UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549





FORM
10-K





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





For the
fiscal year ended December 31, 2009





or





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





For the
transition period from ___________ to _________.





Commission
file number 000-30587





SPARE BACKUP, INC.(Exact
      name of  registrant as specified in its
  charter)





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





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





Registrant's telephone
number, including area code: (760) 779
0251








Securities
registered pursuant to Section 12(b) of the Act: None





Securities
registered pursuant to Section 12(g) of the Act:


Common Stock, par value
$0.001


(Title
of class)





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes [  ]  No
[X]





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes
[  ]  No [X]





Indicate
by check mark whether the registrant:  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes
[  ]  No [X]




Indicate
by checkmark whether the registrant submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post
such files). Yes  No 





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [  ]







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





Large
accelerated filer
[   ]                                                                    Accelerated
filer [  ]





Non-accelerated
filer
[   ]                                                                      Smaller
reporting company [X]


(Do not
check if a smaller reporting company)





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





The
aggregate market value of the common equity voting shares of the registrant held
by non-affiliates on June 30, 2009, the registrant's most recently completed
second fiscal quarter, was $19,266,255.





The
number of the registrant’s shares of common stock outstanding as of March 31,
2010: 142,532,608.





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 raise sufficient capital to fund our
ongoing operations and satisfy our obligations as they become due, 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 Part I.
Item 1A. 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 "Spare Backup," " we," "our," and "us" refers
to Spare Backup, Inc., a Delaware corporation formerly known as Newport
International Group, Inc., and our subsidiaries.





2


SPARE
      BACKUP, INC.
                2009
      ANNUAL REPORT ON FORM 10-KTable
      of ContentsPART
      IPageItem
      1.
              Business
              4Item
      1A.
              Risk
      Factors
              11Item
      1B.
              Unresolved
      Staff Comments
              17Item
      2.
              Properties
              17Item
      3.
              Legal
      Proceedings
              18Item
      4.
              (Removed
      and Reserved)
              18
  PART
      IIItem
      5.
              Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
              18Item
      6.
              Selected
      Financial Data
              19Item
      7.
              Management
      ’s Discussion and Analysis of Financial Condition and Results of
      Operations
              19Item
      7A.
              Quantitative
      and Qualitative Disclosures About Market Risk
              24Item
      8.
              Financial
      Statements and Supplementary Data
              24Item
      9.
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
              24Item
      9A(T).
              Controls
      and Procedures
              25Item
      9B.
              Other
      Information
              26PART
      IIIItem
      10.
              Directors,
      Executive Officers and Corporate Governance
              27Item
      11.
              Executive
      Compensation
              29Item
      12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              36Item
      13.
              Certain
      Relationships and Related Transactions, and Director
      Independence
              38Item
      14.
              Principal
      Accountant Fees and Services
              39
  PART
      IVItem
      15.
              Exhibits,
      Financial Statement Schedules
              39





3


PART
I





Item
1.  Business





We are a
developer and marketer of a line of software products specifically designed for
consumers as well as 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, Spare Backup software and our Spare Switch PC data migration
software.





Our
Products and Services





Our
flagship product is Spare
BackupTM, a fully-automated remote backup solution designed and developed
especially for the small office or home environment which automatically and
efficiently backs up all data on selected laptop or desktop computers. As a
result, we believe consumers and small companies can ensure file safety in
personal computers (PCs) and laptops for backup and retrieval. We launched our
Spare Back-up service and software product version 1.0 in March 2005 and are
currently offering version 6.0 of the product. Our Spare SwitchTM software
enables users to complete the transfer of personal files from one PC to another
via a high speed Internet connection. Our software has unique characteristics of
additional coding that enables easy to scale infrastructure and support elements
which we believe provides a competitive advantage over other providers whose
products require large investments in hardware, as well as professional
installation, training and support.





Spare
Backup offers:





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





●
            No
      complicated file selection - Spare Backup scans the user's computer and
      has a number of presets which it backs up automatically, such
      as:





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





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





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





●
            All
      desktop files.





In
addition, users can manually include any files that are not in the present
group.





●
            Simple,
      fast data recovery of individual files or the complete
    desktop





●
            Open
      file backup, giving the user the ability to back up while a particular
      program is open





●
            Reports
      automatically available to users in Spare
Backup





●
            Redundant
      file support - select a restore from the last five
  backups





●
            Online
      file retrieval from any Internet connection - using Spare
    Key





●
            Provides
      files security via 256 Rijndael AES 256 block cipher with unique user
      encryption key





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





The VeriSign/Starfield Technology
high assurance certificates provide authenticity for web based transactions. The
encryption we use for ensuring privacy is the 256 Rijndael AES, a block cypher
adopted as an encryption standard by the U.S. Government. The data is protected
in transit and communication via Secure Sockets Layer (SSL), a cryptographic
protocol which provides secure communications over the public
Internet.





4


An
overview of customer benefits includes:





●
            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
      allows users to retrieve multiple past versions of a file, not just the
      most recently backed-up version.





●
            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.





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





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 encrypted 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 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 pricing is done
on a case by case basis per partner.





Spare
Backup software comes with the monthly service and enables users to also back up
to local storage devices with or without using the online service.





Our
offers vary depending on partnerships, in some cases we offer new users a free
14-day trial, other could be an allocation of space of 1 gigabyte. Spare Backup
services cost $6.99 per month for up to 50 gigabytes of data storage bought
directly from the Company, along with annual plans that are
available.





We
developed new products and integrated new feature functionality into our Spare Backup® software. The
new offerings in our Spare line of software products include: Spare RoomTM, Spare MobileTM, Spare SynchronizationTM and
Spare DiagnosticsTM.
Below provide certain information regarding our new line of products and
features:





Spare Room is designed to
complement the Spare
Backup software. We launched this product in the second quarter of fiscal
2009. This is a first step to digital contract management and cloud computing
for Spare Backup users. This feature has been distributed and is available to
our active Spare backup users by downloading and installing the software which
is obtainable thru our distribution partners. We are currently in production
with this product for Car Phone Warehouse Limited, which distributes this under
the name “My Hub.”.





The Spare Backup software easily
and automatically backs up a user's files from the user's desktop to the Spare Backup's cloud. Once
files are stored securely in the cloud, the Spare Room application allows
a user to take advantage of a wide range of sharing and social networking tools.
The solution allows the user to get the most out of available tools and services
on the Internet while providing the security of online backup.





In the
first version of the Spare
Room, the applications allow our customers to easily access and manage
their backed-up photos, videos, music and documents.  As well as
enabling users to access other services and applications, such as for music,
mobile devices and mobile banking for purchases and or convenience. Future
versions of Spare Room
will include additional features beyond photo sharing to include Video, Contact
Management and Calendar management. These features will be displayed on the
Spare Room Dashboard allowing a user to easily navigate Spare Room and manage their
digital data stored in the Spare cloud from a variety of devices.





Spare Mobile was launched in
“Beta” in the third quarter of fiscal 2009. For the initial phase of Spare Mobile, a user must
first have an active Spare Backup account and have access to Spare Room. The downloadable
installation will be readily available to anyone who visits and has the Spare
Backup software itself, and can be downloaded from the Spare Room and the Spare Mobile website. We are
currently in the development stage for the last six months on this version along
with Spare Room.





5


Spare Mobile will provide a
user with the ability to backup data and settings from their phone to the Spare
cloud without the need to connect the mobile device to a PC via a
cable.





●
            Backup
      will be performed securely using the users’ mobile network; mobile network
      usage charges may apply.





●
            Backup
      will capture data stored both on the Mobile devices onboard memory as well
      as any add on memory devices such as a memory
  card.





●
            Backup
      will capture all pertinent user data and configuration if
      feasible.





●
            A
      user will have the ability to configure the frequency that backups
      occur.





●
            The
      Spare Mobile
      software will detect files that should be backed up
      automatically.





●
            Users
      will have the ability to customize which files will be backed up and which
      will not and will  have the ability to recover a backed up
      file(s) to their mobile device.





●
            If
      a user also has a Spare Backup account, the user will have the ability to
      retrieve mobile files from a variety of devices using our Spare Synchronization
      service.





●
            Spare Mobile will
      support the following Mobile device operating
  systems:





●
            Windows
      Mobile by Microsoft ©;●
            JavaTM
      (CLDC/MIDP);●
            Blackberry®●
            iPhone
      by Apple, Inc.©; and●
            AdnroidTM.





***NOTE:
Due to differences in OS functionality the Spare Mobile application may
differ slightly in appearance between each supported OS. The functionality
however shall remain static.





Spare Mobile works in
conjunction with the users of Spare Backup and Spare Room accounts. Spare Room provides an
interface for a user to manage their mobile device and the files contained on
their mobile device.





Another
feature functionality that we have developed is Spare Synchronization. In
order to take advantage of the synchronization functionality, the user must
first possess an active Spare Backup account with Spare Room. Synchronization
will be an add on product to a users standard Family Pack account.. Spare Synchronization is
defined as the mirroring or synchronization of content across multiple machines.
Spare Backup defines synchronization rules based on file types. A user who
chooses to synchronize pictures will synchronize all pictures that exist on two
machines. Photos on both machines will be replicated between the two machines so
that when the synchronization process is complete the same files will exist on
both machines.





The user
will configure their synchronization preferences from within Spare Room. Each machine that
is to be synchronized must have the Spare Backup client software installed and
have an active connection to the internet.





The user
will not need to make any configuration changes to their existing Spare Backup
account. However the client software will provide the user a link to Spare Room from the client
software. If the user chooses this link from within the Spare Backup client
software the user will be re-directed to the Spare Room website and
automatically logged in.





Spare Diagnostics is another
product we are working on that works in conjunction with Spare Backup in order to help
predict, prevent and solve computer issues of our users before they have an
impact on their operating systems. Spare Diagnostics will track
system data and generate reports on any potential issues that may cause our
customers to experience problems with their computers.  The
information collected via the diagnostics will enable us to provide proactive
customer support as well.





6


Our
Target Customers





We focus
on owners and executives of businesses which do not have an IT (information
technology) department that use technology to support their businesses as well
as small business users and consumers 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, as well as individuals who use mobile devices. 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. Spare
Backup now has a SMB product directed toward the small to mid-size business with
500 or less computers. The same ease of use that the consumer product is known
for the SMB product has with an ease to use administrative dashboard for set up,
grouping of departments and storage controls.





How
We Market Our Products and Services





Our
strategy is to partner with leading companies such as computer manufacturers
(OEMs), high speed cable providers (MSOs), retailers mobile operators, mobile
resellers, warranty and service companies that have established brands as a way
to gain acceptance for, and create a demand for, our products and services. We
believe that by bundling our products and services as one feature of a
value-added service offered by major national and international brands that we
will be able to leverage their brand recognition and marketing efforts to
accelerate our market acceptance and significantly increase our adoption
rates.





Our
products are sold direct to the customer via our web site for online
distribution. Users may try our products and services at no cost for a limited
trial period or by a quantity of storage, which can be easily
downloaded.





In
January 2008, we entered into a License Agreement with Sony Electronics, Inc.©
(Sony) under which we granted Sony a non-exclusive, world-wide license to our
Spare Backup fully-automated remote backup solution and software tools,
including the right to reproduce, publish, prepare derivative works and sell the
product, as well as the right to use our trade name, trademarks and other
identifying logos. Under a one year program, Sony may preinstall our Spare
Backup service and software tools, on hardware, and or other Sony products it
sells, as it determines, on a royalty-fee basis. Sony will receive a percentage
of each subscription sold to the end user during the term of the agreement and
for 24 months after its termination.





Under the
terms of the agreement, we are responsible for delivery of the service to Sony's
end users as well as providing for training, at our expense, to Sony's technical
support personnel. We have indemnified Sony in connection with claims related to
our products and service raising from non-performance. The agreement, which may
be renewed for successive 12 month terms, may be immediately terminated by Sony
in the event we should directly or indirectly defraud Sony, for any
misrepresentation or breach of any warranty made by us in the agreement, or in
the event of our bankruptcy or insolvency.





In July
2008, we have received a purchase order amounting to $50,000 from VAIO North
America, a division of Sony Electronics in connection with our enterprise-level
"Corporate Protection Products" in which certain divisions of Sony are now using
this custom product. The product focuses on enterprise-level solutions, bringing
its reliable automated data storage services to IT managers and business
executive’s at large corporations. The product is now currently being used and
all payments have been collected in full.





During
fiscal 2008 and 2009, our marketing efforts were primarily invested in marketing
strategies and initiatives such as direct mail, marketing materials, in store
promotion and bundling with other services.





On
September 17, 2008, we have signed a Master Service Agreement (MSA) with Sony of
America (VAIO division). The MSA will serve as the primary agreement whereby all
contracts and statements of work ("SOW") will reside under the MSA. Future SOW
will include unique terms specific to the project or program. During 2009 we
terminated our agreement with Sony.





On
November 5, 2008, we entered into a data storage services agreement with The Car
Phone Warehouse Limited, a company incorporated under the laws of England and
Wales, for purposes of providing data backup services for Car Phone's customers.
The agreement is for a 12-month term subject to initial renewal periods as
elected by the parties. Car Phone is obligated to provide its reasonable best
efforts to promote the Company's backup service, and Spare Backup designed the
data backup service and will create a backup Web site for Car Phone. We will
invoice Car Phone customers directly for all monthly and annual fees and Car
Phone will be paid in a commission basis. During 2009, we amended and expanded
our agreement with Car Phone via a memorandum of understanding, in which we will
now provide Cloud computing, online PC data backup, online PC data transfer, PC
synchronization and other additional services. The agreement calls for us to
design and host a digital platform service, or consumer cloud, via Spare Room which will sync
with all content from multiple devices, as well as for us to provide certain
multimedia content for sale to the end users beginning in October 2009. Car
Phone Warehouse will provide our services throughout their retail services and
online markets and will share revenue with us on an undisclosed
basis.





7


During
2009, we also entered into a 45-day memorandum of understanding with Trend Micro
(UK) Limited (“TMI”). The agreement calls for our services to be embedded within
Trend Micro Internet Security PRO service offered to Car Phone Warehouse
customers in the U.K. The services will be co-branded with TMI using “Geek
Squad” user interfaces and powered us. We will receive revenue as customers
register for the online storage service on an undisclosed basis.





In
February 2009, we entered into a 1 year agreement with privately held Cydcor
whereby Cydcor will market our line of backup services for consumers and small
businesses throughout its business to business direct sales network. Cydcor is a
market leader in outsourced direct sales with over 3,000 direct sales
professionals servicing hundreds of thousands of business clients in North
America. Their clients represent some of the brands, covering many different
industries, including telecommunications, cable, internet, office products,
merchant services and energy. Under the terms of the agreement, Cydcor will
offer Spare Backup's business data storage solutions to its network of business
clients. Cydcor will be paid in a commission basis on all customer orders that
has an authorization for customer payment received via the efforts of Cydcor. In
addition, Cydcor will receive volume bonuses based on total number of sales
generated in any given calendar month.





In June
2009, we entered into a 6 week Memorandum of Understanding agreement with Comet,
which is part of Kesa Electricals PLC, located in England.  The
agreement provides that we will provide Online PC data backup, PC data transfer,
Cloud computing via Spare
Room and PC synchronization services, which will be co-branded by Comet.
Comet offers a wide range of electrical products for business and consumer
usage, with products ranging from televisions to computers. During October 2009,
a definitive agreement was reached with Comet, agreeing to an 18 month agreement
of service. Comet will make our services available to its customers via its
retail sales markets comprising England, Scotland, Ireland and
Wales.





In April
2010, we entered into a 3 year agreement with Simplexity, LLC, owner of the
website Wirefly.com (“Simplexity”). Simplexity is based in Reston, Virginia and
is the Internet’s leading authorized seller of cell phones and wireless
services. The agreement gives Simplexity the exclusive right for marketing and
distribution of our data storage and cloud computing services through online
mobile sales sites. We will provide the co-branded platform to Simlexity’s
Wiefly.com customers, as well as affilitated companies through a promotional
offer anticipated to begin in the second quarter of 2010. We will share all
revenue derived from this agreement with Simplexity on an undisclosed
basis.





In
January 2010, we signed a term sheet with ServiceLive, Inc., a Sears Holdings
Corporation (“SLI). The term sheet provides for the distributions of our
proprietary services, including Online PC data backup, PC data transfer, Cloud
computing (Spare Room)
and PC synchronization to SLI’s customers. These services will be co-branded
ServiceLic, powered by Spare Backup. We will share all revenue derived from the
agreement on an undisclosed basis. At March 31, 2010, no master service
agreement had been reached.





In April
2010, we entered into a 2 year agreement with Saveology, LLC (“Saveology”),
which automatically renews for another 2 years unless either party terminates.
The agreement provides Saveology with the non-exclusive license to market our
services to their customers, giving them the opportunity to register for our
services directly through a co-branded website maintained and constructed by us.
We will share all revenue derived from this agreement with Saveology on a
undisclosed basis.





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. Our support services
were initially available from during evening hours during the week and extended
hours on weekends. In March 2007 we began offering 24/7/365 customer
support.





8


Research
and Development





Our
products were developed primarily by our employees assisted by contractors in
certain specialty areas. We have invested approximately $1.1 million and
approximately $1.3 million in research and development during fiscal 2009 and
fiscal 2008, respectively.





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 redundant 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 backup settings for the user.





We own
all of our servers and utilize hosting in geographically dispersed TIA-964
Tier-3 rated collocation facilities. Our server architecture employs multiple
servers and switching equipment to provide redundancy and high availability to
Spare Backup service users. The entire storage area network (SAN) storage system
is replicated in near real-time to a secondary SAN to backup the primary one,
which will automatically become available in the event of an outage at the
primary storage array. 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 predictable costs.





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 a leased facility in
Arizona. While our infrastructure is fully redundant and Tier 3 rated, our
insurance coverage covers lost profits and accordingly 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.





Competition





We face
intense and increasing competition in the web-based 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:





●
            service
      functionality, quality and
performance;





●
            ease
      of use, reliability and security of
services;





●
            establishment
      of a significant base of customers and distribution
    partners;





●
            ability
      to introduce new services to the market in a timely manner by adding
      additional suite of products to our Backup
  client;





●
            customer
      service and support; and





●
            pricing.





9


Our
primary competitors are various Internet-based backup providers broadcasters,
such as Connected.com, Livevault, and backup.com, Carbonite and EMC/Mozy. 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 and Symantec (swampdrive) (Norton
360).





Substantially
most 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.





A
non-provisional patent application for the client side technology utilized by
Spare Backup was filed in the United States Patent and Trademark Office on June
27, 2006. A non-provisional patent application for the server side technology
utilized by Spare Backup was filed in the United States Patent and Trademark
Office on August 10, 2006. Both applications are currently pending in the Patent
Office and awaiting examination. We are currently looking at expanding our
portfolio of intellectual property and we expect to file new applications in the
second quarter of fiscal 2009. 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 there under 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.





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.





Employees





As of
March 31, 2010 we had 43 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.





10


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.





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.





