UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-QSB
(Mark One)

[X]      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                For the quarterly period ended September 30, 2006

[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT

                For the transition period from _______ to _______


                        Commission file number 000-30451


                               SPARE BACKUP, INC.
                               ------------------
        (Exact name of small business issuer as specified in its charter)


                DELAWARE                              23-3030650
                --------                              ----------
     (State or other jurisdiction          (IRS Employer Identification No.)
   of incorporation or organization)


                            70361 El Paseo, Suite 202
                          Palm Desert, California 92260
                          -----------------------------
                    (Address of principal executive offices)


                                 (760) 779-0251
                                 --------------
                           (Issuer's telephone number)


                                 not applicable
                                 --------------
              (Former name, former address and former fiscal year,
                         if changed since last report)

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

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

                      APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: At November 1, there were 42,199,316
shares of common stock were issued and outstanding.

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

<PAGE>

         When used in this quarterly report, the terms "Spare Backup," " we,"
"our," and "us" refers to Spare Backup, Inc., a Delaware corporation formerly
known as Newport International Group, Inc., and our subsidiaries.

           CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION

         Certain statements in this report contain or may contain
forward-looking statements that are subject to known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. These
forward-looking statements were based on various factors and were derived
utilizing numerous assumptions and other factors that could cause our actual
results to differ materially from those in the forward-looking statements. These
factors include, but are not limited to, our ability to implement our strategic
initiatives, economic, political and market conditions and fluctuations,
government and industry regulation, interest rate risk, U.S. and global
competition, and other factors. Most of these factors are difficult to predict
accurately and are generally beyond our control. You should consider the areas
of risk described in connection with any forward-looking statements that may be
made herein. Readers are cautioned not to place undue reliance on these
forward-looking statements and readers should carefully review this report in
its entirety. Except for our ongoing obligations to disclose material
information under the Federal securities laws, we undertake no obligation to
release publicly any revisions to any forward-looking statements, to report
events or to report the occurrence of unanticipated events. These
forward-looking statements speak only as of the date of this report and you
should not rely on these statements without also considering the risks and
uncertainties associated with these statements and our business.

                                        2
<PAGE>

                          PART I-FINANCIAL INFORMATION

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS

                               SPARE BACKUP, INC.
                           CONSOLIDATED BALANCE SHEET
                               September 30, 2006
                                   (Unaudited)

                                     ASSETS
Current Assets:
  Cash .........................................................   $    655,401
  Accounts receivable, net of provision for returns of $234,312               -
  Restricted cash ..............................................      1,060,000
                                                                   ------------
     Total current assets ......................................      1,715,401

  Property and equipment, net of accumulated depreciation of
   $168,302 ....................................................        423,781
  Other assets .................................................         76,381
                                                                   ------------

     Total assets ..............................................   $  2,215,563
                                                                   ============

                      LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities:
  Accounts payable and accrued expenses ........................   $    617,026
  8% Convertible promissory notes ..............................        688,413
  12.5% Convertible promissory notes, net of debt discount of
   $155,234 ....................................................        219,766
  Accrued interest on convertible promissory notes .............         25,697
  Derivative liabilities .......................................     13,604,485
  Due to stockholder ...........................................         15,000
                                                                   ------------

     Total current liabilities .................................     15,170,387

  Other liabilities ............................................          6,425
                                                                   ------------

     Total liabilities .........................................     15,176,812

Stockholders' Deficit:
  Preferred stock; $.0001 par value, 5,000,000 shares
   authorized, none issued and outstanding .....................              -
  Common stock; $.001 par value, 150,000,000 shares authorized,
   39,573,617 issued and outstanding ...........................         39,574
  Additional paid-in capital ...................................     35,515,747
  Accumulated deficit ..........................................    (48,223,026)
  Deferred compensation ........................................       (293,544)
                                                                   ------------

     Total stockholders' deficit ...............................    (12,961,249)
                                                                   ------------

     Total liabilities and stockholders' deficit ...............   $  2,215,563
                                                                   ============

            See Notes to Unaudited Consolidated Financial Statements.

                                        3
<PAGE>
<TABLE>
                                              SPARE BACKUP, INC.
                                    CONSOLIDATED STATEMENTS OF OPERATIONS
                                                 (Unaudited)

<CAPTION>
                                                      For the nine-month             For the three-month
                                                         period ended                    period ended
                                                         September 30,                   September 30,
                                                     2006            2005            2006            2005
                                                 ------------    ------------    ------------    ------------
                                                                  (restated)                      (restated)
<S>                                              <C>             <C>             <C>             <C>
Revenues .....................................   $     47,558    $     15,463    $     13,913    $      2,035

Operating expenses:
  Research and development ...................        567,268         469,722         134,150         138,574
  Amortization of deferred compensation ......      1,655,427         287,734         463,232         287,734
  Share-based payment- options ...............      1,960,441         618,018         372,656         335,888
  Sales, general and administrative ..........      4,612,614       3,383,471       1,655,190       1,402,362
                                                 ------------    ------------    ------------    ------------

     Total operating expenses ................      8,795,750       4,758,945       2,625,228       2,164,558
                                                 ------------    ------------    ------------    ------------

     Operating loss ..........................     (8,748,192)     (4,743,482)     (2,611,315)     (2,162,523)
                                                 ------------    ------------    ------------    ------------

Other income-derivative liabilities ..........              -      10,696,213               -               -
Other expenses-derivative liabilities ........     (3,770,230)       (557,620)     (3,255,344)     (1,056,427)
Other expense-liquidated damages .............              -        (172,929)              -               -
Transfer-unrealized gain-investment held
 for sale to trading security ................        112,509               -               -               -
Unrealized loss-transfer of available-for-
 sale securities to trading securities .......              -      (4,999,263)              -               -
Unrealized loss-trading securities ...........              -        (270,384)              -               -
Realized loss-trading securities .............       (111,624)     (5,777,843)              -               -
Interest expense .............................     (2,624,176)     (2,164,744)     (2,145,467)     (1,099,105)
                                                 ------------    ------------    ------------    ------------
  Total other expenses, net ..................     (6,393,521)     (3,246,570)     (5,400,811)     (2,155,532)

Net loss .....................................   $(15,141,713)   $ (7,990,052)   $ (8,012,126)   $ (4,318,055)
                                                 ============    ============    ============    ============

Transfer of previous unrealized loss on
 restricted investment .......................              -       4,999,263               -               -
Transfer of available-for-sale securities
 to trading securities .......................              -       4,999,263               -               -
Unrealized gain (loss)-restricted investments               -         306,198               -         306,198
Transfer- unrealized gain-investment held for
 sale to trading security ....................       (112,509)            -                 -               -
                                                 ------------    ------------    ------------    ------------

Comprehensive income (loss) ..................   $(15,254,222)   $  2,314,672    $ (8,012,126)   $ (4,011,857)
                                                 ============    ============    ============    ============

Basic net loss per common share ..............   $      (0.37)   $      (0.28)   $      (0.20)   $      (0.14)
                                                 ============    ============    ============    ============

Diluted net loss per share ...................   $      (0.37)   $      (0.64)   $      (0.20)   $      (0.14)
                                                 ============    ============    ============    ============

Basic weighted average common
shares outstanding ...........................     41,078,439      28,184,029      39,573,617      30,605,811
                                                 ============    ============    ============    ============

Diluted weighted average common
shares outstanding ...........................     41,078,439      28,184,029      39,573,617      30,605,811
                                                 ============    ============    ============    ============

                          See Notes to Unaudited Consolidated Financial Statements.

                                                      4
</TABLE>
<PAGE>
<TABLE>
                                     SPARE BACKUP, INC.
                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                       For the nine-month period ending September 30,
                                        (Unaudited)
<CAPTION>
                                                                   2006            2005
                                                               ------------    ------------
                                                                                (Restated)
<S>                                                            <C>             <C>
Cash flows from operating activities:

Net loss ...................................................   $(15,141,713)   $ (7,990,052)
Adjustments to reconcile net loss to net cash
 used in operating activities:
  Unrealized loss-transfer of available-for-sale
   securities to trading securities ........................              -       4,999,263
  Realized loss on trading securities ......................              -       5,777,843
  Unrealized loss-trading securities .......................              -         270,384
  Fair value of derivatives at issuance related
   to consulting services ..................................      1,066,500         283,050
  Fair value of derivatives at issuance of
   financing instruments ...................................        582,887         557,620
  Increase (decrease) in fair value of derivative
   liabilities .............................................      3,187,394     (10,696,213)
  Fair value of options issued to employees ................      1,960,441         618,018
  Amortization of debt discount ............................      1,823,811       1,670,650
  Amortization of deferred compensation ....................      1,655,427         287,734
  Fair value of shares of common stock issued in
   payment of interest on convertible promissory
    note ...................................................         90,265         122,026
  Fair value of shares issued in connection with
   the failure to timely file the registration
   statement ...............................................              -         132,851
  Excess of fair value of shares issued in
   satisfaction of accounts payable ........................              -         181,607
  Fair value of shares issued in connection with
   services rendered .......................................              -          13,440
  Depreciation .............................................         49,340          57,823
  Amortization of deferred financing costs .................        671,976         188,384
Changes in operating assets and liabilities
  Restricted cash ..........................................     (1,000,000)              -
  Other assets .............................................        (50,000)         24,000
  Security deposits ........................................          1,603               -
  Accounts payable and accrued expenses ....................        110,217         295,328
  Deferred revenues ........................................        (12,684)              -
  Accrued interest on note receivable ......................              -           1,200
  Accrued interest on convertible promissory
   notes ...................................................         11,914           1,284
                                                               ------------    ------------

Net cash used in operating activities ......................     (4,992,622)     (3,203,760)
                                                               ------------    ------------
Cash flows from investing activities:
  Proceeds from disposition of marketable
   securities ..............................................              -          68,925
  Proceeds from disposition of trading
   securities ..............................................              -         642,117
  Proceeds from note receivable ............................              -          85,000
  Purchases of property and equipment ......................       (142,535)        (92,593)
                                                               ------------    ------------
Net cash (used in) provided by investing
 activities ................................................       (142,535)        703,449
                                                               ------------    ------------
Cash flows from financing activities:
  Principal repayments on lease obligations ................         (6,932)         (7,835)
  Principal repayments on convertible
   promissory note .........................................       (275,000)              -
  Repurchase of shares of common stock .....................       (633,602)              -
  Proceeds from issuance of convertible
   promissory notes ........................................              -         635,000
  Proceeds from issuance of bridge notes ...................      1,500,000               -
  Proceeds from issuance of shares .........................      5,647,600       1,328,750
  Proceeds from exercise of warrants .......................              -         189,375
  Proceeds from exercise of stock options ..................            115             554
  Payments of convertible promissory notes .................              -        (265,000)
  Payments of deferred financing costs .....................       (190,000)              -
  Payments of financing costs ..............................       (417,561)        (35,375)
                                                               ------------    ------------
Net cash provided by financing activities ..................      5,624,620       1,845,469
                                                               ------------    ------------
Decrease in cash ...........................................        489,463        (654,842)
Cash, beginning of period ..................................        165,938       1,671,773
                                                               ------------    ------------
Cash, end of period ........................................   $    655,401    $  1,016,931
                                                               ============    ============
Supplemental disclosures of cash flow information:
  Cash paid during the year for interest ...................   $      8,664    $      3,909
                                                               ============    ============

