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, 2012



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.)



| | 990 Ironwood Drive,
        Minden, NV 98423         | 
| | ---------------------------------------------------- | 
| | (Address of principal  executive offices) (Zip Code) | 



Registrant's
telephone number, including area code:(888) 525-4677



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 [X]  No [  ]



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 December 31, 2102 was $3,653,199. For purposes of this calculation,
an aggregate of 49,926,772 shares of Common Stock were held by the directors, officers, and affiliates of the registrant on December
31, 2102 and have been included in the number of shares of Common Stock held by affiliates.



The number of the registrant’s shares of common stock outstanding
as of April 5, 2013: 447,887,403.





1







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.

2012 ANNUAL REPORT ON FORM 10-K



Table of Contents



|PART I  
|--------
|        
|        
|Item 1. 
|Item 1A.
|Item 1B.
|Item 2. 
|Item 3. 
|Item 4. 
|        



|PART II    
|-----------
|           
|Item 5.    
|Item 6.    
|Item 7.    
|Item 7A.   
|Item 8.    
|Item 9.    
|Item 9A(T).
|Item 9B.   
|           
|           
|           
|           
|Item 10.   
|Item 11.   
|Item 12.   
|Item 13.   
|Item 14.   
|           
|           



|         | PART IV                                 |   
|-------- | --------------------------------------- | --
|         |                                         |   
|Item 15. | Exhibits, Financial Statement Schedules | 43







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 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 Mobile, Spare Backup for PC and tablets, Spare Switch PC data migration software, and
our Parental Controls.



Our Products and Services



Our flagship products
areSpare MobileTM andSpare BackupTM, a fully-automated remote backup solution designed and developed
for mobile devices and small office or home environment users, allowing automatic and efficient back ups of all data on selected
mobile devices, laptop and desktop computers. As a result, we believe consumers and small companies can ensure file safety of
all files contained on their mobile devices, 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 software
has 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 Mobile will
provide a user with the ability to backup data and content from their phone to the Spare cloud without the need to connect the
mobile device to a PC via a cable.



|● | Backup is performed securely using the users’ mobile or Wi-Fi network;
    mobile network usage charges may apply.                                                 
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|● | Backup captures data stored both on the Mobile devices onboard memory as well as any add on
    memory devices such as a memory card.                              
|● | Backup captures all pertinent user data and configuration if feasible.                                                                                             
|● | A user has the ability to configure the frequency that backups occur.                                                                                              
|● | TheSpare Mobile software detects files that should be backed up automatically.                                                                                     
|● | Users have the ability to customize which files to back up and 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 has the ability to retrieve mobile files
    from a variety of devices using ourSpare Synchronization  service.
|● | Spare Mobile will support the following Mobile device operating systems:                                                                                           
|● | Blackberry Platform v4.0 & above, some exceptions based on models and hardware/software
    features available on the phone, such as GPS chip;                     
|● | Android OS v1.5 & 1.6 backup and security functions;                                                                                                               
|● | Android OS v2.1 & v2.3 above backup and security functions;                                                                                                        
|● | WinMobile OS v6.0, v6.1 & v6.5 backup and security functions;                                                                                                      
|● | iPhone OS v3.1.3 supports backup only;                                                                                                                             
|● | iPhone OS v4.0 & above backup and security functions; and                                                                                                          
|● | Java phones with MIDP 2.0 and/or MIDP 2.1 backup only.                                                                                                             



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

4











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



TheVeriSign/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.



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.



5







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. Spare
Backup services retail between $0.99 and $6.99 per month and certain partners offer annual plans.



We developed new products
and integrated new feature functionality into ourSpare Backup® software. The new offerings in our Spare line of software
products include:Spare RoomTM ,Spare MobileTM , Spare Security Suite for Mobile  and Tablets,
and Parental Controls. The following paragraphs provide certain information regarding our line of products and features:





Spare Room is
designed to complement theSpare 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”.



TheSpare Backup
software easily and automatically backs up a user's files from the user's desktop to theSpare Backup 's cloud. Once files
are stored securely in the cloud, theSpare 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 theSpare 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 ofSpare 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 navigateSpare Room and manage their digital data stored in the Spare cloud from a
variety of devices.



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



Our Target Customers



We distribute our product
line through four vertical channels as a “white label solution,” branding our solutions under our distribution partners’
brands.  We are focusing on the insurance and warranty space where we are bundled into a warranty with retailers online,
including OEM’s and Telco’s.  Our partners will then resell our products to 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 too 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.



6







How We Market Our Products and Services



We market our software
products through distributor’s retailers as well as a "white label" solution that will be distributed through
its vertical channel, such as insurance and warranty providers.  We are continuing to expand our current distribution
base with scheduled launches throughout the remainder of the year. We will focus our distribution efforts in four vertical channels:



| | · | Insurance and warranties
| | - | ------------------------



| | · | Retailers
| | - | ---------



| | · | Original Equipment Manufacturers
| | - | --------------------------------



| | · | Telephone Carriers
| | - | ------------------



We will continue to aggressively
add additional partnerships. We expect our current partners will commence scheduled launches of our services during 2013. We are
in various stages of negotiations with potential partners in the U.S., Brazil, India, the Middle East, South America, and the
South Pacific. We are hopeful that these negotiations will result in additional partnerships in the coming quarters.



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



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



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



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



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



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



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



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



7







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



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



We
have now converted our product to support the local language in the Netherlands and Spain. We have also begun translation of our
product and documentation into the Turkish language which we anticipate will be launched in 2013.



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



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



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



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



Through our relationship
with LSG’s client companies, Spare Backup will broaden its distribution efforts with current and new partners and initiate
new launches into Ireland, Poland, Turkey, the Middle East, India, Brazil and South America.  In 2013, we anticipate
expanding our marketing partnerships across our four vertical marketing channels and across additional geographic areas in order
to reach the widest potential subscriber base.



8







Customer Support



We provide 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 Minden, Nevada. 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.



Research and Development



Our products were developed
primarily by our employees assisted by contractors in certain specialty areas. We have invested approximately $0.8 million and
approximately $1.1 million in research and development during fiscal 2012 and fiscal 2011, 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 back up 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.



9







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.



On April 4, 2013, the Company entered an amended agreement with IO Capital Princess to reduce the monthly hosting fees from
approximately $38,000 to $14,000 a month. This represents a 63% decrease in this recurring monthly cash expenditure, which
is one of the highest expenses the Company incurs on a monthly basis. The Company entered an initial Master Service Agreement
with the vendor on September 11, 2008.



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.                                                                                                                           



Our primary competitors
are various Internet-based backup providers’ such as Connected.com, Livevault, and backup.com, Carbonite and EMC/Mozy. These
companies provide services similar to our PC backup 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). With mobile technology, we have very
few competitors that can compete with our service of synchronization between the PC and mobile devices. Competitors include SugarSync,
Inc., Lookout, Inc.  and to an extent McAfee, Inc.



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.



10







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.  In the fourth quarter the company filed for patents involving
its Parental Controls.



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 December 31,
2012 we had 5 full-time employees, including all of our executive officers and 19 independent contractors. We believe this operational
model reduces our fixed costs and enables us to better manage our cash flow. As of December 31, 2011 we had 22 full-time employees,
including all of our executive officers. Consequently, our overall head count of full-time employees has been reduced by 77% during
fiscal 2012, or 15 full-time employees. We have also fully outsourced our customer support functions which we anticipate will
result in a substantial reduction in our expenses related to that function in 2013.



None of our employees
are covered by collective bargaining agreements, and we believe our relationships with our employees to be good.



Our History



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



11







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. 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.



If we are unable to obtain financing
necessary to support our operations, we may be unable to continue as a going concern.





Our net losses for the
fiscal years ended December 31, 2012 and 2011 were $3,529,813 and $5,850,863, respectively. We have never generated sufficient
revenues to fund our ongoing operations. Our operating losses for fiscal 2012 and fiscal 2011 were $3,572,914 and $7,552,495, respectively,
and these losses are primarily attributable to our selling, general and administrative expense. The report of our independent registered
public accounting firm on our financial statements for the year ended December 31, 2012 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.





Our operating loss has
decreased approximately 53% for fiscal 2012 compared to fiscal 2011; we will need to significantly increase our revenues to fund
these costs. At December 31, 2012 we had approximately $18,136 cash overdraft and a working capital deficit of approximately $11.3
million. We have raised, during the year ended December 31, 2012, approximately $735,333 from the sale of our common stock. We
intend to use the proceeds from the sale of the common stock for working capital purposes. 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.





12







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.



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 $539,396 and $399,343, respectively, for the fiscal years ended December 31, 2012 and 2011. Our net revenues significantly
decreased for fiscal 2012 over fiscal 2011 and we 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.







We have approximately $2,508,672 of debt which is presently
past due 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 $2,508,672 which are either currently
past due or which are due in the current fiscal year. Currently, there are $1,593,772 principal amount of the 8% short-term notes
which are past due, $306,563 principal of the 10% short-term notes which are past due, and $508,000 of notes payable which are
past due. During 2012, 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 2012 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 ours 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 2012, 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.



13







We are past due in the payment of payroll
taxes.





At December 31, 2012,
we had approximately $4,445,882 of accrued but unpaid payroll taxes due to various governmental agencies. We do not have the funds
necessary to satisfy this obligation. We have made payments during the current year to pay down our outstanding balance. If we
are unable to raise the funds necessary, it is possible that we will be subject to significant additional fines and penalties.
The government could file liens against our company and our bank accounts until such time as the amounts have been paid. Customers
may be asked to remit payments directly to the government to satisfy our tax obligations. We are also currently working with the
IRS on a settlement and corresponding payment plan for our outstanding balance with them. We are current with our obligations with
all Federal payroll taxes incurred for the year-ended December 31, 2012.





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 four  separate lawsuits. 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, 2013
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 99,791,184 shares
    of our common stock at prices ranging between $0.01 to $1.30 per share;                                                             
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|● | 9,632,107 shares of our common stock issuable upon the possible conversion of the outstanding
    $2,636,012 principal amount 8% and 10% convertible promissory notes due between August 2008 and June 2011, and
|● | 29,118,482 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.



14







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



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



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
from inception through December 31, 2012, and at December 31, 2012 we had an accumulated deficit of approximately $120.3 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.                                                                               



15







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.



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.



16









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, Livevault, and backup.com, Carbonite and
EMC/Mozy. These companies provide services similar to our PC backup 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). With mobile
technology, we have very few competitors that can compete with our service of synchronization between the PC and mobile devices.
Competitors include SugarSync, Inc., Lookout, Inc.  and, to an extent, McAfee, Inc.



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.



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.



17







Our common stock is currently quoted
on the OTCQB, 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 May 2011 we entered
into a two year lease agreement, commencing June 1, 2011, with Biofilm Management, Inc., which is affiliated with a board member
by means of common ownership and management, which serves as our principal executive office. Under the terms of the lease our initial
base rent is approximately $3,000 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 $3,090 in the second year. We believe this facility meets our operational
needs for the foreseeable future. This lease will expire May 2013, at which time the Company intends to renew the lease on a month
by month basis. We intend to decrease the space used in an effort to increase efficiency.



In October 2011 we entered into a two year lease agreement, commencing November 15, 2011, with an unrelated
third party for 3,610 square feet which serves as our secondary office. Under the terms of the lease our initial base rent is approximately
$8,664 and we will be responsible for our pro-rata share of common area expenses. This lease was terminated early during April
of 2012, which resulted in the deposit being forfeited.





Item 3.  Legal Proceedings



The Company has appealed to the California
Court of Appeals in a matter involving a consultant. The issue on appeal is the California Superior Court’s failure to disregard
a NY state court judgment for approximately $100,000, which the Company asserts was improperly entered and, therefore, should
not be recognized as a valid sister state judgment. The Company’s likelihood of success on this appeal cannot be determined
at this time.



18





In February 2012, a former employee filed suit against the Company alleging various employment related claims. The Company conducted
litigation and discovery, the case is in settlement discussions and was set for trial in 2013.
In June 2012, a vendor filed suit against the Company for breach of contract related to call center services they provided. The
Company is currently conducting litigation and discovery, the case is not yet set for trial.



At
December 31, 2012, the Company has recorded liabilities in connection with such legal proceedings.



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 OTCQB under the symbol SPBU. The reported high and low sales prices for the common stock as reported on the OTCQB 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, 2011    | High   | Low   
|-------------------------------------- | ------ | ------
|                                       |        |       
|First quarter ended March 31, 2011     | $ 0.11 | $ 0.08
|Second quarter ended June 30, 2011     | $ 0.09 | $ 0.05
|Third quarter ended September 30, 2011 | $ 0.17 | $ 0.05
|Fourth quarter ended December 31, 2011 | $ 0.13 | $ 0.07





|Fiscal Year Ended December 31, 2012    | High    | Low     
|-------------------------------------- | ------- | --------
|                                       |         |         
|First quarter ended March 31, 2012     | $ 0.087 | $ 0.049 
|Second quarter ended June 30, 2012     | $ 0.062 | $ 0.021 
|Third quarter ended September 30, 2012 | $ 0.046 | $ 0.017 
|Fourth quarter ended December 31, 2012 | $ 0.024 | $ 0.0072



|                                   | High   | Low    
|---------------------------------- | ------ | -------
|                                   |        |        
|First quarter ended March 31, 2013 | $ 0.02 | $ 0.004



Stockholders



On March 28, 2013, the
last sale price of our common stock as reported on the OTCQB was $0.007. As of March 31, 2013, there were approximately 482 record
owners of our common stock.



19







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





During
the three-month period ended December 31, 2012, we  issued in aggregate 19,888,999 shares of our common stock to 5 accredited
investors pursuant to a private placement which generated gross proceeds of approximately $140,833 or $0.01 per share. The Company
issued 11,666,665 warrants, exercisable at $0.02 per share, as finder’s fees. The warrants expire in December 2015.
This private transaction is exempt from registration under the Securities Act of 1933 in reliance on exemptions provided by
Regulation D, Rule 506 and Section 4(2) of that act.



During
the three-month period ended December 31, 2012, we issued short-term convertible notes payable of $178,750.  The
number of warrants issued with convertible notes s were 28,550,000 shares of our common stock at an exercise price of $0.05 per
share.  The warrants expire in December 2015. This private transaction is exempt from registration under the Securities
Act of 1933 in reliance on exemptions provided by Section 4(2) of that Act.





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.



Overview



We are a software development company and
service provider for the PC and mobile device industry.  Our flagship products isSpare Backup, a fully-automated
remote backup solution designed and developed especially for the small office, mobile and home environment which automatically
and efficiently backs up all data on selected laptops, tablets or desktop computers, as well as smart phones. As a result, we
believe individuals and businesses can ensure file safety. We launched our Spare Back-up service and software product version
1.0 in March 2005 specifically designed for the PC. As part of our software we offer Spare Switch which enables users to
complete the transfer of personal files from one personal computer (PC) to another via a high speed Internet connection. We focus
on individuals and businesses that use diverse technologies and various devices to support their businesses and lifestyles.



We began to migrate the product to encompass
the mobile environment in 2010 and we are currently offering version 6.0 of the product which now incorporates PC’s, tablets
and smart phones . Our mobile software product, which is carrier agnostic and handset agonistic, is marketed under the name “Spare
Mobile”.



20









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



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



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



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



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



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





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





We have focused
our more recent development and marketing efforts on ourSpare Mobile product, which backs up personal content on “smart
phones” and “tablets,” such as contacts, emails, calendar events, photos, music, videos and data files.  It
also offers a complete line of mobilesecurity products andparental controls (developed in 2011 and 2012) to compliment
the users’ mobile devices, as described in our software development section. We have shifted our focus to the mobile industry
to take advantage of a number of industry trends which we believe represent a tremendous growth opportunity for our company. In
2011, there were approximately six billion mobile subscribers throughout the world according to The International Telecommunications
Union, representing almost 87% of the world’s population.  Industry experts, includingInternational
Data Corporation (IDC)and Strategy Analytics, estimate that worldwide shipments of smart phones in 2012 were approximately 575 million units, up over
10% from 2011, and representing over 45.5% of all handsets shipped. In June of 2012,Ericsson
forecasts that mobile subscriptions will reach 9 billion in 2017, of which 5 billion will be mobile broadband connections.
With recent estimates by Juniper Research that less than 1 in 20 smart phones and tablets have third-party security software installed
in them, this represents a vast potential market for mobile security. According to Canalys, the U.S. market for mobile security
is estimated to grow to over $3 billion annually by 2015. Additionally,according
to theIDCSmart
Connected Device Tracker, worldwide shipments of smart connected devices
grew 29.1% year over year in 2012, crossing 1 billion units shipped with a value of $576.9 billion. The market expansion was largely
driven by 78.4% year-over-year growth in tablet shipments, which surpassed 128 million in 2012. IDC expects that tablet shipments
will surpass desktop PCs in 2013 and portable PCs in 2014. In 2013, worldwide desktop PC shipments are expected to drop by 4.3%
and portable PCs to maintain a flat growth of 0.9%. The tablet market, on the other hand, is expected to reach a new high of 190
million shipment units with year-on-year growth of 48.7% while the smartphone market is expected to grow 27.2% to 918.5 million
units. IDC predicts the worldwide smart connected device space will continue to surge with shipments surpassing 2.2 billion units
and revenues reaching $814.3 billion in 2017





We have generated minimal revenue since our
inception on September 12, 2002, and have incurred net losses of approximately $120.3 million from cash and non-cash activity
since inception through December 31, 2012. Revenues generated from our business have not been sufficient to fund our current operations
and we have relied on funds raised from the sale of our securities to provide sufficient cash to operate our business.





21









Business Development and Marketing Strategy:



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



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



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



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



| | · | Carriers
| | - | --------



Examples of our marketing partners within
the four vertical distribution channels include Wirefly/Simplexity, Assurant/Federal Home Warranty, Life Styles Group (a UK warranty
provider), Best Buy Europe, and Sony. We will continue to aggressively add additional partnerships. We expect our current partners
will commence scheduled launches of our services during 2013. We are in various stages of negotiations with potential partners
in the U.S., Brazil, India, the Middle East, South America, and   the South Pacific. We are hopeful that these
negotiations will result in additional partnerships in the coming quarters.





While,
we believe the launch of our base offerings will be commercially successful and our revenue has improved, several launches were
delayed in 2012 as a result of upgrading our software to accommodate the breadth of operating systems currently available in the
mobile phone market place, and to facilitate new software design applications, making it still too early to determine the extent
of the market penetration capabilities of these offerings.





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



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



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



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



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



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



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



22







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



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



We began an initial small-scale launch with
the UK-based Carphone Warehouse in April of 2011 and in the Netherlands in May 2011.  We have now converted our
product to support the local language in the Netherlands and Spain.





In September 2010 we reached a distribution
agreement with Simplexity, LLC., (“Simplexity”), the parent company of Wirefly.com.  Simplexity, a privately
held company, is the Internet's leading authorized seller of cell phones and wireless services. Wirefly is Simplexity's shopping
and comparison site for consumers, bringing online shoppers an unprecedented selection of cell phones and service plans from every
major U.S. carrier with the convenience of automated application processing and cell phone activation. For the last six years
Wirefly has been the internet's #1 authorized dealer for AT&T, Verizon Wireless, Sprint, and T-Mobile.  Simplexity
also operates and maintains similar online websites for a number of major retailers in North America. We believe Simplexity is
uniquely positioned in the U.S. market to reach potential mobile customers across a wide variety of carriers through online mobile
sales sites they own or manage   within North America.  We began the sales launch of our services through
Simplexity’s distribution network in 2011 and have experienced steady sales growth in 2012 on a small scale from this channel
throughout 2012. The service will be offered as an add-on or inclusive in the service packages such as “data protection,”
currently marketed by Simplexity to its channel partners and customers.



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



We also have a distribution partnership with
Lifestyle Services Group (LSG), provider of leading lifestyle solutions and insurance products. LSG specializes in supporting
its client products brands, attracting customers, improving the customer journey, and reducing customer attrition rates. LSG’s
portfolio includes Mobile Phone Insurance, Card Protection and Tech Protect®, and The HubbTM, which allows clients to seamlessly integrate a complete suite of products and services all accessed via one number.  Their
customer base includes Virgin Mobile, Orange, “3”,  Phone, Phones 4 U, Barclay’s and Lloyds bank to
name a few in the U.K.   LSG has also amended our December 13, 2010 master services agreement in the third
quarter of 2011 to include our parental controls functionality. Under the terms of the amended agreement, Spare Backup will supply
the parental controls to LSG for distribution to LSG's affinity distribution channels, which includes most of the major retail
banks and mobile networks and targets approximately 10 million customers.



23







We launched the marketing of our services
with certain LSG partners in the second half of 2012, including Lloyds in the third quarter of 2012 and a soft launch with the
Bank of Scotland in the fourth quarter of 2012. These rolling launches are expected to continue in 2013 and we expect to add new
customers and grow revenue accordingly as these partners increase their marketing and awareness campaigns for the products to
their customers.  Our software is marketed as a way to not only protect data from loss, but to also increase the likelihood
of retrieving a lost or stolen phone through the suite of security features.  As mobile devices are becoming more prevalent
and more powerful, we believe this channel should become a significant source of revenue to our company in the coming quarters.  We
anticipate that these companies will continue to roll out marketing programs progressively in 2013.



Through our relationship with LSG’s
client companies, Spare Backup will broaden its distribution efforts with current and new partners and initiate new launches into
Ireland, Spain, Poland, Turkey, the Middle East, India, Brazil and South America.  On August 30, 2012, Spare Backup
and LSG executed a client addendum to make Spare Mobile available through LSG Asistans Hizmetleri Anonim Şirketi (“LSG
Assistance”) a company registered in Turkey), to the leading mobile communications company in Turkey.  The
launch of our products in Turkey is now expected to take place in the second quarter of 2013. We believe the Turkish market represents
a substantial opportunity for our company as it represents one of the largest smartphone markets in the European/Middle Eastern
region. In 2013 we also anticipate expanding our marketing partnerships across our four vertical marketing channels and across
additional geographic areas in order to reach the widest potential subscriber base.



Software Development



Our decision to expand the scope of our cloud-based
platform into mobile backup and security required us to make substantial changes to our software to enhance the scalability and
functionality of our services across a wide array of devices and platforms.  We completed the majority of that work
in 2011.





Over the course of 2012 we completed the full
migration to an HTML-based platform for our distribution partners.  We developed a number of web hosting sites through our
platform with our marketing partners to support current and future marketing roll outs of our software.   The sites enable
a full touchscreen interface to support all tablet and mobile device applications including Android, Blackberry, Windows and Apple.
HTML will also enable quicker launch schedules for new customers, greater scalability, simplification of server technology, and
faster maintenance. The hosting of these sites represents an additional revenue source for us as we charge monthly service fees
to each distributor for hosting and maintaining the sites.







During
2012 we upgraded our software to accommodate the breadth of operating systems currently available in the mobile phone market place,
and to facilitate new software design applications.  This upgrade, however, caused delays in launching some of Spare Backup’s
marketing partnerships during 2012. While the core development work for our current product offerings is largely complete, we
continue to make improvements to increase the capabilities of the product, enhance the user experience and support the inclusion
of new operating systems, languages and devices.





Expense
Reductions



In an effort to reduce our overall expenses,
we have made a number of changes to our corporate structure. We completed the move of our corporate headquarters, including a
major portion of our software development team, to Minden, Nevada in the third quarter of 2011.  The move has enabled
the company to significantly reduce its corporate taxes due to a significantly more favorable corporate tax environment as well
as less expensive rent and labor costs.



24







We also have largely completed an outsourcing
plan to reduce our employment costs. At December 31, 2012 we had 5 full-time employees, including executive officers. We now utilize
approximately 19 independent contractors on a project basis. We believe this operational model reduces our fixed costs and enables
us to better manage our cash flow. We have also fully outsourced our customer support functions which we anticipate will result
in a substantial reduction in our expenses related to that function in 2013.



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



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



Results of Operations



SPARE BACKUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                               |  | For the Year Ended |             | Increase/  |  | Increase/ 
|---------------------------------------------- |  | ------------------ | ----------- | ---------- |  | ----------
|                                               |  | December 31,       |             | (Decrease) |  | (Decrease)
|                                               |  | 2012               |             |            |  | 2011      
|                                               |  |                    |             |            |  |           
|                                               |  |                    |             |            |  |           
|Net Revenues                                   |  | $                  | 539,396     |            |  |           
|                                               |  |                    |             |            |  |           
|Operating expenses:                            |  |                    |             |            |  |           
|Research and development                       |  |                    | 817,369     |            |  |           
|Selling, general and administrative            |  |                    | 3,294,941   |            |  |           
|Total operating expenses                       |  |                    | 4,112,310   |            |  |           
|                                               |  |                    |             |            |  |           
|Operating loss                                 |  |                    | (3,572,914  | )          |  |           
|                                               |  |                    |             |            |  |           
|Other income (expense):                        |  |                    |             |            |  |           
|Change in fair value of derivative liabilities |  |                    | 251,414     |            |  |           
|Gain from debt settlement                      |  |                    | 329,721     |            |  |           
|Realized gain on foreign currency              |  |                    | (1,828      | )          |  |           
|Interest expense                               |  |                    | (536,206    | )          |  |           
|Total other income (expense)                   |  |                    | 43,101      |            |  |           
|                                               |  |                    |             |            |  |           
|Net loss                                       |  |                    | (3, 529,813 | )          |  |           





NM: Not Meaningful

25







Revenues





Our net revenues primarily
consist of subscription fees charged for online back-up services. Our net revenues increased during fiscal 2012, when compared
to fiscal 2011, due to an increase in revenues from our new distributors who launched our products and growth with our existing
customers. We expect that our revenues during 2013 will continue to increase sequentially from 2012.







During 2012, Spare Backup
spent a considerable amount of money and effort to upgrade its software.  This upgrade was necessary to accommodate the breadth
of operating systems currently available in the mobile phone market place, and to facilitate new software design applications. 
This upgrade, however, caused delays in launching some of Spare Backup’s marketing partnerships during 2012.





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 fiscal 2012 include costs associated with
continued development of user interfaces and enhancements of existing products.





The decrease in our research
and development expenses during fiscal 2012, when compared to the prior year periods, is primarily attributable to the completion
of our Spare back-Up offering as a cloud solution during the first half of 2010, while our research and development expenses during
fiscal 2012 consisted mostly of upgrades necessary to accommodate the breadth of operating systems currently available in the mobile
phone market place, and to facilitate new software design applications for enhancements to our existing solutions.





Selling, General and Administrative Expenses



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





The decrease in selling,
general and administrative expenses in 2012, as compared to 2011 of $3,568,208 or 52% is primarily due to the following:





|● | a decrease in non-recurring fair value
        of options, warrants, and our shares of common stock issued to employees and consultants, including the fair value of
        modification of terms of such options and warrants.  Otherwise, selling, general, and administrative expenses
        during fiscal 2012 are at comparable levels to the prior year period.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | a
                                                                                                                      reduction
                                                                                                                      of our overall
                                                                                                                      head count
                                                                                                                      of full-time
                                                                                                                      employees
                                                                                                                      of 77% during
                                                                                                                      fiscal 2012,
                                                                                                                      or 15 full-time
                                                                                                                      employees.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | reduced rent due to
                                                                                                        the early termination
                                                                                                        of the lease in Los Angeles
                                                                                                        during the fiscal 2012
                                                                                                        year.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Change in Fair Value of Derivative Liabilities



Change in fair value
of derivative liabilities results from the changes in the fair value of the derivative liability due to the application of ASC
815, resulting in either income or expense, depending on the difference in fair value of the derivative liabilities between their
measurement dates.  The decrease or increase in fair value of derivative liabilities recognized during fiscal 2012 and
2011 is primarily due to a decrease or increase of our common stock quoted price between measurement dates and during such periods,
respectively.  Our common stock quoted price is one of the primary assumptions used in the computation of our derivative
liabilities.



26







Gain from Debt Settlement





During
fiscal 2012 and 2011, we settled numerous court cases and disputes with vendors, which resulted in gains from debt settlements
amounting to approximately $446,387and
$172,000, respectively.





Interest Expense



Interest expense consists
primarily of interest recognized in connection with the excess of the fair value of the shares issued to satisfy such obligations,
over their carrying value, the amortization of debt discount and interest on our convertible promissory notes. The decrease in
interest expense during fiscal 2012 is primarily due to lower amortization of debt discount than in fiscal 2011. We recognized
the amortization of debt discount over the terms of their respective promissory notes, which matured during the latter part of
the fiscal 2010 and the first half of 2011.



Liquidity and Capital Resources









At December 31, 2012, our cash overdraft amounted
to $18,136 and our working deficit amounted to approximately $11,362,337 as compared with the cash overdraft of $70,750 and a working
deficit of approximately $10,909,000 at December 31, 2011.



During the year ended December 31, 2012, we
used cash in our operating activities amounting to approximately $1,678,581. Our cash used in operating activities was comprised
of our net loss of approximately $3,529,813 adjusted for the following:



| | ● | Change in fair value of our derivative liabilities of approximately $600,770;                              
| | - | -----------------------------------------------------------------------------------------------------------
| | ● | Fair value of shares of common stock issued in connection with services rendered of approximately $844,730;
| | ● | Fair value of options and warrants issued for services of approximately $350,377;                          



|Additionally, the following variations in operating assets and liabilities impacted our cash used in operating activities:
|--------------------------------------------------------------------------------------------------------------------------
|                                                                                                                          
|                                                                                                                          



During the year ended December 31, 2012, we
generated cash from financing activities of approximately $1.7 million, which consisted of the proceeds from notes payable and
convertible promissory notes of $871 thousand, and the net proceeds from the issuance of common stock for cash of $735 thousand
offset the funding of our overdraft of approximately $53,000. Additionally, we generated proceeds from exercise of options and
warrants aggregating approximately $125,900.









27







During the year ended December 31, 2011, we
used cash in our operating activities amounting to approximately $3,812,000. Our cash used in operating activities was comprised
of our net loss of approximately $5,851,000 adjusted for the following:



| | ● | Change in fair value of our derivative liabilities of approximately $2,297,000;                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| | ● | Fair value of stock-based payments issued to employees and consultants of approximately $851,000;                
| | ● | Fair value of shares of common stock issued in connection with services rendered of approximately
    $1,018,000;
| | ● | Fair value of equity transactions related to financing of approximately $343,000;                                



|Additionally, the following variations in operating assets and liabilities impacted
    our cash used in operating activities:
|------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                              
|                                                                                                                              



During the year ended December 31, 2011, we
generated cash from financing activities of approximately $4 million, which consisted of the proceeds from notes payable and convertible
promissory notes of $1.3 million, and the net proceeds from the issuance of common stock for cash of $2.2 million offset principal
repayments of certain notes payable aggregating $173,000 and the funding of our overdraft of approximately $57,000. Additionally,
we generated proceeds from exercise of options and warrants aggregating approximately $496,000.



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.



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.



28







The Company follows the
guidance of the Securities and Exchange Commission's Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial
Statements". The Company records revenue when persuasive evidence of an arrangement exists, on-line back-up services have
been rendered, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. Online backup
service fees received in advance are reflected as deferred revenue on the accompanying balance sheet. Deferred revenue as of 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 $120.3 million from cash and
non-cash activity since inception through December 31, 2012. Our current operations are not an adequate source of cash to fund
our current operations and we have relied on funds raised from the sale of our securities to provide sufficient cash to operate
our business. The report of our independent registered public accounting firm on our financial statements for the year ended December
31, 2012 contains an explanatory paragraph regarding our ability to continue as a going concern based upon our net losses and
cash used in operations. Our ability to continue as a going concern is dependent upon our ability to obtain the necessary financing
to meet our obligations and repay our liabilities when they become due and to generate profitable operations in the future. If
we are unable to raise capital as needed, it is possible that we would be required to cease operations. The financial statements
included in this report do not include any adjustments to reflect future adverse effects on the recoverability and classification
of assets or amounts and classification of liabilities that may result if we are not successful.



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.



29







Item 9A(T). Controls and Procedures





Evaluation of Disclosure Controls and Procedures



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



Changes in Internal Control over Financial Reporting



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



Item 9B. Other Information



None.





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 | Position                                                    
|-------------- | --- | ------------------------------------------------------------
|Cery B. Perle  | 50  | Chief Executive Officer, President and Chairman of the Board
|Daniel X. Wray | 58  | 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.



30







We believe that Mr. Perle
is qualified to serve on our board of directors due to his experience with numerous start-up ventures and his sales and marketing
skills. Mr. Perle is also our founder.



Daniel X. Wray. Mr. Wray was appointed
to the Company’s board of directors on January 14, 2012. Mr. Wray is currently the Chairman of Biofilm, Inc. (“Biofilm”),
a privately held company based in Vista, California, that manufactures and distributes healthcare products.  Prior to
becoming Chairman of Biofilm in 2011, Mr. Wray served as CEO of Biofilm, since founding the company in 1991.  Prior
to founding BioFilm, Mr. Wray has held various positions in the Aerospace industry and holds six patents for technologies he developed
during that time.  Mr. Wray has a Bachelor’s of Science degree in Chemistry from the University of Arizona.



Mr. Wray was appointed to the board of directors
to replace Ivor Newman, whose resignation as a board member and from the position of COO became effective as of January 14, 2012.





Key Employees



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



|Name       | Age | Position                                                    
|---------- | --- | ------------------------------------------------------------
|Cery Perle | 50  | Chief Executive Officer, President and Chairman of the Board



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, 2012, 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:



31







|● | 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.                                                                



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, 990 Ironwood Drive, Minden, NV 89423, 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, 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.



32







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 one most highly compensated executive officers other than our
    principal executive officer who was serving as executive officers at December 31, 2012 as that term is defined under Rule
    3b-7 of the Securities Exchange Act of 1934. In the case of our company this includes one key employee of our company, and
|● | up to one 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, 2011.                                                                                                                                          



33







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
    Table | 
|------------------------------ | 
|Name and Principal Position    | 
|Cery Perle, President and      | 
|Chief Executive
    Officer    | 
|                               | 
|                               | 



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







Employment Agreements and Narrative Regarding Executive Compensation



Employment Agreement with Cery Perle



On January 1, 2012, Cery
Perle’s employment agreement automatically renewed for an additional year. Under the terms of this agreement, we currently
pay Mr. Perle an annual base salary of $363,000. We initially granted him an option to purchase 1,000,000 shares of our common
stock at an exercise price of $0.01 per share as additional compensation, which vest immediately.  During 2010, the
Board Approved granted him options to purchase a total of 3,100,000 shares of our common stock at an exercise prices ranging from
$0.01 to $0.18 per share which were valued at $372,950. In addition, during fiscal 2008, 2009 and 2010 we paid him certain additional
compensation set forth in the above 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.





34









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, 2012:





|Option Awards |  | Stock Awards                                                       
|------------- |  | -------------------------------------------------------------------
|Name          |  | Number of securities underlying unexercised options (#) exercisable
|Cery B. Perle |  |                                                                    
|              |  |                                                                    
|              |  |                                                                    
|              |  |                                                                    
|              |  |                                                                    
|              |  |                                                                    
|              |  |                                                                    
|              |  |                                                                    
|              |  |                                                                    
|              |  |                                                                    
|              |  |                                                                    
|              |  |                                                                    
|              |  |                                                                    
|              |  |                                                                    
|              |  |                                                                    
|              |  |                                                                    
|              |  |                                                                    
|              |  |                                                                    
|              |  |                                                                    
|              |  |                                                                    







35







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.



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.



36







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.



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.



37







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.





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.



38







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 September 30, 2014 pursuant to the extension
from a Board resolution.



Director Compensation



Our Board of Directors
is comprised of Messrs. Perle and Wray. 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 Mr. Wray for services
as members of our Board of Directors for fiscal 2012. The value attributable to any option awards is computed in accordance with
FAS 123R.



|Director Compensation |                                                 |                  |                                               |                                                            |                                                                         |                                    |          
|--------------------- | ----------------------------------------------- | ---------------- | --------------------------------------------- | ---------------------------------------------------------- | ----------------------------------------------------------------------- | ---------------------------------- | ---------
|Name                  | 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 ($)
|Daniel X. Wray (1)    | -                                               | -                | 15,640                                        | -                                                          | -                                                                       | -                                  | 15,640   



|(1) | Represents the value of options to purchase 1,000,000 shares of our common
    stock with an exercise price of $0.025 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.



39







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





At March 31, 2013 we had:
447,887,403 shares of common stock, 50,000 shares of Series A Preferred Stock and 100,000 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.







The following table sets forth information
known to us as of March 31, 2013 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 990 Ironwood Drive, Minden, Nevada 89423. 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 Ownership
|--------------------------------------------------------------------- |  | -----------------------------------------
|                                                                      |  | Common Stock                             
|Name (1)                                                              |  | # of Shares                              
|Cery B. Perle (2)                                                     |  |                                          
|Daniel X. Wray                                                        |  |                                          
|All named executive officers and directors as a group (three persons) |  |                                          
|RJ Dailey                                                             |  |                                          
|The Ferrari’s                                                         |  |                                          
|Joel Yanowitz                                                         |  |                                          
|* represents less than 1%                                             |  |                                          







|(1)             | Unless otherwise indicated, the business address of each person listed is in care of Spare Backup, Inc., 990 Ironwood Drive, Minden, NV 89423
|--------------- | ---------------------------------------------------------------------------------------------------------------------------------------------
|(2)   Includes: | Includes 17,072,794 shares of our common stock underlying options with exercise prices ranging from $0.005 to $0.18 per share.               



40









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 8.8% of our
outstanding voting securities. These actions were approved by our Board of Directors of which Mr. Perle is a member.



Related Party Transactions



None.



Director Independence



Mr. Wray is "independent" within
the meaning of Marketplace Rule 5605 of the NASDAQ Stock Market, Inc.



Item 14. Principal Accountant Fees and Services



Sherb & Co., LLP
served as our independent registered public accounting firm for Q1-Q3 during the fiscal year ended December 31, 2012. The following
table shows the fees that were billed for the audit and other services provided by such firm for fiscal 2012 and fiscal 2011.
On April 5, 2013, the Company dismissed Sherb & Co., LLP as its auditor. The decision to change independent registered public
accounting firm was approved by the Board of Directors of the Company.





|Fee Category       |  | 2012 |        | 2011
|------------------ |  | ---- | ------ | ----
|Audit Fees         |  | $    | 84,900 |     
|Audit Related Fees |  |      | —      |     
|Tax Fees           |  |      | —      |     
|All Other Fees     |  |      | —      |     
|Total              |  | $    | 84,900 |     





41







On April 5, 2013, concurrent with the dismissal
of Sherb & Co, the Company, upon the Board of Directors’ approval, engaged Li and Company, PC (“LICO”) as
its new independent registered public accounting firm to audit and review the Company’s consolidated financial statements
effective April 5, 2013.

|Fee Category       |  | 2012 |        | 2011
|------------------ |  | ---- | ------ | ----
|Audit Fees (1)     |  | $    | 25,000 |     
|Audit Related Fees |  |      | —      |     
|Tax Fees           |  |      | —      |     
|All Other Fees     |  |      | —      |     
|Total              |  | $    | 25,000 |     



| | (1) | This fee was paid during the first quarter of 2013, but related
                                                              to the audit of the financial statements for the year ended December
                                                              31, 2012.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.









42







PART IV



Item 15. Exhibits, Financial Statement Schedules



|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)

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)





43









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 Liand Company, PC *

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 *

101.1 The following materials from the Company's
Annual Report on Form 10-K for the year ended December 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i)
the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Cash Flows, and (v) related notes to these financial
statements, tagged as blocks of text.



* 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.

(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.





44









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 22, 2013



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                                                        | Date          
|------------------- |  | ------------------------------------------------------------ | --------------
|                    |  |                                                              |               
|By: /s/ Cery Perle  |  | Chief Executive Officer, President and Chairman of the Board | April 22, 2013
|Cery Perle          |  | (Principal executive officer and financial officer)          |               
|                    |  |                                                              |               
|By: /s/ Daniel Wray |  | Director                                                     | April 22, 2013
|Daniel Wray         |  |                                                              |               
|                    |  |                                                              |               
|                    |  |                                                              |               





45









SPARE BACKUP, INC. AND SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2012



Index to Consolidated Financial Statements and Financial Statement
Schedules





|                                                                                                              | Page
|------------------------------------------------------------------------------------------------------------- | ----
|Report of Independent Registered Public Accounting Firm                                                       | F-2 
|Report of Independent Registered Public Accounting Firm                                                       | F-3 
|Consolidated Balance Sheet as of December 31, 2012 and 2011                                                   | F-4 
|Consolidated Statement of Operations for each of the two years in the period ended December 31, 2012 and 2011 | F-5 
|Consolidated Statement of Shareholders’ Equity for the  year ended December 31, 2011                          | F-6 
|Consolidated Statement of Shareholders’ Equity for  the  year  ended December 31, 2012                        | F-7 
|Consolidated Statement of Cash Flows for each of the two years in the period ended December 31, 2012 and 2011 | F-8 
|Notes to the Consolidated Financial Statements                                                                | F-9 





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 and Stockholders
of



Spare Backup, Inc.

Minden, Nevada



We have audited the accompanying consolidated
balance sheet of Spare Backup, Inc. (the "Company") as of December 31, 2012, and the related consolidated statements
of operations, stockholders' deficit, and cash flows for the year then ended. 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
audit.



We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. Our audit 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 audit provides
a reasonable basis for our opinion.



The Company’s
consolidated financial statements as of December 31, 2011 and for the year then ended was audited by other auditors whose reports
dated April 25, 2012included an explanatory paragraph as to an uncertainty with respect to the Company’s ability
to continue as a going concern.  The other auditors’  report has been furnished  to
us, and our opinion,  insofar as it relates  to  amounts  included  for
such prior  period,  is based  solely on the report of such other auditors.



In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Spare Backup, Inc. at December
31, 2012, and the results of its operations and its cash flows for the year then ended 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/ Li and Company, PC
        Li and Company, PC
        
        Skillman, New Jersey
        April 22, 2013
|--------------------------------------------------------------------------------------------------------------









F-2











Report of Independent Registered Public Accounting
Firm



To the Board of Directors



Spare Backup, Inc.



We have audited the accompanying consolidated balance sheet of Spare
Backup, Inc. and Subsidiary as of December 31, 2011, and the related consolidated statements of operations, stockholders' deficit,
and cash flows for the year ended December 31, 2011. 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 audit.



We conducted our audit 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 audit 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 audit provides 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, 2011,
and the results of their operations and their cash flows for the year ended December 31, 2011 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 25, 2012
|----------------------------------------------------------------------------------











F-3











|                                                                                                     |  |                   |              |                  
|---------------------------------------------------------------------------------------------------- |  | ----------------- | ------------ | -----------------
|SPARE BACKUP, INC. AND SUBSIDIARY                                                                   
|CONSOLIDATED BALANCE SHEETS                                                                         
|                                                                                                    
|                                                                                                     |  |                   |              |                  
|                                                                                                     |  | December 31, 2012 |              | December 31, 2011
|                                                                                                     |  |                   |              |                  
|                                                                                                     |  |                   |              |                  
|ASSETS                                                                                               |  |                   |              |                  
|                                                                                                     |  |                   |              |                  
|Current Assets:                                                                                      |  |                   |              |                  
|Cash                                                                                                 |  | $                 | —            |                  
|Accounts receivable, net allowance for bad debts of $86,714 and $100,000, respectively               |  |                   | 84,282       |                  
|Prepaid expenses                                                                                     |  |                   | —            |                  
|Total current assets                                                                                 |  |                   | 84,282       |                  
|                                                                                                     |  |                   |              |                  
|Property and equipment, net of accumulated depreciation of $341,255 and $279,345, respectively       |  |                   | 37,448       |                  
|                                                                                                     |  |                   |              |                  
|Other assets                                                                                         |  |                   | 61,209       |                  
|                                                                                                     |  |                   |              |                  
|Total assets                                                                                         |  | $                 | 182,939      |                  
|                                                                                                     |  |                   |              |                  
|LIABILITIES AND STOCKHOLDERS' DEFICIT                                                                |  |                   |              |                  
|                                                                                                     |  |                   |              |                  
|Current Liabilities:                                                                                 |  |                   |              |                  
|Accounts payable and accrued expenses                                                                |  | $                 | 3,500,711    |                  
|Overdraft liability                                                                                  |  |                   | 18,136       |                  
|Accrued payroll taxes                                                                                |  |                   | 4,455,882    |                  
|Current maturities of convertible promissory notes, net of discount of $528,788 and $0, respectively |  |                   | 2,000,672    |                  
|Accrued interest on  notes                                                                           |  |                   | 244,948      |                  
|Notes payable                                                                                        |  |                   | 508,000      |                  
|Deferred revenue                                                                                     |  |                   | 102,500      |                  
|Derivative liabilities                                                                               |  |                   | 600,770      |                  
|Due to stockholder                                                                                   |  |                   | 15,000       |                  
|                                                                                                     |  |                   |              |                  
|Total current liabilities                                                                            |  |                   | 11,446,619   |                  
|                                                                                                     |  |                   |              |                  
|Non-current Liabilities:                                                                             |  |                   |              |                  
|Convertible promissory notes, net of current maturities                                              |  |                   | 618,440      |                  
|                                                                                                     |  |                   |              |                  
|Total non-current liabilities                                                                        |  |                   | 618,440      |                  
|                                                                                                     |  |                   |              |                  
|Total liabilities                                                                                    |  |                   | 12,065,059   |                  
|                                                                                                     |  |                   |              |                  
|Stockholders' Deficit:                                                                               |  |                   |              |                  
|Preferred stock, par value $0.001, 5,000,000 shares authorized:                                      |  |                   |              |                  
|50,000 and 100,000 shares designated as Series A and Series B Preferred Stock, respectively          |  |                   |              |                  
|Series A Preferred stock, par value $0.001, 50,000 shares designated:                                |  |                   |              |                  
|50,000 shares issued and outstanding                                                                 |  |                   | 50           |                  
|Series B Preferred stock, par value $0.001, 100,000 shares designated:                               |  |                   |              |                  
|100,000 shares issued and outstanding                                                                |  |                   | 100          |                  
|Common stock; par value $0.001; 900,000,000 shares authorized;                                       |  |                   |              |                  
|407,349,546 and 303,943,573 issued and outstanding, respectively                                     |  |                   | 407,349      |                  
|Additional paid-in capital                                                                           |  |                   | 108,034,704  |                  
|Accumulated deficit                                                                                  |  |                   | (120,324,323 | )                
|                                                                                                     |  |                   |              |                  
|Total stockholders’ deficit                                                                          |  |                   | (11,882,120  | )                
|                                                                                                     |  |                   |              |                  
|Total liabilities and stockholders’ deficit                                                          |  | $                 | 182,939      |                  



See Notes to Consolidated Financial Statements.





F-4













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





See Notes to Consolidated Financial Statements.





F-5









SPARE BACKUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIT)

From January 1, 2012 to December 31, 2012









|                                                                         |  | Series A  |        |   |  | Series B  |    |   |  |        |         |   |  |                 |     |              |  |      
|------------------------------------------------------------------------ |  | --------- | ------ | - |  | --------- | -- | - |  | ------ | ------- | - |  | --------------- | --- | ------------ |  | -----
|                                                                         |  | Preferred |        |   |  | Preferred |    |   |  | Common |         |   |  | Additional      |     |              |  |      
|                                                                         |  | Stock     |        |   |  | Stock     |    |   |  | Stock  |         |   |  | Paid in Capital |     | ACC. Deficit |  | Total
|                                                                         |  | #         |        | $ |  | #         |    | $ |  | #      |         | $ |  | $               |     | $            |  | $    
|                                                                         |  |           |        |   |  |           |    |   |  |        |         |   |  |                 |     |              |  |      
|Beginning Balance                                                        |  |           | 50,000 |   |  |           | 50 |   |  |        | 100,000 |   |  |                 | 100 |              |  |      
|                                                                         |  |           |        |   |  |           |    |   |  |        |         |   |  |                 |     |              |  |      
|Issuance
    of common stock and warrants for cash:                      |  |           |        |   |  |           |    |   |  |        |         |   |  |                 |     |              |  |      
|                                                                         |  |           |        |   |  |           |    |   |  |        |         |   |  |                 |     |              |  |      
|Reprice of previous agreement                                            |  |           |        |   |  |           |    |   |  |        |         |   |  |                 |     |              |  |      
|                                                                         |  |           |        |   |  |           |    |   |  |        |         |   |  |                 |     |              |  |      
|Issuance
    of common stock for Conversion of convertible notes payable |  |           |        |   |  |           |    |   |  |        |         |   |  |                 |     |              |  |      
|                                                                         |  |           |        |   |  |           |    |   |  |        |         |   |  |                 |     |              |  |      
|Isuance of common stock for services                                     |  |           |        |   |  |           |    |   |  |        |         |   |  |                 |     |              |  |      
|                                                                         |  |           |        |   |  |           |    |   |  |        |         |   |  |                 |     |              |  |      
|Excersie of stock options                                                |  |           |        |   |  |           |    |   |  |        |         |   |  |                 |     |              |  |      
|                                                                         |  |           |        |   |  |           |    |   |  |        |         |   |  |                 |     |              |  |      
|Excersie of warrants                                                     |  |           |        |   |  |           |    |   |  |        |         |   |  |                 |     |              |  |      
|                                                                         |  |           |        |   |  |           |    |   |  |        |         |   |  |                 |     |              |  |      
|Isuance of warrants for services                                         |  |           |        |   |  |           |    |   |  |        |         |   |  |                 |     |              |  |      
|                                                                         |  |           |        |   |  |           |    |   |  |        |         |   |  |                 |     |              |  |      
|Isuance of warrants for interest                                         |  |           |        |   |  |           |    |   |  |        |         |   |  |                 |     |              |  |      
|                                                                         |  |           |        |   |  |           |    |   |  |        |         |   |  |                 |     |              |  |      
|Common Stock issued for accrued interest                                 |  |           |        |   |  |           |    |   |  |        |         |   |  |                 |     |              |  |      
|                                                                         |  |           |        |   |  |           |    |   |  |        |         |   |  |                 |     |              |  |      
|FV options                                                               |  |           |        |   |  |           |    |   |  |        |         |   |  |                 |     |              |  |      
|                                                                         |  |           |        |   |  |           |    |   |  |        |         |   |  |                 |     |              |  |      
|Warrant modification
    exp                                             |  |           |        |   |  |           |    |   |  |        |         |   |  |                 |     |              |  |      
|                                                                         |  |           |        |   |  |           |    |   |  |        |         |   |  |                 |     |              |  |      
|Net loss                                                                 |  |           |        |   |  |           |    |   |  |        |         |   |  |                 |     |              |  |      
|                                                                         |  |           |        |   |  |           |    |   |  |        |         |   |  |                 |     |              |  |      
|Closing Balance                                                          |  |           | 50,000 |   |  |           | 50 |   |  |        | 100,000 |   |  |                 | 100 |              |  |      





See Notes to Consolidated Financial Statements.





F-6













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







See Notes to Consolidated Financial Statements.





F-7









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 $3.5 million during the year
ended December 31, 2012. 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, including
accrued payroll taxes and statutory additions amounts to approximately $4.5 million at December 31, 2012, 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.



Cash and Cash Equivalents



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



Concentration of Credit Risks





The Company's accounts receivable are due from
a few customers, who are located in the Unites States and United Kingdom. At December 31, 2012, two of the Company’s customers
accounted for 76% of its accounts receivable. Two of the Company’s customers accounted for 85% of its accounts receivable
at December 31, 2011.



One
of the Company's customers accounted for approximately 40% of its revenues during the year ending December 31, 2012. One of the
Company’s customers accounted for 44% of the Company’s revenue during the year ending December 31, 2011.







F-8









Accounts Receivable



The Company has a policy of reserving for
uncollectible accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable.
The Company periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of
past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed
to be uncollectible are charged to the bad debt expense after all means of collection have been exhausted and the potential for
recovery is considered remote.  Management determined that an allowance of $86,714 and $100,000 was necessary at December
31, 2012 and 2011, respectively.



Property and Equipment



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



Revenue Recognition



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



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





Product Concentration



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



Fair Value of Financial Instruments



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



F-9







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



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





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



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, 2012. Instead, such amounts are included in the statement of operations under the caption "Research and Development."



Foreign Currency Transactions



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



Income Taxes



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



Share-based Payments



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



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



F-10







Convertible Instruments



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



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



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



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



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



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



Recent Accounting Pronouncements



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



Basic and Diluted Earnings per Share



Basic earnings per share is calculated by
dividing income available to stockholders by the weighted-average number of common shares outstanding for each period. Diluted
earnings per share is computed using the weighted-average number of common and dilutive common share equivalents outstanding during
the period. Dilutive common share equivalents consist of shares issuable upon the exercise of stock options and warrants (calculated
using the reverse treasury stock method). The outstanding options, warrants and shares equivalent issuable pursuant to convertible
promissory notes amounted to 111,303,079 and 105,097,959 at December 31, 2012 and 2011, respectively. Accordingly, these
common share equivalents at December 31, 2012 and 2011 are excluded from the loss per share computation for that period due to
their antidilutive effect.



F-11













NOTE 3 - PROPERTY AND EQUIPMENT



Property and equipment consisted of the following:



|                              |  |                |  | December 31, |          | December 31,
|----------------------------- |  | -------------- |  | ------------ | -------- | ------------
|                              |  | Estimated life |  | 2012         |          | 2011        
|Computer and office equipment |  | 3 to 5 years   |  | $            | 378,703  |             
|Leasehold improvements        |  | 5 years        |  |              | —        |             
|                              |  |                |  |              | 378,703  |             
|Less:Accumulated depreciation |  |                |  |              | (341,255 | )           
|                              |  |                |  | $            | 37,448   |             



Depreciation expense amounted to $61,910 and
$217,537 during the years ended December 31, 2012 and 2011, respectively.



NOTE 4 – ACCRUED PAYROLL TAXES



At December 31, 2012, the Company recorded
a liability of approximately $4.5 million to certain U.S. and state governmental agencies for unpaid payroll taxes, including
statutory additions, such as interest and penalties.



F-12







NOTE 5 - CONVERTIBLE PROMISSORY NOTES



Convertible promissory notes consist of the
following as of:



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | December 31, 2012 |           | December 31, 2011
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | --------- | -----------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                  
|Convertible promissory notes - 8%, bearing interest at 8% per annum, matured in August 2009. Interest payable commencing the quarter ending December 31, 2007, payable within 30 days after the end of the quarter. Interest may be paid in cash or common stock at the option of the Company. Interest paid in common stock will be calculated at a range of 90% of the average closing price for the common stock for the five (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 its common stock at an effective conversion rate of $0.25 per share. It is currently past due.                                                         |  | $                 | 1,593,772 |                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                   |           |                  
|Convertible promissory notes payable - 10%, bearing interest at 10% per annum, matured between August 2008 and October 2011. Interest payable commencing the quarter ending September 30, 2008, within 30 days after the end of the quarter. Interest may be paid in cash or common stock at the option of the Company. Interest paid in common stock will be calculated at 100% of the volume weighted average price for the common stock for 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 the Company’s common stock at an effective conversion rate ranging from $0.05 to $0.25 per share. The notes are currently past due. |  |                   | 274,963   |                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                   |           |                  
|Convertible note payable for up to $1.5 million, convertible at 75% of the Company’s 5-day moving average quoted price of the stock for that month, bearing interest at 10% per annum, payable monthly beginning August 2011, maturing in June 2014.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                   | 585,000   |                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                   |           |                  
|Secured convertible note payable, convertible at the lessor of: 1) 70% of the lowest traded price of the Company’s common stock for the 20 trading days prior to the conversion, or 2) $0.035 per share, bearing a one-time interest payment of 10%, payable upon conversion, matured December 15, 2012. The note is currently past due.                                                                                                                                                                                                                                                                                                                                                                                                   |  |                   | 60,000    |                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                   |           |                  
|Convertible note payable for up to $385,000, convertible at the lessor of: 1) $0.035 per share, or 2) 70% of the lowest trade price in the 25 trading days prior to the conversion, bearing an original issuance discount of 9.1% and no interest for the first 90 days, bearing a one-time interest payment of 5% after 90 days, payable on conversion, maturing one year from the effective date of each receipt.                                                                                                                                                                                                                                                                                                                        |  |                   | 54,545    |                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                   |           |                  
|Convertible note payable - 10%, convertible at 60% of the average of the lowest three trading prices for the Company’s common stock in the ten day trading period ended one trading day prior to the conversion date, bearing interest at 6% per annum, payable upon conversion, matured on February 18, 2013.  The notes are currently past due.                                                                                                                                                                                                                                                                                                                                                                                          |  |                   | 160,000   |                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                   |           |                  
|Convertible note payable valued at $100,000, convertible at a conversion price of $0.05 per share at maturity or when in default at a strike price of $0.01 per share, maturing on September 5, 2012, 2 million warrants with a strike price of one cent per a share, matured on October 15, 2012.  The note is currently past due.                                                                                                                                                                                                                                                                                                                                                                                                        |  |                   | 100,000   |                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                   |           |                  
|Convertible note payable issued with a 2- year 2,000,000 warrants with exercise price of $0.01 convertible at maturity with conversion price of $0.0125 per share or when in default at a strike price of $0.05 per share, matured on October 15, 2012. The note is currently past due.                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |                   | 34,000    |                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                   |           |                  
|Convertible note payable -  issued on August 22, 2012, bearing interest at 6% per annum payable in common stock, maturing on August 22, 2014, with principal and interest convertible  to common stock at 70% of the lowest closing bid price for any of the five (5) trading days including the day upon which a Notice of Conversion is received by the Company.                                                                                                                                                                                                                                                                                                                                                                         |  |                   | 75,000    |                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                   |           |                  
|Convertible note payable -  issued with s warrants to purchase 8.3 million shares of the Company’s common share over the 3-year period with exercise price of $0.05 per share in December 2012, bearing interest at 12% per annum payable in common stock, with principal and interest convertible to common stock at 50% of the lowest closing bid price for any of the five (5) trading days including the day upon which a Notice of Conversion is received by the Company, matured on December 20, 2012. The note is currently past due.                                                                                                                                                                                               |  |                   | 41,500    |                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                   |           |                  
|Convertible note payable -  issued with warrants to purchase 20.25million shares of the Company’s common share over the 3-year period with exercise price of $0.05 per share  in December 2012, bearing interest at 12% per annum payable in common stock, , with principal and interest convertible payable to common stock at 50% of the lowest closing bid price for any of the five (5) trading days including the day upon which a Notice of Conversion is received by the Company, matured on December 20, 2012. It is currently past due.                                                                                                                                                                                           |  |                   | 137,500   |                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                   |           |                  
|Convertible note payable, convertible at $0.05 per share, non-interest bearing and due on demand.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                   | 29,600    |                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                   |           |                  
|Convertible note payable, convertible at $0.02 per share, non-interest bearing  and due on demand .                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |                   | 2,000     |                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                   |           |                  
|Total convertible notes payable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |                   | 3,147,880 |                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                   |           |                  
|Long-term portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                   | (618,440  | )                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                   |           |                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                   | 2,529,440 |                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                   |           |                  
|Discount on convertible notes payable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                   | (528,768  | )                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                   |           |                  
|Current maturities, net of discount                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  | $                 | 2,000,672 |                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                   |           |                  







