UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, ~~2008~~2009

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

For the transition period from to

Commission File No. 000-51995

ETELOS, INC.

(Exact name of registrant as specified in its charter)

Delaware		77-0407364
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

26828 Maple Valley Highway-#297
Maple Valley, WA		98038
(Address of principal executive offices)		(Zip Code)

(425) 458-4510

Registrant’s telephone number

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

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, Par Value $0.01		None

Title of Each Class		Name of Each Exchange on Which Registered
None		None

Securities registered ~~pursuant~~ pursuant to Section 12(g) of the Exchange Act: ~~None~~Common Stock, Par Value $0.01

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

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

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.

Large accelerated filer o		Accelerated filer o
Non-accelerated filer o (Do not check if a smaller company)		Smaller reporting company x

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

The aggregate market value of the shares of common stock held by non-affiliates of the issuer, based upon the closing price of the common stock as of the last business day of the registrant’s most recently completed second fiscal quarter as reported on the OTC Bulletin Board ($40.0036 per share), was approximately $272.616 million. Shares of common stock held by each executive officer and director and by each person who owned 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The determination of who was a 10% stockholder and the number of shares held by such person is based on Schedule 13D, Schedule 13G, ~~filings~~and Form 4 filings with the Securities and Exchange Commission as of June 30, ~~2008~~2009.

As of March 2016, ~~2009~~2010, there were 23,~~022~~939,~~027~~810 shares of the issuer’s common stock outstanding and ~~833~~743,333 shares of the issuer’s New Series A Preferred stock outstanding.

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EXPLANATORY NOTE

On February 8, 2007, Tripath Technology Inc., a Delaware corporation (“Tripath”) filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. On February 1, 2008, the bankruptcy court issued an order confirming approval of the Plan of Reorganization, including the merger and the transfer of all of Tripath’s existing assets into a separate bankruptcy estate and the discharge of all of Tripath’s liabilities. The Plan of Reorganization also contemplated the merger of Etelos, Incorporated, a Washington corporation (“Etelos-WA”) with Tripath. The overall impact of the confirmed Plan of Reorganization was for Tripath to emerge from the bankruptcy proceeding with no assets and no liabilities as a shell corporation and for all issued and outstanding securities of and interests in Tripath, including debentures, stock options (including, but not limited to, all stock options granted to employees), warrants, and other shares of common stock to be canceled and extinguished.

On April 23, 2008, Tripath filed a Current Report on Form 8-K announcing, among other things, that Etelos-WA, merged with and into Tripath, and that the surviving corporation changed its name to Etelos, Inc. ~~and~~ and its fiscal year end to December 31. The effective date of the merger was April 22, 2008, and Etelos, Inc., as the surviving corporation, will conduct the business and operations previously conducted by Etelos-WA. In connection with the merger, all outstanding shares of Etelos-WA common stock ~~were~~ were converted into shares of Etelos, Inc. common stock on a three for one ratio: one share of Etelos, Inc. common stock for every three shares of common stock of Etelos-WA. Also in connection with the merger, (i) all outstanding shares of preferred stock of Etelos-WA were converted into shares of common stock of Etelos, Inc., (ii) Etelos, Inc. issued an aggregate of 5,010,000 shares of its common stock to the secured and unsecured creditors of Tripath and (iii) all the shares of Tripath were cancelled. Prior to the merger, Tripath was a shell corporation and in accordance with the Plan of Reorganization had no assets or liabilities. While Tripath acquired all the outstanding preferred and common stock of Etelos-WA, for accounting purposes, the acquisition has been treated as a recapitalization of Etelos-WA with Etelos-WA as the acquirer (a reverse acquisition). The historical financial statements prior to April 22, 2008, are those of Etelos-WA and the description of the business contained in this report as well as the one contained in the financial statements reflect the operations of Etelos-WA for the quarterly and twelve month periods ended December 31, 2008 and 2007.

Also, on April 23, 2008, Etelos, Inc., formerly Tripath, amended its certificate of incorporation with the state of Delaware to change its total authorized shares of stock to 300,000,000 shares, of which 250,000,000 shares are designated “common stock” with a par value of $0.01 per share and 50,000,000 shares are designated “preferred stock” with a par value of $0.01 per share. The preferred stock may be issued from time to time in one or more series, each of such series to consist of such number of shares and to have such terms, rights, powers and preferences, and the qualifications and limitations with respect thereto, as stated in the resolutions providing for the issue of such series adopted by the board of directors.

Information concerning number of shares outstanding for Etelos, Inc. including the conversion prices and number of shares issuable upon conversion of convertible securities and exercise prices of warrants and stock options and the number of shares issuable upon exercise of such options and warrants, has been adjusted to reflect the three for one conversion ratio effected in connection with the merger as if it had occurred for all periods presented.

In this report, unless the context indicates otherwise, the terms “Etelos,” “Company,” “we,” “us,” and “our” refer to Etelos, Inc., a Delaware corporation.

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Etelos, Inc.

Annual Report on Form 10-K

For the Year Ended December 31, ~~2008~~2009

TABLE OF CONTENTS

		Page
PART I
ITEM 1.	BUSINESS	1
ITEM 1A.	RISK FACTORS	78
ITEM 1B.	UNRESOLVED STAFF COMMENTS	2119
ITEM 2.	PROPERTIES	2119
ITEM 3.	LEGAL PROCEEDINGS	2119
ITEM 4.	~~SUBMISSION~~REMOVED OFAND ~~MATTERS TO A VOTE OF SECURITY HOLDERS~~RESERVED	2220
PART II
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	2220
ITEM 6.	SELECTED FINANCIAL DATA	2322
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	2322
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	33
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	33
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	33
ITEM 9A.	CONTROLS AND PROCEDURES	33
ITEM 9B.	OTHER INFORMATION	35
PART III
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	35
ITEM 11.	EXECUTIVE COMPENSATION	37
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	3938
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTION, AND DIRECTOR INDEPENDENCE	4039
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	4140
PART IV
ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES	4240
	SIGNATURES	4443
	FINANCIAL STATEMENTS	4544

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FORWARD LOOKING STATEMENTS

In this report, unless the context indicates otherwise, the terms “Etelos,” “Company,” “we,” “us,” and “our” refer to Etelos, Inc., a Delaware corporation.

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, or the “Securities Act,” and Section 21E of the Securities Exchange Act of 1934 or the “Exchange Act.” These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or anticipated results, including those set forth under the heading “Risk Factors” and elsewhere in, or incorporated by reference into, this report.

In some cases, you can identify forward looking statements by terms such as “may,” “intend,” “might,” “will,” “should,” “could,” “would,” “expect,” “believe,” “anticipate,” “estimate,” “predict,” “potential,” or the negative of these terms. These terms and similar expressions are intended to identify forward-looking statements. ~~Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected.~~ The forward-looking statements in this report are based upon management’s current expectations and belief, which management believes are reasonable. In addition, we cannot assess the impact of ~~each~~ each factor on our business or the extent to which any factor or combination of factors, or factors we are aware of, may cause actual results to differ materially from those contained in any forward looking statements. You are cautioned not to place undue reliance on any forward-looking statements. These statements represent our estimates and assumptions only as of the date of this report. Except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

You should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including:

· our ability to obtain future financing or funds when needed;

· market acceptance and market demand for our products and services;

· new competitors are likely to emerge and new technologies may further increase competition;

· our operating costs may increase beyond our current expectations and we may be unable to fully implement our current business plan;

· our ability to successfully obtain a diverse customer base;

· our ability to protect our intellectual property through patents, trademarks, copyrights and confidentiality agreements;

· our ability to attract and retain a qualified employee base;

· our ability to respond to new developments in technology and new applications of existing technology before our competitors;

· acquisitions, business combinations, strategic partnerships, divestures, and other significant transactions may involve additional uncertainties; and

· our ability to maintain and execute a successful business strategy~~; and~~.

~~· we~~Other ~~face~~risks ~~other~~and uncertainties include those outlined ~~risks~~in ~~described~~risk ~~from~~factors ~~time~~detailed toin ~~time~~this report and our other SEC filings. You should consider carefully the statements under “Item 1A. Risk Factors” in ~~periodic~~Part I and ~~current~~other ~~reports~~sections weof ~~file~~this ~~with~~report, which address additional factors that could cause our actual results to differ from those set forth in the ~~United~~forward-looking ~~States~~statements ~~Securities~~and could materially and adversely ~~Exchange~~affect ~~Commission~~our business, operating results and financial condition. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the ~~“SEC~~applicable cautionary statements.”

Other risks and uncertainties include such factors as market acceptance and market demand for our products and services, pricing, the changing regulatory environment, the effect of our accounting policies, potential seasonality, industry trends, adequacy of our financial resources to execute our business plan, our ability to attract, retain and motivate key technical, marketing and management personnel, possible disruption in commercial activities occasioned by terrorist activity and armed conflict, and other risk factors detailed in this report and our other SEC filings. You should consider carefully the statements under “Item 1A. Risk Factors” in Part I and other sections of this report, which address additional factors that could cause our actual results to differ from those set forth in the forward-looking statements and could materially and adversely affect our business, operating results and financial condition. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the applicable cautionary statements.

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PART I

ITEM 1. BUSINESS

Business

We have a Web Application distribution platform delivering Web Applications for businesses. We provide a Software-as-a-Service (SaaS) ecosystem for building, distributing, and using Web Applications, including a marketplace to deploy and support them. Unlike other cloud computing and Platform-as-a-Service (PaaS) solutions, we enable software manufacturers to migrate existing applications or create new applications, then package, distribute, host, bill, market and support their SaaS enabled applications through multiple private label applications marketplaces.

We have developed products for Web Applications, which include open standards-based tools for Web developers, businesses and individual users such as the Etelos Application ServerTM (EASTM) and the Etelos Development EnvironmentTM (EDETM). EAS and EDE support many common programming languages and also support ~~the~~our English Application Scripting Engine (EASETM), a simple-to-use open standards-based scripting language ~~developed~~we ~~by us~~developed. In order to support broader adoption of our products, EASE and other components of the EDE are made available to developers at market appropriate pricing. This is done to support the development of new Web Applications and the migration of existing Web Applications into the Etelos ecosystem where there are tools and other support mechanisms for the marketing, distribution, and support of these applications. We generally receive a transaction fee or subscription fee for transactions that occur within the Etelos ecosystem either via the Etelos Marketplace™ pursuant to Storefront Operating Agreements, or in third-party branded Marketplaces operated by us pursuant to Marketplace Partner Agreements (sometimes referred to as “an Etelos Marketplace” or, collectively, as “the Etelos Marketplaces”). Most customers in Etelos Marketplaces pay a subscription fee, which we share with Syndication Partners and Marketplace Partners; this revenue share is calculated as a percentage of gross revenues from the sale of subscriptions to Syndication Partner offerings in the Etelos Marketplaces.

~~Etelos~~Our ~~Marketplaces~~business ~~support~~model focuses on the sales and ~~encourage~~operation of ~~communities~~private-label Web application marketplaces, including provision of ~~developers~~the professional services required to develop, deploy and operate such ~~distributors~~marketplaces, and ~~consumers~~the launch of offerings of the Etelos Platform SuiteTM. The Etelos Platform Suite is designed to ~~expand~~allow Independent Software Vendors (ISVs) to implement a SaaS delivery version of their ~~offerings~~existing applications, ~~collaborate~~whether onor not ~~new~~those ~~ideas~~ applications are already Web Applications, and ~~improvements~~to syndicate the offering of those applications through multiple private label marketplaces. In these difficult economic times, we believe that a variety of ISVs will have applications that they need to move to the Web for lower cost implementation, easier, simpler scalability, and ~~provide~~broader ~~scalable~~distribution. The ~~solutions~~Etelos Platform ~~using~~Suite also enables Marketplace Partners, including non-technology businesses, to have their own private label marketplaces and tools to offer SaaS Web Applications ~~available~~ to ~~others~~better serve their customers in multiple distribution channels.

~~History~~Although we have long enabled applications to be distributed via the Web, we believe that our shift away from a direct marketing focus to providing professional services and tools to ISVs will have four major benefits for our business. First, this offering will expose the core platform to more ISVs for greater benefit to their end users and the creation of a larger pool of applications for syndication. Second, the development and operation of third party-branded marketplaces shifts the financial expense and operational burdens of sales and marketing to end users to Marketplace Partners that better know their customers and are better capitalized to support necessary sales and marketing activities. Third, because this two-pronged go-to-market strategy is offered on a revenue-sharing basis, it fundamentally reduces barriers to acceptance by eliminating up front costs for Syndication Partners to offer their products through multiple Marketplace Partners, and by charging Marketplace Partners only for sales success. Finally, this shift allows us to focus on our core competency in development and operation of online marketplaces, while better managing limited financial and other resources.

WeIn ~~were~~addition ~~originally~~to ~~organized~~revenues from asconsulting ~~Etelos~~services, ~~Incorporated,~~we receive a ~~Washington~~transaction fee or subscription fee for ~~corporation~~transactions onthat ~~May 5,~~occur ~~1999.~~within Wethese ~~have~~private-label ~~been~~Web ~~engaged~~application marketplaces. Most customers in these marketplaces pay a subscription fee, which we share with Syndication Partners and Marketplace Partners; this revenue share is calculated as a percentage of gross revenues from the ~~business~~sale of ~~web~~subscriptions to Syndication Partner offerings in private-label Web application ~~development~~marketplaces ~~and~~operating ~~services~~on ~~since~~the ~~our~~Etelos ~~inception~~Platform Suite.

OnWe ~~April 22,~~were ~~2008,~~originally weorganized ~~completed~~as ~~the~~Etelos, ~~merger~~Incorporated, a ~~with~~Washington ~~and~~corporation ~~into~~on ~~Tripath~~May 5, ~~changed~~ ~~the~~1999. ~~name~~We ofhave ~~the~~been ~~surviving~~engaged ~~entity~~in tothe business ~~Etelos, Inc.~~of ~~and~~web ~~changed~~application ~~its fiscal~~development ~~year~~and ~~end~~services tosince ~~December 31~~our inception.

~~Recent~~On ~~Developments~~February 8, 2007, Tripath Technology Inc., a Delaware corporation (“Tripath”) filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. On February 1, 2008, the bankruptcy court issued an order confirming approval of the Plan of Reorganization, including the merger and the transfer of all of Tripath’s existing assets into a separate bankruptcy estate and the discharge of all of Tripath’s liabilities. The Plan of Reorganization also contemplated the merger of Etelos, Incorporated with and into Tripath.