Effective
August 16, 2006 we changed our name to Spare Backup, Inc. The corporate name
change was brought about by a merger of a wholly-owned subsidiary into Newport
International Group, Inc. with Newport International Group, Inc. surviving but
renamed Spare Backup, Inc.





Item
1A. 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.
If any of the following risks and uncertainties develop into actual events, our
business, financial condition or results of operations could be materially
adversely affected and you could lose your entire investment in our
company.





11


We
have a history of losses and an accumulated deficit. We anticipate continuing
losses may result in significant liquidity and cash flow problems. The report on
our financial statements for Fiscal 2008 contains and explanatory paragraph
regarding our ability to continue as a going concern.





Our net
losses for the fiscal years ended December 31, 2009 and 2008 were $10,571,914
and $15,132,558, respectively. We have never generated sufficient revenues to
fund our ongoing operations. Our operating losses for fiscal 2009 and fiscal
2008 were $8,795,283 and $10,605,030, respectively, and these losses are
primarily attributable to our sales, general and administrative expense. The
report of our independent registered public accounting firm on our financial
statements for the year ended December 31, 2009 contains an explanatory
paragraph regarding our ability to continue as a going concern based upon our
net losses, cash used in operations and working capital deficit. Our ability to
continue as a going concern is dependent upon our ability to raise additional
capital as described below. The financial statements included in this annual
report do not include any adjustments to reflect future adverse effects on the
recoverability and classification of assets or amounts and classification of
liabilities that may result if we are not able to continue as a going
concern.





Our
revenues are not sufficient to fund our operating expenses and we will need to
raise additional capital.





While our
operating loss has decreased approximately 17% for fiscal 2009 over fiscal 2008,
we will need to significantly increase our revenues to fund these costs. At
December 31, 2009 we had approximately $44,000 cash overdraft and a working
capital deficit of approximately $9.41 million. We have raised subsequent to
December 31, 2009, approximately $778,000 from the sale of our common stock, and
entered into a subscription agreement with an accredited investor for a $7
million secured revolving credit note. The proceeds form the sale of the common
stock for working capital purposes and intend to use the proceeds from the $7
millions revolving credit note to help pay off our liabilities. However, our
current working capital is not sufficient to pay our operating expenses, our
obligations as they become due or certain tax liabilities nor is our working
capital sufficient to fund any expansion of our company.





While we
are constantly evaluating our cash needs and existing burn rate in order to make
appropriate adjustments in operating expenses, we need to raise additional debt
or equity capital to provide funding for ongoing and future operations and to
satisfy our obligations as they become due. While we have historically been able
to raise capital, the current capital markets are very challenging and there are
no assurances 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 products successfully. If we are unable to raise
capital as needed, it is possible that we would be required to cease operations
in which event you would lose your entire investment in our Company. During
February 2010 we were able to secure a $7 million secured revolving credit note.
The note is has a term of 3 years and interest will be payable on the unpaid
principal balance at 10% per annum and 4% per annum for the amount of the
convertible note which has not been funded. Under the term of the agreement, we
will also issue to the note holder five-year warrants to purchase 15 million
shares of our common stock with an exercise price of $0.30 per share, as well as
50,000 share of our Series B Preferred Stock. The note is also convertible at
any time at the option of the holder based on the principal amount outstanding
as follows: (i) up to $1 million, convertible at $0.20, (ii) in excess of $1
million up to $2 million, convertible at $0.25, and (iii) in excess of $2
million up to $7 million, convertible at $0.30.





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.





Net
revenues from the sales of our Spare Backup line of products have been limited
and insufficient to fund our ongoing operations. We reported net revenues of
$2,692,320 and $1,381,443, respectively, for the fiscal years ended December 31,
2009 and 2008. While our net revenues significantly increased for fiscal 2009
over fiscal 2008, our net revenues will need to significantly increase if we are
to provide cash to fund our operating expenses. We cannot guarantee either that
the demand for our Spare Backup line of software products will develop, that
such demand will be sustainable or that we will ever effectively compete in our
market segment. In addition, we cannot predict what impact, if any, the
reduction in discretionary spending will have on future sales of our products.
If we are unable to generate any significant net 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, if at all.





12


We
have approximately $2,620,000 of debt which is presently past due and an
additional $1,201,000 which will become due during 2010 and we do not have the
funds necessary to pay these obligations.





In
addition to funding our operating expenses, we need capital to pay various debt
obligations totaling approximately $3,821,000 which are either currently past
due or which are due in the current fiscal year. Currently, there are $120,000
principal amount of the 10% short-term notes which have already become due in
August and September 2008, and $2,500,000 principal of the 8% short-term notes
which has become due in August 2009. In 2010, $570,000 principal of the 8%
short-term notes become due between June and September, $245,000 principal of
the 8% long-term notes become due between October and November, and $336,000
principal of the 10% short-term notes become due in January. Additionally, there
are $96,000 principal amount of the 8% long term notes which becomes due between
January and March 2011. Under the terms of the various short-term notes in the
aggregate principal amount of $2,500,000, we have the right to force a
conversion of those obligations into equity providing that we have registered
the shares of common stock issuable upon such conversions prior to the maturity
dates of the notes. We have not filed the requisite registration statement and
unless we are successful in extending the maturity dates of these obligations it
is not likely we will be able to avail our company of this opportunity before
the notes become due. During 2010, we have been in contact with numerous note
holders to work out either a repayment or extension of these notes. The
existence of these obligations provides additional challenges to us in our
efforts to raise capital to fund our operations. If we are unable to restructure
these notes and we are unable to raise the capital necessary to satisfy the
obligations, it is possible we will be forced to cease operations.





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 our operating expenses have continued to grow
and we do not know if our net 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. While the actual amount of our
future capital requirements, however, depend on a number of factors, including
our ability to grow our net revenues and manage our business, it is likely we
will need to raise a significant amount of capital during fiscal 2010 if we are
to continue our current operations and satisfy our obligations as they become
due. In addition to the challenges facing the capital markets today which make
raising equity capital much more difficult for a company such as our than in
prior years, the existence of a number of short term notes which are either
currently past due or which will become due in 2010, together with the pending
litigation facing our company and the piggy-back registration rights we have
granted a number of investors serve to also make it harder to raise the capital
we need. 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.





We
have been dependent on our relationship with DSG International for a majority of
our revenues.





During
2009 approximately 89% of our net revenues were derived by sales through our
relationship with DSG International. During December 2009 we mutually ended our
agreement with DSG International. We are now materially dependent on our other
various customers.





We
are past due in the payment of payroll taxes.





At
December 31, 2009 we had approximately $2,027,000 of accrued but unpaid payroll
taxes due to the federal government and since that date, through March 31, 2010
the amount has increased to $2,149,000. We do not have the funds necessary to
satisfy this obligation. During October 2009, the Company had entered into an
installment plan with the state of California to pay off their outstanding
balance from 2008 of $82,346 for three equal installments of $33,000 due in
October November and December. In October 2009 we paid the first installment,
however, we have not paid either the second or third installments, as a result
we paid $9,639 of penalty and interest. We intend to use part of the $7 million
revolving credit note to pay off our outstanding taxes. During 2010, we have
attempted to negotiate with the various authorities for payment plans to help
reduce the penalties and interest. If we are unable to raise the funds
necessary, it is possible that we will be subject to significant additional
fines and penalties, Mr. Perle, our President, and our Board of Directors could
be personally subject to a 100% penalty on the amount of unpaid taxes and the
government could file liens against our company and our bank accounts until such
time as the amounts have been paid.





13


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
are a defendant in a number of lawsuits.


We are
currently a defendant in three separate lawsuits in which the plaintiffs are
seeking approximately $252,000 together with attorney's fees, costs and
prejudgment interest. We are also incurring additional legal fees in our efforts
to defend these actions. While we believe our defenses are meritorious in each
of these cases, should we not prevail in one or more of the actions we could be
forced to pay significant amounts which, given our current cash position and
need for working capital, could materially adversely affect our ability to
continue as a going concern.





The
exercise of outstanding warrants and the conversion of outstanding notes will be
dilutive to our existing stockholders.





As of
March 31, 2010 the following securities which are convertible or exercisable
into shares of our common stock were outstanding:





●
            common
      stock purchase warrants to purchase a total of 79,237,812 shares of our
      common stock at prices ranging between $0.12 to $1.30 per
      share;





●
            18,686,250
      shares of our common stock issuable upon the possible conversion of the
      outstanding $3,917,000 principal amount 8% and 10% convertible promissory
      notes due between August 2008 and March 2011,
  and





●
            28,736,767
      shares of our common stock issuable upon exercise of outstanding options
      with exercise prices ranging from $0.01 to
  $0.93.





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.





Our
quarterly financial results will continue to fluctuate making it difficult to
forecast out operating results.





Our
quarterly operating results have fluctuated in the past and we expect our net
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:





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





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





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





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





●
            government
      regulation; and





●
            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.





14


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 net 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 net 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 our stock may decline.





We have
incurred net losses quarterly from inception through December 31, 2009, and at
December 31, 2009 we had an accumulated deficit of approximately $100 million.
We expect to continue to incur net losses for the foreseeable future absent a
significant increase in our revenues, of which there are no assurances.
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 net revenues to be profitable in
the future and we may not generate sufficient net 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:





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





●
            Successfully
      raise additional capital in the
future;





●
            Successfully
      integrate, leverage and expand our product
  distribution;





●
            Successfully
      scale our current operations;





●
            Implement
      and execute our business and marketing
  strategies;





●
            Address
      intellectual property rights issues that affect our
    business;





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





●
            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 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, 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 have only two
independent directors. 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.





15


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, net 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:





●
            Service
      functionality, quality and
performance;





●
            Ease
      of use, reliability and security of
services;





●
            Establish
      a significant base of customers and distribution
  partners;





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





●
            Customer
      service and support; and





●
            Pricing.





Our
primary competitors are various Internet-based backup providers’ broadcasters,
such as Connected.com, Novastar, Livevault, firstbackup.com, Carbonate, EMC/Mozy
and Norton 360 a product of Symantac. 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 EMC and VERITAS along with
CommVault Systems.





Substantially
all of our competitors may 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 net 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.





16


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. We recently issued our CEO a series of super
voting preferred stock which increased his ability to control the outcome of
stockholder votes.





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. In January 2008 we created a series of
50,000 shares of Series A Preferred Stock which carries super voting rights of
400 votes per share which were issued to our CEO as additional compensation.
Prior to the issuance of the shares of Series A Preferred Stock to Mr. Perle he
controlled the vote of approximately 10% of our outstanding voting securities.
As a result of the issuance of these securities, Mr. Perle now controls the vote
of approximately 11.8% of our outstanding voting securities. This action was
approved by our Board of Directors of which Mr. Perle is a member in accordance
with the provisions of our certificate of incorporation.





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 affect 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.





Item
1B. Unresolved Staff Comments





Not
applicable to a smaller reporting company.





Item
2.  Properties





In
November 2006 we entered into a five year lease agreement, commencing January 1,
2007, with an unrelated third party for approximately 6,850 square feet which
serves as our principal executive offices. Under the terms of the lease our
initial annual base rent is approximately $152,000 and we will be responsible
for our pro-rata share of common area expenses. The annual rent will escalate
annually during the term of the lease to approximately $171,000 in the fifth
year. We believe this facility meets our operational needs for the foreseeable
future.





In March
2010 we entered into a 1 year lease agreement, commencing April 26, 2010, with
an unrelated third party for approximately 1,900 square feet which serves as our
office for research and development. Under the terms of the lease our monthly
rent is $2,625 per month, with $3,062 due at signing.





17


Item
3.  Legal Proceedings





In
January 2009, we filed a declaratory relief in connection with an investment
banking agreement entered into fiscal 2008 against Merriman Curhan Ford &
Co. in the Supreme Court of California - County of Riverside Case No. 083346. In
February 2009, we received a notice of petition for order compelling arbitration
in the Superior Court California- San Francisco County, Case No. CFP 09-509186,
which was filed on January 28, 2009 by a placement agent, Merriman Curhan Ford
& Co., for failure to pay fees for services associated with an investment
banking agreement. The placement agent is seeking for the reimbursement for out
of pocket fees of approximately $31,000, payment of notes payable with principal
amount of $161,200 and 370,370 shares of the Company. The case is set for
arbitration in September 2010, and mediation will be completed by July 2010. We
contend that the agreement was obtained by misrepresentations and concealment
and that it is unenforceable and void. If the case proceeds, we intend to
respond aggressively to the arbitration and management believes that there is a
very low likelihood of an unfavorable outcome.





We are a
party to litigation in the Riverside County Superior Course, Case No. INC084243,
which was filed in February 2009 by Accretive Solutions in the state of Florida.
The vendor is claiming a breach of contract, resulting in damages from a 2007
corporate compliance agreement. We contend that no services were ever provided.
The vendor is seeking damages of approximately $37,000. The case will most
likely be referred to arbitration. Management believes that there is a low
likelihood of an unfavorable outcome.





We are a
party to litigation in the New York Supreme Court, Case No. 109746-2009, which
was filed in July 2009 by Wolfe, Axelrod, Weinberger, LLC, an IR firm. The firm
is claiming a breach of contract, resulting in damages from the 2007 agreement.
We contend that the contract was terminated by the agreement and intends on
filing a cross complaint. The firm is seeking damages of approximately $55,000,
and settlement discussions have been ongoing for several months. Management
believes that there is a low likelihood of an unfavorable outcome.





Item
4. (Removed and Reserved)





PART
II





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





Our
common stock is quoted on the OTCBB under the symbol SPBU. 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.





Fiscal Year Ended December 31,
      2008
            High
            LowFirst
      quarter ended March 31, 2008
            $
      0.50
            $
      0.32Second
      quarter ended June 30, 2008
            $
      0.40
            $
      0.23Third
      quarter ended September 30, 2008
            $
      0.30
            $
      0.08Fourth
      quarter ended December 31, 2008
            $
      0.19
            $
      0.07





Fiscal Year Ended December 31,
      2009
            High
            LowFirst
      quarter ended March 31, 2009
            $
      0.26
            $
      0.13Second
      quarter ended June 30, 2009
            $
      0.24
            $
      0.11Third
      quarter ended September 30, 2009
            $
      0.26
            $
      0.13Fourth
      quarter ended December 31, 2009
            $
      0.17
            $
      0.09





High
            LowFirst
      quarter ended March 31, 2010
            $
      0.23
            $
      0.10





On March
31, 2010, the last sale price of our common stock as reported on the OTCBB was
$0.20. As of March 31, 2010, there were approximately 649 record owners of our
common stock.





18


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.





Unregistered
Sales of Equity Securities and Use of Proceeds





During
October 2009 we issued 490,571 shares of our common stock valued at $69,001 in
connection with the payment of the accrued interest on the 8% and 10%
convertible promissory notes.





During
December 2009 we issued 190,411 shares of our common stock for services valued
at $24,349.





During
October 2009 we issued 314,298 shares of our common stock for the conversion of
a 10% short-term convertible promissory note with a principal of $50,000 and
interest of $288.





Between
October and December 2009 we issued 5,750,624 shares of our common stock valued
at $802,500 pursuant to a private placement. In connection with the issuance of
shares, we also issued warrants to purchase 4,663,541 shares of common stock at
an exercise price range of $0.16 to $0.20.





During
January 2010 we issued 619,600 shares of our common stock valued at $68,637 in
connection with the payment of the accrued interest on the 8% and 10%
convertible promissory notes.





During
January 2010 we issued 575,833 shares of our common stock for services valued at
$87,048.





During
February 2010 we issued 100,000 shares of our common stock valued at $1,000 for
the exercise of options.





During
February 2010 we issued 100,000 shares of our common stock valued at $20,000 per
the settlement with one of our vendors.





During
February 2010 we issued 135,000 shares of our common stock for the conversion on
a 8% short-term convertible promissory note with a principal of $20,000 and
interest of $1,600.





During
March 2010 we issued 725,000 shares of our common stock for the conversion of
two 10% short-term convertible promissory notes with principals totaling
$125,000.





Between
January and March 2010 we issued 6,211,113 shares of our common stock valued at
$776,975 pursuant to a private placement. In connection with the issuance of
shares, we also issued warrants to purchase 3,106,231 shares of common stock at
an exercise price range of $0.16 to $0.20.





Item
6. Selected Financial Data





Not
applicable to a smaller reporting company.





Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operation





The
following information should be read in conjunction with our financial
statements and accompanying notes included in this Annual Report on Form
10-K.





19


Overview





Our
flagship product is Spare
Backup, a fully-automated remote backup solution designed and developed
especially for the small office or home environment which automatically and
efficiently backs up all data on selected laptop or desktop computers, as well
as mobile devices. As a result, we believe small companies can ensure file
safety in PCs and laptops for backup and retrieval. We launched our Spare
Back-up service and software product version 1.0 in March 2005 and we are
currently offering version 6.0 of the product. Our Spare Switch software enables
users to complete the transfer of personal files from one personal computer (PC)
to another via a high speed Internet connection. We focus on owners and
executives of businesses that use technology to support their businesses, but do
not have an IT (information technology) department, as well as consumers who
desire to secure available files and documents vital to the continuity of their
operations, business, or personal information. Our concept is to develop a suite
of complementary products and services which are designed for use by technical
and non-technical users featuring a user interface that can cross both sets of
users. Our software has unique characteristics of additional coding that enables
easy to scale infrastructure and support elements which we believe provides a
competitive advantage over other providers whose products require large
investments in hardware, as well as professional installation, training and
support.





During
the year ended December 31, 2009, we spent significant resources, both financial
and management time, in implementing our distribution model and broadening our
partnership relationships to accomplish our goals. These costs included
approximately $1,807,000 for sales and marketing advertising and business
development expenses as well as approximately $624,000 of travel and travel
related expenses, and approximately $542,000 of costs associated with technology
service which includes engineering development, software and hardware related to
the ongoing provision of our services. During this year we also spent
approximately $1,140,000 on research and development. The research and
development expenses were primarily related to compensation expenses paid to our
software engineers, employees and consultants in conjunction with the
development or enhancement of our products.





We are
also spending significant time with our new partner Cydcor, which has over 3000
door to door sales people starting to sell our SMB products. In February 2009,
we entered into a 1 year marketing agreement with Cydcor Inc. whereby Cydcor
will market our services and perform marketing campaigns as it may determine
from time to time. Cydcor will be paid in a commission basis on all customer
orders that has an authorization for customer payment received via the efforts
of Cydcor. In addition, Cydcor will receive volume bonuses based on total number
of sales generated in any given calendar month.





In 2009
Spare will form its Enterprise division, as we have had a successful launch of
its product with Sony Corp.





During
2009, we introduced our new advertising division, which has the ability to sell
or cross market products to our data base of clients. We can partner with ours
exiting clients and or solicit new customers to cross market products based on
the end users behavior.





