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

                                   FORM 10-KSB
(Mark One)

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

                   For the fiscal year ended December 31, 2005

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

                For the transition period from _______ to _______

                        Commission file number: 000-30587

                        Newport International Group, Inc.
                        ---------------------------------
                 (Name of small business issuer in its charter)

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

        73061 El Paso, Suite 202, Palm Desert, CA             92260
        -----------------------------------------          ----------
        (Address of principal executive offices)           (Zip Code)

                     Issuer's telephone number: 760-779-0251

Securities registered under Section 12(b) of the Exchange Act:

       Title of each class       Name of each exchange on which registered

               None                           not applicable
               ----                           --------------
      (Title of each class)

Securities registered under Section 12(g) of the Exchange Act:

                    common stock, par value $0.001 per share
                    ----------------------------------------
                                (Title of class)

         Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. [_]

         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[_]

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [_]

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

         State issuer's revenues for its most recent fiscal year. $23,920 for
the fiscal year ended December 31, 2005.

         State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked prices of such common
equity, as of a specified date within the past 60 days. The aggregate market
value of the common equity held by non-affiliates computed at the closing price
of the registrant's common stock on April 10, 2006 is approximately $16,880,674.

         March 24, 2006 42,768,582 shares of common stock are issued and
outstanding.

<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

         If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB (e.g., Part I, Part II,
etc.) into which the document is incorporated: (1) any annual report to security
holders; (2) any proxy or information statement; and (3) any prospectus filed
pursuant to Rule 424(b) of the Securities Act of 1933 ("Securities Act"). The
listed documents should be clearly described for identification purposes (e.g.,
annual report to security holders for fiscal year ended December 24, 1990). Not
Applicable.

         Transitional Small Business Disclosure Form (check one): Yes ___ No _X_


           CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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

         When used in this annual report, the terms "Newport International," "
we," "our," and "us" refers to Newport International Group, Inc., a Delaware
corporation, and our subsidiaries. Our web sites are
www.newport-international-group.com, www.nwpo.biz and www.sparebackup.com. The
information which appears on our Web sites is not part of this annual report.

                                        2
<PAGE>

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

OUR PRODUCTS AND SERVICES

         We are a developer and marketer of a line of software products
specifically designed for the small business and home business users. Our
products are designed and developed so that technical skills are not necessary
to use or manage the software. Our Spare line of software products includes our
Spare Backup service and our Spare Switch PC file transfer software.

         SPARE BACK-UP

         Spare Backup, a fully-automated remote backup solution designed and
developed especially for the small office or home environment, 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 software product in March
2005.

         Spare Backup offers:

      o  An automatic program installation that requires absolutely no user
         interaction to configure backups,

      o  Complete backups for all for all registry settings in every directory,

         o  No complicated file selection - Spare Backup scans the user's
            computer and backs up:

         o  All contacts, email messages and attachments, address book, folders
            and contents, signature files from Outlook, and Outlook Express

         o  Word, Excel, PowerPoint files, templates and settings from MS Office

         o  My Documents, My Music, My Pictures, Quicken, QuickBooks, MS Money,
            Turbo Tax and Tax Cut

         o  All desktop files

      o  Simple, fast data recovery,

      o  Reports sent automatically to users via e-mail and available in Spare
         Backup,

      o  Redundant file support - select a restore from the last 10 backups,

      o  Online file retrieval from any Internet connection - using Spare Key,

      o  Three levels of encryption - SSL with Verisign authenticity
         certificates, Blowfish with private key, AES 256 block cipher with
         unique user key, and

      o  Decryption protected by Spare Key in the user's computer and with
         broker so complete loss of the computer is not a problem.

                                        3
<PAGE>

         An overview of customer benefits includes:

      o  Ease-of-use - Spare Backup provides fast, easy and fully automated data
         protection. Users benefit from automated data file selection, which
         distinguishes user data files from operating system and application
         files. As a result, users do not have to remember where all of their
         data files are stored. Spare Backup also ensures that open files are
         protected, and allows users to retrieve multiple past versions of a
         file, not just the most recently backed-up version.

      o  Impenetrable Security and Protection of Corporate Data - Spare Backup
         ensures that all data is encrypted with advanced 256-bit encryption on
         the user's machine using a user provided "key" or password. The data is
         encrypted a second time using SSL, or secure sockets layer, while it is
         being transmitted and a third time before it is stored on the RAID, or
         redundant array of independent disc, servers using a strong private
         key.

      o  SSL Support - SSL based protocol enhancements to address security
         parameters during: registration, upgrade, backup and retrieve.

         We offer new users a free 45-day trial. Spare Backup services costs
$9.99 per month for the first gigabyte of storage plus $1.99 per month per
additional gigabyte. For users interested in using Spare Backup service on their
own locate storage device, we also package a software-only version which is
available for $39.99.

         SPARE SWITCH

         Spare Switch enables users to complete the transfer of personal files
from an old personal computer (PC) to a new one via a high speed Internet
connection. Spare Switch locates, packs and transfers files securely without the
need for transfer cables or other accessories. Spare Switch, designed for both
individual and business use, ensures that not only the files transfer easily,
but that they will look, feel and work on the new computer in the same manner
with all the personal settings and layouts built into them. We launched Spare
Switch in August 2005.

         Spare Switch is used by either downloading the software from the
Internet or by inserting an installation CD into the old computer. Spare Switch
then scans the hard drive and inventories of personal directories, giving the
user a detailed report of the documents and other files. From that inventory,
the user can then select the exact files that he or she wishes to transfer to
the new PC. Spare Switch avoids the need for PC-to-PC transfer cable by
compacting, encrypting and then transferring the files via the Internet. Spare
Switch's data center can then hold the data for as long as a week, giving the
user the flexibility to choose when to download the files to the new PC. The
files are downloaded from our secure Spare Switch data center using the Spare
Switch CD. Spare Switch uses a 256-bit encryption cipher with non-algorithmic
key to ensure that the information is impervious to hackers at every step of the
process. Spare Switch is priced at $39.99 and supports five users.

                                        4
<PAGE>

OUR TARGET CUSTOMERS

         We focus on owners and executives of small to mid-size businesses that
use technology to support their businesses and individuals who desire to secure
the redundancy of available files and documents vital to the continuity of their
operations, business, or personal information. Since our products and services
allow non-technical users to quickly, easily and thoroughly secure and backup
their files or data archiving and storage, we believe that our business is
uniquely relevant to enabling small companies to succeed using technology. Our
products and services also support individual business professionals working in
companies of all sizes. Other unique characteristics are additional coding that
enables easy to scale infrastructure and support elements. We believe that this
characteristic provides a competitive advantage over other providers whose
products require large investments in hardware, as well as professional
installation, training and support.

HOW WE MARKET OUR PRODUCTS AND SERVICES

         Our products are sold direct to the customer via online distribution.
Users may try our products and services at no cost for a limited trial period by
downloading our software.

         In addition, we are establishing a network of affiliates that also
distribute our products online, as well as a partnership network that will
promote and/or resell our products. The primary focus of our partnership efforts
will be with key retailers, such as CompUSA, and Fry, original equipment
manufacturers (OEMs), and distributors such as Ingram-Micro. As of the date of
this annual report our products are distributed by a number of OEMs, resellers
and corporate partners, including:

         o  Ameralinx                 o  Mennta Sverige AB
         o  CompUSA                   o  Narvarre Corporation
         o  Computers4Sure.com        o  PC Mall Sales, Inc.
         o  Computer Repair Guys      o  PC Connectin.com Inc.
         o  Digital Unique            o  PC Tune Up Pros
         o  eCOST.com                 o  Tech Depot (an Office Depot subsidiary)
         o  Fry's Outpost.com         o  TigerDirect.com
         o  Ingram Micro              o  Wynit Inc.
         o  Jumbo

         In March 2006, we launched our co-marketing efforts with Systemax, Inc.
under which Systemax is incorporating the Spare Backup solution in shipments of
PCs ordered through Systemax's various distribution channels. Under the terms of
the memorandum of understanding, Spare Backup is embedded as an offering icon,
which will open upon the initial customer start up of the new PC. Each Systemax
PC customer will receive a 60-day free trial of Spare Backup and Systemax is
entitled to 35% of the monthly subscriptions revenue from those customers who
subscribe for the Spare Backup service at the end of the trial period. In
addition, we will support the project in our data centers at no charge to
Systemax as well as providing sales training.

         CUSTOMER SUPPORT

         We provide our tier 1 and tier 2 support for our services. Our tier 1
customer support provides initial call resolution and direct linking
capabilities to our tier 2 customer support. Tier 2 customer support is managed
by an internal group of specialists who are co-located within our Network
Operation Center and software development headquarters in Palm Desert.
Co-location with the software development group allows for the resolution of
highly specific technical issues as well as identification of potential
application flaws.

                                        5
<PAGE>

RECENT DEVELOPMENTS

         In March 2006, we signed a memorandum of understanding with Brainware
Cons. & Dev. AG to create and deliver what we believe is the first event PC-down
and backup/restore solution to consumers and small businesses. The agreement
extends to cover technology development, marketing, channel development and
cross-selling in world-wide markets, including Brainware's approximate 150,000
customers in Switzerland.

         It is anticipated that the technology will enable the parties to
deliver a solution by which customers can access the Internet even when their
computer fails to boot its operating system. It is contemplated that once the PC
is connected to the Internet, a series of diagnostics and repair tools will be
able to be run remotely to correct the malfunction. In the event the computer
cannot be fixed remotely, a trouble ticket listing the exact configuration of
the PC and nature of the problem will be electronically submitted to any one of
a number of user-chosen service providers, such as "Geek Squad", who will
dispatch the necessary hardware or software to fix the problem. Meanwhile, all
data stored on the PC will be accessible over Spare Backup's remote encrypted
data centers.

         The memorandum of understanding contemplates the parties mutually
agreeing upon certain timelines and collaboration to complete the creation of a
deliverable product, as well as the execution of a definitive agreement.

RESEARCH AND DEVELOPMENT

         Our products were developed primarily by our employees assisted by
contractors in certain specialty areas. We have invested $782,000 and
approximately $720,000 in research and development during 2005 and 2004.

TECHNOLOGY

         Our products use a sophisticated combination of hardware, software, and
networking to intelligently select files and settings from a customer's computer
and reliably transfer these to secure twin data centers, making the data highly
available.

         The networking systems used by us were designed to use outbound
Internet connections for all communications, thus allowing many users who are
behind a firewall access to the backup services. The proprietary software
designed by us has been developed to remove the technical knowledge required to
use other backup products by selecting files and registry settings for the user

         We own all of our servers and utilize hosting in geographically
dispersed tier-1 collocation facilities. All of our products utilize the same
secure twin data center design to ensure maximum availability. Our entire server
configuration is replicated in near real-time to a secondary data center, which
will automatically become available in the event of an outage at the primary
facility. Our servers use the latest enterprise level operating system available
from Microsoft and use industry standard networking and communication protocols.
This provides a highly available network that can scale rapidly using off the
shelf hardware. These systems are fully redundant and we anticipate our
reliability at 99.9%. We can expand our network capacity quickly and with highly
predicable costs.

                                        6
<PAGE>

         Our business will suffer if our systems fail or our third-party
facilities become unavailable. A reduction in the performance, reliability and
availability of our systems and network infrastructure may harm our ability to
distribute our products and services to our customers and other users, as well
as harm our reputation and ability to attract and retain customers. Our systems
and operations are susceptible to, and could be damaged or interrupted by,
outages caused by fire, flood, power loss, telecommunications failure, Internet
breakdown, earthquake and similar events. If for some reason we should not have
redundancy in our facilities, any damage or destruction to our systems would
significantly harm our business. Our systems are also subject to human error,
security breaches, power losses, computer viruses, break-ins, "denial of
service" attacks, sabotage, intentional acts of vandalism and tampering designed
to disrupt our computer systems, Web sites and network communications which are
beyond our control. This could lead to slower response times or system failures.

         Our computer and communications infrastructure is located in multiple
leased facilities in Arizona and California. The infrastructure here is not
fully redundant and we may not have adequate business interruption insurance to
compensate us for losses that may occur from a system outage. Despite our
efforts, our network infrastructure and systems could be subject to service
interruptions or damage and any resulting interruption of services could harm
our business, operating results and reputation.

OUR CONGA LINE OF PRODUCTS

         Following our transaction with Grass Roots International, Inc. in
August 2004, our operations included the sale of our Conga line of products. The
Conga products were web-based and broadband-enabled software applications, which
focused on improving remote communications and automating data archiving and
storage for the non-technical owners and managers of small and medium sized
businesses. During fiscal 2004 and the first six months of fiscal 2005 our Conga
line of products represented 100% of our sales. The video conferencing market is
very competitive and we were never able to generate any significant revenues
from the Conga product line. Following our introduction of Space Backup in the
second quarter of fiscal 2005 we began devoting substantially all of our
resources to the marketing of the Spare family of products and we have
discontinued all marketing and sales efforts related to the Conga line.

COMPETITION

         We face intense and increasing competition in the web-base backup
solutions market. If we do not compete effectively or if we experience reduced
market share from increased competition, our business will be harmed. In
addition, the more successful we are in the emerging market for web-based
storage solutions, the more competitors are likely to emerge. We believe that
the principal competitive factors in our market include:

         o  Service functionality, quality and performance;

         o  Ease of use, reliability and security of services;

         o  Establishment of a significant base of customers and distribution
            partners;

         o  Ability to introduce new services to the market in a timely manner;

         o  Customer service and support; and

         o  Pricing.

                                        7
<PAGE>

         Our primary competitors are various Internet-based backup providers
broadcasters, such as Connected.com, Novastar, Livevault, and backup.com. These
companies provide services similar to ours and each have to various degrees a
market presence. We also compete with providers of traditional backup
technologies, such as Veritas.

         Substantially all of our competitors have more capital, longer
operating histories, greater brand recognition, larger customer bases and
significantly greater financial, technical and marketing resources than we do.
These competitors may also engage in more extensive development of their
technologies, adopt more aggressive pricing policies and establish more
comprehensive marketing and advertising campaigns than we can. Our competitors
may develop products and service offerings that we do not offer or that are more
sophisticated or more cost effective than our own. For these and other reasons,
our competitors' products and services may achieve greater acceptance in the
marketplace than our own, limiting our ability to gain market share and customer
loyalty and to generate sufficient revenues to achieve a profitable level of
operations. Our failure to adequately address any of the above factors could
harm our business and operating results.

INTELLECTUAL PROPERTY

         Our intellectual property is critical to our business, and we may seek
to protect our intellectual property through copyrights, trademarks, patents,
trade secrets, confidentiality provisions in our customer, supplier, potential
investors, and strategic relationship agreements, nondisclosure agreements with
third parties, and invention assignment agreements with our employees and
contractors, although we do not execute such agreements in every case. Our
protection efforts may prove to be unsuccessful, and unauthorized parties may
copy or infringe upon aspects of our technology, services or other intellectual
property rights. In addition, these parties may develop similar technology
independently. Existing trade secret, copyright and trademark laws offer only
limited protection and may not be available in every country in which we will
offer our services.

         On August 10, 2005, provisional patent applications were filed with the
United States Patent and Trademark Office in connection with the server and
client technologies utilized by our Spare Backup subsidiary. The provisional
applications must be re-filed as utility applications on or before August 10,
2006, or the provisional applications will expire. We are also exploring our
abilities to file for patents to include living document functions. The
applications we plan to file may fail to result in any patents being issued.
Even if one or more of these patents are issued, any patent claims allowed may
not be sufficiently broad to protect our technology. In addition, any patents
may be challenged, invalidated or circumvented and any right granted thereunder
may not provide meaningful protection to us. The failure of any patents may not
provide meaningful protection to us. The failure of any patent to provide
protection for our technology would make it easier for other companies or
individuals to develop and market similar systems and services without
infringing any of our intellectual property rights.

                                        8
<PAGE>

GOVERNMENT REGULATION

         Although there are currently relatively few laws and regulations
directly applicable to the Internet, it is likely that new laws and regulations
will be adopted in the United States and elsewhere covering issues such as
limitations on the use of mass-delivered e-mails, broadcast license fees,
copyrights, privacy, pricing, sales taxes and the characteristics and quality of
Internet services. The adoption of restrictive laws or regulations could slow
Internet growth. The application of existing laws and regulations governing
Internet issues such as property ownership, libel and personal privacy is also
subject to substantial uncertainty. There can be no assurance that current or
new government laws and regulations, or the application of existing laws and
regulations (including laws and regulations governing issues such as property
ownership, taxation, defamation and personal injury), will not expose us to
significant liabilities, slow Internet growth or otherwise hurt us financially.

         The Investment Company Act of 1940 restricts the operations of
companies that are deemed to be "investment companies." As a result of the
transaction with Langley Park which is described elsewhere in this annual
report, at December 31, 2004 a significant portion of our assets were classified
as "restricted investment in equity securities." Prior to entering into the
transaction with Langley Park our board of directors passed a resolution
affirmatively stating that we do not intend to become an investment company and
thereby be subject to the Investment Company Act of 1940. Because these
securities are subject to escrow agreements which prohibit us from disposing of
them, notwithstanding the requirement under generally accepted accounting
principles that the value of the securities be represented as an asset on our
balance sheet, this asset is presently illiquid and we do not consider it a
marketable security. As a result, we do not believe that we will be deemed to be
an "investment company" by virtue of this transaction. If, however, we should
inadvertently become subject to the Investment Company Act of 1940 and if we
should fail to comply with the requirements of that act, we would be prohibited
from engaging in business or selling our securities, and could be subject to
civil and criminal actions for doing so. Any failure to comply with the
Investment Company Act would therefore seriously harm our business.

EMPLOYEES

         As of March 30, 2006, we had 12 full-time employees, including all of
our executive officers. None of our employees are covered by collective
bargaining agreements, and we believe our relationships with our employees to be
good.

OUR HISTORY

         We were incorporated in Delaware on December 27, 1999 under the name
First Philadelphia Capital Corp. to serve as a vehicle to effect a merger,
exchange of common stock, asset acquisition or other business combination with
domestic or foreign private business. On October 30, 2000, we completed a
business combination with Conservation Anglers Manufacturing, Inc., a real
estate holding and development company that was originally organized in Florida
on February 7, 2000. The combination was a stock-for-stock merger that was
accounted for as a "pooling-of-interests". In connection with the merger, we
issued 235,000 shares of our common stock in exchange for all the outstanding
stock of Conservation Anglers Manufacturing, Inc. In January 2001 we changed our
name to Newport International Group, Inc. to better reflect and describe our
then current strategic direction.

                                        9
<PAGE>

         As a result of the transaction with Conservation Anglers Manufacturing,
Inc. we became a real estate holding company that intended to specialize in
large-scale commercial, industrial and residential mixed-use property
development. At the time of the transaction with Conservation Anglers
Manufacturing, Inc. we did not own any real estate and our activities were
limited to securing acquisition financing for a projects that we proposed to
acquire and develop.

         In November 2000, Mr. Soloman Lam, our then president and CEO, executed
certain land contracts to purchase approximately 3,300 acres of land for a total
of $11,389,600 which we intended to develop in the future. These contracts were
due to close on September 1, 2001, but were extended to March 1, 2002 at the
sellers' request. Mr. Lam personally deposited $180,000 into escrow pending
closing and we had agreed to reimburse him when he assigned the contracts to us.
On February 12, 2002, the land contracts were cancelled and the $180,000 deposit
was returned to Mr. Lam. Simultaneously, on February 12, 2002, Mr. Lam executed
a new land contract to purchase approximately 2,300 acres of land for
$15,000,000. We deposited $10,000 in escrow pending closing on April 30, 2002.
The closing on this contract was subsequently extended until July 29, 2002 and
as consideration we released the $10,000 to the seller that was in escrow.
Subsequently, the closing was again extended to September 30, 2002, in
consideration for a $25,000 non-refundable deposit. The closing was again
extended to December 30, 2002, then to March 31, 2003, then to July 31, 2003,
then to October 30, 2003, and subsequently to January 30, 2004, with no
additional deposit required. The check representing the $25,000 deposit was
never negotiated and in December 2003 it was voided. We do not intend to proceed
with this project. We have forfeited the $10,000 deposit and all rights and
obligations of this project have been assigned by us to Newport International
Group, Inc., a Florida corporation formerly known as Linda Development
Corporation, a company affiliated with Mr. Clint Beckwith, a former officer and
director of our company.