On ~~November~~April 622, 2008, we ~~announced~~completed ~~changes to our business model to focus on~~ the ~~sales~~merger ~~and operation of private label Web application marketplaces,~~with ~~including provision of the professional services required to develop, deploy~~ and ~~operate~~into ~~such marketplaces~~Tripath, ~~and~~changed the ~~launch~~name of ~~offerings of~~ the ~~Etelos~~surviving ~~Platform SuiteTM. The~~entity ~~Etelos Platform Suite focuses on enabling Independent Software Vendors (ISVs)~~ to ~~implement SaaS delivery of their existing applications~~Etelos, ~~whether or not those applications are already Web Applications, and syndicating the offering of those applications through multiple private label marketplaces~~ Inc. ~~In these difficult economic times~~, we ~~believe that a variety of ISVs will have applications that they need to move to the Web for lower cost implementation, easier, simpler scalability,~~ and ~~broader distribution. The~~changed ~~Etelos~~our ~~Platform~~fiscal ~~Suite also~~year ~~enables~~end ~~Marketplace Partners, including non-technology businesses,~~ to ~~have their own private label marketplaces and tools to offer SaaS Web Applications to better serve their customers in multiple distribution channels~~December 31.

Although we have long enabled applications to be distributed via the Web, we believe this shift away from a core direct marketing focus of offering multiple products through a single portal in the Etelos Marketplace will have four major benefits for our business. First, this offering will expose the core platform to more ISVs for greater benefit to their end users and the creation of a larger pool of applications for syndication. Second, the development and operation of third party-branded marketplaces shifts the financial expense and operational burdens of sales and marketing to end users to Marketplace Partners that better know their 1

1Table of Contents

~~Table~~Recent ~~of Contents~~Developments

~~customers~~On ~~and~~June 30, ~~are~~2009, ~~better~~we ~~capitalized~~restructured toour ~~support~~January 2008 ~~necessary~~and ~~sales~~April 2008 ~~and~~Convertible ~~marketing~~6% ~~activities~~Secured Debentures in the principal amount of $5. ~~Third~~5 million. Under the terms of the agreement, ~~because~~the ~~this~~terms ~~two-pronged~~of the debentures ~~go-~~are extended to~~-market~~ ~~strategy~~December 31, is2012, ~~offered~~interest onaccrues aat ~~revenue-sharing~~0% ~~basis,~~from itthe ~~fundamentally~~date of ~~reduces~~the ~~barriers~~agreement tountil ~~acceptance~~October 1, by2010, ~~eliminating~~and upat ~~front~~6% ~~costs~~thereafter. ~~for~~All ~~Syndication~~accrued but ~~Partners~~unpaid tointerest ~~offer~~as ~~their~~of ~~products~~June 30, ~~through~~2009, ~~multiple~~and ~~Marketplace~~interest ~~Partners~~due to be earned to September 30, 2010 under the original terms of the January 2008 and byApril 2008 ~~charging~~Debentures ~~Marketplace~~was ~~Partners~~added ~~only~~to ~~for~~the ~~sales~~principal ~~success~~amount and will be payable on the date of maturity. ~~Finally,~~ Our ~~this~~obligation ~~shift~~to ~~allows~~make usmonthly amortizing redemption payments has been terminated; we will make semi-annual interest payments only. We also agreed to ~~focus~~terminate onthe registration rights ~~our~~agreement ~~core~~entered ~~competency~~into in ~~development~~conjunction ~~and~~with ~~operation~~the ofdebentures ~~online~~and ~~marketplaces,~~to ~~while~~exchange the ~~better~~warrants ~~managing~~issued ~~limited~~in ~~financial~~conjunction ~~and~~with ~~other~~the ~~resources~~debentures for Etelos common stock on a 1:1 basis.

~~During~~On ~~the quarter ended December~~September 3129, ~~2008~~2009, we ~~began~~entered tointo ~~implement~~a ~~this~~securities ~~shift~~purchase ~~and,~~agreement ~~during~~with three accredited investors for the ~~period~~sale upof 10% tosenior secured convertible debentures in the ~~date~~principal amount of $2.0 million. We refer to these debentures as our September 2009 Debentures. In this ~~report~~transaction, in addition to the debentures, we ~~have~~issued to ~~announced~~the investors warrants to ~~new~~purchase ~~Syndication~~3,000,000 ~~Partner~~shares ~~agreements~~of our common stock with ~~ISVs~~an toexercise ~~deliver~~price ~~SaaS-enabled~~of ~~versions~~$0.60 ofper ~~their~~share, ~~products~~or ~~and~~the “September 2009 warrants,” a warrant to ~~syndicate~~purchase 2,250,000 ~~those~~shares ~~apps~~of ~~for~~our ~~distribution~~common ~~through~~stock awith ~~number~~ an exercise price of ~~third~~$0.01 ~~party-branded~~per ~~SaaS~~share, or ~~marketplaces~~the “ September 2009 par value warrant,” and 750,000 weshares ~~have~~of ~~announced~~our restricted ~~agreements~~common tostock, or the “closing shares.” One of the investors ~~launch~~paid ~~third~~part ~~party~~of ~~private~~its ~~label~~subscription ~~marketplaces,~~amount ~~including~~through ~~third~~the ~~parties~~cancellation ~~not~~of approximately ~~traditionally~~$1.2 ~~regarded~~million asworth ~~technology~~of ~~providers. We~~short-term ~~expect~~indebtedness we owed to ~~make~~such investor. The securities purchase agreement further ~~such~~provided ~~announcements~~that ~~reflecting~~we ~~this~~had ~~shift~~the ~~during~~right, ~~the~~subject ~~coming~~to ~~months~~certain ~~but~~conditions, weto dorequire ~~not~~the ~~have~~investors to purchase an ~~estimate~~aggregate orof ~~projection~~$1.0 million in additional principal amount of ~~how,~~debentures. We orexercised ~~when,~~that right oron ifDecember 15, ~~the benefits~~2009, ifand ~~any,~~issued ~~of this~~an ~~shift~~additional ~~will~~$1.0 bemillion ~~reflected~~of debentures into ~~our~~the ~~operating~~investors ~~results~~on that date.

InSubsequently, on ~~the period after the year ended December~~January 3125, ~~2008~~2010, we entered into a ~~series~~securities ofpurchase ~~bridge~~agreement ~~loans~~ with an ~~certain~~entity ~~purchasers~~affiliated ofwith ~~our~~Donald ~~New~~W. ~~Series A Preferred~~Morissette, ~~stock~~who, ~~and~~together with ~~the~~his ~~holders~~affiliates, beneficially owns more than 10% of our ~~January 2008~~outstanding ~~and~~common ~~April 2008 Debentures. In~~stock, for the ~~aggregate these~~sale ~~bridge~~of ~~loans~~10% ~~were~~senior ~~for~~secured convertible debentures, identical to the September 2009 Debentures, in the principal amount of $~~655 thousand~~250,000. ~~which~~In isthis ~~estimated~~transaction, in addition to ~~cover~~the ~~our~~debentures, ~~operating~~we ~~expenses~~issued ~~through~~a ~~June 2009. These~~warrant ~~notes~~to ~~bear~~purchase ~~interest~~375,000 atshares ~~ten~~of our ~~percent~~common stock with an exercise price of $0.60 per ~~annum,~~ share and ~~have~~375,000 ~~maturities~~shares of ~~ranging~~our ~~from~~restricted ~~May 31,~~common ~~2009~~stock, ~~through~~or ~~October 17, 2009~~the “closing shares.” ~~The~~We ~~notes~~refer ~~payable~~ to ~~the holders~~this offinancing as our ~~New Series~~January A2010 ~~Preferred~~financing ~~stock~~in ~~were~~this ~~accompanied~~report. byThe ~~146~~securities purchase agreement further provided that we had the right,~~667~~ ~~warrants~~subject to certain conditions, to require the investor to purchase ~~shares~~an aggregate of ~~our~~$125,000 ~~Common~~in additional ~~Stock~~principal atamount $0of debentures between March 15 and 31, 2010.75 We ~~per~~exercised ~~share~~that right on March 15, ~~with~~2010, aand ~~term~~issued of$125 ~~five~~thousand in ~~years~~additional debentures to an entity affiliated with Mr. Morissette. ~~The~~See ~~notes~~“MANAGEMENT’S ~~payable~~DISCUSSION toAND ~~the~~ANALYSIS ~~holder~~OF ofFINANCIAL ~~our~~CONDITION ~~January 2008~~AND ~~and~~RESULTS ~~April 2008~~OF ~~Debentures~~OPERATIONS ~~are~~— ~~subject~~Liquidity toand ~~the~~Capital Resources” ~~security~~below ~~interest~~for ~~granted~~a todescription ~~those~~of ~~holders~~the interms ~~connection~~of ~~with~~all ~~those~~of our outstanding debentures.

~~Industry~~In ~~Background~~the quarter ended December 31, 2009, and subsequently, we resolved a number of significant litigation items in a manner that we believe was generally favorable to the Company. These matters asserted claims against the Company in the aggregate amount of approximately $2.5 million, and were settled for cash and note payments in the aggregate amount of approximately $400 thousand, payable over the next 6-12 months, and the issuance of 346,667 shares of common stock of the Company, valued at approximately $218 thousand. In one of these matters, we repurchased and retired 2.4 million shares of our common stock - approximately 10% of the issued and outstanding shares for $175,000. See “LEGAL PROCEEDINGS” below.

The 1990s saw the widespread adoption among large enterprises of packaged business management applications that automated a variety of departmental functions, such as accounting, finance, order and inventory management, human resources, sales, and customer support. These sophisticated applications required significant cash outlays for the initial purchase and for ongoing maintenance and support. In addition, ~~these~~payment ~~applications~~schedules ~~were internally~~for ~~managed~~approximately ~~and maintained by enterprise customers, requiring~~$300 ~~increasingly~~thousand ~~large~~in ~~staffs~~long tooverdue ~~support~~accounts ~~complex~~payable ~~information~~have ~~technology infrastructures.~~been ~~Most~~negotiated ~~importantly,~~for ~~the~~payment ~~applications generally were provided by~~over ~~multiple vendors, with each application providing only a departmental view of~~ the ~~enterprise.~~next ~~To gain an enterprise~~6-~~wide~~12 ~~view, organizations attempted to tie together their various incompatible packaged applications through long, complex, and costly integration efforts~~months. Many of these attempts failed, in whole or in part, often after significant delay and expense. As a consequence, many large enterprises have transitioned from multiple point products to comprehensive, integrated business management suites, such as those offered by Oracle and SAP, as their core business management platforms.

~~Small-to-Medium~~On ~~sized~~December 22, 2009, ~~Businesses~~the ~~(SMBs)~~board of directors, ~~which~~with weMr. Kolke ~~define~~and asMr. Rudy ~~businesses~~abstaining ~~with~~in upthe tomatters ~~1,000~~affecting ~~employees,~~them ~~have~~or ~~application~~their ~~software~~affiliates, ~~requirements~~authorized ~~that~~the ~~are similar~~issuance of (a) 434,754 shares inof ~~many~~Common ~~respects,~~Stock to ~~large~~Selma ~~enterprises~~and ~~because~~Daniel ~~their~~Kolke, ~~core~~for ~~business processes~~payment ~~are~~of ~~substantially~~45% of the principal ~~same.~~and ~~These~~100% ~~requirements~~of ~~include~~the accrued interest on the ~~integration~~ ofpromissory ~~back-office~~note ~~activities~~dated December 30, 2007, ~~such~~which ashas ~~managing~~been ~~payroll~~in ~~and~~default ~~tracking inventory~~since September 2008; ~~front-office~~(b) ~~activities~~28,939 ~~including~~shares ~~order~~of Common ~~management~~Stock ~~and~~to ~~customer support;~~Paul ~~and~~Stuit, ~~increasingly,~~for ~~sophisticated~~payment ~~e-commerce~~in ~~capabilities.~~full ~~According~~of ~~to a~~principal ~~2006~~and ~~forecast~~accrued interest ~~for~~on the ~~CRM~~promissory ~~market~~note ~~and~~dated ~~2007~~February 24, ~~forecasts~~2009, ~~for~~which ~~the~~was ~~ERP~~in default; and ~~supply chain management~~(c) 143,379 orshares ~~SCM,~~of ~~markets~~Common ~~from~~Stock ~~Gartner~~to Ronald Rudy, ~~Inc.,~~ ~~companies~~for payment in ~~North America~~full ~~spent~~of ~~approximately~~principal ~~$13.7~~and ~~billion~~accrued interest on ~~ERP,~~the ~~CRM,~~promissory ~~and~~note ~~SCM~~dated ~~software~~March 31 ~~applications in 2006~~2009, of which ~~SMBs~~also ~~accounted~~was ~~for~~in $4default.4 The transactions ~~billion~~were effective on December 31, or2009, 32and ~~percent.~~the ~~Gartner~~Common Stock was ~~projects~~issued ~~that~~at ~~SMB~~an ~~spending~~effective onprice ~~these~~of ~~applications~~$0.75 ~~will~~per ~~grow~~share ~~8.7~~and ~~percent~~the ~~annually from~~amount ~~2006~~of notes payable to ~~2010,~~related ~~compared~~parties converted to ~~5.7~~common ~~percent~~stock ~~for~~by ~~large~~these ~~businesses~~issuances was $455,304.

~~SMBs~~In ~~are~~partial ~~generally~~settlement ~~less~~of approximately ~~capable~~$292 ~~than~~thousand ~~large~~of ~~enterprises~~an ofaggregate ~~performing the~~$575 ~~costly,~~thousand ~~complex,~~in unpaid salaries due and ~~time-consuming~~owing ~~integration~~to current employees of ~~multiple~~the ~~point~~Company ~~products from~~as ~~one~~of orDecember 31, ~~more~~2009, the ~~vendors.~~board Asof adirectors ~~result,~~has ~~SMBs~~authorized ~~can~~the ~~frequently~~registration ~~derive~~of ~~greater~~500,000 shares of ~~benefits~~Common ~~from~~Stock apreviously ~~comprehensive~~reserved ~~business~~under ~~suite.~~the ~~Suites~~Company’s ~~designed~~2009 ~~for,~~Equity ~~and~~Incentive ~~broadly~~Plan ~~adopted~~as ~~by,~~partial ~~large~~payment ~~enterprises~~of up to ~~provide~~50% aof ~~comprehensive,~~the ~~integrated~~amount ~~platform for~~of ~~managing~~unpaid ~~these~~salary ~~core~~due ~~business~~and ~~processes~~owing ~~generally~~to each ~~are~~current ~~not~~employee. 369,078 ~~well~~of ~~suited to~~those ~~SMBs~~shares ~~due~~are to be issued upon completion of the ~~complexity~~registration ~~and~~process ~~cost~~at an effective price of ~~such~~$0.79 ~~applications~~per share.

Recently, SMBs have begun to benefit from the development of the on-demand SaaS model. SaaS uses the Internet to deliver access to software applications from a centrally hosted computing facility by users through a web browser. SaaS eliminates the costs associated with installing and maintaining applications within the customer’s information technology infrastructure. On-demand applications are generally licensed for a monthly, quarterly or annual subscription fee, as opposed to on-premise enterprise applications that typically require the payment of a much larger, upfront license fee. As a result, on-demand applications require substantially less initial and ongoing investment in software, hardware and implementation services and lower ongoing support and maintenance, making them more affordable for SMBs.2

2Table of Contents

~~Table of~~Industry ~~Contents~~Background

ToThe ~~date,~~1990s saw the widespread ~~on-demand~~adoption ~~software~~among ~~model~~large ~~has~~enterprises ~~been~~of ~~applied~~packaged tobusiness management applications that automated a variety of ~~types~~ ofdepartmental ~~business software applications~~functions, ~~including~~such ~~CRM~~as accounting, ~~security~~finance, ~~accounting~~order and inventory management, human resources ~~management~~, ~~messaging~~sales, and customer support. These sophisticated applications required significant cash outlays for the initial purchase and ~~others~~for ongoing maintenance and support. In addition, these applications were internally managed and itmaintained ~~has~~by enterprise ~~been~~customers, ~~broadly~~requiring increasingly large staffs to support complex ~~adopted~~information technology infrastructures. Most importantly, the applications generally were provided by multiple vendors, with each application providing only a ~~wide~~departmental ~~variety~~view of ~~businesses~~the enterprise. ~~IDC~~To ~~estimates~~gain ~~worldwide~~an onenterprise-~~demand~~wide view, ~~enterprise~~organizations ~~software~~attempted ~~vendor~~to ~~revenues~~tie ~~were~~together ~~approximately~~their $3various incompatible packaged applications through long, complex, and costly integration efforts.7 ~~billion~~Many of these attempts failed, in ~~2006~~whole or in part, often after significant delay and ~~that~~expense. ~~they~~As ~~will~~a ~~grow~~consequence, 32many ~~percent~~large ~~annually~~enterprises ~~through~~have ~~2011~~transitioned from multiple point products to ~~$14.8~~comprehensive, ~~billion~~integrated business management suites, such as those offered by Oracle and SAP, as their core business management platforms.

~~While~~Small-to-Medium ~~SaaS~~sized Businesses ~~applications~~(SMBs), ~~have~~which ~~enabled~~we ~~SMBs~~define as businesses with up to ~~benefit~~1,000 ~~from~~employees, ~~enterprise-class~~have ~~capabilities~~application software requirements that are similar, ~~most~~in many respects, to large enterprises because their core business processes are ~~still~~substantially ~~products~~the same. ~~that~~These ~~require~~requirements ~~extensive~~include the integration of back-office activities, ~~costly,~~such as managing payroll and ~~time~~tracking inventory; front-~~consuming~~office ~~integration~~activities, including toorder ~~work~~management ~~with~~and ~~other~~customer ~~applications.~~support; ~~SMBs~~and, increasingly, ~~generally~~sophisticated ~~have~~e-commerce ~~been~~capabilities. ~~unable~~According to ~~implement~~ a ~~comprehensive~~2006 ~~set~~forecast offor ~~business~~the CRM ~~management~~market ~~products~~and at2007 anforecasts ~~affordable~~for ~~level~~the ofERP ~~cost~~and ~~that~~supply ~~will~~chain ~~enable~~management, ~~them~~or ~~to run~~SCM, ~~their~~markets ~~businesses~~from ~~using~~Gartner, Inc., acompanies ~~single~~in ~~system~~North ofAmerica ~~records~~spent approximately $13.7 billion on ERP, ~~provide~~CRM, ~~real-time~~and ~~views~~SCM software applications in 2006, of which SMBs ~~their~~accounted ~~operations~~for $4.4 billion, ~~and~~or be32 ~~readily~~percent. ~~customizable~~Gartner ~~and~~projects ~~rapidly~~that ~~deployed~~SMB ~~and~~spending ~~implemented~~on these applications will grow 8.7 percent annually from 2006 to 2010, compared ~~especially~~to in5.7 apercent ~~geographically~~for ~~dispersed~~large ~~organization~~businesses.

~~Etelos™~~SMBs ~~Products~~are generally less capable than large enterprises of performing the costly, complex, and time-consuming ~~Services~~integration of multiple point products from one or more vendors. As a result, a comprehensive business suite may provide comparatively greater benefits and value for the SMB customer. Suites designed for, and broadly adopted by, large enterprises to provide a comprehensive, integrated platform for managing these core business processes generally are not well suited to SMBs due to the complexity and cost of such applications.

WeRecently, SMBs have ~~developed~~begun to ~~and~~benefit ~~offer~~from athe ~~range~~development of ~~products~~the ~~and~~on-demand ~~services~~SaaS ~~for~~model. SaaS uses the ~~developers~~Internet to provide users with access to software applications from a centrally hosted computing facility through a web browser. SaaS eliminates the costs associated with installing and ~~for~~maintaining ~~consumers~~applications ofwithin ~~Web~~the ~~Applications~~customer’s information technology infrastructure. ~~Our~~ ~~product~~On-demand ~~offerings~~applications are ~~grouped~~generally licensed ~~into~~for ~~two~~a monthly, quarterly or annual subscription fee, as opposed to ~~basic~~on-premise ~~programs:~~enterprise applications that typically require the ~~Etelos~~payment ~~Ecosystem™~~of a much larger, upfront license fee. As a result, on-demand applications require substantially less initial and ~~the~~ongoing ~~Etelos~~investment ~~Platform~~in ~~Suite~~software, hardware and implementation services and lower ongoing support and maintenance, making them more affordable for SMBs.

~~The~~To ~~Etelos~~date, ~~Ecosystem.~~the ~~The~~on-demand software ~~Etelos~~model ~~Ecosystem~~has isbeen applied to a ~~dynamic~~variety ~~development,~~of types of business software ~~distribution~~applications, ~~and~~including ~~consumption~~CRM, ~~environment~~security, ~~for~~accounting, ~~scaling~~human ~~applications~~resources management, messaging, and ~~providing business~~others, ~~solutions~~and toit ~~common~~has ~~business~~been ~~problems. Our~~broadly ~~ecosystem~~adopted ~~is constantly~~by ~~being~~a ~~improved~~wide ~~and~~variety ~~expanded~~of businesses. toIDC ~~contain~~estimates ~~the~~worldwide ~~tools~~on-demand ~~and~~enterprise ~~support~~software vendor ~~programs~~revenues ~~that~~were ~~help~~approximately ~~foster~~$3.7 ~~continued~~billion ~~development~~in of2006 aand ~~network~~that ofthey ~~added~~will ~~value~~grow 32 ~~development~~percent ~~and~~annually ~~distribution~~through ~~partners~~2011 to $14.8 billion.

~~Our~~While ~~products~~SaaS ~~for~~applications ~~Web~~have ~~Applications~~enabled ~~include~~SMBs ~~open~~to ~~standards-based tools~~benefit ~~for~~from ~~Web~~enterprise-class ~~developers~~capabilities, ~~business~~most ~~and~~are ~~individual~~still ~~users~~products ~~such~~that ~~as the Etelos~~require ~~Application~~extensive, ~~Server™~~costly, ~~(EAS™)~~ and ~~the~~time-consuming ~~Etelos~~integration ~~Development~~to ~~Environment™~~work ~~(EDE™). EAS~~with ~~and~~other ~~EDE support many~~applications. ~~common~~SMBs ~~application~~generally ~~languages~~have ~~and~~been ~~also~~unable ~~support~~to ~~the~~implement ~~English Application Scripting Engine (EASE™),~~ a ~~simple-to-use~~comprehensive ~~open~~set ~~standards~~of ~~scripting language developed by us. In~~business ~~order~~management ~~to support broader adoption of our~~ products, ~~EASE~~at ~~and~~an ~~other~~affordable ~~components~~level of ~~our~~ ~~platform~~cost ~~are~~that ~~provided~~will toenable ~~developers~~them ~~and~~to ~~users at market appropriate~~run ~~pricing. This~~their isbusinesses ~~done~~using toa ~~support~~single ~~the~~system ~~development~~ of ~~new~~records, ~~Web~~provide ~~Applications and~~real-time ~~the~~views ~~migration~~ of ~~existing Web Applications into the Etelos ecosystem where~~ ~~there~~their ~~are~~operations, ~~tools~~ and ~~other~~be ~~support~~readily ~~mechanisms~~customizable ~~for the marketing, distribution, sales~~ and ~~support~~rapidly ofdeployed ~~these applications. We generally receive a~~and ~~transaction fee~~implemented, aespecially ~~revenue-share~~in ~~based subscription fee or~~ a ~~license~~geographically ~~fee~~dispersed ~~for transactions that occur within the Etelos ecosystem via an Etelos Marketplace~~organization.

~~Web Applications built with or brought to the~~ Etelos™ ~~ecosystem~~Products are made available for distribution in an Etelos Marketplace as a subscription service using the Software-as-a-Service (SaaS) or software-on-demand business model. The Etelos ecosystem gives developers of Web Applications, including us, an easy place to distribute and support Web Applications. Web Applications delivered through the Etelos Marketplace or through third-party branded Marketplaces operated by us can be easily and conveniently billed, distributed and configured to provide updates and support to users exactly in accordance with the developer’s desires, without requiring the developer to perform development unrelated to the underlying Web Application or to operate a robust licensing and delivery infrastructure. An Etelos Marketplace relieves the burdens to developers of delivery and support to the users of their Web Applications. We also provide additional paid professional services and support on behalf of our Syndication and Marketplace Partners.Services

We ~~also~~have ~~offer~~developed ~~Etelos Ad Serve™, an on-demand system for purchasing or~~and ~~publishing~~offer ~~advertising in the Etelos ecosystem. Etelos Ad Serve allows~~ a ~~customer~~ torange ~~purchase~~of ~~ads~~products toand beservices ~~displayed~~for indevelopers ~~our~~and ~~applications~~for ~~(i.e.~~consumers inof ~~Etelos~~Web ~~CRM™ or Etelos Projects™), or in an Etelos Marketplace~~Applications. Our ~~Etelos~~product Adofferings ~~Serve also allows our~~are ~~partners~~grouped tointo ~~become~~two ~~advertising~~basic ~~publishers~~programs: inthe ~~their own web site or on their applications hosted in an~~ Etelos ~~Marketplace. Etelos~~Ecosystem™ ~~Ad Serve is an important tool for us~~ and ~~our~~the ~~Syndication Partners to receive revenue while delivering trial or “free” ad-supported subscriptions to applications in an~~ Etelos ~~Marketplace. In~~Platform ~~addition to the benefits of revenue, this tool enables wider adoption of Web Applications through reduced or no-cost subscriptions, which serves important viral marketing goals~~Suite™.

AnThe Etelos ~~Marketplace~~Ecosystem. ~~enables~~The ~~rapid~~Etelos ~~adoption~~Ecosystem ofis ~~Web Applications by giving customers freedom of choice to select from~~ a ~~wide array of fully~~dynamic ~~customizable~~development, ~~on-demand~~distribution, ~~business~~and ~~applications. These~~consumption ~~applications may be deployed in the hosting~~ environment offor ~~the~~scaling ~~customer’s choice, including hosting~~applications ~~services~~and ~~provided~~providing ~~through~~business ~~us.~~solutions ~~Web Applications built on our platform may be integrated with other Web Applications through the use of Etelos App Sync™, hosted anywhere, and customized~~ to ~~create~~common ~~highly flexible~~ business ~~solutions~~problems. Our ~~Not~~ecosystem ~~only~~is ~~can~~constantly ~~businesses~~being ~~easily~~improved ~~choose~~and ~~from~~expanded ato ~~range~~contain ofthe ~~Web~~tools ~~Applications, but~~and ~~they~~support ~~can~~programs ~~instantly~~that ~~“try~~help orfoster ~~buy”~~continued ~~them.~~development ~~The flexibility~~ of ~~the Etelos ecosystem enables businesses to assemble~~ a ~~Web~~network ~~Applications~~of ~~suite. The~~added ~~Build-a-Suite™ concept~~value isdevelopment ~~ideally tailored for particular business needs~~ and ~~building~~distribution ~~scalable solutions~~partners.

3Our products for Web Applications include open standards-based tools for Web developers, business and individual users such as the Etelos Application Server™ (EAS™) and the Etelos Development Environment™ (EDE™). EAS and EDE support many common application languages and also support the English Application Scripting Engine (EASE™), our simple-to-use open standards scripting language. In order to support broader adoption of our products, EASE and other components of our platform are provided to developers and users at market appropriate pricing. This is done to support the development of new Web Applications and the migration of existing Web Applications into the Etelos ecosystem where there are tools and other support mechanisms for the marketing, distribution, sales and support of these applications. We generally receive a transaction fee, a revenue-share based subscription fee or a license fee for transactions that occur within the Etelos Ecosystem via an Etelos Marketplace.