  Cash paid during the year for taxes ......................   $          -    $          -
                                                               ============    ============

Supplemental schedule of non-cash financing and
 investing activities:

Fair value of warrants and embedded conversion
 features issued in connection with the issuance
 of convertible promissory notes and corresponding
 debt discount .............................................   $  1,500,000    $    650,000
                                                               ============    ============
Fair value of warrants issued in connection with
 the repurchase of shares of common stock ..................   $    900,000    $          -
                                                               ============    ============
Fair value of warrants and embedded conversion
 features issued in connection with the issuance
 of common stock and corresponding increase in
 derivative liabilities ....................................   $  1,686,308    $    177,736
                                                               ============    ============

Reclassification of liability contracts to equity ..........   $  1,585,714    $          -
                                                               ============    ============
Conversion of convertible promissory notes in
 shares of common stock ....................................   $    104,906    $    827,307
                                                               ============    ============
Fair value of shares of common stock issued to
 consultants for services ..................................   $    333,500    $  1,586,250
                                                               ============    ============

                 See Notes to Unaudited Consolidated Financial Statements.

                                             5
</TABLE>
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2006

NOTE 1 - ORGANIZATION, BASIS OF PRESENTATION AND GOING CONCERN

Spare Backup, Inc., formerly known as Newport International Group, Inc., (the
"Company") was incorporated in Delaware in December 1999. During February 2004,
the Company acquired GrassRoots Communications, Inc. ("GrassRoots"). The
Company, through one of its subsidiaries, Spare Backup, Inc., sells on-line
backup solutions software and services to individuals, business professionals,
small office and home office companies, and small to medium sized businesses.
The Company has substantially discontinued its marketing and development efforts
under GrassRoots.

The accompanying financial statements have been prepared on a going concern
basis. The Company has generated minimal revenue since its inception on June 12,
2002 and has incurred net losses of approximately $15.1 million during the
nine-month period ended September 30, 2006. The Company's ability to continue as
a going concern is dependent upon its ability to obtain the necessary financing
to meet its obligations and repay its liabilities arising from normal business
operations when they come due, to fund possible future acquisitions, and to
generate profitable operations in the future. Management plans to continue to
provide for its capital requirements by issuing additional equity securities and
debt. The outcome of these matters cannot be predicted at this time and there
are no assurances that if achieved, the Company will have sufficient funds to
execute its business plan or generate positive operating results.

These matters, among others, raise substantial doubt about the ability of the
Company to continue as a going concern. These financial statements do not
include any adjustments to the amounts and classification of assets and
liabilities that may be necessary should the Company be unable to continue as a
going concern.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Significant estimates made by management include, but are not
limited to, the valuation of derivative liabilities and share-based payments.
Actual results will differ from these estimates.

EARNINGS PER SHARE

Basic earnings per share are calculated by dividing income available to
stockholders by the weighted-average number of common shares outstanding during
each period. Diluted earnings per share are computed using the weighted average
number of common and dilutive common share equivalents outstanding during the
period. Dilutive common share equivalents consist of shares issuable upon the
exercise of stock options and warrants (calculated using the reverse treasury
stock method). The outstanding options, warrants and shares equivalent issuable
pursuant to embedded conversion features amounted to 36,914,790 and 23,774,737
at September 30, 2006 and 2005, respectively. The outstanding options, warrants
and shares equivalent issuable pursuant to embedded conversion features and
warrants at September 30, 2006 and 2005 are excluded from the loss per share
computation for that period due to their anti-dilutive effect.

                                        6
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2006

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The following sets forth the computation of basic and diluted earnings per share
for the nine-month periods ended September 30:

                                                       2006            2005
                                                   ------------    ------------
Numerator:
  Net (loss) income ............................   $(15,141,713)   $ (7,990,052)
Adjustments:
  Other (income)-derivative liabilities ........             (-)    (10,138,593)
                                                   ------------    ------------
Adjusted net loss for diluted earnings per share   $(15,141,713)   $(18,128,645)
                                                   ============    ============
Denominator:
  Denominator for basic earnings per share-
   weighted average shares outstanding .........     41,078,439      28,184,029
  Effect of dilutive warrants, embedded
   conversion features and liquidated damages ..              -               -
  Denominator for diluted earnings per share-
   weighted average shares outstanding .........     41,078,439      28,184,029
                                                   ============    ============
Basic earnings (loss) per share ................   $      (0.37)   $      (0.28)
                                                   ============    ============
Diluted earnings (loss) per share ..............   $      (0.37)   $      (0.64)
                                                   ============    ============

RISKS AND UNCERTAINTIES

The Company maintains its cash and cash equivalent accounts in financial
institutions. Accounts at these institutions are insured by the Federal Deposit
Insurance Corporation ("FDIC") up to $100,000. During the nine-month period
ended September 30, 2006, the Company has reached bank balances exceeding the
FDIC insurance limit. To reduce its risk associated with the failure of such
financial institutions, the Company evaluates at least annually the rating of
the financial institutions in which it holds deposits.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of the Company's cash and cash equivalents, accounts
payable and accrued expenses and due to stockholder approximate their estimated
fair values due to the short-term maturities of those financial instruments. The
carrying amount of the derivative liability is based on its fair value. The
carrying amount of the convertible notes approximates the estimated fair value
for these financial instruments as management believes that such convertible
notes constitute substantially all of the Company's debt and the interest
payable on the convertible notes approximates the Company's incremental
borrowing rate.

                                        7
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2006

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial statements and with the instructions to Form l0-QSB and Article 10 of
Regulation S-B. Accordingly, they do not include all the information and
disclosures required for annual financial statements. These financial statements
should be read in conjunction with the consolidated financial statements and
related footnotes as of and for the year ended December 31, 2005, included in
the Annual Report filed on Form l0-KSB.

In the opinion of the management, all adjustments (consisting of normal
recurring items) necessary to present fairly the Company's financial position as
of September 30, 2006, and the results of operations and cash flows for the
nine-month period ending September 30, 2006 have been included. The results of
operations for the nine-month period ended September 30, 2006 are not
necessarily indicative of the results to be expected for the full year. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report filed on Form l0-KSB
as filed with the Securities and Exchange Commission for the year ended December
31, 2005.

INVESTMENT IN EQUITY SECURITIES AND COMPREHENSIVE LOSS

During 2004, the Company received shares of a United Kingdom Corporation (the
"Investee") pursuant to a stock-exchange agreement whereby the Company issued
5,882,352 of its shares of common stock in exchange for the Investee's stock. At
the time of issuance, the Company recorded the cost of the investment at the
market value of the shares exchanged of approximately $11.8 million.

The Company held 3,242,420 shares of the Investee in an escrow account which
could not be released without the Investee's permission until August 2006. Until
these shares were released from escrow, the Company accounted for the value
attributable to such shares as restricted investment in marketable securities.
The Company adjusted the carrying value of the restricted investment to $133,921
at September 30, 2005 to reflect an other-than temporary impairment amounting to
approximately $5.8 million and has been recognized as realized loss in earnings.

During May 2006, the Company assigned its remaining interest in the shares to
the Investee, which were valued at approximately $135,000 at the date of
assignment and no longer holds the shares of the Investee.

The decrease in the market value from January 1, 2006 to the date of assignment
which amounted to approximately $112,000, has been recorded as a realized loss
on trading securities.

During July 2005, the Company sold 3,242,420 shares of the Investee used as
collateral for the Company's possible obligation to repurchase 2,500,000 shares
it has issued in a private placement during November 2004 ("Put Option"),
generating proceeds of approximately $640,000. The decrease in the carrying and
the fair value of this investment of approximately $5.3 million as of June 30,
2005 has been recorded as unrealized loss in the statement of operations of
approximately $5.0 million and as a realized loss of approximately $270,000.

                                        8
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2006

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SOFTWARE DEVELOPMENT COSTS

Costs incurred in the research and development of software products are expensed
as incurred until technological feasibility has been established. After
technological feasibility is established, any additional costs are capitalized
in accordance with SFAS No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO
BE SOLD, LEASED OR OTHERWISE MARKETED. The Company believes that the current
process for developing software is essentially completed concurrently with the
establishment of technological feasibility; accordingly, no software development
costs have been capitalized as of September 30, 2006.

PROPERTY AND EQUIPMENT

Property and equipment, which primarily consists of office equipment and
computer software, are recorded at cost and are depreciated on a straight-line
basis over their estimated useful lives of three to five years. Maintenance and
repairs are charged to expense as incurred. Significant renewals and betterments
are capitalized. At the retirement or other disposition of property and
equipment, the cost and accumulated depreciation are removed from the accounts
and any resulting gain or loss is reflected in other income (expense) in the
accompanying statements of operations.

DEFERRED FINANCING COSTS

Deferred financing costs represent costs incurred in connection with the
issuance of the convertible promissory notes. Deferred financing costs were
amortized over the terms of the related debt agreements, which range between one
to two years, or earlier, if the debt is satisfied prior to maturity.

SHARE-BASED PAYMENTS

In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which
replaces SFAS No. 123 and supersedes APB Opinion No. 25. Under SFAS No. 123(R),
companies are required to measure the compensation costs of share-based
compensation arrangements based on the grant-date fair value and recognize the
costs in the financial statements over the period during which employees are
required to provide services. Share-based compensation arrangements include
stock options, restricted share plans, performance-based awards, share
appreciation rights and employee share purchase plans. In March 2005, the SEC
issued Staff Accounting Bulletin No. 107, or "SAB 107". SAB 107 expresses views
of the staff regarding the interaction between SFAS No. 123(R) and certain SEC
rules and regulations and provides the staff's views regarding the valuation of
share-based payment arrangements for public companies. SFAS No. 123(R) permits
public companies to adopt its requirements using one of two methods. On April
14, 2005, the SEC adopted a new rule amending the compliance dates for SFAS
123(R). Companies may elect to apply this statement either prospectively, or on
a modified version of retrospective application under which financial statements
for prior periods are adjusted on a basis consistent with the pro forma
disclosures required for those periods under SFAS 123. Effective January 1,
2006, the Company has fully adopted the provisions of SFAS No. 123(R) and
related interpretations as provided by SAB 107. As such, compensation cost is
measured on the date of grant as the fair value of the share-based payments.
Such compensation amounts, if any, are amortized over the respective vesting
periods of the option grant. The Company applies this statement prospectively.