         In December 2001, Mr. Lam entered into purchase contracts to acquire 45
acres of vacant land, representing nine lots, in Wellington, Florida for a total
purchase price of $470,000. In April 2002, Mr. Lam closed on two of the nine
lots and in May 2002, closed on a third lot. The remaining six lots were to be
purchased when and if financing becomes available. Mr. Lam agreed to transfer
the vacant land to us in exchange for a purchase price equal to cost. Deposits
totaling $15,000 were paid by us in 2002 in conjunction with this land. The lots
were never transferred to us, the $15,000 became a receivable from Mr. Lam and
in December 2003 was expensed as an addition to our additional paid-in capital.

         On February 6, 2004, we closed an Agreement and Plan of Merger with
Grass Roots Communications Inc., a Delaware corporation. Grass Roots was a
development stage company incorporated in Delaware in June 2002 initially to
create, produce, deliver and track targeted multimedia communications over the
Internet. Under the terms of this agreement, Grass Roots became our wholly-owned
subsidiary. At the effective time of the merger, the stockholders of Grass Roots
exchanged their securities for approximately 12,300,000 shares of our common
stock, representing approximately 93% of our common stock. Contemporaneous with
this transaction, Grass Roots' President and Chief Executive Officer, Mr. Cery
B. Perle, was elected as a member of our Board of Directors and appointed CEO,
and Mr. Lam resigned his positions with our company. Mr. Richard Galterio, the
other member of our Board of Directors before the transaction remained as a
director, and Mr. Edward L. Hagan, Secretary of Grass Roots, was appointed our
secretary. Mr. Perle, the principal stockholder of Grass Roots, and members of
his family/household received an aggregate of 46% of our shares of common stock
as a result of the exchange upon the merger.

                                       10
<PAGE>

         Prior to our acquisition of Grass Roots, on January 6, 2003, Grass
Roots entered into a stock purchase agreement, with Ms. Esther Jill Pinsker and
Mr. Jan Johannes Dekkers, as amended on January 24, 2003, to purchase all of the
issued and outstanding capital stock of FocusFocus.com, Inc. for a purchase
price of $1,710,000. Under the terms of the agreement, $150,000 of the purchase
price was to be paid by the closing date and the remaining $1,560,000 was to be
paid in monthly installments of $30,000 plus accrued interest with the remaining
balance due on the 13th month after the closing date. FocusFocus provided
private, web page-based video and audio communications services, e-conferencing,
collaborative document preparation and revisions and chat services in a real
time, web-based environment. After Grass Roots' acquisition of FocusFocus, it
restructured its product and service offerings and combined its operations with
FocusFocus' web-based conference and collaboration tools.

         Under the terms of this agreement, Grass Roots has paid the sellers
$250,000. By letter dated May 2, 2003 counsel for the sellers advised Grass
Roots that it was in breach of the agreement and promissory notes for failing to
make scheduled monthly payments. By letter dated May 16, 2003, counsel for the
sellers gave notice that they would sell the assets of FocusFocus.com Inc. to
the highest bidder at a public auction on May 30, 2003. By letter dated May 22,
2003, counsel for Grass Roots notified counsel for the sellers that Grass Roots
was prepared to return to all of the assets of FocusFocus.com, Inc. to the
sellers. Grass Roots subsequently returned those assets, which included patent
applications, software applications, programs, code and related materials. The
promissory notes from Grass Roots to sellers provide that notwithstanding the
acceleration clause, upon an event of default (as defined in the agreement) that
is not cured within the prescribed time, that the shares of FocusFocus.com, Inc.
and the assets of it acquired by Grass Roots will revert back to the sellers,
the promissory notes would be terminated and be of no further force and effect
and all remaining sums due thereunder would be cancelled.

         In addition to the stock purchase agreement, at the time of the
transaction Grass Roots entered into three-month consulting agreements with each
of the sellers obligating them to perform certain consulting services to Grass
Roots in exchange for Grass Roots granting each of them options to purchase
500,000 shares of Grass Roots' common stock at an exercise price of $.01 per
share. These options were exchanged for like options in our company.

         In December 2004, we received a letter from counsel for the former
owners of FocusFocus requesting that we ceased to state in our public filings
that they did not perform under the aforementioned consulting agreements and
have also requested to receive the initial 500,000 stock options.

         To date, while no litigation has been filed, the parties have attempted
unsuccessfully to resolve their differences. In the event the parties are unable
to resolve their differences, litigation may result. In that event, Grass Roots
will take the position that it has returned all of the FocusFocus.com, Inc.
assets to the sellers and owes nothing under the stock purchase and related
agreements and it is likely that the sellers will take the position that they
are owed the remaining balance under the promissory notes and the right to
purchase 1,000,000 shares of Grass Roots' common stock for $.01 per share.

RISK FACTORS

         An investment in our common stock involves a significant degree of
risk. You should not invest in our common stock unless you can afford to lose
your entire investment. You should consider carefully the following risk factors
and other information in this annual report before deciding to invest in our
common stock.

WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT. WE ANTICIPATE CONTINUING
LOSSES MAY RESULT IN SIGNIFICANT LIQUIDITY AND CASH FLOW PROBLEMS.

                                       11
<PAGE>

         Our net loss for the years ended December 31, 2005 and 2004 were
$7,831,803 and $19,808,600, respectively. We have never generated meaningful
revenues to fund our ongoing operations. At December 31, 2005 we had
approximately $160,000 of cash on hand and subsequent to that date we have
raised approximately $2,000,000 in net proceeds through the sale of our
securities. We are constantly evaluating our cash needs and existing burn rate
in order to make appropriate adjustments in operating expenses. We will need to
raise additional debt or equity capital within the next 12 months to provide
funding for ongoing and future operations and to satisfy our obligations as they
become due. No assurances can be given that we will be successful in obtaining
additional capital, or that such capital will be available on terms acceptable
to us. Our continued existence is dependent upon, among other things, our
ability to raise capital and to market and sell our services successfully. The
financial statements do not include any adjustments to reflect future adverse
effects on the recoverability and classification of assets or amounts and
classification of liabilities that may result if we are not successful.

WE RECENTLY CHANGED OUR PRODUCT FOCUS. WE HAVE A LIMITED OPERATING HISTORY,
MAKING IT DIFFICULT FOR YOU TO EVALUATE OUR BUSINESS AND YOUR INVESTMENT

         We launched our Conga line of products and services in 2004; during the
second quarter of fiscal 2005 we began focusing all of our efforts away from our
original Conga line of products to concentrate on our new Spare line of software
products. In addition to a very limited operating history upon which you may
evaluate our operations and future prospects, this recent change in product
focus as well as our limited insight into emerging trends that may affect our
business may adversely affect our ability to successfully establish any brand
recognition for our products. Our focus on our Spare family of products is the
result of what we believe to be the best use of our available resources and
limited personnel, and of our belief that this area will provide a greater
opportunity for earlier returns on this technology as compared to video
conferencing, the market segment in which Conga competed. There are no
assurances that this change in strategy will be successful for our company. We
face risks and uncertainties relating to our ability to implement our business
plan successfully and you must consider these risks, uncertainties and
difficulties in evaluating our potential for future profitability.

WE HAVE OUTSTANDING $793,319 PRINCIPAL AMOUNT 8% PROMISSORY NOTES WHICH WERE DUE
ON MARCH 1, 2006 AND DO NOT PRESENTLY HAVE SUFFICIENT CASH TO SATISFY THE
OBLIGATIONS.

         Between October 2003 and March 2004, we sold 8% promissory notes of
which $793,319 principal amount remains outstanding on March 31, 2006. These
notes, together with all accrued but unpaid interest, were due on March 1, 2006.
We did not pay the notes when due and do not presently have sufficient cash to
satisfy the obligations. The notes are unsecured obligations of our company and
are convertible into shares of our common stock at the option of the holder at a
conversion price of $0.375 per share. A default of these notes can be declared
by the holders of at least 40% of the outstanding principal amount. Upon the
declaration of the default, the interest rate increases to 18% per annum. As of
March 31, 2006, no default has been declared on these notes nor has any note
holder requested the conversion of the note into equity. So long as we lack
sufficient cash resources to satisfy these obligations, until such time as these
notes are either converted by the note holders or the payment terms are
restructured, the past due status of the notes could adversely impact our
ability to raise additional working capital we need to fund our ongoing
operations and otherwise expand our business. In addition, the note holders
could declare an event of default and bring litigation seeking a judgment
against us, which would require us to use a portion of our limited working
capital for legal defense costs further adversely impacting our ability to fund
our ongoing operations.

                                       12
<PAGE>

WE CANNOT PREDICT OUR FUTURE REVENUES OR WHETHER OUR PRODUCTS WILL BE ACCEPTED.
IF THE MARKETS FOR OUR PRODUCTS AND SERVICES DO NOT DEVELOP, OUR FUTURE RESULTS
OF OPERATIONS WILL BE ADVERSELY AFFECTED.

         We reported revenues of $23,920 and $10,583 for the fiscal years ended
December 31, 2005 and 2004. All of the revenues in fiscal 2004 were from sales
of our Conga line of products. Revenues for fiscal 2005 were attributable to
sales of our Spare Backup product, the first software product in our Spare line.
Following the launch of Spare Backup we ceased all our marketing and development
efforts for our Conga line of products and are focusing our efforts on our Spare
product line. We cannot guarantee either that the demand for our Spare line of
software products will develop, that such demand will be sustainable or that we
will ever effectively compete in our market segment. If we are unable to
generate any significant revenues from our products and services our business,
operating results, and financial condition in future periods will be materially
and adversely affected and we may not be able to continue our business as
presently operated.

WE WILL NEED ADDITIONAL FINANCING WHICH WE MAY NOT BE ABLE TO OBTAIN ON
ACCEPTABLE TERMS. IF WE ARE UNABLE TO RAISE ADDITIONAL CAPITAL AS NEEDED, OUR
CONTINUED OPERATIONS WILL BE ADVERSELY AFFECTED AND THE FUTURE GROWTH OF OUR
BUSINESS AND OPERATIONS WILL BE SEVERELY LIMITED.

         Historically, our operations have been financed primarily through the
issuance of equity and debt. Because we have a history of losses and have never
generated sufficient revenue to fund our ongoing operations, we are dependent on
our continued ability to raise working capital through the issuance of equity or
debt to fund our present operations. Because we do not know if our revenues will
grow at a pace sufficient to fund our current operations, the continuation of
our operations and any future growth will depend upon our ability to raise
additional capital, possibly through the issuance of long-term or short-term
indebtedness or the issuance of our equity securities in private or public
transactions. The actual amount of our future capital requirements, however,
depends on a number of factors, including our ability to grow our revenues and
manage our business.

         If we raise additional capital through the issuance of debt, this will
result in increased interest expense. If we raise additional funds through the
issuance of equity or convertible debt securities, the percentage ownership of
our company held by existing stockholders will be reduced and those stockholders
may experience significant dilution. In addition, new securities may contain
certain rights, preferences or privileges that are senior to those of our common
stock. There can be no assurance that acceptable financing can be obtained on
suitable terms, if at all. If we are unable to raise additional working capital
as needed, our ability to continue our current business will be adversely
affected and may be forced to curtail some or all of our operations.

CERTAIN OF OUR OUTSTANDING SECURITIES ARE CONSIDERED DERIVATE LIABLITLIES. WE
HAVE RECOGNIZED NON-CASH INCOME AND LOSSES IN FISCAL 2005 AND FISCAL 2004, WHICH
HAVE HAD A MATERIAL EFFECT ON OUR FINANCIAL STATEMENTS.

                                       13
<PAGE>

         In connection with the issuance of the 8% promissory notes in March, we
granted a subsequent financing conversion reset right, which expired on March 1,
2006. 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, at December 31, 2005 we were
unable to assert that we had sufficient authorized and unissued shares to settle
such feature. Accordingly, all of our previously issued and outstanding
instruments, such as warrants and options issued to non-employees pursuant to
rendered services as well as those issued in the future, would be classified as
liabilities, effective with the granting of the subsequent financing conversion
reset feature. As described in Note 4 to the financial statements for the years
ended December 31, 2005 and 2004, which are included elsewhere in this annual
report, the application of EITF Issue No. 00-19 on our financial statements for
fiscal 2005 resulted in other income to us of $11,689,725, while it resulted in
other expense of $5,139,975 for fiscal 2004. While these income and expense
items are non-cash transactions, in each of the years the application of the
accounting standard had a significant impact on our net loss for the period
through a reduction in our net loss of $11,689,725 for fiscal 2005 and an
increase in our net loss of $5,139,975 for fiscal 2004. In addition, at December
31, 2005 our balance sheet reflects a current liability of $5,828,454 related to
the derivative liability. This derivative liability has materially adversely
impacted our working capital. While we cannot predict the impact of this
accounting standard on our financial statement in future periods as the
income/expense calculation is based upon a current market value of our common
stock, it is likely that it will have similar impacts on our financial statement
in future periods.

POSSIBLE DECLINE IN VALUE OF SHARES OF LANGLEY PARK INVESTMENTS, PLC.

         At December 31, 2005 we held 3,242,420 ordinary shares of Langley Park
Investments, PLC, which were received in July 2004 in exchange for shares of our
common stock pursuant to a stock exchange agreement with that company. These
shares are listed on the London Stock Exchange. At the date of the stock
exchange agreement, the Langley investment shares were valued at $11.8 million.
Based on the subsequent decline in the market price of these shares, we are
reflecting as of December 31, 2005 that the investment has lost approximately
$11.6 million in value. Under the terms of our agreement, we have no guarantees
as to the price of the Langley Park ordinary shares and no right to receive
additional shares based on the decline in the value of the investment. Until the
shares are released from escrow, we account for the value attributable to such
shares as a restricted investment in marketable securities, which is reflected
on our balance sheet as an asset. It is possible that the value of these shares
may decline further in the future, in which event the value of our restricted
investment will be reduced further, and the benefit to our financial position
may be substantially reduced or eliminated. In addition, under the terms of the
stock purchase agreement we have placed the 3,242,420 Langley Park ordinary
shares in escrow as a downside price protection for Langley Park on the value of
our shares of common stock issued in the transaction. These Langley Park
ordinary shares will remain in the escrow account for up to two years from the
July 2004 date of the transaction, subject to early termination upon the consent
of the parties. If at the end of this two year period the average closing bid
price of our common stock during the 10 trading days immediately preceding July
30, 2006 is below $2.01 per share, a proportion of the Langley Park ordinary
shares will be returned to Langley Park in the same ratio as the average bid
price is to $2.01. At March 31, 2006 the average closing bid price of our common
stock for the preceding 10 trading days was $0.553. Accordingly, unless there is
a significant increase in the trading price of our common stock, a portion of
the Langley Park ordinary shares held in escrow could be returned to Langley
Park. This would result in an increase in our stockholders' deficit based upon
the then carrying value of the securities and we would be deprived from any cash
we could generate from the sale of these securities.

                                       14
<PAGE>

OUR PRICING MODEL FOR OUR PRODUCTS AND SERVICES IS UNPROVEN AND MAY BE LESS THAN
ANTICIPATED, WHICH MAY HARM OUR GROSS MARGINS.

         The pricing model of our products and services may be lower than
expected as a result of competitive pricing pressures, promotional programs and
customers who negotiate price reductions in exchange for longer term purchase
commitments or otherwise. Our pricing model depends on the duration of the
agreement, the specific requirements of the order, purchase volumes, the sales
and service support and other contractual agreements. We expect to experience
pricing pressure and anticipate that the average selling prices and gross
margins for our products may decrease over product life cycles. We may not be
successful in developing and introducing on a timely basis new products with
enhanced features and services that can be sold at higher gross margins.

WE GRANTED A PURCHASER OF SHARES OF OUR COMMON STOCK CERTAIN PUT OPTION RIGHTS.
IF THE PUTS ARE EXERCISED, OR IF WE ARE ULTIMATELY REQUIRED TO HONOR CERTAIN PUT
OPTIONS THAT HAVE BEEN RECENTLY REPUDIATED BY THE PURCHASER, OUR RESULTS OF
OPERATIONS IN FUTURE PERIODS WILL BE ADVERSLY AFFECTED.

         In connection with the sales of shares of our common stock to Robinson
Reed, Inc. in fiscal 2004 we granted Robinson Reed, Inc. a put option covering
an aggregate of 2,000,000 shares of our common stock which expires between
February and March 2007. If the put option is exercised in full, we could be
required to either pay the holder $2,500,000 in cash, less any funds which have
been deposited in escrow, or issue the holder a convertible promissory note with
a conversion price less than the then market value of our common stock. If we
satisfy the put option in cash, assuming we had sufficient cash to pay the
amount due, our working capital would be proportionality reduced at a time when
we might need the funds to pay our ongoing obligations and we could have
difficulty in raising additional capital. If we issue the convertible note and
the note was converted, we would be required to issue a presently undeterminable
number of unregistered shares of our common stock at an effective price below
the then current market value of our common stock, as to which the purchaser
would have the right to demand registration. This would result in not only an
expense to us, but ultimately could be dilutive to our stockholders and could
adversely affect our ability to fund our ongoing operations.

THE EXERCISE OF OUTSTANDING WARRANTS AND THE CONVERSION OF OUTSTANDING NOTES
WILL BE DILUTIVE TO OUR EXISTING STOCKHOLDERS.

         As of March 31, 2006 we had the following securities which are
convertible or exercisable into shares of our common stock were outstanding:

         o  5,130,016 common stock purchase warrants to purchase a total of
            5,130,016 shares of our common stock at prices ranging between
            $0.375 to $1.50 per share;

         o  2,115,997 shares of our common stock issuable upon the possible
            conversion of the outstanding $793,348 principal amount 8%
            promissory notes which were due March 1, 2006,

         o  1,733,333 shares of our common stock issuable upon the possible
            conversion of the outstanding $650,000 principal amount 12.5%
            convertible subordinated promissory debentures due March 2007, and

         o  9,953,444 shares of our common stock issuable upon exercise of
            outstanding options with exercise prices ranging from $0.001 to
            $2.25.

         The exercise of these warrants and the conversion of the notes may
materially adversely affect the market price of our common stock and will have a
dilutive effect on our existing stockholders.

                                       15
<PAGE>

OUR QUARTERLY FINANCIAL RESULTS WILL CONTINUE TO FLUCTUATE MAKING IT DIFFICULT
TO FORECAST OUR OPERATING RESULTS.

         Our quarterly operating results have fluctuated in the past and we
expect our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, many of which are beyond our control,
including:

         o  the announcement or introduction of new services and products by us
            and our competitors;

         o  our ability to upgrade and develop our products in a timely and
            effective manner;

         o  our ability to retain existing customers and attract new customers
            at a steady rate, and maintain customer satisfaction;

         o  the amount and timing of operating costs and capital expenditures
            relating to expansion of our business and operations;

         o  government regulation; and

         o  general economic conditions and economic conditions specific to
            development and marketing of software products, the market
            acceptance of new products offered by us, our competitors and
            potential competitors.

         Our limited operating history and unproven business model further
contribute to the difficulty of making meaningful quarterly comparisons. Our
current and future levels of expenditures are based primarily on our growth
plans and estimates of expected future revenues. Such expenditures are primarily
fixed in the short term and our sales cycle can be lengthy. Accordingly, we may
not be able to adjust spending or generate new revenue sources timely to
compensate for any shortfall in revenues. If our operating results fall below
the expectations of investors, our stock price will likely decline
significantly.

BECAUSE WE EXPECT TO CONTINUE TO INCUR NET LOSSES, WE MAY NOT BE ABLE TO
IMPLEMENT OUR BUSINESS STRATEGY AND THE PRICE OF OUR STOCK MAY DECLINE.

         We have incurred net losses quarterly from inception through December
31, 2005, and we expect to continue to incur net losses for the foreseeable
future. Accordingly, our ability to operate our business and implement our
business strategy may be hampered by negative cash flows in the future, and the
value of our stock may decline as a result. Our capital requirements may vary
materially from those currently planned if, for example, we incur unforeseen
capital expenditures, unforeseen operating expenses or investments to maintain
our competitive position. If this is the case, we may have to delay or abandon
some or all of our development plans or otherwise forego market opportunities.
We will need to generate significant additional revenues to be profitable in the
future and we may not generate sufficient revenues to be profitable on either a
quarterly or annual basis in the future. To address the risks and uncertainties
facing our business strategy, we must, among other things:

         o  Achieve broad customer adoption and acceptance of our products and
            services;

         o  Successfully raise additional capital in the future;

         o  Successfully integrate, leverage and expand our product
            distribution;

         o  Successfully scale our current operations;

                                       16
<PAGE>

         o  Implement and execute our business and marketing strategies;

         o  Address intellectual property rights issues that affect our
            business;

         o  Develop and maintain strategic relationships to enhance the
            development and marketing of our existing and new products and
            services; and

         o  Respond to competitive developments in the software industry.

