UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



(Mark One)



xQUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended September 30,
2012



or



oTRANSITION
REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from _________ to
________



Commission File Number: 000-30587



SPARE BACKUP, INC.

(Exact name of registrant as specified in its
charter)



|Delaware                                                           |  | 23-3030650                          
|------------------------------------------------------------------ |  | ------------------------------------
|(State or other jurisdiction of incorporation or
    organization) |  | (I.R.S. Employer Identification No.)



990 Ironwood, Minden, NV 98423

(Address of principal executive offices)



(775) 392-2180

(Registrant’s telephone number, including
area code)



N/A

(Former name, former address
and former fiscal year, if changed since last report)



Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 o



Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (ss. 232.405 of this chapter) during the preceding 12 (or for such shorter period that the registrant was
required to submit and post such files).Yeso    Noo



Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



|Large accelerated filer | o | Accelerated filer         | o
|----------------------- | - | ------------------------- | -
|Non-accelerated filer   | o | Smaller reporting company | x



Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act) Yeso    No
x

Indicate the number of shares outstanding of each of the
issuer’s classes of common stock, as of the latest practicable date, 368,599,362 shares of common stock are issued and outstanding
as of November 26, 2012.















OTHER PERTINENT INFORMATION



When used in this report, the terms “Spare Backup,”
the Company”, “ we”, “our”, and “us” refers to Spare Backup, Inc., a Delaware corporation
formerly known as Newport International Group, Inc., and our subsidiary. The information which appears on our web site is not
part of this report.



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 raise sufficient capital to fund our ongoing operations and satisfy our obligations
as they become due, our ability to increase our revenues, our ability to compete within our market segment, 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, as well as our annual report on Form 10-K for the year ended December 31, 2011 including the
risks described in Part I. Item 1A. Risk Factors of that report. 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.





EXPLANATORY NOTE



Spare Backup, Inc. (the “Company”) is filing this Quarterly
Report on Form 10-Q for the quarter ended September 30, 2012 (the “Report”) on the date hereof in reliance on Order
Under Section 17A and Section 36 of the Securities Exchange Act of 1934 Granting Exemptions from Specified Provisions of the Exchange
Act and Certain Rules Thereunder (the “Order”) promulgated by the Securities and Exchange Commission (the “SEC”)
on November 14, 2012 (Securities Exchange Act of 1934– Release No. 68224).

The Company was not able to meet the SEC mandated filing deadline
for the Report due to Hurricane Sandy. The Company’s certified public accounting firm hired to review the Report and the
financial statements contained herein, Sherb and Co. LLP (“Sherb”), is located in New York, New York. Sherb’s
offices were closed during Hurricane Sandy and for approximately one week thereafter due to lack of power, heat and telephone
service. Because of Hurricane Sandy, Sherb was not able to provide its accounting review service in a timely fashion. Because
of this delay, the Company was not able to file the Report until today.







|1
|-





Table of Contents





SPARE BACKUP, INC.



INDEX



|                                |                                                                                           | Page
|------------------------------- | ----------------------------------------------------------------------------------------- | ----
|                                |                                                                                          
|PART I - FINANCIAL INFORMATION: | 3                                                                                        
|                                |                                                                                           |     
|Item 1.                         | Financial Statements                                                                      | 3   
|                                |                                                                                           |     
|Item 2.                         | Management’s Discussion and Analysis of Financial
    Condition and Results of Operations | 4   
|                                |                                                                                           |     
|Item 3.                         | Quantitative and Qualitative Disclosures About Market Risk                                | 13  
|                                |                                                                                           |     
|Item 4.                         | Controls and Procedures                                                                   | 13  
|                                |                                                                                          
|PART II - OTHER INFORMATION     |                                                                                          
|                                |                                                                                           |     
|Item 1.                         | Legal Proceedings                                                                         | 13  
|                                |                                                                                           |     
|Item 1A.                        | Risk Factors                                                                              | 14  
|                                |                                                                                           |     
|Item 2.                         | Unregistered Sales of Equity Securities and Use of Proceeds                               | 14  
|                                |                                                                                           |     
|Item 3.                         | Defaults Upon Senior Securities                                                           | 14  
|                                |                                                                                           |     
|Item 4.                         | [Removed and Reserved]                                                                    | 14  
|                                |                                                                                           |     
|Item 5.                         | Other Information                                                                         | 14  
|                                |                                                                                           |     
|Item 6.                         | Exhibits                                                                                  | 14  
|                                |                                                                                          
|Signatures                      | 15                                                                                       







|2
|-





Table of Contents





PART I - FINANCIAL
INFORMATION





|Item 1.  Financial Statements                                                                                                          |     
|-------------------------------------------------------------------------------------------------------------------------------------- | ----
|                                                                                                                                       |     
|                                                                                                                                       |     
|INDEX TO UNAUDITED FINANCIAL STATEMENTS                                                                                                | PAGE
|                                                                                                                                       |     
|                                                                                                                                       |     
|Consolidated Balance Sheets at September
    30, 2012 (Unaudited) and December 31, 2011                                                | F-1 
|                                                                                                                                       |     
|Unaudited Consolidated Statements
    of Operations for the three and nine months period ended September 30, 2012 (Unaudited) and 2011 | F-2 
|                                                                                                                                       |     
|Unaudited Consolidated Statements
    of Cash Flows for the nine months periods ended September 30, 2012 (Unaudited) and 2011          | F-3 
|                                                                                                                                       |     
|Notes to Consolidated Financial Statements                                                                                             | F-4 



|3
|-





Table of Contents







|SPARE BACKUP, INC. AND SUBSIDIARY                                                 
|----------------------------------------------------------------------------------
|CONSOLIDATED BALANCE SHEETS                                                       
|                                                                                  
|                                                                                  
|ASSETS                                                                            
|                                                                                  
|Current Assets:                                                                   
|Cash                                                                              
|Accounts receivable, net allowance for bad debt of $98,623 and $100,000           
|Prepaid expenses                                                                  
|Total current assets                                                              
|                                                                                  
|Property and equipment, net of accumulated depreciation of $331,026 and $279,345  
|                                                                                  
|Deferred financing costs                                                          
|Other assets                                                                      
|Total assets                                                                      
|                                                                                  
|LIABILITIES AND STOCKHOLDERS' DEFICIT                                             
|                                                                                  
|Current Liabilities:                                                              
|Accounts payable and accrued expenses                                             
|Overdraft liability                                                               
|Accrued payroll taxes                                                             
|Convertible promissory notes, net of unamortized debt discount of $447,061 and -0-
|Accrued interest on convertible promissory notes                                  
|Notes payable                                                                     
|Derivative liabilities                                                            
|Deferred revenue                                                                  
|Due to stockholder                                                                
|Total current liabilities                                                         
|                                                                                  
|Stockholders' Deficit:                                                            
|Preferred stock, $0.001 par value, 5,000,000 shares authorized:                   
|150,000 issued and outstanding                                                    
|Common stock; $.001 par value; 450,000,000 shares authorized;                     
|370,093,881 and 303,943,573 issued; 366,793,881 and 303,943,573 outstanding       
|Additional paid-in capital                                                        
|Accumulated deficit                                                               
|                                                                                  
|Total stockholders’ deficit                                                       
|                                                                                  
|Total liabilities and stockholders’ deficit                                       
|                                                                                  
|(1) Derived from audited financial statements                                     



See Notes to Unaudited Consolidated Financial
Statements.



|F-1
|---





Table of Contents







|SPARE BACKUP, INC. AND SUBSIDIARY                           
|------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF OPERATIONS                       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                            
|                                                            
|Revenues                                                    
|                                                            
|Operating expenses:                                         
|Research and development                                    
|Selling, general and administrative                         
|Total operating expenses                                    
|                                                            
|Operating loss                                              
|                                                            
|Other income (expense):                                     
|Change in fair value of derivative liabilities              
|Gain from debt settlements                                  
|Interest expense                                            
|Other loss                                                  
|Total other income (expense)                                
|                                                            
|Net loss                                                    
|                                                            
|                                                            
|Basic and diluted loss per common share                     
|                                                            
|Basic and diluted weighted average common shares outstanding



See Notes to Unaudited Consolidated Financial
Statements.