Results
of Operations





SPARE
      BACKUP, INC.RESULTS
      OF OPERATIONS





Year
      ended
            
            
            Increase/
            
            
            Increase/December
      31,
            
            
            (Decrease)
            
            
            (Decrease)2009
            
            
            2008
            
            
            in
      $ 2009
            
            
            in
      % 2009vs
      2008
            
            
            vs
      2008Net
      revenues
            
            $
            2,692,320
            
            
            $
            1,381,443
            
            
            $
            1,310,877
            
            
            
            94.9
            %Operating
      expenses:Research
      and development
            
            
            1,139,951
            
            
            
            1,270,776
            
            
            
            (130,825)
            
            
            
            -10.3
            %Selling,
      general and administrative
            
            
            10,347,652
            
            
            
            10,715,697
            
            
            
            (368,045)
            
            
            
            -3.4
            %Total
      operating expenses:
            
            
            11,487,603
            
            
            
            11,986,473
            
            
            
            (498,870)
            
            
            
            -4.2
            %Operating
      loss
            
            
            (8,795,283)
            
            
            
            (10,605,030)
            
            
            
            1,809,747
            
            
            
            -17.1
            %Other
      income (expense)Change
      in fair value of derivative liabilities
            
            
            179,689
            
            
            
            -
            
            
            
            179,689
            
            
            
            NMGain
      from debt settlement
            
            
            940,106
            
            
            
            35,713
            
            
            
            904,393
            
            
            
            2,532.4
            %Interest
      expense
            
            
            (2,896,426
            )
            
            
            (4,563,241
            )
            
            
            1,666,815
            
            
            
            -36.5
            %Total
      other income (expense)
            
            
            (1,776,631
            )
            
            
            (4,527,528
            )
            
            
            2,750,897
            
            
            
            -60.8
            %Net
      loss
            
            
            (10,571,914
            )
            
            
            (15,132,558
            )
            
            
            4,560,644
            
            
            
            -30.1
            %NM:
      Not Meaningful





20


Revenues





Our net
revenues increased substantially in the year ended December 31, 2009 from the
fiscal year of 2008. This increase in revenues reflects the increased adoption
rate of our products by trial users who convert to subscriptions. For the year
ended December 31, 2009, approximately 89% of our total net revenues were
primarily attributable to the establishment of an international partner
relationship with DSG International focusing in Europe. During December 2009 we
mutually ended our agreement with DSG International. We are now materially
dependent on our other various customers for revenue.





Research
and Development





Research
and development expenses consist primarily of compensation expenses paid to our
software engineers, employees and consultants in conjunction with the
development or enhancement of our products. Our research and development
expenses for fiscal 2009 include costs associated with continued development of
user interfaces and additional products, including version 6.0 of Spare-Backup,
a family pack, and our SMB (small to medium business) products Spare’s cloud or
Spare Room, Spare Mobile, Spare Synchronization and
Spare Diagnostics, and
reflected increased research and development efforts to successfully meet
various deadlines set by our OEM partners. Included in research and development
expenses for the year ended December 31, 2009 are non-cash expenses of $3,600
which represents the fair value of stock issued to a key employee in lieu of
cash compensation. The decrease in our research and development expenses when
compared to the comparable periods in 2008 is primarily attributable to
decreased use of consultants for research and development of our product due to
lack of working capital. Subject to the availability of sufficient working
capital, we anticipate that we will continue to incur research and development
expenses in future periods as a result of the addition of new features, the
launch of new versions of our products and the expansion of our engineering
staff, however we are not able at this time to quantify the amount of such
expenditures. In some cases as we develop or co-develop additional services and
products, we may from time to time get our partners to contribute funding for
some of these projects.





Selling,
General and Administrative Expenses





The
decrease in selling, general and administrative expenses in 2009, as compared to
2008 of $368,045 or 3.4% is primarily due to the following:





●
            an
      increase in advertising and sales and marketing expenses of approximately
      $968,000; this increase is primarily due to an increase in sales
      commissions to DSG International. During 2009, we reached a settlement
      agreement with DSG International, mutually ending our agreement, at which
      point all remaining prepaid commission were expensed, amounting to
      approximately $453,000;●
            an
      increase in professional and consulting services of approximately
      $643,000; this increase is primarily due to an increase in litigation
      expenses of approximately $373,000 due to an increase in our efforts to
      settle any disputes our litigations, an increase in
      consulting  fees of $166,000 due to an increase in our efforts
      to decrease our spending on payroll expenses and an increase in PR/IR
      expense of $134,000; offset by●
            a
      decrease in option expenses of approximately $840,000; this decrease is
      primarily due to a re-pricing of options during 2008 in which we
      recognized a one time expense of approximately
$370,000;●
            a
      decrease in technology services of approximately $264,000; this decrease
      is primarily due to an effort to decrease our cost of
      services;●
            a
      decrease in employee related expenses of approximately $214,000 ; this
      decrease is due to an increase in penalties and interest related to
      payroll taxes of approximately $399,000, offset by the decrease in payroll
      expense of $142,000 and a decrease in stock based consulting expenses of
      approximately $470,000.





21


Other
Expenses





Our total
other expenses, net for fiscal 2009 decreased $2,750,897, or approximately 61%,
from the same period in fiscal 2008. The decrease in total other expenses from
fiscal 2008 to 2009 were primarily attributable to the following:





Change
in Fair Value of Derivative Liabilities and Derivative Liabilities
Expense





Change in
fair value of derivative liabilities and derivative liabilities expense consist
of income or expense associated with the change in the fair value of derivative
liabilities as a result of the application of ASC 815. The difference in
fair value of the derivative liabilities between the date of their issuance and
their measurement date, which amounted to an increase of approximately $247,000
and $0 for fiscal 2009 and 2008, respectively, and derivative liability expense
of approximately $180,000 and $0 for fiscal 2009 and 2008, respectively has been
recognized as other income/expense in those periods. We did not have a
comparable other expense during fiscal 2008 due to our having satisfied all of
the 8% and 10% convertible promissory notes during fiscal 2007, the terms of
which resulted in the application of ASC 815 to our financial statements, thus
eliminating such derivative liabilities.





Historically
we have been at a disadvantage in negotiating the terms of financing
transactions which have resulted in the recognition of these derivative
liabilities. We have reassessed at December 31, 2009, the number of authorized
but unissued shares and taking into consideration the floorless feature in
connection with the redemption provision on the 10% and 8% convertible
promissory notes and have concluded that a derivative liability of approximately
$247,000 is necessary.





Gain
from Debt Settlement





During
2009, we settled numerous court cases and disputes with vendors. As a result, we
recognized a total gain from debt settlement of approximately $940,000,
representing an increase of approximately $904,000, or 3,115% from 2008. During
2008, we only reached two settlements with vendors.





Interest
Expense





Interest
expense consists primarily of interest recognized in connection with the
amortization of debt discount and interest on our convertible promissory notes.
The increase in interest expense during the 2009 periods when compared to the
2008 periods is primarily attributable to the amortization of the debt discount
of approximately $1.1 million, expense associated with the modification of the
8% and 10% convertible promissory notes of approximately $1.1 million, accrued
interest of approximately $366,000 and amortization of debt deferred financing
costs of approximately $301,000 associated with the 8% and 10% convertible
promissory notes .





Liquidity
and Capital Resources





At
December 31, 2009, our cash overdraft amounted to approximately $43,489 and our
working deficit amounted to approximately $9,414,000. During the year ended
December 31, 2009, cash decreased due to cash used in operating and investing
activities, offset by cash provided by financing activities.





During
the year ended December 31, 2009, we used cash in our operating activities
amounting to approximately $4,031,000. Our cash used in operating activities was
comprised of our net loss of approximately $10,572,000 adjusted for the
following:





●
            Change
      in fair value of derivative liabilities of approximately
      $180,000;●
            Fair
      value of options and warrants granted to employees of approximately
      $1,004,000;●
            Amortization
      of prepaid expenses, debt discount and deferred financing costs, and
      depreciation of fixed assets of approximately
  $3,300,000;●
            Gain
      from debt settlement of approximately $940,000;●
            Fair
      value of beneficial conversion features modifications of approximately
      $1,069,000;●
            Fair
      value of shares, warrants or options issued for services of approximately
      $532,000; and●
            Fair
      value of shares issued for interest payment of approximately
      $15,000.





22


Additionally,
      the following variations in operating assets and liabilities impacted our
      cash used in operating activities:●
            Increase
      in accounts payable, accrued expenses and accrued payroll taxes of
      approximately $2,074,000, resulting from a an increase in
      expenditures;●
            Increase
      in deferred revenue of approximately $381,000, resulting from an increased
      number of consumers successfully prepaying for online backup
      services;●
            Increase
      in accrued interest on convertible promissory notes of approximately
      $366,000, resulting from the issuance of $1,804,000 8% and 10% convertible
      promissory notes in 2009;●
            Decrease
      in accounts receivable of approximately $81,000, resulting from a decrease
      in the amount of time it takes our customers to pay us; offset
      by●
            Increase
      in prepaid expense and other current assets of approximately $1,164,000,
      resulting from an increase in the prepaid commissions and marketing fees
      associated with our DSG International
agreement.





During
the year ended December 31, 2009, we incurred capital expenditures of
approximately $293,000.





During
the year ended December 31, 2009, we generated cash from financing activities of
approximately $4,305,000, which primarily consisted of the proceeds from
convertible promissory notes of $1,804,000, net proceeds from the issuance of
common stock for cash of $2,507,500 and cash overdraft of approximately $43,000,
offset by the repayment of a convertible promissory note of
$50,000.





During
the year ended December 31, 2008, we used cash in our operating activities
amounting to approximately $5,345,000. Our cash used in operating activities was
comprised of our net loss of approximately $15,133,000 adjusted for the
following:





●
            Fair
      value of options and warrants granted to employees of approximately
      $1,906,000;●
            Amortization
      of prepaid expenses, debt discount and deferred financing costs, and
      depreciation of fixed assets of approximately
  $5,283,000;●
            Fair
      value of preferred stock issued for services rendered of $50;
      and●
            Fair
      value of shares, warrants or options issued for services of approximately
      $1,677,000.





Additionally,
      the following variations in operating assets and liabilities impacted our
      cash used in operating activities:●
            Increase
      in accounts payable, accrued expenses and accrued payroll taxes of
      approximately $621,000, resulting from a an increase in
      expenditures;●
            Increase
      in deferred revenue of approximately $133,000, resulting from an increased
      number of consumers successfully prepaying for online backup
      services;●
            Increase
      in accrued interest on convertible promissory notes of approximately
      $290,000, resulting from the issuance of  8% and 10% convertible
      promissory notes amounting to $1,948,500 in 2008;●
            Increase
      in prepaid expense and other current assets of approximately $10,000,
      resulting from an increase in the prepaid commissions and marketing fees
      associated with our DSG International agreement; offset
  by●
            Increase
      in accounts receivable of approximately $132,000, resulting from an
      increase in revenue.





During
the year ended December 31, 2008, we incurred capital expenditures of
approximately $270,000.





During
the year ended December 31, 2008, we generated cash from financing activities of
approximately $5,107,000, which primarily consisted of the proceeds from
convertible promissory notes of $2,008,500, proceeds from the issuance of common
stock for cash of $1,917,000, proceeds from the exercise of warrants of
approximately $1,142,000 and the proceeds from the exercise of stock options of
approximately $140,000, offset by the payment of deferred financing costs of
approximately $38,000 associated with the convertible promissory notes and the
repayment of a convertible promissory notes of $62,500.





Off
Balance Sheet Arrangements





We have
no off-balance sheet arrangements.





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.





23


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





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





The
Company follows the guidance of the Securities and Exchange Commission's Staff
Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements". The
Company records revenue when persuasive evidence of an arrangement exists,
on-line back-up services have been rendered, the sales price to the customer is
fixed or determinable, and collectability is reasonably assured. Online back up
service fees received in advance are reflected as deferred revenue on the
accompanying balance sheet. Deferred revenue as of December 31, 2008 amounted to
$240,436 and will be recognized as revenue over the respective service
period.





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





Going
Concern





We have
generated minimal revenue since our inception on September 12, 2002, and have
incurred net losses of approximately $100 million from cash and non-cash
activity since inception through December 31, 2009. Our current operations are
not an adequate source of cash to fund our current operations and we have relied
on funds raised from the sale of our securities to provide sufficient cash to
operate our business. The report of our independent registered public accounting
firm on our financial statements for the year ended December 31, 2009 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. During February 2010 we
entered into a subscription agreement with an accredited investor for a $7
million secured revolving credit note. . The note is has a term of 3 years and
interest will be payable on the unpaid principal balance at 10% per annum and 4%
per annum for the amount of the convertible note which has not been funded.
Under the term of the agreement, we will also issue to the note holder five-year
warrants to purchase 15 million shares of our common stock with an exercise
price of $0.30 per share, as well as 50,000 share of our Series B Preferred
Stock. The note is also convertible at any time at the option of the holder
based on the principal amount outstanding as follows: (i) up to $1 million,
convertible at $0.20, (ii) in excess of $1 million up to $2 million, convertible
at $0.25, and (iii) in excess of $2 million up to $7 million, convertible at
$0.30. If we are unable to raise capital as needed, it is possible that we would
be required to cease operations. The financial statements included in this
report do not include any adjustments to reflect future adverse effects on the
recoverability and classification of assets or amounts and classification of
liabilities that may result if we are not successful.





Item
7A. Quantitative and Qualitative Disclosures About Market Risk





Not
applicable to smaller reporting companies.





Item
8. Financial Statements and Supplementary Data





Our
financial statements are contained in pages F-1 through F-22, which appear at
the end of this annual report.





Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure





None.





24


Item
9A(T). Controls and Procedures





Disclosure
Controls and Procedures





Our Chief
Executive Officer is responsible for establishing and maintaining disclosure
controls and procedures for us. Disclosure controls and procedures are controls
and procedures designed to reasonably assure that information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934, such
as this report, is recorded, processed, summarized and reported within the time
periods prescribed by SEC rules and regulations, and to reasonably assure that
such information is accumulated and communicated to our management, including
our Chief Executive Officer who also acts as our principal financial and
principal accounting officer, to allow timely decisions regarding required
disclosure.





Our
management does not expect that our disclosure controls or our internal controls
will prevent all error and fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. In addition, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people or by management override of the control. The design of any systems of
controls also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Over time,
controls may become inadequate because of changes in conditions, or the degree
of compliance with the policies or procedures may deteriorate. Because of these
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.





As
required by Rule 13a-15 under the Securities Exchange Act of 1934, as of
December 31, 2009, the end of the period covered by this report, our management
concluded its evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures. As of the evaluation date, our CEO who also
serves as our principal financial and accounting officer, concluded that we do
not maintain disclosure controls and procedures that are effective in providing
reasonable assurance that information required to be disclosed in our reports
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods prescribed by SEC rules and regulations, and
that such information is accumulated and communicated to our management to allow
timely decisions regarding required disclosure.





Management’s
Report on Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934. Our internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Our
internal control over financial reporting includes those policies and procedures
that:





●
            pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of our
      assets;





●
            o
      provide reasonable assurance that transactions are recorded as necessary
      to permit preparation of financial statements in accordance with generally
      accepted accounting principles, and that our receipts and expenditures are
      being made only in accordance with authorizations of our management and
      directors; and





●
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of our assets that could have
      a material effect on the financial
statements.





Because
of the inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





25


Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2009. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control-Integrated Framework. Management's
assessment included an evaluation of the design of our internal control over
financial reporting and testing of the operational effectiveness of these
controls.





Based on
this assessment, our management has concluded that as of December 31, 2009, our
internal control over financial reporting were not effective to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
U.S. generally accepted accounting principles.





Our lack
of resources prevents us from maintaining proper segregation of duties,
documentation of internal controls, implementation and monitoring.





This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management's report in this annual
report.





Changes
in Internal Control Over Financial Reporting





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





Item
9B. Other Information





During
October 2009 we issued 490,571 shares of our common stock valued at $69,001 in
connection with the payment of the accrued interest on the 8% and 10%
convertible promissory notes.





During
December 2009 we issued 190,411 shares of our common stock for services valued
at $24,349.





During
October 2009 we issued 314,298 shares of our common stock for the conversion of
a 10% short-term convertible promissory note with a principal of $50,000 and
interest of $288.





Between
October and December 2009 we issued 5,750,624 shares of our common stock valued
at $802,500 pursuant to a private placement. In connection with the issuance of
shares, we also issued warrants to purchase 4,663,541 shares of common stock at
an exercise price range of $0.16 to $0.20.





During
January 2010 we issued 619,600 shares of our common stock valued at $68,637 in
connection with the payment of the accrued interest on the 8% and 10%
convertible promissory notes.





During
January 2010 we issued 575,833 shares of our common stock for services valued at
$87,048.





During
February 2010 we issued 100,000 shares of our common stock valued at $1,000 for
the exercise of options.





During
February 2010 we issued 100,000 shares of our common stock valued at $20,000 per
the settlement with one of our vendors.





During
February 2010 we issued 135,000 shares of our common stock for the conversion on
a 8% short-term convertible promissory note with a principal of $20,000 and
interest of $1,600.





During
March 2010 we issued 725,000 shares of our common stock for the conversion of
two 10% short-term convertible promissory notes with principals totaling
$125,000.





Between
January and March 2010 we issued 6,211,113 shares of our common stock valued at
$776,975 pursuant to a private placement. In connection with the issuance of
shares, we also issued warrants to purchase 3,106,231 shares of common stock at
an exercise price range of $0.16 to $0.20.





26


PART
III





Item
10. Directors, Executive Officers and Corporate Governance





Directors
and Executive Officers





The
following individuals serve as our executive officers and members of our Board
of Directors:





Name
            Age
            PositionCery
      B. Perle
            47
            Chief
      Executive Officer, President and Chairman of the BoardEdward
      Hagan
            36
            Secretary
      and DirectorRobert
      Binkelle
            46
            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.





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 and since 2003 he has
owned SeaBreeze Nursery, a commercial container nursery.





Robert Binkelle. Mr. Binkelle
is the founder and CEO of The Estate Planning Team, Inc., a company that has
grown to service over 2200 securities advisors, CPA's, attorneys and other
professionals nationwide with tax strategies, estate and pension planning. Mr.
Binkelle is the Indian Wells, CA wealth manager for J.P. Turner & Company,
LLC. a national full service registered broker dealer. Mr. Binkelle has
participated in many public offerings, and has become very knowledgeable in high
tech and medical companies and is well versed in the financial needs of small
emerging growth companies and the means to satisfy them. Prior to joining
Atlanta based J.P. Turner & Company, Mr. Binkelle was a wealth manager with
Brook Street Securities and Raymond James Financial Services Inc., a highly
regarded national brokerage based in St. Petersburg, FL. Prior to Raymond James
Financial Services, Mr. Binkelle was an Academic All American football player
for the University of Utah where he majored in finance. Mr. Binkelle continued
his football career as a professional football player for the San Francisco
Forty-Niners during 1985 and 1986.





There are
no family relationships between any of the executive officers and directors,
except as set forth above. 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.





Key
Employees





Following
is biographical information on those persons whom we consider key employees of
our company:





Name
            Age
            PositionIvor
      A. Newman
            45
            Vice
      President of OperationsDarryl
      Adams
            35
            Director
      of Software Operations





Ivor A. Newman. Mr. Newman,
44, has served as Vice President of Operations of our Spare Backup subsidiary
since May 2006. Mr. Newman has over 20 years of program management and product
marketing experience. Prior to joining Spare Backup, from November 1999 to May
2006, Mr. Newman was the Worldwide cross line of business (X-Lob) Program
Manager for Dell Inc. where he was responsible for the successful creation and
implementation of global services programs. Mr. Newman joined Dell in 1999 and
was intimately involved with the global services division.