         We might not be successful in achieving any or all of these business
objectives in a cost-effective manner, if at all, and the failure to achieve
these could have a serious adverse impact on our business, results of operations
and financial position. Each of these objectives may require significant
additional expenditures on our part. Even if we ultimately do achieve
profitability, we may not be able to sustain or increase profitability, we may
not be able to sustain or increase profitability on a quarterly or annual basis.

WE HAVE NOT VOLUNTARILY IMPLEMENTED VARIOUS CORPORATE GOVERNANCE MEASURES, IN
THE ABSENCE OF WHICH, STOCKHOLDERS MAY HAVE MORE LIMITED PROTECTIONS AGAINST
INTERESTED DIRECTOR TRANSACTIONS, CONFLICTS OF INTEREST AND SIMILAR MATTERS.

         Recent Federal legislation, including the Sarbanes-Oxley Act of 2002,
has resulted in the adoption of various corporate governance measures designed
to promote the integrity of the corporate management and the securities markets.
Some of these measures have been adopted in response to legal requirements.
Others have been adopted by companies in response to the requirements of
national securities exchanges, such as the NYSE or The Nasdaq Stock Market, on
which their securities are listed. Among the corporate governance measures that
are required under the rules of national securities exchanges and Nasdaq are
those that address board of directors' independence, audit committee oversight,
and the adoption of a code of ethics. Although we have adopted a Code of Ethics,
we have not yet adopted any of these other corporate governance measures and,
since our securities are not yet listed on a national securities exchange or
Nasdaq, we are not required to do so. We have not adopted corporate governance
measures such as an audit or other independent committees of our board of
directors as we presently only have one independent director. If we expand our
board membership in future periods to include additional independent directors,
we may seek to establish an audit and other committees of our board of
directors. It is possible that if we were to adopt some or all of these
corporate governance measures, stockholders would benefit from somewhat greater
assurances that internal corporate decisions were being made by disinterested
directors and that policies had been implemented to define responsible conduct.
For example, in the absence of audit, nominating and compensation committees
comprised of at least a majority of independent directors, decisions concerning
matters such as compensation packages to our senior officers and recommendations
for director nominees may be made by a majority of directors who have an
interest in the outcome of the matters being decided. Prospective investors
should bear in mind our current lack of corporate governance measures in
formulating their investment decisions.

OUR SUCCESS IS DEPENDENT ON THE PERFORMANCE AND RETENTION OF OUR CHIEF EXECUTIVE
OFFICER AND KEY EMPLOYEES.

         Our business and operations are substantially dependent on the
performance of our executive officers and key employees, including Cery B.
Perle, all of whom are employed on an at-will basis and have worked together for
only a relatively short period of time. The loss of one or several executives
could seriously harm our business. Any reorganization or reduction in the size
of our employee base could harm our ability to attract and retain other valuable
employees critical to the success of our business.

                                       17
<PAGE>

WE CANNOT BE CERTAIN THAT WE WILL BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY,
AND WE MAY BE FOUND TO INFRINGE ON PROPRIETARY RIGHTS OF OTHERS, WHICH COULD
HARM OUR BUSINESS

         Our intellectual property is critical to our business, and we seek to
protect our intellectual property through copyrights, trademarks, patents, trade
secrets, confidentiality provisions in our customer, supplier, potential
investors, and strategic relationship agreements, nondisclosure agreements with
third parties, and invention assignment agreements with our employees and
contractors. We cannot assure you that measures we take to protect our
intellectual property will be successful or that third parties will not develop
alternative solutions that do not infringe upon our intellectual property.

         In addition, we could be subject to intellectual property infringement
claims by others. Claims against us, and any resultant litigation, should it
occur in regard to any of our services and applications, could subject us to
significant liability for damages including treble damages for willful
infringement. In addition, even if we prevail, litigation could be
time-consuming and expensive to defend and could result in the diversion of our
time and attention. Any claims from third parties may also result in limitations
on our ability to use the intellectual property subject to these claims.
Further, we plan to offer our services and applications to customers worldwide
including customers in foreign countries that may offer less protection for our
intellectual property than the United States. Our failure to protect against
misappropriation of our intellectual property, or claims that we are infringing
the intellectual property of third parties could have a negative effect on our
business, revenues, financial condition and results of operations.

COMPETITION MAY DECREASE OUR MARKET SHARE, REVENUES, AND GROSS MARGINS.

         We face intense and increasing competition in the web-base backup
solutions market. If we do not compete effectively or if we experience reduced
market share from increased competition, our business will be harmed. In
addition, the more successful we are in the emerging market for web-based
storage solutions, the more competitors are likely to emerge. We believe that
the principal competitive factors in our market include:

         o  Service functionality, quality and performance;

         o  Ease of use, reliability and security of services;

         o  Establish a significant base of customers and distribution partners;

         o  Ability to introduce new services to the market in a timely manner;

         o  Customer service and support; and

         o  Pricing.

         Our primary competitors are various Internet-based backup providers
broadcasters, such as Connected.com, Novastar, Livevault, and backup.com. These
companies provide services similar to ours and each have to various degrees a
market presence. We also compete with providers of traditional backup
technologies, such as Veritas.

                                       18
<PAGE>

         Substantially all of our competitors have more capital, longer
operating histories, greater brand recognition, larger customer bases and
significantly greater financial, technical and marketing resources than we do.
These competitors may also engage in more extensive development of their
technologies, adopt more aggressive pricing policies and establish more
comprehensive marketing and advertising campaigns than we can. Our competitors
may develop products and service offerings that we do not offer or that are more
sophisticated or more cost effective than our own. For these and other reasons,
our competitors' products and services may achieve greater acceptance in the
marketplace than our own, limiting our ability to gain market share and customer
loyalty and to generate sufficient revenues to achieve a profitable level of
operations. Our failure to adequately address any of the above factors could
harm our business and operating results.

RESULT IN PRODUCT LIABILITY OR DECREASE MARKET ACCEPTANCE OF OUR SERVICES AND
APPLICATIONS.

         The technology underlying services and applications are complex and
include software that is internally developed and software licensed from third
parties. These software products may contain errors or defects, particularly
when first introduced or when new versions or enhancements are released. We may
not discover software defects that affect our current or new services and
applications or enhancements until after they are sold. Furthermore, because our
services and applications are designed to work in conjunction with various
platforms and applications, we are susceptible to errors or defects in
third-party applications that can result in a lower quality product for our
customers. Because our customers depend on us for communications management, any
interruptions could:

         o  Damage our reputation;

         o  Cause our customers to initiate product liability suits against us;

         o  Increase our product development resources;

         o  Cause us to lose revenues; and

         o  Delay market acceptance of our services and applications.

         Our operations also depend on receipt of timely feeds from our content
providers, and any failure or delay in the transmission or receipt of such feeds
could disrupt our operations. We also depend on Web browsers, ISPs and online
service providers to provide access over the Internet to our product and service
offerings. Many of these providers have experienced significant outages or
interruptions in the past, and could experience outages, delays and other
difficulties due to system failures unrelated to our systems. These types of
interruptions could continue or increase in the future.

         Our digital distribution activities are managed by sophisticated
software and computer systems. We must continually develop and update these
systems over time as our business and business needs grow and change, and these
systems may not adequately reflect the current needs of our business. We may
encounter delays in developing these systems, and the systems may contain
undetected errors that could cause system failures. Any system error or failure
that causes interruption in availability of products or content or an increase
in response time could result in a loss of potential or existing business
services customers, users, advertisers or content providers. If we suffer
sustained or repeated interruptions, our products, services and Web sites could
be less attractive to such entities or individuals and our business could be
harmed.

                                       19
<PAGE>

         Significant portions of our business are dependent on providing
customers with efficient and reliable services to enable customers to broadcast
content to large audiences on a live or on-demand basis. Our operations are
dependent in part upon transmission capacity provided by third-party
telecommunications network providers. Any failure of such network providers to
provide the capacity we require may result in a reduction in, or interruption
of, service to our customers. If we do not have access to third-party
transmission capacity, we could lose customers and, if we are unable to obtain
such capacity on terms commercially acceptable to us our business and operating
results could suffer.

         Our computer and communications infrastructure is located at a single
leased facility in California. We do not have fully redundant systems, and we
may not have adequate business interruption insurance to compensate us for
losses that may occur from a system outage. Despite our efforts, our network
infrastructure and systems could be subject to service interruptions or damage
and any resulting interruption of services could harm our business, operating
results and reputation.

PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS MAY DELAY OR PREVENT A
TAKEOVER WHICH MAY NOT BE IN THE BEST INTERESTS OF OUR STOCKHOLDERS.

         Provisions of our certificate of incorporation and bylaws may be deemed
to have anti-takeover effects, which include when and by whom special meetings
of our stockholders may be called, and may delay, defer or prevent a takeover
attempt. In addition, certain provisions of Delaware law also may be deemed to
have certain anti-takeover effects which include that control of shares acquired
in excess of certain specified thresholds will not possess any voting rights
unless these voting rights are approved by a majority of a corporation's
disinterested stockholders.

         In addition, our certificate of incorporation authorizes the issuance
of up to 5,000,000 shares of preferred stock with such rights and preferences as
may be determined by our board of directors. Our board of directors may, without
stockholder approval, issue preferred stock with dividends, liquidation,
conversion or voting rights that could adversely affect the voting power or
other rights of our common stockholders.

OUR COMMON STOCK IS CURRENTLY QUOTED ON THE OTCBB, BUT TRADING IN OUR STOCK IS
LIMITED. BECAUSE OUR STOCK CURRENTLY TRADES BELOW $5.00 PER SHARE, AND IS QUOTED
ON THE OTC BULLETIN BOARD, OUR STOCK IS CONSIDERED A "PENNY STOCK" WHICH CAN
ADVERSELY EFFECT ITS LIQUIDITY.

         The market for our common stock is extremely limited and there are no
assurances an active market for our common stock will ever develop. Accordingly,
purchasers of our common stock cannot be assured any liquidity in their
investment. In addition, the trading price of our common stock is currently
below $5.00 per share and we do not anticipate that it will be above $5.00 per
share in the foreseeable future. Because the trading price of our common stock
is less than $5.00 per share, our common stock is considered a "penny stock,"
and trading in our common stock is subject to the requirements of Rule 15g-9
under the Securities Exchange Act of 1934. Under this rule, broker/dealers who
recommend low-priced securities to persons other than established customers and
accredited investors must satisfy special sales practice requirements. SEC
regulations also require additional disclosure in connection with any trades
involving a "penny stock," including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and its
associated risks. These requirements severely limit the liquidity of our
securities in the secondary market because few broker or dealers are likely to
undertake these compliance activities.

                                       20
<PAGE>

ITEM 2.  DESCRIPTION OF PROPERTY

         Our executive offices are located at 73-061 El Paseo, Suites 202 and
205, Palm Desert, California 92211. We lease this approximate 4,000 square foot
space which, houses all of our executive and administrative personnel for
approximately $62,000 annually, plus our pro-rata share of common area expenses.
Our lease for this space expires on March 31, 2009. We believe this facility
will meet our operational needs for the foreseeable future. If we need
additional space for our hosting and data center operations, we believe we will
be able to obtain it on commercially reasonable terms.

         We lease an office in an office building at 2501 West Behrend Drive,
Phoenix, Arizona 85027. This space is approximately 4,150 square feet and houses
our servers for our hosting and data center operations and our technical
personnel. Our lease for this space provides for annual rental of approximately
$31,000 and expires on June 2007. We believe this facility will meet our
operational needs for the foreseeable future. If we need additional space for
our hosting and data center operations, we believe we will be able to obtain it
on commercially reasonable terms.

ITEM 3.  LEGAL PROCEEDINGS

         We are not a party to any pending legal proceedings, and, to our
knowledge, none of our officers, directors or principal stockholders are party
to any legal proceeding in which they have an interest adverse to us.

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

         None.

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Our common stock is quoted on the OTCBB under the symbol NWPO. The
reported high and low sales prices for the common stock as reported on the OTCBB
are shown below for the periods indicated. The quotations reflect inter-dealer
prices, without retail mark-up, markdown or commission, and may not represent
actual transactions.

                                                        High                Low
                                                        ----                ---
Fiscal 2004

January 1, 2004 through March 31, 2004                  $2.45              $1.75
April 1, 2004 through June 30, 2004                     $2.45              $1.20
July 1, 2004 through September 30, 2004                 $2.95              $1.20
October 1, 2004 through December 31, 2004               $3.25              $0.40

Fiscal 2005

January 1, 2005 through March 31, 2005                  $1.65              $0.40
April 1, 2005 through June 30, 2005                     $0.60              $0.34
July 1, 2005 through September 30, 2005                 $1.55              $0.44
October 1, 2005 through December 31, 2005               $1.39              $0.61

Fiscal 2006

January 1, 2006 through March 31, 2006                  $0.85              $0.50

         On April 10, 2006, the last sale price of our common stock as reported
on the OTCBB was $0.42. As of March 24, 2006, there were approximately 222
record owners of our common stock.

                                       21
<PAGE>

DIVIDEND POLICY

         We have never paid cash dividends on our common stock. Under Delaware
law, we may declare and pay dividends on our capital stock either out of our
surplus, as defined in the relevant Delaware statutes, or if there is no such
surplus, out of our net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. If, however, the capital of our
company, computed in accordance with the relevant Delaware statutes, has been
diminished by depreciation in the value of our property, or by losses, or
otherwise, to an amount less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets, we are prohibited from declaring and
paying out of such net profits any dividends upon any shares of our capital
stock until the deficiency in the amount of capital represented by the issued
and outstanding stock of all classes having a preference upon the distribution
of assets shall have been repaired.

RECENT SALES OF UNREGISTERED SECURITIES

         None.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

         The following table sets forth securities authorized for issuance under
equity compensation plans, including individual compensation arrangements, by us
under our 2002 Stock Option and Stock Award Plan and any compensation plans not
previously approved by our stockholders as of December 31, 2005.

                       Number of         Weighted          Number of
                       securities to     average           securities remaining
                       be issued upon    exercise          available for future
                       exercise of       price of          issuance under equity
                       outstanding       outstanding       compensation plans
                       options,          options,          (excluding securities
                       warrants          warrants          reflected in column
                       and rights (a)    and rights (b)        (a))(c)
                       --------------    --------------    --------------------
Plan category

2002 Stock Option and
Stock Award Plan          8,953,444           $0.53             2,206,413

Equity compensation
plans not approved by
stockholders                none                -                   -


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

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

                                       22
<PAGE>

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

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

         The resources necessary to execute on our business strategy are sales
and program management and are relative to penetration and meeting competition.
Our sales resources are presently on-staff and the program management is on
retainer. As our revenues increase we expect to increase our headcount in areas
of program management, marketing, development and customer service. Our approach
is to outsource as many of these functions as possible to suppliers who are
experts in the various disciplines, while only hiring senior staff for the
purpose of interaction with suppliers. We believe this strategy will allow us to
keep expenses flat while growing our revenue base. In addition, our internal
analysis predicts that we can sustain 3,000,000 total users in our current
architecture. Accordingly, we expect to use this architecture in the foreseeable
future although we may, subject to the availability of sufficient capital, make
improvements in our data center localization and services from time to time. Our
capital expenditures are expected to remain flat during fiscal 2006, with
purchases designed to improve workplace layout, support for internal process
improvements and automation.

                                       23
<PAGE>

GOING CONCERN

         We have generated minimal revenue since our inception on June 12, 2002,
and have incurred net losses of approximately $33.1 million since inception
through December 31, 2005. As a result, our current operations are not an
adequate source of cash to fund future operations. The report of our independent
registered public accounting firm on our financial statements for the year ended
December 31, 2005 contains an explanatory paragraph regarding our ability to
continue as a going concern based upon our net losses and cash used in
operations. Our ability to continue as a going concern is dependent upon our
ability to obtain the necessary financing to meet our obligations and repay our
liabilities when they become due and to generate profitable operations in the
future. We plan to continue to provide for our capital requirements through the
sale of equity securities and debt, however, we have no firm commitments from
any third party to provide this financing and we cannot assure you we will be
successful in raising working capital as needed. There are no assurances that we
will have sufficient funds to execute our business plan, pay our obligations as
they become due or generate positive operating results.

CRITICAL ACCOUNTING POLICIES

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

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

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

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

                                       24
<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

                                       25
<PAGE>

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

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

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

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

                                       26
<PAGE>

RESULTS OF OPERATIONS

FISCAL YEAR ENDED DECEMBER 31, 2005 ("FISCAL 2005") AS COMPARED TO THE PERIOD
FROM APRIL 6, 2004 (INCEPTION) THROUGH DECEMBER 31, 2004 ("FISCAL 2004")
<TABLE>
<CAPTION>
                                                                                 (Decrease)       (Decrease)
                                                     2005           2004       $ 2005 vs 2004   % 2005 vs 2004
                                                 ------------   ------------   --------------   --------------
<S>                                              <C>            <C>             <C>                   <C>
Revenues .....................................   $     23,920   $     10,583    $     13,337          126%

Operating expenses:
  Research and development ...................        782,150        722,113          60,037            8%
  Amortization of deferred compensation ......        834,404              -         834,404           NM
  Stock-based compensation ...................        456,631      1,081,914        (625,283)         -58%
  Sales, general and administrative ..........      3,915,331      5,003,994      (1,088,663)         -22%
                                                 ------------   ------------    ------------          ----

     Total operating expenses ................      5,988,516      6,808,021        (819,505)         -12%

     Operating loss ..........................     (5,964,596)    (6,797,438)        832,842          -12%

Other expenses ...............................     11,689,725     (5,139,975)     16,829,700           NM
Unrealized loss-transfer of available-for-sale
 securities to trading securities ............       (730,000)    (2,775,000)     (2,045,000)          NM
Unrealized loss on trading securities ........     (4,999,263)             -      (4,999,263)          NM
Realized loss - investment ...................     (6,048,227)             -        6,048,227          NM
Interest expense .............................     (1,779,442)    (5,096,187)     (3,316,745)         -65%
                                                 ------------   ------------    ------------          ----
  Total other expenses, net ..................     (1,867,207)   (13,011,162)    (11,143,955)          85%

Net loss .....................................   $ (7,831,803)  $(19,808,600)    (11,973,797)          60%
                                                 ============   ============    ============          ====
</TABLE>
NM:  Not meaningful

REVENUES

         We have generated minimal revenues since inception. Revenues recognized
2005 consists of licensing fees generated from our Spare Back-Up product
offerings launched during 2005. Revenues recognized during fiscal 2004 consisted
of monthly licensing fees generated from our Conga product offerings. During
fiscal 2005 we launched our Spare software products group. In fiscal 2005 we
received orders for approximately $270,000 of product, which includes $233,037,
which has been sold to retailers with a right to return unsold product.
Accordingly, that amount will not be recognized as revenue until such time as
the return period has lapsed. We are unable to estimate the amount of returns,
if any, that we will receive on these product sales. In addition, we recorded
deferred revenues of $12,684 in fiscal 2005 as part of the total order number,
which will be recognized as revenue in fiscal 2006. We anticipate that revenues
from the Spare software product group will represent all of our revenues during
fiscal 2006. While we have begun establishing our distribution channels for this
product group, we are unable to predict if we will generate any significant
revenues during fiscal 2006.

RESEARCH AND DEVELOPMENT

         Research and development expenses consist primarily of compensation
expenses paid to our software engineers, employees and consultants. The increase
in our research and development expenses during fiscal 2005 as compared to
fiscal 2004 is primarily due to an increase in software engineers during 2005.
We anticipate that our research development and expenses during 2006 will remain
at levels comparable to 2005.

                                       27
<PAGE>

AMORTIZATION OF DEFERRED COMPENSATION

         Amortization of deferred compensation consists primarily of the value
of shares issued as compensation for consulting services during fiscal 2005 and
fiscal 2004 under agreements for which services services were not substantially
completed at the time of issuance of the shares. During, fiscal 2005 and fiscal
2004, we issued 3,915,500 and 172,500 shares, respectively, of common stock to
consultants for marketing and strategic planning services. The fair value of
such shares amounted to approximately $2.5 million and $328,000, respectively.
During fiscal 2005, we recognized approximately $2.5 million as deferred
compensation, of which approximately $800,000 was amortized during fiscal 2005.
We anticipate that we will continue to recognize similar expenses during future
periods, although we are unable to predict the amount of or timing of such
expenses.