                                        9
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2006

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The following pro forma information is to reflect the change from applying the
provisions of FAS 123 and APB 25:

                                                            September 30,
                                                         2006          2005
                                                    ------------   ------------
Net (loss) income ................................  $(15,141,713)  $ (7,990,052)
Adjustments:
  Other (income)- derivative liabilities .........            (-)   (10,138,593)
                                                    ------------   ------------
  Adjusted net loss for diluted earnings per share  $(15,141,713)  $(18,128,645)

Add:  Stock-based compensation expense included
 in reported net (loss) income, net of related
 tax effects: ....................................             -        618,018

Deduct:  Total stock-based employee compensation
 expense determined under fair value based method
 for all awards, net of related tax effects
 excluded from net (loss) income .................             -       (720,523)
                                                    ------------   ------------
Net (loss) income pro forma ......................  $(15,141,713)  $(18,231,150)
                                                    ============   ============

Proforma earnings per share:
  Basic ..........................................  $      (0.37)  $      (0.28)
                                                    ============   ============
  Diluted ........................................  $      (0.37)  $      (0.64)
                                                    ============   ============

The fair value of the options granted during the nine-month period ended
September 30, 2005 was determined using the Black-Scholes option-pricing model
with the following assumptions: risk-free interest of 3.32-3.95%; stock
volatility of 36-86%; no dividends; and estimated life of 36 months.

DERIVATIVE LIABILITIES

The Company accounts for its liquidated damages pursuant to Emerging Issue Task
Force ("EITF ")05-04, View C, "The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument Subject to EITF ISSUE NO. 00-19, "Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock". Pursuant to EITF 05-04, View C, the liquidated damages
paid in cash or stock are accounted for as a separate derivative, which requires
a periodical valuation of its fair value and a corresponding recognition of
liabilities associated with such derivative. The Company accounts for its
embedded conversion features and freestanding warrants pursuant to SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which requires a
periodic valuation of their fair value and a corresponding recognition of
liabilities associated with such derivatives. The recognition of derivative
liabilities related to the issuance of shares of common stock is applied first
to the proceeds of such issuance, at the date of issuance, and the excess of
derivative liabilities over the proceeds is recognized as other expense in the
accompanying consolidated financial statements. The recognition of derivative
liabilities related to the issuance of convertible debt and associated warrants
or other derivatives is applied first to the proceeds of such issuance as a debt
discount, at the date of issuance, and the excess of derivative liabilities over
the proceeds is recognized as other expense in the accompanying consolidated
financial statements. Any subsequent increase or decrease in the fair value of
the derivative liabilities is recognized as other expense or other income,
respectively.

                                       10
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2006

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION, ACCOUNTS RECEIVABLE, AND PROVISION FOR RETURNS

Revenue is recognized when it is earned. The Company's revenue recognition
policies are in compliance with SOP 97-2 Software Revenue Recognition (as
amended by SOP 98-4 and SOP 98-9) and related interpretations.

The Company markets its software through multiple channel resellers and retail
stores. The Company provides for unlimited rights of return to its customers.
The Company has only recently licensed its products through such multiple
channels and does not have a historical pattern of returns. Additionally, such
customers generally pay software vendors based on their own sell-thru and return
the unsold products to the software vendor. The customers have not returned any
products at September 30, 2006. Accordingly, the Company provides for a
provision for returns for all outstanding receivables until the customers return
the products or the customers pay their invoices. The outstanding gross
receivables at September 30, 2006 amounted to approximately $234,000. The
Company has recorded a corresponding amount as provision for returns at
September 30, 2006.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2005, the Financial Accounting Standard Board ("FASB") issued Statement
No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion
No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in
Interim Financial Statements" (SFAS 154). SFAS 154 changes the requirements for
the accounting for, and reporting of, a change in accounting principle.
Previously, most voluntary changes in accounting principles were required to be
recognized by way of a cumulative effect adjustment within net income during the
period of the change. SFAS 154 requires retrospective application to prior
periods' financial statements, unless it is impracticable to determine either
the period-specific effects or the cumulative effect of the change. SFAS 154 is
effective for accounting changes made in fiscal years beginning after December
15, 2005; however, the Statement does not change the transition provisions of
any existing accounting pronouncements. We do not believe adoption of SFAS 154
will have a material effect on our financial position, results of operations or
cash flows.

In July 2005, the FASB issued FASB Staff Position ("FSP") 150-5, "Accounting
Under SFAS 150 for Freestanding Warrants and Other Similar Instruments on
Redeemable Shares". FSP 150-5 clarifies that warrants on shares that are
redeemable or puttable immediately upon exercise and warrants on shares that are
redeemable or puttable in the future qualify as liabilities under SFAS 150,
regardless of the redemption feature or redemption price. The FSP is effective
for the first reporting period beginning after September 30, 2005, with
resulting changes to prior period statements reported as the cumulative effect
of an accounting change in accordance with the transition provisions of SFAS
150. We adopted the provisions of FSP 150-5 on July 1, 2005, which did not have
a material effect on our financial statements.

                                       11
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2006

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In July 2005, the FASB issued EITF 05-6, "Determining the Amortization period
for Leasehold Improvements Purchased After Lease Inception or Acquired in a
Business Combination", which addressed the amortization period for leasehold
improvements made on operating leases acquired significantly after the beginning
of the lease. The EITF is effective for leasehold improvements made in periods
beginning after September 29, 2005. We adopted the provisions of EITF 05-6 on
July 1, 2005, which did not have a material impact to the Company's financial
position, results of operations and cash flows.

In September 2006, the FASB issued FASB Statement No. 157. This Statement
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is a
relevant measurement attribute. Accordingly, this Statement does not require any
new fair value measurements. However, for some entities, the application of this
Statement will change current practices. This Statement is effective for
financial statements for fiscal years beginning after November 15, 2007. Earlier
application is permitted provided that the reporting entity has not yet issued
financial statements for that fiscal year. Management believes this Statement
will have no impact on the financial statements of the Company once adopted.

NOTE 3 - RESTATEMENT OF FINANCIAL STATEMENTS

In March 2006, the Company revised its accounting for certain transactions
related to its convertible debt and associated warrants as well as liquidated
damages issued in fiscal 2004 and 2005. The Company revised its accounting to
reflect the issuance of convertible notes which are convertible in an
undeterminable amount of shares. Accordingly, the embedded conversion features
associated with such convertible notes are recorded as derivative liabilities.
Furthermore, because the Company cannot ascertain that it has a sufficient
amount of authorized but unissued shares, all other financial instruments, such
as options or warrants, outstanding at the time of the issuance of the
convertible notes are considered derivatives as well.

This revised accounting treatment resulted in an increase in derivative
liabilities and accumulated deficit of $7,518,503 as of September 30, 2005.
Additionally, the Company increased its other-income derivative liabilities and
increased its net loss by $10,138,593 for the nine-month ended September 30,
2005. The revised accounting treatment did not have any impact on the Company's
net cash used in operating activities, investing activities, of financing
activities.

                                       12
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2006

NOTE 4 - RESTRICTED CASH

The Company's restricted cash consists primarily of $1.0 million at September
30, 2006, and is held in escrow to fund the sales and marketing expenses
incurred by the Company with a US retailer.

NOTE 5 - CONVERTIBLE PROMISSORY NOTES

Convertible promissory notes consist of the following as of September 30, 2006:

8% Convertible promissory notes, bearing interest at 8% per annum,
matured on March 1, 2006. Interest payable June 30, 2004 and every
quarter thereafter either in cash or common stock. Interest paid in
common stock is convertible using the 10-day average closing bid of
the stock prior to the end of the quarter. Each occurrence of
interest not paid within 30 days following the end of each quarter
causes a reduction of 10% in the conversion price of the promissory
notes and the exercise price of the related warrants. The promissory
notes are convertible at any time at the option of the holder, into
shares of common stock at a rate of $0.375. ........................  $ 688,413

Less: unamortized discount .........................................         (-)
                                                                      ---------
Convertible promissory notes-short-term ............................  $ 688,413
                                                                      =========

12.5% Convertible promissory notes, bearing interest at 12.5% per
annum, maturing between March and June 2007. Interest payable June
30, 2005 and every quarter thereafter either in cash or common
stock. Interest paid in common stock is convertible using the 5-day
average closing price of the stock prior to the end of the quarter.
Each occurrence of interest not paid within 30 days following the
end of each quarter causes a reduction of 10% in the conversion
price of the promissory notes and the exercise price of the related
warrants. The promissory notes are convertible into shares of common
stock at a rate of $0.35. ..........................................  $ 375,000

Less: unamortized discount .........................................   (155,234)
                                                                      ---------
Convertible promissory notes-short term ............................  $ 219,766
                                                                      =========

8% Bridge promissory notes, bearing interest at 8% per annum,
maturing between November and December 2007. Interest payable at
maturity. Principal and interest immediately converts upon the
closing of subsequent financing of at least $1,000,000. The
promissory notes are convertible into shares of common stock at a
rate of $0.35. .....................................................  $       -

Less: unamortized discount .........................................         (-)
                                                                      ---------
Convertible promissory notes-short term ............................  $       -
                                                                      =========

                                       13
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2006

NOTE 5 - CONVERTIBLE PROMISSORY NOTES (CONTINUED)

The convertible rates for the 8% and 12.5% Convertible promissory notes interest
accrued as of September 30, 2006 amounted to $0.59 per share. The Company issued
136,042 and 196,155 shares in connection with the payment of interest on the
Convertible promissory notes during the nine-month period ended September 30,
2006 and 2005, respectively. The fair value of such shares issued during the
nine-month period ended September 30, 2006 and 2005 amounted to approximately
$90,000 and $122,000, respectively. Furthermore, the Company issued 43,143
shares in October 2006 in connection with the payment of accrued interest of
approximately $26,000 as of September 30, 2006.

During the nine-month period ended September 30, 2006, certain note holders of
8% convertible promissory notes converted their promissory notes and accrued
interest amounting to approximately $105,000 in 279,750 shares of common stock.

During the nine-month period ended September 30, 2006 and September 30, 2005,
the Company received $1,500,000 and $635,000 in consideration for the issuance
of the bridge promissory notes and convertible promissory notes, respectively.
The bridge promissory note and accrued interest aggregating $1,523,792 converted
into 4,353,691 shares of the Company's common stock in July 2006.