~~Table of Contents~~3

~~Etelos~~Table Platform Suite The Etelos Platform Suite allows third parties to use our software platforms and our services to develop a private label application and marketplace. We began working with third parties on private label solutions in November 2008 and expect that our first customers will launch their private label marketplaces beginning in the second quarter of ~~fiscal 2009. There are four components to the Etelos Platform Suite:~~Contents

~~· The~~Web Applications built with or brought to the Etelos Ecosystem are made available for distribution in an Etelos Marketplace as a subscription service using the Software-as-a-Service (SaaS) or software-on-demand business model. The Etelos Ecosystem gives ~~Application~~developers ~~Platform~~of ~~enables~~Web ~~technology~~Applications, ~~providers~~including us, an easy place to ~~move~~distribute ~~their~~and support ~~non-~~Web Applications. Web Applications delivered through the Etelos Marketplace or through third-party branded Marketplaces operated by us can be easily and conveniently billed, distributed and configured to provide updates and support to users exactly in accordance with the developer’s desires, without requiring the developer to perform development unrelated to the underlying Web Application or ~~service~~to operate a robust licensing and delivery infrastructure. An Etelos Marketplace relieves the burdens to ~~web-based~~developers of ~~SaaS~~delivery ~~distribution;~~and support to the users of their Web Applications. We also provide additional paid professional services and support on behalf of our Syndication and Marketplace Partners.

~~· The~~An ~~SaaS~~ Etelos Marketplace ~~Platform~~ enables rapid ~~third~~adoption ~~parties~~of Web Applications by giving customers freedom of choice to select ~~offer~~from a ~~variety~~wide array of ~~syndicated~~fully customizable, on-demand business applications. These applications may be deployed in the hosting environment of the customer’s choice, including hosting services provided through us. Web Applications built on our platform may be integrated with other Web Applications through the use of Etelos App Sync™, hosted anywhere, and ~~services~~customized into create highly flexible business solutions. Not only can businesses easily choose from a ~~third~~range ~~party~~of Web Applications, but they can instantly “try or buy” them. The flexibility of the Etelos Ecosystem enables businesses to assemble a Web Applications suite. The Build-~~branded~~a-Suite™ ~~SaaS~~concept ~~marketplace;~~is ideally tailored for particular business needs and building scalable solutions.

~~· The~~Etelos ~~SaaS Distribution~~ Platform ~~allows technology companies and service providers to distribute additional Web Applications and services to customers on a SaaS platform; and~~Suite

· The ~~SaaS Syndication~~Etelos Platform ~~lets~~Suite allows ~~SaaS~~third ~~providers~~parties ~~distribute~~to use ~~their~~our ~~Web~~software ~~Applications~~platforms and our services ~~through~~to adevelop ~~network~~and ofoperate private label applications and marketplaces. We began working with third ~~party-branded~~parties on private label solutions in November 2008 and our first customers launched their private label marketplaces in mid-fiscal 2009.

~~Our~~There ~~Etelos~~are ~~Platform~~four ~~Suite allows~~components ~~our customers~~ to ~~take advantage of our tools and experience in~~ the ~~SaaS market to move their existing applications to the Web for lower cost implementation, easier, simpler scalability, and broader distribution. Our~~ Etelos Platform ~~Suite enables Marketplace~~ ~~Partners, including non-technology businesses, to have their own private label marketplaces and tools to offer SaaS Web Applications to better serve their customers in multiple distribution channels.~~Suite:

~~Etelos~~· The ~~Web Application Hosting. By using almost any programming~~SaaS ~~language a developer chooses, including our own EASE language, and by hosting Web Applications wherever users want, utilizing our Etelos~~ Application ~~Server, the~~Platform ~~Etelos~~enables ~~Development~~technology ~~Environment~~providers ~~allows our partners~~ to ~~extend~~move ~~solutions using our platform. Our customers rely on our products and the products of our Syndication Partners to run~~ their ~~businesses, and, as a result, it is our responsibility to ensure the availability of our service. We continue to improve our infrastructure with the goal of maximizing the availability of our~~ non-Web ~~Applications and those of our developers,~~ ~~distributors~~Application and users. We host on a highly-scalable network located in secure third-party facilities. We have facility space, power, and Internet connectivity provided by Network OS in the Seattle, WA area. In anticipation of future growth, we may engage additional providers and/or expand the number of data centers utilized with existing vendors. Our hosting operations incorporate industry-standard hardware and our EAS operating system and databases and application servers provide a flexible, scalable architecture. Elements of our products’ infrastructure can be replaced or added with no interruption in service, ~~helping~~ to ~~ensure~~web-based ~~that~~SaaS ~~the failure of any single device will not cause a broad service outage.~~distribution;

~~Professional~~· The ~~Services.~~SaaS Marketplace WePlatform ~~are~~enables ~~developing~~third ~~repeatable,~~parties ~~cost-effective consulting and implementation services~~ to ~~assist~~offer ~~our~~a ~~customers~~variety ~~with~~of ~~integrating~~syndicated Web Applications, ~~using them on~~ and ~~off-line and importing data from other systems. We provide support~~ services ~~to aid~~ in ~~changing~~a ~~their~~third ~~business processes to take advantage of the enhanced flexibility enabled by our Build~~party-~~a-Suite concept. Build-a-Suite enables~~branded ~~our~~SaaS customers to implement cost reducing, scalable business processes within their organization and identifying, configuring, and customizing our products and those of our partners for each unique business process and requirement, with a goal of entering data once and using it across the organization and across the applications used by the business.marketplace;

~~Our~~· The ~~consulting and implementation methodology leverages the nature of~~SaaS ~~our~~Distribution ~~on-demand~~Platform ~~Web~~allows ~~Application~~technology ~~software~~companies ~~architecture, the industry-specific expertise of our professional services employees,~~ and ~~the~~service ~~design~~providers ~~of the Etelos ecosystem and Etelos Marketplaces. They are used~~ to ~~simplify, reduce costs and~~ ~~expedite~~distribute ~~the~~additional ~~implementation of scalable~~ Web Applications to aid in better business operations. We generally employ a joint staffing model for implementation projects in which we involve the customer more actively in the implementation process than traditional software companies. We believe this better prepares our customers to support their own application set. In addition, because our Web Applications are on-demand, our Professional Services employees can remotely configure many applications for most situations. Our consulting and ~~implementation~~ services ~~are~~to ~~generally~~customers ~~offered~~ on a ~~fixed price~~SaaS ~~basis.~~platform; ~~Our network of partners also provides professional services to our customers.~~and

~~Customer~~· The ~~Support and Management. Our technical support organization,~~SaaS ~~with~~Syndication ~~personnel~~Platform inlets ~~the~~SaaS ~~United~~providers ~~States,~~distribute ~~offers~~their ~~support via the~~ Web 24Applications ~~hours a day, seven days a week. Our system allows for skills-based~~ and ~~time zone-based~~ ~~routing to address general and technical inquiries across all aspects of our~~ services. For our direct customers and development partners, we offer tiered customer support programs depending upon the service needs of both our and their customers’ Web Applications. Support contracts typically have a one-year term. For customers who purchase Web Applications through ~~distribution partners, we attempt to assure~~ a ~~quality~~network ~~customer experience by providing primary product support, instead~~ of ~~permitting~~third ~~the~~party-branded ~~distribution partner to provide that support~~marketplaces.

The ~~advantages~~Etelos Platform Suite allows our customers to take advantage of our ~~products~~tools and ~~services~~experience ~~are:~~in the SaaS market to move their existing applications to the Web for lower cost implementation, easier, simpler scalability, and broader distribution. Our Etelos Platform Suite enables Marketplace Partners, including non-technology businesses, to have their own private label marketplaces and tools to offer SaaS Web Applications to better serve their customers in multiple distribution channels.

~~Open~~Etelos ~~Standards~~Web Application Hosting. ~~Products~~ ~~distributed~~By inusing almost anany ~~Etelos~~programming ~~Marketplace~~language a developer chooses, including our own EASE ~~are~~language, ~~developed~~and onby ~~open~~hosting ~~standards. This~~Web ~~foundation~~Applications ~~makes~~wherever ~~the~~users ~~products~~want, ~~easy~~utilizing our toEtelos ~~develop~~Application Server, ~~easy~~the Etelos Development Environment allows our partners to ~~adopt~~extend solutions using our platform. Our customers rely on our products and ~~integrate~~the products ~~with~~of ~~other~~our ~~Web~~Syndication ~~Applications~~Partners to run their businesses, and, ~~easy~~as a result, toit ~~swap~~is orour ~~modify~~responsibility to ~~meet~~ensure ~~specific~~the ~~customer~~availability ~~needs. The~~of ~~use~~our ofservice. ~~open~~We continue ~~standards~~to ~~for~~improve ~~business~~our ~~applications~~infrastructure ~~distinguishes~~with the ~~products~~goal inof anmaximizing ~~Etelos~~the availability of ~~Marketplace~~our ~~not~~Web ~~only~~Applications ~~from~~and ~~comprehensive~~those ~~product~~of ~~suites~~our ~~from~~developers, ~~such~~distributors ~~vendors~~and ofusers. ~~proprietary~~We ~~software~~host ason ~~Microsoft~~a highly-scalable network located in secure third-party facilities. We have facility space, ~~Oracle~~power, and ~~SAP~~Internet connectivity provided by Network OS, ~~but~~a ~~also~~third ~~from~~party ~~products~~co-location ~~offered by~~and ~~other~~hosting ~~SaaS~~provider, ~~vendors~~located in ~~such~~the asSeattle, ~~salesforce~~WA area.~~com~~ orIn ~~NetSuite~~anticipation of future growth, ~~that~~we ~~require~~may engage ~~developers~~additional providers and/or expand the number of ~~Web~~data ~~Applications~~centers toutilized ~~adopt~~with existing avendors. ~~high~~Our hosting operations incorporate industry-~~cost~~standard ~~proprietary~~hardware and ~~foundation~~our ~~for~~EAS operating system and databases and application servers provide a ~~their~~flexible, scalable architecture. Elements of our products,’ ~~resulting~~infrastructure can be replaced or added with no interruption in ~~higher~~service, ~~costs~~helping to ~~both~~ensure ~~developers~~that the ~~and~~failure ~~their customers~~of any single device will not cause a broad service outage.

Table of Contents

~~On-Demand~~Professional ~~Delivery Model~~Services. We deliver our products over the Internet as a license-based or subscription based service using a SaaS model, making adoption easy and scalability simple. The SaaS delivery model also eliminates the need for customers to buy and maintain on-premise hardware and software. Our products are designed to be reliable, scalable and secure. Our architecture enables businesses to maintain very high levels of availability, scale easily as their business and customers grow while providing a safe and secure environment for business-critical data and applications.

~~Low~~We ~~Total~~are ~~Cost of Ownership. Our SaaS delivery model and each~~developing ~~different~~repeatable, ~~Web~~cost-effective ~~Application’s~~consulting ~~ease of use~~ and ~~configurability~~implementation ~~aids~~services into ~~helping~~assist toour ~~significantly~~customers ~~reduce~~with ~~implementation~~integrating ~~and~~Web ~~maintenance~~Applications, ~~costs~~using ofthem ~~hardware,~~on ~~software~~ and ~~services.~~off-line ~~The~~and importing ~~Etelos~~data ~~ecosystem~~from ~~virtually~~other ~~eliminates~~systems. ~~the~~We ~~need~~provide ~~for dedicated software development or information technology~~ support ~~personnel.~~services ~~Customers subscribe~~ to ~~products~~aid ~~through~~in changing antheir ~~Etelos~~business ~~Marketplace~~processes ~~for~~to atake ~~monthly~~advantage ~~fee~~of ~~based on~~ the ~~number~~enhanced offlexibility enabled ~~users~~by ~~and~~our ~~the products they select~~Build-a-Suite concept. ~~Subscription~~ ~~fees~~Build-a-Suite enables ~~paid~~our customers to usimplement ~~periodically,~~cost ~~typically monthly~~reducing, ~~tend~~scalable tobusiness beprocesses ~~significantly~~within ~~less than~~their ~~typical~~organization ~~upfront~~and ~~costs~~identifying, ~~paid~~configuring, byand ~~businesses~~customizing toour ~~purchase~~products ~~product licenses from~~and ~~other~~those ~~providers.~~of ~~Our~~our ~~on-demand~~partners ~~delivery~~for ~~model~~each ~~virtually~~unique ~~eliminates~~business ~~ongoing maintenance~~process and ~~upgrade~~requirement, ~~costs associated~~ with a ~~typical distributed~~ ~~infrastructure.~~goal ~~Because~~of ~~Web~~entering ~~Applications~~data ~~distributed~~once inand anusing ~~Etelos~~it ~~Marketplace are~~across ~~developed~~the onorganization ~~open standards~~ and ~~delivered~~across ~~over~~ the ~~Internet, any desired~~ ~~customization~~applications ~~can~~used beby ~~highly targeted, and therefore usually performed at lower cost to~~ the business ~~customer~~.

~~Rapid~~Our ~~Implementation.~~consulting ~~The~~and implementation ~~Internet-based~~methodology leverages the nature of our on-demand ~~delivery model~~Web ~~implemented~~Application bysoftware anarchitecture, ~~Etelos~~the ~~Marketplace~~industry-specific ~~enables~~expertise ~~remote~~of ~~deployment~~our professional services employees, and ~~eliminates many~~the design of the ~~steps~~Etelos Ecosystem and ~~costs~~private-label Web ~~typically~~application ~~associated~~marketplaces ~~with~~operating on~~-premise~~ ~~installations~~the Etelos Platform Suite. They are ~~Syndication~~used ~~Partners~~to simplify, reduce costs and ~~their~~expedite ~~customers~~the ~~can~~implementation ~~implement~~of scalable Web Applications to aid in better business operations. We generally employ a joint staffing model for implementation projects in which we involve the customer more actively in the implementation process than traditional software companies. We believe this better prepares our ~~offerings~~customers to support their own application ~~themselves~~set. In addition, orbecause ~~work~~our ~~with~~Web Applications are on-demand, our Professional ~~development~~Services ~~partners~~employees orcan ~~our~~remotely ~~professional~~configure many applications for most situations. Our consulting and implementation services are generally ~~organization~~offered toon ~~meet~~a ~~their~~fixed ~~specific~~price ~~needs~~basis. Our network of partners also provides professional services to our customers.

~~Security,~~Customer ~~Control~~Support and ~~Choice. The combination of open standards~~ and Internet-based on-demand delivery and support enabled using an Etelos Marketplace provides customers with security for their important business data, control over the use and portability of that data, and flexibility and freedom of choice in Web Applications that provide built-in quality and scalability as solutions to specific business needsManagement.

~~Sales~~Our technical support organization, with personnel in the United States, offers support via the Web 24 hours a day, seven days a week. Our system allows for skills-based and ~~Marketing~~time zone-based routing to address general and technical inquiries across all aspects of our services. For our direct customers and development partners, we offer tiered customer support programs depending upon the service needs of both our and their customers’ Web Applications. Support contracts typically have a one-year term. For customers who purchase Web Applications through distribution partners, we attempt to assure a quality customer experience by providing primary product support, instead of permitting the distribution partner to provide that support.

~~Sales. We~~Etelos generate sales through both indirect and direct approaches. Most selling of subscriptions for Web Applications and Hosting is done over the Internet. Sales of custom products and Professional Services tend to be direct. Our direct sales team consists of professionals in various locations in the United States, with additional development, distribution, and business relationships being developed in North America, South America, Europe, and the Asia-Pacific region.Benefits

~~Our~~The ~~Web~~advantages ~~Applications and Hosting sales activities generally are the result~~ of ~~word of mouth, marketing programs, or user referrals. As leads self qualify and most often use credit cards for payment,~~ our ~~sales~~products and ~~support personnel provide web based seminars, forums, and direct support~~ services to ensure continued subscription sales. The sales cycle typically ranges from days to months, and can vary based on the Web Application, the scope of any customization desired, and the scope of any professional services required to meet specific customer requirements.are:

~~Our~~Open ~~sales~~Standards. Products ~~process~~distributed ~~for~~in ~~Custom~~an ~~Products~~Etelos Marketplace ~~and~~are ~~Professional~~developed ~~Services typically~~on ~~begins~~open ~~with~~standards. This foundation makes the products ~~generation~~easy ofto adevelop, ~~sales~~easy ~~lead~~to ~~from~~adopt aand ~~marketing~~integrate ~~program~~with other Web Applications, and easy to swap or modify to meet specific customer ~~referral~~needs. The ~~After~~use ~~the~~of ~~lead~~open isstandards ~~qualified,~~for ~~our~~business ~~sales~~applications ~~personnel~~distinguishes ~~conduct~~the products ~~focused~~in ~~web-based~~an ~~demonstrations~~Etelos ~~along~~Marketplace ~~with~~not ~~initial~~only ~~price~~from ~~discussions.~~comprehensive ~~Members~~product suites from such vendors of ~~our~~proprietary ~~professional~~software ~~services~~as ~~team~~Microsoft, ~~are engaged~~Oracle, asand ~~needed~~SAP, tobut ~~offer~~also ~~insight~~from ~~around~~products ~~aspects~~offered ofby ~~the~~other ~~implementation.~~SaaS ~~Our~~vendors ~~sales~~such ~~cycle~~as ~~typically~~salesforce.com ~~ranges~~or ~~from~~NetSuite, that ~~days~~require todevelopers ~~months,~~of ~~but~~Web ~~can~~Applications ~~vary~~to ~~based~~adopt ona ~~the~~high-cost ~~specific~~proprietary foundation ~~application,~~for ~~the~~their ~~size~~products, ~~and complexity~~resulting ofin ~~the~~higher ~~potential~~costs ~~customer’s~~to ~~information~~both ~~technology~~developers ~~environment,~~ and ~~many~~their ~~other factors~~customers.

~~Marketing~~On-Demand Delivery Model. We ~~tailor~~deliver our ~~marketing~~products ~~efforts~~over ~~around~~the ~~relevant~~Internet ~~application~~as ~~categories,~~a ~~customer~~license-based ~~sizes~~or subscription based service using a SaaS model, making adoption easy and ~~customer~~scalability ~~industries~~simple. The ~~As part~~SaaS ofdelivery ~~our~~model ~~marketing~~also eliminates ~~strategy,~~the weneed ~~have~~for ~~established~~customers ato ~~number~~buy ofand ~~key~~maintain ~~programs~~ on-premise hardware and software. ~~initiatives,~~Our ~~including~~products ~~online~~are ~~and~~designed ~~search~~to ~~engine~~be ~~advertising~~reliable, ~~email~~scalable and secure. Our ~~campaigns,~~architecture ~~web~~enables ~~based~~businesses ~~seminars,~~to ~~product~~maintain ~~launch~~very ~~events~~high levels of availability, scale ~~trade~~easily ~~show~~as their business and ~~industry event~~customers ~~sponsorship~~grow ~~and~~while ~~participation,~~providing ~~and~~a ~~marketing~~safe ~~support~~and secure environment for ~~development~~business-critical data and ~~distribution~~ ~~partners~~applications.

Low Total Cost of Ownership. Our SaaS delivery model and each different Web Application’s ease of use and configurability aids in helping to significantly reduce implementation and maintenance costs of hardware, software and services. The Etelos ecosystem virtually eliminates the need for dedicated software development or information technology support personnel. Customers subscribe to products through an Etelos Marketplace for a monthly fee based on the number of users and the products they select. Subscription fees paid to us periodically, typically monthly, tend to be significantly less than typical upfront costs paid by businesses to purchase product licenses from other providers. Our on-demand delivery model virtually eliminates ongoing maintenance and upgrade costs associated with a typical distributed infrastructure. Because Web Applications distributed in an Etelos Marketplace are developed on open standards and delivered over the Internet, any desired customization can be highly targeted, and therefore usually performed at lower cost to the business customer.

AsRapid ofImplementation. ~~December 31,~~The ~~2008,~~Internet-based weon-demand ~~served approximately 10,000 active~~delivery ~~customers~~model ofimplemented ~~diverse~~by ~~sizes~~an ~~and~~Etelos ~~types~~Marketplace ~~across~~enables aremote ~~wide~~deployment ~~variety of industries, with~~and aeliminates ~~focus~~many onof ~~SMBs,~~the ~~which~~steps weand ~~define~~costs astypically ~~businesses~~associated with ~~fewer than 1,000 employees,~~on-premise ~~and divisions of larger companies~~installations. NoSyndication ~~single~~Partners ~~customer~~and ~~accounted~~their ~~for~~customers ~~more~~can ~~than 10~~implement ~~percent of~~ our offerings ~~revenue~~themselves, ~~during~~or ~~the~~work ~~quarter~~with ~~and~~our ~~year~~development ~~ended~~partners ~~December 31, 2008. Customers~~or ~~of all types use~~ our ~~products~~professional services organization to ~~achieve~~meet atheir ~~wide~~specific ~~variety of business objectives~~needs.

5Security, Control and Choice. The combination of open standards and Internet-based on-demand delivery and support enabled using an Etelos Marketplace provides customers with security for their important business data, control over the use and portability of that data, and flexibility and freedom of choice in Web Applications that provide built-in quality and scalability as solutions to specific business needs.

~~Table of Contents~~5

~~Competition~~Table of Contents

WeSales ~~compete with a broad array of Enterprise Software, On-line Advertising~~ and SaaS companies. These markets are highly competitive, fragmented, and subject to rapid changes in technology. Many of our potential customers are seeking their first business Web Application and, as such, evaluate a wide range of alternatives during their purchase process. We face significant competition within each of our markets from companies with broad product suites and greater name recognition and resources than us. We also face competition from smaller companies focused on specialized solutions. To a lesser extent, we compete with internally developed and maintained solutions. Current competitors include NetSuite,Inc., Epicor Software Corporation, Intuit Inc., Microsoft Corporation, SAP, The Sage Group plc, Amazon, salesforce.com, inc., and others not listed here, both public and private.Marketing

We ~~believe~~generate ~~that~~sales through both indirect and direct approaches. Most selling of subscriptions for Web Applications and Hosting is done over the Internet. Sales of custom ~~principal~~products ~~competitive~~and ~~factors~~Professional Services tend to be direct. Our direct sales team consists of professionals in ~~our~~various ~~markets~~locations ~~include:~~in the United States, including resellers, with additional development, distribution, and business relationships being developed in North America, South America, Europe, and the Asia-Pacific region.

~~· freedom~~Our Web Applications and Hosting sales activities generally are the result of ~~choice~~word inof mouth, marketing programs, or user referrals. Our sales and support personnel provide web based seminars, forums, and direct support services to ensure continued subscription sales. The sales cycle typically ranges from days to months, and can vary based on the Web ~~Applications;~~Application, the scope of any customization desired, and the scope of any professional services required to meet specific customer requirements.

~~· service~~Our ~~breadth~~sales process for Custom Products and ~~functionality;~~Professional Services typically begins with the generation of a sales lead from a marketing program or customer referral. After the lead is qualified, our sales personnel conduct focused web-based demonstrations along with initial price discussions. Members of our professional services team are engaged, as needed, to offer insight around aspects of the implementation. Our sales cycle typically ranges from days to months, but can vary based on the specific application, the size and complexity of the potential customer’s information technology environment, and many other factors.

~~· performance~~We tailor our marketing efforts around relevant application categories, ~~security~~customer sizes, and ~~reliability;~~customer industries. As part of our marketing strategy, we have established a number of key programs and initiatives, including online and search engine advertising, email campaigns, web based seminars, product launch events, trade show and industry event sponsorship and participation, and marketing support for development and distribution partners.

~~· “Try and Buy”: the ability to tailor and customize services for a specific company, vertical or industry;~~Customers

~~· ease~~As of ~~use~~December 31, 2009, we had limited revenues, primarily from consulting projects for a very limited number of customers in projects of varying sizes and ~~replacement~~duration. During 2009, three customers comprised 77% of our total revenues and each of these customers accounted for more than 10 percent of our revenue during the year ended December 31, 2009. There were no accounts receivable from those three customers as of December 31, 2009; one other customer accounts for 100% of the Company’s accounts receivables as of December 31, 2009.

~~· speed and ease of deployment, integration and configuration;~~Competition

~~· total~~We ~~cost~~compete with a broad array of ~~ownership~~Enterprise Software, ~~including~~On-line Advertising and SaaS companies. These ~~subscription~~markets are highly competitive, ~~implementation~~fragmented, and ~~support~~subject ~~costs;~~to rapid changes in technology. Many of our potential customers are seeking their first business Web Application and, as such, evaluate a wide range of alternatives during their purchase process. We face significant competition within each of our markets from companies with broad product suites and greater name recognition and resources than us. We also face competition from smaller companies focused on specialized solutions. To a lesser extent, we compete with internally developed and maintained solutions. Current competitors include NetSuite,Inc., Epicor Software Corporation, Jamcracker, Intuit Inc., Microsoft Corporation, SAP, The Sage Group plc, Amazon, salesforce.com, inc., and others not listed here, both public and private.

~~· sales~~We ~~and~~believe ~~marketing~~that ~~approach;~~the ~~and~~principal competitive factors in our markets include:

· ~~financial~~freedom ~~resources~~of ~~and~~choice ~~reputation.~~in Web Applications;

We· service ~~believe~~breadth ~~that we compete favorably with most of our competitors on the basis of each of the factors listed above. We further note, however, that certain of our competitors have greater sales, marketing,~~ and financial resources, more extensive geographic presence, and greater name recognition than us. In addition, although we have extended the number of applications we have introduced for specific vertical markets, we may be at a disadvantage in certain other vertical markets compared to certain of our competitors. We may face future competition in our markets from other large, established companies, as well as from emerging companies. In addition, we expect that there is likely to be continued consolidation in the industry that could lead to increased technology, price, and other forms of competition.functionality;

~~Intellectual~~· performance, ~~Property~~security, and reliability;

~~Our~~· “Try ~~success~~and ~~depends~~Buy”: ~~in part~~the ~~upon our~~ ability to ~~protect~~tailor ~~our core technology~~ and ~~intellectual property.~~ Tocustomize ~~accomplish~~services ~~this,~~for ~~we rely on~~ a ~~combination~~specific ~~of intellectual property rights~~company, ~~including~~ ~~trade~~vertical ~~secrets,~~or patents, copyrights and trademarks, as well as customary contractual protections. We view our patents, trade secrets, and know-how as a significant component of our intellectual property assets, as we have spent years designing and developing our products, which we believe differentiates us from our competitors.industry;

As· ease of ~~December 31, 2008,~~use ~~we had multiple U.S.~~ and foreign patent applications pending. We plan to file additional patent applications in the U.S. and elsewhere. We do not know whether our pending or future patent applications will result in the issuance of patents in the U.S. or elsewhere, or whether the examination process will require us to narrow our claims. Even if granted, there can be no assurance that the pending patent applications will provide us with protection.replacement;

We· speed ~~use~~and aease ~~number~~ of ~~unregistered~~ ~~trademarks. We~~deployment, ~~have not registered any trademarks or service~~integration ~~marks.~~and configuration;

We· total ~~maintain~~cost aof ~~policy requiring our employees~~ownership, ~~consultants and other third parties to enter into~~including ~~confidentiality and proprietary rights agreements and to control access to software~~subscription, ~~documentation~~implementation and ~~other~~support ~~proprietary information.~~costs;

6· sales and marketing approach; and

~~Table of~~· financial ~~Contents~~resources and reputation.

We ~~have~~believe ~~not~~that ~~maintained~~we ~~operating~~compete ~~controls~~favorably orwith ~~logs,~~most ~~or initiated or conducted any forensic, code history, ‘genealogy’ or other form~~ of ~~audit,~~our ~~analysis,~~competitors ~~processes,~~on ~~training,~~the ~~or code~~basis ~~review~~ of ~~software~~each ~~code incorporated into any~~ of ~~our products or in other~~the ~~products~~factors ~~offered~~listed ~~by others in an Etelos Marketplace~~above. ~~These~~We ~~products~~further ~~may include~~note, ~~code subject to various forms of ‘open source’~~however, ~~‘copyleft’ or similar licenses~~ that ~~require~~certain ~~as a condition~~ of ~~modification or distribution of software~~our ~~subject~~competitors tohave ~~such~~greater ~~license(s) that~~sales, ~~[a]~~marketing, ~~such~~and ~~software~~financial orresources, ~~other software~~more ~~combined~~extensive orgeographic ~~distributed~~presence, ~~with~~and ~~such~~greater ~~software~~name berecognition ~~disclosed~~than orus. ~~distributed in~~In ~~source code form~~addition, oralthough ~~[b]~~we ~~such~~have ~~software~~extended orthe ~~other~~number ~~software~~of ~~combined~~applications orwe have ~~distributed~~introduced ~~with~~for ~~such~~specific ~~software~~vertical markets, ~~and~~we ~~any~~may ~~related intellectual property,~~ be ~~licensed~~ onat a ~~royalty-free~~disadvantage ~~basis,~~in ~~including for the purposes of making~~certain ~~additional~~other ~~copies~~vertical ormarkets ~~derivative~~compared ~~works~~to certain of ~~such~~our ~~software~~competitors. ~~This~~ We may face ~~adversely~~future ~~affect~~competition in our ~~ability~~markets tofrom ~~patent~~other ~~certain~~large, ~~inventions~~established orcompanies, ~~to license or~~as ~~distribute~~well ~~certain~~as ~~products~~from –emerging ~~whether~~companies. byIn ~~open~~addition, ~~source~~we ~~license~~expect orthat ~~other~~there ~~form~~is oflikely to ~~license~~be orcontinued ~~right~~consolidation –in ~~and~~the ~~may~~industry ~~result~~that incould ~~liability~~lead to ~~unknown parties for~~increased ~~infringement~~technology, ofprice, ~~their~~and ~~patents or~~ other ~~intellectual~~forms ~~property~~of ~~rights~~competition.