SALES, GENERAL, AND ADMINISTRATIVE EXPENSES

         Sales, general, and administrative expenses consist primarily of
salaries and related expenses paid to our employees and contractors as well as
advertising expenses. The decrease in sales, general, and administrative
expenses for fiscal 2005 is primarily due to a one-time finders' fees of $1.6
million paid in connection with the Langley Park transaction in September 2004,
offset by advertising fees we have incurred in connection with the launch of our
new product Spare as well as legal fees incurred in connection with our
registration statement filed in 2005 and legal fees incurred in connection with
the Robinson Reed transaction. We did not have comparable costs in fiscal 2004.
During the third quarter of fiscal 2005 we reduced our head count, which we
believe will provide for reduced costs of operations in the foreseeable future.
As the demand for our products and services increases, we intend to add
personnel who will primarily focus in the areas of customer service and quality
monitoring, as well as administrative functions to support growing operations.
We believe that our sales, general, and administrative expenses during 2006 will
increase commensurate with an expected increase in our revenues.

STOCK-BASED COMPENSATION

         Stock-based compensation consists of the fair value of options issued
to employees. The decrease in stock-based compensation expense during 2005 when
compared to 2004 is primarily due to a larger number of options granted below
fair value during 2003 which vested in 2004.

OTHER INCOME (EXPENSES)

         Other income (expenses) consist primarily of income/expenses associated
with the recognition of derivative liabilities at their date of issuance and
their decrease in fair value as well as the fair value of shares issued pursuant
to penalties associated with the failure to timely file the registration
statement and loss on disposition of property and equipment. The increase in
other expenses during fiscal 2005 consists primarily of the fair value of the
shares issued in during fiscal 2005 and the effect of the application of EITF
00-19 to our financial statements. During fiscal 2005 and fiscal 2004, we
allocated $2,206,420 and $650,000, respectively, of the fair value of the
derivatives issued in connection with our convertible promissory notes, at their
date of issuance, to debt discount. The excess of the fair value of the
derivative liabilities over the debt discount has been recognized as other
expense, which amounted to $14.8 million and $284,000 during fiscal 2005 and
fiscal 2004, respectively. During fiscal 2005 and fiscal 2004, we allocated
approximately $318,000 and $3.8 million, respectively, of the fair value of the
derivatives to the net value of the issuance of shares of common stock as

                                       28
<PAGE>

additional consideration provided to such stockholders; these amounts have been
recorded as an offset to additional paid-in capital. The aggregate fair value of
all derivative liabilities upon issuance of the various debt and equity
instruments amounted to approximately $1.9 million and $25.9 million during
fiscal 2005 and fiscal 2004, respectively. The decrease in fair value of the
derivative liabilities between the date of their issuance and the respective
balance sheet date amounted to $11.6 million and $9.4 million during fiscal 2005
and fiscal 2004, respectively. The decrease in fair value of the derivative
liabilities has been recognized as other income (expense) in our financial
statements for the respective periods. As we will be required to "mark to
market" the value of these derivative liabilities on a quarterly basis until
such time as they are no longer considered a derivative liability, 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. We are unable to estimate
the amount of such income/expense.

SETTLEMENT WITH STOCKHOLDERS

         Settlement with stockholder consisted of the fair value of 1,500,000
shares of our common stock issued in December 2004 as settlement of a dispute in
connection with the sale of securities to Robinson Reed, Inc. and First Capital
Holdings International, Inc. during fiscal 2004, and the fair value of an
additional 1,000,000 shares issued during fiscal 2005 in final settlement of the
dispute. We do not anticipate additional expenses during fiscal 2006.

UNREALIZED/REALIZED LOSS ON MARKETABLE SECURITIES

         The unrealized/realized loss on marketable securities consists of
losses on our investment in Langley Park recognized in earnings, which
aggregated approximately $11.0 million during fiscal 2005. A significant portion
of the unrealized/ realized loss resulted from a decline in value of the Langley
Park shares in 2004, which was previously recorded as a separate element of
comprehensive income. We do not anticipate that we will incur similar expenses
in fiscal 2006.

INTEREST EXPENSE

         Interest expense consists primarily of interest recognized in
connection with the settlement of pre-merger obligations as well as amortization
of debt discount and interest on our convertible promissory notes. The decrease
in interest expense during fiscal 2005 is primarily due to the recognition of
interest expense of $3.4 million in connection with the settlement of pre-merger
obligations in February 2004. The interest expense associated with the
settlement of pre-merger obligations result from the one-time issuance of shares
of our common stock valued at approximately $4.0 million in consideration for
the payment of $600,000 of pre-merger obligations. Our interest expenses should
decrease during 2006 assuming that we will satisfy the 8% convertible promissory
notes.

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. We have experienced losses and negative cash flows from
operations since inception and the report of our independent registered public
accounting firm on our financial statements for fiscal 2005 contains an
explanatory paragraph regarding our ability to continue as going concern. At
December 31, 2005, we had cash on hand of approximately $160,000.

                                       29
<PAGE>

         At December 31, 2005, we had a working capital deficiency of
Approximately $6.9 million. A significant component of this working capital
deficiency is a derivative liability of $5,828,454, which we have recognized in
connection with the grant or the issuance of various embedded conversion
features, liquidated damages, and freestanding warrants.

         During fiscal 2005, our cash balance decreased $1,505,835. This
decrease consisted of $4,098,271 used in operating activities, which was offset
by $425,272 provided by investing activities and $2,167,164 provided by
financing activities.

         Net cash used in operating activities for fiscal 2005 declined
approximately $1 million from fiscal 2004. This decrease is primarily
attributable to a decrease in our net loss, and the effect of non-cash
transactions including the gain associated with derivative liabilities in fiscal
2005, a reduction in settlement expenses and pre-merger obligations in fiscal
2005 from fiscal 2004, an increase in provisions for returns, amortization of
debt discount and the net effect of the Langley Park transaction. In addition,
during fiscal 2005 changes in operating assets and liabilities included
decreases of due from related party of $23,400 and accounts receivable of
approximately $233,067 which were offset by increases in other assets of
approximately $33,000, accounts payable and accrued expenses of approximately
$284,000 and deferred revenues of approximately $13,000. These changes reflect
the transition of our product focus away from our Conga line to our Spare line
of software products.

         Net cash provided by investing activities was $425,272 for fiscal 2005
as compared to net cash used in financing activities of $268,267 for fiscal
2004. This change is primarily attributable to proceeds we received from the
sale of Langley Park securities.

         Net cash provided by financing activities decreased $4,752,092 during
fiscal 2005 from fiscal 2004. During fiscal 2005 we received approximately $2.5
million from the issuance of convertible notes, the sale of equity securities
and the exercise of options and warrants, which was offset by the repayment of
convertible notes and payment of financing costs. During fiscal 2004 we received
approximately $8,037,000 from the issuance of convertible promissory notes,
sales of equity securities, advances from a stockholder and the exercise of
stock options, which was offset by the repayment of convertible notes and notes
payable and financing costs.

         We have generated minimal revenues since inception. As a result, our
current operations are not an adequate source of cash to fund future operations.
To fund our cash requirements we have relied on private placement issuances of
equity and debt financing instruments. Our future capital requirements depend
primarily on the rate at which we increase our revenues and correspondingly
decrease our use of cash to fund operations. While we do not presently have any
obligations for capital expenditures, approximately $800,000 principal amount 8%
promissory notes were due March 1, 2006, which remain outstanding as of the date
of this annual report and an additional $650,000 principal amount 12.5%
convertible subordinated promissory debentures are due in March 2007. We do not
have sufficient cash to satisfy the 8% promissory notes, which are unsecured
obligations of our company, which are past due.

                                       30
<PAGE>

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

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

RECENT CAPITAL RAISING TRANSACTIONS

         During February and March 2006, we issued 4,000,000 shares of our
common stock to foreign investors. We generated $2,000,000 from the issuance of
the shares. All of the investors were non-US residents, each of whom represented
that they were accredited investors and were provided with current information
pertaining to the Company. Accordingly, the transaction was exempt from
registration under the Securities Act of 1933 by reason of Rule 506 and Section
4(2) thereunder.

         During February and March 2006, we issued 875,000 shares of our common
stock to two accredited investors. We generated $350,000 from the issuance of
the shares. Inasmuch as each of the investors was an accredited investor and
received current information pertaining to the Company, the issuance of these
securities was exempt from registration under rule 506 and Section 4(2) of the
Securities Act of 1933. In connection with this transaction, we issued 350,000
warrants to the investors. The exercise price of the warrants is $0.40. The
warrants expire in February and March 2011.

ITEM 7.  FINANCIAL STATEMENTS

         Our financial statements are contained in pages F-1 through F-31, which
appear at the end of this annual report.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         None.

ITEM 8A. CONTROLS AND PROCEDURES

         Our principal executive officer and principal financial officer
evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended) as of the end of the period covered by this report. Based on
this evaluation, our principal executive officer and principal financial officer
have concluded that our controls and procedures are effective in providing
reasonable assurance that the information required to be disclosed in this
report has been recorded, processed, summarized and reported as of the end of
the period covered by this report.

                                       31
<PAGE>

         On November 9, 2005, we announced that we restated our consolidated
balance sheet, statement of operations and statements of stockholders' deficit
as of and for the interim period ended June 30, 2005 to correct the carrying
value of our restricted investment in marketable securities. Previously, we had
presented this restricted investment in marketable securities at a value of
$795,311. As a result of a normal periodic review of its financial statements by
the staff of the Securities and Exchange Commission, and after considering the
length of time and the extent to which the market value of the restricted
investment has been less than its cost and other factors, we determined that the
fair value of the restricted investment amounted to $133,921 as of June 30,
2005. Consequently, on November 9, 2005 we filed an amendment to our June 30,
2005 Form 10-QSB restating our interim financial statements as of June 30, 2005
and for the interim period then ended. As a result of the restatement, we
determined that there was a material weakness in our internal control over
financial reporting as of June 30, 2005 related to the carrying value of our
restricted investment in marketable securities. The transaction leading to our
acquisition of marketable securities was a one-time transaction and management
does not anticipate we will enter into similar transactions in future periods.
Because we corrected the carrying value of our restricted investment in
marketable securities and the related charge to earnings, and as a result of the
nonrecurring nature of the underlying transaction, our management believes that
we have corrected this material weakness.

         During the period covered by this report, there have not been any
significant changes in our internal controls or, to our knowledge, in other
factors that could significantly affect our internal controls.

ITEM 8B. OTHER INFORMATION

         None.

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

DIRECTORS AND EXECUTIVE OFFICERS

         NAME                  AGE      POSITIONS

         Cery B. Perle         43       President, CEO and Chairman of the Board
         Edward L. Hagan       33       Secretary and director
         Richard Galterio      41       Director

         Cery B. Perle. Mr. Perle has served as our President, CEO and Chairman
since February 2004. Mr. Perle co-founded Grass Roots in June of 2002. Mr. Perle
has experience in numerous start-up ventures. A primary focus of Mr. Perle's
experience has been on the sales and marketing of innovative ideas and products.
Prior to Grass Roots, from 2001 to 2002, he was director of Crystal Consulting
Group, a business-consulting firm. From 2000 to 2001, he was engaged as a
consultant to Rxalternative.com, an alternative healthcare web site. From 1994
to 1998, he was President and Chief Executive Officer of Waldron & Co., a
California-based registered broker-dealer, where he established four branch
offices in addition to the West Coast based corporate office of the investment
firm.

                                       32
<PAGE>

         In September 1998, the Securities and Exchange Commission commenced a
civil action against Mr. Perle and Waldron & Co., a broker-dealer registered
with the Commission. The civil action alleged that Mr. Perle and Waldron
artificially raised the market price of Shopping.com, an Internet retailer whose
initial public offering was underwritten by Waldron & Co. In February 1999, the
United States District Court for the Central District of California, acting upon
the Commission's allegations, entered a permanent injunction against Mr. Perle,
enjoining him from violating Section 17(a) of the Securities Act of 1933 and
Sections 10(b) and 15(c)(1) of the Securities Exchange Act of 1934 and Rules
10b-5 and 15cl-2 thereunder, and required Mr. Perle to pay a $110,000 civil
penalty. As a result of the February 1999 injunction, in October 1999, Mr. Perle
was barred from association with any broker-dealer. In June 2001, Mr. Perle was
barred by the National Association of Securities Dealers, Inc. from any
association with any NASD member in any capacity. The sanction was based upon
findings that Mr. Perle received $30,000 of checks from customers for the
purchase of Shopping.com IPO stock prior to the IPO registration statement being
declared effective by the Commission. In April 1998, a class action lawsuit was
filed against Shopping.com, Mr. Perle and Waldron in the United States District
Court for the Central District of California. Mr. Perle filed for personal
bankruptcy in 2001 for which a final decree was granted in March 2002. In
January 2001 the U.S. Department of Labor brought an action against Waldron &
Co. and Mr. Perle in the U.S. District Court for the Central District of
California for violations of the Employee Retirement Income Security Act of 1974
(ERISA) alleging that violations of ERISA occurred when Waldron & Co. and Mr.
Perle failed to forward contributions of approximately $50,000 withheld from
employee paychecks to Waldron & Co.'s 401(k) Plan. Among other relief's, the
suit sought to permanently bar Mr. Perle from serving as a fiduciary of or
service provider to any plan covered by ERISA. Although Mr. Perle was never
formally notified of the outcome of the action, he has assumed that such an
order was issued.

         Edward L. Hagan. Mr. Hagan has been a member of our Board of Directors
and our Secretary since February 2004. Mr. Hagan co-founded Grass Roots in June
2002 and has been a director and secretary of that company since inception, and
served as Chief Financial Officer from inception through September 2, 2002.
Since 1990, he has owned and managed Hagan Farms Partnership, a commercial
agricultural company.

         Richard Galterio. Mr. Galterio has been a member of our Board of
Directors since July 2003. Since September 2004 he has been Chief Operating
Officer, Chief Compliance Officer and Secretary of Skyebanc, Inc., an NASD
member firm. From October 1998 until September 2004 he was Managing Director of
Private Equity for vFinance, Inc., an investment banking firm which is a member
of the NASD, a position he had held since the acquisition in September 1998 by
vFinance, Inc. of First Level Capital, a NASD member firm which he co-founded in
1998. Mr. Galterio is also a member of the Board of Directors of ResQnet. During
his tenure at First Level Capital, Mr. Galterio served as Compliance and
Operations Director. Mr. Galterio was employed by Commonwealth Associates, an
NASD member firm, from 1991 to 1998, initially in the capacity as a registered
representative (1991 to 1993) and then as Managing Director (1994 to 1998) where
his responsibilities included branch management and compliance. From 1986 to
1991, Mr. Galterio was Director of Research for Barry Leeds and Associates, a
firm specializing in sales tracking research for the banking industry. Mr.
Galterio received a B.S. in Business Management with honors from Villanova
University. Mr. Galterio holds Series 27, 7 and 55 licenses from the NASD.

         There are no family relationships between any of the executive officers
and directors. Each director is elected at our annual meeting of stockholders
and holds office until the next annual meeting of stockholders, or until his
successor is elected and qualified.

                                       33
<PAGE>

DIRECTOR COMPENSATION

         Members of our Board of Directors do not receive cash compensation for
their services as directors but are reimbursed for their reasonable expenses for
attending board and board committee meetings. In addition, from time to time we
may also grant our Board members stock options as compensation for their
services to us. During fiscal 2005, we granted each of Messrs. Hagan and
Galterio options to purchase 500,000 shares of our common stock with an exercise
price of $0.45 per share.

COMMITTEES OF THE BOARD OF DIRECTORS AND AUDIT COMMITTEE FINANCIAL EXPERT

         Our Board of Directors has not established any committees, including an
Audit Committee or a Nominating Committee. The functions of those committees are
being undertaken by the entire board as a whole. At such time as we expand our
Board of Directors, we intend to establish an Audit Committee of our Board of
Directors. We are not currently subject to any law, rule or regulation, however,
requiring that all or any portion of our Board of Directors include
"independent" directors, nor are we required to establish or maintain an Audit
Committee or other committee of our Board of Directors.

         None of our directors is an "audit committee financial expert" within
the meaning of Item 401(e) of Regulation S-B. In general, an "audit committee
financial expert" is an individual member of the audit committee or Board of
Directors who:

         o  understands generally accepted accounting principles and financial
            statements,

         o  is able to assess the general application of such principles in
            connection with accounting for estimates, accruals and reserves,

         o  has experience preparing, auditing, analyzing or evaluating
            financial statements comparable to the breadth and complexity to our
            financial statements,

         o  understands internal controls over financial reporting, and

         o  understands audit committee functions.

CODE OF BUSINESS CONDUCT AND ETHICS

         We have adopted a Code of Business Conduct and Ethics to provide
guiding principles to all of our employees. Our Code of Business Conduct and
Ethics does not cover every issue that may arise, but it sets out basic
principles to guide our employees and provides that all of our employees must
conduct themselves accordingly and seek to avoid even the appearance of improper
behavior. Any employee which violates our Code of Business Conduct and Ethics
will be subject to disciplinary action, up to an including termination of his or
her employment. Generally, our Code of Business Conduct and Ethics provides
guidelines regarding:

         o  compliance with laws, rules and regulations,

         o  conflicts of interest,

         o  insider trading,

                                       34
<PAGE>

         o  corporate opportunities,

         o  competition and fair dealing,

         o  discrimination and harassment,

         o  health and safety,

         o  record keeping,

         o  confidentiality,

         o  protection and proper use of company assets,

         o  payments to government personnel,

         o  waivers of the Code of Business Conduct and Ethics,

         o  reporting any illegal or unethical behavior, and

         o  compliance procedures.

         In addition, we have also adopted a Code of Ethics for our Chief
Executive Officer and Senior Financial Officers. In addition to our Code of
Business Conduct and Ethics, our CEO and senior financial officers are also
subject to specific policies regarding:

         o  disclosures made in our filings with the SEC,

         o  deficiencies in internal controls or fraud involving management or
            other employees who have a significant role in our financial
            reporting, disclosure or internal controls,

         o  conflicts of interests, and

         o  knowledge of material violations of securities or other laws, rules
            or regulations to which we are subject.

         A copy of our Code of Business Conduct and Ethics has been filed with
the Securities and Exchange Commission as an exhibit to this annual report. We
will provide a copy, without charge, to any person desiring a copy of the Code
of Business Conduct and Ethics, by written request to 73061 El Paso, Suite 202,
Palm Desert, CA 92260.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to us under Rule 16a-3(d) of the Securities Exchange Act during the
fiscal year ended December 31, 2005 and Forms 5 and amendments thereto furnished
to us with respect to the fiscal year ended December 31, 2005, as well as any
written representation from a reporting person that no Form 5 is required, we
are aware that the above Board members failed to file on a timely basis, as
disclosed in the aforementioned Forms, reports required by Section 16(a) of the
Securities Exchange Act during the fiscal year ended December 31, 2005 except
Messrs. Galterio and Hagan who failed to timely report the granting of stock
options in July 2005..

                                       35
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

         The following table summarizes all compensation recorded by us in each
of the last three fiscal years for our Chief Executive Officer and each other
executive officers serving as such (the "Named Executive Officers") whose annual
compensation exceeded $100,000.
<TABLE>
                                          SUMMARY COMPENSATION TABLE
<CAPTION>
                               Annual Compensation                        Long-Term Compensation
                      -------------------------------------    ---------------------------------------------
                                                                           Securities
                                               Other Annual    Restricted  Underlying  LTIP     All Other
Name and Principal    Fiscal  Salary    Bonus  Compensation    Stock        Options/   Payouts  Compensation
Position              Year    ($)       ($)    ($)             Awards ($)   SARs (#)   ($)      ($)
------------------    ----    --------  -----  ------------    ----------  ----------  -------  ------------
<S>                   <C>     <C>       <C>      <C>               <C>       <C>         <C>      <C>
Cery B. Perle(1)      2005    $221,500  $   0    $14,400           $0        649,822     $0       $      0
                      2004    $221,500  $   0    $     0           $0              0     $0       $      0

Soloman Lam (2)       2004    $      0  $   0    $     0           $0              0     $0       $      0
                      2003    $      0  $   0    $     0           $0              0     $0       $      0

Clint Beckwith (3)    2004    $      0  $   0    $     0           $0              0     $0       $      0
                      2003    $      0  $   0    $     0           $0              0     $0       $216,400
</TABLE>
_________

(1) Mr. Perle has served as our President and Chief Executive Officer since
    February 2004.