|F-2
|---





Table of Contents





|SPARE BACKUP, INC. AND SUBSIDIARY                                                                                                                                 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                                                                             
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|Cash flows from operating activities:                                                                                                                             
|Net loss                                                                                                                                                          
|Adjustments to reconcile net loss to net cash used in                                                                                                             
|operating activities:                                                                                                                                             
|Change in fair value of derivative liabilities                                                                                                                    
|Fair value of options and warrants issued for services                                                                                                            
|Fair value of option and warrant modifications                                                                                                                    
|Fair value of common stock issued in connection with service rendered                                                                                             
|Fair value of convertible promissory notes modifications                                                                                                          
|Fair value of common stock issued in connection with note payable issuance                                                                                        
|Fair value of common stock issued to satisfy accrued interest                                                                                                     
|Gain on extinguishment of debt                                                                                                                                    
|Depreciation and amortization                                                                                                                                     
|Bad debt                                                                                                                                                          
|Amortization of debt discount                                                                                                                                     
|Changes in operating assets and liabilities:                                                                                                                      
|Accounts receivable                                                                                                                                               
|Prepaid expense and other current assets                                                                                                                          
|Deferred financing costs                                                                                                                                          
|Accounts payable, accrued expense and accrued payroll taxes                                                                                                       
|Accrued interest on convertible promissory notes                                                                                                                  
|                                                                                                                                                                  
|Net cash used in operating activities                                                                                                                             
|                                                                                                                                                                  
|Cash flows used in investing activities:                                                                                                                          
|Capital expenditures                                                                                                                                              
|                                                                                                                                                                  
|Net cash used in investing activities                                                                                                                             
|                                                                                                                                                                  
|Cash flows from financing activities:                                                                                                                             
|Proceeds from issuance of convertible promissory notes                                                                                                            
|Proceeds from issuance of notes payable                                                                                                                           
|Repayment of notes payable                                                                                                                                        
|Net proceeds from issuance of common stock for cash                                                                                                               
|Cash overdraft                                                                                                                                                    
|Proceeds from exercise of warrants                                                                                                                                
|Proceeds from exercise of stock options                                                                                                                           
|                                                                                                                                                                  
|Net cash provided by financing activities                                                                                                                         
|                                                                                                                                                                  
|Net increase (decrease) in cash                                                                                                                                   
|                                                                                                                                                                  
|Cash, beginning of period                                                                                                                                         
|                                                                                                                                                                  
|Cash, end of period                                                                                                                                               
|                                                                                                                                                                  
|Supplemental disclosures of cash flow information:                                                                                                                
|Cash paid for interest                                                                                                                                            
|Cash paid for income taxes                                                                                                                                        
|                                                                                                                                                                  
|Non-cash investing and financing activities:                                                                                                                      
|Write off of fully depreciated property and equipment                                                                                                             
|Fair value of warrants and embedded conversion features issued in
    connection with the issuance of convertible promissory notes and corresponding debt discount
|Conversion of convertible promissory notes and accrued interest
        into shares of common stock                                                               
|Conversion of notes payable into shares of common stock                                                                                                           
|Fair value of derivative liability                                                                                                                                
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  







See
Notes to Unaudited Consolidated Financial Statements.



|F-3
|---





Table of Contents





SPARE BACKUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2012

(Unaudited)



NOTE 1 - ORGANIZATION, BASIS OF PRESENTATION
AND GOING CONCERN



Spare Backup, Inc., (the "Company")
was incorporated in Delaware in December 1999. The Company 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 balance sheet presented as of September 30, 2012 has been derived
from our audited financial statements. The unaudited financial statements have been prepared pursuant to the rules and regulations
of the SEC. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance
with accounting principles generally accepted in the United States of America, have been omitted pursuant to those rules and regulations,
but we believe that the disclosures are adequate to make the information presented not misleading. The financial statements and
notes included herein should be read in conjunction with the annual financial statements and notes for the year ended December
31, 2011 included in our Annual Report on Form 10-K filed on April 26, 2012.  The results of operations for the nine-month
period ended September 30, 2012 are not necessarily indicative of the results for the year ending December 31, 2012.



The accompanying consolidated unaudited financial
statements have been prepared on a going concern basis. The Company has incurred net losses of approximately $2.9 million during
the nine-month period ended September 30, 2012 and its current liabilities exceed its current assets by $11.7 million. 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, 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.



The accompanying consolidated unaudited financial
statements include the accounts of Spare Backup and its wholly-owned subsidiary. All material inter-company balances and transactions
have been eliminated in consolidation.



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES



Use of Estimates



The preparation of the consolidated unaudited
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 share-based payments, derivative liabilities, and useful life of
property and equipment. Actual results will differ from these estimates.



|F-4
|---





Table of Contents





Cash and Cash Equivalents



The Company considers all highly liquid temporary
cash investments with an original maturity of three months or less when purchased, to be cash equivalents.



Reclassification



Certain items in the September 30, 2011 financial statements have
been reclassified to conform to the presentation in the September 30, 2012 financial statements. Such reclassifications did not
have a material impact on the presentation of the overall financial statements.



Concentration of Credit Risks



The Company is subject to concentrations of credit risk primarily
from cash and cash equivalents.



The Company’s cash and cash equivalents
accounts are held at financial institutions and are insured by the Federal Deposit Insurance Corporation, or the FDIC, up to $250,000.
During the nine-month period ended September 30, 2012, the Company did not exceed the FDIC insurance limit.



The Company's accounts receivable are due from a few customers,
which are located in the Unites States and United Kingdom. At September30, 2012,two of the Company’s customers accounted
for 43% and 17% of its accounts receivable. Two of the Company’s customers accounted for 16% and 96%of its accounts receivable
at December 31, 2011.



Accounts Receivable



The Company has a policy of reserving for
uncollectible accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable.
The Company periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of
past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed
to be uncollectible are charged to the bad debt expense after all means of collection have been exhausted and the potential for
recovery is considered remote. Management determined that an allowance of $98,623 and $100,000 was necessary at September 30,
2012 and December 31, 2011.



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.



Revenue Recognition



The Company follows the guidance of the FASB
ASC 605-10-S99 "Revenue Recognition Overall - SEC Materials." The Company records revenue when persuasive evidence of
an arrangement exists, on-line back-up services have been rendered, the sales price to the customer is fixed or determinable,
and collectability is reasonably assured.



The Company has collected annual fees related
to online back-up services. Online back-up service fees received in advance or collected up front are reflected as deferred revenue
on the accompanying balance sheet. Deferred revenue as of September 30, 2012 and December 31, 2011 amounted to $102,500, and will
be recognized as revenue over the respective subscription period.



Revenue consists of the gross value of billings
to clients. The Company reports this revenue gross in accordance with Generally Accepted Accounting Pronouncements (“GAAP”)
because it is responsible for fulfillment of the service, has substantial latitude in setting price and assumes the credit risk
for the entire amount of the sale, and it is responsible for the payment of all obligations incurred for sales marketing and commissions.



|F-5
|---





Table of Contents





Customer Concentration



Two of the Company’s customers accounted for 43% and 17%
of the Company’s revenue during the nine-month period ending September 30, 2012. One of the Company’s customers accounted
for 50% of the Company’s revenue during the nine-month period ending September 30, 2011.



Product Concentration



The Company offers subscriptions to online and software backup
products to assist individuals, small businesses and home business users.



Fair Value of Financial Instruments



FASB ASC 820 “Fair Value Measurements
and Disclosures” establishes a common definition for fair value to be applied to existing generally accepted accounting
principles that require the use of fair value measurements, establishes a framework for measuring fair value and expands disclosure
about such fair value measurements. The adoption of ASC 820 did not have an impact on the Company’s financial position
or operating results, but did expand certain disclosures.



ASC 820 defines fair value as the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable
inputs and minimize the use of unobservable inputs. These inputs are prioritized below:



|Level 1: |  | Observable inputs such as quoted market prices in active markets
    for identical assets or liabilities                             
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------
|Level 2: |  | Observable market-based inputs or unobservable inputs that are corroborated
    by market data                                       
|Level 3: |  | Unobservable inputs for which there is little or no market data, which
    require the use of the reporting entity’s own assumptions.



The Company did not have any Level 2 or Level 3 assets or
liabilities as of September 30, 2012 and December 31, 2011, with the exception of its convertible promissory notes and derivative
liabilities. The carrying amount of the convertible promissory notes at September 30, 2012 and December 31, 2011, approximate
their respective fair value based on the Company’s incremental borrowing rate. The derivative liabilities are computed using
either the Black Scholes Model or the binomial method and are classified as Level 3 liabilities.



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 FASB ASC 985-20, “Costs of Software to be Sold,
Leased, or 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, 2012. Instead, such amounts are included in the statement of operations under the caption "Research and development."



Foreign Currency Transactions



The Company periodically engages in transactions
in countries outside the United States which may result in foreign currency transaction gains or losses. Gains and losses resulting
from foreign currency transactions are recognized as foreign currency gain (loss) in the statement of operations of the period
incurred.



|F-6
|---





Table of Contents





Income Taxes



Income taxes are accounted for in accordance with the provisions
of FASB ASC-740 - Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amounts expected to be realized, but no less than quarterly.



Share-based Payments



The Company accounts for stock-based compensation in accordance
with ASC Topic 718, Compensation-Stock Compensation(“ASC 718”). Under the fair value recognition provisions of this
topic, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense
on a straight-line basis over the requisite service period, which is the vesting period.



The Company has elected to use the Black-Scholes-Merton (“BSM”)
option-pricing model to estimate the fair value of its options, which incorporates various subjective assumptions including volatility,
risk-free interest rate, expected life, and dividend yield to calculate the fair value of stock option awards. Compensation expense
recognized in the consolidated statements of operations is based on awards ultimately expected to vest and reflects estimated
forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates.



Convertible Instruments



The Company evaluates and accounts for conversion options embedded
in its convertible instruments and warrants in accordance with professional standards for “Accounting for Derivative Instruments
and Hedging Activities.”



Professional standards generally provides three criteria that,
if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative
financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of
the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract,
(b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured
at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings
as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered
a derivative instrument.  Professional standards also provide an exception to this rule when the host instrument is
deemed to be conventional as defined under professional standards as “The Meaning of “Conventional Convertible Debt
Instrument.”



The Company accounts for convertible instruments (when it has determined
that the embedded conversion options should not be bifurcated from their host instruments) in accordance with professional standards
when “Accounting for Convertible Securities with Beneficial Conversion Features,” as those professional standards
pertain to “Certain Convertible Instruments.” Accordingly, the Company records, when necessary, discounts to convertible
notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value
of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the
note. Debt discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption.
The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares
based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction
and the effective conversion price embedded in the note.



|F-7
|---





Table of Contents





ASC 815-40 provides that, among other things, generally, if an
event is not within the entity’s control could require net cash settlement, then the contract shall be classified as an
asset or a liability.



Pursuant to 815-40-25-22, if the number of
currently authorized but unissued shares, less the maximum number of shares that could be required to be delivered during the
contract period under existing commitments, including outstanding convertible debt or instruments, outstanding stock options and
warrants, exceeds the maximum number of shares that could be required to be delivered under share settlement of the contract,
then the excess is to be accounted for as a liability.



Additionally, the Company determines whether
the instruments issued in the transactions are considered indexed to the Company’s own stock.



Recent Accounting Pronouncements



Management does not believe that any recently issued, but not yet
effective, accounting standards could have a material effect on the accompanying consolidated financial statements. As new accounting
pronouncements are issued, the Company will adopt those that are applicable under the circumstances.



Basic and Diluted Earnings per Share



Basic earnings per share is calculated by dividing income available
to stockholders by the weighted-average number of common shares outstanding for each period. Diluted earnings per share is 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 convertible promissory notes amounted
to 183,022,916 and 113,959,750 at September 30, 2012and 2011, respectively. Accordingly, these common share equivalents at
September 30, 2012 and 2011 are excluded from the loss per share computation for that period due to their anti-dilutive effect.



|F-8
|---





Table of Contents







The following sets forth the computation of basic and diluted earnings
per share for the nine-month periods ended September 30, 2012 and 2011:



|                                                            |  | Three months ended |             | Nine months ended
|----------------------------------------------------------- |  | ------------------ | ----------- | -----------------
|                                                            |  | September 30,      |             | September 30,    
|                                                            |  | 2012               |             | 2011             
|Numerator:                                                  |  |                    |             |                  
|Net loss                                                    |  | $                  | (1,028,523  | )                
|Increase (decrease) in fair value of derivative liabilities |  |                    | 168,806     |                  
|Numerator for basic earnings per share- loss                |  |                    |             |                  
|attributable to common stockholders - as adjusted           |  |                    | (859,717    | )                
|Numerator for diluted earnings per share-net income (loss)  |  |                    |             |                  
|attributable to common stockholders - as adjusted           |  | $                  | (859,717    | )                
|                                                            |  |                    |             |                  
|Denominator:                                                |  |                    |             |                  
|Denominator for basic earnings per share—weighted           |  |                    |             |                  
|average shares                                              |  |                    | 364,835,548 |                  
|Effect of dilutive securities:                              |  |                    |             |                  
|Assumed conversion of Series A preferred stock              |  |                    | —           |                  
|Assumed conversion of notes payable                         |  |                    | —           |                  
|Stock options                                               |  |                    | —           |                  
|Warrants                                                    |  |                    | —           |                  
|Dilutive potential common shares                            |  |                    | —           |                  
|Denominator for diluted earnings per share—adjusted         |  |                    |             |                  
|weighted-average shares and assumed conversions             |  |                    | 364,835,548 |                  
|                                                            |  |                    |             |                  
|Loss per share:                                             |  |                    |             |                  
|Net loss available to common stockholders                   |  |                    |             |                  
|Basic and diluted                                           |  | $                  | (0.00       | )                



NOTE 3- PROPERTY AND EQUIPMENT



Property and equipment consisted of the following:



|                               |  |               |  | September 30, |          | December 31,
|------------------------------ |  | ------------- |  | ------------- | -------- | ------------
|                               |  | Estimate Life |  | 2012          |          | 2011        
|Computer and office equipment  |  | 3 to 5 years  |  | $             | 378,470  |             
|                               |  |               |  |               | 378,470  |             
|Less: Accumulated depreciation |  |               |  |               | (331,026 | )           
|                               |  |               |  | $             | 47,444   |             



Depreciation expense amounted to approximately
$51,681 and $161,000 during the nine-month periods ended September 30, 2012 and 2011, respectively.



|F-9
|---





Table of Contents





NOTE 4-ACCRUED PAYROLL TAXES



At September 30, 2012, the Company recorded
a liability of approximately $4.3 million to certain U.S. and state governmental agencies for unpaid payroll taxes, including
statutory additions, such as interest and penalties.



NOTE 5 - CONVERTIBLE PROMISSORY NOTES



Convertible promissory notes



Convertible promissory notes consist of the
following as of:





|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  | September 30, |           | December 31,
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | --------- | ------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  | 2012          |           | 2011        
|Convertible promissory notes, bearing interest between 8% and 10% per annum, maturing
    between August 2008 and October 2011. Interest is within 30 days after the end of the quarter. Interest may be paid in cash
    or common stock at the option of the Company. Interest paid in common stock will be calculated at a range of 90% of the average
    closing price for the common stock for the five trading days preceding the interest payment date to 100% of the volume weighted
    average price for the common stock for the ten trading days preceding the interest payment date. The promissory notes are
    convertible at any time at the option of the holder, into shares of common stock at an effective conversion rate ranging from
    $0.05 to $0.25. These notes are currently in default. |  | $             | 1,918,735 |             
|Convertible note payable for up to $1.5 million, convertible at 75% of the Company’s 5-day
    moving average quoted price of the stock for that month, bearing interest at 10% per annum, payable monthly beginning August
    2011, maturing in June 2014.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |               | 585,000   |             
|Convertible note payable, convertible at the lessor of: 1) 70% of the lowest traded price of
    the Company’s common stock for the 20 trading days prior to the conversion, or 2) $0.035, bearing a one-time interest
    payment of 10%, payable upon conversion, maturing December 15, 2012.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |               | 60,000    |             
|Convertible note payable for up to $385,000, convertible at the lessor of: 1) $0.035, or 2) 70%
    of the lowest trade price in the 25 trading days prior to the conversion, bearing an original issuance discount of 9.1% and
    no interest for the first 90 days, bearing a one-time interest payment of 5% after 90 days, payable on conversion, maturing
    one year from the effective date of each payment.                                                                                                                                                                                                                                                                                                                                                                                                   |  |               | 54,545    |             
|Convertible note payable, convertible at 60% of the average of the lowest three trading
    prices for the Company’s common stock in the ten day trading period ended one trading day prior to the conversion date,
    bearing interest at 6% per annum, payable upon conversion, maturing on February 18, 2013.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |               | 160,000   |             
|Convertible note payable valued at $100,000, convertible at a conversion price of $0.01 per share
    maturity or when in default at a strike price of $0.05 per share, maturing on September 5, 2012 2 million warrants with
    a strike price of one cent per a share, maturing on October 15, 2012                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |               | 100,000   |             
|Convertible note payable with a value for up to $500,000, convertible at maturity or when in
    default at a strike price of $0.05 per share, maturing on September 5, 2012 2 million warrants with a strike price of
    one cent per a share, maturing on October 15, 2012                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |               | 35,000    |             
|Convertible note payable for up to $150,000, convertible at 70% of the lowest traded price in
    the 5 trading days prior to the conversion, bearing interest at 6% per annum, maturing on August 22, 2014 Convertible
    note payable, convertible at $0.02, bearing no interest and no maturity date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |               | 75,000    |             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |               |           |             
|Less: debt discount                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |               | 477,061   |             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  | $             | 2,511,219 |             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |               |           |             







|F-10
|----





Table of Contents





The following sets forth the Company’s activity of its convertible
notes payable during the nine-month period ended September 30, 2012 and 2011, respectively:



|                                                                                                                 |  |   | Nine-month period ended September 30, 2012 |  |  |   | Nine-month period ended September 30, 2011 | 
|---------------------------------------------------------------------------------------------------------------- |  | - | ------------------------------------------ |  |  | - | ------------------------------------------ | 
|Reprising of certain convertible promissory notes from $0.16 to $0.12 per
    share recorded as interest expense |  | $ | —                                          |  |  | $ | —                                          | 
|Issuance of -0- and 11,760,000 shares of common stock pursuant
    to conversion of convertible notes payable    |  |   | —                                          |  |  |   | 818,500                                    | 
|Proceeds from issuance of convertible notes payable                                                              |  |   | 782,000                                    |  |  |   | 490,000                                    | 
|Fair value of warrants issued to certain promissory note holders recorded
    as interest expense                |  |   | —                                          |  |  |   | 207,910                                    | 
|Fair value of 2,166,737 and 955,029 shares of common stock to satisfy accrued
    interest obligations           |  |   | 137,510                                    |  |  |   | 50,995                                     | 
|Fair value of warrants and embedded conversion features recorded as corresponding
    debt discount              |  |   | 672,217                                    |  |  |   | 47,672                                     | 
|Fair value of warrants issued to satisfy accrued interest obligations                                            |  |   | —                                          |  |  |   |                                            | 
|Amortization of debt discount                                                                                    |  |   | 209,701                                    |  |  |   | 40,761                                     | 
|Notes payable converted to convertible notes payable                                                             |  |   | 302,600                                    |  |  |   | —                                          | 
|Original issuance discount on convertible notes payable                                                          |  |   | 14,545                                     |  |  |   | —                                          | 
|                                                                                                                 |  |   |                                            |  |  |   |                                            | 



