on the date of exercise, lapse of restriction, or payment. The Company will be entitled to a concurrent deduction equal to the ordinary income recognized by the participant.

A participant who is granted an incentive stock option will not recognize taxable income at the time of exercise. However, the excess of the stock’s fair market value over the option price could be subject to the alternative minimum tax (assuming the stock received is not subject to a risk of forfeiture and is not transferable). If stock acquired upon exercise of an incentive stock option is held for a minimum of two years from the date of grant and one year from the date of exercise, the gain or loss (in an amount equal to the difference between the sales price and the exercise price) upon disposition of the stock will be treated as a long-term capital gain or loss, and the Company will not be entitled to any deduction. If the holding period requirements are not met, the incentive stock option will not meet the requirements of the Code and the tax consequences generally described for non-qualified stock options will apply.

Congress has enacted Section 409A of the Code, which dramatically changes the tax rules for deferred compensation arrangements. Among other things, Section 409A expands the definition of deferred compensation arrangements to include, for example, below market option grants, certain SARs, and performance shares. Upon a violation of Section 409A, a participant must include in ordinary income all deferred compensation required to be aggregated, pay interest from the date of the deferral, and pay an additional 20% tax. The 2006 Plan prohibits the Compensation Committee from taking any action with respect to the operation of the 2006 Plan that would violate Section 409A. Any award agreement subject to Section 409A will include provisions necessary for compliance as determined by the Compensation Committee. The Company intends that awards granted under the 2006 Plan will comply with the requirements of Section 409A and intends to administer and interpret the 2006 Plan in such a manner.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth the number of shares of Quepasa’s common stock beneficially owned as of March 24, 2009information required by (i) those persons knownthis Item is incorporated by Quepasa to be owners of more than 5% of Quepasa’s common stock, (ii) each director (iii) each of the Named Executive Officers, and (iv) all executive officers and directors as a group: