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

                                   FORM 10-QSB

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

                  For the quarterly period ended June 30, 2007

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                 For the transition period from _____ to ______


                        Commission file number 000-30451


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


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


                 72757 Fred Waring Drive, Palm Desert, CA 92260
                 ----------------------------------------------
                    (Address of principal executive offices)


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


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


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

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

                      APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 73,174,044 shares of common stock
issued and outstanding at August 7, 2007.

Transitional Small Business Disclosure Format: Yes [ ] No [X]

<PAGE>

           CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

         Certain statements in this Quarterly Report on Form 10-QSB 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
significantly increase our revenues, our ability to raise working capital as
necessary to fund our ongoing operations and satisfy our obligations as they
become due, 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, which speak only as of the date of this report.
Readers should carefully review this quarterly report in its entirety, including
but not limited to our financial statements and the notes thereto appearing
elsewhere herein. 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.

                           OTHER PERTINENT INFORMATION

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

                                      INDEX
                                                                        Page No.
                                                                        --------
Part I - FINANCIAL INFORMATION

Item 1.  Financial Statements

Consolidated Balance Sheet at June 30, 2007 (unaudited)....................... 3

Consolidated Statements of Operations for the three months and
six months ended June 30, 2007 and 2006 (unaudited) .......................... 4

Consolidated Statements of Cash Flows for the six months ended
June 30, 2007 and 2006 (unaudited) ........................................... 5

Notes to Unaudited Consolidated Financial Statements ......................... 6

Item 2.  Management's Discussion and Analysis or Plan of Operation ...........20

Item 3.  Controls and Procedures .............................................29

Part II - OTHER INFORMATION ..................................................30

                                        2
<PAGE>

                         PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                               SPARE BACKUP, INC.
                           CONSOLIDATED BALANCE SHEET
                                  June 30, 2007
                                   (Unaudited)

                                     ASSETS

Current Assets:
  Cash ........................................................    $    643,411
  Restricted cash .............................................         299,990
  Prepaid marketing expense ...................................       1,191,776
  Prepaid expenses ............................................          50,000
  Other current assets ........................................          58,157
                                                                   ------------
     Total current assets .....................................       2,243,334

  Property and equipment, net of accumulated depreciation
    of $502,085 ...............................................       1,945,174
                                                                   ------------

     Total assets .............................................    $  4,188,508
                                                                   ============

                      LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities:
  Accounts payable and accrued expenses .......................    $  2,515,231
  Accrued interest on convertible promissory notes ............           2,703
  Due to stockholder ..........................................          15,000
                                                                   ------------

     Total liabilities ........................................       2,532,934


Stockholders' Deficit:
  Preferred stock; $.0001 par value, 5,000,000 shares
    authorized, none issued and outstanding ...................               -
  Common stock; $.001 par value, 150,000,000 shares
    authorized, 63,680,681 issued and outstanding .............          71,037
  Additional paid-in capital ..................................      65,270,928
  Subscription receivable .....................................               -
  Accumulated deficit .........................................     (63,686,391)
  Deferred compensation .......................................               -
                                                                   ------------

     Total stockholders' deficit ..............................       1,655,574
                                                                   ------------

     Total liabilities and stockholders' deficit ..............    $  4,188,508
                                                                   ============

            See Notes to Unaudited Consolidated Financial Statements.

                                        3
<PAGE>
<TABLE>
                                              SPARE BACKUP, INC.
                                     CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
                                                  For the three months ended       For the six months ended
                                                           June 30,                        June 30,
                                                     2007            2006            2007            2006
                                                 ------------    ------------    ------------    ------------
                                                  (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)
<S>                                              <C>             <C>             <C>             <C>
Revenues .....................................   $     16,429    $     16,824    $     37,371    $     33,645

Operating expenses:
  Research and development ...................        399,492         182,300         947,735         433,118
  Sales, general and administrative ..........      5,374,081       2,142,539       8,184,855       5,737,353
                                                 ------------    ------------    ------------    ------------

     Total operating expenses ................      5,773,573       2,324,839       9,132,590       6,170,471
                                                 ------------    ------------    ------------    ------------

     Operating loss ..........................     (5,757,144)     (2,308,015)     (9,095,219)     (6,136,826)
                                                 ------------    ------------    ------------    ------------

Other income (expense):
Change in fair value of derivative liabilities      8,691,510         648,521      (5,275,067)         73,963
Derivative liability expense .................              -               -        (334,030)       (588,900)
Transfer- unrealized gain- investment held for
  sale to trading security ...................              -          62,911               -         112,509
Interest income ..............................              3               -               3               -
Realized loss- trading securities ............              -         (62,026)              -        (111,624)
 Interest expense ............................         (6,804)       (235,852)     (1,422,289)       (478,709)
                                                 ------------    ------------    ------------    ------------
  Total other expenses .......................      8,684,709         413,554      (7,031,383)       (992,761)

                                                 ------------    ------------    ------------    ------------

Net Income (loss) ............................   $  2,927,565    $ (1,894,461)   $(16,126,602)   $ (7,129,587)
                                                 ============    ============    ============    ============

Transfer- unrealized gain- investment held for
  sale to trading security ...................              -               -               -        (112,509)
                                                 ------------    ------------    ------------    ------------

Comprehensive Income (loss) ..................   $  2,927,565    $ (1,894,461)   $(16,126,602)   $ (7,242,096)
                                                 ============    ============    ============    ============

Basic net income (loss) per common share .....   $       0.05    $      (0.04)   $      (0.26)   $      (0.17)
                                                 ============    ============    ============    ============

Diluted net income (loss) per share ..........   $       0.05    $      (0.04)   $      (0.26)   $      (0.17)
                                                 ============    ============    ============    ============

Basic weighted average common
shares outstanding ...........................     62,066,796      42,413,813      62,878,197      42,413,813
                                                 ============    ============    ============    ============

Diluted weighted average common
shares outstanding ...........................     62,066,796      42,413,813      62,878,197      42,413,813
                                                 ============    ============    ============    ============

                           See Notes to Unaudited Consolidated Financial Statements.

                                                       4
</TABLE>
<PAGE>
<TABLE>
                                              SPARE BACKUP, INC.
                                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
                                                                                   For the six months ended
                                                                                           June 30,
                                                                                     2007            2006
                                                                                 ------------    ------------
                                                                                  (Unaudited)     (Unaudited)
<S>                                                                              <C>             <C>
Cash flows from operating activities:
Net loss .....................................................................   $(16,126,602)   $ (7,129,587)
Adjustments to reconcile net loss to net cash used in operating activities:
  Fair value of derivatives at issuance ......................................              -       1,029,000
  Derivative liability expense ...............................................        334,030         588,900
  Change in fair value of derivative liabilities .............................      5,275,067         (73,963)
  Fair value of options issued to employees ..................................      2,320,672       1,587,785
  Amortization of debt discount ..............................................      1,404,799         317,505
  Amortization of deferred compensation ......................................        142,370       1,192,195
  Amortization of prepaid marketing expense ..................................        812,824               -
  Fair value of shares of common stock issued in payment of interest on
   convertible promissory note ...............................................              -          63,858
  Fair value of shares issued in connection with services rendered ...........        217,520               -
  Depreciation ...............................................................        307,151          42,933
  Amortization of deferred financing costs ...................................              -          77,679
Changes in operating assets and liabilities
  Restricted cash ............................................................        572,830               -
  Prepaid expenses and other current assets ..................................        (32,777)              -
  Other assets ...............................................................              -         (50,000)
  Accounts payable and accrued expenses ......................................      1,607,840        (120,975)
  Deferred revenues ..........................................................              -         (12,684)
  Accrued interest on convertible promissory notes ...........................         17,490           5,637
  Other liabilities ..........................................................         (6,426)              -
                                                                                 ------------    ------------

Net cash used in operating activities ........................................     (3,153,212)     (2,481,717)
                                                                                 ------------    ------------

Cash flows from investing activities:
  Purchases of property and equipment ........................................     (1,748,507)        (65,653)
                                                                                 ------------    ------------

Net cash used in investing activities ........................................     (1,748,507)        (65,653)
                                                                                 ------------    ------------

Cash flows from financing activities:
  Principal repayments on lease obligations ..................................              -          (6,932)
  Principal repayments on convertible promissory notes .......................        (21,480)        (52,193)
  Repurchase of shares of common stock .......................................     (1,150,000)       (633,602)
  Proceeds from issuance of convertible promissory notes .....................      1,325,000               -
  Proceeds from issuance of bridge notes .....................................              -       1,500,000
  Net proceeds from issuance of shares for cash ..............................      2,020,001       2,450,000
  Net proceeds from exercise of warrants .....................................      2,942,455               7
  Proceeds from exercise of stock options ....................................        282,836               -
  Payments of deferred financing costs .......................................              -        (190,000)
  Payments of financing costs ................................................              -         (25,000)
                                                                                 ------------    ------------

Net cash provided by financing activities ....................................      5,398,812       3,042,280
                                                                                 ------------    ------------

Increase in cash .............................................................        497,093         494,910

Cash, beginning of period ....................................................        146,318         165,938
                                                                                 ------------    ------------

Cash, end of period ..........................................................   $    643,411    $    660,848
                                                                                 ============    ============

Supplemental disclosures of cash flow information:
  Cash paid during the year for interest .....................................   $          -    $      8,664
                                                                                 ============    ============

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

Supplemental schedule of non-cash financing and investing activities:

Fair value of warrants and embedded conversion features issued in
 connection with the issuance of convertible promissory notes and
 corresponding debt discount .................................................   $          -    $  1,500,000
                                                                                 ============    ============

Fair value of warrants issued in connection with the repurchase of
  shares of common stock .....................................................   $          -    $    900,000
                                                                                 ============    ============

Fair value of warrants and embedded conversion features issued in
 connection with the issuance of common stock and corresponding increase
 in derivative liabilities ...................................................   $  1,599,459    $    300,725
                                                                                 ============    ============

Reclassification of liability contracts to equity ............................   $ 22,147,932    $          -
                                                                                 ============    ============

Conversion of convertible promissory notes in shares of common stock .........   $  1,972,029    $    104,906
                                                                                 ============    ============

Fair value of shares of common stock issued for payment of accrued interest ..   $     36,884    $          -
                                                                                 ============    ============

Fair value of shares of common stock issued for payment of accrued expenses ..   $     36,000    $          -
                                                                                 ============    ============

                           See Notes to Unaudited Consolidated Financial Statements.

                                                       5
</TABLE>
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2007

NOTE 1 - ORGANIZATION, BASIS OF PRESENTATION AND GOING CONCERN

Spare Backup, Inc., formerly known as Newport International Group, Inc., (the
"Company") was incorporated in Delaware in December 1999. During February 2004,
the Company acquired GrassRoots Communications, Inc. ("GrassRoots"). The Company
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 accompanying unaudited consolidated financial statements have been prepared
on a going concern basis. The Company has generated minimal revenue since its
inception on June 12, 2002 and has incurred net losses of approximately $16.1
million during the six months ended June 30, 2007. The Company's ability to
continue as a going concern is dependent upon its ability to obtain the
necessary financing to meet its obligations and repay its liabilities arising
from normal business operations when they come due, to fund possible future
acquisitions, and to generate profitable operations in the future. Management
plans to continue to provide for its capital requirements by issuing additional
equity securities and debt. The outcome of these matters cannot be predicted at
this time and there are no assurances that if achieved, the Company will have
sufficient funds to execute its business plan or generate positive operating
results.

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

                                        6
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2007

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

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

EARNINGS PER SHARE

Basic earnings per share are calculated by dividing income available to
stockholders by the weighted-average number of common shares outstanding during
each period. Diluted earnings per share are computed using the weighted average
number of common and dilutive common share equivalents outstanding during the
period. Dilutive common share equivalents consist of shares issuable upon the
exercise of stock options and warrants (calculated using the reverse treasury
stock method). The outstanding options, warrants and shares equivalent issuable
pursuant to embedded conversion features amounted to 35,062,857 and 30,740,001
at June 30, 2007 and 2006, respectively. The outstanding options, warrants and
shares equivalent issuable pursuant to embedded conversion features and warrants
at June 30, 2007 and 2006 are excluded from the loss per share computation for
that period due to their antidilutive effect.

The following sets forth the computation of basic and diluted earnings per share
for the six months ended June 30:

                                                       2007            2006
                                                       ----            ----
Numerator:
Net (loss) income ..............................   $(16,126,602)   $ (7,129,587)
Adjustments:
Other income, net-derivative liabilities .......             (-)         67,950
                                                   ------------    ------------
Adjusted net loss for diluted earnings per share   $(16,126,602)   $ (7,061,637)
                                                   ============    ============

Denominator:
Denominator for basic earnings per
 share-weighted average shares outstanding .....     62,878,197      42,413,813
Effect of dilutive warrants, embedded conversion
 features and liquidated damages ...............              -               -
Denominator for diluted earnings per
 share-weighted average shares outstanding .....     62,878,197      42,413,813
                                                   ============    ============

Basic loss per share ...........................   $      (0.26)   $      (0.17)
                                                   ============    ============
Diluted loss per share .........................   $      (0.26)   $      (0.17)
                                                   ============    ============

                                        7
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2007

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

RISKS AND UNCERTAINTIES

The Company maintains its cash and cash equivalent accounts in financial
institutions. Accounts at these institutions are insured by the Federal Deposit
Insurance Corporation ("FDIC") up to $100,000. During the six months ended June
30, 2007, the Company had reached bank balances exceeding the FDIC insurance
limit. To reduce its risk associated with the failure of such financial
institutions, the Company evaluates at least annually the rating of the
financial institutions in which it holds deposits.

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial statements and with the instructions to Form l0-QSB and Article 10 of
Regulation S-B. Accordingly, they do not include all the information and
disclosures required for annual financial statements. These financial statements
should be read in conjunction with the consolidated financial statements and
related footnotes as of and for the year ended December 31, 2006, included in
the Annual Report filed on Form l0-KSB.

In the opinion of management, all adjustments (consisting of normal recurring
items) necessary to present fairly the Company's financial position as of June
30, 2007, and the results of operations and cash flows for the six months ending
June 30, 2007 have been included. The results of operations for the six months
ended June 30, 2007 are not necessarily indicative of the results to be expected
for the full year. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report filed
on Form l0-KSB as filed with the Securities and Exchange Commission for the year
ended December 31, 2006.

RECLASSIFICATION

Certain amounts in the 2006 consolidated financial statements have been
reclassified to conform to the 2007 presentation. Such reclassifications had no
effect on the reported net loss.

                                        8
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2007

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVESTMENT IN EQUITY SECURITIES AND COMPREHENSIVE LOSS

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

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

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

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

During July 2005, the Company sold 3,242,420 shares of the Investee used as
collateral for the Company's possible obligation to repurchase 2,500,000 shares
it has issued in a private placement during November 2004 ("Put Option"),
generating proceeds of approximately $640,000.

During 2006, the Company repurchased 5,882,352 shares of its common stock and as
consideration, paid to the Investee approximately $630,000, issued 3,000,000
warrants and assigned its investment in the Investee's shares to the Investee.
The aggregate consideration for the repurchase of the Company's shares of common
stock amounted to approximately $1.7 million.

SOFTWARE DEVELOPMENT COSTS

Costs incurred in the research and development of software products are expensed
as incurred until technological feasibility has been established. After
technological feasibility is established, any additional costs are capitalized
in accordance with SFAS No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO
BE SOLD, LEASED OR OTHERWISE MARKETED. The Company believes that the current
process for developing software is essentially completed concurrently with the
establishment of technological feasibility; accordingly, no software development
costs have been capitalized as of June 30, 2007.

                                        9
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2007

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

PROPERTY AND EQUIPMENT

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

DEFERRED FINANCING COSTS

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

SHARE-BASED PAYMENTS

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

                                       10
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2007

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

DERIVATIVE LIABILITIES

The Company accounted for its liquidated damages during 2006 and 2005 pursuant
to Emerging Issue Task Force ("EITF ")05-04, View C, "The Effect of a Liquidated
Damages Clause on a Freestanding Financial Instrument Subject to EITF Issue No.
00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock". In December 2006, FASB issued
FASB Staff Position No. EITF 00-19-2 "Accounting for Registration Payment
Arrangements" ("FSP 00-19-2"), which superseded EITF 05-04. FSP 00-19-2 provides
that the contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, should be separately
recognized and measured in accordance with FASB Statement No.5, "Accounting for
Contingencies". The registration statement payment arrangement should be
recognized and measured as a separate unit of account from the financial
instrument(s) subject to that arrangement. If the transfer of consideration
under a registration payment arrangement is probable and can be reasonably
estimated at inception, such contingent liability is included in the allocation
of proceeds from the related financing instrument. Pursuant to EITF 05-04, View
C, the liquidated damages paid in cash or stock are accounted for as a separate
derivative, which requires a periodical valuation of its fair value and a
corresponding recognition of liabilities associated with such derivative.
FSP00-19-2 did not have an impact on the Company's accounting of the liquidated
damages.