Notes Payable



Notes payable do not have any stated interest rate, are payable
on demand and are unsecured, with the exception of one note, which amounts to $37,500, which has a premium of $15,000 and was
due on November 16, 2011. The amount due under such note at September 30, 2012 and December 31, 2011 amounts to $15,000.





|F-11
|----





Table of Contents





The following sets forth the Company’s activity of its notes
payable during the nine-month period ended September 30, 2012 and 2011, respectively:





|                                                                                                 |  | Nine-month period ended September 30, 2012 |         | Nine-month period ended September 30, 2011
|------------------------------------------------------------------------------------------------ |  | ------------------------------------------ | ------- | ------------------------------------------
|Principal repayments                                                                             |  | $                                          | —       |                                           
|Proceeds from issuance of note payable                                                           |  |                                            | 23,000  |                                           
|Fair value of -0- and 955,029 shares of common stock to satisfy accrued
    interest obligations |  |                                            | —       |                                           
|Issuance of -0- and 12,496,000 shares to satisfy obligations under certain
    notes payable     |  |                                            | —       |                                           
|Conversion of note payable to convertible note payable                                           |  |                                            | 257,000 |                                           
|Issuance of notes payable to satisfy certain accounts payable                                    |  |                                            | —       |                                           







The Company recognized approximately $402,000
and $644,000 during the nine-month periods ended September 30, 2012 and 2011, respectively, as interest expense, which consists
of the excess of the fair value of shares of common stock over the carrying value of the convertible promissory notes and notes
payable satisfied, amortization of debt discount, amortization of deferred financing costs, fair value of the Company’s
shares of common stock and warrants issued in lieu of interest.



NOTE 6 - DERIVATIVE LIABILITIES



A summary of the transactions related to the
derivative liability for the nine-month period ended September 30, 2011:



|Derivative liability at January 1, 2011                                    |  | $ | 470,871   |  
|-------------------------------------------------------------------------- |  | - | --------- | -
|Reclassification of equity contracts to liability contracts                |  |   | 2,407,261 |  
|Reclassification of liability contracts to equity contracts                |  |   | (656      | )
|Issuance of warrants                                                       |  |   | 200,000   |  
|Decrease in fair value of derivative liability, recognized as other income |  |   | (838,844  | )
|Derivative liability at September 30, 2011                                 |  | $ | 2,238,832 |  



A summary of the transactions related to the
derivative liability for the nine-month period ended September 30, 2012:



|Derivative liability at January 1, 2012                                     |  | $ | —        |  
|--------------------------------------------------------------------------- |  | - | -------- | -
|Issuance of embedded conversion features, recognized as interest expense    |  |   | 672,217  |  
|Decrease in fair value of derivative liability, recognized as other expense |  |   | (155,936 | )
|Derivative liability at September 30, 2012                                  |  | $ | 516,281  |  



The maximum number of shares required to be
delivered during the period under which substantially all of the Company’s outstanding warrants, options, and convertible
notes exceeded the amount of authorized shares through September 30, 2012.



The Company accounts for the embedded conversion
features included in its convertible promissory notes and outstanding warrants.



|F-12
|----





Table of Contents





Derivative liabilities amounted to $516,281
and $0 at September 30, 2012 and December 31, 2011, respectively.



During the first three quarters of 2011, the
warrants and convertible promissory notes issued by the Company were recognized as liability contracts because, at issuance, the
Company did not have sufficient amount of authorized of shares of common stock to satisfy its obligations under such contracts.



During December 2011, the Company’s
shareholders approved an increase in the Company’s authorized number of its shares of common stock to 450,000,000. Accordingly,
the Company reclassified its previously-recorded liability contracts to equity contracts in December 2011.



At each measurement date, the fair value of
the embedded conversion features and warrants were based on the binomial and the Black Scholes method, respectively.



During the nine-month period ended September
30, 2011, the Company issued warrants in connection with the sale of the Company’s common stock, conversion of convertible
promissory notes, and short-term note payable, as well convertible promissory notes. The maximum number of shares required to
be delivered during the period under which the warrants issued pursuant to common stock, conversion of promissory notes and short-term
note payables, as well as the issuance of convertible promissory note, together with all the outstanding convertible debt, stock
options, warrants and common stock, exceeded the amount of authorized common stock shares at September 30, 2011. As a result,
the Company recorded a derivative liability aggregating $2,238,832 and was offset against additional-paid in capital.



The fair value of the derivative instruments
were based on the following assumptions:



|Exercise price:                |  |  | $0.05 - $0.13 |  
|------------------------------ |  |  | ------------- | -
|Market price at date of grant: |  |  | $0.09 - $0.13 |  
|Expected volatility:           |  |  | 78            | %
|Term:                          |  |  | >1 year       |  
|Risk-free interest rate:       |  |  | 0.28% - 1.93% |  



During the nine-month period ended September
30, 2012, the Company issued warrants in connection with the sale of the Company’s common stock, conversion of convertible
promissory notes, and short-term note payable, as well convertible promissory notes. The maximum number of shares required to
be delivered during the period under which the warrants issued pursuant to common stock, conversion of promissory notes and short-term
note payables, as well as the issuance of convertible promissory note, together with all the outstanding convertible debt, stock
options, warrants and common stock, exceeded the amount of authorized common stock shares at September 30, 2012.  As
a result, the Company recorded a derivative liability aggregating $516,282 and was offset against debt discount.



The fair value of the derivative instruments
were based on the following assumptions:



|Exercise price:                |  |  | $0.013 - $0.029   |  
|------------------------------ |  |  | ----------------- | -
|Market price at date of grant: |  |  | $0.032 - $0.043   |  
|Expected volatility:           |  |  | 76                | %
|Term:                          |  |  | >1 year - 3 years |  
|Risk-free interest rate:       |  |  | 0.06% -0.31%      |  
|                               |  |  |                   |  



|F-13
|----





Table of Contents





NOTE 7 - STOCKHOLDERS' DEFICIT



Preferred Stock



During the year ended December 31, 2011, the
Company issued 100,000 shares of its Series B Preferred Stock. The Series B Preferred Stock’s designation provides voting
rights amounting to 400-to-1 shares. The Company issued 50,000 of such shares to one of its directors, who also manages and controls
a company which is one of the Company’s customers. Additionally, the Company issued 50,000 of such shares to one of its
lenders and shareholders, who has granted a $1.5 million convertible note payable and was the owner of 7,416,666 shares of the
Company’s common stock at the date of issuance of the $1.5 million convertible note payable.



The issuance of the shares of Series B Preferred
Stock was recognized at their par value.



Common Stock



During December 2011, the Company increased its authorized shares
of common stock to 450,000,000.