27


Darryl Adams. Mr. Adams, 34,
has served as our Director of Software Operations since October 2006. Mr. Adams
is experienced in software development. Prior to joining our company, from March
2003 until October 2006 he was employed by Automated Trading Desk, LLC, a South
Carolina based high-tech brokerage and market maker that applies sophisticated
algorithmic methods to equities trading, as a team member responsible for
implementation and analysis of various stock price prediction engines. From
December 2001 to March 2003 he operated Cinderblock Inc., a North Carolina-based
consulting firm that he founded which provided custom software solutions for
technology companies and from September 1999 to October 2001 he was employed by
ClickRadio, Inc., a provider of Internet based music entertainment software,
where he participate in the development of software elements and was responsible
for client configuration management and build processes needed to release
software and upgrades to the public. Mr. Adams received a B.S. with honors in
mathematics from the College of Charleston.





Compliance
with Section 16(A) of the Exchange Act





Section
16(a) of the Securities Exchange Act of 1934 requires that our executive
officers, directors and persons who own more than ten percent of a registered
class of our equity securities file reports of ownership on Form 3 and changes
in ownership on Form 4 or 5 with the SEC. Such executive officers, directors and
ten percent stockholders are also required by the SEC rules to furnish to us
copies of all Section 16(a) reports that they file. Based solely on its review
of the copies of such forms received by us, or written representations from
certain reporting persons that they were not required to file a Form 5, we
believe that during the fiscal year ended December 31, 2009, our executive
officers, directors and ten percent stockholders complied with all Section 16(a)
filing requirements applicable to such persons.





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 who 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:





●
            compliance
      with laws, rules and regulations,●
            conflicts
      of interest,●
            insider
      trading,●
            corporate
      opportunities,●
            competition
      and fair dealing,●
            discrimination
      and harassment,●
            health
      and safety,●
            record
      keeping,●
            confidentiality,●
            protection
      and proper use of company assets,●
            payments
      to government personnel,●
            waivers
      of the Code of Business Conduct and Ethics,●
            reporting
      any illegal or unethical behavior, and●
            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:





●
            disclosures
      made in our filings with the SEC,.





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





●
            conflicts
      of interests, and





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





28


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, 17257 Fred Waring Drive, Palm Desert, CA
92260, Attention: Corporate Secretary.





Committees
of the Board of Directors





Our Board
of Directors has not established any committees, including an Audit Committee, a
Compensation Committee or a Nominating Committee, any committee performing a
similar function. The functions of those committees are being undertaken by the
entire board as a whole. Because of the small size of our company and the even
number of independent directors, our Board of Directors believes that the
establishment of committees of the Board would not provide any benefits to our
company and could be considered more form than substance.





We do not
have a policy regarding the consideration of any director candidates which may
be recommended by our stockholders, including the minimum qualifications for
director candidates, nor has our Board of Directors established a process for
identifying and evaluating director nominees. We have not adopted a policy
regarding the handling of any potential recommendation of director candidates by
our stockholders, including the procedures to be followed. Our Board has not
considered or adopted any of these policies as we have never received a
recommendation from any stockholder for any candidate to serve on our Board of
Directors. Given our relative size and lack of directors and officers insurance
coverage, we do not anticipate that any of our stockholders will make such a
recommendation in the near future. While there have been no nominations of
additional directors proposed, in the event such a proposal is made, all members
of our Board will participate in the consideration of director
nominees.





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:





●
            understands
      generally accepted accounting principles and financial
      statements,





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





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





●
            understands
      internal controls over financial reporting,
and





●
            understands
      audit committee functions.





Since our
formation we have relied upon the personal relationships of our CEO to attract
individuals to our Board of Directors. While we would prefer that one or more of
our directors be an audit committee financial expert, the individuals whom we
have been able to attract to our Board do not have the requisite professional
backgrounds. As with most small companies until such time our company further
develops its business, achieves a stronger revenue base and has sufficient
working capital to purchase directors and officers insurance, we do not have any
immediate prospects to attract independent directors. When we are able to expand
our Board of Directors to include one or more additional independent directors,
we intend to establish an Audit Committee of our Board of Directors. It is our
intention that one or more of these additional independent directors will also
qualify as an audit committee financial expert. Our securities are not quoted on
an exchange that has requirements that a majority of our Board members be
independent and we are not currently otherwise subject to any law, rule or
regulation 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.





Item
11. Executive Compensation





The
following table summarizes all compensation recorded by us in the last completed
fiscal year for





●
            our
      principal executive officer or other individual serving in a similar
      capacity,





●
            our
      two most highly compensated executive officers other than our principal
      executive officer who were serving as executive officers at December 31,
      2009 as that term is defined under Rule 3b-7 of the Securities Exchange
      Act of 1934. In the case of our company this includes two key employees of
      our company, and





●
            up
      to two additional individuals for whom disclosure would have been required
      but for the fact that the individual was not serving as an executive
      officer at December 31, 2009.





29


For
definitional purposes in this annual report these individuals are sometimes
referred to as the "named executive officers." The value attributable to any
option awards is computed in accordance with ASC 718.





Summary Compensation
  TableName and Principal Position
            Year
            Salary($)
            Stock Awards
              ($)
            Option Awards
              ($) (1)
            All Other
              Compensation
            Total ($)Cery
      Perle, President and
            2007
            245,989
            33,401
      (3)
            468,000
      (4)
            204,696
            952,086Chief
      Executive Officer (2)
            2008
            269,923
            101,160
      (5)
            603,810
      (6)
            195,073
            1,169,9662009
            282,250
            -
            491,000
      (7)
            58,739
            831,989Ivor
      Newman, Vice President
            2007
            195,800
            17,190
      (9)
            250,000
      (10)
            14,679
            477,669of
      Operations (8)
            2008
            98,963
            161,735
      (11)
            31,810
      (12)
            16,011
            308,5192009
            163,800
            -
            194,650
      (13)
            14,141
            372,591Darryl
      Adams, Director of
            2007
            246,429
            17,602
      (15)
            561,000
      (16)
            34,734
            859,765Software
      Operations (14)
            2008
            156,750
            138,326
      (17)
            200,137
      (18)
            4,189
            499,4022009
            243,765
            -
            326,650
      (19)
            3,374
            573,789





(1)              The
dollar value recognized for the stock option awards was determine in accordance
with ASC 718. For a disclosure of the assumptions made in the valuation please
refer to footnote 10 in our consolidate financial statements filed under Item 8
of this Annual Report on Form 10-K.





(2)              During
fiscal 2007, in addition to Mr. Perle’s salary of $273,000, he was also paid
other compensation of $45,000 of payment for unused vacation and sick pay,
$50,193 for personal expense, $40,801 for health, dental and life insurance and
$68,702 for automobile expenses. During fiscal 2008, in addition to Mr. Perle’s
salary of $300,000, he was also paid other compensation of $25,000 of payment
for unused vacation and sick pay, $96,967 for personal expense, $10,123 for
health, dental and life insurance and $62,983 for automobile expenses. During
fiscal 2009, in addition to Mr. Perle’s salary of $330,000, he was also paid
other compensation of $18,561 for personal expense which was offset by unpaid
vacation and sick pay of $25,000, $8,805 for health, dental and life insurance
and $49,934 for automobile expenses.





(3)              Stock
awards of 22,335 shares of our common stock valued at $13,401, plus an
additional 1,000,000 shares of common stock resulting from a cashless exercise
valued at $20,000.





(4)              
Options to purchase 700,000 shares of our common stock at an exercise price
ranging from $0.44 to $0.93 per share, vesting at date of grant.





(5)              Stock
awards of 353,180 shares of our common stock valued at $101,160.





(6)              Options
to purchase 2,600,000 shares of our common stock at an exercise price ranging
from $0.11 to $0.36 per share, vesting at a range from at the date of grant to
over 24 months.





(7)              Options
to purchase 2,750,000 shares of our common stock at an exercise price ranging
from $0.15 to $0.19 per share, vesting at a range from at the date of grant to
over 24 months.





(8)              During
fiscal 2007, in addition to Mr. Newman’s salary of $180,000, he was also paid a
bonus of $15,800, as well as other compensation of $14,679 for health and dental
insurance. During fiscal 2008, in addition to Mr. Newman’s salary of $180,000,
he was also paid other compensation of $16,011 for health and dental insurance.
During fiscal 2009, in addition to Mr. Newman’s salary of $180,000, he was also
paid other compensation of $14,141 for health and dental insurance.





(9)              Stock
awards of 28,650 shares of our common stock valued at $17,190.





30


(10)              Options
to purchase 500,000 shares of our common stock at an exercise price ranging from
$0.44 to $0.93 per share, vesting at the date of grant.





(11)              Stock
awards of 804,639 shares of our common stock valued at $161,735.





(12)              Options
to purchase 200,000 shares of our common stock at an exercise price ranging from
$0.11 to $0.30 per share, vesting at the date of grant.





(13)              Options
to purchase 1,850,000 shares of our common stock at an exercise price ranging
from $0.15 to $0.20 per share, vesting at the date of grant.





(14)              During
fiscal 2007, in addition to Mr. Adam’s salary of $260,000, he was also paid a
bonus of $15,800, as well as other compensation of $3,532 for health and dental
insurance, $11,567 for automobile expenses and $19,635 for temporary housing
expenses.. During fiscal 2008, in addition to Mr. Adam’s salary of $260,000, he
was also paid other compensation of $4,189 for health and dental insurance.
During fiscal 2009, in addition to Mr. Adam’s salary of $260,000, he was also
paid other compensation of $3,374 for health and dental insurance.





(15)              Stock
awards of 29,337 shares of our common stock valued at $17,602.





(16)              Options
to purchase 1,100,000 shares of our common stock at an exercise price ranging
from $0.48 to $0.51 per share, vesting at a range from at the date of grant to
over 24 months.





(17)              Stock
awards of 351,848 shares of our common stock valued at $38,326.





(18)              Options
to purchase 1,504,018 shares of our common stock at an exercise price ranging
from $0.01 to $0.30 per share, vesting at the date of grant.





(19)              Options
to purchase 2,650,000 shares of our common stock at an exercise price ranging
from $0.18 to $0.21 per share, vesting at a range from at the date of grant to
over 24 months.





Employment
Agreements and Narrative Regarding Executive Compensation





Employment
Agreement with Cery Perle





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 renews for an
additional two-year term upon its expiration, with a 10% increase in his base
salary annually. On January 2009, the agreement automatically renewed for an
additional three-year term. Under the terms of this agreement, we currently pay
Mr. Perle an annual base salary of $330,000. 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. During fiscal 2008 as additional compensation approved by our
Board of Directors of which he is a member we issued him 353,180 shares of our
common stock which were valued at $101,160, and granted him options to purchase
a total of 2,600,000 shares of our common stock at an exercise prices ranging
from $0.11 to $0.30 per share which were valued at $603,810. During 2009, the
Board Approved granted him options to purchase a total of 2,750,000 shares of
our common stock at an exercise prices ranging from $0.15 to $0.18 per share
which were valued at $491,000. In addition, during fiscal 2007, 2008 and 2009 we
paid him certain additional compensation set forth in the foregoing table which
was approved by our Board of Directors. The agreement also provides for an
automobile allowance which is presently $5,000 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.





31


How
Mr. Newman's compensation was determined





On April
26, 2006, we entered into an employment agreement with Mr. Newman to serve as
our Vice President of Operations. Under the terms of this agreement, Mr.
Newman's base salary was $156,000. We currently pay Mr. Newman an annual base
salary of $180,000. We initially granted him an option to purchase 350,000
shares of our common stock at an exercise price of $0.40 per share as additional
compensation. This option vested ratably over the two-year term of the
agreement. Mr. Newman's employment with the company is "at will"
basis.





How
Mr. Adams's compensation was determined





On
September 20, 2006, we entered into an employment agreement with Mr. Adams to
serve as our Director of Software Operations. Under the terms of this agreement,
Mr. Adam's base salary is $260,000. In addition, Mr. Adams will receive a
guaranteed bonus of $80,000 whereby Mr. Adams has an option of accepting bonus
payment in cash or stocks. We currently pay Mr. Adam an annual base salary of
$260,000. We initially granted him an option to purchase 1,000,000 shares of our
common stock at an exercise price of $0.51 per share as additional compensation.
This option vested ratably over the two-year term of the agreement. Mr. Adams
orally agreed to accept stock options as payment of bonus during fiscal 2007,
2008 and 2009. Mr. Adam's employment with the company is "at will"
basis.





Outstanding
Equity Awards at Fiscal Year End





The
following table provides information concerning unexercised options, stock that
has not vested and equity incentive plan awards for each named executive officer
outstanding as of December 31, 2009:





Option Awards
            
            Stock AwardsName
            Number
      of securities underlying unexercised options (#)
    exercisable
            Number
      of securities underlying unexercised options (#)
    unexercisable
            Equity
      incentive plan awards: Number of securities underlying unexercised
      unearned options (#)
            Option
      exercise price ($)
            Option
      expiration date
            
            Number
      of shares or units of stock that have not vested (#)
            Market
      value of shares or units of stock that have not vested ($)
            Equity
      incentive plan awards: Number of unearned shares, units or other rights
      that have not vested (#)
            Equity
      incentive plan awards: Market or payout value of unearned shares, units or
      other rights that have not vested (#)Cery
      B. Perle
            100,000
            
            
            0.30
            03/21/10500,000
            
            
            0.30
            06/30/102,000,000
            
            
            0.30
            01/14/11500,000
            
            
            0.30
            05/31/11118,000
            
            
            0.30
            07/26/1150,000
            
            
            0.30
            10/12/11100,000
            
            
            0.30
            01/09/12500,000
            
            
            0.30
            04/05/12100,000
            
            
            0.30
            09/26/121,961,111
            38,889
            
            0.30
            01/16/13500,000
            
            
            0.30
            03/26/13100,000
            
            
            0.11
            10/15/13150,000
            
            
            0.18
            01/23/14500,000
            
            
            0.19
            02/11/14100,000
            
            
            0.15
            06/18/14500,000
            1,500,000
            
            0.18
            07/13/14




32




Ivor
      Newman
            100,000
            
            
            0.30
            07/27/11350,000
            
            
            0.30
            08/01/11200,000
            
            
            0.30
            08/23/1150,000
            
            
            0.30
            10/13/11100,000
            
            
            0.30
            01/09/12100,000
            
            
            0.30
            05/04/12100,000
            
            
            0.30
            06/21/12100,000
            
            
            0.30
            09/13/12100,000
            
            
            0.30
            10/19/12100,000
            
            
            0.30
            01/18/13100,000
            
            
            0.11
            10/15/13150,000
            
            
            0.18
            01/23/14200,000
            
            
            0.15
            06/18/141,500,000
            
            
            0.20
            11/10/14Darryl
      Adams
            1,000,000
            
            
            0.30
            01/05/12100,000
            
            
            0.30
            09/26/1225,000
            
            
            0.30
            01/18/13713,478
            
            
            0.01
            09/22/13128,788
            
            
            0.01
            10/01/13108,974
            
            
            0.01
            10/15/13100,000
            
            
            0.11
            10/15/1388,542
            
            
            0.01
            10/31/13118,056
            
            
            0.01
            11/15/13221,180
            
            
            0.01
            12/31/13150,000
            
            
            0.18
            01/23/14375,000
            625,000
            
            0.21
            03/31/141,500,000
            
            
            0.20
            11/10/14





2002
Stock Option and Stock Award Plan





Overview





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 Option and Stock
Award 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, and on May 31, 2006 the plan
was again amended to further increase the number of shares covered by the plan
to 27,000,000 shares.





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.





33


During
fiscal 2009 we granted options to purchase an aggregate of 10,900,000 shares of
our common stock at exercise prices ranging from $0.15 to $0.21 per share to our
executive officers, directors, employees and consultants. At each of December
31, 2009 and March 31, 2010 we had 16,317,596 shares and 15,985,251 shares,
respectively, available for grant under the plan.





On
January 14, 2010, the board approved the repricing of all options granted to our
employees and directors. The new exercise price for all options is
$0.18.





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 27,000,000 of our authorized but unissued shares of common
stock for issuance under the plan, and a maximum of 27,000,000 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 will 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 terminates 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 there under 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.





34


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 therefore. 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.





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.





35


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 there under. Unless the plan shall theretofore have been suspended or
terminated by the board of directors, the plan will terminate on August 9,
2012.





Director
Compensation





Our Board
of Directors is comprised of Messrs. Perle, Binkelle and Hagan. Mr. Perle, who
is also an executive officer of our company, does not receive any compensation
specifically for his Board services. The following table provides information
concerning the compensation of Messrs. Hagan and Binkelle for services as
members of our Board of Directors for fiscal 2009. The value attributable to any
option awards is computed in accordance with FAS 123R.





Director
      CompensationName
            Fees
      earned
              or
      paid in
              cash
      ($)
            Stock
      awards ($)
            Warrant
              and
      Option
              awards
      ($)
            Non-equity
              incentive
      plan
              compensation
      ($)
            Nonqualified
              deferred
              compensation
              earnings
      ($)
            All
      other
              compensation
      ($)
            Total
      ($)Edward
      Hagan (1)
            -
            -
            54,640
            -
            -
            -
            54,640Robert
      Binkelle (2)
            -
            -
            45,000
            -
            -
            -
            45,000





(1)
            Represents
      the value of options to purchase 350,000 shares of our common stock with
      an exercise price ranging from $0.18 to $0.19 per
  share.





(2)
            Represents
      the value of options to purchase 250,000 shares of our common stock with
      an exercise price of $0.19 per
share.





We have
not established standard compensation arrangements for our directors and the
compensation payable to each individual for their service on our Board is
determined from time to time by our Board of Directors based upon the amount of
time expended by each of the directors on our behalf.





Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters





At March
31, 2010 we had 142,532,608 shares of common stock, 50,000 shares of Series A
Preferred Stock and 50,000 shares of Series B Preferred Stock issued and
outstanding. Each share of common stock entitles the holder to one vote, each
share of Series A Preferred Stock entitles the holder to 400 votes, and each
share of Series B Preferred Stock entitles the holder to 400 votes at any
meeting of our stockholders and the shares of common stock, Series A Preferred
Stock and Series B Preferred Stock vote together on all matters submitted to a
vote of our stockholders.





36


The
following table sets forth information known to us as of March 31, 2010 relating
to the beneficial ownership of shares of our voting securities by:





●
            each
      person who is known by us to be the beneficial owner of more than five
      percent of our outstanding voting
stock;





●
            each
      director;





●
            each
      named executive officer; and





●
            all
      named executive officers and directors as a
  group.





Unless
otherwise indicated, the business address of each person listed is in care of
17257 Fred Waring Drive, 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.