(2) Mr. Lam served as our President from 2000 until February 2004.

(3) Mr. Beckwith served as our Vice President of Investor Relations and was a
    member of our Board of Directors until February 2004. In February 2003 we
    issued Mr. Beckwith 90,000 shares of our common stock as compensation for
    his services for the period of April 2000 through December 2003 and as
    repayment to a loan to us in the amount of $60,000. We valued these shares
    at $360,000, of which $216,400 was applicable to compensation.

EMPLOYMENT AGREEMENTS

         On January 1, 2003 we entered into a two-year employment agreement with
Mr. Cery B. Perle to serve as our president. The agreement automatically renewed
for an additional two-year term upon its expiration, with a 10% increase in his
base salary. Under the terms of this agreement, we currently pay Mr. Perle an
annual base salary of $239,800. We initially granted him an option to purchase
2,000,000 shares of our common stock at an exercise price of $0.01 per share as
additional compensation. This option vested ratably over the two-year term of
the agreement. Upon the renewal of the agreement in January 2006 we granted him
options to purchase an additional 2,000,000 shares of common stock with an
exercise price of $0.45 per share, which vest ratably over a 24-month period.
The agreement also provides for an automobile allowance of $1,200 per month,
paid vacation, fringe benefits commensurate with his duties and responsibilities
and benefits in the event of disability, as well as containing certain
non-disclosure and non-competition provisions. Under the terms of the agreement,
we may terminate Mr. Perle's employment either with or without cause. If the
agreement is terminated by us without good cause, or by Mr. Perle with cause, we
would be obligated to pay him his base salary though the end of the term of the
agreement, continue his benefits through the end of the term and all options
would continue to vest during the remaining period of the term. To the extent
that Mr. Perle is terminated for cause, or he voluntarily resigns, no severance
benefits will be paid.

                                       36
<PAGE>

STOCK OPTION INFORMATION

         The following table sets forth certain information with respect to
stock options granted in fiscal 2005 to the Named Executive Officers.

                      OPTION/SAR GRANTS IN LAST FISCAL YEAR

                                   % OF TOTAL
               NUMBER OF SHARES    OPTIONS  GRANTED  EXERCISE OR
               UNDERLYING OPTIONS  TO EMPLOYEES IN   BASE PRICE    EXPRIRATION
NAME           GRANTED (#)         FISCAL YEAR       ($/SH)        DATE
-------------  ------------------  ----------------  ------------  -----------
Cery B. Perle        649,822            649,822      $0.001-$0.45      2010

<TABLE>
                       AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                                  AND FY-END OPTION/SAR VALUES
<CAPTION>
                                           NO. OF SECURITIES
                                         UNDERLYING UNEXERCISED         VALUE OF UNEXERCISED
                 SHARES                       OPTIONS AT             IN-THE-MONEY OPTIONS AT
                ACQUIRED                  DECEMBER 31, 2005             DECEMBER 31, 2005
                   ON       VALUE     ---------------------------   ---------------------------
NAME            EXERCISE   REALIZED   EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
-------------  ---------   --------   -----------   -------------   -----------   -------------
<S>                <C>        <C>     <C>                <C>        <C>                <C>
Cery B. Perle      0          0       1,649,822          0          $ 420,925          0
</TABLE>

2002 STOCK PLAN

         On August 9, 2002, our board of directors authorized, and holders of a
majority of our outstanding common stock approved and adopted, our 2002 Stock
Plan covering 1,000,000 shares of common stock. On April 20, 2004, the plan was
amended to increase the number of shares covered by the plan to 12,000,000
shares to accommodate grants previously provided under the Grass Roots
Communications, Inc. compensation program.

         The purpose of the plan is to encourage stock ownership by our
officers, directors, key employees and consultants, and to give such persons a
greater personal interest in the success of our business and an added incentive
to continue to advance and contribute to us. Our board of directors, or a
committee of the board, will administer the Plan including, without limitation,
the selection of the persons who will be awarded stock grants and granted
options, the type of options to be granted, the number of shares subject to each
option and the exercise price.

         Plan options may either be options qualifying as incentive stock
options under Section 422 of the Internal Revenue Code of 1986, as amended, or
non-qualified options. In addition, the plan allows for the inclusion of a
reload option provision, which permits an eligible person to pay the exercise
price of the option with shares of common stock owned by the eligible person and
receive a new option to purchase shares of common stock equal in number to the
tendered shares. Furthermore, compensatory stock amounts may also be issued. Any
incentive option granted under the plan must provide for an exercise price of
not less than 100% of the fair market value of the underlying shares on the date
of grant, but the exercise price of any incentive option granted to an eligible
employee owning more than 10% of our outstanding common stock must not be less
than 110% of fair market value on the date of the grant. The term of each plan
option and the manner in which it may be exercised is determined by the board of
directors or the committee, provided that no option may be exercisable more than
10 years after the date of its grant and, in the case of an incentive option
granted to an eligible employee owning more than 10% of the common stock, no
more than five years after the date of the grant.

                                       37
<PAGE>

         Eligibility

         Our officers, directors, key employees and consultants are eligible to
receive stock grants and non-qualified options under the plan. Only our
employees are eligible to receive incentive options.

         Administration

         The plan will be administered by our board of directors or an
underlying committee. The board of directors or the committee determines from
time to time those of our officers, directors, key employees and consultants to
whom stock grants or plan options are to be granted, the terms and provisions of
the respective option agreements, the time or times at which such options shall
be granted, the type of options to be granted, the dates such plan options
become exercisable, the number of shares subject to each option, the purchase
price of such shares and the form of payment of such purchase price. All other
questions relating to the administration of the plan, and the interpretation of
the provisions thereof and of the related option agreements, are resolved by the
board of directors or committee.

         Shares Subject to Awards

         We have currently reserved 12,000,000 of our authorized but unissued
shares of common stock for issuance under the plan, and a maximum of 12,000,000
shares may be issued, unless the plan is subsequently amended, subject to
adjustment in the event of certain changes in our capitalization, without
further action by our board of directors and stockholders, as required. Subject
to the limitation on the aggregate number of shares issuable under the plan,
there is no maximum or minimum number of shares as to which a stock grant or
plan option may be granted to any person. Shares used for stock grants and plan
options may be authorized and unissued shares or shares reacquired by us,
including shares purchased in the open market. Shares covered by plan options
which terminate unexercised will again become available for grant as additional
options, without decreasing the maximum number of shares issuable under the
plan, although such shares may also be used by us for other purposes.

         The plan provides that, if our outstanding shares are increased,
decreased, exchanged or otherwise adjusted due to a share dividend, forward or
reverse share split, recapitalization, reorganization, merger, consolidation,
combination or exchange of shares, an appropriate and proportionate adjustment
shall be made in the number or kind of shares subject to the plan or subject to
unexercised options and in the purchase price per share under such options. Any
adjustment, however, does not change the total purchase price payable for the
shares subject to outstanding options. In the event of our proposed dissolution
or liquidation, a proposed sale of all or substantially all of our assets, a
merger or tender offer for our shares of common stock, the board of directors
may declare that each option granted under the Plan shall terminate as of a date
to be fixed by the board of directors; provided that not less than 30 days
written notice of the date so fixed shall be given to each participant holding
an option, and each such participant shall have the right, during the period of
30 days preceding such termination, to exercise the participant's option, in
whole or in part, including as to options not otherwise exercisable.

         Terms of Exercise

         The plan provides that the options granted thereunder shall be
exercisable from time to time in whole or in part, unless otherwise specified by
the committee or by the board of directors. The plan provides that, with respect
to incentive stock options, the aggregate fair market value (determined as of
the time the option is granted) of the shares of common stock, with respect to
which incentive stock options are first exercisable by any option holder during
any calendar year shall not exceed $100,000.

                                       38
<PAGE>

         Exercise Price

         The purchase price for shares subject to incentive stock options must
be at least 100% of the fair market value of our common stock on the date the
option is granted, except that the purchase price must be at least 110% of the
fair market value in the case of an incentive option granted to a person who is
a "10% stockholder." A "10% stockholder" is a person who owns, within the
meaning of Section 422(b)(6) of the Internal Revenue Code of 1986, at the time
the incentive option is granted, shares possessing more than 10% of the total
combined voting power of all classes of our outstanding shares. The plan
provides that fair market value shall be determined by the board of directors or
the committee in accordance with procedures which it may from time to time
establish. If the purchase price is paid with consideration other than cash, the
Board or the Committee shall determine the fair value of such consideration to
us in monetary terms.

         The exercise price of non-qualified options shall be determined by the
board of directors or the committee, but shall not be less than the par value of
our common stock on the date the option is granted. The per share purchase price
of shares issuable upon exercise of a plan option may be adjusted in the event
of certain changes in our capitalization, but no such adjustment shall change
the total purchase price payable upon the exercise in full of options granted
under the plan.

         Manner of Exercise

         Plan options are exercisable by delivery of written notice to us
stating the number of shares with respect to which the option is being
exercised, together with full payment of the purchase price therefor. Payment
shall be in cash, checks, certified or bank cashier's checks, promissory notes
secured by the shares issued through exercise of the related options, shares of
common stock or in such other form or combination of forms which shall be
acceptable to the board of directors or the committee, provided that any loan or
guarantee by us of the purchase price may only be made upon resolution of the
board of directors or committee that such loan or guarantee is reasonably
expected to benefit us.

         Option Period

         All incentive stock options shall expire on or before the tenth
anniversary of the date the option is granted except as limited above. However,
in the case of incentive stock options granted to an eligible employee owning
more than 10% of the common stock, these options will expire no later than five
years after the date of the grant. Non-qualified options shall expire 10 years
and one day from the date of grant unless otherwise provided under the terms of
the option grant.

         Termination

         All plan options are non-assignable and nontransferable, except by will
or by the laws of descent and distribution, and during the lifetime of the
optionee, may be exercised only by such optionee. If an optionee shall die while
our employee or within three months after termination of employment by us
because of disability, or retirement or otherwise, such options may be
exercised, to the extent that the optionee shall have been entitled to do so on
the date of death or termination of employment, by the person or persons to whom
the optionee's right under the option pass by will or applicable law, or if no
such person has such right, by his executors or administrators.

                                       39
<PAGE>

         In the event of termination of employment because of death while an
employee or because of disability, the optionee's options may be exercised not
later than the expiration date specified in the option or one year after the
optionee's death, whichever date is earlier, or in the event of termination of
employment because of retirement or otherwise, not later than the expiration
date specified in the option or one year after the optionee's death, whichever
date is earlier.

         If an optionee's employment by us terminates because of disability and
such optionee has not died within the following three months, the options may be
exercised, to the extent that the optionee shall have been entitled to do so at
the date of the termination of employment, at any time, or from time to time,
but not later than the expiration date specified in the option or one year after
termination of employment, whichever date is earlier.

         If an optionee's employment shall terminate for any reason other than
death or disability, optionee may exercise the options to the same extent that
the options were exercisable on the date of termination, for up to three months
following such termination, or on or before the expiration date of the options,
whichever occurs first. In the event that the optionee was not entitled to
exercise the options at the date of termination or if the optionee does not
exercise such options (which were then exercisable) within the time specified
herein, the options shall terminate.

         If an optionee's employment shall terminate for any reason other than
death, disability or retirement, all right to exercise the option shall
terminate not later than 90 days following the date of such termination of
employment.

         If an optionee's employment with us is terminated for any reason
whatsoever, and within three months after the date thereof optionee either (i)
accepts employment with any competitor of, or otherwise engages in competition
with us, or (ii) discloses to anyone outside our company or uses any
confidential information or material of our company in violation of our policies
or any agreement between the optionee and our company, the committee, in its
sole discretion, may terminate any outstanding stock option and may require
optionee to return to us the economic value of any award that was realized or
obtained by optionee at any time during the period beginning on that date that
is six months prior to the date optionee's employment with us is terminated.

         The committee may, if an optionee's employment with us is terminated
for cause, annul any award granted under this plan to such employee and, in such
event, the committee, in its sole discretion, may require optionee to return to
us the economic value any award that was realized or obtained by optionee at any
time during the period beginning on that date that is six months prior to the
date optionee's employment with us is terminated.

         Modification and Termination of Plan

         The board of directors or committee may amend, suspend or terminate the
plan at any time. However, no such action may prejudice the rights of any holder
of a stock grant or optionee who has prior thereto been granted options under
the plan. Further, no amendment to this plan which has the effect of (a)
increasing the aggregate number of shares subject to this plan (except for
adjustments due to changes in our capitalization), or (b) changing the
definition of "Eligible Person" under the plan, may be effective unless and
until approved by our stockholders in the same manner as approval of this plan
is required. Any such termination of the plan shall not affect the validity of
any stock grants or options previously granted thereunder. Unless the plan shall
theretofore have been suspended or terminated by the board of directors, the
plan will terminate on August 9, 2012.

                                       40
<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

         At March 24, 2006, we had 42,768,582 shares of our common stock issued
and outstanding. The following table sets forth information regarding the
beneficial ownership of our common stock as of March 24, 2006 by:

         o  each person known by us to be the beneficial owner of more than 5%
            of our common stock;

         o  each of our directors;

         o  each of our executive officers; and

         o  our executive officers, directors and director nominees as a group.

         Unless otherwise indicated, the business address of each person listed
is in care of at 73061 El Paso, Suite 202, Palm Desert, California 92260. The
percentages in the table have been calculated on the basis of treating as
outstanding for a particular person, all shares of our common stock outstanding
on that date and all shares of our common stock issuable to that holder in the
event of exercise of outstanding options, warrants, rights or conversion
privileges owned by that person at that date which are exercisable within 60
days of that date. Except as otherwise indicated, the persons listed below have
sole voting and investment power with respect to all shares of our common stock
owned by them, except to the extent that power may be shared with a spouse.

Name of                                      Amount and Nature of     Percentage
Beneficial Owner                             Beneficial Ownership      of Class
----------------                             --------------------      --------

Cery B. Perle(1,6) ..........................      7,519,665             17.0%
Edward L. Hagan(2) ..........................      2,225,000              5.1%
Richard Galterio(3) .........................        710,000              1.6%
All officers and directors as
 a group (three persons)(1,2,3,6) ...........     10,454,665             23.0%
First Capital Holdings International, Inc.(4)      2,806,613              6.5%
Langley Park Investment Trust PLC(5) ........      5,882,352             13.8%
Preston & Price, S.A.(6) ....................      1,500,000              3.5%
Jenell DelRio (Fontes)(7) ...................      2,497,294              5.6%
Curtis Lawler(8) ............................      2,344,108              5.3%
_________

(1) The number of shares beneficially owned by Mr. Perle includes:

         o  436,500 shares held in trust for his minor children,

         o  1,500,000 shares of common stock held by Preston & Price, S.A., over
            which Mr. Perle can exercise voting rights. See footnote 6 below,

         o  options to purchase 1,000,000 shares of common stock with an
            exercise price of $0.02 per share held by Mr. Perle, and

         o  options to purchase 416,665 shares of common stock with an exercise
            price of $0.45 per share held by Mr. Perle.

         The shares beneficially owned by Mr. Perle excludes options to purchase
1,583,335 shares of our common stock with an exercise price of $0.45 per share
which have not yet vested and securities owned by his fiancee, Jenell Del Rio
(Fontes), over which he disclaims any beneficial ownership. See footnote 8
below.

                                       41
<PAGE>

(2) The number of shares beneficially owned by Mr. Hagan includes:

         o  360,000 shares of our common stock held by his wife Stephanie,

         o  250,000 shares of our common stock held by his daughter, Makena
            Hagan,

         o  30,000 shares held by his son, Edward, and

         o  options to purchase 600,000 shares of our common stock at exercise
            prices ranging from $0.45 to $1.75 per share.

         The number of shares beneficially owned by Mr. Hagan excludes 261,364
shares of common stock held by the Sandra L. Hagan Irrevocable Trust over which
he disclaims beneficial ownership..

(3) The number of shares beneficially owned by Mr. Galterio includes options to
purchase 500,000 shares of our common stock exercisable at $0.45 per share,
options to purchase 100,000 shares of our common stock exercisable at $1.75 per
share and warrants to purchase 110,000 shares of our common stock exercisable at
$0.375 per share.

(4) The number of shares beneficially owned by First Capital Holdings
International, Inc. includes warrants to purchase 281,250 shares of our common
stock exercisable at $1.49 per share and 58,220 shares of our common stock which
we are obligated to issue as a result of our failure to timely file a
registration statement. Mr. Andri Athanasiou is the control person of First
Capital Holdings International, Inc.

(5) Messrs. Alstair Rae and Harry Pearl are the control persons of Langley Park
Investments, PLC.

(6) Mr. Cery B. Perle holds voting control over the shares owned beneficially by
Preston & Price, S.A. See footnote 1 above. Mr. Peter Grut is the control person
of Preston & Price, S.A.

(7) Includes 500,000 shares of our common stock issuable upon the exercise of
options with an exercise price of $0.02 per share, 733,333 shares of common
stock issuable upon the conversion of the $275,000 principal amount 12.5%
convertible promissory debenture issued to her in March 2005 based upon a
conversion price of $0.375 per share together with 256,667 shares of common
stock issuable upon the exercise of a warrant with an exercise price of $0.375
per share issued in conjunction with the debenture. Ms. Fontes, an employee of
our company, is Mr. Perle's fiancee. See footnote 1 above.

(8) Includes 800,000 shares of common stock issuable upon the conversion of the
$300,000 principal amount 12.5% convertible promissory debenture issued to her
in March 2005 based upon a conversion price of $0.375 per share together with
280,000 shares of common stock issuable upon the exercise of a warrant with an
exercise price of $0.375 per share issued in conjunction with the debenture.

                                       42
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         During fiscal 2003, we advanced $23,400 to Mr. Cery B. Perle, our
president, and during fiscal 2004 we paid $113,054 of personal expenses on his
behalf. These amounts, which were advanced to Mr. Perle or paid on his behalf
when Grass Roots was a privately held company, were repaid in full by Mr. Perle
prior to December 31, 2004.

         Mr. Rich Galterio, a member of our Board of Directors, was employed by
vFinance, Inc., an affiliate of vFinance Investments, Inc. vFinance Investments,
Inc. acted as placement agent for us in the sale of our 8% promissory notes
between October 2003 and March 2004 and the sale of our 10% secured notes
between May and August 2004.

         On March 31, 2005, we sold $575,000 principal amount 12.5% convertible
promissory notes to two accredited investors and issued these investors four
year common stock purchase warrants to purchase an aggregate of 536,667 shares
of our common stock in a private transaction exempt from registration under the
Securities Act of 1933, as amended, in reliance on an exemption provided by
Section 4(2) of that act. The purchasers included Ms. Jenell Fontes, an employee
of our company and the fiancee of Cery B. Perle our CEO and President, as well
as Mr. Curtis Lawler, a principal stockholder of our company. Mr. Perle
disclaims beneficial ownership of the notes and underlying securities owned by
Ms. Fontes.

ITEM 13. EXHIBITS

         The following documents are filed as a part of this report or are
incorporated by reference to previous filings, if so indicated:

EXHIBIT NO.                       DESCRIPTION
-----------                       -----------

2.1      Acquisition Agreement and Plan of Merger(3)

2.2      Agreement and Plan of Merger(4)

3.1      Certificate of Incorporation(1)

3.2      By-Laws (1)

3.3      Certificate of Incorporation, as amended(2)

3.4      Certificate of Amendment to the Certificate of Incorporation(5)

3.5      Certificate of Amendment to the Certificate of Incorporation (9)

4.1      Form of 8% promissory note (12)

4.2      Form of 10% secured note (9)

4.3      Form of Investor Warrant to Purchase Common Stock issued with 8%
         promissory note (12)

4.4      Form of Common Stock Purchase Warrant issued with 10% secured note (12)

4.5      Form of Common Stock Purchase Warrant issued to Robinson Reed Inc. and
         First Capital Holdings International, Inc.(12)

                                       43
<PAGE>

4.6      Form of $0.75 Investor Warrant (12)

4.7      $275,000 principal amount 12.5% convertible promissory debenture dated
         March 31, 2005 issued to Jenell Fontes (11).