The issuance of common stock during the nine-month
period ended September 30, 2011 is summarized in the table below:



|                                                                         |  | Number of Shares of Common Stock |            | Fair Value at Issuance |  | Fair Value at  Issuance (per share)
|------------------------------------------------------------------------ |  | -------------------------------- | ---------- | ---------------------- |  | -----------------------------------
|Accrued Interest Payment for 8% and 10% convertible promissory
    notes |  |                                  | 517,623    |                        |  | $                                  
|Services performed- Investor relations                                   |  |                                  | 5,395,000  |                        |  |                                    
|Exercised stock options                                                  |  |                                  | 4,000,000  |                        |  |                                    
|Exercised warrants                                                       |  |                                  | 5,109,403  |                        |  |                                    
|Conversion of convertible promissory notes and notes payable             |  |                                  | 29,033,591 |                        |  |                                    
|Private placement, net of finder’s fee of $57,330                        |  |                                  | 41,258,336 |                        |  |                                    
|                                                                         |  |                                  |            |                        |  |                                    
|Interest associated with issuance of notes payable                       |  |                                  | 500,000    |                        |  |                                    



The issuance of common stock during
the nine-month period ended September 30, 2012 is summarized in the table below:



|                                                                     |  | Number of Shares of Common Stock |            | Fair Value at Issuance |  | Fair Value at Issuance (per share)
|-------------------------------------------------------------------- |  | -------------------------------- | ---------- | ---------------------- |  | ----------------------------------
|Services performed- Investor relations                               |  |                                  | 5,850,000  |                        |  | $                                 
|Services performed-Consulting                                        |  |                                  | 13,725,000 |                        |  |                                   
|Accrued interest payment for 8% and 10% convertible promissory notes |  |                                  | 2,116,737  |                        |  |                                   
|Exercise of stock options                                            |  |                                  | 3,640,000  |                        |  |                                   
|Private placement                                                    |  |                                  | 33,251,904 |                        |  |                                   
|Exercised warrants                                                   |  |                                  | 4,000,000  |                        |  |                                   
|                                                                     |  |                                  |            |                        |  |                                   



Additionally, the Company issued 3,300,000
shares of its common stock as collateral in connection with the issuance of a note payable of $60,000 during the nine-month period
ended September 30, 2012.



|F-14
|----





Table of Contents



Warrants



The issuance of warrants during the nine-month
period ended September 30, 2011 is summarized in the table below:



|                        |  | Number of |           | Exercise |  | Expiration |              | Value at
|----------------------- |  | --------- | --------- | -------- |  | ---------- | ------------ | --------
|Association             |  | Warrants  |           | Price    |  | Date       |              | Issuance
|Private Placement       |  |           | 1,090,000 |          |  | $          | 0.09         |         
|                        |  |           |           |          |  |            |              |         
|Finder's Fees           |  |           | 4,575,000 |          |  | $          | 0.05 - 0.012 |         
|                        |  |           |           |          |  |            |              |         
|Conversion of 8%        |  |           |           |          |  |            |              |         
|Note payable            |  |           | 166,667   |          |  | $          | 0.16         |         
|                        |  |           |           |          |  |            |              |         
|Accrued interest on     |  |           |           |          |  |            |              |         
|Conversion of 8%        |  |           |           |          |  |            |              |         
|Note payable            |  |           | 19,981    |          |  | $          | 0.16         |         
|                        |  |           |           |          |  |            |              |         
|Issuance of convertible |  |           |           |          |  |            |              |         
|Promissory note         |  |           | 5,000,000 |          |  | $          | 0.09         |         



The issuance of warrants during the nine-month
period ended September 30, 2012 is summarized in the table below:



|                  |  | Number of |           | Exercise |  | Expiration |           | Value at
|----------------- |  | --------- | --------- | -------- |  | ---------- | --------- | --------
|Association       |  | Warrants  |           | Price    |  | Date       |           | Issuance
|Private Placement |  |           | 7,350,000 |          |  | $          | 0.01-0.07 |         
|                  |  |           |           |          |  |            |           |         
|Issuance of       |  |           |           |          |  |            |           |         
|Note payable      |  |           | 100,000   |          |  | $          | 0.03      |         
|                  |  |           |           |          |  |            |           |         
|Services          |  |           | 1,000,000 |          |  | $          | 0.018     |         



The fair value of the warrants granted is
based on the Black Scholes Model using the following assumptions:



|                               |  | September 30, 2012 |                 | September 30, 2011
|------------------------------ |  | ------------------ | --------------- | ------------------
|Exercise price:                |  |                    | $0.018 - $0.03  |                   
|Market price at date of grant: |  |                    | $0.035 - $0.048 |                   
|Expected volatility:           |  |                    | 76.21           | %                 
|Term:                          |  |                    | 3 years         |                   
|Risk-free interest rate:       |  |                    | 0.72            | %                 



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.



In May 2006, the Board increased the authorized
amount to 27,000,000. 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 fair value of stock options granted was
estimated at the date of grant using the Black-Scholes options pricing model. The Company used the following assumptions for determining
the fair value of options granted under the Black-Scholes option pricing model:



|                              |  | September 30, 2012 |                  | September  30, 2011
|----------------------------- |  | ------------------ | ---------------- | -------------------
|Exercise Price                |  |                    | $ 0.02 - $ 0.05  |                    
|Market price at date of grant |  |                    | $ 0.021 - $ 0.07 |                    
|Expected volatility           |  |                    | 76.15% - 76.21%  |                    
|Risk-free interest rate       |  |                    | 0.51% - 0.72%    |                    



The following activity occurred under our plan:



|                                                          |  |   | Nine- month period ended September 30, 2012 |  |  |   | Nine- month period ended September 30, 2011 | 
|--------------------------------------------------------- |  | - | ------------------------------------------- |  |  | - | ------------------------------------------- | 
|Weighted-average grant-date fair value of options granted |  | $ | 0.04                                        |  |  | $ | 0.04                                        | 
|Fair value of options recognized as expense:              |  | $ | 299,984                                     |  |  | $ | 468,346                                     | 
|Options granted                                           |  |   | 5,640,000                                   |  |  |   | 4,500,000                                   | 



The total compensation cost related to non-vested options not yet
recognized amounted to approximately $7,089 at September 30, 2012 and the Company expects that it will be recognized over the
following weighted-average period of 3 months.



NOTE 8 - COMMITMENTS AND CONTINGENCIES



Litigation





The Company has appealed to the California
Court of Appeals in a matter involving a consultant. The issue on appeal is the California Superior Court’s failure to disregard
a NY state court judgment for approximately $100,000, which the Company asserts was improperly entered and, therefore, should not
be recognized as a valid sister state judgment. The Company’s likelihood of success on this appeal cannot be determined at
this time.
In November 2011, a note holder filed suit against the Company in Nevada State Court in Douglas County, alleging breach of a promissory
debenture. The Company has filed motions to dismiss the action based on the fact that the note holder has been dissolved and the
Company has entered into individual agreements with its former partners. The case has not been set for trial and, as of this date,
there is a low likelihood of an unfavorable outcome.
In February 2011, a former employee filed suit against the Company alleging various employment related claims. The Company conducted
litigation and discovery and on April 4, 2012, the case was settled in exchange for a judgment of $125,000.
In February 2012, a former employee filed suit against the Company alleging various employment related claims. The Company conducted
litigation and discovery, the case is set for trial later this year.
In June 2012, a vendor filed suit against the Company for breach of contract related to call center services they provided. The
Company is currently conducting litigation and discovery, the case is not yet set for trial.





|F-15
|----





Table of Contents





NOTE 9 - GAIN ON WRITE-OFF FROM DEBT SETTLEMENTS



During the nine months ended September 30,
2012, the Company recorded a gain from debt settlements of $446,387 on write off of certain payables on which the statute of limitations
has expired relating to the collectability of these payables.



NOTE 10 - RELATED PARTY TRANSACTIONS



The Company made rental payments for property
owned by the Chief Executive Officer of the Company during the nine-month periods ended September 30, 2012 and 2011 amounting
$0 and $2,500, respectively. The rental property was used for temporary employee housing during such periods.



NOTE 11 - SEGMENTS



During the nine-month periods ended September
30, 2012 and 2011, the Company operated in one business segment. The percentages of sales by geographic region for the nine-month
periods ended September 30, 2012 and 2011 were approximately:



|              |  | 2012 |    | 2011
|------------- |  | ---- | -- | ----
|United States |  |      | 39 | %   
|Europe        |  |      | 61 | %   











|F-16
|----





Table of Contents





Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations.



Overview



We are a software development company and
service provider for the PC and mobile device industry.  Our flagship product isSpare Backup , a fully-automated
remote backup solution designed and developed especially for the small office, mobile and home environment which automatically
and efficiently backs up all data on selected laptops, tablets or desktop computers, as well as smart phones. As a result, we
believe individuals and businesses can ensure file safety. We launched our Spare Back-up service and software product version
1.0 in March 2005 specifically designed for the PC, and we are currently offering version 6.0 of the product which now incorporates
not only the PC but tablets and smart phones which are carrier agnostic and handset agonistic .



OurSpare Switch software
enables users to complete the transfer of personal files from one personal computer (PC) to another via a high speed Internet
connection. We focus on individuals and businesses that use diverse technologies and various devices to support their businesses
and lifestyles.



OurSpare Mobile product
backs up personal content on your “smart phones” such as contacts, emails, calendar events, photos, music and videos.  We
offer a complete line ofsecurity products to compliment the user’s smart phone, such as:



Last Known LocationPRO:  View
the approximate location of your registered phone(s) on an integrated map using the phone’s built-in GPS.



Lock/Unlock PhonePRO:  Remotely
lock your phone to prevent unauthorized use and protect your personal information.



Display MessagePRO:  Send
a message to your phone that locks your phone and displays a message requesting that the Good Samaritan holding your phone contact
you to return it.



Set Phone AlarmPRO:  Locks
your phone and sends a loud, audible alert directly to your phone to immediately pinpoint its location.



Erase PhonePRO:  Remotely
lock your phone and erase your contacts, photos, etc. from your phone.