During the nine-month period ended September 30, 2006, the Company made
principal repayments of approximately $275,000 on a 12.5% Convertible promissory
note held by the fiancee of the Company's Chief Executive officer.

In the event the Company issues any shares of its common stock or issues any
options, warrants, convertible preferred stock or convertible debt issuable or
convertible into common stock of the Company at an exercise price or conversion
price per share less than $0.75 per share within two years following the closing
of the 12.5% Convertible Promissory Notes, then the exercise price of the
warrants issued pursuant to the Follow-on Financing will reset to such lower
price. As of September 30, 2006, the exercise price of such warrants are $0.35.

The Company has the right to call all of the 8% Convertible promissory notes and
12.5% convertible promissory notes warrants, if the stock underlying the
warrants has been registered (and that registration statement is still
effective), the lock-up restriction, as defined, on the common stock has been
lifted, and after the lock-up restriction has been lifted the stock maintains a
closing bid price above $3.00 for 15 business days. The Company may redeem the
warrants for $0.01 if not exercised within 30 days of the call notification.

The Company has the right to call all of the 8% Bridge promissory notes and
related warrants, if the stock underlying the warrants has been registered (and
that registration statement is still effective), the lock-up restriction, as
defined in the agreement, on the common stock has been lifted, and after the
lock-up restriction has been lifted the stock maintains a closing bid price
above and $0.75 for 15 business days. The Company may redeem the warrants for
$0.01 if not exercised within 30 days of the call notification.

The Company recognized a debt discount of $1,500,000 in connection with the
issuance of the 8% Bridge promissory notes. The debt discount relates to the
recognition of derivative liabilities associated with the 8% Bridge promissory
notes.

                                       14
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2006

NOTE 5 - CONVERTIBLE PROMISSORY NOTES (CONTINUED)

The Company paid financing fees of $190,000 to the placement agent in connection
with the issuance of the Bridge promissory notes. Additionally, the Company
issued 1,071,429 warrants to the placement agent. The fair value of the
warrants, which amounted to approximately $439,000 together with the financing
fees have been recorded as deferred financing costs during the nine-month period
ended September 30, 2006.

The 8% Convertible promissory notes are currently due. Management is in
discussion with the holders of such notes to satisfy these obligations with
either cash or stock consideration or a combination of both.

Amortization of the debt discount amounted to approximately $1.8 million and
$1.7 million during the nine-month period ended September 30, 2006 and 2005,
respectively, and is included in interest expense.

Amortization of the deferred financing costs amounted to approximately $672,000
and $215,000 during the nine-month period ended September 30, 2006 and 2005,
respectively, and is included in interest expense.

Accrued interest on the Convertible Promissory Notes amounted to approximately
$26,000 as of September 30, 2006.

NOTE 6 - DERIVATIVE LIABILITIES

During March 2004, the Company closed its 8% Convertible Promissory Notes
private placement. In connection with the issuance of the 8% Convertible
Promissory Notes, the Company granted a subsequent financing conversion reset
right which expired on March 1, 2006. Subsequently, the Company issued similar
rights to the holders of its 12.5% Convertible promissory notes. The subsequent
financing conversion reset is considered an embedded conversion feature pursuant
to EITF ISSUE NO. 00-19. Additionally, because there is no explicit number of
shares that are to be delivered upon satisfaction of subsequent financing
conversion reset feature, the Company is unable to assert that it had sufficient
authorized and unissued shares to settle such feature. Accordingly, all of the
Company's previously issued and outstanding instruments, such as warrants and
options issued to non-employees pursuant to rendered services as well as those
issued in the future, would be classified as liabilities, effective with the
granting of the subsequent financing conversion reset feature.

The Company recognized liabilities for the following derivatives at the date of
their issuance during the nine-month period ended September 30, 2006 and 2005,
respectively:

                                       15
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2006

NOTE 6 - DERIVATIVE LIABILITIES (CONTINUED)

                                                    At issuance      At issuance
                                                        2006             2005
                                                    -----------      -----------
Embedded conversion features
12.5% convertible notes ......................       $        -       $  934,000
8% bridge notes ..............................        1,500,000                -
Freestanding warrants and options
12.5% convertible notes ......................                -          273,620
8% bridge notes ..............................          582,857                -
Other warrants and options ...................        6,174,351          460,786
Liquidated damages ...........................                -                -
                                                     ----------       ----------
                                                     $8,257,208       $1,668,406
                                                     ==========       ==========

The fair value of the derivative liabilities at September 30, 2006 are as
follows:

         Embedded conversion features-
         8% convertible notes ........................      $   385,528
         12.5% convertible notes .....................          675,000
         Freestanding warrants and options
         8% convertible notes ........................        1,144,274
         10% convertible notes .......................          179,550
         12.5% convertible notes .....................          345,680
         8% bridge notes .............................          994,286
         Other warrants and options ..................        7,286,946
         Common stock subject to put .................        2,288,136
         Liquidated damages ..........................          305,085
                                                            -----------
                                                            $13,604,485
                                                            ===========

The Company used the following assumptions to measure the identified derivatives
at issuance, which is during the nine-month periods ended September 30, 2006 and
2005 and at September 30, 2006, as follows:

Embedded conversion feature-Convertible Promissory Notes and Common Stock
Subject to Put

                                    Nine Month Period Ended
                                         September 30,            At September
                                      2006          2005            30, 2006
                                  ---------     ------------     ---------------
Market price: ................    $    0.41     $ 0.40-$0.62     $          0.59
Exercise price: ..............    $    0.35     $0.188-$0.85     $0.188 - $1.75
Term: ........................    1.5 years        3-5 years     1.25-4.75 years
Volatility: ..................         221%              86%                225%
Risk-free interest rate: .....         5.1%            3.32%               4.69%
Maximum liability:
8% convertible notes .........                                   $       688,443
12.5% convertible notes ......                                   $       562,500

                                       16
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2006

NOTE 6 - DERIVATIVE LIABILITIES (CONTINUED)

Liquidated damages
                                                              At September
                                              At issuance       30, 2006
                                              -----------     ------------
         Market price: .....................      n/a          $    0.59
         Exercise price: ...................      n/a          $    0.59
         Term: .............................      n/a             1 year
         Volatility: .......................      n/a               225%
         Risk-free interest rate: ..........      n/a              4.69%
         Maximum liability: ................      n/a          $ 975,000

Freestanding warrants and options

                                   Nine Month Period Ended
                                         September 30,             At September
                                     2006            2005            30, 2006
                                -------------    ------------     --------------
Market price: ...............   $0.41 - $0.59    $ 0.40-$0.62     $         0.59
Exercise price: .............   $0.40 - $0.59    $0.188-$0.85     $0.188 - $1.75
Term: .......................       2-5 years       3-5 years          2-5 years
Volatility: .................     221% - 225%             86%               225%
Risk-free interest rate: ....   4.18% - 5.10%           3.32%              4.69%
Options and warrants ........       8,498,215         681,000         14,572,105

The embedded conversion features are as follows:

Reset Feature Following Subsequent Financing - 12.5% Convertible Promissory
notes: 50%, which is the effective discount to market value the Company would
offer in the event it provides for a subsequent private placement financing

Liquidated Damage Clause: 22.5%, which is the difference, in months between the
time the underlying shares are free-trading and the grace period to obtain a
registration statement, multiplied by the liquidated damage rate of 1% per
month.

Common stock subject to put: 25%, which is the effective discount to market
value assuming that the putholders convert 2,500,000 shares in convertible
promissory notes.

During the nine month periods ended September 30, 2006 and 2005, the Company
allocated $1,500,000 and $635,000, respectively, of the fair value of the
derivatives issued in connection with convertible promissory notes, at their
date of issuance, to debt discount. The excess of the fair value of the
derivative liabilities over the debt discount has been recognized as other
expense-derivative liabilities, which amounts to approximately $583,000 and
$557,000 during the nine-month period ended September 30, 2006 and 2005,
respectively.

                                       17
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2006

NOTE 6 - DERIVATIVE LIABILITIES (CONTINUED)

During the nine month periods ended September 30, 2006 and 2005, the Company
allocated approximately $1.7 million and $178,000, respectively, of the fair
value of the derivatives to the net value of the issuance of shares of common
stock as additional consideration provided to such stockholders and has been
recorded as an offset to additional paid-in capital.

During the nine month period ended September 30, 2006 and 2005, the Company
allocated approximately $1.1 million and $283,000, respectively, of the fair
value of the derivatives recognized in connection with the issuance of certain
warrants issued to consultants to sales, general, and administrative expenses.

During the nine month period ended September 30, 2006, the Company allocated
$439,256 of the fair value of the derivatives recognized in connection with the
issuance of certain warrants issued to a placement agent to deferred financing
costs.

During the nine month period ended September 30, 2006, the Company reclassified
the embedded conversion features of the Bridge promissory notes as equity
contracts, upon its conversion in July 2006. The fair value of the embedded
conversion features at the date of conversion amounted to approximately $1.6
million. This reclassification resulted in an increase in additional paid-in
capital and a decrease in derivative liabilities of the corresponding amount.

During the nine month period ended September 30, 2006, the Company allocated
$900,000 of the fair value of the derivatives recognized in connection with the
issuance of certain warrants issued to the Investee associated with the
Company's repurchase of its shares to additional paid-in capital.

The difference in fair value of the derivative liabilities between the date of
their issuance and the appropriate measurement dates, which amounted to an
increase of approximately $3.2 million and a decrease of $11.8 million for the
nine-month periods ended September 30, 2006 and 2005, respectively, has been
recognized as other expense and other income, respectively.

NOTE 7 - STOCKHOLDERS' DEFICIT

ISSUANCE OF COMMON STOCK PURSUANT TO SERVICES PERFORMED

During the nine-month period ended September 30, 2006 and 2005, the Company
issued 1,325,000 and 2,553,000 shares of common stock, respectively, to
consultants for services performed. The fair value of such shares amounted to
approximately $334,000 and $1.6 million during the nine-month period ended
September 30, 2006 and 2005, respectively. The nature of the services rendered
in connection with the issuance of these shares were for marketing purposes.
Some of these services are provided for periods up to 12 months. The Company has
recognized amortization of deferred compensation of approximately $1.6 million
and $290,000 during the nine month-periods ended September 30, 2006 and 2005,
respectively, in connection with the issuance of these shares.

                                       18
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2006

NOTE 7 - STOCKHOLDERS' DEFICIT (CONTINUED)

ISSUANCE OF COMMON STOCK PURSUANT TO THE PAYMENT OF INTEREST ON THE CONVERTIBLE
DEBT

The Company issued 136,042 and 196,155 shares in connection with the payment of
interest on the Convertible promissory notes during the nine-month period ended
September 30, 2006 and 2005, respectively. The fair value of such shares issued
during the nine-month period ended September 30, 2006 and 2005 amounted to
approximately $90,000 and $122,000, respectively. Furthermore, the Company
issued 43,143 shares in October 2006 in connection with the payment of accrued
interest of approximately $26,000 as of September 30, 2006.

ISSUANCE OF COMMON STOCK PURSUANT TO FAILURE TO TIMELY FILE REGISTRATION
STATEMENT

During the nine-month period ended September 30, 2005, the Company issued 92,903
shares of common stock pursuant to its failure to timely file its registration
statement. The fair value of such shares amounted to approximately $133,000 and
is included in other expenses.

ISSUANCE OF COMMON STOCK PURSUANT TO PRIVATE PLACEMENTS

During the nine-month period ended September 30, 2006, the Company issued
12,179,306 shares pursuant to two private placements which generated net
proceeds of approximately $5.2 million.

During September 2005, the Company issued 2,415,907 shares pursuant to a private
placement which generated net proceeds of approximately $1.3 million. In
connection with this private placement, the Company issued 664,375 warrants
exercisable at a price of $1.30 per share. The warrants expire in September
2010.

REPURCHASE AND CANCELLATION OF COMMON STOCK

During May 2006, the Company repurchased 5,882,352 shares of its common stock
and as consideration, paid to the Investee approximately $630,000, issued
3,000,000 warrants and assigned its investment in the Investee's shares to the
Investee. The aggregate consideration for the repurchase of the Company's shares
of common stock amounted to approximately $1.7 million and has been recorded as
a decrease of the stockholders' deficit during the nine-month period ended
September 30, 2006.

NOTE 8 - STOCK OPTIONS AND WARRANTS

WARRANTS

During the nine month period ended September 30, 2005, the Company issued
596,000 warrants in connection with the issuance of the 12.5% Convertible
Promissory Notes. The exercise price of the warrants is $0.35 per underlying
share of common stock. The warrants expire in December 2009.

                                       19
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2006

NOTE 8 - STOCK OPTIONS AND WARRANTS (CONTINUED)

During the nine month period ended September 30, 2006, the Company issued
1,714,286 warrants in connection with the issuance of the 8% Bridge promissory
notes. Additionally, the Company issued 1,071,429 warrants to the placement
agent as finders' fee in connection with the issuance of the 8% Bridge
promissory notes. The exercise price of the warrants is $0.40 per underlying
share of common stock. The warrants expire in September 2008.

During the nine month period ended September 30, 2006, the Company issued
3,000,000 warrants in connection with the repurchase of its shares from the
Investee. The exercise price of the warrants is $1.00. The warrants expire in
May 2008.

During the nine month period ended September 30, 2006, the Company issued
2,100,000 warrants to two consultants. The exercise price of the warrants is
$0.50. The warrants expire in March 2011.

During the nine month period ended September 30, 2006, the Company issued in
aggregate 3,279,722 warrants to investors pursuant to two equity private
placements. The Company issued 437,500 warrants in connection with the first
private placement. The warrants are exercisable at a price of $0.40 per share.
The warrants expire in March 2011. The Company issued 2,842,222 warrants in
connection with the second private placement. The warrants are exercisable at a
price of $0.60 per share. The warrants expire in September 2009. Additionally,
the Company issued 175,000 and 710,566 warrants to the placement agents of the
first and second private placements. Such warrants have substantially the same
terms as those granted to the investors.

In connection with the September 2005 private placement, the Company issued
664,375 warrants to the investors. The exercise price of the warrants is $1.30
per share. The warrants expire in September 2010. During the nine-month period
ended September 30, 2005, The Company issued 505,000 shares of common stock
pursuant to the exercise of warrants which generated proceeds of approximately
$190,000.

STOCK OPTIONS

In 2002, the Company adopted the 2002 Stock Plan under which stock awards or
options to acquire shares of the Company's common stock may be granted to
employees and non-employees of the Company. The Company has authorized
12,000,000 shares of the Company's common stock for grant under the 2002 Plan.
The 2002 Plan is administered by the Board of Directors and permits the issuance
of options for the purchase of up to the number of available shares outstanding.
Options granted under the 2002 Plan vest in accordance with the terms
established by the Company's stock option committee and generally terminates ten
years after the date of issuance.

The Company granted 4,869,183 and 2,291,535 options during the nine-month period
ended September 30, 2006 and 2005, respectively, to purchase common stock to
employees for services performed. The exercise prices of such options ranged
from $0.001 to $0.56 during the nine-month period ended September 30, 2006 and
$.001 to 1.62 for options granted during the nine-month period ended September
30, 2005, respectively.

                                       20
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2006

NOTE 8 - STOCK OPTIONS AND WARRANTS (CONTINUED)

The Company issued 2,291,535 options with below market exercise prices during
the nine-month period ended September 30, 2005. The issuance of such options to
employees resulted in compensation expense pursuant to APB Opinion No. 25
amounting to approximately $410,000 during the nine-month period ended September
30, 2005.

Employees are holding 11,950,127 options outstanding at September 30, 2006. The
outstanding options vest over periods of up to two years. During the nine month
period ended September 30, 2006, we recorded a share-based payment expense
amounting to approximately $1.9 million. The share based payment is based on the
fair value of the outstanding options amortized over the requisite period of
service for option holders, which is generally the vesting period of the
options. The fair value of the options is based on the Black-Scholes Model using
the following assumptions:

         Exercise price: ..........................      $0.001 - $2.25
         Market price at date of grant: ...........      $0.02 -$0.1.95
         Volatility: ..............................          0% to 225%
         Expected dividend rate: ..................                  0%
         Risk-free interest rate: .................        2.78% - 5.1%

NOTE 9 - COMMITMENTS AND CONTINGENCIES

LITIGATION

The Company may become involved in certain legal proceedings and claims which
arise in the normal course of business. Management does not believe that the
outcome of any such matter will have a material effect on the Company's
financial position or results of operations.

During fiscal 2005, an arbitrator awarded a consultant certain compensation
amounting to $81,250 payable by Grassroots, one of the Company's subsidiaries.

During fiscal 2005, a note holder requested an entry of default in the amount of
the note amounting to $15,000 and less than $1,000 in interest and costs. The
note is payable by Grassroots, one of the Company's subsidiaries.

The Company has recorded a corresponding liability related to these matters in
the accompanying financial statements.

                                       21
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2006

NOTE 10 - SUBSEQUENT EVENTS

The Company issued 48,929 shares in October 2006 in connection with the payment
of accrued interest of approximately $21,000 as of September 30, 2006.

The Company issued 2,576,770 shares pursuant to a private placement, generating
gross proceeds of $2,526,770. In connection with the private placement, the
Company issued 1,010,708 warrants to the investors. The warrants are exercisable
at a price of $0.60 per share. The warrants expire in October 2009.
Additionally, the Company issued 631,693 warrants to the placement agent of the
private placement. Such warrants have substantially the same terms as those
granted to the investors.

                                       22
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         During March 2005 we launched Spare Backup, our fully automated online
backup service, and in August 2005 we introduced our Spare Switch software. We
are now focusing all our marketing and development efforts on our Spare family
of software products, which we believe will constitute all of our revenues and
operating expenses in the future. Our decision to discontinue all marketing of
our Conga product line to focus on the Spare product line is the result of what
we believe to be the best use of our available resources and limited personnel
and of our belief that this area will provide a greater opportunity for earlier
returns on this technology as compared to video conferencing.

         During fiscal 2005 we began establishing a reseller network focusing on
retailers and original equipment manufacturers (OEMs). We believe that these
distribution channels will significantly broaden the market exposure of our
products while containing marketing costs. Our pricing model for Spare Backup
and Spare Switch product offerings are subscription-based. Certain of our
marketing programs provide for end-user trial periods of up to nine months. We
anticipate that within 45 days of a trial download we will begin generating
revenues from automatic billing of credit cards to those users who wish to
continue the service. We are unable to predict at this time with any certainty
what our retention percentage of customers will be following the trial download
period. We believe, however that the retention rate should be high based upon
the convenience we are offering customers at a relatively low monthly cost. In
addition, as a result of the period between the beginning of the trial download
period and the credit card billing cycle, which can be as much as 135 days,
there is a rather significant "lag" time before we begin generating revenues
from customers who try our products and decide to purchase the subscription
service.

         Our concept is to develop a suite of complimentary products. In
addition to the current product offerings, we have several new products in the
development pipeline, which are designed to extend the service to specialized
areas including mobile devices, music and email. Additional service extensions
are currently envisioned to provide alternatives to users when access by the
user to his or her PC is unavailable. The timing of these additional services
will be keyed to our success in developing OEM bundling packages in order to
leverage our allocation of marketing and sales expenses. We do not believe
utilizing retail sales channels will be the most effective way to sell our
products. Generally, when a consumer is purchasing a new computer the method the
purchaser will eventually use to backup of the data to be stored on that device
is not of principal concern. During fiscal 2006 we are devoting significant
focus on creating bundling opportunities with computer OEMs whereby our software
is pre-loaded on the hardware and the purchaser is given a free trial which we
believe will provide us more opportunity to retain the customer after the trial
period. We are currently participating in pilot programs with several major
computer OEMs as part of our focus on creating bundling opportunities.

         In August 2006, we entered in a technical support services agreement
with Circuit City Stores, Inc. ("Circuit City") which provides that Circuit City
will market and support our Spare Back-Up product. The agreement provides that,
among other things, we will deposit up to $1,000,000 in an escrow account to
secure certain obligations associated with compensation to Circuit City for
installs of our software on each computer sold to their customers. Additionally,
we agreed to pay $200,000 to Circuit City for marketing development funds
related to the promotion of our software.

         The resources necessary to execute on our business strategy are sales
and program management and are relative to penetration and meeting competition.
Our sales resources are presently on-staff and the program management is on
retainer. As our revenues increase we expect to increase our headcount in areas
of program management, marketing, development and customer service. Our approach
is to outsource as many of these functions as possible to suppliers who are
experts in the various disciplines, while only hiring senior staff for the
purpose of interaction with suppliers. We believe this strategy will

                                       23
<PAGE>

allow us to keep expenses flat while growing our revenue base. In addition, our
internal analysis predicts that we can sustain 3,000,000 total users in our
current architecture. Accordingly, we expect to use this architecture in the
foreseeable future although we may, subject to the availability of sufficient
capital, make improvements in our data center localization and services from
time to time. Our capital expenditures are expected to remain flat during fiscal
2006, with purchases designed to improve workplace layout, support for internal
process improvements and automation.

GOING CONCERN

         We have generated minimal revenue since our inception on June 12, 2002,
and have incurred net losses of approximately $48.2 million since inception
through September 30, 2006. As a result, our current operations are not an
adequate source of cash to fund future operations. The report of our independent
registered public accounting firm on our financial statements for the year ended
December 31, 2005 contains an explanatory paragraph regarding our ability to
continue as a going concern based upon our net losses and cash used in
operations. Our ability to continue as a going concern is dependent upon our
ability to obtain the necessary financing to meet our obligations and repay our
liabilities when they become due and to generate profitable operations in the
future. We plan to continue to provide for our capital requirements through the
sale of equity securities and debt, however, we have no firm commitments from
any third party to provide this financing and we cannot assure you we will be
successful in raising working capital as needed. There are no assurances that we
will have sufficient funds to execute our business plan, pay our obligations as
they become due or generate positive operating results.

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2006 AS COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2006
<TABLE>
<CAPTION>
                                              Nine Months Ended
                                                 September 30,
                                             2006            2005         Increase/      Increase/
                                                         (unaudited)    (Decrease) $    (Decrease) %
                                         (unaudited)     (restated)     2006 vs 2005    2006 vs 2005
                                        ------------    ------------    ------------    ------------
<S>                                     <C>             <C>             <C>             <C>
Revenues ............................   $     47,558    $     15,463          32,095         208%

Operating expenses:
 Research and development ...........        567,268         469,722          97,546          21%
Amortization of deferred compensation      1,655,427         287,734       1,367,693         475%
Stock based payment -options ........      1,960,441         618,018       1,342,423         217%
 Sales, general and administrative ..      4,612,614       3,383,471       1,229,143          36%
                                        ------------    ------------    ------------    ------------

Total operating expenses ............      8,795,750       4,758,945       4,036,805          85%

Operating loss ......................     (8,748,192)     (4,743,482)      4,004,710          84%

Other income -  derivative
liabilities .........................              -      10,696,213     (10,696,213)       (100)%
Other expenses - derivative
liabilities .........................     (3,770,230)       (557,620)      3,212,610         576%
Other expense - liquidated damages ..              -        (172,929)       (172,929)       (100)%
Transfer - unrealized gain -
investment held for sale to trading
security ............................        112,509               -         112,509         100%
Unrealized loss - transfer of
available for sale securities to
trading securities ..................              -      (4,999,263)     (4,999,263)       (100)%
Unrealized loss - trading securities               -        (270,384)       (270,384)       (100)%
Realized loss - trading securities ..       (111,624)     (5,777,843)     (5,666,219)        (98)%
Interest expense ....................     (2,624,176)     (2,164,744)        459,432          21%
                                        ------------    ------------    ------------    ------------
 Total other expenses, net ..........     (6,393,521)     (3,246,570)      3,146,951          97%

Net Loss ............................   $(15,141,713)   $ (7,990,052)      7,151,661          90%
Comprehensive income (loss) .........   $(15,254,222)   $  2,314,672     (17,568,894)        759%
</TABLE>

                                       24
<PAGE>

REVENUES

         We market our software through multiple channel resellers and retail
stores and give these customers unlimited rights of return. Generally, our
customers pay software vendors based on their own sell-thru and return the
unsold products to the software vendor. Accordingly, we do not recognize revenue
until we have received payment from our customers.

         The increase in revenues for the nine months ended September 30, 2006
as compared to the nine months ended September 30, 2005 reflects our continuing
efforts to market our Spare Back-Up product offerings. Included in our revenues
for the nine months ended September 30, 2006 were deferred revenues of $12,684
we had recorded in fiscal 2005. While we have begun establishing our
distribution channels for this product group, we are unable to predict if we
will generate any significant revenues during fiscal 2006 or beyond from these
products.

OPERATING EXPENSES

         RESEARCH AND DEVELOPMENT

         Research and development expenses consist primarily of compensation
expenses paid to our software engineers, employees and consultants. The increase
in our increase in research and development expenses during the nine month
period ended September 30, 2006 when compared to the comparable period in fiscal
2005 is primarily due to reallocation of additional internal resources during
fiscal 2006 to develop additional features and enhancements for our Spare
Back-Up product.

         AMORTIZATION OF DEFERRED COMPENSATION

         Amortization of deferred compensation consists primarily of the value
of shares issued as compensation for consulting services prior to September 30,
2006 which were not substantially completed at the time of the issuance of the
shares. The increase in amortization of deferred compensation during the nine
month period ended September 30, 2006 is primarily due to shares we issued for
services during the second half of fiscal 2005 and the first half of fiscal 2006
for strategic and marketing services to be rendered over periods of up to one
year. We issued 1,075,000 and 2,553,000 shares of our common stock during the
nine month period ended September 30, 2006 and 2005, respectively. As a result
of the amortization of the deferred compensation expense during the balance of
fiscal 2006, we will continue to recognize similar expenses during future
periods, although we are unable to predict the amount of or timing of such
expenses.

         SHARE-BASED PAYMENT - OPTIONS

         Stock-based compensation consists of the fair value of options. The
increase in share-based payment during the nine month period ended September 30,
2006 is primarily attributable to the implementation of SFAS 123(R). Under SFAS
No. 123(R), which was effective January 1, 2006, companies are now required to
measure the compensation costs of share-based compensation arrangements based on
the grant date fair value and recognize the costs in the financial statements
over the period during which employees are required to provide services.

         SALES, GENERAL, AND ADMINISTRATIVE EXPENSES

         Sales, general, and administrative expenses consist primarily of
salaries and related expenses paid to our employees and contractors as well as
advertising expenses. The increase in sales, general, and administrative
expenses during the nine month period ended September 30, 2006 is primarily due
to certain payments made to two consultants aggregating $525,000 in February

                                       25
<PAGE>

2006 as well as the issuance of warrants to these consultants valued at
approximately $1 million. The services performed by such consultants are for
strategic and marketing purposes. This increase was offset by a decrease in
sales, general, and administrative expenses related to the issuance of options
with exercise prices below their market value amounting to approximately
$285,000 during the nine month period ended September 30, 2005, a decrease in
marketing and advertising expenses of approximately $250,000, which occurred
during the nine month period ended September 30, 2005 while no such expenses
occurred during the nine month period ended September 30, 2006. Additionally,
the remaining decrease in sales, general, and administrative expenses is
attributable to a general expense reduction program implemented during the
latter part of the second quarter of fiscal 2005 and which was fully effective
during the nine months ended September 30, 2006. We believe that our selling,
general, and administrative expenses will increase in the foreseeable future
resulting from our agreement with Circuit City as described earlier in this
report. Under the terms of that agreement, we will incur at least $200,000 in
marketing expenses during the second half of fiscal 2006.

TOTAL OTHER EXPENSES, NET

         OTHER INCOME - DERIVATIVE LIABILITIES AND OTHER EXPENSES- DERIVATIVE
LIABILITIES

         Other income - derivative liabilities and other expenses - derivative
liabilities consist of income or expense associated with the change in the fair
value of derivative liabilities as a result of the application of EITF Issue No.
00-19 to our financial statements. During March 2004, we sold 8% promissory
notes private placement. In connection with the issuance of the 8% promissory
notes, we granted a subsequent financing conversion reset right which expired on
March 1, 2006. Subsequently, we granted similar rights to the holders of our
12.5% convertible subordinated promissory debentures which we sold in March
2005. The subsequent financing conversion reset is considered an embedded
conversion feature pursuant to EITF Issue No. 00-19. Because there is no
explicit number of shares that are to be delivered upon satisfaction of
subsequent financing conversion reset feature, we are unable to assert that we
have sufficient authorized and unissued shares to settle such feature.
Accordingly, all of our previously issued and outstanding instruments, such as
warrants and options issued to non-employees pursuant to rendered services, are
be classified as derivative liabilities, effective with the granting of the
subsequent financing conversion reset feature. This classification will apply to
all future options and warrants as well. The difference in fair value of the
derivative liabilities between the date of their issuance and their measurement
date, which amounted to an increase of approximately $3.2 million and a decrease
of $11.8 million for the nine month periods ended September 30, 2006 and 2005,
respectively, has been recognized as other expense and other income,
respectively. Please see Note 5 - Derivative Liabilities of the Notes to
Unaudited Consolidated Financial Statements appearing elsewhere in this report
for a more complete description of the components of derivative liabilities and
their impact on our financial statements.

         We anticipate that we will recognize other income or expense in future
periods based upon the fluctuation of the market price of our common stock. This
non-cash income or expense has materially impacted our results of operations in
prior periods and is reasonably anticipated to materially affect our net loss or
net income in future periods. We are, however, unable to estimate the amount of
such income/expense in future periods as the income/expense is partly based on
the market price of our common stock at the end of a future measurement date.
Investors are cautioned to consider the impact of this non-cash accounting
treatment on our financial statements.

                                       26
<PAGE>

OTHER EXPENSE - LIQUIDATED DAMAGES

         Other expense-liquidated damages consist of the fair value of shares
issued as liquidated damages for failure to timely filed a registration
statement. The decrease in other expense-liquidated damages during the
nine-month period ended September 30, 2006 is primarily attributable to incurred
such liability during the period ended September 30, 2005 while not incurring
this liability during the nine-month period ended September 30, 2006.

TRANSFER-UNREALIZED GAIN -INVESTMENT HELD FOR SALE TO TRADING SECURITIES AND
UNREALIZED LOSS - TRANSFER OF AVAILABLE-FOR-SALE SECURITIES TO TRADING
SECURITIES

         Transfer-unrealized gain -investment held for sale to trading
securities consist of unrealized gain or losses on investment held for sale
which were re-categorized as trading securities transferred from other
comprehensive income (loss) to earnings at the date of the intent to sell the
shares. Such re-categorizations were one-time events and we do not expect that
such transfers will occur in the foreseeable future.

UNREALIZED AND REALIZED LOSS TRADING SECURITIES

         Unrealized and realized loss- trading securities consist of realized
losses on trading securities which were sold during the nine months ended
September 30, 2005. Such sales were one-time events and we do not expect that
such sales will occur in the foreseeable future.

INTEREST EXPENSE

         Interest expense consists primarily of interest recognized in
connection with the amortization of debt discount and interest on our
convertible promissory notes. The increase in interest expense during the nine
month period ended September 30, 2006 when compared to the prior period is
primarily attributable to the amortization of the debt discount amounting to
$1.5 million associated with the Bridge note payables which was issued during
the second quarter of 2006.

COMPREHENSIVE INCOME (LOSS)

         For the nine months ended September 30, 2006 we recognized a loss of
$112,509 on the transfer of unrealized gain - investment held for sale to
trading security and during the nine months ended September 30, 205 we
recognized income of $10,304,724 related to transfer of previous realized loss
on restricted investment ($4,999,263), transfer of available for sale securities
to trading securities ($4,999,263) and unrealized gain - restricted investments
of $306,198. As described in Note 2 - Summary of Significant Accounting Policies
to the Notes to Unaudited Consolidated Financial Statements appearing elsewhere
in this report, the items of income and expense were one-time events and we do
not expect to report similar expense or income in future periods. These
one-time, non-cash items, however, increased our net loss by $112,509 for the
nine months ended September 30, 2006 and resulted in comprehensive income for
the comparable period in fiscal 2005 of $2,314,672.

                                       27
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
                                                                                                        % of Change
                                                   SEPTEMBER 30,      DECEMBER 31,        $ Change      2006 v 2005
                                                       2006               2005          2006 vs 2005       (+/-)
                                                   ------------      ------------      ------------     -----------
<S>                                                <C>               <C>               <C>              <C>
Working capital (deficit) ......................   $(13,454,983)     $ (6,875,700)     $  6,579,283           96%
Cash ...........................................   $    655,401      $    165,938      $    489,463          295%
Restricted cash ................................   $  1,060,000      $     60,000      $  1,000,000            NM
Total current assets ...........................   $  1,715,401      $    225,938      $  1,489,463          659%
Property and equipment, net of depreciation ....   $    423,781      $    330,584      $     93,197           28%
Restricted investment in marketable securities .   $          -      $    246,430      $   (246,430)       (100)%
Deferred financing costs, net of amortization ..   $          -      $     42,720      $    (42,720)       (100)%
Other assets ...................................   $     76,380      $     27,983      $     48,397          173%
Total assets ...................................   $  2,215,562      $    873,657      $  1,341,905          154%

Accounts payable and accrued expenses ..........   $    617,023      $    506,572      $    110,451           22%
8% convertible promissory notes, net of debt
discount of $98,898 at December 31, 2005 .......   $    688,413      $    694,421      $     (6,008)           NM
12.5% convertible notes, net of debt discount of
$155,234 at September 30, 2006 (1) .............   $    219,766      $          -(1)             NM            NM
Accrued interest on promissory notes ...........   $     25,697      $     37,575      $    (11,878)        (32)%
Derivative liabilities .........................   $ 13,604,485      $  5,828,454      $  7,776,031          133%
Total current liabilities ......................   $ 15,170,384      $  7,101,638      $  8,068,746          114%
12.5% convertible notes, net of debt discount of
$380,147 at December 31, 2005 (1) ..............   $          -(1)   $    269,853                NM           NM
Total liabilities ..............................   $ 15,176,809      $  7,377,916      $  7,798,893          106%
Total stockholders' (deficit) ..................   $(12,691,249)     $ (6,504,259)     $  6,186,990           95%
</TABLE>
__________
NM = not meaningful

(1) The 12.5% convertible notes are due in March 2007. Accordingly, at December
31, 2005 they were classified as a long-term liability on our balance sheet but
at September 30, 2006 these notes are now considered a current liability and are
classified accordingly on our balance sheet at that date.

         Liquidity is the ability of a company to generate funds to support its
current and future operations, satisfy its obligations and otherwise operate on
an ongoing basis. We have experienced losses and negative cash flows from
operations since inception and the report of our independent registered public
accounting firm on our financial statements for fiscal 2005 contains an
explanatory paragraph regarding our ability to continue as going concern. At
September 30, 2006, we had cash on hand of approximately $655,000 which reflects
proceeds we received from the sale of securities. Since September 30, 2006 we
have sold additional securities which have resulted in gross proceeds to us of
$1,438,000.

         At September 30, 2006, we had a working capital deficiency of
approximately $13.5 million. A significant component of this working capital
deficiency is a derivative liability of $13,604,485, which we have recognized in
connection with the grant or the issuance of various embedded conversion
features, liquidated damages, and freestanding warrants. As discussed earlier in
this report, we anticipate that we will recognize changes in these liabilities
in future periods based upon the fluctuation of the market price of our common
stock. This non-cash liability materially impacts our balance sheet at September
30, 2006. Based upon the value associated with the liability at future
measurement dates, the amount of the liability could significantly increase or
decrease in future periods, however, we are unable to quantify the amount of the
liabilities associated with these derivatives in those future periods.

                                       28
<PAGE>

         During the nine months ended September 30, 2006, our cash increased
$489,463. This increase consisted of $5,624,620 in cash provided by financing
activities which was offset by $4,992,622 of cash used in operating activities
and $142,535 of cash used in investing activities.

         We market our software through multiple channel resellers and retail
stores and we give these customers unlimited rights of return. Because we have
only recently licensed our products through these multiple channels we do not
have a historical pattern of returns. Additionally, our customers generally pay
software vendors based on their own sell-thru and return the unsold products to
the software vendor. Accordingly, we provide for a provision for returns for all
outstanding receivables until the customers either return the products or pay
their invoices. The outstanding gross receivables at September 30, 2006 amounted
to approximately $234,000 and we recorded a corresponding amount as provision
for returns at September 30, 2006. The customers have not returned any products
at September 30, 2006, however, this reserve for possible returns reduces our
working capital by the amount of the reserve.

         In August 2006 we entered in a technical support services agreement
with Circuit City which provides that Circuit City will market and support our
Spare Back-Up product. The agreement provides that, among other things, we will
deposit up to $1,000,000 in an escrow account to secure certain obligations
associated with compensation to Circuit City for installs of our software on
each computer sold to their customers. The $1,000,000 we have deposited in
escrow in connection with the Circuit City agreement is reflected on our balance
sheet at September 30, 2006 as a component of restricted cash. Additionally, we
agreed to pay $200,000 to Circuit City for marketing development funds related
to the promotion of our software; this amount is included in our accounts
payable and accrued expenses at September 30, 2006.

         Net cash used in operating activities for the nine months ended
September 30, 2006 increased approximately $1,788,862 from the nine months ended
September 30, 2005. Included in this change is an increase in our net loss for
the period to $15,141,713, as compared to a net loss of $7,990,052 for the nine
months ended September 30, 2005, and is primarily attributable to an increase of
$1,229,142 in our sales general and administrative expenses for the nine months
ended September 30, 2006 from the nine months ended September 30, 2005 and the
effect of increased expenses in the 2006 period related to non-cash transactions
including the losses associated with derivative liabilities, amortization of
debt discounts and deferred compensation and the value of shares issued as
compensation. In addition, during the nine months ended September 30, 2006
changes in operating assets and liabilities included an expense of $1,000,000
associated the deposit of that amount in escrow account to secure certain
obligations associated with compensation to Circuit City, together decreases in
other assets of $50,000 and deferred revenues of $12,684 which was offset by
increases in accounts payable and accrued expenses of $110,217 and an increase
in accrued interest on convertible promissory notes of $11,914.

         Net cash used in investing activities was $142,535 for the nine months
ended September 30, 2006 as compared to net cash provided by financing
activities of $703,449 for the comparable nine month period in fiscal 2005. This
change is attributable to a reduction in cash received from the sale of
marketable securities and proceeds from the issuance of notes during the nine
months ended September 30, 2006 as compared to the nine months ended September
30, 2005, together with an increase in cash used for the purchase of equipment.

         Net cash provided by financing activities increased $3,779,151 during
the nine months ended September 30, 2006 from the comparable period in fiscal
2005. During the fiscal 2006 quarter we received $3,950,007 from the issuance of
securities which was offset by the repayment of lease obligations, principal
repayments on notes, payment of financing costs and the repurchase of shares of
our common stock from Langley Park Investment Trust PLC. During the fiscal 2005
period we received $635,413 from the issuance of convertible promissory notes
and the exercise of options which was offset by the repayment of convertible
notes and principal repayments of lease obligations.

                                       29
<PAGE>

         We have generated minimal revenues since inception and our current
operations are not an adequate source of cash to fund future operations.
Historically we have relied on private placement issuances of equity and debt
financing instruments. Our future capital requirements depend primarily on the
rate at which we increase our revenues and correspondingly decrease our use of
cash to fund operations. While we do not presently have any obligations for
capital expenditures, approximately $690,000 principal amount 8% promissory
notes were due March 1, 2006, which remain outstanding as of the date of this
quarterly report and an additional $325,000 principal amount 12.5% convertible
subordinated promissory debentures are due in March 2007.

         It is likely that we will need to raise additional working capital to
fund our ongoing operations and growth. The amount our future capital
requirements depend primarily on the rate at which we increase our revenues and
correspondingly decrease our use of cash to fund operations. Cash used for
operations will be affected by numerous known and unknown risks and
uncertainties including, but not limited to, our ability to successfully market
our products and services and the degree to which competitive products and
services are introduced to the market. As long as our cash flow from operations
remains insufficient to completely fund operations, we will continue depleting
our financial resources and seeking additional capital through equity and/or
debt financing. If we raise additional capital through the issuance of debt,
this will result in increased interest expense. If we raise additional funds
through the issuance of equity or convertible debt securities, the percentage
ownership of our company held by existing stockholders will be reduced and those
stockholders may experience significant dilution. In addition, new securities
may contain certain rights, preferences or privileges that are senior to those
of our common stock.

         There can be no assurance that acceptable financing to fund our ongoing
operations can be obtained on suitable terms, if at all. If we are unable to
obtain the financing necessary to support our operations, we may be unable to
continue as a going concern. In that event, we may be forced to cease operations
and our stockholders could lose their entire investment in our company.

CRITICAL ACCOUNTING POLICIES

         A summary of significant accounting policies is included in Note 2 to
the audited consolidated financial statements included elsewhere in this
prospectus. We believe that the application of these policies on a consistent
basis enables our company to provide useful and reliable financial information
about the company's operating results and financial condition.

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

         We account for stock options issued to employees in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. As such,
compensation cost is measured on the date of grant as the excess of the current
market price of the underlying stock over the exercise price. Such compensation
amounts, if any, are amortized over the respective vesting periods of the option
grant. We adopted the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" and SFAS 148, "Accounting for Stock-Based Compensation
-Transition and Disclosure", which permits entities to provide pro forma net
income (loss) and pro forma earnings (loss) per share disclosures for employee
stock option grants as if the fair-valued based method defined in SFAS No. 123
had been applied. We account for stock options and stock issued to non-employees
for goods or services in accordance with the fair value method of SFAS 123.

                                       30
<PAGE>

         We account for our investment in equity securities pursuant to
Statement of Financial Accounting Standards ("SFAS") No.115. This standard
requires such investments in equity securities that have readily determinable
fair values be measured at fair value in the balance sheet and that unrealized
holding gains and losses for investments in available-for-sale equity securities
and investments in trading equity securities be recorded as a component of
stockholders' equity and statement of operations, respectively. Furthermore, it
provides that if factors leads us to determine that the fair value of certain
financial instruments is impaired, that we should adjust the carrying value of
such investments to its fair value.