Amount
      and Nature of Beneficial OwnershipCommon Stock
            Series A Preferred Stock
            Series B Preferred StockName
      (1)
            #
      of Shares
            %
      of Class
            #
      of Shares
            %
      of Class
            #
      of Shares
            %
      of Class
            %
      of VoteCery
      B. Perle (2)
            18,027,694
            11.76%
            50,000
            100%
            -
            n/a
            11.79%Edward
      L. Hagan (3)
            3,587,500
            2.49%
            -
            n/a
            -
            n/a
            2.49%Robert
      Binkelle (4)
            1,099,487
            0.77%
            -
            n/a
            -
            n/a
            0.77%Ivor
      Newman (5)
            3,250,000
            2.23%
            -
            n/a
            -
            n/a
            2.23%Darryl
      Adams (6)
            5,274,018
            3.57%
            -
            n/a
            -
            n/a
            3.57%All
      named executive officers and directors as a group (five
      persons)
            31,238,699
            20.82%
            50,000
            100%
            -
            n/a
            20.84%Gimmel
      Partners, LP (7)
            8,295,378
            12.33%
            -
            n/a
            -
            n/a
            12.33%*
      represents less than 1%





(1)
            Unless
      otherwise indicated, the business address of each person listed is in care
      of Spare Backup, Inc., 72757 Fred Waring Drive, Palm Desert, CA
      92260





(2)   Includes:
            Common
      stock of 7,309,694, of which 685,194 shares is held by Mr. Perle,
      4,000,000 shares are held in a trust for his benefit, 1,124,500 shares
      held in a trust for his minor children, and 1,500,000 shares held by
      Preston & Price, S.A. over which Mr. Perle can exercise voting rights;
      and10,718,000
      options, exercisable at a range of $0.11 to $0.18 per
    share.





(3)   Includes:
            Common
      stock of 1,935,975, of which 1,179,975 shares is held by Mr. Hagan,
      412,000 shares held as custodian for his child, 244,000 shares held by his
      wife Stephanie and 100,000 shares held by his mother, Sandra
      Hagan;1,426,525
      options, exercisable at a range of $0.18 to $0.30 per share;
      and225,000
      warrants, exerciseable at a range of $0.20 to $1.30 per
    share.





(4)   Includes:
            Common
      stock of 99,487, which is held by Mr. Binkelle;500,000
      options, exercieable at $0.165 per shares; and500,000
      warrants, exercisable at $0.13 per
share.





(5)   Includes:
            3,250,000
      options, exercisable at a range of $0.11 to $0.30 per
    share.





(6)   Includes:
            Common
      stock of 20,000, which is held by Mr. Adams; and5,254,018
      options, exercisable at a range of $0.01 to $0.18 per
    share.





37


(7)   Includes:
            Common
      stock of 3,537,797, which is held by Gimmel Partners,
  LP;4,757,581
      warrants, exercisable at a range of $0.20 to  $1.00 per
      share;10,000,000
      shares of our common stock underlying an 8% convertible promissory note in
      the principal amount of $2,500,000 which is presently overdue and is
      convertible at $0.25 per share; and1,250,000
      shares of our common stock underlying a 10% convertible promissory note in
      the principal amount of $200,000 which is presently overdue, and is
      convertible at $0.16 per share.*The
      address for Gimmel Partners, LP is 767 Third Avenue, 6th
      Floor, New York, New York 10017





Item
13. Certain Relationships and Related Transactions, and Director
Independence





Mr.
Perle, our CEO, has made an available home owned by him for our use as temporary
housing for new employees at monthly rental costs which we believe are below
market. During each of these years we used this home for approximately 70% of
the year. We reimburse each of Mr. Perle for the actual mortgage payment and pay
ordinary operating expenses associated with such home including utilities,
maintenance and insurance. During fiscal 2009 and 2008 we made rental payments
to Mr. Perle of $15,000 and $40,200, respectively.





In
January 2008 we issued Mr. Cery Perle, our CEO and a member of our Board of
Directors, 50,000 shares of a newly created Series A Preferred Stock as
additional compensation valued at $.001 per share or $50.00. The designations,
rights and preferences of the Series A Preferred Stock includes:





●
            each
      share has a stated value and a liquidation preference of $0.001 per share
      which equals the par value of the
shares,





●
            the
      shares are not convertible or exchange into any other
      security,





●
            each
      share entitles the holder to 400 votes at any meeting of our stockholders
      and such shares will vote together with our common stockholders, provided,
      however, that Mr. Perle is not eligible to vote the shares in connection
      with an amendment to increase the number of our authorized shares of
      common stock if such amendment is proposed to our stockholders within four
      months from the date of issuance of the
shares,.





●
            the
      shares are not subject to redemption,
and





●
            so
      long as the shares are outstanding we have agreed not to alter or change
      the rights of the security in a manner which would adversely affect the
      Series A Preferred Stock, or take any action which would result in the
      taxation of the holder under Section 305 of the Internal Revenue
      Code.





Prior to
the issuance of the shares of Series A Preferred Stock to Mr. Perle, he
controlled the vote of approximately 10% of our outstanding voting securities.
As a result of the issuance of these securities, Mr. Perle presently controls
the vote of approximately 11.92% of our outstanding voting securities. These
actions were approved by our Board of Directors of which Mr. Perle is a
member.





Director
Independence





Messrs.
Hagan and Binkelle are "independent" within the meaning of Marketplace Rule 5605
of the NASDAQ Stock Market, Inc.





38





Item
14. Principal Accountant Fees and Services





Sherb
& Co., LLP served as our independent registered public accounting firm for
fiscal 2008 and fiscal 2007. The following table shows the fees that were billed
for the audit and other services provided by such firm for fiscal 2008 and
fiscal 2007.





Fee
      Category
            
            2008
            
            
            2009Audit
      Fees (1)
            
            $
            67,500
            
            
            $
            74,000Audit
      Related Fees
            
            
            -
            
            
            
            -Tax
      Fees (2)
            
            
            -
            
            
            
            -All
      Other Fees
            
            
            -
            
            
            
            -Total
            
            $
            67,500
            
            
            $
            74,000




(1)  Consists
of fees for professional services rendered in connection with the review of our
three quarterly reports on Form 10-Q and the financial statements included in
our annual report on Form 10-K


(2)  Consists
of fees relating to our tax compliance and tax planning.




We do not
have an Audit Committee. Our Board of Directors pre-approves all auditing
services and permissible non-audit services provided to us by our independent
registered public accounting firm. All fees listed above were pre-approved in
accordance with this policy.





PART
IV





Item
15. Exhibits, Financial Statement Schedules





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





a.
            Index
      to Consolidated Financial Statements and Financial Statement
      Schedules





PageReport
      of Independent Registered Public Accounting Firm
            F-2Consolidated
      Balance Sheet as of December 31, 2008 and 2009
            F-3Consolidated
      Statement of Operations for each of the two years in the period ended
      December 31, 2009
            F-4Consolidated
      Statement of Shareholders’ Equity for each of the two years in the period
      ended December 31, 2009
            F-5Consolidated
      Statement of Cash Flows for each of the two years in the period ended
      December 31, 2009
            F-6Notes
      to Consolidated Financial Statements
            F-7
      – F-22





b.
            All
      other schedules for which provision is made in the applicable accounting
      regulations of the SEC are not required under the related instructions, or
      are inapplicable, and therefore have been
  omitted.





c.
            Exhibits





EXHIBIT
      NO.
            DESCRIPTION





2.1    Acquisition
Agreement and Plan of Merger(3)


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 (8)


3.6    Certificate
of Ownership merging Spare Backup, Inc. into Newport International Group, Inc.
(19)


3.7    Certificate
of designations, rights and preferences of Series A Preferred Stock
(23)


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


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


4.3    Form
of Common Stock Purchase Warrant issued to Robinson Reed Inc. and First Capital
Holdings International, Inc.(11)


4.4    Form
of $0.75 Investor Warrant (11)


4.5    Common
stock purchase warrant issued March 31, 2005 to purchase 256,667 shares of
common stock issued to Jenelle Fontes (10)


4.6    Common
stock purchase warrant issued March 31, 2005 to purchase  280,000
shares of common stock issued to Curtis Lawler (10)


4.7    Form
of $1.30 common stock purchase warrant (13)


4.8    Form
of common stock purchase warrant issued to Langley Park Investment Trust, PLC
(16)




39


4.9    Form
of placement agent warrant issued to Brookstreet Securities Corporation
(20)


4.10   Option
to Purchase Common Stock issued to Wolfe Axlerod Weinberger (20)


4.11   Option
to Purchase Common Stock issued to The Sterling Group (20)


4.12   Form
of warrant issued to DSG Plc.(24)


10.1   2002
Stock Option and Stock Award Plan (15)


10.2   Lease
for principal executive offices (24)


10.3   Stock
Purchase Agreement with Langley Park Investment Trust PLC (9)


10.4   Employment
Agreement with Cery B. Perle (11)


10.5   Common
Stock and Warrant Purchase Agreement dated as of August 27, 2004
(9)


10.6   Registration
Rights Agreement dated as of August 27, 2004 (9)


10.7   Amendment
No. 1 to Common Stock and Warrant Purchase Agreement dated as of November 2,
2004 (9)


10.8   Settlement
Agreement and Release between Newport International Group, Inc., Robinson Reed,
Inc., First Capital Holdings International, Inc., Continental Blue Limited and
E-Holdings, Inc. (11)


10.9   Supplier
Agreement with CompUSA (12)


10.10  Form
of Settlement Agreement between Newport International Group, Inc, Robinson Reed,
Inc. and First Capital Holdings International, Inc. (14)


10.11  Amendment
No. 1 to the 2002 Stock Option and Stock Award Plan (6)


10.12  Form
of Repurchase Agreement with Langley Park Investment Trust PLC (16)


10.13  Form
of Amendment to Escrow Agreement with Langley Park Investment Trust PLC
(16)


10.14  Amendment
No. 2 to the 2002 Stock Option and Stock Award Plan (17)


10.15  Customer
Technical Support Services Agreement with Circuit City Stores, Inc.
(18)


10.16  Standard
Services Agreement and Statement of Work with Hewlett-Packard Company
(20)


10.17  Finder's
Agreement dated February 5, 2007 between Spare Backup, Inc. and Skyebanc, Inc.
(21)


10.18  Agreement
Regarding Put Option dated as of May 8, 2007 by and among Spare Backup, Inc.,
Robinson Reed, Inc. and First Capital Holdings International, Inc.
(22)


10.19  Software
License and Distribution Agreement with Gateway Companies, Inc. (22) Portions of
this agreement have been omitted and separately filed with the Securities and
Exchange Commission with a request for confidential treatment.


10.20  Data
Storage Services Agreement dated February 2, 2007 between DSG Retail and Spare
Backup, Inc. (24) Portions of this agreement have been omitted and separately
filed with the Securities and Exchange Commission with a request for
confidential treatment.


14.1   Code
of Business Conduct and Ethics and Code of Ethics for the Chief Executive
Officer and Senior Financial Officers (11)


21.1   Subsidiaries
of the registrant (11)


23.1   Consent
of Sherb & Co., LLP *


31.1   Section
302 Certificate of Chief Executive Officer *


31.2   Section
302 Certificate of principal accounting and financial officer *


32.1   Section
906 Certificate of Chief Executive Officer and principal


financial
and accounting officer *





* filed
herewith





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


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


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


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


(7)    Intentionally
omitted.


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


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


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


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


(12)   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.




40


(13)   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.


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


(15)   Incorporated
by reference to the registration statement on Form S-8, SEC File No. 333-98229,
as filed on August 16, 2002.


(16)   Incorporated
by reference to the Current Report on Form 8-K as filed on May 31,
2006.


(17)   Incorporated
by reference to the Current Report on Form 8-K as filed on June 6,
2006.


(18)   Incorporated
by reference to the Current Report on Form 8-K as filed on August 18, 2006.
Portions of this agreement have been omitted and marked with a [_] and
separately filed with the Securities and Exchange Commission with a request for
confidential treatment.


(19)   Incorporated
by reference to the Current Report on Form 8-K as filed on August 16,
2006.


(20)   Incorporated
by reference to the registration statement on Form SB-2, SEC File No.
333-139138, as amended, as declared effective by the SEC on February 13,
2007.


(21)   Incorporated
by reference to the Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2006 as filed on April 2, 2007.


(22)   Incorporated
by reference to the Quarterly Report on Form 10-QSB for the period ended March
31, 2007 as filed on May 21, 2007.


(23)   Incorporated
by reference to the Current Report on Form 8-K as filed on January 18,
2008.


(24)   Incorporated
by reference to the Annual Report on Form 10-K for the fiscal year ended
December 31, 2007 as filed on April 14, 2008.




41


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.








SPARE
BACKUP, INC.




By: /s/ Cery Perle


Cery
Perle


Executive
Officer, President and Director





Date:
April 15, 2010





Pursuant
to the requirements of the Securities Exchange Act of 1934, 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
            DateBy: /s/ Cery Perle
            
            Chief
      Executive Officer, President and Chairman of the Board
            April
      15, 2010(Principal
      executive officer and financial officer)By: /s/ Edward Hagan
            
            Secretary
      and Director
            April
      15, 2010By: /s/Robert Binkelle
            
            Director
            April
      15, 2010








42




SPARE
BACKUP, INC. AND SUBSIDIARY
 CONSOLIDATED
FINANCIAL STATEMENTS
 AS OF
DECEMBER 31, 2009
 
 Index to Consolidated
Financial Statements and Financial Statement Schedules
 
 PageReport
      of Independent Registered Public Accounting Firm
              F-2Consolidated
      Balance Sheet as of December 31, 2008 and 2009
              F-3Consolidated
      Statement of Operations for each of the two years in the period ended
      December 31, 2009
              F-4Consolidated
      Statement of Shareholders’ Equity for each of the two years in the period
      ended December 31, 2009
              F-5Consolidated
      Statement of Cash Flows for each of the two years in the period ended
      December 31, 2009
              F-6Notes
      to Consolidated Financial Statements
              F-7
      – F-22
 
 All other
schedules for which provision is made in the applicable accounting regulations
of the SEC are not required under the
  F-1
  Report
of Independent Registered Public Accounting Firm
  To the
Board of Directors
  Spare
Backup, Inc.
  We have
audited the accompanying consolidated balance sheets of Spare Backup, Inc. and
Subsidiary as of December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the years
ended December 31, 2009 and 2008. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the consolidated financial statements based on our
audits.
  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 audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
controls over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. 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 Spare Backup, Inc. and
Subsidiary at December 31, 2009 and 2008, and the results of their operations
and their cash flows for the year ended December 31, 2009 and 2008 in conformity
with accounting principles generally accepted in the United States of
America.
  The
accompanying consolidated 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 has suffered recurring losses
from operations and has negative working capital and a net capital deficiency
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1.
These consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
 
 /s/
      Sherb &
      Company LLP
                  
                  New
      York, New York
                  April
      15, 2010
 
 F-2
 
  SPARE
      BACKUP, INC. AND SUBSIDIARYCONSOLIDATED
      BALANCE SHEETSDecember
      31,
                  
                  
                  December
      31,ASSETS
                  
                  2009
                  
                  
                  2008Current
      Assets:Cash
                  
                  $
                  -
                  
                  
                  $
                  18,946Accounts
      receivable
                  
                  
                  51,371
                  
                  
                  
                  132,389Prepaid  expenses
                  
                  
                  17,487
                  
                  
                  
                  97,630Total
      current assets
                  
                  
                  68,858
                  
                  
                  
                  248,965Property
      and equipment, net of accumulated depreciation of $2,384,638 and
      $1,586,435 atDecember
      31, 2009 and 2008, respectively
                  
                  
                  528,639
                  
                  
                  
                  1,093,732Other
      assets
                  
                  
                  161,104
                  
                  
                  
                  56,985Total
      assets
                  
                  $
                  758,601
                  
                  
                  $
                  1,399,682LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      Liabilities:Accounts
      payable and accrued expenses
                  
                  $
                  2,546,236
                  
                  
                  $
                  2,834,230Overdraft
      liability
                  
                  
                  43,489
                  
                  
                  
                  -Accrued
      payroll taxes
                  
                  
                  2,027,378
                  
                  
                  
                  664,9228%
      convertible promissory notes, net of debt discountof
      $96,865 and $0 at December 31, 2009 and 2008, respectively
                  
                  
                  3,276,135
                  
                  
                  
                  2,500,00010%
      convertible promissory notes, net of debt discountof
      $0 and $74,992 at December 31, 2009 and 2008, respectively
                  
                  
                  581,000
                  
                  
                  
                  776,008Accrued
      interest on convertible promissory notes
                  
                  
                  125,829
                  
                  
                  
                  78,338Derivative
      liabilities
                  
                  
                  246,973
                  
                  
                  
                  -Deferred
      revenue
                  
                  
                  621,127
                  
                  
                  
                  240,436Due
      to stockholder
                  
                  
                  15,000
                  
                  
                  
                  15,000Total
      current liabilities
                  
                  
                  9,483,167
                  
                  
                  
                  7,108,9348%
      convertible promissory notes, net of debt discountof
      $24,846 and $59,679 at December 31, 2009 and 2008,
      respectively
                  
                  
                  71,154
                  
                  
                  
                  190,321Total
      liabilities
                  
                  
                  9,554,321
                  
                  
                  
                  7,299,255Stockholders'
      Deficit:Preferred
      stock, $0.001 par value, 5,000,000 shares authorized:50,000
      issued and outstanding
                  
                  
                  50
                  
                  
                  
                  50Common
      stock; $.001 par value; 300,000,000 shares authorized;134,036,062
      and 105,193,730 issued and outstandingat
      December 31, 2009 and 2008, respectively
                  
                  
                  134,036
                  
                  
                  
                  105,194Additional
      paid-in capital
                  
                  
                  90,886,623
                  
                  
                  
                  82,772,427Accumulated
      deficit
                  
                  
                  (99,816,429
                  )
                  
                  
                  (88,777,244
                  )Total
      stockholders’ deficit
                  
                  
                  (8,795,720
                  )
                  
                  
                  (5,899,573
                  )Total
      liabilities and stockholders’ deficit
                  
                  $
                  758,601
                  
                  
                  $
                  1,399,682


See Notes
to Consolidated Financial Statements.




F-3


SPARE
BACKUP, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF OPERATIONS


For
      the Years EndedDecember
      31,2009
              
              
              2008Net
      Revenues
              
              $
              2,692,320
              
              
              $
              1,381,443Operating
      expenses:Research
      and development
              
              
              1,139,951
              
              
              
              1,270,776Selling,
      general and administrative
              
              
              10,347,652
              
              
              
              10,715,697Total
      operating expenses
              
              
              11,487,603
              
              
              
              11,986,473Operating
      loss
              
              
              (8,795,283
              )
              
              
              (10,605,030
              )Other
      income (expense):Change
      in fair value of derivative liabilities
              
              
              179,689
              
              
              
              -Gain
      from debt settlement
              
              
              940,106
              
              
              
              35,713Interest
      expense
              
              
              (2,896,426
              )
              
              
              (4,563,241
              )Total
      other expense
              
              
              (1,776,631
              )
              
              
              (4,527,528
              )Net
      loss
              
              $
              (10,571,914
              )
              
              $
              (15,132,558
              )Basic
      and diluted loss per common share
              
              $
              (0.09
              )
              
              $
              (0.17
              )Basic
      and diluted weighted average commonshares
      outstanding
              
              
              117,190,142
              
              
              
              88,033,460


See Notes
to Consolidated Financial Statements.