We provide an easy to use, scalable, cloud-based
solution for securing business files, media, and personal data. The total Spare Backup offerings represent a suite of complementary
products and services which are designed for use by technical and non-technical users. Our software has unique, easy, scalable   characteristics
which we believe provides a competitive advantage over other competitors whose products require large investments in hardware,
installation, training and support.



We
have focused our more recent development and marketing efforts on ourSpare Mobile product, which backs up personal
content on “smart phones” and “tablets,” such as contacts, emails, calendar events, photos, music,
videos and data files.  It also offers a complete line of mobilesecurity productsandparental
controls(developed in 2011 and 2012) to compliment the users’ mobile devices, as described in our software development
section. We have shifted our focus to the mobile industry to take advantage of a number of industry trends which we believe
represent a tremendous growth opportunity for our company. In 2011, there were approximately six billion mobile subscribers
throughout the world according to The International Telecommunications Union, representing almost 87% of the
world’s population.  Industry experts, including IDC and Strategy Analytics, estimate that worldwide
shipments of smart phones were approximately 490 million units, up over 60% from 2010, and representing over 31% of all
handsets shipped. In June of 2012,Ericsson forecasts that mobile subscriptions will reach
9 billion in 2017, of which 5 billion will be mobile broadband connections. With recent
estimates by Juniper Research that less than 1 in 20 smart phones and tablets have third-party security software installed in
them, this represents a vast potential market for mobile security. According to Canalys, the U.S. market for mobile security
is estimated to grow to over $3 billion annually by 2015.



|4
|-





Table of Contents





We have generated minimal revenue since our
inception on September 12, 2002, and have incurred net losses of approximately $119million from cash and non-cash activity since
inception through September30, 2012. Revenues generated from our business have not been sufficient to fund our current operations
and we have relied on funds raised from the sale of our securities to provide sufficient cash to operate our business.



Corporate Relocation



We completed the move of our corporate headquarters,
including a major portion of our software development team, to Minden, Nevada in the third quarter of 2011.  We believe
the move will enable us to draw from a more experienced labor pool for software design, as well as provide us with a significantly
more favorable corporate tax environment.  We currently anticipate that we will be subject to minimal corporate taxes
for the remainder of 2012.



Business Development and Marketing Strategy:



We market our software products through distributor’s
retailers as well as insurance and warrantee providers.  We are continuing to expand our current distribution base with
scheduled launches throughout the remainder of the year. We will focus our distribution efforts in four vertical channels:



| | · | Insurance and warranties: Assurant, Service Net and Lifestyle Group;
| | - | --------------------------------------------------------------------



| | · | Retail: Car Phone Warehouse, Best Buy Europe and Simplexity;
| | - | ------------------------------------------------------------



| | · | Original Equipment Manufacturers: Sony;
| | - | ---------------------------------------



| | · | Carriers
| | - | --------



Examples of our marketing partners within
the four vertical distribution channels include Wirefly/Simplexity, Assurant/Federal Home Warranty, Life Styles Group (a UK warranty
provider), Best Buy Europe, and Sony. We will continue to aggressively add additional partnerships. We expect our current partners
will commence a number of scheduled launches of our services during 2012 and we are in late stage negotiations for a near term
launch with a large international mobile communications company. We are also in various stages of negotiations with potential
partners in the U.S., Brazil, India, the Middle East, South America, and   the South Pacific. We are hopeful that
these negotiations will result in additional partnerships in the coming quarters.



While, we believe the launch of our base offerings
will be commercially successful, it is still too early, to determine the extent of its market penetration.



We continue to invest in our software development,
particularly focusing on the smart phone market. We have added additional features, such as:



Last Known LocationPRO:  View
the approximate location of your registered phone(s) on an integrated map using the phone’s built-in GPS.



Lock/Unlock PhonePRO:  Remotely
lock your phone to prevent unauthorized use and protect your personal information.



Display MessagePRO:  Send
a message to your phone that locks your phone and displays a message requesting that the Good Samaritan holding your phone contact
you to return it.



Set Phone AlarmPRO:  Locks
your phone and sends a loud, audible alert directly to your phone to immediately pinpoint its location.



Erase PhonePRO:  Remotely
lock your phone and erase your contacts, photos, etc. from your phone.   Since Wirefly Mobile Backup also backs
up your contacts, photos, and more, you can easily transfer your stored data to your replacement device in minutes.



In the third quarter of 2011 we completed
the first phase of development of a new suite of parental controls to enable parents to monitor and manage numerous aspects of
their children's use of smart mobile devices. The parental controls are activated through a simple set-up wizard that helps users
establish boundaries for monitoring up to 5 children’s locations and times of daily activities like school, sports, and
time with friends.  Once specific rules are put into place by the subscriber, if the child's phone is not in the location
it should be, the intelligent software automatically notifies the subscriber through email or text. Through the secure website
and mobile devices a parent can view the exact movements of a monitored child to see where they have been.  Additional functionalities
are being developed which we anticipate will be released in the coming quarters



We believe our offerings will adapt to the
customer’s day-to-day needs, as our cloud system provides smart phones with the ability to link to our cloud and connect
to multiple devices, which include PC’s and tablets.





|5
|-





Table of Contents



In addition, we are working on providing our
partners with real time data analytics which will provide them with behavioral pattern matching and market research.



We have now converted our
product to support the local language in the Netherlands and Spain. We have also begun translation of our product and documentation into the Turkish language
which we anticipate will be launched December 2012.



In September 2010 we reached a distribution agreement with Simplexity,
LLC., (“Simplexity”), the parent company of Wirefly.com. Simplexity, a privately held company, is the Internet's
leading authorized seller of cell phones and wireless services. Wirefly is Simplexity's shopping and comparison site for consumers,
bringing online shoppers an unprecedented selection of cell phones and service plans from every major U.S. carrier with the convenience
of automated application processing and cell phone activation. For the last six years Wirefly has been the internet's #1 authorized
dealer for AT&T, Verizon Wireless, Sprint, and T-Mobile. Simplexity also operates and maintains similar online websites
for a number of major retailers in North America. We believe Simplexity is uniquely positioned in the U.S. market to reach potential
mobile customers across a wide variety of carriers through online mobile sales sites they own or manage   within
North America.  We anticipate the sales launch of our services through Simplexity’s distribution network to progressively
grow in 2012 and beyond. The service will be offered as an add-on or inclusive in the service packages such as “data protection,”
currently marketed by Simplexity to its channel partners and customers.



We opened a new distribution channel for our
mobile platform through mobile insurance and warrantee providers.  In North America we reached an agreement with Assurant
(Federal Warranty Service Corporation). Assurant, which develops, underwrites, and markets specialty insurance, extended service
contracts, and other risk management solutions with leading financial institutions, retailers, and other entities, has bundled
us into their services. The first of their launches is with Sprint, a US-based cellular company.  Our backup solution
will be bundled into all warranties associated with tablet sales.  We will be expanding our offerings and are currently
doing translations for  additional languages to support additional launches throughout 2012 and 2013.



We also have a distribution
partnership with Lifestyle Services Group (LSG), provider of leading lifestyle solutions and insurance products. LSG
specializes in supporting its client products brands, attracting customers, improving the customer journey, and reducing
customer attrition rates. LSG’s portfolio includes Mobile Phone Insurance, Card Protection and Tech Protect®, and
The HubbTM, which allows clients to seamlessly integrate a complete suite of products
and services all accessed via one number.  Their customer base includes Virgin Mobile, Orange,
“3”,  Phone, Phones 4 U, Barclay’s and Lloyds bank. Bank of Scotland to name a few in the
U.K.   LSG has also amended our December 13, 2010 master services agreement in the third quarter of 2011
to include our parental controls functionality. Under the terms of the amended agreement, Spare Backup will supply the
parental controls to LSG for distribution to LSG's affinity distribution channels.





We expect to be able to work with each LSG
partner, including scheduled launches which occurred in Q3 of 2012 with Lloyds and a soft launch with the Bankof Scotland in Q3
of 2012, as these rolling launches continue, we expect to add customers and revenue accordingly as these partners increase their
marketing and awareness of the product to their customers.  The software is marketed as a way to not only protect data
from loss, but to also increase the likelihood of retrieving a lost or stolen phone through the suite of security features.  As
mobile devices are becoming more prevalent and more powerful, we believe this channel should become a significant source of revenue
to our company in the coming quarters.  We anticipate that these companies will continue to roll out marketing programs
progressively in 2012 and 2013.











|6
|-





Table of Contents





Software Development



Our decision to expand the scope of our cloud-based
platform into mobile backup and security required us to make substantial changes to our software to enhance the scalability and
functionality of our services across a wide array of devices and platforms.  This expansion delayed our ability to launch
a number of important programs in 2011. Our development team continued to test and improve the mobile platform throughout the
second half of 2011 and now feel that these changes enable us to complete launches with our marketing partners in 2012 and 2013. We believe with the improvements that we have made, we are able to handle carrier commitments that
the company is currently negotiating to launch..