The Company accounts for its embedded conversion features and freestanding
warrants pursuant to SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", which requires a periodic valuation of their fair value and
a corresponding recognition of liabilities associated with such derivatives. The
recognition of derivative liabilities related to the issuance of shares of
common stock is applied first to the proceeds of such issuance, at the date of
issuance, and the excess of derivative liabilities over the proceeds is
recognized as other expense in the accompanying consolidated financial
statements. The recognition of derivative liabilities related to the issuance of
convertible debt and associated warrants or other derivatives is applied first
to the proceeds of such issuance as a debt discount, at the date of issuance,
and the excess of derivative liabilities over the proceeds is recognized as
other expense in the accompanying consolidated financial statements. Any
subsequent increase or decrease in the fair value of the derivative liabilities
is recognized as other expense or other income, respectively.

REVENUE RECOGNITION, ACCOUNTS RECEIVABLE, AND PROVISION FOR RETURNS

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

The Company markets its software through multiple channel resellers and retail
stores. The Company provides for unlimited rights of return to its customers.
The Company has only recently licensed its products through such multiple
channels and does not have a historical pattern of returns. Additionally, such
customers generally pay software vendors based on their own sell-thru and return
the unsold products to the software vendor.

                                       11
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2007

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109." This interpretation provides guidance
for recognizing and measuring uncertain tax positions, as defined in SFAS No.
109, "Accounting for Income Taxes." FIN No. 48 prescribes a threshold condition
that a tax position must meet for any of the benefit of an uncertain tax
position to be recognized in the financial statements. Guidance is also provided
regarding de-recognition, classification, and disclosure of uncertain tax
positions. FIN No. 48 is effective for fiscal years beginning after December 15,
2006. The Company does not expect that this interpretation will have a material
impact on its financial position, results of operations, or cash flows.

In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, "Fair Value Measurements" ("FAS 157"). This Statement defines fair
value as used in numerous accounting pronouncements, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosure related to the use of fair value measures in financial statements.
The Statement is to be effective for the Company's financial statements issued
in 2008; however, earlier application is encouraged. The Company is currently
evaluating the timing of adoption and the impact that adoption might have on its
financial position or results of operations.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when quantifying Misstatements in
Current Year Financial Statements ("SAB 108"). SAB 108 requires companies to
evaluate the materiality of identified unadjusted errors on each financial
statement and related financial statement disclosure using both the rollover
approach and the iron curtain approach, as those terms are defined in SAB 108.
The rollover approach quantifies misstatements based on the amount of the error
in the current year financial statement, whereas the iron curtain approach
quantifies misstatements based on the effects of correcting the misstatement
existing in the balance sheet at the end of the current year, irrespective of
the misstatement's year(s) of origin. Financial statements would require
adjustment when either approach results in quantifying a misstatement that is
material. Correcting prior year financial statements for immaterial errors would
not require previously filed reports to be amended. If a Company determines that
an adjustment to prior year financial statements is required upon adoption of
SAB 108 and does not elect to restate its previous financial statements, then it
must recognize the cumulative effect of applying SAB 108 in fiscal 2006
beginning balances of the affected assets and liabilities with a corresponding
adjustment to the fiscal 2006 opening balance in retained earnings. SAB 108 is
effective for interim periods of the first fiscal year ending after November 15,
2006. The adoption of SAB 108 did not have an impact on the Company's
consolidated financial statements.

                                       12
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2007

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

RECENT ACCOUNTING PRONOUNCEMENTS (continued)

In December 2006, FASB Staff Position No. EITF 00-19-2, "Accounting for
Registration Payment Arrangements," was issued. The FSP specifies that the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument or other
agreement, should be separately recognized and measured in accordance with SFAS
No. 5, "Accounting for Contingencies." The Company believes that its current
accounting is consistent with the FSP.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities, Including an Amendment of FASB
Statement No. 115", under which entities will now be permitted to measure many
financial instruments and certain other assets and liabilities at fair value on
an instrument-by-instrument basis. This Statement is effective as of the
beginning of an entity's first fiscal year that begins after November 15, 2007.
Early adoption is permitted as of the beginning of a fiscal year that begins on
or before November 15, 2007, provided the entity also elects to apply the
provisions of SFAS 157. The Company is currently assessing the impact, if any,
the adoption of SFAS 159 will have on its financial statements.

Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies that do not require adoption until a future date
are not expected to have a material impact on the consolidated financial
statements upon adoption.

NOTE 3 - CONVERTIBLE PROMISSORY NOTES

Between April and June 2007, the Company issued 1,109,375 shares of common stock
to satisfy the remaining balance of the 12.5% convertible promissory notes
amounting to approximately $355,000 and paid $20,000 in cash. The balance of the
12.5% convertible promissory notes as of June 30, 2007 is $0.

Between February and March 2007, the Company issued 912,594 shares of common
stock to satisfy the 8% convertible promissory notes amounting to approximately
$292,000. The balance of the 8% convertible promissory notes as of June 30, 2007
is $0.

The Company issued 66,098 shares of common stock in connection with the payment
of interest on the 8% and 12.5% convertible promissory notes during the six
months ended June 30, 2007. The fair value of such shares issued during the six
months ended June 30, 2007 amounted to approximately $37,000.

During the six months ended June 30, 2007, the Company received $1,325,000 in
consideration for the issuance of the bridge promissory notes. The Company also
issued a five-year common stock purchase warrants to purchase 1,394,721 shares
of the Company's common stock at $0.475 per share. The bridge promissory note of
$1,325,000 converted into 2,789,473 shares of the Company's common stock in
March 2007. Additionally, during the six months ended June 30, 2007, the Company
paid financing fees of $25,000 to the placement agent in connection with the
issuance of the Bridge promissory notes which was included in general and
administrative expenses as reflected in the accompanying consolidated statements
of operations.

                                       13
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2007

NOTE 3 - CONVERTIBLE PROMISSORY NOTES (CONTINUED)

The Company recognized a debt discount of $1,325,000 in connection with the
issuance of the 8% Bridge promissory notes and 1,394,721 common stock purchase
warrants. The debt discount relates to the recognition of derivative liabilities
associated with the 8% Bridge promissory notes.

Amortization of the debt discount amounted to approximately $1.4 million and
$318,000 during the six months ended June 30, 2007 and 2006, respectively, and
is included in interest expense.

Amortization of the deferred financing costs amounted to approximately $0 and
$78,000 during the six months ended June 30, 2007 and 2006, respectively, and is
included in interest expense.

Accrued interest on the 12.5% Convertible Promissory Notes amounted to
approximately $2,700 as of June 30, 2007.

NOTE 4 - DERIVATIVE LIABILITIES

During March 2004, the Company closed its 8% Convertible Promissory Notes
private placement. In connection with the issuance of the 8% Convertible
Promissory Notes, the Company granted a subsequent financing conversion reset
right which expired on March 1, 2006. Subsequently, the Company issued similar
rights to the holders of its 12.5% Convertible promissory notes. The subsequent
financing conversion reset is considered an embedded conversion feature pursuant
to EITF Issue No. 00-19. Additionally, because there is no explicit number of
shares that are to be delivered upon satisfaction of subsequent financing
conversion reset feature, the Company is unable to assert that it had sufficient
authorized and unissued shares to settle such feature. Accordingly, all of the
Company's previously issued and outstanding instruments, such as warrants and
options issued to non-employees pursuant to rendered services as well as those
issued in the future, would be classified as liabilities, effective with the
granting of the subsequent financing conversion reset feature. During the six
months ended June 30, 2007, the Company has satisfied all of the 8% and 12.5%
Convertible Promissory Notes and accordingly, has reclassified all of derivative
liabilities amounting to $22,147,932 to paid in capital as a result of the
repayment and conversion of the 8% and 12.5% Convertible Promissory Notes into
common stock. At June 30, 2007, derivative liabilities amounted to $0.

Between January and February 2007, the Company allocated $1,659,030 of the fair
value of the derivatives issued in connection with the debt, at their date of
issuance, to debt discount. The excess of the fair value of the derivative
liabilities over the debt discount has been recognized as derivative liability
expense, which amounts to $334,030 during the six months ended June 30, 2007.

During the six months ended June 30, 2007, the Company allocated $217,520 of the
fair value of the derivatives issued in connection with services performed by
consultants to consulting expenses, $1,599,459 of the fair value of derivatives
from the granting of warrants in connection with private placements allocated
against paid in capital and $2,004,600 of the fair value of derivatives in
connection with the granting of warrants related to a twelve month retail
marketing agreement allocated to prepaid marketing expenses (See Note 6 - Stock
options and warrants).

                                       14
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2007

NOTE 4 - DERIVATIVE LIABILITIES (CONTINUED)

The variation in fair value of the derivative liabilities between measurement
dates amounted to an increase of approximately $5.3 million and a decrease of
$74,000 during the six months ended June 30, 2007 and 2006, respectively. The
increase/decrease in fair value of the derivative liabilities has been
recognized as other expense/income.

NOTE 5 - STOCKHOLDERS' DEFICIT

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

The Company issued 66,098 shares of common stock in connection with the payment
of interest on the 8% and 12.5% convertible promissory notes during the six
months ended June 30, 2007. The fair value of such shares issued during the six
months ended June 30, 2007 amounted to approximately $37,000.

ISSUANCE OF COMMON STOCK PURSUANT TO SERVICES PERFORMED

In January 2007, the Company issued 24,194 shares of common stock to a
consultant. The fair value of such shares amounted to approximately $15,000. The
nature of the services rendered in connection with the issuance of these shares
was for leasehold improvements. The Company has recognized leasehold
improvements of $15,000.

On February 28, 2007, the Company issued 50,000 shares of common stock to a
consultant for a 60 day consulting agreement. The fair value of such shares
amounted to approximately $49,000. The nature of the services rendered in
connection with the issuance of these shares was for marketing purposes. The
Company has recognized stock based consulting expense of $50,000 during the six
months ended June 30, 2007.

In April 2007, the Company issued 51,429 shares of common stock for accrued
legal services. The fair value of such shares amounted to approximately $36,000.
The Company has allocated the fair value against accrued expenses during the six
months ended June 30, 2007.

ISSUANCE OF COMMON STOCK PURSUANT TO EXERCISE OF STOCK WARRANTS AND OPTIONS.

During the six months ended June 30, 2007, in connection with the exercise of
stock warrants, the Company issued 5,992,865 shares of common stock for net
proceeds of $2,942,455. During the six months ended June 30, 2007, the Company
paid commissions to placement agent of approximately $217,000 in cash and
granted 402,381 warrants valued at $241,429 (using the blackscholes model) which
has been allocated against paid in capital.

                                       15
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2007

NOTE 5 - STOCKHOLDERS' DEFICIT (CONTINUED)

During the six months ended June 30, 2007, in connection with the exercise of
stock options, the Company issued 603,964 shares of common stock to employees
and non employees for net proceeds of $282,836.

Between April and May 2007, in connection with a cashless exercise of stock
warrants, the Company issued 73,872 shares of common stock.

ISSUANCE OF COMMON STOCK PURSUANT TO CONVERSION OF CONVERTIBLE PROMISSORY NOTES

Between January and February 2007, the Company received $1,325,000 in
consideration for the issuance of the bridge promissory notes. The Company also
issued five-year common stock purchase warrants to purchase 1,394,721 shares of
the Company's common stock at $0.475 per share. The bridge promissory note of
$1,325,000 converted into 2,789,473 shares of the Company's common stock in
March 2007.

Between February and March 2007, the Company issued 912,594 shares of common
stock to satisfy the 8% convertible promissory notes amounting to approximately
$292,000.

Between April and June 2007, the Company issued 1,109,375 shares of common stock
to satisfy the 12.5% convertible promissory notes amounting to approximately
$355,000.

ISSUANCE OF COMMON STOCK PURSUANT TO PRIVATE PLACEMENTS

During the six months ended June 30, 2007, the Company issued 3,925,006 shares
pursuant to private placements which generated net proceeds of approximately $2
million. Additionally, the Company has allocated $1,332,992 of the fair value of
warrants granted in connection with these private placements which has been
initially recorded as derivative liabilities and allocated against paid in
capital. During the six months ended June 30, 2007, in connection with these
private placements, the Company paid commissions to its placement agent of
approximately $21,000 in cash, granted 40,385 warrants valued at approximately
$25,000 and accrued commissions of approximately $90,000 which have been
allocated against paid in capital.

REPURCHASE AND CANCELLATION OF COMMON STOCK

In March 2007, the holders of a put have exercised their options to have the
Company repurchase 1,617,228 shares of its common stock. The Company paid
$1,250,000 (less $100,000 previously paid) to the holders of the put and the
holders will retain the remaining 1,285,892 shares. The Company cancelled the
remaining 331,336 shares of the put to satisfy its obligations under this
arrangement.

                                       16
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2007

NOTE 6 - STOCK OPTIONS AND WARRANTS

WARRANTS

Between January and February 2007, the Company received $1,325,000 in
consideration for the issuance of the bridge promissory notes. The Company also
issued a five-year common stock purchase warrants to purchase 1,394,721 shares
of the Company's common stock at $0.475 per share (See Note 3 - Convertible
Promissory Notes).

On January 24, 2007, the Company granted a five-year warrant to purchase 100,000
shares of common stock to a consultant at an exercise price of $0.475 per share
for marketing strategy and business development services rendered. The Company
valued these warrants utilizing the Black-Scholes options pricing model at
approximately $0.675 or $67,520 and recorded a stock-based consulting expense of
$67,520 for the six months ended June 30, 2007. The fair value of such warrants
was initially recorded as derivative liabilities.

On March 19, 2007, in connection with a 12-month retailer marketing agreement
entered into on February 2, 2007, the Company granted a three-year warrant to
purchase 2,000,000 shares of common stock to an electronic retailing group in
Europe at an exercise price of $1.25 per share. The Company valued these
warrants utilizing the Black-Scholes options pricing model at approximately
$1.00 or $2,004,600. In connection with the issuance of these warrants, for the
six months ended June 30, 2007, the Company recorded marketing expense of
$812,824 and prepaid marketing expense of $1,191,776 which will be amortized
over the remaining period. The fair value of such warrants was initially
recorded as derivative liabilities.

During the six months ended June 30, 2007, the Company paid commissions to
placement agent for proceeds received from the exercise of certain stock
warrants of approximately $217,000 in cash and granted 402,381 warrants valued
at $241,429 (using the blackscholes model) which has been allocated against paid
in capital. These warrants are exercisable at $.45 per share and expire in May
2012. The fair value of such warrants was initially recorded as derivative
liabilities.

During the six months ended June 30, 2007, the Company granted a five-year
warrant to purchase 1,962,502 shares of common stock in connection with private
placements. The Company has allocated $1,332,992 of the fair value of warrants
granted which was initially recorded as derivative liabilities and allocated
against paid in capital. These warrants are exercisable at $1.00 per share.
Additionally, the Company granted 40,385 warrants as commissions to placement
agent valued at approximately $25,000 (using the blackscholes model) which has
been allocated against paid in capital. These warrants are exercisable at $1.00
per share. The fair value of such warrants was initially recorded as derivative
liabilities.

                                       17
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2007

NOTE 6 - STOCK OPTIONS AND WARRANTS (CONTINUED)

STOCK OPTIONS

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

During the six months ended June 30, 2007, in connection with the exercise of
stock options, the Company issued 603,964 shares of common stock to employees
and non employees for net proceeds of $282,836.

On April 5, 2007, the Company granted 200,000 five-year stock options to
purchase common stock for services performed at an exercise price of $.93 per
share. The Company valued these options utilizing the Black-Scholes options
pricing model at approximately $0.75 or $150,000. In connection with these
options, the Company recorded professional fees of $150,000 for professional
services performed.

During the six months ended June 30, 2007, the Company granted 3,887,500
five-year stock options to purchase common stock to employees at exercise prices
ranging from $.44 to $.97 per share. For the six months ended June 30, 2007 and
2006, total stock-based compensation charged to operations for option-based
arrangements amounted to $2,320,672 and $1,587,785, respectively. At June 30,
2007, there was approximately $1,687,000 or total unrecognized compensation
expense related to non-vested option-based compensation arrangements under the
Plan.

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:

                                               June 30,
                                      -------------------------
                                          2007          2006
                                      -----------   -----------
         Expected volatility ......     89%-94%       0%-221%
         Expected term ............     5 years       5 years
         Risk-free interest rate ..   4.54%-5.05%   2.78%-4.37%
         Expected dividend yield ..        0%            0%

                                       18
<PAGE>

                               SPARE BACKUP, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2007

NOTE 7 - COMMITMENTS AND CONTINGENCIES

LITIGATION

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

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

The Company is a party to litigation in Riverside County Superior Court, Case
No. INC 057586, which was filed on March 22, 2006 by a former employee who
alleges that she suffered harassment and infliction of emotional distress during
her brief employment from July to October 2005, and that the Company breached a
purported employment contract with her upon her resignation. The Company denies
the former at-will employee's claims. On November 15, 2006, the Court entered an
order sustaining in part and overruling in part our demurrer to that complaint,
and an amended complaint was filed December 8, 2006, against which we filed a
second demurrer. No trial date has been set. In August 2007, the Company,
through a formal mediation, settled for $10,000. The Company was released from
further action and has been dismissed from this litigation.

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

NOTE 8 - SUBSEQUENT EVENTS

In July 2007, in connection with the exercise of stock options, the Company
issued 99,873 shares of common stock to employees for net proceeds of
approximately $18,000.

On July 6, 2007, the Company issued 576,924 shares pursuant to a private
placement which generated net proceeds of approximately $279,000 after
commissions of $21,000 and granted five year warrants to purchase 40,385 shares
of common stock to its placement agent. In connection with this private
placement, the Company issued 288,462 warrants exercisable at a price of $1.00
per share. The warrants expire in July 2012.

In July 2007, the Company issued 1,561,538 shares pursuant to a private
placement which generated gross proceeds of approximately $1,015,000. In
connection with this private placement, the Company issued 780,767 warrants
exercisable at a price of $1.00 per share. The warrants expire in July 2012.

On July 7, 2007, the Company executed a 6 months Aircraft lease agreement. The
lease provides for 50 hours of flight time a month at a cost of $65,000. The
monthly payment shall be paid in advance for each monthly rental period of this
lease and requires a $65,000 security deposit upon acceptance of agreement which
is to be retained by the lessor during the entire agreement.

In July 2007, the Company issued 50,000 shares of common stock in connection
with a finder's fee agreement dated June 1, 2007. The fair value of such shares
amounted to approximately $43,000 and has been allocated against accrued
expenses.

In August 2007, the Company issued 3,309 shares of common stock in connection
with the payment of accrued interest on the 12.5% Convertible promissory notes.
The fair value of such shares issued amounted to approximately $2,700.

                                       19
<PAGE>

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

OVERVIEW

         Our flagship product is Spare Backup, a fully-automated remote backup
solution designed and developed especially for the small office or home
environment which automatically and efficiently backs up all data on selected
laptop or desktop computers. As a result, we believe small companies can ensure
file safety in PCs and laptops for backup and retrieval. We launched our Spare
Back-up service and software product version 1.0 in March 2005. We are currently
offering version 3.6 of the product and anticipate the launch of version 4.0
during August 2007. Our Spare Switch software which 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 owners and executives of businesses
that use technology to support their businesses, but do not have an IT
(information technology) department, as well as consumers who desire to secure
the redundancy of available files and documents vital to the continuity of their
operations, business, or personal information. Our concept is to develop a suite
of complementary products and services which are designed for use by technical
and non-technical users featuring a user interface that can cross both sets of
users. Our software has unique characteristics of additional coding that enables
easy to scale infrastructure and support elements which we believe provides a
competitive advantage over other providers whose products require large
investments in hardware, as well as professional installation, training and
support.

         In fiscal 2006 our initial distribution strategy evolved and we now
focus our efforts on partnering with leading companies such as computer
manufacturers, high speed cable providers, warranty and service companies that
have established brands as a way to gain acceptance for, and create a demand
for, our products and services. We believe that by bundling our products and
services as one feature of a value-added service, offered by major national and
international brands, that we will be able to leverage their brand recognition
and marketing efforts to accelerate our market acceptance and significantly
increase our adoption rates. We use an "opt-out" adoption model which varies
from partner to partner but requires the user to provide us with enrollment
information and a credit card at the time of activation. The initial trial
generally provides a certain amount of free storage space once activated and the
ability to easily continue the service at the end of the trial period or upgrade
the storage capacity. The change during fiscal 2006 from an "opt-in" to an
"opt-out" adoption model has increased the retention of our customer base.

         During the second quarter of fiscal 2007 we continued our efforts begun
in fiscal 2006 to implement our distribution model and broaden our partnership
relationships. Our previously set goals for fiscal 2007 included:

         o  improving our agility in expanding our network infrastructure to
            accommodate our anticipated growth,

         o  enhancing features and functionalities of our product offerings as
            well as providing translated versions of our existing and enhanced
            product offerings to expand our customer base,

         o  expanding our customer service capabilities to accommodate the our
            anticipated growth in the United States and in Europe,

         o  increasing our resources in marketing programs to expand our
            distribution channels to other major original equipment
            manufacturers and resellers and distributors, and

         o  securing additional financing to accommodate our anticipated growth
            of operations.

                                       20
<PAGE>

         During the first two quarters of fiscal 2007 we spent significant
resources, both financial and management time, towards the accomplishment of
these goals. During the six months ended June 30, 2007, we spent approximately
$8.2 million on sales, general and administrative expenses. These costs included
approximately $2,104,000 for sales and marketing, advertising and business
development expenses which included approximately $800,000 to test various
marketing programs in the U.K., including collateral materials, as well as
travel and travel related expenses, and approximately $930,000 of costs
associated with technology service which includes engineering development,
software and hardware related to the ongoing provision of our services. During
this period we also spent approximately $948,000 on research and development.
The research and development and technology service expenses were related to the
user interface for our products as well as the development of Workgroup for
Hewlett Packard and the media vault family of products.

         During the six months ended June 30, 2007 we purchased approximately
$1,600,000 of servers and other computer equipment for our New Jersey data
center which increases our data center capacity to handle the anticipated
increases in our subscriber base. This co-located center will handle all
European traffic from the DSG agreement. Finally, as we continue to grow our
infrastructure to support our anticipated growth, our employee and overhead
costs have also increased. During the second quarter of fiscal 2007 we added
three additional software engineers and plan to add an additional three before
the end of fiscal 2007. Our sales resources are presently on-staff and one of
our program managers is on retainer. We have outsourced our tier 1 customer
support to a third party that provides support in five languages, but will
continue to handle tier 2 customer support from our Palm Desert facility. As our
revenues increase we expect to increase our headcount in areas of program
management, marketing, development and customer service. Our approach is to
outsource as many of these functions as possible to suppliers who are experts in
the various disciplines, while only hiring senior staff for the purpose of
interaction with suppliers.

         Our efforts during the second quarter of fiscal 2007 were focused in
Europe and our OEM partner DSG International. During the quarter we completed a
number of marketing trials with our DSG International, through its PCWorld
stores. While the costs were high, we believe that we have learned how to
effectively market our products to the consumer and we are now beginning to
learn how to reduce our customer acquisition costs. Most importantly, however,
we believe that the results of these efforts have proven that our products are
viable in the marketplace. We presently have in excess of approximately 11,000
subscribers in our opt-out model and we expect that number to dramatically
increase by the end of fiscal 2007 as DSG International completes a full roll
out of our products through its 1,450 retail and online stores. DSG, which has a
customer network exceeding 20,000,000 in 27 countries, owns PCWorld, Curry's and
The Tech Guys. Our conversion rate to fully paid subscribers continues to
increase and the retention rates of those subscribers are very high.

         We have also continued to make progress in our relationship with
Hewlett-Packard and in June 2007 we announced our Spare Backup Workgroup
software, which enables small and medium businesses to incorporate a fully
encrypted, internet enabled, offsite backup service to protect important data
and mission-critical files, would be included in a number of HP products
designed for small and medium businesses (SMBs). HP will distribute the Spare
Backup service as part of its SMB portfolio through various web offerings and
other channels.

         In May 2007 we entered into a Software License and Distribution
Agreement with Gateway Companies, Inc. We have completed the custom software
design for Gateway and we anticipate that Gateway will roll out this program
during the fourth quarter of fiscal 2007.

                                       21
<PAGE>

         We are also continuing our efforts to add additional OEM partners. We
are focusing our efforts on these large channel distribution outlets such as DSG
International in the retail space, along with MSO (multi-system operators) and
companies such as HP and Gateway as we believe it allows us the greatest
chance of significantly increasing our subscriber base while ultimately reducing
our customer acquisition costs.

         To date, during fiscal 2007 we have raised approximately $7,900,000 in
working capital, which includes approximately $1,300,000 received after June 30,
2007. The purchase of servers and other computer equipment for our New Jersey
data center in the first quarter of fiscal 2007 increased our data center
capacity to handle the anticipated increases in our subscriber base should be
sufficient to handle between 300,000 to 400,000 subscribers. We will need to
raise an additional $2,000,000 to $2,500,000 for working capital during the
balance of fiscal 2007. Based on our internal projections, we anticipate that
our revenues in fiscal 2008 will be sufficient to fund most, if not all, of our
operating expenses. However, if there is a delay in the introduction of our
products by one or more of our partners, or if our marketing expenses are
greater than projected or our adoption and retention rates are lower than
demonstrated to date, we may need to raise additional working capital. There
are, of course, no assurances that we will be able to raise the additional
capital necessary to continue to implement our business model. If this capital
is not available to us during fiscal 2007, we may be forced to curtail some of
our growth plans and operations.

GOING CONCERN

         We have generated minimal revenue since our inception on September 12,
2002, and have incurred net losses of approximately $63.7 million since
inception through June 30, 2007, which includes non-cash losses which are
principally related to stock compensation expense and expenses associated with
derivative liabilities in prior periods. As a result, our current operations are
not an adequate source of cash to fund future operations. The report of our
independent registered public accounting firm on our financial statements for
the year ended December 31, 2006 contains an explanatory paragraph regarding our
ability to continue as a going concern based upon our net losses and cash used
in operations. Our ability to continue as a going concern is dependent upon our
ability to obtain the necessary financing to meet our obligations and repay our
liabilities when they become due and to generate profitable operations in the
future. We plan to continue to provide for our capital requirements through the
sale of equity securities and debt, however, we have no firm commitments from
any third party to provide this financing and we cannot assure you we will be
successful in raising working capital as needed. There are no assurances that we
will have sufficient funds to execute our business plan, pay our obligations as
they become due or generate positive operating results.