F-4


SPARE
BACKUP, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT From
January 1, 2008 to December 31, 2009


TotalPreferred
      Stock
                
                Common
      Stock
                
                Additional
                
                Accumulated
                
                Stockholders'Shares
                
                $
                
                Shares
                
                $
                
                Paid-in
      Capital
                
                Deficit
                
                DeficitBalance,
      January 1, 2008
                -
                
                $
                -
                
                77,221,052
                
                $
                77,221
                
                $
                72,585,482
                
                $
                (73,644,686
                )
                $
                (981,983
                )Exercise
      of options
                -
                
                
                -
                
                569,371
                
                
                570
                
                
                139,330
                
                
                -
                
                
                139,900Exercise
      of warrants
                -
                
                
                -
                
                5,448,664
                
                
                5,449
                
                
                1,136,316
                
                
                -
                
                
                1,141,765Common
      stock issued for cash, net of financing costs
                -
                
                
                -
                
                10,833,333
                
                
                10,833
                
                
                1,906,167
                
                
                -
                
                
                1,917,000Fair
      value of shares issued for interest payment
                -
                
                
                -
                
                1,210,976
                
                
                1,211
                
                
                243,884
                
                
                -
                
                
                245,095Fair
      value of shares issued for services
                -
                
                
                -
                
                2,748,972
                
                
                2,749
                
                
                730,758
                
                
                -
                
                
                733,507Fair
      value of warrants issued for services
                -
                
                
                -
                
                -
                
                
                -
                
                
                72,253
                
                
                -
                
                
                72,253Fair
      value of shares issued to employees for services
                -
                
                
                -
                
                3,150,526
                
                
                3,150
                
                
                687,286
                
                
                -
                
                
                690,436Fair
      value of preferred shares issued for services
                50,000
                
                
                50
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                50Conversion
      of convertible promissory notes
                -
                
                
                -
                
                4,765,340
                
                
                4,765
                
                
                1,315,235
                
                
                -
                
                
                1,320,000Fair
      value of warrants issued for debt issuance costs
                -
                
                
                -
                
                -
                
                
                -
                
                
                21,010
                
                
                -
                
                
                21,010Cancellation
      of shares issued for services
                -
                
                
                -
                
                (754,504
                )
                
                (754
                )
                
                (129,786
                )
                
                -
                
                
                (130,540
                )Fair
      value of options issued for services
                -
                
                
                -
                
                -
                
                
                -
                
                
                310,874
                
                
                -
                
                
                310,874Beneficial
      conversion features of convertible notes
                -
                
                
                -
                
                -
                
                
                -
                
                
                1,847,563
                
                
                -
                
                
                1,847,563Fair
      value of warrants granted
                -
                
                
                -
                
                -
                
                
                -
                
                
                60,350
                
                
                -
                
                
                60,350Fair
      value of options granted
                -
                
                
                -
                
                -
                
                
                -
                
                
                1,845,705
                
                
                -
                
                
                1,845,705Net
      loss
                -
                
                
                -
                
                -
                
                
                -
                
                
                -
                
                
                (15,132,558
                )
                
                (15,132,558
                )Ending
      balance, December 31, 2008
                50,000
                
                
                50
                
                105,193,730
                
                
                105,194
                
                
                82,772,427
                
                
                (88,777,244
                )
                
                (5,899,573
                )Common
      stock issued for cash, net of costs
                -
                
                
                -
                
                17,098,124
                
                
                17,098
                
                
                2,490,402
                
                
                -
                
                
                2,507,500Fair
      value of shares issued for interest payment
                -
                
                
                -
                
                1,748,372
                
                
                1,748
                
                
                285,777
                
                
                -
                
                
                287,525Fair
      value of shares issued for services
                -
                
                
                -
                
                1,621,839
                
                
                1,622
                
                
                293,526
                
                
                -
                
                
                295,148Fair
      value of warrants issued for debt issuance costs
                -
                
                
                -
                
                -
                
                
                -
                
                
                174,495
                
                
                -
                
                
                174,495Fair
      value of shares issued for debt issuance costs
                -
                
                
                -
                
                246,875
                
                
                247
                
                
                43,753
                
                
                -
                
                
                44,000Fair
      value of warrants issued for interest
                -
                
                
                -
                
                -
                
                
                -
                
                
                14,944
                
                
                -
                
                
                14,944Conversion
      of convertible promissory notes
                -
                
                
                -
                
                8,127,122
                
                
                8,127
                
                
                1,328,213
                
                
                -
                
                
                1,336,340Write
      off of derivative liability as a result of conversion
                -
                
                
                -
                
                -
                
                
                -
                
                
                40,609
                
                
                -
                
                
                40,609Beneficial
      conversion features of convertible notes
                -
                
                
                -
                
                -
                
                
                -
                
                
                1,130,378
                
                
                -
                
                
                1,130,378Fair
      value of beneficial conversion features modifications
                -
                
                
                -
                
                -
                
                
                -
                
                
                1,068,707
                
                
                -
                
                
                1,068,707Fair
      value of warrants issued for services
                -
                
                
                -
                
                -
                
                
                -
                
                
                59,611
                
                
                -
                
                
                59,611Fair
      value of options issued for services
                -
                
                
                -
                
                -
                
                
                -
                
                
                177,666
                
                
                -
                
                
                177,666Fair
      value of options granted
                -
                
                
                -
                
                -
                
                
                -
                
                
                1,004,120
                
                
                -
                
                
                1,004,120Fair
      value of options modifications
                -
                
                
                -
                
                -
                
                
                -
                
                
                1,995
                
                
                -
                
                
                1,995Change
      in accounting principle
                -
                
                
                -
                
                -
                
                
                -
                
                
                -
                
                
                (467,271
                )
                
                (467,271
                )Net
      loss
                -
                
                
                -
                
                -
                
                
                -
                
                
                -
                
                
                (10,571,914
                )
                
                (10,571,914
                )Ending
      balance, December 31, 2009
                50,000
                
                $
                50
                
                134,036,062
                
                $
                134,036
                
                $
                90,886,623
                
                $
                (99,816,429
                )
                $
                (8,795,720
                )


See Notes
to Consolidated Financial Statements.


F-5


SPARE
BACKUP, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CASH FLOWS


For
      the Years EndedDecember
      31,2009
              
              
              2008Cash
      flows from operating activities:Net
      loss
              
              $
              (10,571,914
              )
              
              $
              (15,132,558
              )Adjustments
      to reconcile net loss to net cash used inoperating
      activities:Change
      in fair value of derivative liabilities
              
              
              (179,689
              )
              
              
              -Fair
      value of options and warrants issued to employees
              
              
              1,004,120
              
              
              
              1,906,055Fair
      value of options issued to consultants
              
              
              177,666
              
              
              
              310,874Fair
      value of option modifications
              
              
              1,995
              
              
              
              -Fair
      value of warrants issued to consultants
              
              
              59,611
              
              
              
              72,253Fair
      value of warrants issued as interest expense
              
              
              14,944
              
              
              
              -Amortization
      of debt discount
              
              
              1,143,338
              
              
              
              4,271,516Fair
      value of common stock issued in connection with service
      rendered
              
              
              295,148
              
              
              
              1,293,402Fair
      value of shares of preferred stock issued in connection
    withservices
      rendered
              
              
              -
              
              
              
              50Fair
      value of beneficial conversion features modifications
              
              
              1,068,707
              
              
              
              -Depreciation
              
              
              798,203
              
              
              
              828,808Amortization
      of prepaid expenses
              
              
              1,057,053
              
              
              
              181,238Amortization
      of deferred financing costs
              
              
              301,326
              
              
              
              1,603Gain
      from debt settlement
              
              
              (940,106
              )
              
              
              -Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              81,018
              
              
              
              (132,389
              )Prepaid
      expense and other current assets
              
              
              (1,163,860
              )
              
              
              10,292Accounts
      payable, accrued expense and accrued payroll taxes
              
              
              2,074,098
              
              
              
              621,140Deferred
      revenues
              
              
              380,691
              
              
              
              132,514Accrued
      interest on convertible promissory notes
              
              
              366,356
              
              
              
              290,123Net
      cash used in operating activities
              
              
              (4,031,295
              )
              
              
              (5,345,079
              )Cash
      flows used in investing activities:Capital
      expenditures
              
              
              (292,640
              )
              
              
              (270,463
              )Net
      cash used in investing activities
              
              
              (292,640
              )
              
              
              (270,463
              )Cash
      flows from financing activities:Proceeds
      from issuance of convertible promissory notes
              
              
              1,804,000
              
              
              
              2,008,500Net
      proceeds from issuance of common stock for cash
              
              
              2,507,500
              
              
              
              1,917,000Net
      proceeds from exercise of warrants
              
              
              -
              
              
              
              1,141,765Cash
      overdraft
              
              
              43,489
              
              
              
              -Proceeds
      from exercise of stock options
              
              
              -
              
              
              
              139,899Payment
      of deferred financing costs
              
              
              -
              
              
              
              (37,578
              )Principle
      repayments of convertible promissory notes
              
              
              (50,000
              )
              
              
              (62,500
              )Net
      cash provided by financing activities
              
              
              4,304,989
              
              
              
              5,107,086Net
      decrease in cash
              
              
              (18,946
              )
              
              
              (508,456
              )Cash,
      beginning of year
              
              
              18,946
              
              
              
              527,402Cash,
      end of year
              
              $
              -
              
              
              $
              18,946Supplemental
      disclosures of cash flow information:Cash
      paid for interest
              
              $
              -
              
              
              $
              -Cash
      paid for income taxes
              
              $
              -
              
              
              $
              -Non-cash
      investing and financing activities:Transfer
      of property and equipment in satisfaction of obligation
              
              $
              59,530
              
              
              $
              -Fair
      value of warrants and embedded conversion features issued
    inconnection
      with the issuance of convertible promissory notes andcorresponding
      debt discount
              
              $
              1,130,378
              
              
              $
              1,847,563Fair
      value of warrants issued for debt issuance costs
              
              $
              174,495
              
              
              $
              -Fair
      value of common stock for debt issuance costs
              
              $
              44,000
              
              
              $
              -Conversion
      of convertible promissory notes and accrued interestinto
      shares of common stock
              
              $
              1,336,340
              
              
              $
              1,320,000Fair
      value of shares of common stock issued for payment ofaccrued
      interest
              
              $
              287,525
              
              
              $
              245,095




See Notes
to Consolidated Financial Statements.




F-6




SPARE
BACKUP, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
1 - ORGANIZATION, BASIS OF PRESENTATION AND GOING CONCERN
 
 Spare
Backup, Inc., (the "Company") was incorporated in Delaware in December 1999. The
Company sells on-line backup solutions software and services to individuals,
business professionals, small office and home office companies, and small to
medium sized businesses.
 
 The
accompanying consolidated financial statements have been prepared on a going
concern basis. The Company has incurred net losses of approximately $10.6
million during the year ended December 31, 2009. The Company's ability to
continue as a going concern is dependent upon its ability to obtain the
necessary financing to meet its obligations and repay its liabilities arising
from normal business operations when they come due, and to generate profitable
operations in the future. Management plans to continue to provide for its
capital requirements by issuing additional equity securities and debt. The
outcome of these matters cannot be predicted at this time and there are no
assurances that if achieved, the Company will have sufficient funds to execute
its business plan or generate positive operating results.
 
 These
matters, among others, raise substantial doubt about the ability of the Company
to continue as a going concern. These financial statements do not include any
adjustments to the amounts and classification of assets and liabilities that may
be necessary should the Company be unable to continue as a going
concern.
 
 The
accompanying consolidated financial statements include the accounts of Spare
Backup and its wholly-owned subsidiary. All material inter-company balances and
transactions have been eliminated in consolidation.
 
 NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Use of
Estimates
 
 The
preparation of the consolidated financial statements in accordance with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Significant estimates made by management
include, but are not limited to share-based payments and useful life of property
and equipment. Actual results will differ from these estimates.
 
 Earnings per
Share
 
 Basic
earnings per share is calculated by dividing income available to stockholders by
the weighted-average number of common shares outstanding for each period.
Diluted earnings per share is computed using the weighted-average number of
common and dilutive common share equivalents outstanding during the period.
Dilutive common share equivalents consist of shares issuable upon the exercise
of stock options and warrants (calculated using the reverse treasury stock
method). The outstanding options, warrants and shares equivalent issuable
pursuant to convertible promissory notes amounted to 108,113,194 and
74,367,956 at December 31, 2009 and 2008, respectively. Accordingly, these
common share equivalents at December 31, 2009 and 2008 are excluded from the
loss per share computation for that period due to their antidilutive
effect.
 
 Concentration of Credit
Risks
 
 The
Company is subject to concentrations of credit risk primarily from cash and cash
equivalents.
 
 F-7
 The
Company's cash and cash equivalents accounts are held at financial institutions
and are insured by the Federal Deposit Insurance Corporation ("FDIC") up to
$100,000 between January 2007 and October 2008 and $250,000 for interest-bearing
accounts and an unlimited amount for noninterest-bearing accounts after October
2008. During 2009 and 2008, the Company has reached bank balances exceeding the
FDIC insurance limit. While the Company periodically evaluates the credit
quality of the financial institutions in which it holds deposits, it cannot
reasonably alleviate the risk associated with the sudden failure of such
financial institutions.
 
 The
Company's accounts receivable are due from two customers, both of which are
located in the United Kingdom. One of the Company’s customers accounted for 98%
of its accounts receivables at December 31, 2009.
 
 On
December 30, 2009, the Company mutually terminated an agreement with a key
customer, which represented 89% and 77% of revenues during 2009 and 2008,
respectively.
 
 Fair Value of Financial
Instruments
 
 Effective
January 1, 2008, the Company adopted FASB ASC 820, “Fair Value Measurements
and Disclosures” (“ASC 820”), for assets and liabilities measured at fair value
on a recurring basis. ASC 820 establishes a common definition for fair value to
be applied to existing generally accepted accounting principles that require the
use of fair value measurements, establishes a framework for measuring fair value
and expands disclosure about such fair value measurements. The adoption of
ASC 820 did not have an impact on the Company’s financial position or
operating results, but did expand certain disclosures.
 
 ASC 820
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date. Additionally, ASC 820 requires the use of valuation
techniques that maximize the use of observable inputs and minimize the use of
unobservable inputs. These inputs are prioritized below:
 
 Level 1:
              Observable
      inputs such as quoted market prices in active markets for identical assets
      or liabilitiesLevel 2:
              Observable
      market-based inputs or unobservable inputs that are corroborated by market
      dataLevel 3:
              Unobservable
      inputs for which there is little or no market data, which require the use
      of the reporting entity’s own
assumptions.
 
 The
Company did not have any Level 2 or Level 3 assets or liabilities as of
December 31, 2009 and 2008, with the exception of its convertible promissory
notes.  The carrying amount of the convertible promissory notes at December
31 2009 and 2008, approximate their respective fair value based on the Company’s
incremental borrowing rate.
 
 Cash and
cash equivalents include money market securities that are considered to be
highly liquid and easily tradable as of December 31, 2009 and 2008,
respectively. These securities are valued using inputs observable in active
markets for identical securities and are therefore classified as Level 1
within our fair value hierarchy.
 
 In
addition, FASB ASC 825-10-25 Fair Value Option was effective for January 1,
2008. ASC 825-10-25 expands opportunities to use fair value measurements in
financial reporting and permits entities to choose to measure many financial
instruments and certain other items at fair value. The Company did not elect the
fair value option for any of its qualifying financial
instruments.
 
 Accounts
Receivable
 
 The
Company has a policy of reserving for uncollectible accounts based on its best
estimate of the amount of probable credit losses in its existing accounts
receivable. The Company periodically reviews its accounts receivable to
determine whether an allowance is necessary based on an analysis of past due
accounts and other factors that may indicate that the realization of an account
may be in doubt. Account balances deemed to be uncollectible are charged to the
bad debt expense after all means of collection have been exhausted and the
potential for recovery is considered remote. At December 31, 2009 and 2008,
management has determined that an allowance is not necessary.
 
 F-8
 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.
 
 Software Development
Costs
 
 Costs
incurred in the research and development of software products are expensed as
incurred until technological feasibility has been established. After
technological feasibility is established, any additional costs are capitalized
in accordance with FASB ASC 985-20, “Costs of Software to be Sold, Leased, or
Marketed.” The Company believes that the current process for developing software
is essentially completed concurrently with the establishment of technological
feasibility. Accordingly, no software development costs have been capitalized as
of December 31, 2009. Instead, such amounts are included in the statement of
operations under the caption "Research and development".
 
 Share-based
Payments
 
 The
Company accounts for stock-based compensation in accordance with ASC Topic 718,
Compensation-Stock Compensation(“ASC 718”) for all the
stock awards granted after December 31, 2005, and granted prior to but not
yet vested as of December 31, 2005. Under the fair value recognition
provisions of this topic, stock-based compensation cost is measured at the grant
date based on the fair value of the award and is recognized as expense on a
straight-line basis over the requisite service period, which is the vesting
period. See Note 7 for further information regarding the Company’s stock-based
compensation assumptions and expenses. The Company elected to use the modified
prospective transition method as permitted by ASC 718.
 
 Effective
January 1, 2006, the Company changed its method of attributing the value of
stock-based compensation to expense from the accelerated multiple-option
approach to the straight-line single option method. Compensation expense for all
share-based payment awards granted prior to January 1, 2006 will continue
to be recognized using the accelerated multiple-option approach while
compensation expense for all share-based payment awards granted on or subsequent
to January 1, 2006 has been and will continue to be recognized using the
straight-line single-option approach.
 
 The
Company has elected to use the Black-Scholes-Merton (“BSM”) option-pricing model
to estimate the fair value of its options, which incorporates various subjective
assumptions including volatility, risk-free interest rate, expected life, and
dividend yield to calculate the fair value of stock option awards. Compensation
expense recognized in the consolidated statements of operations is based on
awards ultimately expected to vest and reflects estimated forfeitures. ASC 718
requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates.
 
 Foreign Currency
Transactions
 
 The
Company periodically engages in transactions in countries outside the United
States which may result in foreign currency transaction gains or losses. Gains
and losses resulting from foreign currency transactions are recognized as
foreign currency gain (loss) in the statement of operations of the period
incurred.
 
 F-9
 Revenue
Recognition
 
 The
Company follows the guidance of the FASB ASC 605-10-S99 "Revenue Recognition
Overall – SEC Materials". The Company records revenue when persuasive evidence
of an arrangement exists, on-line back-up services have been rendered, the sales
price to the customer is fixed or determinable, and collectability is reasonably
assured.
 
 The
Company has collected annual fees related to online back-up services. Online
back up service fees received in advance or collected up front are reflected as
deferred revenue on the accompanying balance sheet. Deferred revenue as of
December 31, 2009 and December 31, 2008 amounted to $621,127 and $240,436,
respectively, and will be recognized as revenue over the respective subscription
period.
 