4.8      $300,000 principal amount 12.5% convertible promissory debenture dated
         March 31, 2005 issued to Curtis Lawler (11)

4.9      Common stock purchase warrant issued March 31, 2005 to purchase 256,667
         shares of common stock issued to Jenell Fontes (11)

4.10     Common stock purchase warrant issued March 31, 2005 to purchase 280,000
         shares of common stock issued to Curtis Lawler (11)

4.11     Form of $1.30 common stock purchase warrant (14)

10.1     2002 Stock Option and Stock Award Plan (7)

10.2     Lease for principal executive offices (12)

10.3     Stock Purchase Agreement with Langley Park Investments PLC (10)

10.4     Escrow Agreement with Langley Park (12)

10.5     Employment Agreement with Cery B. Perle (12)

10.6     Common Stock and Warrant Purchase Agreement dated as of August 27, 2004
         (10)

10.7     Registration Rights Agreement dated as of August 27, 2004 (10)

10.8     Amendment No. 1 to Common Stock and Warrant Purchase Agreement dated as
         of November 2, 2004 (10)

10.9     Settlement Agreement and Release between Newport International Group,
         Inc., Robinson Reed, Inc., First Capital Holdings International, Inc.,
         Continental Blue Limited and E-Holdings, Inc. (12)

10.10    Finder's Fee Agreement with E-Holdings, Inc. (12)

10.11    Supplier Agreement with CompUSA (13)

10.12    Form of Settlement Agreement between Newport International Group, Inc,
         Robinson Reed, Inc. and First Capital Holdings International, Inc. (15)

14.1     Code of Business Conduct and Ethics and Code of Ethics for the Chief
         Executive Officer and Senior Financial Officers (14)

21.1     Subsidiaries of the registrant (12)

23.1     Consent of Sherb & Co. LLP *

31.1     Section 302 Certification of Chief Executive Officer *

31.2     Section 302 Certification of Principal Accounting Officer *

32.1     Section 906 Certification of Chief Executive Officer *

                                       44
<PAGE>

__________

*        filed herewith

(1)      Incorporated by reference to the Form 10-SB as filed with the SEC on
         May 10, 2000.

(2)      Incorporated by reference to the Report on Form 8-K as filed with the
         SEC on February 5, 2001.

(3)      Incorporated by reference to the Report on Form 8-K filed with the SEC
         on November 6, 2000.

(4)      Incorporated by reference to the Report on Form 8-K filed with the SEC
         on February 13, 2004.

(5)      Incorporated by reference to the definitive Information Statement on
         Schedule 14C as filed with the SEC on November 14, 2003.

(6)      Incorporated by reference to the Report on Form 8-K as filed with the
         SEC on June 3, 2003.

(7)      Incorporated by reference to the registration statement on Form S-8 as
         filed with the SEC on August 8, 2004.


(8)      Incorporated by reference to the Report on Form 8-K as filed with the
         SEC on December 16, 2004.

(9)      Incorporated by reference to the quarterly report on Form 10-QSB for
         the three and six months ended June 30, 2004.

(10)     Incorporated by reference to the quarterly report on Form 10-QSB for
         the three and nine months ended September 30, 2004.

(11)     Incorporated by reference to the Report on Form 8-K as filed with the
         SEC on May 5, 2005.

(12)     Incorporated by reference to the registration statement on Form SB-2,
         as amended, file number 333-123096, as declared effective on May 19,
         2005.

(13)     Incorporated by reference to the Quarterly Report on Form 10-QSB for
         the three and six months ended June 30, 2005. Portions of this
         agreement have been omitted and separately filed with the Securities
         and Exchange Commission with a request for confidential treatment.

(14)     Incorporated by reference to the registration statement on Form SB-2,
         SEC file number 333-128980, as amended, as declared effective by the
         SEC on November 14, 2005.

(15)     Incorporated by reference to the Report on Form 8-K as filed with the
         SEC on December 15, 2005.

                                       45
<PAGE>

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

         Sherb & Co, LLP served as our independent registered public accounting
firm for fiscal 2005 and fiscal 2004. The following table shows the fees that
were billed for the audit and other services provided by the firm for fiscal
2005 and 2004.

                             Fiscal 2005     Fiscal 2004
                             -----------     -----------

Audit Fees ...........         $57,870         $66,950
Audit-Related Fees ...               0               0
Tax Fees .............               0               0
All Other Fees .......               0               0
                               -------         -------
         Total .......         $57,870         $66,950
                               =======         =======

         Audit Fees -- This category includes the audit of our annual financial
statements, review of financial statements included in our Form 10-QSB Quarterly
Reports and services that are normally provided by the independent auditors in
connection with engagements for those fiscal years. This category also includes
advice on audit and accounting matters that arose during, or as a result of, the
audit or the review of interim financial statements.

         Audit-Related Fees -- This category consists of assurance and related
services by the independent auditors that are reasonably related to the
performance of the audit or review of our financial statements and are not
reported above under "Audit Fees." The services for the fees disclosed under
this category include consultation regarding our correspondence with the SEC and
other accounting consulting.

         Tax Fees -- This category consists of professional services rendered by
our independent auditors for tax compliance and tax advice. The services for the
fees disclosed under this category include tax return preparation and technical
tax advice.

         All Other Fees -- This category consists of fees for other
miscellaneous items.

         Our Board of Directors has adopted a procedure for pre-approval of all
fees charged by the our independent auditors. Under the procedure, the Board
approves the engagement letter with respect to audit, tax and review services.
Other fees are subject to pre-approval by the Board, or, in the period between
meetings, by a designated member of Board. Any such approval by the designated
member is disclosed to the entire Board at the next meeting. The audit and tax
fees paid to the auditors with respect to fiscal year 2005 were pre-approved by
the entire Board of Directors.

                                       46
<PAGE>

                                   SIGNATURES

         In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.


                                  Newport International Group, Inc.


April 14, 2006                    By: /s/ Cery B. Perle
                                      -----------------
                                      Cery B. Perle, CEO and President,
                                      principal executive officer and
                                      principal financial and accounting officer


         In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.


     Signature                          Title                          Date

/s/ Cery B. Perle         President, Chief Executive Officer,     April 14, 2006
-----------------
Cery B. Perle             principal executive officer and
                          principal accounting officer

/s/ Edward L. Hagan       Secretary and director                  April 14, 2006
--------------------
Edward L. Hagan

/s/ Richard Galterio      Director                                April 14, 2006
--------------------
Richard Galterio


                                       47
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC

                          INDEX TO FINANCIAL STATEMENTS

                                                                         Page
                                                                         ----

REPORTS OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTANTS .......   F-2

FINANCIAL STATEMENTS

Consolidated Balance Sheet ...........................................   F-3

Consolidated Statements of Operations ................................   F-4

Consolidated Statements of Stockholders' Deficit .....................   F-5

Consolidated Statements of Cash Flows ................................   F-6

Notes of Consolidated Financial Statements ...........................F-7 - F-31



                                       F-1
<PAGE>

                                         1900 NW Corporate Blvd., Suite 210 East
                                                       Boca Raton, Florida 33431
                                                               Tel. 561-886-4200
                                                               Fax. 561-886-3330
                                                        e-mail:info@sherbcpa.com

SHERB & CO., LLP                                 Offices in New York and Florida
________________________________________________________________________________

Certified Public Accountants


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
Newport International Group, Inc.


We have audited the accompanying consolidated balance sheet of Newport
International Group, Inc. and its Subsidiary as of December 31, 2005, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 2005 and 2004. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amount and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Newport
International Group, Inc. and Subsidiaries as of December 31, 2005, and the
results of their operations and their cash flows for the years ended December
31, 2005 and 2004, in conformity with accounting principles generally accepted
in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company had net losses, cash used in
operations and working capital deficit of $7,831,803, $4,098,271 and $6,875,701
respectively, for the year ended December 31, 2005. This raises substantial
doubt about its ability to continue as a going concern. Management's plans in
regards to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.


                                       /s/ Sherb & Co., LLP
                                       Certified Public Accountants

Boca Raton, Florida
March 31, 2006

                                       F-2
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC.
                           CONSOLIDATED BALANCE SHEET
                                December 31, 2005

                                     ASSETS
Current Assets:
  Cash ..........................................................  $    165,938
  Accounts receivable, net of provision for returns of $233,037 .             -
  Restricted cash ...............................................        60,000
                                                                   ------------
     Total current assets .......................................       225,938

  Restricted investment in marketable securities, adjusted for
   unrealized appreciation ......................................       246,430
  Property and equipment, net of accumulated depreciation
   of $118,962 ..................................................       330,586
  Deferred financing costs, net of accumulated amortization
   of $309,991 ..................................................        42,720
  Other assets ..................................................        27,983
                                                                   ------------

     Total assets ...............................................  $    873,657
                                                                   ============

                      LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities:
  Accounts payable and accrued expenses .........................  $    506,572
  Current portion of capitalized lease obligations ..............         6,932
  8% Convertible promissory notes, net of debt discount
   of $98,898 ...................................................       694,421
  Accrued interest on convertible promissory notes ..............        37,575
  Deferred revenues .............................................        12,684
  Derivative liabilities ........................................     5,828,454
  Due to stockholder ............................................        15,000
                                                                   ------------

     Total current liabilities ..................................     7,101,638

  12.5% Convertible promissory notes, net of debt discount
   of $380,147 ..................................................       269,853
  Other liabilities .............................................         6,425
                                                                   ------------

     Total liabilities ..........................................     7,377,916

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,
   38,682,726 issued and outstanding ............................        38,683
  Additional paid-in capital ....................................    28,106,370
  Accumulated deficit ...........................................   (33,081,350)
  Deferred compensation .........................................    (1,680,471)
  Accumulated comprehensive income ..............................       112,509
                                                                   ------------

     Total stockholders' deficit ................................    (6,504,259)
                                                                   ------------

     Total liabilities and stockholders' deficit ................  $    873,657
                                                                   ============

                 See Notes to Consolidated Financial Statements.

                                       F-3
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                        For the years ended
                                                            December 31,
                                                    ---------------------------
                                                        2005           2004
                                                    ------------   ------------
                                                                    (restated)
Revenues .........................................  $     23,920   $     10,583
                                                    ------------   ------------

Operating expenses:
  Research and development .......................       782,150        722,113
  Amortization of deferred compensation ..........       834,404              -
  Stock-based compensation .......................       456,631      1,081,914
  Sales, general and administrative ..............     3,915,331      5,003,994
                                                    ------------   ------------

     Total operating expenses ....................     5,988,516      6,808,021
                                                    ------------   ------------

     Operating loss ..............................    (5,964,596)    (6,797,438)
                                                    ------------   ------------

Other income (expenses)-derivative liabilities ...    11,689,725     (5,139,975)
Settlement with stockholders .....................      (730,000)    (2,775,000)
Unrealized loss-transfer of available-for-sale
 securities to trading securities ................    (4,999,263)             -
Realized loss-trading securities .................      (270,384)             -
Realized loss-restricted investment ..............    (5,777,843)             -
Interest expense .................................    (1,779,442)    (5,096,187)
                                                    ------------   ------------
     Total other expenses, net ...................    (1,867,207)   (13,011,162)

Net loss .........................................  $ (7,831,803)  $(19,808,600)
                                                    ============   ============

Transfer of previous unrealized loss on
 restricted investment ...........................     4,999,263              -
Transfer of available-for-sale securities to
 trading securities ..............................     4,999,263              -
Unrealized gain (loss)-restricted investment .....       112,509     (9,998,526)
                                                    ------------   ------------

Comprehensive income (loss) ......................  $  2,279,232   $(29,807,126)
                                                    ============   ============

Basic and diluted net loss per common share ......  $      (0.26)  $      (1.12)
                                                    ============   ============

Basic and diluted weighted average common
shares outstanding ...............................    30,311,261     17,608,577
                                                    ============   ============

                 See Notes to Consolidated Financial Statements.

                                       F-4
<PAGE>
<TABLE>
                                       NEWPORT INTERNATIONAL GROUP, INC.
                                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                            FOR THE PERIOD FROM JANUARY 1, 2004 TO DECEMBER 31, 2005

<CAPTION>

                                                       Common Stock               Additional
                                               -----------------------------       Paid-in        Accumulated
                                                  Shares           Amount          Capital          Deficit
                                               ------------     ------------     ------------     ------------
<S>                                            <C>              <C>              <C>              <C>
Balance at January 1, 2004 ................      12,304,353     $     12,304     $  4,778,411     $ (5,440,947)


Issuance of common stock pursuant to the
 merger with GrassRoots ...................       1,009,112            1,009         (779,181)               -
Cancellation of common stock  issued
 pursuant to extinghushment of debt .......        (530,000)            (530)               -                -
Issuance of common stock pursuant to the
 settlement of pre-merger obligations .....       1,365,000            1,365        4,025,385                -
Issuance of common stock pursuant to
 exercise of stock options ................         187,500              188          188,063                -
Issuance of common stock for cash, net of
 financing costs ..........................       4,500,000            4,500        2,046,531                -
Issuance of common stock in connection with
 settlement with stockholders .............       1,500,000            1,500        2,773,500                -
Issuance of common stock pursuant to a
 share exchange agreement .................       5,882,352            5,882       11,817,646                -
Issuance of common stock to pay interest on
 convertible promissory notes .............          48,921               49          108,504                -
Issuance of common stock to partially repay
 convertible promissory notes .............          40,000               40           59,960                -
Issuance of common stock to consultants and
 a reseller for services rendered .........         172,500              173          327,952                -
Issuance of common stock for failure to
 timely file registration statement .......          20,323               20           37,943                -
Cancellation of shares issued to a reseller        (100,000)            (100)               -                -
Fair value of options issued to employees .               -                -        1,081,914                -
Reclassification of equity contract to
 derivative liability .....................               -                -       (5,115,602)               -
Unrealized loss on investment in marketable
 securities ...............................               -                -                -                -
Net loss ..................................               -                -                -      (19,808,600)
                                               ------------     ------------     ------------     ------------
                                                 26,400,061     $     26,400     $ 21,351,026     $(25,249,547)
                                               ============     ============     ============     ============

Issuance of common stock pursuant to
 exercise of stock options ................         652,643              653           18,107                -
Issuance of common stock for cash, net of
 financing costs ..........................       2,779,543            2,780        1,312,859                -
Issuance of common stock in connection with
 settlement with stockholders .............       1,000,000            1,000          589,667                -
Issuance of common stock to pay interest on
 convertible promissory notes .............         237,582              237          158,808                -
Issuance of common stock to partially repay
 convertible promissory notes .............          75,610               75           48,675                -
Issuance of common stock to consultants for
 services rendered ........................       3,915,500            3,916        2,513,399                -
Issuance of common stock for failure to
 timely file registration statement .......          92,903               93          132,758                -
Issuance of common stock pursuant to
 conversion of convertible promissory notes       2,508,644            2,509          938,232                -
Issuance of common stock to partially
 satisfy accounts payable .................         259,489              259          306,375                -
Issuance of common stock pursuant to the
 exercise of warrants .....................         760,751              761          279,833                -
Fair value of options issued to employees .               -                -          456,631                -
Amortization of deferred compensation .....               -                -                -                -
Transfer of unrealized loss on restricted
 investment ...............................               -                -                -                -
Transfer of available-for-sale securities .               -                -                -                -
Unrealized gain on investment in marketable
 securities ...............................               -                -                -                -
Net loss ..................................               -                -                -       (7,831,803)
                                               ------------     ------------     ------------     ------------
                                                 38,682,726     $     38,683     $ 28,106,370     $(33,081,350)
                                               ============     ============     ============     ============
                                                                                                  (continued)

                                See Notes to Consolidated Financial Statements.

                                                      F-5A
</TABLE>
<PAGE>
<TABLE>
                                       NEWPORT INTERNATIONAL GROUP, INC.
                                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                            FOR THE PERIOD FROM JANUARY 1, 2004 TO DECEMBER 31, 2005
                                                  (continued)
<CAPTION>
                                                Accumulated
                                                   Other
                                               Comprehensive              Deferred
                                                   Loss                 Compensation                  Total
                                               -------------            ------------              ------------
<S>                                             <C>                     <C>                       <C>
Balance at January 1, 2004 ................     $         -             $          -              $   (650,232)


Issuance of common stock pursuant to the
 merger with GrassRoots ...................               -                        -                  (778,172)
Cancellation of common stock  issued
 pursuant to extinghushment of debt .......               -                        -                      (530)
Issuance of common stock pursuant to the
 settlement of pre-merger obligations .....               -                        -                 4,026,750
Issuance of common stock pursuant to
 exercise of stock options ................               -                        -                   188,251
Issuance of common stock for cash, net of
 financing costs ..........................               -                        -                 2,051,031
Issuance of common stock in connection with
 settlement with stockholders .............               -                        -                 2,775,000
Issuance of common stock pursuant to a
 share exchange agreement .................               -                        -                11,823,528
Issuance of common stock to pay interest on
 convertible promissory notes .............               -                        -                   108,553
Issuance of common stock to partially repay
 convertible promissory notes .............               -                        -                    60,000
Issuance of common stock to consultants and
 a reseller for services rendered .........               -                        -                   328,125
Issuance of common stock for failure to
 timely file registration statement .......               -                        -                    37,963
Cancellation of shares issued to a reseller               -                        -                      (100)
Fair value of options issued to employees .               -                        -                 1,081,914
Reclassification of equity contract to
 derivative liability .....................               -                        -                (5,115,602)
Unrealized loss on investment in marketable
 securities ...............................      (9,998,526)                       -                (9,998,526)
Net loss ..................................               -                        -               (19,808,600)
                                                -----------             ------------              ------------
                                                $(9,998,526)            $          -              $(13,870,647)
                                                ===========             ============              ============

Issuance of common stock pursuant to
 exercise of stock options ................               -                        -                    18,760
Issuance of common stock for cash, net of
 financing costs ..........................               -                        -                 1,315,639
Issuance of common stock in connection with
 settlement with stockholders .............               -                        -                   590,667
Issuance of common stock to pay interest on
 convertible promissory notes .............               -                        -                   159,045
Issuance of common stock to partially repay
 convertible promissory notes .............               -                        -                    48,750
Issuance of common stock to consultants for
 services rendered ........................               -               (2,503,875)                   13,440
Issuance of common stock for failure to
 timely file registration statement .......               -                        -                   132,851
Issuance of common stock pursuant to
 conversion of convertible promissory notes               -                        -                   940,741
Issuance of common stock to partially
 satisfy accounts payable .................               -                        -                   306,634
Issuance of common stock pursuant to the
 exercise of warrants .....................               -                        -                   280,594
Fair value of options issued to employees .               -                        -                   456,631
Amortization of deferred compensation .....               -                  823,404                   823,404
Transfer of unrealized loss on restricted
 investment ...............................       4,999,263                        -                 4,999,263
Transfer of available-for-sale securities .       4,999,263                        -                 4,999,263
Unrealized gain on investment in marketable
 securities ...............................         112,509                        -                   112,509
Net loss ..................................               -                        -                (7,831,803)
                                                -----------             ------------              ------------
                                                $   112,509             $ (1,680,471)             $ (6,504,259)
                                                ===========             ============              ============


                                See Notes to Consolidated Financial Statements.