CRITICAL ACCOUNTING POLICIES

         A summary of significant accounting policies is included in Note 2 to
the audited consolidated financial statements included in our Form 10KSB for the
year ended December 31, 2006. 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.

                                       22
<PAGE>

         Effective January 1, 2006, we adopted the provisions of SFAS No.
123(R), "Share-Based Payment," under the modified prospective method. SFAS No.
123(R) 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 SFAS No. 123, as amended by SFAS No. 148,
will continue to be required under SFAS No. 123(R) to the extent those amounts
differ from those in the Statement of Operations.

RECENT ACCOUNTING PRONOUNCEMENTS

         In July 2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109." This interpretation provides guidance
for recognizing and measuring uncertain tax positions, as defined in SFAS No.
109, "Accounting for Income Taxes." FIN No. 48 prescribes a threshold condition
that a tax position must meet for any of the benefit of an uncertain tax
position to be recognized in the financial statements. Guidance is also provided
regarding de-recognition, classification, and disclosure of uncertain tax
positions. FIN No. 48 is effective for fiscal years beginning after December 15,
2006. The Company does not expect that this interpretation will have a material
impact on its financial position, results of operations, or cash flows.

         In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements" ("FAS 157"). This Statement defines
fair value as used in numerous accounting pronouncements, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosure related to the use of fair value measures in financial
statements. The Statement is to be effective for the Company's financial
statements issued in 2008; however, earlier application is encouraged. The
Company is currently evaluating the timing of adoption and the impact that
adoption might have on its financial position or results of operations.

         In September 2006, the SEC issued Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when quantifying
Misstatements in Current Year Financial Statements ("SAB 108"). SAB 108 requires
companies to evaluate the materiality of identified unadjusted errors on each
financial statement and related financial statement disclosure using both the
rollover approach and the iron curtain approach, as those terms are defined in
SAB 108. The rollover approach quantifies misstatements based on the amount of
the error in the current year financial statement, whereas the iron curtain
approach quantifies misstatements based on the effects of correcting the
misstatement existing in the balance sheet at the end of the current year,
irrespective of the misstatement's year(s) of origin. Financial statements would
require adjustment when either approach results in quantifying a misstatement
that is material. Correcting prior year financial statements for immaterial
errors would not require previously filed reports to be amended. If a Company
determines that an adjustment to prior year financial statements is required
upon adoption of SAB 108 and does not elect to restate its previous financial
statements, then it must recognize the cumulative effect of applying SAB 108 in
fiscal 2006 beginning balances of the affected assets and liabilities with a
corresponding adjustment to the fiscal 2006 opening balance in retained
earnings. SAB 108 is effective for interim periods of the first fiscal year
ending after November 15, 2006. The adoption of SAB 108 did not have an impact
on the Company's consolidated financial statements.

                                       23
<PAGE>

         In December 2006, FASB Staff Position No. EITF 00-19-2, "Accounting for
Registration Payment Arrangements," was issued. The FSP specifies that the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument or other
agreement, should be separately recognized and measured in accordance with SFAS
No. 5, "Accounting for Contingencies." The Company believes that its current
accounting is consistent with the FSP.

         In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities, Including an Amendment of FASB
Statement No. 115", under which entities will now be permitted to measure many
financial instruments and certain other assets and liabilities at fair value on
an instrument-by-instrument basis. This Statement is effective as of the
beginning of an entity's first fiscal year that begins after November 15, 2007.
Early adoption is permitted as of the beginning of a fiscal year that begins on
or before November 15, 2007, provided the entity also elects to apply the
provisions of SFAS 157. The Company is currently assessing the impact, if any,
the adoption of SFAS 159 will have on its financial statements.

         Other accounting standards that have been issued or proposed by the
FASB or other standards-setting bodies that do not require adoption until a
future date are not expected to have a material impact on the consolidated
financial statements upon adoption.

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 2007 (UNAUDITED) AS COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 2006 (UNAUDITED)

         Following a comparative information on certain selected income
statement items.
<TABLE>
<CAPTION>
                                                   SIX MONTHS ENDED JUNE 30,
                                                     2007            2006        $ OF CHANGE     % OF CHANGE
                                                 ------------    ------------    -----------     -----------
<S>                                              <C>             <C>             <C>             <C>
Revenues .....................................   $     37,371    $     33,645          3,726          +11.0%

Operating expenses:
Research and development .....................        947,735         433,118        514,617           +119%
Sales, general and administrative ............      8,184,855       5,737,353      2,447,502          +43.0%
                                                 ------------    ------------
Total operating expenses .....................      9,132,590       6,170,471      2,962,119          +48.0%

Operating loss ...............................     (9,095,219)     (6,136,826)     2,958,393          +48.0%

Other income (expense):
Change in fair value of derivative liabilities     (5,275,067)         73,963     (5,349,030)             NM
Derivative liability expense .................       (334,030)       (588,900)       254,870              NM
Interest income ..............................              3               -              3              NM
Transfer- unrealized gain- investment held
  for sale ...................................              -         112,509       (112,509)             NM
Realized loss - trading securities ...........              -        (111,624)       111,624              NM
Interest expense .............................     (1,422,289)       (478,709)       943,580           +197%
                                                 ------------    ------------
Total other expenses .........................     (7,031,383)       (992,761)     6,038,622              NM

Net loss .....................................   $(16,126,602)   $ (7,129,587)     8,997,015           +126%
Comprehensive loss ...........................   $(16,126,602)   $ (7,242,096)     8,884,506           +123%

Basic and diluted net loss per common share ..   $      (0.26)   $      (0.17)          0.09          +52.9%
Basic and diluted weighted average common
shares outstanding ...........................     62,878,197      42,413,813     20,464,384          +48.2%
</TABLE>
NM = not meaningful

                                       24
<PAGE>

REVENUES

         The modest increase in revenues of approximately $3,700 for the six
months ended June 30, 2007 as compared to the same period in fiscal 2006
reflects the increased adoption rate of our products by trial users who convert
to subscriptions. For example, in the 30 day period subsequent to the end of the
quarter, we have added approximately 2,000 additional fully paid subscribers
which represents monthly gross sales of approximately $12,000.

OPERATING EXPENSES

         Our total operating expenses for the six months ended June 30, 2007
increased $2,962,119, or approximately 48%, from the six months ended June 30,
2006. Our operating expenses included expenses related to research and
development and selling, general and administrative expenses.

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. We spent
$947,735 on research and development expenses for the six months ended June 30,
2007 as compared to $433,118 for the six months ended June 30, 2006. Research
and development expenses represented approximately 10% of our total operating
expenses for the six months ended June 30, 2007 as compared to approximately 7%
for same period in 2006. Our research and development expenses for the six
months ended June 30, 2007 include costs associated with continued development
of user interfaces and additional products, including version 4.0 of
Spare-Backup, a family pack, and our SMB (small to medium business) products,
including Workgroup, and reflected increased R&D efforts to successfully meet
various deadlines set by our OEM partners. During the six months ended June 30,
2007 we hired an three additional software engineers and a product manager and
will need to hire three additional engineers before the end of fiscal 2007. We
anticipate that we will continue to incur research and development expenses in
future periods as a result of the addition of new features, the launch of new
versions of our products and the expansion of our engineering staff, however we
are not able at this time to quantify the amount of such expenditures.

Sales, General, and Administrative Expenses

         For the six months ended June 30, 2007, our selling, general and
administrative expenses were $8,184,855 as compared to $5,737,353 for the same
period in fiscal 2006, an increase of $2,447,502, or approximately 43%. Sales,
general and administrative expenses represented approximately 90% and
approximately 93% of our total operating expenses for the six months ended June
30, 2007 and 2006, respectively. Included in our sales, general and
administrative expenses for the six months ended June 30, 2007 were:

         o approximately $2,104,000 of sales and marketing, advertising and
business development expenses which includes costs associated with the various
pilot marketing programs discussed earlier as well as travel and travel related
expenses associated with our efforts to further develop and broaden our OEM
partner base and non-cash expenses associated with the granting of a warrant to
DSGI, PLC. While a significant portion of these expenses in the six months ended
June 30, 2007 were one-time expenses, we anticipate that we will continue to
incur similar sales and marketing, advertising and business development expenses
during the balance of fiscal 2007 and beyond,

         o approximately $1,436,000 of employee related costs which includes
salaries and employee costs, recruiting expenses and 401k contributions. We
anticipate that we will be required to hire additional software engineers and
other staff to support our projected growth. Our offices are in a geographic

                                       25
<PAGE>

location which is tech heavy and we face competition in hiring qualified
employees and consultants. If we are able to hire the personnel we presently
deem necessary, our selling, general and administrative expenses will increase
although we are presently unable to quantify the amount of projected increase,

         o approximately $930,000 of costs associated with technology service
which includes engineering development, software and hardware related to the
ongoing provision of our services. We anticipate that these costs will be
relatively constant during the balance of fiscal 2007,

         o approximately $850,000 of general overhead expense, including rent,
insurance, legal and accounting fees and other general operating expenses. We
anticipated that these costs will be relatively constant during the balance of
fiscal 2007, and

         o approximately $2,838,000 of non-cash expense including option expense
associated with options granted to our executive officers and other employees
($2,320,672), depreciation ($307,151) and stock based consulting fees
$(209,890).