The steps we have taken to protect our intellectual property rights may not be adequate. Third parties may infringe or misappropriate our proprietary rights. Competitors may also independently develop technologies that are substantially equivalent or superior to the technologies we employ in our services. Failure to protect our proprietary rights adequately could significantly harm our competitive position and operating results.6

InTable ~~addition, we license third-party technologies that are incorporated into some elements~~ of ~~our service offerings. Licenses of third-party technologies may not continue to be available to us at a reasonable cost, or at all.~~Contents

~~The~~Intellectual software and technology industries are characterized by the existence of a large number of patents, copyrights, trademarks, and trade secrets and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. As we face increasing competition, the possibility of intellectual property rights claims against us grows. Many of our commercial agreements require us to indemnify our customers for third-party intellectual property infringement claims, which would increase our costs as a result of defending those claims and might require that we pay damages if there were an adverse ruling in any such claims.Property

~~With~~Our ~~respect~~success todepends ~~any~~in ~~intellectual~~part ~~property~~upon ~~rights~~our ~~claim~~ability ~~against~~to usprotect or our ~~customers,~~core wetechnology ~~may~~and ~~have~~intellectual toproperty. ~~pay~~To ~~damages~~accomplish orthis, ~~stop~~we ~~using~~rely ~~technology~~on ~~found~~a tocombination ~~be in violation~~ of aintellectual ~~third party’s~~property rights., including Wetrade ~~may~~secrets, ~~have~~patents, tocopyrights ~~seek~~and ~~a license for the technology~~trademarks, ~~which~~as ~~may~~well ~~not~~as becustomary ~~available~~contractual onprotections. ~~reasonable~~We ~~terms,~~view ~~may~~our ~~significantly~~patents, ~~increase~~trade ~~our~~secrets, ~~operating~~and ~~expenses,~~know-how oras ~~may~~a ~~require~~significant uscomponent toof ~~restrict~~ our ~~business~~intellectual ~~activities~~property inassets, ~~one~~as ~~or more~~we ~~respects.~~have ~~The~~spent ~~technology~~years ~~also~~designing ~~may~~and ~~not~~developing beour ~~available for license to us at all. As a result~~products, which we ~~may be required to develop alternative non-infringing technology,~~believe ~~which~~differentiates ~~could~~us ~~require~~from ~~significant~~our ~~effort and expense~~competitors.

~~Research~~As of December 31, 2009, we had multiple U.S. and ~~Development~~foreign patent applications pending. We may file additional patent applications in the U.S. and elsewhere. We do not know whether our pending or future patent applications will result in the issuance of patents in the U.S. or elsewhere, or whether the examination process will require us to narrow our claims. Even if granted, there can be no assurance that the pending patent applications will provide us with significant competitive protection.

~~During~~We ~~the~~use ~~years~~a ~~ended~~number ~~December 31,~~of ~~2008,~~unregistered ~~and December 31, 2007, research and development expenses were $2~~trademarks.~~6 million~~ We ~~and~~have ~~$2.0~~not ~~million,~~registered ~~respectively,~~any ~~and~~trademarks ~~consisted~~or ~~primarily of employee and~~service ~~employee-related expenses~~marks.

~~Employees~~We maintain a policy requiring our employees, consultants and other third parties to enter into confidentiality and proprietary rights agreements and to control access to software, documentation and other proprietary information.

AsWe ofdo ~~December 31,~~not ~~2008,~~analyze the software that we ~~had~~distribute ~~approximately~~from 13our ~~full-time~~ISV Syndication Partners to determine the ~~employees~~adequacy ~~and~~of ~~one~~their ~~part-time~~intellectual ~~employee~~property rights. ~~From~~We ~~time~~have tonot ~~time~~maintained operating controls or logs, weor ~~also~~initiated ~~engage~~or conducted ~~temporary~~any ~~employees~~forensic, ~~and~~code ~~consultants.~~history, ‘genealogy’ or other form of audit, ~~None~~analysis, processes, training, or code review of software code incorporated into any of our ~~employees~~products ~~are~~or ~~represented~~in other products offered by aour ~~labor~~ISV ~~union~~Syndication Partners ~~with~~in ~~respect~~any Etelos Marketplace. These products may include code subject to ~~his~~various forms of ‘open source’, ‘copyleft’ or similar licenses that ~~her~~require ~~employment~~as ~~with~~a ~~us. We~~condition ~~consider~~of ~~our relationships~~modification ~~with~~or ~~our~~distribution ~~employees~~of software subject to such license(s) that [a] such software or other software combined or distributed with such software be ~~satisfactory. However,~~disclosed weor ~~have~~distributed ~~experienced~~in ~~significant~~source code form, ~~operating~~or ~~issues~~[b] ~~which~~such ~~have~~software ~~caused~~or usother tosoftware ~~reduce~~combined ~~employment~~or distributed with such software, and ~~reduce~~any related intellectual property, be licensed on a ~~compensation~~royalty-free ~~paid~~basis, toincluding ~~our~~for ~~employees~~the purposes of making additional copies or derivative works of such software. ~~See~~This may adversely affect our ability ~~Risk~~to ~~Factors~~patent ~~“We~~certain ~~have~~inventions ~~reduced~~or ~~our~~to ~~employment~~license ~~force~~or distribute certain products — whether by open source license or other form of license or right — and may ~~have~~result ~~challenges~~in ~~meeting~~liability ~~our~~to ~~operating~~unknown ~~demands”~~parties ~~discussion~~for ~~infra~~infringement of their patents or other intellectual property rights.

~~Additional~~The ~~Information~~steps we have taken to protect our intellectual property rights may not be adequate. Third parties may infringe or misappropriate our proprietary rights. Competitors may also independently develop technologies that are substantially equivalent or superior to the technologies we employ in our services. Failure to protect our proprietary rights adequately could significantly harm our competitive position and operating results.

~~Our~~In ~~annual and quarterly reports~~addition, ~~along~~we ~~with all other reports and amendments filed with or furnished to~~license ~~the~~third-party ~~SEC~~technologies that are ~~publicly~~incorporated ~~available~~into ~~free~~some ofelements ~~charge on the Investor section~~ of our ~~website~~service ~~at www~~offerings.~~etelos.com~~ asLicenses ~~soon as reasonably practicable after these materials are filed with or furnished to the SEC. Our corporate governance policies, ethics code and board~~ of ~~directors’~~third-party ~~committee~~technologies ~~charters~~may ~~are also posted within this section of the website. The information on our website is~~ not ~~part~~continue ~~of this or any other report we file with, or furnish~~ to, ~~the SEC. The~~be ~~SEC~~available ~~also~~to ~~maintains~~us anat ~~Internet~~a ~~site~~reasonable ~~that contains reports~~cost, ~~proxy~~or ~~and information~~at ~~statements, and other information regarding issuers that file electronically with the SEC~~all. ~~The address of that site is www.sec.gov.~~

~~ITEM~~The software and 1Atechnology industries are characterized by the existence of a large number of patents, copyrights, trademarks, and trade secrets and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. ~~RISK~~ ~~FACTORS~~As we face increasing competition, the possibility of intellectual property rights claims against us grows. Many of our commercial agreements require us to indemnify our customers for third-party intellectual property infringement claims, which would increase our costs as a result of defending those claims and might require that we pay damages if there were an adverse ruling in any such claims.

~~Investment~~With inrespect ~~our~~to ~~common~~any intellectual ~~stock~~property ~~involves~~rights aclaim ~~high~~against ~~degree~~us ofor ~~risk.~~our ~~You~~customers, we may have to ~~should~~pay ~~carefully~~damages ~~consider~~or ~~the~~stop ~~risks~~using ~~described~~technology ~~below~~found ~~together~~to ~~with~~be ~~all~~in violation of ~~the~~a third party’s ~~other~~rights. ~~information~~We ~~included~~may inhave ~~this~~to ~~report~~seek ~~before~~a ~~making~~license anfor ~~investment~~the ~~decision.~~technology, which may not be Ifavailable ~~any~~on ofreasonable ~~the~~terms, ~~following~~may ~~risks~~significantly ~~actually~~increase ~~occur~~our operating expenses, or may require us to restrict our business, ~~financial~~activities ~~condition~~ in one or ~~results~~more respects. ofThe ~~operations~~technology ~~could~~also ~~suffer.~~may Innot ~~that~~be ~~case,~~available ~~the~~for ~~market~~license ~~price~~to ofus ~~our common~~at ~~stock~~all. ~~could~~As a ~~decline~~result, ~~and~~we ~~you~~ may ~~lose~~be ~~all~~required orto ~~part~~develop ofalternative ~~your~~non-infringing ~~investment~~technology, which could require significant effort and expense.

7Research and Development

~~Table~~During the years ended December 31, 2009, and 2008, research and development expenses were $1.3 million and $2.6 million, respectively, and consisted primarily of ~~Contents~~employee and employee-related expenses. To date, we have expensed all of our product development costs as incurred; we do not capitalize software development costs.

~~Our current cash will fund our business as currently planned only through June 2009. We need additional funding or we will be forced to curtail or cease operations.~~Employees

WeAs ~~need~~of ~~immediate~~December 31, ~~and~~2009, ~~substantial~~we ~~cash~~had to12 ~~continue our operations. We~~full-time ~~currently~~employees ~~have~~and noone ~~funding~~part-time ~~commitments~~employee. ~~Management has projected that cash on~~ ~~hand~~From ~~will~~time ~~be sufficient~~ to ~~allow~~time, uswe toalso ~~continue~~engage ~~our~~temporary ~~operations~~employees ~~only~~and ~~through June 2009~~consultants. ~~We have not made required payments under our~~ ~~outstanding~~None ~~debt securities and the holders~~ of our ~~outstanding~~employees ~~debt~~are ~~securities have~~represented ~~the~~by ~~right~~a tolabor ~~demand~~union ~~payment~~with ofrespect ~~the~~to ~~amounts~~his ~~currently due under such~~or ~~securities~~her oremployment ~~exercise~~with ~~their other remedies, such as foreclosing on our assets~~us. We ~~also~~consider ~~need to negotiate payment plans for~~our ~~certain~~relationships ~~payables~~with ~~and~~our ~~there~~employees isto abe ~~risk~~satisfactory. However, ~~that~~we ~~trade~~have ~~creditors~~experienced ~~will not accept~~significant ~~deferred~~operating ~~payment~~issues ~~and~~which ~~exercise~~have ~~other~~caused ~~remedies~~us to ~~collect~~reduce ~~balances~~employment ~~due~~ and ~~owing.~~reduce Wecompensation ~~therefore~~paid ~~will~~to ~~need~~our ~~additional~~employees. See ~~funding, either through equity or debt~~“RISK ~~financings,~~FACTORS or- weWe ~~will~~have bereduced ~~forced~~our toemployment ~~curtail~~force orand ~~cease operations or consider~~have ~~other~~challenges ~~strategic~~meeting ~~alternatives~~our ~~such~~operating asdemands” ~~bankruptcy~~below.

We have a limited operating history, have experienced significant expenditures related to funding our initial product development, and are currently carrying a net loss. If our business model is not successful, or if we are unable to generate sufficient revenue to offset our start-up expenditures, then we may not become profitable and you may lose your entire investment in our company.7

WeTable began our operations in 1999 but we did not adopt the SaaS on-demand Web Applications delivery model until 2005, and further changed our business model in the quarter ended December 31, 2008. As such, we have a limited operating history in the SaaS industry in general, and even more limited experience with our new business model, from which to evaluate our business and prospects. We incurred a net loss of ~~$19.4~~ million for the year ended December 31, 2008, and $4.0 million for the year ended December 31, 2007, and have an accumulated deficit of $29.8 million at December 31, 2008. We cannot assure you that our future planned operations will be implemented successfully or that we will ever have profits. Furthermore, we are experiencing the initial costs and uncertainties of a young operating company, including start-up expenditures, unforeseen costs and difficulties, complications, and delays, all of which must be resolved and/or paid without the benefit of a predictable revenue stream. We cannot be sure that we will be successful in meeting these challenges and addressing these risks and uncertainties. If we are unable to do so, then we may be required to scale back our business, sell or license some or all of our technology or assets, or curtail or cease operations.Contents

WeAdditional ~~do not have sufficient current cash to pay the principal and accrued interest amounts due under our outstanding debt securities.~~Information

~~The~~Our ~~debentures~~annual weand ~~issued~~quarterly ~~require~~reports, ~~monthly~~along ~~principal~~with ~~payments~~all ~~equal~~other reports and amendments filed with or furnished to the SEC are publicly ~~1/18th~~available free of charge on the ~~principal~~Investor ~~amount~~section ~~due~~of ~~under~~our ~~each~~website ~~debenture~~at www. ~~The~~etelos.com ~~debentures~~as ~~accrue~~soon ~~interest~~as atreasonably ~~the~~practicable ~~rate~~after ofthese materials are ~~six~~filed ~~percent~~with ~~per~~or ~~annum,~~furnished ~~payable~~to ~~quarterly~~the SEC. Our corporate governance policies, ethics code and onboard ~~each~~of ~~monthly~~directors’ ~~principal~~committee charters are also posted within this ~~payment~~section of the website. We ~~have~~The information on our website is not ~~made~~part ~~certain~~of this or ~~payments~~any asother ~~required~~report bywe ~~the~~file ~~terms~~with, ofor furnish to, the ~~debentures~~SEC. The SEC also maintains an Internet site that contains reports, proxy and doinformation ~~not~~statements, ~~expect~~and other toinformation ~~have the~~regarding ~~ability~~issuers tothat dofile soelectronically inwith the ~~near~~SEC. ~~future~~The address of that site is www.sec.gov.

WeITEM ~~are currently in default of our debentures because of our failure to make certain payments when due~~1A. As ~~a result~~RISK the holders of the debentures have the right to accelerate all amounts outstanding under the debentures and demand payment of a mandatory default amount equal to 130 percent of the amount outstanding under the debenture, plus accrued interest and expenses. If such demand was made, we would be unable to repay the mandatory default amount, and the holders could commence legal action against us. Any such action could impose significant costs on us and require us to curtail or cease operations.FACTORS

InInvestment ~~addition,~~in asour acommon ~~result~~stock ofinvolves ~~being~~a inhigh ~~default under our January Debentures~~degree ~~and~~of ~~April Debentures,~~risk. ~~the~~You ~~holders~~should ~~may~~carefully ~~have~~consider the ~~right~~risks todescribed ~~foreclose~~below ~~on substantially~~together with all of ~~our~~the ~~assets~~other ~~pursuant~~information toincluded ~~the~~in ~~terms~~this ofreport ~~the~~before ~~security~~making ~~agreement~~an weinvestment ~~entered~~decision. ~~into~~If ~~with~~any ~~such~~of ~~holders and they would have~~ the ~~right~~following torisks ~~take possession~~actually ofoccur, our ~~assets and operate our~~ business~~. Though~~, wefinancial ~~are~~condition inor ~~regular~~results ~~communication with the holders~~ of ~~our~~operations ~~outstanding~~could ~~debt~~suffer. ~~securities,~~In ~~and none of them have demanded~~that ~~payment~~case, orthe ~~exercised~~market ~~other~~price ~~remedies~~of ~~due to~~ our ~~current~~common ~~default~~stock ~~under~~could ~~such securities~~decline, weand ~~can~~you ~~give~~may nolose ~~assurances that the holders will not exercise their~~all ~~remedies~~or inpart ~~the~~of ~~future~~your investment.

Our ~~limited~~current ~~operating~~cash ~~history~~will ~~may~~fund ~~not~~our business ~~serve~~ as ancurrently ~~adequate~~planned ~~basis~~only tothrough early-mid 2010. We need additional ~~judge~~funding ~~our~~or ~~future~~we ~~prospects~~will ~~and~~be ~~results~~forced ofto curtail or cease operations.

We ~~began~~need ~~our~~immediate ~~operations~~and insubstantial ~~1999~~cash ~~but~~to wecontinue ~~did~~our operations. ~~not~~Management ~~adopt~~has ~~the~~projected ~~SaaS~~that cash on~~-demand Web~~ ~~Application~~hand ~~delivery~~will ~~model~~be ~~until~~sufficient ~~2005,~~only to ~~and~~allow weus ~~have~~to ~~recently~~continue ~~changed~~ our ~~basic~~ ~~business~~operations ~~model.~~through ~~Our~~early-mid ~~limited~~2010. We ~~operating~~are ~~history~~presently engaged in ~~the~~active discussions ~~SaaS~~for ~~industry~~additional ~~may not~~investments ~~provide~~by aexisting ~~meaningful~~and ~~basis~~prospective oninvestors but ~~which~~we tocurrently ~~evaluate~~have ~~our~~no ~~business~~funding commitments. We ~~Since~~have ~~our inception~~not ~~our~~made ~~revenues~~required ~~have~~payments ~~not~~under ~~always~~our ~~grown~~outstanding ~~from~~debt ~~year~~securities and tothe ~~year. We~~holders ~~cannot~~of ~~assure~~our ~~you~~outstanding ~~that~~debt wesecurities ~~will~~have ~~achieve~~the ~~our~~right to demand ~~growth~~payment ~~targets,~~of orthe ~~that~~amounts wecurrently ~~will~~due ~~achieve~~under ~~positive~~such ~~cash-flow~~securities or ~~profitability,~~exercise ortheir ~~that~~other weremedies, ~~will~~such ~~not~~as ~~incur~~foreclosing ~~negative~~on ~~cash~~our ~~flow~~assets. We oralso ~~net~~need ~~losses~~to inmake ~~the~~payments ~~future.~~and Wenegotiate ~~expect~~payment ~~that~~plans ~~our~~for ~~operating~~certain ~~expenses~~notes ~~will~~payable ~~increase~~and asother wepayables ~~expand.~~and ~~Any~~there ~~significant~~is a risk ~~failure~~that totrade ~~realize~~creditors ~~anticipated~~will ~~revenue~~not ~~growth~~accept ~~could~~deferred ~~result~~payment inand ~~significant~~may exercise other ~~operating~~remedies ~~losses~~to ~~beyond~~collect ~~our~~balances ~~forecasts~~due and owing. We therefore will ~~continue~~need toadditional funding, ~~encounter~~either ~~risks~~through ~~and difficulties~~equity ~~frequently~~or ~~experienced~~debt byfinancings, ~~companies~~or atwe awill ~~similar~~be ~~stage~~forced ofto ~~development,~~curtail ~~including~~or ~~our~~cease ~~potential~~operations ~~failure~~or ~~to:~~consider other strategic alternatives such as bankruptcy.

~~· maintain~~We ~~and~~have a substantially reduced ~~improve~~employment force and have challenges meeting our ~~technology;~~operating demands.

~~· expand~~We have decreased our number of full-time employees ~~product~~from ~~and~~46 ~~service~~at ~~offerings~~June 30, ~~and~~2008, ~~maintain~~to 12 as of December 31, 2009. All except the ~~high~~three ~~quality~~lowest paid current employees are being paid less than full salary, ranging from 97% to 74% of ~~products~~net salary, and there is no assurance that any of these personnel will be able to ~~services~~continue ~~offered;~~to work on this payment arrangement. Our operating plan has placed, and our anticipated growth plan is expected to continue to place, a significant strain on our very limited managerial, administrative, operational, financial, and other resources, compounded by these recent reductions in headcount. Although we will be required to continue to improve our operational, financial, and management controls and our reporting procedures it is clear that we may not be able to do so effectively and may not be able to recruit or retain adequate, qualified personnel to meet our operating demands. As such, we may be unable to manage our expenses effectively in the future, which may negatively impact our gross margins or operating expenses in any particular quarter.

8We have a history of losses and are currently carrying a net loss. If our business model is not successful, or if we are unable to generate sufficient revenue to offset our expenditures, then we may not become profitable and you may lose your entire investment in our company.

~~Table~~We have not been profitable on an annual or quarterly basis since our formation. We incurred net losses of ~~Contents~~$6.8 million and $19.3 million for the years ended December 31, 2009, and 2008, respectively, and have an accumulated deficit of $36.6 million at December 31, 2009. Although our revenue has slightly increased and our costs of sales and expenses have decreased, our growth has been insignificant and future revenue growth may not be sustainable and we may not achieve sufficient revenue to achieve or maintain profitability. We have incurred and may continue to incur significant losses in the future, for a number of reasons including the other risks described in this report, and we may encounter unforeseen expenses, difficulties, complications, delays, and other unknown factors. Accordingly we may not be able to achieve or maintain profitability and we may continue to incur significant losses in the foreseeable future. These losses may require us to scale back our business, sell or license some or all of our technology or assets, or curtail or cease operations.

· sell subscriptions to our products and offerings by our Syndication Partners to sufficient, quality customers to produce revenues adequate to meet our operating needs;8

~~· manage~~Table ~~our expanding operations, including the integration~~ of ~~any future acquisitions;~~Contents

~~· obtain~~Our limited operating history may ~~sufficient~~not ~~working~~serve ~~capital~~as an adequate basis to ~~support~~judge our ~~expansion~~future prospects and toresults ~~fill customers’~~of ~~orders in time;~~operations.

~~· maintain~~We began our operations in 1999 but we did not adopt ~~adequate~~the ~~control~~SaaS ofon-demand Web Application delivery model until 2005, and we have recently changed our basic business model. Our limited operating history in the SaaS industry may not provide a meaningful basis on which to evaluate our business. Since our inception our revenues have not always grown from year to year. We cannot assure you that we will achieve our growth targets, or that we will achieve positive cash-flow or profitability, or that we will not incur negative cash flow or net losses in the future. We expect that our operating expenses; will increase as we expand. Any significant failure to realize anticipated revenue growth could result in significant operating losses beyond our forecasts. We will continue to encounter risks and difficulties frequently experienced by companies at a similar stage of development, including our potential failure to:

· ~~implement~~maintain ~~our product development, marketing, sales,~~ and ~~acquisition strategies and adapt and~~ ~~modify~~improve ~~them~~our ~~as needed~~technology; ~~and/or~~

· ~~anticipate~~expand our product and ~~adapt~~service toofferings ~~changing~~and ~~conditions~~maintain in the ~~markets~~high inquality ~~which we operate as well as the impact~~ of ~~any~~products ~~changes in government regulation, mergers~~ and ~~acquisitions~~ ~~involving~~services ~~our competitors, technological developments, and other significant competitive and market dynamics.~~offered;

If· sell weour products ~~are~~and ~~not~~services ~~successful~~to insufficient, ~~addressing~~quality ~~any~~customers orto ~~all~~produce ofrevenues adequate ~~these~~to ~~risks,~~meet ~~then~~ our ~~business~~operating ~~may be materially and adversely affected.~~needs;

We· manage ~~may encounter substantial competition in~~ our ~~business and our~~ ~~failure~~expanding tooperations, ~~compete~~including ~~effectively~~the ~~may~~integration ~~adversely~~of ~~affect~~any ~~our~~future ~~ability to generate revenue.~~acquisitions;

~~We believe that existing and new competitors will continue to improve~~· obtain ~~the~~sufficient ~~design~~working ~~and~~capital ~~performance of their products and~~ to ~~introduce~~support ~~new~~our ~~products~~expansion ~~with competitive price~~ and ~~performance characteristics. We expect that we will be required~~ to ~~continue~~fill ~~to invest in product development and productivity~~customers’ ~~improvements~~orders ~~to compete effectively~~ in our markets. Our competitors could develop better technology or more efficient products or undertake more aggressive and costly marketing campaigns than ours, which may adversely affect our marketing strategies and could have a material adverse effect on our business, results of operations, and financial condition.time;

~~Our major competitors may be better able than us to successfully endure downturns in our markets. In periods of reduced demand for our products, we can either choose to~~ · maintain ~~market share by reducing our subscription prices to~~ ~~meet~~adequate ~~competition~~control ~~or maintain subscription prices, which likely would result in sacrifice~~ of our market share. Sales and overall profitability would be reduced and sustained losses may continue in either case. In addition, we cannot be assured that additional competitors will not enter our existing markets, or that we will be able to compete successfully against existing or new competition.expenses;

We· implement ~~have~~our product adevelopment, ~~history~~marketing, ofsales, ~~losses~~ and weacquisition ~~may~~strategies ~~not~~and ~~achieve~~adapt ~~profitability~~and modify inthem ~~the future.~~as needed; and/or

~~We have not been profitable on a quarterly or annual basis since our~~· anticipate ~~formation. Our operations resulted in a net loss of $19.4 million for the year ended December 31, 2008~~ and ~~$4.0~~adapt ~~million for the year ending December 31, 2007. As of December 31, 2007, our accumulated deficit was $10.4 million and at December 31, 2008, our accumulated deficit was $29.8 million. We expect~~ to ~~make~~changing ~~significant~~conditions ~~future~~in ~~expenditures related to~~ the ~~development~~markets ~~and expansion~~in ofwhich ~~our~~we ~~business.~~operate ~~In addition,~~ as awell ~~public company, we will incur significant legal, accounting, and other expenses that we did not incur~~ as a ~~private~~the ~~company.~~impact ~~As a result~~ of ~~these~~any ~~increased~~changes ~~expenditures, we will have to generate and sustain increased revenue to achieve and maintain future profitability. While our revenue has grown somewhat~~ in ~~recent~~government ~~periods~~regulation, ~~that growth~~mergers ~~has not been significant~~ and ~~future revenue growth may not be~~acquisitions ~~sustainable~~involving ~~and~~our ~~we may not achieve sufficient revenue to achieve or maintain profitability. We have incurred and may continue to incur significant losses in the future for a number of reasons~~competitors, ~~including~~technological ~~due to the other risks described in this report~~developments, and ~~we may encounter unforeseen expenses, difficulties, complications, delays, and~~ other ~~unknown factors. Accordingly, we may not be~~significant ~~able~~competitive ~~to achieve or maintain profitability~~ and wemarket ~~may continue to incur significant losses for the foreseeable future~~dynamics.

~~The~~If ~~market~~we ~~for~~are ~~on-demand~~not ~~Web~~successful ~~Applications~~in ~~may~~addressing ~~develop~~any ~~more~~or ~~slowly~~all ~~than~~of wethese ~~expect~~risks, then our business may be materially and adversely affected.

~~Our~~We ~~success~~may ~~will~~encounter ~~depend, to a large extent, on the willingness of~~substantial ~~individuals~~competition ~~and~~in ~~SMBs~~our ~~to accept on-demand services for Web Applications that they view as critical to the success of their~~ business. ~~Many businesses have invested substantial effort~~ and ~~financial~~our ~~resources~~failure to ~~integrate~~compete ~~traditional enterprise~~effectively ~~software into their businesses and~~ may ~~be reluctant or unwilling to~~ ~~switch~~adversely toaffect aour ~~different~~ability ~~application or~~ to ~~migrate~~generate ~~these applications to on-demand Web Applications~~revenue.

~~Other~~We ~~factors~~face ~~that~~competition ~~may~~from ~~affect~~both ~~market~~traditional ~~acceptance~~software vendors and other SaaS providers. Many of our ~~Web~~actual ~~Applications~~and potential competitors ~~include~~enjoy substantial competitive advantages over us, such as greater name recognition, longer operating histories, more varied products and services, and larger marketing budgets, as well as substantially greater financial, technical, and other resources. In addition, many of our ~~ability~~competitors have established marketing relationships and access to: larger customer bases, and have major distribution agreements with consultants, system integrators, and resellers. If we are not able to compete effectively, then our operating results will be harmed.