In the third quarter we began the full migration
to an HTML-based platform for our distribution partners.  We have begun launching with our marketing partners and anticipate
a progressive roll out system-wide by the end of 2012.  The sites will enable a full touchscreen interface to support
all tablet and mobile device applications including Android, Blackberry, Windows and Apple. HTML will also enable quicker launch
schedules for new customers, greater scalability, simplification of server technology, and faster maintenance.



We also began the upgrade of our hardware in the third quarter
of 2011 to a scalable storage platform capable of supporting millions of users for our software products. Through a unique cloud-like
structure, this new platform can be infinitely scaled as usage increases by the combined use of additional network storage and
virtual machine arrays (VMWARE). Upon completion all user backup data will be stored on state of the art NetAPP SAN storage.  User
account information and transactional information will be stored in a secure SQL-Server redundant distributed database utilizing
special high-speed RAID drives.  In addition, our IIS web servers each can support thousands of simultaneous users.
 Combining this with our new, scalable virtual machine array allows the system to be used by millions of users.



We believe that through our software and
hardware improvements we are now better positioned to begin the launches of Assurant, Simplexity, LSG and other potential
partners in 2012 and 2013. The above partnerships represent multiple opportunities, as each of the companies has different
distributors and strategic alliances marketing their products. We will continue to enhance our platform nonetheless. We
believe the backbone for our service platform has been substantially developed. We have added new features to our existing
services that will continue rolling out throughout 2012 that will accelerate revenue from our distribution.



|7
|-





Table of Contents





Results of Operations for the three-month and nine-month periods
ended September 30, 2012 compared to the three-month and nine-month periods ended September 30, 2011





|SPARE BACKUP, INC. AND SUBSIDIARY             
|----------------------------------------------
|CONSOLIDATED STATEMENTS OF OPERATIONS         
|                                              
|                                              
|                                              
|                                              
|                                              
|                                              
|Revenues:                                     
|                                              
|Operating expenses:                           
|Research and development                      
|Selling, general and administrative           
|Total operating expenses                      
|                                              
|Operating loss                                
|                                              
|Other income (expense):                       
|Change in fair value of derivative liabilities
|Gain from debt settlement                     
|Interest expense                              
|Other loss                                    
|Total other income (expense)                  
|                                              
|Net loss                                      
|                                              
|NM: Not Meaningful                            



Revenues



Our net revenues primarily consist of fees
charged for the hosting, development and modification of portals related to the support of our online back-up services, as well
as monthly subscriptions. Our net revenues decreased during the three-month periods ended September 30, 2012, when compared to
the prior year period, due to a decrease in fees associated with the development of portals during the three-month period ended
September 30, 2012, offset by an increase in monthly subscription revenues. Our net revenues increased during the nine-month period
ended September 30, 2012, when compared to the prior year period, due to an increase in the number of software development projects
in the first quarter of 2012, in combination with growing subscription revenues attributable to a larger number of users of our
products and several new hosting agreements during the nine-month period ended September 30, 2012.



We believe that our monthly subscription revenues
will continue to grow sequentially during the remainder of 2012. We believe that our portal-related revenues will vary depending
on how many new distribution partners begin these marketing programs for the remainder of 2012.

|8
|-





Table of Contents



Research and Development



Research and development expenses consist primarily of compensation
expenses paid to our software engineers, employees and consultants in conjunction with the development or enhancement of our products.
Our research and development expenses for the three-month and nine-month periods ended September 30, 2012 include costs associated
with continued development of user interfaces and enhancements of existing products.



Research and development expenses during the three-month and nine-month
periods ended September 30, 2012 decreased due to reduced research and development related payroll expenses to provide for the
maintenance and upgrades of existing portals during the first half of 2012, while the Company was still developing such portals
in the comparable periods of the prior year.



Selling, General, and Administrative Expenses



Selling, general, and administrative expenses primarily consist
of consultant fees related to the marketing of our products, advertising, as well as other general and administrative expenses,
such as payroll expenses, necessary to support our existing and anticipated growth in our revenues and legal and professional
fees.



The decrease in selling, general and administrative expenses during
the three-month period ended September 30, 2012, when compared with the prior period, is primarily due to a shift of our resources
allocated to our marketing efforts from customer acquisition to enhancing our existing distribution channels, which is less costly.
In addition, the shift toward developing our current distribution channels has allowed us to significantly decrease our payroll
and related expenses due to increased focus and efficiency. Selling, general and administrative expenses during the nine-month
period ended September 30, 2012, when compared with the prior period, are decreased



Change in Fair Value of Derivative Liabilities



Change in fair value of derivative liabilities results from the
changes in the fair value of the derivative liability due to the application of ASC 815, resulting in either income or expense,
depending on the difference in fair value of the derivative liabilities between their measurement dates. The decrease in fair
value of derivative liabilities recognized during the three-month and nine-month periods ended September 30, 2012, when compared
to the prior year period, is primarily due to a decrease in our share price between measurement dates. Our share price is one
of the main assumptions in our computation of derivative liabilities.



Interest Expense



Interest expense consists primarily of interest on our convertible
promissory notes and the amortization of debt discount. The decrease in interest expense during the three-month and nine-month
periods ended September 30, 2012 is primarily due to the fair value of shares issued in connection with notes payable and the
amortization of debt discount during the three-month and nine-month periods ended September 30, 2011. We recognized the amortization
of debt discount over the terms of their respective promissory notes, which matured during the latter part of the fiscal 2010
and the first half of 2011.



|9
|-





Table of Contents





Liquidity and Capital Resources





|Sources of liquidity and capital resources         |  |                                |           |                                           |  |      |           |     
|-------------------------------------------------- |  | ------------------------------ | --------- | ----------------------------------------- |  | ---- | --------- | ----
|                                                   |  |                                |           |                                           |  |      |           |     
|                                                   |  | Ending balance at September 30 |           | Average balance during nine-month periods
|                                                   |  | 2012                           |           | 2011                                      |  | 2012 |           | 2011
|Cash                                               |  | $                              | —         |                                           |  | $    | 162,759   |     
|Accounts receivable, net of allowance for bad debt |  |                                | 103,814   |                                           |  |      | 140,855   |     
|Accounts payable and accrued expenses              |  |                                | 3,462,073 |                                           |  |      | 3,767,719 |     
|Convertible notes payable excluding debt discount  |  |                                | 2,542,853 |                                           |  |      | 1,921,459 |     
|Notes payable, excluding debt discount             |  |                                | 508,000   |                                           |  |      | 452,100   |     





At September 30, 2012 and 2011, 48% and 58%, respectively, of our
total assets consisted of cash and cash equivalents and accounts receivable.



We extend unsecured credit in the normal course of business to
our customers. The determination of the appropriate amount of the reserve for uncollectible accounts is based upon a review of
the amount of credit extended, the length of time each receivable has been outstanding, and the specific customers from whom the
receivables are due.



The objective of liquidity management is to ensure that we have
ready access to sufficient funds to meet commitments while implementing our growth strategy. Our primary sources of liquidity
include the sale of our securities and other financing activities, such as the issuance of a convertible promissory notes and
notes payable aggregating $456,000 during the nine-month period ended September 30, 2012. We cannot ascertain that we have sufficient
funds from operations to fund our ongoing operating requirements through December 31, 2012. We may need to raise funds to enhance
our working capital and use them for strategic purposes. If such need arises, we intend to generate proceeds from either debt
or equity financing.

|10
|--





Table of Contents



We do not have any material commitments for capital expenditures.
We routinely purchase computer equipment and technology to support our products and their development, and such capital expenditures
have ranged between $1,055 and $10,265 during the nine-month periods ended September 30, 2012 and 2011.





|                                                                            |  | Nine-Month Periods Ended September 30
|--------------------------------------------------------------------------- |  | -------------------------------------
|                                                                            |  | 2012                                 
|Cash flows from operating activities                                        |  |                                      
|                                                                            |  |                                      
|Net loss                                                                    |  | $                                    
|Non-cash adjustments                                                        |  |                                      
|Change in fair value of derivative liabilities                              |  |                                      
|Fair value of options and warrants issued for services                      |  |                                      
|Fair value of warrants issued for accrued interest                          |  |                                      
|Fair value of warrants issued to convertible promissory note holders        |  |                                      
|Fair value of stock issued in connection with services rendered             |  |                                      
|Fair value of convertible promissory notes modifications                    |  |                                      
|Fair value of common stock issued in connection with notes payable issuance |  |                                      
|Fair value of common stock issued to satisfy accrued interest               |  |                                      
|Gain on extinguishment of debt                                              |  |                                      
|Depreciation and amortization                                               |  |                                      
|Bad debt                                                                    |  |                                      
|Amortization of debt discount                                               |  |                                      
|Accounts receivable                                                         |  |                                      
|Prepaid expense and other current assets                                    |  |                                      
|Deferred financing costs                                                    |  |                                      
|Accounts payable, accrued expenses, and accrued payroll taxes               |  |                                      
|Accrued interest on convertible promissory notes                            |  |                                      
|Net cash provided by (used in) operating activities                         |  |                                      
|                                                                            |  |                                      
|Cash flows from investing activities                                        |  |                                      
|Purchase of fixed assets and other, net                                     |  |                                      
|                                                                            |  |                                      
|                                                                            |  |                                      
|Cash flows from financing activities                                        |  |                                      
|Proceeds from issuance of convertible promissory notes payable              |  |                                      
|Proceeds from issuance of notes payable                                     |  |                                      
|Repayment of notes payable                                                  |  |                                      
|Net proceeds from issuance of common stock for cash                         |  |                                      
|Cash overdraft                                                              |  |                                      
|Proceeds from exercise of warrants                                          |  |                                      
|Proceeds from exercise of stock options                                     |  |                                      
|Net cash provided by financing activities                                   |  |                                      
|Net increase in cash                                                        |  |                                      









|11
|--





Table of Contents





Nine months ended September 30, 2012



The increase in accounts receivable as of September 30, 2012 is
primarily due to slower payment processing by our primary clients. The decrease in accounts payable and accrued expenses during
the nine-month period ended September 30, 2012 is primarily due to a decrease in our operating expenses, in combination with a
series of accounts payable adjustments made during the nine-month period ended September 30, 2012 for unenforceable debts.