         We anticipate that our general and administrative expenses will
continue to increase in the balance of the fiscal 2007 periods as we continue to
expand our partner base and our operations. We are unable at this time, however,
to quantify the amount of such increases.

TOTAL OTHER EXPENSES

         Our total other expenses, net for the six months ended June 30, 2007
increased $6,038,622, or approximately 608%, from the same period in fiscal
2006. This increase included the following:

Change in Fair Value of Derivative Liabilities and Derivative Liabilities
expense

         Change in fair value of derivative liabilities and derivative
liabilities expense consist of income or expense associated with the change in
the fair value of derivative liabilities as a result of the application of EITF
Issue No. 00-19 to our financial statements. The difference in fair value of the
derivative liabilities between the date of their issuance and their measurement
date, which amounted to an increase of approximately $5.3 million and a decrease
of approximately $74,000 for the six months ended June 30, 2007 and 2006,
respectively, has been recognized as other expense/income in those periods. In
addition, during the six months ended June 30, 2007, we have satisfied all of
the 8% convertible promissory notes and 12.5% convertible subordinated
promissory debentures and accordingly, has reclassified all of derivative
liabilities amounting to $22,147,932 to paid in capital as a result of the
repayment and conversion of the 8% convertible promissory notes and 12.5%
convertible subordinated promissory debentures into common stock. At June 30,
2007, derivative liabilities amounted to $0.

         While at June 30, 2007 we no longer had any derivate liabilities, as a
result of the financings described later in this report we anticipate that we
will recognize other income or expense in future periods based upon the
fluctuation of the market price of our common stock. This non-cash income or
expense has materially impacted our results of operations in prior periods and
is reasonably anticipated to materially affect our net loss or net income in
future periods. We are, however, unable to estimate the amount of such
income/expense in future periods as the income/expense is partly based on the
market price of our common stock at the end of a future measurement date.
Investors are cautioned to consider the impact of this non-cash accounting
treatment on our financial statements.

                                       26
<PAGE>

Interest Expense

         Interest expense consists primarily of interest recognized in
connection with the amortization of debt discount and interest on our
convertible promissory notes. The increase in interest expense during the six
months ended June 30, 2007 when compared to the six months ended June 30, 2006
is primarily attributable to the amortization of the debt discount amounting to
$1.4 million associated with the 8% convertible promissory notes which were sold
during the six months ended June 30, 2007. These notes were subsequently
converted into equity during March 2007 pursuant to their terms.

Comprehensive Loss

         For the six months ended June 30, 2006 we recognized a loss of $112,509
on the transfer of unrealized gain - investment held for sale to trading
security. The item of expense was a one-time event and we do not expect to
report similar expense in future periods. This one-time, non-cash item, however,
increased our net loss by $112,509 for the six months ended June 30, 2006.

LIQUIDITY AND CAPITAL RESOURCES

         Liquidity is the ability of a company to generate funds to support its
current and future operations, satisfy its obligations and otherwise operate on
an ongoing basis. The following table provides certain selected balance sheet
comparisons between June 30, 2007 (unaudited) and December 31, 2006:
<TABLE>
<CAPTION>
                                                              JUNE 30,      DECEMBER 31,
                                                                2007            2006        $ OF CHANGE    % OF CHANGE
                                                            ------------    ------------    -----------    -----------
<S>                                                         <C>             <C>             <C>            <C>
Working capital (deficit) ...............................   $   (289,600)   $(11,852,100)   (11,562,500)        -97.6%
Cash ....................................................   $    643,411    $    146,318        497,093          +340%
Restricted cash .........................................   $    299,990    $    872,820       (572,830)        -65.6%
Prepaid marketing expenses ..............................   $  1,191,776    $          0      1,191,776          +100%
Prepaid expenses ........................................   $     50,000    $          0         50,000          +100%
Other current assets ....................................   $     58,157    $          0         58,157          +100%
Total current assets ....................................   $  2,243,334    $  1,019,138      1,224,196          +120%
Property and equipment, net .............................   $  1,945,174    $    488,818      1,456,356          +298%
Other assets ............................................   $          0    $     75,380        (75,380)         -100%
Total assets ............................................   $  4,188,508    $  1,583,336      2,605,172          +165%

Accounts payable and accrued expenses ...................   $  2,515,231    $    853,176      1,662,055          +195%
8% convertible promissory notes .........................   $          0    $    293,509       (293,509)         -100%
12.5% convertible subordinated promissory debentures, net   $          0    $    295,201       (295,201)         -100%
Accrued interest on convertible promissory notes ........   $      2,703    $     22,097        (19,394)        -87.8%
Derivative liabilities ..................................   $          0    $ 11,392,255    (11,392,255)         -100%
Due to stockholder ......................................   $     15,000    $     15,000              0            n/a
Total current liabilities ...............................   $  2,532,934    $ 12,871,238    (10,338,304)            NM
Total liabilities .......................................   $  2,532,934    $ 12,877,664    (10,344,730)            NM
</TABLE>
NM = not meaningful

         We have experienced losses and negative cash flows from operations
since inception and the report of our independent registered public accounting
firm on our financial statements for fiscal 2006 contains an explanatory
paragraph regarding our ability to continue as going concern. At June 30, 2007,
we had cash on hand of approximately $643,000, exclusive of restricted cash in
escrow under the terms of our agreement with Circuit City.

         At June 30, 2007, we had a working capital deficiency of approximately
$290,000 which reflects current assets of $2,243,334 less current liabilities of
$2,532,934. Our current assets increased $1,224,916 from December 31, 2006 to
June 30, 2007 which reflects the continuing growth of our company. Included in
this changes is an increase of :

         o $497,093 in cash which includes proceeds from our ongoing capital
raising activities as described later in this section,

                                       27
<PAGE>

         o $1,191,776 in prepaid marketing expenses which represents the value
of the warrant we issued to DSGI International as described elsewhere herein
which is being amortized for the remaining period of the agreement,

         o $50,000 in prepaid legal expenses, and

         o $1,662,055 in accounts payable and accrued expenses. Include in this
amount was approximately $1,600,000 of servers and other computer equipment for
the co-location of a data center in New Jersey which will handle all European
traffic that we purchased during the first quarter of fiscal 2007. This purchase
served also increase our property and equipment assets. This amount was
satisfied subsequent to June 30, 2007.

         These increases were offset by decreases in:

         o $572,830 in restricted cash. Under the terms of an agreement with
Circuit City, in fiscal 2006 we deposited $1,000,000 in an escrow account to
secure the obligations associated with compensation to Circuit City under this
agreement. Circuit City will be entitled to earn a maximum fee of $20 for each
customer which includes the amount of the 60 day trial paid directly to Circuit
City either from a customer for an in-store purchase or collected by us for
purchases made through the co-branded website and an amount for every Circuit
City customer who purchases as Spare Backup service after the initial 60 day
trial period. These amounts will be disbursed to Circuit City from the escrowed
funds until the funds are depleted; thereafter, we are required to pay Circuit
City within 15 days of the end of the month in which the fee was earned. Through
December 31, 2006 approximately $127,000 was disbursed to Circuit City under the
terms of the agreement. In February 2007 we amended the terms of the escrow to
reduce the amount covered by the account. Pursuant to the amendment, an
additional $72,680 of the escrowed funds was disbursed to Circuit City as
marketing expenses and $500,000 of the escrowed funds were returned to us. We
used those monies for general working capital. The remaining escrowed funds will
be disbursed to Circuit City as earned. At June 30, 2007, $299,990 remained on
deposit in the escrow account,

         o $608,104 in amounts due under 8% convertible promissory notes, 12.5%
convertible subordinated promissory debentures, net of debt discount of $79,799,
and accrued interest on these notes. During the six months ended June 30, 2007
the holders of these notes converted the notes and $2,703 of accrued interest
into an aggregate of 3,309 shares of our common stock pursuant to the terms of
the instruments, and

         o $11,392,255 in derivative liabilities. As described earlier in this
section, as a result of the satisfaction of the 8% convertible promissory notes
and 12.5% convertible subordinated promissory debentures, this non-cash
liability was reclassified to paid in capital.