 Revenue
consists of the gross value of billings to clients. The Company reports this
revenue gross in accordance with Generally Accepted Accounting Pronouncements
(“GAAP”) because it is responsible for fulfillment of the service, has
substantial latitude in setting price and assumes the credit risk for the entire
amount of the sale, and it is responsible for the payment of all obligations
incurred for sales marketing and commissions.
 
 Customer
Concentration
 
 One of
the Company's customers accounted for approximately 89% of its revenues during
the year ending December 31, 2009. One of the Company’s customers accounted for
77% of the Company’s revenue during the year ending December 31,
2008.
 
 Product
Concentration
 
 The
Company offers subscriptions to online and software backup products to assist
individuals, small businesses and home business users.
 
 Recent Accounting
Pronouncements
  In
October 2009, the FASB issued guidance for amendments to FASB Emerging Issues
Task Force on EITF Issue No. 09-1 “ Accounting for Own-Share Lending
Arrangements in Contemplation of a Convertible Debt Issuance or Other Financing”
( Subtopic 470-20 ) “Subtopic”. This accounting standards update establishes the
accounting and reporting guidance for arrangements under which own-share lending
arrangements issued in contemplation of convertible debt issuance.
  This
Statement is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2009. Earlier adoption is not
permitted.  Management believes this Statement will have no impact on
the financial statements of the Company once adopted.
  On June
5, 2003, the United States Securities and Exchange Commission (“SEC”) adopted
final rules under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”),
as amended by SEC Release No. 33-9072 on October 13, 2009. Commencing with its
annual report for the year ending December 31, 2010, the Company will be
required to include a report of management on its internal control over
financial reporting. The internal control report must include a statement
of:
 
 ·
                Management’s
      responsibility for establishing and maintaining adequate internal control
      over its financial reporting;
 ·
                Management’s
      assessment of the effectiveness of its internal control over financial
      reporting as of year- end; and
 ·
                The
      framework used by management to evaluate the effectiveness of the
      Company’s internal control over financial
  reporting.
 
 Furthermore,
it is required to file the auditor’s attestation report separately on the
Company’s internal control over financial reporting on whether it believes that
the Company has maintained, in all material respects, effective internal control
over financial reporting.
 
 Management
does not believe that any other recently issued, but not yet effective,
accounting standards, if currently adopted, could have a material effect on the
accompanying financial statements.
 NOTE
3 - PREPAID EXPENSES
 
 Prepaid
expenses generally is compromised of marketing and sales commissions paid to
sales agents for the 1 year prepaid subscriptions related to the Company's
online back-up services. The prepaid marketing expense is being amortized over
the term of the respective subscription sold in accordance with GAAP whereby
incremental direct costs are recognized in earnings in the same pattern as
revenue is recognized. During the years ended December 31, 2009 and 2008,
amortization of prepaid expenses amounted to $1,057,053 and $191,530,
respectively and was recorded as sales, general and administrative expense in
the accompanying statement of operations. On December 31, 2009 and 2008, prepaid
expenses amounted to $17,487 and $97,630, respectively
 
 F-10
 NOTE
4 - PROPERTY AND EQUIPMENT
 
 Property
and equipment consisted of the following:
 
 December
      31,Estimated life
              
              2009
              
              
              2008Computer
      and office equipment
              3
      to 5 years
              
              $
              2,847,098
              
              
              $
              2,616,646Leasehold
      improvements
              5
      years
              
              
              202,298
              
              
              
              202,2982,888,113
              
              
              
              2,818,944Less:
      Accumulated depreciation
              
              
              
              (2,384,638
              )
              
              
              (1,725,212
              )$
              528,639
              
              
              $
              1,093,732
 
 Depreciation
expense amounted to $798,203 and $828,808 during 2009 and 2008,
respectively.
 
 NOTE
5 - OTHER ASSETS
 
 Other
assets generally consists of deferred financing costs related to the issuance of
convertible promissory notes and is awarded on the terms of such notes.
Amortization of other assets- deferred financing costs amounted to $301,326 and
$1,603 during 2009 and 2008, respectively and is included in interest
expense.
 
 NOTE
6 - CONVERTIBLE PROMISSORY NOTES-CURRENT
 
 Convertible
promissory notes consist of the following as of:
 
 December
      31,2009
              
              
              20088%
      Convertible promissory notes, bearing interest at 8% per annum, maturing
      between August 2009 andFebruary
      2010. Interest payable commencing the quarter ended December 31, 2007,
      payable within thirty (30) days of the end of the quarter. Interest may be
      paid in cash or common stock at the option of the Company. Interest paid
      in common stock will be calculated at ninety percent (90%) of the average
      closing price for the common stock for the five (5) trading days preceding
      the interest payment date. The promissory notes are convertible at any
      time at the option of the holder, into shares of common stock at an
      effective conversion rate ranging from $0.16 to $0.25
              
              $
              3,373,000
              
              
              $
              2,500,000Less:
      unamortized discount
              
              
              (96,865
              )
              
              
              (-
              )Convertible
      promissory notes- short-term
              
              $
              3,276,135
              
              
              $
              2,500,000
 
 During
2008, the Company issued 1,875,757 shares in connection with the conversion of
8% convertible promissory notes with an aggregate principal of $475,000. The
fair value of such shares issued amounted to approximately $475,000, or an
average of $0.25 per share.
 
 During
2009, the Company classified $873,000 8% convertible promissory note from
long-term to short-term along with the debt discount of $380,063.
 
 F-11
 December
      31,2009
              
              
              200810%
      Convertible promissory notes, bearing interest at 10% per annum, maturing
      between August 2008 and January 2010. Interest payable commencing the
      quarter ended September 30, 2008, payable within thirty (30) days of the
      end of the quarter. Interest may be paid in cash or common stock at the
      option of the Company. Interest paid in common stock will be calculated at
      the volume weighted average price for the common stock for the ten (10)
      trading days preceding the interest payment date. The promissory notes are
      convertible at any time at the option of the holder, into shares of common
      stock at a rate ranging from $0.16 to $0.25
              
              $
              581,000
              
              
              $
              851,000Less:
      unamortized discount
              
              
              (-
              )
              
              
              (74,992
              )Convertible
      promissory notes- short-term
              
              $
              581,000
              
              
              $
              776,008
 
 During
2008, the Company issued 2,733,333 shares in connection with the conversion of
10% convertible promissory notes with an aggregate principal of $820,000. The
fair value of such shares issued amount to approximately $820,000, or $0.30 per
share.
 
 During
2009, the Company issued 1,464,298 shares in connection with the conversion of
10% convertible promissory notes with an aggregate principal of $270,000. The
fair value of such shares issued amount to approximately $270,000, or an average
of $0.18 per share.
 
 At
      December 31, 2009Principal-
      8% convertible promissory notes past due
              
              
              $ 
      2,500,000Principal-
      10% convertible promissory notes past due
              
              
              $ 
      245,000
  Total
amortization of debt discounts for the convertible promissory notes - current
amounted to approximately $1.1 million and $4.2 million for the years ended
December 31, 2009 and 2008, respectively, and is included in interest
expense.
 
 NOTE
7 - DERIVATIVE LIABILITIES
 
 The
adoption of ASC 815 will affect accounting for convertible instruments and
warrants with provisions that protect holders from declines in the stock price
("round-down" provisions). Warrants with such provisions will no longer be
recorded in equity. The Issue is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years. Earlier application by an entity that has previously adopted an
alternative accounting policy is not permitted.
 
 Instruments
with round-down protection are not considered indexed to a company's own stock
under GAAP, because neither the occurrence of a sale of common stock by the
company at market nor the issuance of another equity-linked instrument with a
lower strike price is an input to the fair value of a fixed-for-fixed option on
equity shares. The appendix to the Consensus contains an example (example 8) of
warrants with round-down provisions that concludes they are not indexed to the
company's owned stock. A round-down provision may be viewed by some as a form of
guarantee provided to the holder of the instrument, which is inconsistent with
equity classification.
 
 GAAP’s
guidance is to be applied to outstanding instruments as of the beginning of the
fiscal year in which the Issue is applied. The cumulative effect of the change
in accounting principle shall be recognized as an adjustment to the opening
balance of retained earnings (or other appropriate components of equity) for
that fiscal year, presented separately. The cumulative-effect adjustment is the
difference between the amounts recognized in the statement of financial position
before initial application of this Issue and the amounts recognized in the
statement of financial position at initial application of this Issue. The
amounts recognized in the statement of financial position as a result of the
initial application of this Issue shall be determined based on the amounts that
would have been recognized if the guidance in this Issue had been applied from
the issuance date of the instrument.
 
 F-12
 Since the
Company did not previously account for warrants with round-down provisions as a
liability in previously issued financial statements earlier application of GAAP
is not permitted.
 
 The
Company recorded a cumulative effect of a change in accounting principle as of
January 1, 2009 in the amount of the estimated fair value of such warrants and
embedded conversion features and will record future changes in fair value in
results of operations. Based on fair value computations of estimated fair value,
using a $0.18 closing stock price on December 31, 2008 there would be a
cumulative effect of approximately $467,000 as of January 1, 2009, which would
be recorded as a credit to derivative liability and debit to accumulated
deficit.
 
 During
2009, the Company wrote off $40,609 of the derivative liability as a result of
the conversion of a certain 10% convertible promissory notes – long
term.
 
 The
variation in fair value of the derivative liabilities between measurement dates
amounted to a decrease of $179,689 during 2009. The decrease in fair value of
the derivative liabilities has been recognized as other income.
 
 NOTE
8 - CONVERTIBLE PROMISSORY NOTES - LONG TERM
 
 Convertible
promissory notes consist of the following as of:
 
 December
      31,2009
              
              
              20088%
      Convertible promissory notes, bearing interest at 8% per annum, maturing
      between February 2010 and December 2010. The promissory notes are
      convertible at any time at the option of the holder, into shares of common
      stock at an effective conversion rate of $0.16.
              
              $
              96,000
              
              
              $
              250,000Less:
      unamortized discount
              
              
              (24,846
              )
              
              
              (59,679
              )Convertible
      promissory notes- long-term
              
              $
              71,154
              
              
              $
              190,321
 
 During
2009, the Company issued 2,764,160 shares in connection with the conversion of
8% convertible promissory notes with an aggregate principal of $425,000. The
fair value of such shares issued amount to approximately $425,000, or $0.15 per
share.
 
 During
2009, the Company repaid $50,000 to two noteholders of the 8% convertible
promissory notes.
 
 During
2009, the Company classified $873,000 8% convertible promissory note from
long-term to short-term along with the debt discount of $380,063.
 
 December
      31,2009
              
              
              200810%
      Convertible promissory notes, bearing interest at 10% per annum, maturing
      between October 2010 and January 2011. The promissory notes are
      convertible at any time at the option of the holder, into shares of common
      stock at a effective conversion rate of $0.16
              
              $
              -
              
              
              $
              -Less:
      unamortized discount
              
              
              (-
              )
              
              
              (-
              )Convertible
      promissory notes- long-term
              
              $
              -
              
              
              $
              -
 
 During
2009, the Company issued $610,000 of 10% convertible promissory notes. In
connection with the issuance of these convertible promissory notes, upon
maturity or conversion, the Company shall issue 3,812,500 warrants at an
exercise price of $0.20. The warrants expire two years from grant date. The
Company recognized a debt discount of $610,000 in connection of the issuance of
10% convertible promissory notes.
 
 F-13
 During
2009, the Company issued 3,812,500 shares in connection with the conversion of
10% convertible promissory notes with an aggregate principal of $610,000. The
fair value of such shares issued amount to approximately $610,000, or $0.16 per
share.
 
 During
2009, the Company classified $318,458 of 8% convertible promissory note- long
term debt discount to 10% convertible promissory note- long term debt
discount.
 
 During
2009, the Company recognized an expense of approximately $1,069,000 due to the
modification of the 8% and 10% convertible promissory notes beneficial
conversion features, which also increased additional-paid in capital
as
 
 In
accordance with FASB ASC 740 Debt- Debt with Conversion Options, the Company
recorded a beneficial conversion feature related to the Convertible promissory
notes. Under the terms of these notes, the intrinsic value of the beneficial
conversion feature was calculated assuming that the conversion date was the same
as the issue date. During the years ended December 31, 2009 and 2008,
respectively, the total beneficial conversion feature for the 8% and 10%
convertible promissory notes amounted to $1,130,378 and $1,847,563. This
beneficial conversion feature is reflected in the accompanying financial
statements as additional paid-in capital and corresponding debt
discount.
 
 Total
amortization of debt discounts for the convertible promissory notes – long term
amounted to approximately $26,000 and $29,000 during 2009 and 2008,
respectively, and is included in interest expense.
 
 NOTE
9 - STOCKHOLDERS' DEFICIT
 
 On August
15, 2008, the Company increased the authorized common shares from 150,000,000 to
300,000,000 shares of common stock at $0.001 par value and approval for a
1-for-10 reverse stock split of its issued and outstanding common
stock.
 
 The
Company filed a Certificate of Amendment to its certificate of incorporation
increasing the number of authorized shares of its common stock to 300,000,000
shares. Additionally, the stockholders granted the Company's Board of Directors
the authority to decide within six months from the date of the special meeting
to implement a reverse stock split, set the timing for such split, and select a
ratio for the reverse split up to a maximum of a one for ten (1:10). The Company
did not implement a reverse stock split during 2009.
 
 Issuance of Preferred Stock
Pursuant to Services Performed
 
 During
2008, the Company issued 50,000 shares of Series A Preferred Stock to the
Company’s CEO for compensation aggregating to $50.
 
 Issuance of Common Stock
Pursuant to the Payment of Interest on the Convertible Debt
 
 During
2008, the Company issued 1,210,976 shares in connection with the payment of
accrued interest of the 8% and 10% convertible promissory notes. The fair value
of such shares issued amounted to approximately $245,000 or $0.20 per
share.
 
 During
2009, the Company issued 1,748,372 shares in connection with the payment of
accrued interest of the 8% and 10% convertible promissory notes. The fair value
of such shares issued amounted to approximately $287,000 or $0.16 per
share.
 
 F-14
 Issuance of Common Stock
Pursuant to Services Performed
 
 The
issuance of common stock pursuant to services performed during 2008 is
summarized in the table below.
 
 Number
      of Shares
              Fair
      Value at Grant
              Expense
      IncurredBusiness
      advisory services
              1,706,472
              $0.26
      - $0.30
              $      479,942Consulting
      expense
              100,000
              $0.45
              45,000Investor
      relations
              350,000
              $0.27
      -$0.37
              99,500Public
      relations
              592,500
              $0.12
      - $0.29
              109,065Stock
      based compensation *
              3,150,526
              $0.10
      - $0.45
              690,436Total
              5,899,498
              
              $   1,423,943
 * Stock
based compensation is attributable to the services performed by the Company’s
employees.
 
 The
issuance of common stock pursuant to services performed during 2009 is
summarized in the table below.
 
 Number
      of Shares
              Fair
      Value at Grant
              Expense
      IncurredConsulting
      expense
              190,411
              $0.12
      - $0.13
              $        24,348Investor
      relations
              600,000
              $0.22
      - $0.24
              134,000Legal
      expense
              771,428
              $0.14
      - $0.18
              126,000Stock
      based compensation *
              60,000
              $0.18
              10,800Total
              1,621,839
              
              $      295,148
 * Stock
based compensation is attributable to the services performed by the Company’s
employees.
 
 Issuance of Common Stock
Pursuant to Debt Issuance Costs
 
 During
2009, the Company issued 246,875 shares of common stock in connection with the
payment of debt issuance costs amounting to approximately $44,000.
 
 Issuance of Common Stock
Pursuant to Exercise of Stock Warrants and Options
 
 During
2008, the Company issued 5,448,664 shares of common stock in connection with the
exercise of stock warrants which generated gross proceeds of approximately
$1,142,000.
 
 During
2008, the Company issued 569,371 shares of common stock in connection with the
exercise of stock options which generated gross proceeds of approximately
$140,000
 
 Issuance of Common Stock
Pursuant to Conversion of Convertible Promissory Notes
 
 During
2008, the Company issued 1,875,757 shares in connection with the conversion of
8% convertible promissory notes- short term with a principal amount of $475,000.
The fair value of such shares issued amounted to approximately $0.25 per
share.
 
 During
2008, the Company issued 2,889,583 shares in connection with the conversion of
10% convertible promissory notes- short term with a principal amount of
$845,000. The fair value of such shares issued amounted to approximately $0.29
per share.
 
 During
2009, the Company issued 2,764,160 shares in connection with the conversion of
8% convertible promissory notes- short term with a principal amount of $425,000
and accrued interest of $17,266. The fair value of such shares issued amounted
to $442,266 or $0.16 per share.
 
 During
2009, the Company issued 1,464,298 shares in connection with the conversion of
10% convertible promissory notes- short term with a principal amount of $270,000
and accrued interest of $288. The fair value of such shares issued amounted to
$270,288 or $0.18 per share. In connection with this conversion, the company
wrote off $21,655 of the derivative liability, which increased additional-paid
in capital.
 
 During
2009, the Company issued 3,898,664 shares in connection with the conversion of
10% convertible promissory notes- long term with a principal amount of $610,000
and accrued interest of $13,786. The fair value of such shares issued amounted
to $623,786 or $0.16 per share.
 
 F-15
 Issuance of Common Stock
Pursuant to Private Placements
 
 During
2008, the Company issued in aggregate 10,833,333 common shares pursuant to a
private placement which generated gross proceeds of approximately $1,927,000. In
connection with this private placement, the Company issued 10,141,666 warrants
exercisable at a price range of $0.20 to $0.309 per share. The warrants expire
three years from the date of grant. The Company paid finder's fee of
$10,000.
 
 During
2009, the Company issued in aggregate 17,098,142 common shares pursuant to a
private placement which generated gross proceeds of approximately $2,620,500. In
connection with this private placement, the Company issued 15,851,041 warrants
exercisable at a price range of $0.16 to $0.20 per share. The warrants expire at
a range of two to three years from the date of grant. The Company paid finder's
fee of $113,000 and issued 46,875 shares of common stock and 106,250 three year
common stock purchase warrants in connection with this private placement which
have been allocated against paid in capital.
 
 Cancelation of Common
Stock
 
 During
2008, the Company cancelled 150,000 shares of common stock previously issued to
consultants. The fair value of such shares at the date of grants amounted to
approximately $94,000 or at a range of $0.45 - $0.98 per share. In connection
with the return of the 150,000 shares of common stock, the Company reduced
stock-based compensation expense by $58,000 based on the fair market value of
the common stock on the dates of cancellation at a range of $0.37 - $0.42 per
share.
 
 During
2008, the Company cancelled 604,504 shares of common stock previously issued to
a key employee. The fair value of such shares at the date of grants amounted to
approximately $128,000 or at a range of $0.19 - $0.35 per share. In connection
with the return of the 604,504 shares of common stock, the Company reduced
stock-based compensation expense by $73,000 based on the fair market value of
the common stock on the date of cancellation of $0.12 per share.
 