RECENT ACCOUNTING PRONOUNCEMENTS

         In November 2004, the Financial Accounting Standards Board issued
Statement No. 151 (SFAS 151), Inventory costs, an amendment of ARB No. 43,
Chapter 4. SFAS 151 clarifies that abnormal amounts of idle facility expense,
freight, handling costs and wasted materials should be recognized as current
period charges. In addition, SFAS 151 requires that allocation of fixed
production overhead to inventory be based on the normal capacity of the
production facilities. SFAS 151 is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. We currently believes that the
adoption of SFAS 151 will not have a material impact on its financial position,
results of operations and cash flows.

         In December 2004, the FASB issued SFAS 123 (revised 2004) "Share-Based
Payment". This Statement requires that the cost resulting from all share-based
transactions be recorded in the financial statements. The Statement establishes
fair value as the measurement objective in accounting for share-based payment
arrangements and requires all entities to apply a fair-value-based measurement
in accounting for share-based payment transactions with employees. The Statement
also establishes fair value as the measurement objective for transactions in
which an entity acquires goods or services from non-employees in share-based
payment transactions. The Statement replaces SFAS 123 "Accounting for
Stock-Based Compensation" and supersedes APB Opinion No. 25 "Accounting for
Stock Issued to Employees". The provisions of this Statement will be effective
for our company beginning with our fiscal year ending 2006. We are currently
evaluating the impact this new Standard will have on its financial position,
results of operations or cash flows.

         In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment," which replaces SFAS No. 123 and supersedes APB Opinion No. 25. Under
SFAS No. 123(R), companies are required to measure the compensation costs of
share-based compensation arrangements based on the grant-date fair value and
recognize the costs in the financial statements over the period during which
employees are required to provide services. Share-based compensation
arrangements include stock options, restricted share plans, performance-based
awards, share appreciation rights and employee share purchase plans. In March
2005 the SEC issued Staff Accounting Bulletin No. 107, or "SAB 107". SAB 107
expresses views of the staff regarding the interaction between SFAS No. 123(R)
and certain SEC rules and regulations and provides the staff's views regarding
the valuation of share-based payment arrangements for public companies. SFAS No.
123(R) permits public companies to adopt its requirements using one of two
methods. On April 14, 2005, the U.S. Securities and Exchange Commission adopted
a new rule amending the compliance dates for SFAS 123(R). Companies may elect to
apply this statement either prospectively, or on a modified version of
retrospective application under which financial statements for prior periods are
adjusted on a basis consistent with the pro forma disclosures required for those
periods under SFAS 123. We are currently evaluating which transitional provision
and fair value methodology we will follow. We expect that any expense associated
with the adoption of the provisions of SFAS 123R will have a material impact on
our results of operations. Effective January 1, 2006, we have fully adopted the
provisions of SFAS No. 123(R) and related interpretations as provided by SAB
107.

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<PAGE>

         In May 2005, the Financial Accounting Standard Board ("FASB") issued
Statement No. 154, "Accounting Changes and Error Corrections, a replacement of
APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements" (SFAS 154). SFAS 154 changes
the requirements for the accounting for, and reporting of, a change in
accounting principle. Previously, most voluntary changes in accounting
principles were required to be recognized by way of a cumulative effect
adjustment within net income during the period of the change. SFAS 154 requires
retrospective application to prior periods' financial statements, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. SFAS 154 is effective for accounting changes made in
fiscal years beginning after December 15, 2005; however, the Statement does not
change the transition provisions of any existing accounting pronouncements. We
do not believe adoption of SFAS 154 will have a material effect on our financial
position, results of operations or cash flows.

         In June 2005, the Emerging Issues Task Force ("EITF") issued EITF 05-2,
"The Meaning of Conventional Convertible Debt Instrument in Issue No. 00-19".
EITF 05-2 retained the definition of a conventional convertible debt instrument
as set forth in EITF 00-19, and which is used in determining certain exemptions
to the accounting treatments prescribed under SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities". EITF 05-2 also clarified that
certain contingencies related to the exercise of a conversion option would not
be outside the definition of "conventional" and determined that convertible
preferred stock with a mandatory redemption date would also qualify for similar
exemptions if the economic characteristics of the preferred stock are more akin
to debt than equity. EITF 05-2 is effective for new instruments entered into and
instruments modified in periods beginning after June 29, 2005. We adopted the
provisions of EITF 05-2 on July 1, 2005, which did not have a material effect on
our financial statements.

         In July 2005, the FASB issued FASB Staff Position ("FSP") 150-5,
"Accounting Under SFAS 150 for Freestanding Warrants and Other Similar
Instruments on Redeemable Shares". FSP 150-5 clarifies that warrants on shares
that are redeemable or puttable immediately upon exercise and warrants on shares
that are redeemable or puttable in the future qualify as liabilities under SFAS
150, regardless of the redemption feature or redemption price. The FSP is
effective for the first reporting period beginning after June 30, 2005, with
resulting changes to prior period statements reported as the cumulative effect
of an accounting change in accordance with the transition provisions of SFAS
150. We adopted the provisions of FSP 150-5 on July 1, 2005, which did not have
a material effect on our financial statements.

         In July 2005, the FASB issued EITF 05-6, "Determining the Amortization
period for Leasehold Improvements Purchased After Lease Inception or Acquired in
a Business Combination", which addressed the amortization period for leasehold
improvements made on operating leases acquired significantly after the beginning
of the lease. The EITF is effective for leasehold improvements made in periods
beginning after June 29, 2005. We adopted the provisions of EITF 05-6 on July 1,
2005, which did not have a material impact to our financial position, results of
operations and cash flows.

ITEM 3.  CONTROLS AND PROCEDURES

         Our management, which includes our CEO, has conducted an evaluation of
the effectiveness of our disclosure controls and procedures (as defined in Rule
13a-14(c) promulgated under the Securities and Exchange Act of 1934, as amended)
as of a date (the "Evaluation Date") as of the end of the period covered by this
report. Based upon that evaluation, our CEO has concluded that our disclosure
controls and procedures are effective for timely gathering, analyzing and
disclosing the information we are required to disclose in our reports filed
under the Securities Exchange Act of 1934, as amended. There have been no
changes in our internal control over financial reporting identified in
connection with the evaluation that occurred during the last fiscal quarter that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.

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<PAGE>

                           PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

None.

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

         Between July 2006 and November 2006 Spare Backup, Inc. sold an
aggregate of 2,060,245 units of our securities at an offering price of $2.25 per
unit to 114 accredited investors in a private placement exempt from registration
under the Securities Act of 1933 in reliance on exemptions provided by Rule 506
of Regulation D and Section 4(2) of that act. We received gross proceeds of
$4,635,500 in this offering. We intend to use the net proceeds from this
offering, after deducting the compensation payable to the placement agent and
other costs of the offering, for debt reduction, sales expenses and general
working capital.

         Each unit consisted of five shares of our common stock and two common
stock purchase warrants each exercisable at $0.60 per share, exercisable for a
period of two years. The warrant contains customary anti-dilution terms under
which the number of shares and exercise price of the warrants are proportionally
adjusted in the event of stock splits, stock dividends, recapitalizations and
similar corporate events. The warrants included in the units are callable by us
at such time as the 10 day non-volume weighted average daily closing price of
our common stock equals or exceeds $1.00 per share providing that the shares
underlying these warrants have been registered for resale for at least 15
business days under an effective registration statement filed with the
Securities and Exchange Commission.

         Brookstreet Securities Corporation acted as placement agent for us in
the offering. We paid that firm a sales commission of 5% of the gross proceeds
$231,775 and a non-accountable expense allowance of 6% of the gross proceeds
$278,130. We also issued Brookstreet Securities Corporation five year warrants
to purchase 2,575,306 shares of our common stock, which represented 25% of the
shares included in the units sold in the offering, with each warrant exercisable
at $0.45 per share. The warrants issued to Brookstreet Securities Corporation
contain a cashless exercise feature and are not redeemable by us. We agreed to
pay Brookstreet Securities Corporation a cash commission of 7% of the proceeds
we receive from any exercise of the warrants included in the units, and to issue
that firm additional warrants equal to 7% of the total number of shares of our
common stock we issue upon the exercise of the warrants included in the units
sold in the offering. The warrants we may issue upon such exercise will be
identical to the warrants we issued as partial compensation for the firm's
services to us as placement agent in this offering.

         We granted Brookstreet Securities Corporation observation rights for
all meetings of our Board of Directors. Without the prior written consent of
Brookstreet Securities Corporation we also agreed not to make any changes in our
management for a period of six months following the closing of the offering and
not to issue any new securities, including debt, until the registration
statement described below has been declared effective. Our officer and
directorshave executed lock-up agreements restricting each of them from
disposing of any of our securities for a period of 180 days following the
closing of the offering.

         We agreed to file a registration statement with the Securities and
Exchange Commission within 30 days of the closing of the offering covering the
shares of common stock, including the shares underlying the warrants, sold in
the offering. We also granted Brookstreet Securities Corporation piggy-back
registration rights covering the shares of common stock underlying the warrants
issued to that firm as partial compensation for their services as placement
agent. Once effective, we have agreed to keep the registration statement
effective for a period of two years, and to pay all costs associated with the
filing of the registration statement, including reasonable fees and expenses of
one counsel for the holders of the securities sold in the offering. If we fail
to file the registration statement within the prescribed timeframe we are
required to issue the purchasers on a pro rata basis additional shares of our
common stock equal to 1% of the shares purchased in the offering for every
business day that we are late in filing the registration statement beyond 30
days and continuing for up to 100 business days.

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<PAGE>

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5.  OTHER INFORMATION

         In March 2005 we sold 12.5% convertible subordinated promissory
debentures to a total of five accredited investors in a private transaction
exempt from registration under the Securities Act of 1933, as amended, in
reliance on an exemption provided by Section 4(2) of that act. The purchasers
included Ms. Jenelle Fontes, an employee of our company ant the fiancee of Cery
Perle our CEO and President, who purchased a $275,000 principal amount 12.5%
convertible subordinated promissory debenture. The debenture matured in March
2007. In June and September, 2006 we repaid the $275,000 principal due Ms.
Fontes under this debenture and satisfied this obligation.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

31.1     Rule 13a-14(a)/15d-14(a) certification of CEO
31.2     Rule 13a-14(a)/15d-14(a) certificate of principal accounting officer
32.1     Section 1350 certification of CEO and principal accounting officer


                                   SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant has
caused his report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                       Spare Backup, Inc.

                                       By: /s/ Cery Perle
                                           --------------
November 14, 2006                      Cery Perle, President and CEO,
                                       principal executive officer and
                                       principal accounting officer

                                       34