                                                      F-5B
</TABLE>
<PAGE>
<TABLE>
                                       NEWPORT INTERNATIONAL GROUP, INC.
                                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                        For the years ended December 31,

<CAPTION>
                                                                                     2005             2004
                                                                                 ------------     ------------
<S>                                                                              <C>              <C>
Cash flows from operating activities:
Net loss ....................................................................    $ (7,831,803)    $(19,808,600)
Adjustments to reconcile net loss to net cash used in operating activities:
  Unrealized loss-transfer of available-for-sale securities to
   trading securities .......................................................       4,999,263                -
  Fair value of derivatives .................................................     (11,684,925)       5,459,174
  Fair value of options isued to employees ..................................         456,631        1,081,914
  Realized loss-trading securities ..........................................         270,384                -
  Realized loss- restricted investment ......................................       5,777,843                -
  Amortization of debt discount .............................................       1,339,387        1,026,557
  Amortization of deferred compensation .....................................         823,404                -
  Fair value of shares issued in connection with the settlement
   of pre-merger obligations ................................................               -        3,482,382
  Fair value of shares of common stock isued in payment of
   interest on promissory notes .............................................         159,045          108,553
  Excess of fair value of shares issued in satisfaction of accounts payable .         181,634                -
  Fair value of shares issued in connection with the failure
   to timely file the registration statement ................................         132,851           37,963
  Fair value of shares issued in connection with services rendered ..........          13,440          134,125
  Depreciation ..............................................................          90,838           94,868
  Amortization of deferred financing costs ..................................         112,316          197,675

  Fair value of shares issued in connection with settlement with stockholders         730,000        2,775,000
  Common stock issued in connection with note payable .......................               -          194,000
  Provision for returns .....................................................         233,037                -
 Changes in operating assets and liabilities:
  Other assets ..............................................................          33,318          (30,073)
  Due from related party ....................................................               -           23,400
  Accounts payable and accrued expenses .....................................         284,319          118,693
  Accounts receivable .......................................................        (233,037)               -
  Deferred revenues .........................................................          12,684                -
  Accrued interest on note receivable .......................................           1,200                -
  Accrued interest on convertible promissory notes ..........................            (100)          44,451
                                                                                 ------------     ------------

Net cash used in operating activities .......................................      (4,098,271)      (5,059,918)
                                                                                 ------------     ------------

Cash flows from investing activities:
  Cash acquired from merger .................................................               -           16,196
  Proceeds from disposition of trading securities ...........................         642,117                -
  Investment in restricted cash .............................................         (60,000)               -
  Proceeds from disposition of marketable securities ........................          68,925                -
  Proceeds from note receivable .............................................          85,000                -
  Purchase of note receivable ...............................................               -          (85,000)
  Purchase of marketable security ...........................................               -          (70,125)
  Purchases of property and equipment .......................................        (310,770)        (129,338)
                                                                                 ------------     ------------

Net cash (used in) provided by investing activities .........................         425,272         (268,267)
                                                                                 ------------     ------------

Cash flows from financing activities:
  Principal repayments on lease obligations .................................         (10,566)          (9,730)
  Proceeds from issuance of convertible promissory notes ....................         650,000        1,752,276
  Proceeds from issuance of shares ..........................................       1,528,750        6,068,982
  Advances from stockholder .................................................               -          215,000
  Proceeds from exercise of warrants ........................................         280,594                -
  Proceeds from exercise of stock options ...................................          18,761              750
  Payments of convertible promissory notes ..................................        (265,000)        (381,250)
  Payments of financing costs ...............................................         (35,375)        (229,000)
  Payments of deferred financing costs ......................................               -         (247,772)
  Payments of notes payable .................................................               -         (250,000)
                                                                                 ------------     ------------

Net cash provided by financing activities ...................................       2,167,164        6,919,256
                                                                                 ------------     ------------

Decrease in cash ............................................................      (1,505,835)       1,591,071

Cash, beginning of period ...................................................       1,671,773           80,702
                                                                                 ------------     ------------

Cash, end of period .........................................................    $    165,938     $  1,671,773
                                                                                 ============     ============
                                                                                                   (continued)
                                See Notes to Consolidated Financial Statements.

                                                      F-6A
</TABLE>
<PAGE>
<TABLE>
                                       NEWPORT INTERNATIONAL GROUP, INC.
                                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                        For the years ended December 31,
                                                  (continued)
<CAPTION>
                                                                                     2005             2004
                                                                                 ------------     ------------
<S>                                                                              <C>              <C>
Supplemental disclosures of cash flow information:
  Cash paid during the year for interest ....................................    $      3,909     $     18,768
                                                                                 ============     ============

  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 the convertible notes and
corresponding increase in derivative liabilities ............................    $    650,000     $  1,349,273
                                                                                 ============     ============

Fair value of warrants issued to placement agent in connection with
the issuance of the convertible notes and corresponding increase in
deferred financing costs ....................................................    $          -     $     51,101
                                                                                 ============     ============

Fair value of warrants and embedded conversion features issued in
connection with the issuance of shares of common stock and
corresponding increase in derivative liabilities ............................    $    317,069     $  3,788,951
                                                                                 ============     ============

Fair value of issuance of common stock in connection with the
setllement of pre-merger obligations ........................................    $          -     $    544,368
                                                                                 ============     ============

Conversion of convertible promissory notes in shares of common stock ........    $    940,774     $          -
                                                                                 ============     ============

Fair value of shares issued for services rendered and corresponding
increase to deferred compensation ...........................................    $  2,503,875     $          -
                                                                                 ============     ============

Advance from a stockholder converted into an exercise of stock options ......               -     $    187,500
                                                                                 ============     ============

Advances from a stockholder converted into convertible promissory notes .....               -     $     40,000
                                                                                 ============     ============

Fair value of shares issued to partially satisfy convertible promissory notes               -     $     60,000
                                                                                 ============     ============

Exchange of shares for restricted investment ................................               -     $ 11,823,528
                                                                                 ============     ============

                                See Notes to Consolidated Financial Statements.

                                                      F-6B
</TABLE>
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC.
                                DECEMBER 31, 2005
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION, BASIS OF PRESENTATION AND GOING CONCERN

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

The acquisition of GrassRoots was treated as a reverse acquisition for financial
reporting purposes. As such, our financial statements have been prepared as
GrassRoots as the acquiror. The results of operations discussed below represent
the operations of GrassRoots through February 9, 2004. The results of operations
subsequent to that date reflect the consolidated operations of GrassRoots and
the Company. We have retroactively restated our net loss per share and the
stockholders' deficit section of our balance sheet to reflect the reverse
acquisition.

The accompanying financial statements have been prepared on a going concern
basis. The Company has generated minimal revenue since its inception on June 12,
2002, and has incurred net losses of approximately $33.1 million. The Company's
ability to continue as a going concern is dependent upon its ability to obtain
the necessary financing to meet its obligations and repay its liabilities
arising from normal business operations when they come due, 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.

                                      F-7
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC.
                                DECEMBER 31, 2005
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Significant estimates made by management include, but are not
limited to, the valuation of embedded conversion features, freestanding warrants
and liquidated damages granted to certain stockholders, noteholders and warrants
issued to consultants. Actual results will differ from these estimates.

LOSS PER SHARE

Loss per share is based on the weighted average number of common shares
outstanding. The outstanding warrants and stock options amounting to 5,130,016
and 8,953,444, respectively, as of December 31, 2005, and the outstanding
warrants and stock options as of December 31, 2004 are excluded from the loss
per share computation due to their antidilutive effect.

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 2005, the Company has
reached bank balances exceeding the FDIC insurance limit. To reduce its risk
associated with the failure of such financial institutions, the Company
evaluates at least annually the rating of the financial institutions in which it
holds deposits.

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

                                      F-8
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC.
                                DECEMBER 31, 2005
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVESTMENT IN EQUITY SECURITIES

During 2004, the Company received 6,484,840 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 holds 3,242,420 shares of the Investee in an escrow account which
may not be released without the Investee's permission until August 2006.Until
these shares are released from escrow, the Company accounts 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.
Any of the restricted investment's future unrealized gain or loss, except for
other-than-temporary impairment, are recognized as an element of comprehensive
income.

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

COMPREHENSIVE LOSS

Comprehensive loss is defined as a change in equity during the period from
transactions and other events and circumstances from non-owner resources.
Included in this category are the following:

      o  Transfer of the unrealized of available for-sale securities to trading
         securities resulting from the change of classification of the Investee
         shares used as collateral for the Put Option amounting to approximately
         $5.0 million during 2005

      o  Transfer of previously recognized unrealized loss on the Company's
         restricted invesment in marketable securities amounting to
         approximately $5.0 million during 2005.

      o  Unrealized gain of approximately $113,000 resulting from an increase in
         the fair value of the restricted investment in marketable securities
         from June 30, 2005 to December 31, 2005.

                                      F-9
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC.
                                DECEMBER 31, 2005
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      o  Unrealized loss on restricted investment in marketable securities and
         Investee shares used as collateral for the Put Option both amounting to
         approximately $10.0 million during 2004, which represent the difference
         between the fair value of such investments at December 31, 2004 and
         their initial carrying value.

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 December 31, 2005.

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.

STOCK-BASED COMPENSATION

Stock-based awards to non-employees are accounted for using the fair value
method in accordance with SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
and EITF Issue No. 96-18, ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO
OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING GOODS OR
SERVICES. All transactions in which goods or services are the consideration
received for the issuance of equity instruments are accounted for based on the
fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more reliably measurable.

                                      F-10
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC.
                                DECEMBER 31, 2005
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION-TRANSITION AND DISCLOSURE,
effective for fiscal years ending after December 15, 2002. SFAS No. 148 amends
SFAS No. 123 to provide alternative methods of transition to the fair value
method of accounting for stock-based employee compensation. SFAS No. 148 also
amends the disclosure provisions of SFAS No. 123 to require disclosure in the
summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
SFAS No. 148 does not amend SFAS No. 123 to require companies to account for
their employee stock-based awards using the fair value method. The disclosure
provisions are required for all companies with stock-based employee
compensation, regardless of whether they utilize the fair value method of
accounting described in SFAS No. 123 or the intrinsic value method described in
Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES.

The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with APB Opinion No. 25. As permitted by SFAS No.
123, as amended by SFAS No. 148, the Company has chosen to continue to account
for its employee stock-based compensation plans under APB Opinion No. 25 and
provide the expanded disclosures specified in SFAS No. 123, as amended by SFAS
No. 148. Had employee stock based compensation cost been determined using the
fair value method the Company's net loss for the respective nine-month period
ended December 31 would have been adjusted to the proforma amounts indicated
below:

                                                        2005           2004
                                                        ----           ----

Net loss as reported .............................  $ (7,831,000)  $(19,808,600)
Add:
 Stock-based compensation expense included in
 reported net loss, net of related tax effects ...       456,631        858,994
Deduct:
 Total stock-based compensation expense
 under fair value based method for all awards,
 net of related tax effects ......................    (1,902,127)    (2,801,017)
                                                    ------------   ------------

Pro forma net loss ...............................  $ (9,276,496)  $(21,750,623)
                                                    ============   ============

Basic and diluted loss per share as reported .....  $      (0.26)  $      (1.12)
                                                    ============   ============
Basic and diluted proforma .......................  $      (0.31)  $      (1.24)
                                                    ============   ============

                                      F-11
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC.
                                DECEMBER 31, 2005
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The pro forma amounts reflected above may not be representative of future
disclosures since the estimated fair value of stock options is amortized to
expense as the options vest and additional options may be granted in future
years.

The fair value of the options granted during 2005 and 2004 was determined using
the Black-Scholes option-pricing model with the following assumptions: risk-free
interest of 3.32%-4.39% and 3.0%, respectively; stock volatility of 36%-86% and
42%, respectively; no dividends; and estimated life of 36 months.

DERIVATIVE LIABILITIES

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

                                      F-12
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC.
                                DECEMBER 31, 2005
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION, ACCOUNTS RECEIVABLE, AND PROVISION FOR RETURNS

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

The Company markets its software through multiple channel resellers and retail
stores. The Company provides for unlimited rights of return to its customers.
The Company has only recently licensed its products through such multiple
channels and does not have a historical pattern of returns. Additionally, such
customers generally pay software vendors based on their own sell-thru and return
the unsold products to the software vendor. The customers have not returned any
products at December 31, 2005.Accordingly, the Company provides for a provision
for returns for all outstanding receivables until the customers return the
products or the customers pay their invoices. The outstanding gross receivables
at December 31, 2005 amounted to approximately $233,000.The Company has recorded
a corresponding amount as provision for returns at December 31, 2005.

RECENT ACCOUNTING PRONOUNCEMENTS

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

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

                                      F-13
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC.
                                DECEMBER 31, 2005
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

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

In June 2005, the Emerging Issues Task Force ("EITF") issued EITF 05-2, "The
Meaning of Conventional Convertible Debt Instrument in Issue No. 00-19".EITF
05-2 retained the definition of a conventional convertible debt instrument as
set forth in EITF 00-19, and which is used in determining certain exemptions to

                                      F-14
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC.
                                DECEMBER 31, 2005
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

the accounting treatments prescribed under SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities". EITF 05-2 also clarified that certain
contingencies related to the exercise of a conversion option would not be
outside the definition of "conventional" and determined that convertible
preferred stock with a mandatory redemption date would also qualify for similar
exemptions if the economic characteristics of the preferred stock are more akin
to debt than equity. EITF 05-2 is effective for new instruments entered into and
instruments modified in periods beginning after June 29, 2005. We adopted the
provisions of EITF 05-2 on July 1, 2005, which did not have a material effect on
our financial statements.

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

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


NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment and related accumulated depreciation at December 31, 2005
consist of the following:

Computer equipment ....................     $ 449,548
Accumulated depreciation ..............      (118,962)
                                            ---------
Property and equipment, net ...........     $ 330,586
                                            =========

Depreciation expense amounted to approximately $91,000 and $95,000 during 2005
and 2004, respectively.

                                      F-15
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC.
                                DECEMBER 31, 2005
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - CONVERTIBLE PROMISSORY NOTES

Convertible promissory notes consist of the following as of December 31, 2005:

8% Convertible promissory notes, bearing interest at 8% per annum,
maturing on March 1, 2006. Interest payable March 31, 2004 and
every quarter thereafter either in cash or common stock. Interest
paid in common stock is convertible using the 10-day average
closing bid of the stock prior to the end of the quarter. Each
occurrence of interest not paid within 30 days following the end of
each quarter causes a reduction of 10% in the conversion price of
the promissory notes and the exercise price of the related
warrants. The promissory notes are convertible at any time at the
option of the holder, into shares of common stock at a rate of
$0.375. ...........................................................   $ 793,319

Less: unamortized discount ........................................     (98,898)
                                                                      ---------

Convertible promissory notes-long-term ............................   $ 694,121
                                                                      =========

12.5% Convertible promissory notes, bearing interest at 12.5% per
annum, maturing between March and June 2007. Interest payable June
30, 2005 and every quarter thereafter either in cash or common
stock. Interest paid in common stock is convertible using the 5-day
average closing price of the stock prior to the end of the quarter.
Each occurrence of interest not paid within 30 days following the
end of each quarter causes a reduction of 10% in the conversion
price of the promissory notes and the exercise price of the related
warrants. The promissory notes are convertible into shares of
common stock at a rate of $0.375. .................................   $ 650,000

Less: unamortized discount ........................................    (380,147)
                                                                      ---------

Convertible promissory notes-short term ...........................   $ 269,853
                                                                      =========

In connection with the issuance of the 8% convertible promissory notes, the
Company issued 1,501,875 warrants to purchase common stock of the Company at an
exercise price of $1.25 per share during 2004. The warrants are exercisable for
a period of five years.

                                      F-16
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC.
                                DECEMBER 31, 2005
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - CONVERTIBLE PROMISSORY NOTES (CONTINUED)

The convertible rates for the 8% convertible promissory notes interest accrued
as of December 31, 2005 amounted to $0.67 per share. The Company issued 237,582
and 48,921 shares in connection with the payment of interest on the 8%
convertible promissory notes during 2005 and 2004, respectively. The fair value
of such shares issued during 2005 and 2004 amounted to approximately $159,000
and $109,000, respectively. Furthermore, the Company issued 43,151 shares in
January 2006 in connection with the payment of accrued interest of approximately
$37,000 as of December 31, 2005.

During 2005, the Company satisfied the remaining 10% Convertible Promissory
Notes amounting to $325,000 by paying $265,000 and issuing 75,000 shares of
common stock. The fair value of the shares of common stock amounted to $48,750.

During 2005, certain noteholders of 8% convertible promissory notes converted
their promissory notes and accrued interest amounting to approximately $940,000
in 2,508,644 shares of common stock.

During 2005 and 2004, the Company received $650,000 and $1,791,335,
respectively, in consideration for the issuance of the convertible promissory
notes.

In the event the Company issues any shares of its common stock or issues any
options, warrants, convertible preferred stock or convertible debt issuable or
convertible into common stock of the Company at an exercise price or conversion
price per share less than $0.75 per share within two years following the closing
of the 8% Convertible Promissory Notes, then the exercise price of the warrants
issued pursuant to the Follow-on Financing will reset to such lower price. As of
December 31, 2005, the exercise price of such warrants are $0.375.

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

Our 8% Convertible Promissory Notes mature on March 1, 2006. The Company is
negotiating with the noteholders to satisfy these notes with the issuance of its
shares of common stock.

                                      F-17
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC.
                                DECEMBER 31, 2005
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - CONVERTIBLE PROMISSORY NOTES (CONTINUED)

Amortization of the debt discount and amortization of the deferred financing
costs amounted to approximately $1.3 million and $132,000 and $1.0 million and
$198,000 during 2005 and 2004, respectively, and are included in interest
expense in the accompanying consolidated statements of operations.

Accrued interest on the Convertible Promissory Notes amounted to approximately
$40,000 as of December 31, 2005.


NOTE 5 - 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 expires on March 1, 2006. The subsequent financing conversion reset
is considered an embedded conversion feature pursuant to EITF Issue No. 00-19.
Additionally, because there is no explicit number of shares that are to be
delivered upon satisfaction of subsequent financing conversion reset feature,
the Company is unable to assert that it had sufficient authorized and unissued
shares to settle such feature. Accordingly, all of the Company's previously
issued and outstanding instruments, such as warrants and options issued to
non-employees pursuant to rendered services as well as those issued in the
future, would be classified as liabilities, effective with the granting of the
subsequent financing conversion reset feature.

The Company recognized liabilities for the following derivatives at the date of
their issuance during 2004 and 2005, respectively:

                                          At issuance-2004      At issuance-2005
                                          ----------------      ----------------
Embedded conversion
Features-
8% convertible notes ............           $ 8,635,768           $         -
10% convertible notes ...........               169,575                     -
12.5% convertible notes .........                     -               934,000
Freestanding warrants and options
8% convertible notes ............             7,914,600                     -
10% convertible notes ...........               302,575                     -
12.5% convertible notes .........                     -               273,620
Other warrants and options ......             5,745,602               531,836
Common stock subject to put .....             2,602,076                     -
Liquidated damages ..............               556,875               139,333
                                            -----------           -----------
                                            $25,927,071           $ 1,878,789

                                      F-18
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC.
                                DECEMBER 31, 2005
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - DERIVATIVE LIABILITIES (CONTINUED)

The fair value of the derivative liabilities at December 31, 2004 and 2005 are
as follows:

                                    At December 31, 2004    At December 31, 2005
                                    --------------------    --------------------
Embedded conversion
Features-
8% convertible notes ............        $ 4,265,861            $ 1,205,890
10% convertible notes ...........             66,625                      -
12.5% convertible notes .........                  -              1,040,000
Freestanding warrants and options
8% convertible notes ............          4,451,963              1,124,614
10% convertible notes ...........            349,125                 49,875
12.5% convertible notes .........                  -                286,080
Other warrants and options ......          4,332,301                915,995
Common stock subject to put .....          2,594,268              1,066,667
Liquidated damages ..............            486,167                139,333
                                         -----------            -----------
                                         $16,546,310            $ 5,828,454

The Company used the following assumptions to measure the identified derivatives
as follows:

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

                                 At their date of issuance  At December 31, 2005
                                 -------------------------  --------------------

Market price: ...................        $ 0.62-3.20            $      0.75
Conversion price: ...............        $0.375-2.00            $     0.375
Term: ...........................            2 years          0.16-1.33 years
Volatitlity: ....................             42-86%                    43%
Risk-free interest rate: ........          3.0-3.32%                  4.39%
Maximum liability:
8% convertible notes ............        $ 2,601,135            $ 1,190,024
10% convertible notes ...........            665,000                      -
12.5% convertible notes .........            975,000                975,000

Liquidated damages:

                                         At issuance        At December 31, 2005
                                         -----------        --------------------

Market price: ...................        $      2.13            $      0.75
Exercise price: .................        $      2.13            $      0.75
Term: ...........................            2 years             1.83 years
Volatitlity: ....................             42-43%                    43%
Risk-free interest rate: ........          3.0-4.39%                  4.39%
Maximum liability: ..............        $ 1,012,500            $   733,333

                                      F-19
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC.
                                DECEMBER 31, 2005
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - DERIVATIVE LIABILITIES (CONTINUED)

Freestanding warrants and options

                                         At issuance        At December 31, 2005
                                         -----------        --------------------

Market price: ...................        $ 0.40-3.20            $      0.75
Exercise price: .................        $0.188-1.75            $0.188-1.75
Term: ...........................          3-5 years            3-4.5 years
Volatitlity: ....................             42-88%                    43%
Risk-free interest rate: ........          3.0-4.39%                  4.39%
Outstanding other
options and warrants ............          8,132,017              6,252,516

The embedded conversion features are as follows:

Reset Feature Following Subsequent Financing-8% and 12.5% Convertible Promissory
notes: 50%, which is the effective discount to market value the Company would
offer in the event we provide for a subsequent private placement financing

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

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

During 2004 and 2005, the Company allocated $2,206,420 and $650,000,
respectively, of the fair value of the derivatives issued in connection with
convertible promissory notes, at their date of issuance, to debt discount. The
excess of the fair value of the derivative liabilities over the debt discount
has been recognized as other expense, which amounts to $14.8 million and
$284,000 during 2004 and 2005, respectively.