 NOTE
10 - STOCK OPTIONS AND WARRANTS
 
 Warrants
 
 During
2008, the Company issued 8% and 10% convertible promissory notes amounting to
$2,008,500. In connection with these issuances, the Company granted 7,261,665
warrants to the note holders at an exercise price ranging from $0.20 to $0.50.
The notes terms range between two and five years. In connection with the recent
private placements in 2008, the Company issued an additional 2,554,363 warrants
to these investors.
 
 During
2008, as part of the issuance of warrants in connection with the issuance of the
8% and 10% convertible promissory notes, the Company also issued five year
warrants to purchase 150,000 shares of common stock to the placement agent at an
exercise price of $0.20. These warrants were valued utilizing the Black-Scholes
options pricing model at $0.14 or approximately $21,000.
 
 During
2008, the Company issued three year warrants to purchase 10,042,857 shares of
common stock to investors in connection with the private placements. These
warrants are exercisable at a price range of $0.20 to $0.50. During 2008, the
Company reduced the exercise price of some of these warrants from $0.50 to
$0.309, and as a result issued an additional 98,809 three year
warrants.
 
 During
2008, the Company granted 250,000 five-year stock warrants to purchase common
stock in connection with an investment banking consulting agreement at an
exercise price of $0.40. The Company valued these options utilizing the
Black-Scholes options pricing model at $0.21 per share or approximately
$53,000.
 
 During
2008, the Company granted 300,000 five-year stock warrants to purchase common
stock in connection with an advisory agreement. The Company valued these
warrants utilizing the Black-Scholes options pricing model at $0.33 or
approximately $100,000.
 
 F-16
 During
2008, the Company granted 500,000 three-year stock warrants to purchase common
stock to the Company's Director. The Company valued these options utilizing the
Black-Scholes options pricing model at $0.12 per share or approximately
$60,000.
 
 During
2008, the Company granted 625,000 three-year stock warrants to purchase common
stock in connection with an extended business advisory agreement. The Company
valued these warrants utilizing the Black-Scholes options pricing model at $0.03
per share or approximately $19,000.
 
 During
2009, in connection with the private placements the Company issued warrants to
purchase 15,851,041 shares of common stock at an exercise price range of $0.18
to $0.20 per share. The warrants expire between 2011 and 2012. In connection
with the private placements, the Company issued warrants to purchase 106,250
shares of common stock to a placement agent. The warrants have an exercise price
of $0.20 and expire three years from grant.
 
 During
2009, in connection with the conversion of 8% and 10% convertible promissory
notes issued warrants to purchase 5,725,324 shares of common stock at an
exercise price range of $0.16 to $0.20 per share. The warrants expire in 2011.
Of these warrants, 194,074 warrants were issued for accrued interest, were
valued at $14,944
 
 During
2009, in connection with the conversion of certain 8% and 10% convertible
promissory notes totaling $1,804,000, the company issued warrants to purchase
1,145,500 shares of common stock to the placement agents. The warrants have an
exercise price ranging from $0.18 to $0.20 and expire between three and five
years from grant. The warrants were value utilizing the Black-Scholes options
pricing model at an average of $0.15 or $174,495 and was recorded as an increase
in additional-paid in capital and an increase in deferred financing
costs.
 
 During
2009, in connection with a general business and marketing advisory agreement,
the Company issued warrants to purchase 993,528 shares of Common Stock at price
of $0.20 per share during 2009. The Company valued these warrants utilizing the
Black-Scholes options pricing model at $0.06 per share or approximately $60,000
and was recorded as an increase in additional-paid in capital and an increase in
stock-based consulting expense.
 
 The
following table summarizes information concerning the currently outstanding
warrants as of December 31, 2009:
 
 Number
      of
                Warrants
              
              
              Weighted
                Average
                Exercise
      Price
              
              
              Fair
      Value -
                Expensed
              
              
              Fair
      Value -
                Debt
      Issuance
                Cost
              
              
              Fair
      Value -
                Beneficial
                Conversion
                FeaturesBalance
      at January 1, 2008
              
              
              28,029,348
              
              
              $
              0.70Granted
              
              
              21,782,694
              
              
              
              0.21
              
              
              $
              132,603
              
              
              $
              21,010Exercised
              
              
              (5,448,664
              )
              
              
              0.21
              
              
              $
              1,141,765Expired
              
              
              (5,392,499
              )
              
              
              0.61Cancelled
              
              
              -
              
              
              
              -Balance
      at December 31, 2008
              
              
              38,970,879
              
              
              $
              0.38Granted
              
              
              23,821,643
              
              
              $
              0.18
              
              
              $
              74,555
              
              
              $
              174,495
              
              
              $
              1,130,378Exercised
              
              
              -
              
              
              
              -Expired
              
              
              (332,500
              )
              
              
              1.25Cancelled
              
              
              (2,312,500
              )
              
              
              1.11Balance
      at December 31, 2009
              
              
              60,147,522
              
              
              $
              0.29
 
 F-17
 The fair
value of the warrants granted during the year ended December 31, 2009 and 2008
is based on the Black Scholes Model using the following
assumptions:
 
 2009
              2008Exercise
      price:
              $0.20
              $0.20
      - $0.40Market
      price at date of grant:
              $0.135
      - $0.23
              $0.10
      - $0.37Expected
      volatility:
              104%
      - 199%
              69%
      - 110%Term:
              2 –
      5 years
              3 –
      5 yearsRisk-free
      interest rate:
              0.81%
      - 2.53%
              0.96%
      - 2.72%
 
 Stock
Options
 
 In 2002,
the Company adopted the 2002 Stock Plan under which stock awards or options to
acquire shares of the Company's common stock may be granted to employees and
non-employees of the Company. The Company has authorized 12,000,000 shares of
the Company's common stock for grant under the 2002 Plan.
 In May
2006, the Board increased the authorized amount to 27,000,000. The 2002 Plan is
administered by the Board of Directors and permits the issuance of options for
the purchase of up to the number of available shares outstanding. Options
granted under the 2002 Plan vest in accordance with the terms established by the
Company's stock option committee and generally terminates ten years after the
date of issuance.
 
 In
February 2008, the Company granted 100,000 five-year stock options to purchase
common stock for marketing strategy and financial advisory services in
connection wit a consulting agreement. The Company valued these options
utilizing the Black-Scholes options pricing model at $0.29 per share of
approximately $29,000.
 
 Between
April and June 2008, the Company granted 1,021,848 five-year stock options to
purchase common stock in connection with consulting agreements. The Company
valued these options utilizing the Black-Scholes options pricing model raging
from $0.05 to $0.34 per share or approximately $94,000.
 
 Between
August and September 2008, the Company granted in aggregate 650,404 three to
five year stock options to purchase common stock in connection with a consulting
and financial advisory agreement. The Company valued these options utilizing the
Black-Scholes options pricing model ranging from $0.10 to $0.21 per share or
approximately $67,000.
 
 In
December 2008, the Company granted 250,000 three-year options to purchase common
stock in connection with an extended business advisory agreement. The Company
valued these options utilizing the Black-Shcoles options pricing model at $0.03
per share or approximately $8,000.
 
 During
the year ended December 31, 2008, the Company granted 6,719,018 five-year stock
options to purchase common stock to employees (including 3,350,000 options
granted to the Company's Chief Executive Officer and two directors of the
Company) at exercise prices ranging from $0.01 to $0.35 per share. For the year
ended December 31, 2008, total stock-based compensation charged to operations
for option-based arrangements amounted to approximately $1,846,000. At December
31, 2008, there was approximately $317,000 of total unrecognized compensation
expense related to non-vested option-based compensation arrangements under the
Plan.
 
 In May
2008, the Company reduced the exercise price of stock options to purchase an
aggregate of 14,716,035 shares of common stock to $0.30 per share. The Company
valued the re-priced options utilizing the Black-Scholes option pricing model
using the following assumptions: estimated volatility of 70%, risk-free interest
rate ranging from 1.90% to 2.68%, no dividend yield, and an expected life
ranging from 0.54 to 4.96 years, and recorded approximately $370,000 as stock
based compensation during the year ended December 31, 2008.
 
 In
February 2009, the Company entered into a 1 year marketing agreement with Cydcor
Inc. whereby Cydcor will market the Company's services and perform marketing
campaigns as it may determine from time to time. Cydcor will be paid on a
commission basis on all customer orders that has an authorization for customer
payment received via the efforts of Cydcor. In addition, Cydcor will receive
volume bonuses based on total number of sales generated in any given calendar
month. In addition, the Company granted 250,000 three-year stock options to
purchase common stock to Cydcor. The Company valued these options utilizing the
Black-Scholes options pricing model at $0.09 per share or approximately $23,000
and recorded marketing expense for the year ended December 31,
2009.
 
 F-18
 In
February 2009, the Company issued in aggregate 700,000 five-year stock options
to purchase common stock for legal services with a vesting period of 12 months.
The Company valued these options utilizing the Black-Scholes options pricing
model at $0.19 per share or $133,000. For the year ended December 31, 2009,
total stock-based legal expense charged to operations amounted to approximately
$111,000. At December 31, 2009, there was approximately $22,000 of total
unrecognized legal expense related to non-vested option-based compensation
arrangements.
 
 In July
2009, the Company issued in aggregate 500,000 three-year stock options to
purchase common stock for consulting services with a vesting period of 6 months.
The Company valued these options utilizing the Black-Scholes options pricing
model at $0.22 per share or approximately $53,000. For the year ended December
31, 2009, total stock-based consulting expense charged to operations amounted to
approximately $44,000. At December 31, 2009, there was approximately $9,000 of
total unrecognized consulting expense related to non-vested option-based
compensation arrangements.
 
 For the
year ended December 31, 2009, the Company granted 9,450,000 five-year stock
options to purchase common stock to employees at exercise prices ranging from
$0.15 to $0.21 per share. For the year ended December 31, 2009 and 2008, total
stock-based compensation charged to operations for option-based arrangements
amounted to approximately $1,004,000 and $1.846,000, respectively. At December
31, 2009, there was approximately $593,000 of total unrecognized compensation
expense related to non-vested option-based compensation arrangements under the
Qualified Stock Option Plan and Non Qualified Stock Option Plan.
 
 During
2009, the Company recognized a modification expense of approximately $2,000 for
the reduction of the exercise price for one of the option holders.
 
 Stock
option activity for the years ended December 31, 2009 and 2008, respectively is
summarized as follows:
 
 Options
              
              
              Weighted
      Average
                Exercise
      Price
              
              
              Weighted
      Average
                Contractual
      Terms
              
              
              Aggregate
                Intrinsic
      ValueOutstanding
      at January 1, 2008
              
              
              13,339,549
              
              
              $
              0.54
              
              
              
              3.00Granted
              
              
              9,241,270
              
              
              
              0.22Exercised
              
              
              (569,371
              )
              
              
              0.22Expired
              
              
              (2,969,518
              )
              
              
              0.34Outstanding
      at December 31, 2008
              
              
              19,041,930
              
              
              
              0.29
              
              
              
              2.74Granted
              
              
              10,900,000
              
              
              
              0.19Exercised
              
              
              -
              
              
              
              -Expired
              
              
              (1,437,508
              )
              
              
              0.31Outstanding
      at December 31, 2009
              
              
              28,504,422
              
              
              $
              0.25
              
              
              
              2.60
              
              
              $
              241,011Exercisable
      and vested atDecember
      31, 2009
              
              
              23,835,671
              
              
              $
              0.20
              
              
              
              4.82
              
              
              $
              -
 
 F-19
 
 The fair
value of stock options granted was estimated at the date of grant using the
Black-Scholes options pricing model. The Company used the following assumptions
for determining the fair value of options granted under the Black-Scholes option
pricing model:
 
 December
      31, 2009
              December
      31, 2008Exercise
      Price
              $
      0.15 - $ 0.21
              $
      0.01- $ 0.48Market
      price at date of grant
              $
      0.13 - $ 0.24
              $
      0.10 -  $ 0.45Expected
      volatility
              68%
      - 199%
              69%
      -  111%Risk-free
      interest rate
              1.34%
      - 3.87%
              0.96%
      - 3.66%
 
 
 NOTE
11: INCOME TAXES
 
 A
reconciliation of the Company’s effective tax rate to the statutory federal rate
is as follows at December 31:
 
 2009
              2008Tax
      at US statutory rate
              35.0%
              35.0%State
      tax rate, net of federal benefits
              4.0
              4.0Permanent
      differences
              (8.0)
              (12.6)Change
      in valuation allowance
              (31.0)
              (26.4)Effective
      tax rate
              0.0%
              0.0%
 
 Management
believes it is more likely than not that it will be able to offset its deferred
tax liability against its net operating losses.
 
 The
components of the deferred tax assets and liabilities are as
follows:
 
 2009
              
              
              2008Deferred
      tax assets:Net
      operating loss carryforward
              
              $
              21,300,000
              
              
              $
              18,500,000Options
      issued as compensation
              
              
              1,400,000
              
              
              
              900,00Less:
      valuation allowance
              
              
              (22,700,000
              )
              
              
              (19,400,000
              )Net
      deferred tax assets
              
              $
              -
              
              
              $
              -
 
 At
December 31, 2009 the Company had estimated tax net operating loss carryforwards
of approximately $54.6 million, which expire through its tax year ending in
2029.
 
 NOTE
12 - COMMITMENTS AND CONTINGENCIES
 
 Litigation
 
 In
January 2009, the Company filed a declaratory relief in connection with an
investment banking agreement entered into fiscal 2008 against Merriman Curhan
Ford & Co. in the Supreme Court of California - County of Riverside Case No.
083346. In February 2009, the Company received a notice of petition for order
compelling arbitration in the Superior Court California- San Francisco County,
Case No. CFP 09-509186, which was filed on January 28, 2009 by a placement
agent, Merriman Curhan Ford & Co., for failure to pay fees for services
associated with an investment banking agreement. The placement agent is seeking
for the reimbursement for out of pocket fees of approximately $31,000, payment
of notes payable with principal amount of $161,200 and 370,370 shares of the
Company. The case is set for arbitration in September 2010, and mediation will
be completed by July 2010. The Company contends that the agreement was obtained
by misrepresentations and concealment and that it is unenforceable and void. If
the case proceeds, the Company intends to respond aggressively to the
arbitration and believes that there is a very low likelihood of an unfavorable
outcome.
 
 The
Company is a party to litigation in the Riverside County Superior Course, Case
No. INC084243, which was filed in February 2009 by Accretive Solutions in the
state of Florida. The vendor is claiming a breach of contract, resulting in
damages from a 2007 corporate compliance agreement. The Company contends that no
services were ever provided. The vendor is seeking damages of approximately
$37,000. The case will most likely be referred to arbitration. The Company
believes that there is a low likelihood of an unfavorable outcome.
 
 F-20
 The
Company is a party to litigation in the New York Supreme Court, Case No.
109746-2009, which was filed in July 2009 by Wolfe, Axelrod, Weinberger, LLC, an
IR firm. The firm is claiming a breach of contract, resulting in damages from
the 2007 agreement. The Company contends that the contract was terminated by the
agreement and intends on filing a cross complaint. The firm is seeking damages
of approximately $55,000, and settlement discussions have been ongoing for
several months. The Company believes that there is a low likelihood of an
unfavorable outcome.
 
 Employment
Contract
 
 The
Company entered into an employment agreement with its Chief Executive Officer
which expires in December 2011 and is renewable for additional 3-year term. The
employment agreement provides for an annual base salary of $310,000 with a 10%
increase in his base salary annually. The Company has the obligation to pay the
Chief Executive Officer's compensation through December 31, 2011 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
 
 The
Company entered into a new lease effective November 2006. The monthly base rent
amounts to $12,667 per month and matures in December 2011.
 
 During
March 2010 the Company entered into a 1 year lease agreement, commencing April
26, 2010, with an unrelated third party for approximately 1,900 square feet
which serves as our office for research and development. Under the terms of the
lease our monthly rent is $2,625 per month, with $3,062 due at
signing.
 
 Future
annual minimum payments, net of sublease income, required under operating lease
obligations at December 31, 2008 are as follows:
 
 Future
      Minimum
                Lease
      Payments2011
              
              $
              139,000
 
 NOTE
13 - RELATED PARTY TRANSACTIONS
 
 The
Company made rental payments for property owned by the Chief Executive Officer
of the Company during 2009 and 2008 amounting $15,000 and $40,200, respectively.
The rental property was used for temporary employee housing during such
periods.
 
 NOTE
14 - ACCRUED PAYROLL TAXES
 
 As of
December 31, 2009, the Company recorded a liability related to unpaid payroll
taxes for the period from May 16, 2008 to December 31, 2009 for approximately
$2,278,000, of which, $377,000 is relates to accrued interest and
penalty.
 
 NOTE
15 - SEGMENTS
 
 During
2009 and 2008, the Company operated in one business segment. The percentages of
sales by geographic region for the years ended December 31, 2009 and 2008 were
approximately:
 
 2009
              2008United
      States
              11%
              23%Europe
              89%
              77%
 
 F-21
 NOTE
16 - SUBSEQUENT EVENTS
 
 At April
15, 2010, the date the financial statements were issued, the following items
were considered significant subsequent events.
 
 During
January 2010 the Company issued 619,600 shares of our common stock valued at
$68,637 in connection with the payment of the accrued interest on the 8% and 10%
convertible promissory notes.
 
 During
January 2010 the Company issued 575,833 shares of our common stock for services
valued at $87,048.
 
 During
February 2010 the Company issued 100,000 shares of our common stock valued at
$1,000 for the exercise of options.
 
 During
February 2010 the Company issued 100,000 shares of our common stock valued at
$20,000 per the settlement with one of our vendors.
 
 During
February 2010 the Company issued 135,000 shares of our common stock for the
conversion on a 8% short-term convertible promissory note with a principal of
$20,000 and interest of $1,600.
 
 During
March 2010 the Company issued 725,000 shares of our common stock for the
conversion of two 10% short-term convertible promissory notes with principals
totaling $125,000.
 
 Between
January and March 2010 the Company issued 6,211,113 shares of our common stock
valued at $776,975 pursuant to a private placement. In connection with the
issuance of shares, the Company also issued warrants to purchase 3,106,231
shares of common stock at an exercise price range of $0.16 to
$0.20.
 
 During
February 2010 the Company was able to secure a $7 million secured revolving
credit note. The note is has a term of 3 years and interest will be payable on
the unpaid principal balance at 10% per annum and 4% per annum for the amount of
the convertible note which has not been funded. Under the term of the agreement,
the Company will also issue to the note holder five-year warrants to purchase 15
million shares of our common stock with an exercise price of $0.30 per share, as
well as 50,000 share of our Series B Preferred Stock. The note is also
convertible at any time at the option of the holder based on the principal
amount outstanding as follows: (i) up to $1 million, convertible at $0.20, (ii)
in excess of $1 million up to $2 million, convertible at $0.25, and (iii) in
excess of $2 million up to $7 million, convertible at $0.30.
 
 During
January 2010, the Company repriced certain options issued to employees and
directors under both the qualified and non-qualified option plans to an exercise
price of $0.18,