F-13







The following sets forth the Company’s activity of its convertible
notes payable during the year ended December 31, 2011 and 2010, respectively:





|                                                                                                                           |  | Year ended December 31, 2012 |         | Year ended  December 31, 2011
|-------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | -----------------------------
|                                                                                                                           |  |                              |         |                              
|                                                                                                                           |  |                              |         |                              
|Issuance of 16,666,666and 13,147,625 shares of common stock pursuant to conversion of convertible promissory notes payable |  |                              | 166,666 |                              
|Proceeds from issuance of convertible notes payable and line of credit                                                     |  |                              | 854,795 |                              
|Fair value of warrants issued to certain promissory note holders recorded as interest expense                              |  |                              | —       |                              
|Fair value of 2,116,737 and 767,623 shares of common stock to satisfy accrued interest obligations                         |  |                              | 137,510 |                              
|Fair value of warrants and embedded conversion features recorded as corresponding debt discount                            |  |                              | 851,484 |                              
|Fair value of warrants issued to satisfy accrued interest obligations                                                      |  |                              | —       |                              
|Amortization of debt discount                                                                                              |  |                              | 334,494 |                              
|Amortization of deferred financing costs                                                                                   |  |                              | 14,545  |                              









Notes Payable





The following sets forth the Company’s
activity of its notes payable during the year ended December 31, 2012 and 2011, respectively:





|                                                                                           |  | Year ended December 31, 2012 |         | Year ended December 31, 2011
|------------------------------------------------------------------------------------------ |  | ---------------------------- | ------- | ----------------------------
|Principal repayments                                                                       |  | $                            | —       |                             
|Proceeds from issuance of note payable                                                     |  |                              | 23,000  |                             
|Fair value of 0 and 980,000 shares of common stock to satisfy accrued interest obligations |  |                              | —       |                             
|Issuance of 0 and  8,072,707 shares to satisfy obligations under certain notes payable     |  |                              | —       |                             
|Issuance of note payable to satisfy certain accounts payable                               |  |                              | 119,750 |                             







The Company recognized approximately $536,206
and $763,775 during 2012 and 2011, respectively, as interest expense, which consists of the excess of the fair value of shares
of common stock over the carrying value of the convertible promissory notes and notes payable satisfied, amortization of debt discount,
amortization of deferred financing costs, fair value of the Company’s shares of common stock and warrants issued in lieu
of interest.







F-14









NOTE 6 – DERIVATIVE LIABILITIES







Summary of the Changes in Fair Value
of Level 3 Financial Liabilities



The table below provides a summary of the changes
in the fair value of the derivative financial instruments and the changes in the fair value of the derivative financial instruments,
including net transfers in and/or out, of all financial assets and liabilities measured at fair value on a recurring basis using
significant unobservable inputs (Level 3):





|Derivative liability at January 1, 2012                          |  | $ | —        |   
|---------------------------------------------------------------- |  | - | -------- | --
|Issuance of embedded conversion features                         |  |   | (851,484 | ))
|Net income (loss)- Changes in fair value of derivative liability |  |   | 251,414  |   
|Derivative liability at December 31, 2012                        |  |   | (600,070 | ) 





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





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



|                              |  | December 31, 2012 |       |  | Issuance or reclassification
    of contracts during the year ended December 31, 2012 |  |              | December 31, 2011 |  |  | Issuance or reclassification
    of contracts during the year ended December 31, 2011 | 
|----------------------------- |  | ----------------- | ----- |  | ------------------------------------------------------------------------------------- |  | ------------ | ----------------- |  |  | ------------------------------------------------------------------------------------- | 
|Embedded Conversion Features: |  |                   |       |  |                                                                                       |  |              |                   |  |  |                                                                                       | 
|Effective Exercise price      |  |                   | $0.05 |  |                                                                                       |  | $0.08 - 0.13 |                   |  |  | $0.20                                                                                 | 
|Effective Market price        |  |                   | $0.01 |  |                                                                                       |  | $0.08 - 0.13 |                   |  |  | $0.075                                                                                | 
|Volatility                    |  |                   | 80%   |  |                                                                                       |  | 69%          |                   |  |  | 77%                                                                                   | 
|Risk-free interest            |  |                   | 0.25% |  |                                                                                       |  | 0.25 - 1.93% |                   |  |  | 0.25%                                                                                 | 
|Terms days                    |  |                   | 1     |  |                                                                                       |  | 1            |                   |  |  | 1                                                                                     | 
|Expected dividend rate        |  |                   | 0%    |  |                                                                                       |  | 0%           |                   |  |  | 0%                                                                                    | 
|                              |  |                   |       |  |                                                                                       |  |              |                   |  |  |                                                                                       | 
|                              |  |                   |       |  |                                                                                       |  |              |                   |  |  |                                                                                       | 
|Warrants:                     |  |                   |       |  |                                                                                       |  |              |                   |  |  |                                                                                       | 
|Effective Exercise price      |  |                   | $0.21 |  |                                                                                       |  | $0.06 - 0.34 |                   |  |  | $0.21                                                                                 | 
|Effective Market price        |  |                   | $0.01 |  |                                                                                       |  | $0.08 - 0.15 |                   |  |  | $0.075                                                                                | 
|Volatility                    |  |                   | 80%   |  |                                                                                       |  | 69-78%       |                   |  |  | 77%                                                                                   | 
|Risk-free interest            |  |                   | 0.25% |  |                                                                                       |  | 0.25-1.76%   |                   |  |  | 0.25%                                                                                 | 
|Terms                         |  |                   | 610   |  |                                                                                       |  | 76-1825      |                   |  |  | 610                                                                                   | 
|Expected dividend rate        |  |                   | 0%    |  |                                                                                       |  | 0%           |                   |  |  | 0%                                                                                    | 





F-15







NOTE 7 - STOCKHOLDERS' DEFICIT



Preferred Stock





During the year ended December 31, 2011, the
Company issued 100,000 shares of its Series B Preferred Stock.  The Series B Preferred Stock’s designation provides
voting rights amounting to 400-to-1 shares.  The Company issued 50,000 of such shares to one of its executives.  Additionally,
the Company issued 50,000 of such shares to one of its lenders and shareholders, who has granted a $1.5 million convertible note
payable and was the owner of 7,416,666 shares of the Company’s common stock at the date of issuance of the $1.5 million convertible
note payable. He was subsequently appointed a director and is the holder of 28,599,078 shares as of December 31, 2012.



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







Common Stock



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



The issuance of common stock during the year
ended December 31, 2011 is summarized in the table below:





|                                                                                |  | Number of Shares of Common Stock |            | Fair Value at Issuance |  | Fair Value at Issuance (per share)
|------------------------------------------------------------------------------- |  | -------------------------------- | ---------- | ---------------------- |  | ----------------------------------
|Accrued interest payment for 8% and 10% convertible promissory notes            |  |                                  | 767,623    |                        |  | $                                 
|Fair value of shares of common stock issued as interest payment on note payable |  |                                  | 250,000    |                        |  |                                   
|Services performed- Investor relations                                          |  |                                  | 6,695,000  |                        |  |                                   
|Services performed-Consulting                                                   |  |                                  | 5,340,000  |                        |  |                                   
|Exercised stock options                                                         |  |                                  | 4,900,404  |                        |  |                                   
|Exercised warrants                                                              |  |                                  | 6,109,403  |                        |  |                                   
|Conversion of convertible promissory notes and notes payable                    |  |                                  | 29,770,332 |                        |  |                                   
|Private placement, net of finder’s fee of $57,330                               |  |                                  | 50,117,856 |                        |  |                                   
|Interest associated with issuance of notes payable                              |  |                                  | 500,000    |                        |  |                                   
|                                                                                |  |                                  |            |                        |  |                                   



The issuance of common stock during the year
ended December 31, 2012 is summarized in the table below:





|                                                                     |  | Number of Shares of Common Stock |            | Value at Issuance |  | Value at Issuance (per share)
|-------------------------------------------------------------------- |  | -------------------------------- | ---------- | ----------------- |  | -----------------------------
|Accrued interest payment for 8% and 10% convertible promissory notes |  |                                  | 2,116,737  |                   |  | $                            
|Common shares issued for services performed                          |  |                                  | 23,575,000 |                   |  |                              
|Exercise of  stock options                                           |  |                                  | 3,640,000  |                   |  |                              
|Exercise of warrants                                                 |  |                                  | 4,000,000  |                   |  |                              
|Conversion of convertible promissory notes                           |  |                                  | 16,666,666 |                   |  |                              
|Private placement                                                    |  |                                  | 53,140,903 |                   |  |                              







Additionally, the Company issued 3,000,000
shares of its common stock as collateral in connection with the issuance of a note payable of $60,000 during the year ended December
31, 2012.