During 2005 and 2004, the Company allocated approximately $318,000 and $3.8
million of the fair value of the derivatives to the net value of the issuance of
shares of common stock as additional consideration provided to such stockholders
and has been recorded as an offset to additional paid-in capital

The aggregate fair value of all derivative liabilities upon issuance of the
various debt and equity instruments amounted to approximately $1.9 million and
$25.9 million during 2005 and 2004. The decrease in fair value of the derivative
liabilities between the date of their issuance and the balance sheet date,
amounted to $11.6 million and $9.4 million during 2005 and 2004, respectively.
The decrease in fair value of the derivative liabilities has been recognized as
other income.

                                      F-20
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC.
                                DECEMBER 31, 2005
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - STOCKHOLDERS' DEFICIT

ISSUANCE OF COMMON STOCK PURSUANT TO A SETTLEMENT OF DEBT

During February 2004, pursuant to a notification of default by the holder, the
Company settled its outstanding notes to a stockholder, its affiliated entity
and other participants. In connection with the settlement of all debt (the
$370,000 convertible debenture and the $10,000 loan along with the related
accrued loan premium of $100,000 and accrued interest of $158,368 due to a
stockholder, and the loan of $100,000 along with the accrued loan premium of
$50,000 and accrued interest of $6,000 to an affiliated entity), the Company
disbursed $250,000 in cash and 1,365,000 shares of common stock, and 530,000
shares of common stock were returned to the Company for cancellation, which
generated an interest expense of approximately $3.5 million 2004.

ISSUANCE OF COMMON STOCK PURSUANT TO SERVICES PERFORMED

During, 2005 and 2004, the Company issued 3,915,500 and 72,500 shares of common
stock to consultants for services performed. The fair value of such shares
amounted to approximately $2.5 million and $134,000. During 2005, the Company
recognized approximately $2.5 million as deferred compensation. The amortization
of the deferred compensation amounted to approximately $823,000 during 2005. The
nature of the services rendered in connection with the issuance of these shares
were for marketing and strategic planning purposes.

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

The convertible rates for the 8% convertible promissory notes interest accrued
as of December 31, 2005 amounted to $0.67 per share. The Company issued 237,582
and 48,921 shares in connection with the payment of interest on the 8%
convertible promissory notes during 2005 and 2004, respectively. The fair value
of such shares issued during 2005 and 2004 amounted to approximately $159,000
and $109,000, respectively. Furthermore, the Company issued 43,151 shares in
January 2006 in connection with the payment of accrued interest of approximately
$37,000 as of December 31, 2005.

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

The Company issued 92,903 and 20,323 shares of common stock pursuant to its
failure to timely file its registration statement during 2005 and 2004,
respectively. The fair value of such shares amounted to approximately $133,000
and $38,000, respectively.

ISSUANCE OF COMMON STOCK PURSUANT TO A STOCK-EXCHANGE AGREEMENT

The Company has entered into a consulting agreement with a third-party in
connection with the stock exchange agreement with the Investee. Pursuant to this
agreement, the Company committed to the following compensation for services
rendered by the consultant:

                                      F-21
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC.
                                DECEMBER 31, 2005
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - STOCKHOLDERS' DEFICIT (CONTINUED)

    1)   to transfer 877,500 shares of the Investee,

    2)   to provide an option to the consultant whereby the Company agrees to
         repurchase all Investee's shares held by the consultant at $1.82 per
         share ("Option Price") by August 2005.

During 2004, the Company has paid approximately $750,000 in lieu of transferring
409,000 shares (of the agreed total 877,500 shares) of the Investee to the
consultant. During November 2004, the Company paid approximately $850,000 in
lieu of transferring the remaining 468,500 shares (of the agreed total 877,500
shares) of the Investee to the Consultant. In aggregate, the consideration for
the consultant's services amounted to approximately $1,600,000, which is
included in the sales, general, and administrative expenses in the accompanying
financial statements.

ISSUANCE OF COMMON STOCK PURSUANT TO PRIVATE PLACEMENTS

During 2005, the Company issued 2,779,543 shares pursuant to a private placement
which generated net proceeds of approximately $1.5 million. In connection with
this private placement, the Company issued 807,891 warrants exercisable at a
price of $1.30 per share. The warrants expire in September 2010.

During 2004, the Company issued 4,500,000 shares of its common stock to two
foreign investors generating proceeds of $6.1 million. The Company paid finders'
fees of $229,000 to a third-party in connection with this transaction. The
Company has also issued 562,500 warrants to the investors in connection with
this transaction. The warrants are convertible at exercise prices ranging
between $1.55 and $1.60 per share and expire five years from the date of
issuance. The investor has the right to have the Company reacquire all or a
portion of 2,000,000 and 2,500,000 shares purchased at a price of $1.25 and
$1.00 per share, respectively, in the event the average price per share is less
than $1.25 and $1.00, respectively, for a period of ten consecutive trading days
during an option period commencing eight months after the effective date of the
Company's registration statement and extending for a period of thirty-six months
thereafter.

Shortly after the closing of this private placement, the foreign investors and
the Company claimed that certain representations made by the both parties were
inaccurate. In December 2004, the Company settled this matter amicably by
issuing 1,500,000 shares to a third foreign investor. The value of the shares
issued in connection with this settlement amounted to $2,775,000 and is included
in other expenses.

During December 2005, the Company settled claims from the foreign investors by
issuing 1,000,000 shares to such investors. The fair value of the shares in
connection with this settlement amounted to $730,000 and is included in other
expenses. The Company also limited the put rights to 2,000,000 shares at a price
of $1.25. The exercise price of the 562,500 warrants was also reduced to $0.45
per share.

                                      F-22
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC.
                                DECEMBER 31, 2005
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - STOCKHOLDERS' DEFICIT (CONTINUED)

EXERCISE OF WARRANTS AND OPTIONS

During 2005, The Company issued 760,751 shares of common stock pursuant to the
exercise of warrants which generated proceeds of approximately $281,000.

During 2005 and 2004, the Company issued 652,643 and 187,500 shares,
respectively, pursuant to the exercise of stock options which generated proceeds
of approximately $19,000 and $188,000, respectively.


NOTE 7 - STOCK OPTIONS AND WARRANTS

WARRANTS

During 2005, the Company issued 596,000 warrants in connection with the issuance
of the 12.5% Convertible Promissory Notes. The exercise price of the warrants is
$0.375 per underlying share of common stock. The warrants expire in December
2009.

The issuance of the 12.5% Convertible Promissory Notes triggered an adjustment
in the exercise price of the following warrants:

      o  2,748,125 warrants issued to the holders of the 8% Convertible
         Promissory Notes. The exercise price of such warrants has been
         decreased from a range of $0.75- $1.25 to $0.375;

      o  425,000 warrants issued to the placement agent of the 8% Convertible
         Promissory Notes. The exercise price of such warrants has been
         decreased from a range of $0.75- $1.25 to $0.375;

      o  562,500 warrants issued to shareholders in connection with the private
         placement closed in November 2004. The exercise price of such warrants
         has been decreased from a range of $1.55-1.60 to $1.49. Furthermore,
         the Company agreed to reduce the exercise price of such warrants to
         0.45 per share.

                                      F-23
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC.
                                DECEMBER 31, 2005
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - STOCK OPTIONS AND WARRANTS (CONTINUED)

During 2004, the Company issued 1,366,875 and 332,500 warrants in connection
with the issuance of the 8% and the 10% Convertible Promissory Notes. The
exercise price of the warrants is $0.375 and $1.25 per share, respectively. The
warrants expire in March 2008 and May 2009, respectively.

During 2005, the Company issued 250,000 warrants to a consultant for services
rendered. The exercise price of the warrants ranges between $0.75 and $1.50 per
share. The warrants expire in December 2008.

During 2005, the Company issued 807,891 warrants pursuant to the issuance of
shares. The exercise price of the warrants is $1.30 per share.

A summary of the activity of the Company's outstanding warrants during 2005 and
2004 is as follows:

                                                                     Weighted
                                                                      Average
                                                     Warrants     Exercise Price
                                                     --------     --------------

Outstanding, January 1, 2004 ...................     2,076,251       $ 1.11
Granted ........................................     2,261,875         1.15
Exercised ......................................             -            -
Expired ........................................             -            -
                                                    ----------       -------
Outstanding and exercisable at December 31, 2004     4,338,126         1.13

Granted ........................................     1,653,891         0.94
Exercised ......................................      (862,001)        0.375
Expired ........................................             -            -
                                                    ----------       -------
Outstanding and exercisable at December 31, 2005     5,130,016       $ 0.67
                                                    ==========       =======


                    Warrants           Weighted Average
Exercise        outstanding and            Remaining           Weighted Average
 prices           exercisable          Contractual Life         Exercise Price
--------        ---------------        ----------------        ----------------

 $0.375            2,897,124                 3.167                  $0.375
   0.45              562,500                 3.9                     0.45
   0.75              125,000                 5                       0.75
   1.25              612,501                 3.5                     1.25
   1.30              807,891                 4.5                     1.30
   1.50              125,000                 5                       1.5

The weighted average remaining contractual life of the terms of the warrants is
4.2 years.

                                      F-24
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC.
                                DECEMBER 31, 2005
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - 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.

The Company granted 4,337,773 and 290,000 options with below market exercise
prices during 2005 and 2004, respectively. The issuance of such options to
employees resulted in compensation expense pursuant to APB Opinion No. 25
amounting to approximately $457,000 and $860,000 during 2005 and 2004,
respectively.

The Company granted 565,000 and 940,000 options to nonemployees for services
rendered during 2005 and 2004, respectively. The fair value of such options has
been recorded as derivative liabilities.

A summary of the activity of the Company's stock option plan is presented below:

                                                                     Weighted
                                                                      Average
                                                      Options     Exercise Price
                                                     ---------    --------------

Outstanding at January 1, 2004 .................     5,032,500          0.91

Granted ........................................     2,132,000          1.97
Exercised ......................................      (187,500)         1.00
Expired ........................................    (1,360,500)         1.57
                                                    ----------        ------
Outstanding at December 31, 2004 ...............     5,616,500        $ 1.51
                                                    ==========        ======

Granted ........................................     8,430,028          0.49
Exercised ......................................      (652,643)         0.03
Expired ........................................    (4,440,441)         1.00
                                                    ----------        ------
Outstanding at December 31, 2005 ...............     8,953,444          0.53

Exercisable at December 31, 2005 ...............     5,743,027        $ 0.53
                                                    ==========        ======

                                      F-25
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC.
                                DECEMBER 31, 2005
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - STOCK OPTIONS AND WARRANTS (CONTINUED)

The weighted average remaining contractual life and weighted average exercise
price of options outstanding and options exercisable at December 31, 2005, for
selected exercise price ranges, is as follows:


Options outstanding:

                                        Weighted average
   Range of            Number        remaining contractual      Weighted average
exercise prices      of options               life               exercise price
---------------      ----------      ---------------------      ----------------

 $0.001-0.02          2,095,444               2.45                  $ 0.02
  0.45-0.75           5,000,000               4.5                     0.45
  0.90-1.25             930,000               4.5                     0.92
  1.60-2.25             928,000               3.8                     1.72


Options exercisable:

                                        Weighted average
   Range of            Number        remaining contractual      Weighted average
exercise prices      of options               life               exercise price
---------------      ----------      ---------------------      ----------------
 $0.001-0.02          2,095,444               2.45                  $ 0.02
  0.45-0.75           2,406,250               4.2                     0.45
  0.90-1.25             313,333               4.5                     0.94
  1.60-2.25             928,000               3.8                     1.72

                                      F-26
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC.
                                DECEMBER 31, 2005
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - INCOME TAXES

Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the net deferred taxes, at December 31, 2005 are as follows:

                                              2005
                                              ----
Deferred tax assets:
Net operating loss carryforward .....    $ 10,275,000
Less valuation allowance ............     (10,275,000)
                                         ------------
Total net deferred tax assets: ......    $          -
                                         ============

SFAS No. 109 requires a valuation allowance to reduce the deferred tax assets
reported, if any, based on the weight of the evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Management has determined that a valuation allowance of $ 10,275,000 at December
31, 2005 is necessary to reduce the deferred tax assets to the amount that will
more likely than not be realized. The change in the valuation allowance during
2005 and 2004 was $5,715,000 and $2,330,000, respectively.

The Company has incurred net operating losses since inception. At December 31,
2005, the Company had a net operating loss carryforward amounting to
approximately $25.6 million for U.S. tax purposes that expire in various amounts
through 2025. The Company has had a change of ownership as defined by the
Internal Revenue Code Section 382. As a result, a substantial annual limitation
may be imposed upon the future utilization of its net operating loss
carryforwards. At this point, the Company has not completed a change in
ownership study and the exact impact of such limitations is unknown.

The federal statutory tax rate reconciled to the effective tax rate during 2005
and 2004, respectively, is as follows:

                                                  2005           2004
                                                  ----           ----

Tax at U.S. statutory rate: ...........           35.0%          35.0%
State tax rate, net of federal benefits            6.0            6.0
Change in valuation allowance .........          (41.0)         (41.0)
                                                 -----          -----
Effective tax rate ....................            0.0%           0.0%
                                                 =====          =====

                                      F-27
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC.
                                DECEMBER 31, 2005
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - COMMITMENTS AND CONTINGENCIES

LITIGATION

FOCUS FOCUS
-----------

On January 6, 2003, the Company entered into a stock purchase agreement (the
"Agreement") with Focus Focus.com, Inc. ("Focus Focus") to purchase all of the
issued and outstanding capital stock of Focus Focus for cash of $150,000 and
promissory notes payable for $1,560,000. In May 2003, the Company received a
letter from counsel for the former owners of Focus Focus advising the Company
that it was in breach of the Agreement and promissory notes for failing to make
scheduled monthly payments. Shortly thereafter, the Company returned the
acquired assets and the Focus Focus stock to the former owners of Focus Focus.

In connection with the Agreement, the Company entered into three-month
consulting agreements with the former owners of Focus Focus to perform certain
consulting services for the Company. As consideration for the services rendered,
the Company granted options to purchase 500,000 shares of the Company's common
stock, which had an exercise price of $0.02 per share, and vested immediately.
The Company contends that the former owners of Focus Focus did not perform under
these consulting agreements, and accordingly, cancelled the options and recorded
no consulting expense in the 2004 and 2003 accompanying financial statements,
respectively.

No litigation has been filed by either party. However, in December 2004, the
Company has received notice from the counsel of the former owners of Focus Focus
that they are entitled to the options initially granted by the Company. The
Company believes that this claim is without merit.


ROBINSON REED, INC. AND FIRST CAPITAL HOLDINGS INTERNATIONAL, INC.
------------------------------------------------------------------

During 2005, Robinson Reed, Inc. and First Capital Holdings International, Inc.
("Robinson Reed and First Capital") threatened to bring litigation against the
Company, the Company's directors and/or the Company's management asserting that
the Company acted in bad faith in connection with the issuance of a promissory
note pursuant to the exercise of their put. In December 2005, the Company
settled this matter by issuing 1,000,000 shares to Robinson Reed and First
Capital. The shares were valued at $730,000 based on the fair value of the price
per share at the date of issuance. Furthermore, the Company granted some
liquidated damages pursuant to registration rights to Robinson Reed. The
liquidated damages consist of 25,000 shares per month for each month the Company
fails to register 2,500,000 shares by February 3, 2006.

                                      F-28
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC.
                                DECEMBER 31, 2005
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

MISCELLANEOUS
-------------

During 2005, certain arbitrators awarded two consultants certain compensation
amounting to approximately $150,000 payable by Grassroots, one of the Company's
subsidiaries. The Company has recorded a corresponding liability in the
accompanying financial statements.

During 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.

EMPLOYMENT CONTRACT

The Company entered in an employment agreement with its chief executive officer
which expires in December 2008 and is renewable for additional 3-year term. The
employment agreement provides for an annual base salary of $239,800. The Company
has the obligation to pay the chief executive officer's compensation through
December 31, 2008 in the event 1) it terminates the employment without cause, 2)
of the death of the chief executive officer, and 3) of the consummation of a
merger or disposition of substantially all assets of the Company.

OPERATING LEASES

On February 16, 2004, the Company entered into a 39-month non-cancelable lease
for a 4,150 square foot office facility in Phoenix, Arizona, which commences
March 1, 2004. Under the terms of the lease, the Company is required to pay
initial monthly base rent of $2,615, plus common area, insurance and property
tax expenses. The base rent will be adjusted annually based on the Consumer
Price Index ("CPI"). The base rent in 2005 has been increased to $2,720.

On March 12, 2004, the Company entered into a 5-year non-cancelable lease for a
4,160 square foot office facility in Palm Desert, California to replace its
existing corporate facility. The lease requires the Company to pay initial
monthly base rent of $5,154, plus common area, insurance and property tax
expenses. The base rent will be adjusted annually based on CPI. The lease is set
to commence on April 1, 2004.

                                      F-29
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC.
                                DECEMBER 31, 2005
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

Future annual minimum payments, net of sublease income, required under operating
lease obligations at December 31, 2005 are as follows:

                                        Future Minimum
                                        Lease Payments
                                        --------------
         2006 .......................       $93,228
         2007 .......................        74,923
         2008 .......................        61,848
         2009 and thereafter ........        15,462


NOTE 10 - CAPITALIZED LEASE OBLIGATIONS

The Company leases certain computer software under a capital lease that expires
in July 2006. The lease provides for monthly payments of $976 at an implicit
interest rate of 9% per annum. The assets and liabilities under the capital
lease are recorded at lease inception at the lower of the present value of the
minimum lease payments or the fair market value of the related assets. The asset
is depreciated over its estimated useful life.

The schedule of future minimum payments under capital lease is as follows:

         Years Ending
         December 31, 2006 ...........................         $ 7,977
         Less: imputed interest ......................          (1,045)
                                                               -------
                                                                 6,932
         Less: current portion .......................          (6,932)
                                                               -------
         Long-term portion ...........................         $     -
                                                               =======

                                      F-30
<PAGE>

                        NEWPORT INTERNATIONAL GROUP, INC.
                                DECEMBER 31, 2005
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - RELATED PARTY TRANSACTIONS

At December 31, 2003, the Company had advanced $23,400 to a majority stockholder
and an officer of the Company. During 2004, the Company paid $113,054 of
personal expenses on behalf of the majority stockholder and officer. The
majority stockholder and officer repaid $136,454 to the Company during 2004.
There is no remaining amount due from such advances as of December 31, 2005.

In September 2003, a stockholder advanced $15,000 to the Company. The advance
does not bear interest and is payable on demand. During 2006, the noteholder has
requested an entry of default from the Superior Court of California.

In May 2004, a stockholder advanced $175,000 to the Company. In August 2004, the
stockholder converted the advance into the exercise of 150,000 stock options at
a price of $1.25. The Company also paid $12,500 of interest in connection with
the advance. There is no outstanding amount due to the stockholder as of
December 31, 2005.

In May 2004, a stockholder advanced $40,000 to the Company. In August 2004, the
stockholder converted the advance into 10% convertible promissory notes. The
advance did not bear interest. There is no outstanding amount due to the
stockholder under this advance as of December 31, 2005.

During 2005, the Company issued a 12.5% Convertible Promissory Note to the
fiance of its Chief Executive Officer. The note amounted to $275,000. In
connection with this note, the Company issued 256,667 warrants. The warrants
have an exercise price of $0.375.


NOTE 12 - SUBSEQUENT EVENTS

The Company issued 43,151 shares in January 2006 in connection with the payment
of accrued interest of approximately $32,000 as of December 31, 2005.

During February and March 2006, the Company issued 4,350,000 shares pursuant to
two private placements, generating gross proceeds of $2,350,000.

                                      F-31