         During the six months ended June 30, 2007, our cash increased $497,093.
This increase consisted of $5,398,812 in cash provided by financing activities
which was offset by $3,153,212 of cash used in operating activities, which is
net of a reduction of $500,000 in restricted cash held in escrow under the terms
of our Circuit City agreement which was released back to us as described later
in this report, and $1,748,507 of cash used in investing activities.

         Net cash used in operating activities for the six months ended June 30,
2007 increased $671,495 from the same period in 2006. Included in this change is
an increase in our net loss for the period to $16,126,602, as compared to a net
loss of $7,129,587 for the six months ended June 30, 2006, and is primarily
attributable to the effect of increased expenses for the six months ended June
30, 2007 related to non-cash transactions including the losses associated with
derivative liabilities, amortization of debt discounts, prepaid marketing
expense, deferred compensation, depreciation and the value of stock options
issued as compensation. In addition, during the six months ended June 30, 2007,

                                       28
<PAGE>

changes in above, together with an increase in other current assets of $32,777
which was offset by increases in accounts payable and accrued expenses of
$1,625,330 related to our purchase of equipment and accrued interest on
convertible promissory notes as described elsewhere herein.

         Net cash used in investing activities was $1,748,507 for the six months
ended June 30, 2007 as compared to net cash used in investing activities of
$65,653 for the comparable period in 2006. This change is attributable to the
purchase of servers and other computer equipment for the New Jersey data center
as described above. We did not have any comparable purchases during the six
months ended June 30, 2006.

         Net cash provided by financing activities increased by $2,356,532 for
the six months ended June 30, 2007 as compared to the same period in 2006.
During the six months ended June 30, 2007, we received proceeds of $3,225,291
from the exercise of stock warrants and options and $1,325,000 proceeds from
issuance of convertible promissory notes which offset by the $1,250,000 (less
$100,000 previously paid) repurchase of shares of our common stock associated
with the exercise of a put right by Robinson Reed as described later in this
report and $21,480 principal repayments on the 12.5% subordinated convertible
promissory debentures and 8% convertible promissory notes. During the six months
ended June 30, 2006, we received $2,450,000 from the issuance of our common
stock and $1,500,000 from issuance of bridge notes which was offset by the
payment of financing costs and principal repayments of lease obligations in the
aggregate amount of $221,932. Additionally, we made principal repayments on a
convertible promissory note amounting to $52,193 and repurchase of 5,882,352
shares of our common stock from Langley Park Investment Trust PLC for $633,602.

         We have generated minimal revenues since inception and our current
operations are not an adequate source of cash to fund future operations absent a
significant increase in our revenues during the remainder of fiscal 2007.
Historically we have relied on private placement issuances of equity and debt
financing instruments to provide capital for our company. The amount our future
capital requirements depend primarily on the rate at which we increase our
revenues and correspondingly decrease our use of cash to fund operations. Cash
used for operations will be affected by numerous known and unknown risks and
uncertainties including, but not limited to, our ability to successfully market
our products and services and the degree to which competitive products and
services are introduced to the market. As long as our cash flow from operations
remains insufficient to completely fund operations, we will continue depleting
our financial resources and seeking additional capital through equity and/or
debt financing. We do not have any external sources for working capital and we
do not have any commitments by any third party to provide capital to us as
needed. There can be no assurance that acceptable financing to fund our ongoing
operations can be obtained on suitable terms, if at all. If we are unable to
obtain the financing necessary to support our operations, we may be unable to
continue as a going concern. In that event, we may be forced to cease operations
and our stockholders could lose their entire investment in our company.

ITEM 3.  CONTROLS AND PROCEDURES

         As required by Rule 13a-15 under the Securities Exchange Act of 1934,
as of June 30, 2007, the end of the period covered by this report, our
management concluded its evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures. Disclosure controls and
procedures are controls and procedures designed to reasonably assure that
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934, such as this report, is recorded, processed, summarized
and reported within the time periods prescribed by SEC rules and regulations,
and to reasonably assure that such information is accumulated and communicated
to our management, including our Chief Executive Officer who also acts as our
principal financial and principal accounting officer, to allow timely decisions
regarding required disclosure.

                                       29
<PAGE>

         Our management does not expect that our disclosure controls and
procedures will prevent all error and all fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not absolute, assurance
that the control system's objectives will be met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, have been detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. The design of any system of controls is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions.

         Based upon the evaluation, our Chief Executive Officer has concluded
that our disclosure controls and procedures are effective for timely gathering,
analyzing and disclosing the information we are required to disclose in our
reports filed under the Securities Exchange Act of 1934. Our management, which
includes our Chief Executive Officer, concluded that our disclosure controls and
procedures are effective to (i) give reasonable assurance that the information
required to be disclosed by us in reports that we file under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms, and (ii) ensure that information required to be disclosed in the reports
that we file or submit under the Securities Exchange Act of 1934 is accumulated
and communicated to our management, including our CEO, to allow timely decisions
regarding required disclosure.

         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

         None.

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

         Between April 2007 and May 2007 we sold 746,659 shares of our common
stock and issued warrants to purchase an additional 373,330 shares at an
exercise price of $1.25 per share to six accredited investors in a private
offering exempt from registration under the Securities Act in reliance on an
exemption provided by Section 4(2) of that act and Rule 506 of Regulation D.
Subsequent to the closing of this offering, we reduced the offering price of the
common stock included in the offering from $0.75 per share to $0.52 per share
and reduced the exercise price of the warrants to $1.00 per share. As a result
of this repricing, we issued an additional 330,266 shares of common stock and
warrants to purchase an additional 165,132 shares of common stock. These
issuances were exempt from registration under the Securities Act of 1933 in
reliance on an exemption provided by Section 4(2) of that act.

         In April 2007 we issued 51,429 shares of our common stock valued at
$36,000 for accrued legal services. The recipients was an accredited or
otherwise sophisticated investor who had such knowledge and experience in
business matters that he was capable of evaluating the merits and risks of the
prospective investment in our securities. The recipient had access to business
and financial information concerning our company. The securities were issued in
reliance on an exemption from registration provided by Section 4(2) of the
Securities Act of 1933.

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<PAGE>

         Between May 2007 and July 2007 we sold 3,425,005 shares of our common
stock and issued warrants to purchase an additional 1,712,502 shares to 18
accredited investors in a private offering exempt from registration under the
Securities Act of 1933 in reliance on an exemption provided by Section 4(2) of
that act and Rule 506 of Regulation D. We received proceeds of $1,781,000 from
this offering. We paid Skyebanc, Inc., an NASD member firm and affiliate of one
of our directors, a commission of $21,000 and issued it warrants to purchase
40,385 shares of common stock which were identical to the warrants issued to the
investors. We also issued a warrant to purchase 70,289 shares of our common
stock with an exercise price of $0.55 per share as a finder's fee to a third
party. We are using the net proceeds from this offering for working capital.

         The warrants issued are exercisable for a period of five years at an
exercise price of $1.00 per share. The exercise price of the warrants and the
number of shares issuable upon exercise is subject to proportional adjustment in
the event of stock splits, dividends, recapitalizations or similar transactions.
We have the right to call the warrants at any time that our common stock trades
above $1.75 per share for five consecutive business days. We granted the
investors piggyback registration rights covering the shares of common stock
issued in the units.

         Between July 2007 and August 2007 we sold 1,561,538 shares of our
common stock and issued warrants to purchase an additional 780,767 shares to
five accredited investors in a private offering exempt from registration under
the Securities Act of 1933 in reliance on an exemption provided by Section 4(2)
of that act and Rule 506 of Regulation D. We received gross proceeds of
$1,015,000 from this offering. [We are using the net proceeds from this offering
for working capital.

         The warrants issued are exercisable for a period of five years at an
exercise price of $1.00 per share. The exercise price of the warrants and the
number of shares issuable upon exercise is subject to proportional adjustment in
the event of stock splits, dividends, recapitalizations or similar transactions.
We have the right to call the warrants at any time that our common stock trades
above $1.75 per share for five consecutive business days. We granted the
investors piggyback registration rights covering the shares of common stock
issued in the units.

ITEM 3.  DEFAULTS ON SENIOR SECURITIES

         None.

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

         None.

ITEM 5.  OTHER INFORMATION

         None.

ITEM 6.  EXHIBITS

Exhibit No.                        Description
-----------                        -----------

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

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<PAGE>

                                    SIGNATURE

In accordance with requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned and duly authorized


SPARE BACK UP, INC.


By: /s/  Cery B. Perle                                           August 17, 2007
    ----------------------------------------------------         ---------------
    Cery B. Perle                                                Date
    President, Chief Executive Officer & Director
    (Principal executive officer and principal financial
    and accounting officer)

                                       32