Cash used in investing activities during the nine-month period
ended September 30, 2012 consists of the purchase of computer equipment of approximately $1,055.



Cash provided by financing activities of approximately $1,572,407
during the nine-month period ended September30, 2012 resulted from the proceeds from the issuance of convertible promissory notes
and notes payable of $698,250, proceeds from the issuance of common stock for cash of approximately $777,877, and the exercise
of warrants and options of approximately $125,900, offset by a cash overdraft of approximately $54,620.



Nine months ended September 30, 2011



The increase in accounts receivable as of September 30, 2011 is
primarily due to slower payment processing by our primary clients. The increase in accounts payable and accrued expenses during
the nine-month period ended September 30, 2012 is primarily due to slower payment processing to vendors relating to a decrease
in liquidity following a decrease in our revenues.



Cash used in investing activities during the nine-month period
ended September 30, 2011 consisted of capital expenditures of approximately $10,265.



Cash provided by financing activities of approximately $2.8 million
consisted of the proceeds from notes payable and convertible notes promissory notes of $857,600, and the net proceeds from the
issuance of our common stock of approximately $1.9 million offset by principal repayments of certain notes payable aggregating
$163,000 and the funding of our overdraft of approximately $127,321. Additionally, we generated proceeds from exercise of options
and warrants aggregating approximately $387,442.



Off-Balance Sheet Arrangements



We have no off-balance sheet arrangements.



Capital Raising Transactions



During the nine-month period ended September 30,2012, we issued
an aggregate 20,501,904 shares of our common stock pursuant to a private placement which generated gross proceeds of approximately
$457,000.



Going Concern



We have generated minimal revenue since
our inception on September 12, 2002, and have incurred net losses of approximately $119 million from cash and non-cash
activity since inception through September 30, 2012. Our current operations are not an adequate source of cash to fund our
current operations and we have relied on funds raised from the sale of our securities to provide sufficient cash to operate
our business. The report of our independent registered public accounting firm on our financial statements for the year ended
December 31, 2011 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. If we are unable to raise capital as needed, it is possible that we would be required to cease
operations. The financial statements included in this report do not include any adjustments to reflect future adverse effects
on the recoverability and classification of assets or amounts and classification of liabilities that may result if we are not
successful.



Critical Accounting Policies



A summary of significant accounting policies
is included in Note 2 to the audited consolidated financial statements included elsewhere in this annual report. 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.



Effective January 1, 2006, we adopted the
provisions of ASC Topic 718 "Compensation-Stock Compensation" under the modified prospective method. ASC 718 eliminates
accounting for share-based compensation transactions using the intrinsic value method prescribed under APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and requires instead that such transactions be accounted for using a fair-value-based method.
Under the modified prospective method, we are required to recognize compensation cost for share-based payments to employees based
on their grant-date fair value from the beginning of the fiscal period in which the recognition provisions are first applied.
For periods prior to adoption, the financial statements are unchanged, and the pro forma disclosures previously required by ASC
718, will continue to be required under ASC 718 to the extent those amounts differ from those in the Consolidated Statement of
Operations.

|12
|--





Table of Contents



The Company follows
the guidance of the Securities and Exchange Commission's Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial
Statements". The Company records revenue when persuasive evidence of an arrangement exists, on-line back-up services have
been rendered, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. Online backup
service fees received in advance are reflected as deferred revenue on the accompanying balance sheet. Deferred revenue as of September
30, 2012 amounted to $102,500 and will be recognized as revenue over the respective service period.



Revenue consists of the gross value of billings
to clients. The Company reports this revenue gross in accordance with EITF 99-19 because it is responsible for fulfillment of
the service, has substantial latitude in setting price and assumes the credit risk for the entire amount of the sale, and it is
responsible for the payment of all obligations incurred for sales marketing and commissions.



Item 3.   Quantitative and
Qualitative Disclosures About Market Risk



Not applicable for a smaller reporting company.



Item 4.   Controls and Procedures



Evaluation of Disclosure Controls and Procedures



We do not maintain proper “disclosure controls and procedures”
as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In designing and evaluating our disclosure
controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally,
in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures
also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future conditions. Based on his evaluation as of the end of the
period covered by this report, our President who also serves as our principal financial and accounting officer, has concluded
that our disclosure controls and procedures were not effective in providing reasonable assurance that information required to
be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods prescribed by SEC rules and regulations, and that such information is not accumulated and communicated to our management,
including our President to allow timely decisions regarding required disclosure.



Changes in Internal Control over Financial Reporting



There have been no changes in our internal control over financial
reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.







PART II - OTHER INFORMATION



Item 1.   Legal Proceedings



We have appealed to the California Court of
Appeals in the matter of Wolfe Axelrod Weinberger, LLC vs. Spare Backup Inc. The issue on appeal is the California Superior
Court’s failure to disregard a NY state court judgment for approximately $100,000, which we assert was improperly entered
and, therefore, should not be recognized as a valid sister state judgment.  The Company’s likelihood of success on
this appeal cannot be determined at this time.



In November 2011, Gimmel Partners, LP filed
suit against us in Nevada State Court in Douglas County, alleging breach of a promissory debenture.  We have filed motions
to dismiss the action based on the fact that Gimmel Partners has been dissolved and we have entered into individual agreements
with its former partners.  The case has not been set for trial and, as of this, date there is a low likelihood of an unfavorable
outcome.



|13
|--





Table of Contents



In February 2011, Darryl Adams filed suit
against us alleging various employment related claims. The matter is set for trial in September 2012. The Company’s
likelihood of success on this appeal cannot be determined at this time.



In January 2012, Ivor Newman filed suit against
us alleging various employment related claims. The matter is set for trial in December 2012. The Company’s likelihood of
success on this appeal cannot be determined at this time.



Item 2.   Unregistered Sales
of Equity Securities and Use of Proceeds



During the three-month period ended September30,
2012, we issued 13,375,000 shares of common stock to five investor relation providers and consultants for service performed at
a fair value of $456,840 or $0.03-0.048 per share. These private transactions are exempt from registration under the Securities
Act of 1933 in reliance on exemptions provided by Section 4(2) of that Act.



During the three-month period ended September
30, 2012, we  issued in aggregate 7,978,571 shares of our common stock to 8 accredited investors pursuant to a private
placement which generated gross proceeds of approximately $151,000 or $0.018 per share. These private transactions are exempt
from registration under the Securities Act of 1933 in reliance on exemptions provided by Regulation D, Rule 506 and Section 4(2)
of that act.



During the nine-month period ended
September 30, 2012, we issued 694,488 shares of common stock to 30 accredited investors in connection with the payment of
accrued interest of the 8% and 10% convertible promissory notes. The fair value of such shares issued amounted to $34,285 or
$0.05 per share. These private transactions are exempt from registration under the Securities Act of 1933 in reliance on
exemptions provided by Section 4(2) of that Act.





Item 3.   Defaults Upon Senior
Securities



None.



Item 4.   [Removed and Reserved]



None.



Item 5.   Other Information



Item 6.    Exhibits



|31.1 | Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer
|---- | ------------------------------------------------------------------



|31.2 | Rule 13a-14(a)/ 15d-14(a) Certification of principal financial and accounting officer
|---- | -------------------------------------------------------------------------------------



|32.1 | Section 1350 Certification of Chief Executive Officer and principal financial and accounting officer
|---- | ----------------------------------------------------------------------------------------------------



|14
|--





Table of Contents



SIGNATURES



Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.



|                         |     | SPARE BACK UP, INC.                                                                                                         
|------------------------ | --- | ----------------------------------------------------------------------------------------------------------------------------
|                         |     |                                                                                                                             
|                         |     |                                                                                                                             
|Dated: November 26, 2012 | By: | /s/ Cery B. Perle                                                                                                           
|                         |     | Cery B. Perle
        President, Chief Executive Officer and Director
        and Principal Financial and Accounting Officer



|15
|--





Table of Contents