F-16









Warrants





The issuance of warrants during the year ended
December 31, 2011 is summarized in the table below:



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



The issuance of warrants during the year ended
December 31, 2012 is summarized in the table below:



|                  |  | Number of |            | Exercise |  | Expiration |  | Value at
|----------------- |  | --------- | ---------- | -------- |  | ---------- |  | --------
|Association       |  | Warrants  |            | Price    |  | Date       |  | Issuance
|Private Placement |  |           | 19,016,665 |          |  |            |  |         
|                  |  |           |            |          |  |            |  |         
|Issuance of       |  |           |            |          |  |            |  |         
|Note payable      |  |           | 28,650,000 |          |  |            |  |         
|                  |  |           |            |          |  |            |  |         
|Services          |  |           | 1,000,000  |          |  |            |  |         





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



|                               | December 31,
        2011 | December 31,
        2012
|------------------------------ | ------------------------- | -------------------------
|Exercise price:                | $0.06 - $0.34             | $0.01 - $0.074           
|Market price at date of grant: | $0.08 - $0.15             | $0.01 - $0.48            
|Expected volatility:           | 69% - 78%                 | 69% - 80%                
|Term:                          | 0 – 5 years               | 3 years                  
|Risk-free interest rate:       | 1.76% - 1.93%             | 0.36% - 0.72%            





F-17







Stock Options



In 2002, the Company adopted the 2002 Stock
Plan under which stock awards or options to acquire shares of the Company's common stock may be granted to employees and non-employees
of the Company. The Company has authorized 12,000,000 shares of the Company's common stock for grant under the 2002 Plan.



In May 2006, the Board increased the authorized
amount to 27,000,000. The 2002 Plan is administered by the Board of Directors and permits the issuance of options for the purchase
of up to the number of available shares outstanding. Options granted under the 2002 Plan vest in accordance with the terms established
by the Company's stock option committee and generally terminates ten years after the date of issuance.





The fair value of stock options granted was
estimated at the date of grant using the Black-Scholes options pricing model. The Company used the following assumptions for determining
the fair value of options granted under the Black-Scholes option pricing model:



Stock option activity for the years ended December
31, 2012 and 2011, respectively is summarized as follows:



|                                            |  | Options |             |   | Weighted
        Average
        Exercise Price |   |       | Weighted
        Average
        Contractual Terms |  |  | Aggregate
        Intrinsic Value | 
|------------------------------------------- |  | ------- | ----------- | - | ----------------------------------------------- | - | ----- | -------------------------------------------------- |  |  | --------------------------------- | 
|Outstanding at January 1, 2011              |  |         | 27,166,497  |   |                                                 | $ | 0.18  |                                                    |  |  |                                   | 
|                                            |  |         |             |   |                                                 |   |       |                                                    |  |  |                                   | 
|Granted                                     |  |         | 15,084,417  |   |                                                 |   | 0.14  |                                                    |  |  |                                   | 
|Exercised                                   |  |         | (4,900,404  |   |                                                 |   | 0.04  |                                                    |  |  |                                   | 
|Expired                                     |  |         | (2,979,817  | ) |                                                 |   | 0.28  |                                                    |  |  |                                   | 
|Outstanding at December 31, 2011            |  |         | 34,370,693  |   |                                                 |   | 0.17  |                                                    |  |  | 1.50                              | 
|                                            |  |         |             |   |                                                 |   |       |                                                    |  |  |                                   | 
|Granted                                     |  |         | 5,640,000   |   |                                                 |   | 0.023 |                                                    |  |  | 3.55                              | 
|Exercised                                   |  |         | (3,640,000) |   |                                                 |   | 0.02  |                                                    |  |  |                                   | 
|Expired                                     |  |         |             |   |                                                 |   |       |                                                    |  |  |                                   | 
|Outstanding at December 31, 2012            |  |         | 34,370,693  |   |                                                 | $ | 0.17  |                                                    |  |  | 1.80                              | 
|                                            |  |         |             |   |                                                 |   |       |                                                    |  |  |                                   | 
|Exercisable and vested at December 31, 2012 |  |         | 26,870,693  |   |                                                 | $ | 0.01  |                                                    |  |  | 2.30                              | 
|                                            |  |         |             |   |                                                 |   |       |                                                    |  |  |                                   | 





|                              |  | December 31, 2011 |  |  | December 31, 2012 | 
|----------------------------- |  | ----------------- |  |  | ----------------- | 
|Exercise Price                |  | $0.03-0.08        |  |  | $0.02-0.05        | 
|Market price at date of grant |  | $0.05-0.08        |  |  | $0.02-0.07        | 
|Expected volatility           |  | 69% - 78%         |  |  | 76.15% - 76.21%   | 
|Risk-free interest rate       |  | 1.76% - 1.93%     |  |  | 0.51% - 0.72%     | 





The following activity occurred under the Company’s option
plan:



|                                                          |  | Year ended December 31, |          
|--------------------------------------------------------- |  | ----------------------- | ---------
|                                                          |  | 2012                    |          
|Weighted-average grant-date fair value of options granted |  | $                       | 0.04     
|Fair value of options recognized as expense:              |  | $                       | 312,484  
|Options granted                                           |  |                         | 5,640,000



The total compensation cost related to non-vested
options not yet recognized amounted to approximately $85,000 at December 31, 2012 and the Company expects that it will be recognized
over the following weighted-average period of 13 months.





F-18









NOTE 8 - INCOME TAXES



A reconciliation of the Company’s effective tax rate to the
statutory federal rate is as follows at December 31:



|                                                                                                                                        |  | 2012 |       | 2011
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ----
|Tax at US statutory rate                                                                                                                |  |      | 35.0  | %   
|State tax rate, net of federal benefits                                                                                                 |  |      | 4.0   |     
|Permanent differences: Changes in fair value of derivative liability Fair value of shares issued for financing and operating activities |  |      | (11.0 | )   
|Change in valuation allowance                                                                                                           |  |      | (41.0 | )   
|Effective tax rate                                                                                                                      |  |      | 0.0   | %   



* Permanent differences consist of changes in fair value derivative
liability and fair value of shares issued for financing or operating activities.



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:



|                                       |  | 2012 |             | 2011
|-------------------------------------- |  | ---- | ----------- | ----
|Deferred tax assets:                   |  |      |             |     
|Net operating loss carry-forward       |  | $    | 29,549,813  |     
|Accrued expenses unpaid within 75 days |  | $    | 4,455,882   |     
|Options issued as compensation         |  |      | 78,400      |     
|Less: valuation allowance              |  |      | (34,084,095 | )   
|Net deferred tax assets                |  | $    | —           |     









NOTE 9 - COMMITMENTS AND CONTINGENCIES



Litigation



The Company has appealed to the California Court of Appeals in
a matter involving a consultant. The issue on appeal is the California Superior Court’s failure to disregard a NY state
court judgment for approximately $100,000, which the Company asserts was improperly entered and, therefore, should not be recognized
as a valid sister state judgment. The Company’s likelihood of success on this appeal cannot be determined at this time.
In November 2011, a note holder filed suit against the Company in Nevada State Court in Douglas County, alleging breach of a promissory
debenture. The Company has filed motions to dismiss the action based on the fact that the note holder has been dissolved and the
Company has entered into individual agreements with its former partners. The case has not been set for trial and, as of this date,
there is a low likelihood of an unfavorable outcome.
In February 2012, a former employee filed suit against the Company alleging various employment related claims. The Company conducted
litigation and discovery, the case is in settlement discussions and was set for trial in 2013.
In June 2012, a vendor filed suit against the Company for breach of contract related to call center services they provided. The
Company is currently conducting litigation and discovery, the case is not yet set for trial.





At December 31, 2012, the Company has
recorded liabilities in connection with such legal proceedings.



In addition, one of the Company’s note holders has initiated
a dispute that is currently in dispute pertaining to an unreasonable amount of penalties and interest related to a prepayment.
We are currently negotiating a settlement offer. This case has not been settled, but it is highly likely that there will be a
favorable outcome.





F-19







Operating Leases



The Company entered into a 2-year lease for
certain office space in Minden, Nevada, effective June 1, 2011 through May 31, 2013. Under the terms of the lease, the Company
pays monthly base rent of $3,000. Pursuant to the terms of the lease, it may renewed for one additional two year period.



During October 2011, the Company entered into
a 2-year lease for certain office space in Los Angeles, California, effective November 15, 2011. Under the terms of the lease,
the Company paid monthly base rent of $8,664. This lease was terminated during the fourth quarter of 2012.



Future annual minimum payments, net of sublease
income, required under operating lease obligations at December 31, 2012 are as follows:



|     |  | Future Minimum
        Lease Payments |       
|---- |  | ------------------------------------- | ------
|2013 |  | $                                     | 15,000
|2014 |  | $                                     | -     
|2015 |  | $                                     | -     







NOTE 10 - GAIN
ON WRITE-OFF FROM DEBT SETTLEMENTS



During the twelve
months ended December 31, 2012, the Company recorded a gain from debt settlements of $446,387 on write off of certain payables
on which the statute of limitations has expired relating to the collectability of these payables.



NOTE 11 - RELATED PARTY TRANSACTIONS



The Company did not engage in any related
party transactions for the year ended December 31, 2012.



NOTE 12 - SEGMENTS



During the years ended December 31, 2012 and
2011, the Company operated in one business segment. The percentages of sales by geographic region for the years ended December
31, 2012 and 2011 were approximately:



|              |  | 2012 |    | 2011
|------------- |  | ---- | -- | ----
|United States |  |      | 32 | %   
|Europe        |  |      | 68 | %   







F-20