~~· minimize~~We believe that existing and new competitors will continue to improve the design and performance of their products and to ~~time~~introduce new products with competitive price and ~~resources~~performance characteristics. We expect that we will be required to ~~implement~~continue to invest in product development and productivity improvements to compete effectively in our markets. Our competitors could develop better technology or more efficient products ~~distributed~~or undertake ~~through~~more anaggressive ~~Etelos~~and costly marketing campaigns than ours, which may ~~Marketplace;~~adversely affect our marketing strategies and could have a material adverse effect on our business, results of operations, and financial condition.

· Our major competitors may be better able than us to successfully endure downturns in our markets. In periods of reduced demand for our products, we can either choose to maintain ~~high~~market share by reducing our ~~levels~~subscription prices to meet competition or maintain subscription prices, which likely would result in sacrifice of ~~customer~~our ~~satisfaction;~~market share. Sales and overall profitability would be reduced and sustained losses may continue in either case. In addition, we cannot be assured that additional competitors will not enter our existing markets, or that we will be able to compete successfully against existing or new competition.

~~· implement upgrades~~The ~~and~~market ~~other~~for ~~changes~~on-demand toWeb Applications ~~our~~may ~~products~~develop ~~without~~more ~~disrupting~~slowly ~~our~~than ~~service; and/or~~we expect.

~~· provide~~Our ~~rapid~~success will depend, to a large extent, on the ~~response~~willingness ~~time~~of ~~during~~individuals ~~periods~~and SMBs to accept on-demand services for Web Applications that they view as critical to the success of ~~intense~~their ~~activity~~business. Many businesses have invested substantial effort and financial resources to integrate traditional enterprise software into their businesses and may be reluctant or unwilling to switch to a different application or to migrate these applications to on-demand ~~customer~~Web ~~websites~~Applications.

9Other factors that may affect market acceptance of our Web Applications include our ability to:

~~Table~~· minimize the oftime ~~Contents~~and resources required to implement products distributed through an Etelos Marketplace;

In· maintain ~~addition,~~high levels ~~market acceptance~~ of ~~our~~customer ~~Web Applications may be affected by:~~satisfaction;

· ~~the security~~implement ~~capabilities,~~upgrades ~~reliability,~~ and ~~availability~~other ofchanges ~~on-demand~~to ~~services~~our products without disrupting our service; and/or

· ~~customer~~provide rapid ~~concerns~~response ~~with~~time ~~entrusting~~during aperiods ~~third~~of ~~party~~intense toactivity ~~store~~on ~~and~~customer ~~manage their data, especially confidential or sensitive data;~~websites.

~~· the level of customization or configuration we offer; and/or~~9

~~· the~~Table ~~price, performance, and availability~~ of ~~competing products and services.~~Contents

~~The~~In ~~market for our products may not develop further~~addition, ormarket itacceptance ~~may develop more slowly than we expect, either~~ of ~~which~~our ~~would~~Web ~~harm~~Applications may ~~our~~be ~~business.~~affected by:

The market in which we participate is intensely competitive, and if we do not compete effectively, then our operating results may be harmed. The market for SaaS on-demand Web Applications for business is highly competitive and rapidly changing with relatively low barriers to entry. With · the ~~introduction of new technologies and~~security ~~new market entrants~~capabilities, we expect competition to intensify in the future. In addition, pricing pressures and increased competition generally could result in reduced sales, reduced margins, or the failure of our products to achieve or maintain more widespread market acceptance. Often we offer products in an Etelos Marketplace that compete against existing systems that our potential customers have already made significant expenditures to install. Competition in our market is based principally upon service breadth and functionality; service performance, security and reliability~~; ability to tailor and customize services for a specific company~~, ~~vertical or industry; ease of use of the service, speed~~ and ~~ease~~availability of ~~deployment,~~on-demand ~~integration and configuration; total cost of ownership, including price and implementation and support costs; professional~~ services ~~implementation~~; ~~and financial resources of the vendor.~~

~~We face competition from both traditional software vendors and other~~· customer ~~SaaS~~concerns ~~providers.~~with ~~Many~~entrusting ofa ~~our~~third ~~actual~~party and potential competitors enjoy substantial competitive advantages over us, such as greater name recognition, longer operating histories, more varied products and services, and larger marketing budgets, as well as substantially greater financial, technical, and other resources. In addition, many of our competitors have established marketing relationships and access to ~~larger~~store ~~customer bases,~~ and ~~have~~manage ~~major~~their ~~distribution agreements with consultants~~data, ~~system integrators, and resellers. If we are not~~ ~~able~~especially toconfidential ~~compete~~or ~~effectively,~~sensitive ~~then our operating results will be harmed.~~data;

~~Our~~· the ~~inability~~level ~~to fund our capital to meet our expenditure requirements~~of ~~may~~customization ~~adversely~~or ~~affect~~configuration ~~our~~we ~~growth~~offer; and ~~profitability.~~/or

Our continued growth is dependent upon our ability to raise capital from outside sources. Our ability to obtain financing will depend upon a number of factors, including our financial condition and results of operations, · the ~~condition~~ ~~of the economy~~price, ~~and conditions in relevant financial markets. If we are unable to obtain financing, as~~ ~~needed~~performance, ~~on a timely basis~~ and onavailability ~~acceptable terms, our financial position, competitive position, growth, and profitability may be adversely affected. The current state~~ of ~~the~~competing USproducts and ~~global economy raises substantial doubts, especially about our ability to raise the additional capital that we will need to sustain our business operations~~services.

WeOur ~~have~~inability ~~reduced~~to fund our ~~employment~~capital to ~~force~~meet ~~and~~our ~~have~~expenditure ~~challenges~~requirements ~~meeting~~may adversely affect our ~~operating~~ ~~demands~~growth and profitability.

WeOur ~~have~~continued ~~decreased~~growth ~~our~~is ~~number~~dependent ofupon ~~full-time~~our ~~employees~~ability ~~from 46 at June 30,~~to ~~2008,~~raise tocapital 13from asoutside ~~of December 31, 2008~~sources. ~~All~~ ofOur ~~these~~ability ~~remaining~~to ~~employees~~obtain ~~are~~financing onwill ~~deferred salary, ranging from~~depend ~~10%~~upon toa ~~100%~~number of ~~base salary~~factors, ~~and~~including ~~there~~our isfinancial nocondition ~~assurance~~and ~~that~~results ~~any~~ of ~~these~~ ~~personnel~~operations, ~~will~~the becondition ~~able~~of tothe ~~continue to work on this payment arrangement. Our operating plan has placed~~economy, and ~~our~~conditions ~~anticipated~~in ~~growth~~relevant ~~plan~~financial markets. If iswe ~~expected~~are ~~to continue~~unable to ~~place~~obtain financing, aas ~~significant~~needed, ~~strain~~ on ~~our~~a ~~very~~timely ~~limited~~basis ~~managerial, administrative, operational, financial,~~ and ~~other~~on ~~resources~~acceptable terms, ~~compounded~~our byfinancial ~~these~~position, ~~recent~~competitive ~~reductions in headcount. Although we will be required to continue to improve our operational~~position, ~~financial~~growth, and ~~management~~profitability ~~controls and our reporting procedures it is clear that we~~ may ~~not~~ be ~~able~~adversely affected. The tocurrent dostate soof ~~effectively~~the US and ~~may~~global ~~not~~economy beraises ~~able~~substantial todoubts, ~~recruit~~especially orabout ~~retain~~our ~~adequate,~~ability ~~qualified personnel~~ to ~~meet~~ ~~our~~raise ~~operating~~the ~~demands.~~additional Ascapital ~~such,~~that we ~~may~~will beneed ~~unable~~ to ~~manage~~sustain our ~~expenses~~business ~~effectively in the future, which may negatively impact our gross margins or operating expenses in any particular quarter~~operations.

Our customers are individuals, small and medium-sized businesses, and divisions of large companies, which may increase our costs to reach, acquire and retain customers.

We market and distribute our products and services and other offerings in Private-label Web application marketplaces operating on the Etelos ~~Marketplaces~~Platform Suite to individuals, SMBs, and divisions of large companies. To grow our revenue quickly, we must add new customers, sell ~~additional~~ additional services to existing customers, and encourage existing customers to renew their subscriptions. However, selling to and retaining individuals and SMBs can be more difficult than selling to and retaining large enterprises because SMB customers tend to be more price sensitive and more difficult to reach with broad marketing campaigns. In addition, individuals and SMBs have high churn rates in part because of the nature of their businesses and often lack the staffing to benefit fully from ~~our~~ our products. Further, individuals and ~~SMBs~~ SMBs often require higher sales, marketing, and support expenditures by vendors ~~that~~ that sell to them per revenue dollar generated for those vendors.

10Many of our customers are price sensitive, and if the prices that we or our Syndication Partners charge for subscriptions to products or services offered in an Etelos Marketplace are unacceptable to our customers, then our operating results will be harmed.

~~Table~~Many of ~~Contents~~our customers are price sensitive, and we have limited experience with respect to determining the appropriate prices for our products or services. In addition, we have no control over prices charged by our Syndication Partners for their products or services offered in an Etelos Marketplace. As the market for our products or services matures, or as new competitors introduce new products or services that compete with ours, we may be unable to renew agreements with existing customers or attract new customers at the same price or based on the same pricing model as previously used. As a result, it is possible that competitive dynamics in our market may require us to change pricing models or reduce prices, which could harm our revenue, gross margin, and operating results.

~~Many~~We ofmay ~~our~~not ~~customers~~be ~~are~~able ~~price~~to ~~sensitive,~~prevent others ~~and~~from ifunauthorized ~~the~~use ~~prices~~of ~~that we or~~ our ~~Syndication~~patents ~~Partners~~and ~~charge~~other ~~for~~intellectual ~~subscriptions to products or services~~property, ~~offered~~which incould anharm ~~Etelos Marketplace are unacceptable to~~ our ~~customers,~~business ~~then~~and ~~our operating~~competitive ~~results will be harmed~~position.

~~Many~~Our ofsuccess ~~our~~depends, ~~customers~~in ~~are price sensitive~~part, ~~and~~on weour ~~have~~ability ~~limited~~to ~~experience~~protect ~~with respect to determining the appropriate prices for~~ our ~~products or~~proprietary ~~services~~technologies. InWe ~~addition,~~rely weon ~~have~~a nocombination ~~control~~of ~~over prices charged by our~~patent, ~~Syndication~~copyright, ~~Partners~~trademark, ~~for~~and ~~their~~trade ~~products~~secret ~~or services offered in an Etelos Marketplace. As the market for our products or services matures~~laws, oras well as ~~new~~confidentiality ~~competitors~~procedures ~~introduce~~and ~~new~~contractual ~~products or services that compete with ours~~restrictions, ~~we may be unable~~ to ~~renew~~establish ~~agreements~~and ~~with~~protect ~~existing customers or attract new customers~~our atintellectual ~~the~~property ~~same~~rights ~~price or based~~ on ~~the~~a ~~same~~global ~~pricing model as previously used. As a result~~basis, itall isof ~~possible that competitive dynamics in our market may require us to change pricing models or reduce prices,~~ which ~~could~~provide ~~harm our revenue, gross~~only ~~margin,~~limited ~~and operating results~~protection.

We ~~may~~own ~~not~~multiple befiled ~~able~~United States and foreign patent applications covering our technology and we expect to ~~prevent~~file ~~others~~more ~~from~~U.S. ~~unauthorized~~and foreign ~~use~~patent applications in the future. We have filed to protect most of those patents in many foreign countries. But the process of seeking patent protection can be lengthy and expensive. We cannot assure you that any patent will issue from our currently pending patent applications in a manner that gives us the protection that we seek, if at all, or that any future patents ~~and~~issued ~~other~~to ~~intellectual~~us ~~property~~will not be challenged, ~~which~~invalidated, ~~could~~or ~~harm~~circumvented. ~~our~~Since ~~business~~the ~~and~~filing of some of these ~~competitive~~patent ~~position~~applications may have been, or will be, made after the date of first sale or disclosure of the subject inventions, patent protection may not be available for these inventions outside the United States. Any patents that may issue in the future may not provide sufficiently broad protection or they may not prove to be enforceable in actions against alleged infringers. Also, we cannot assure you that any future service mark or trademark registrations will be issued for pending or future applications or that any registered service marks or trademarks will be enforceable or provide adequate protection of our domestic and foreign proprietary rights.

Our success depends, in part, on our ability to protect our proprietary technologies. We own multiple filed United States and foreign patent applications covering our technology and we expect to file more U.S. and foreign patent applications in the future. We have filed to protect most of those patents in many foreign countries. But the process of seeking patent protection can be lengthy and expensive and we cannot assure that our patent applications will result in patents being issued, or that our existing or future issued patents will be sufficient to provide us with meaningful protection or commercial advantages. We also cannot assure that our current or potential competitors do not have, and will not obtain, patents that will prevent, limit or interfere with our ability to make, use or sell our technology or operate an Etelos Marketplace.10

~~Our~~Table ~~success~~of ~~depends in large part on our ability to protect and enforce our intellectual property rights.~~Contents

We ~~rely~~do onnot aanalyze ~~combination~~the ofsoftware ~~patent,~~that ~~copyright,~~we ~~service~~distribute ~~mark, trademark,~~from ~~and~~our ~~trade~~ISV ~~secret~~Syndication ~~laws,~~Partners asto ~~well~~determine asthe ~~confidentiality~~adequacy ~~procedures~~of ~~and~~their ~~contractual~~intellectual ~~restrictions,~~property torights. We ~~establish~~have ~~and~~not ~~protect~~maintained operating ~~our~~controls ~~proprietary~~or ~~rights~~logs, onor ainitiated ~~global basis,~~or ~~all~~conducted ofany ~~which~~forensic, ~~provide~~code history, ~~only~~‘genealogy’ ~~limited~~or ~~protection.~~other Weforms ~~cannot~~of ~~assure~~audit, ~~you~~analysis, ~~that~~processes, training, or ~~any~~code ~~patent~~review ~~will~~of ~~issue~~software ~~from~~code ~~our~~incorporated ~~currently~~into ~~pending~~any ~~patent~~Etelos ~~applications~~product or in aother ~~manner~~products ~~that~~offered ~~gives~~by usour ~~the~~ISV ~~protection~~Syndication ~~that~~Partners wein ~~seek,~~any ifEtelos atMarketplace. These ~~all,~~products ormay ~~that~~include ~~any~~code ~~future patents~~subject ~~issued~~ to usvarious ~~will~~forms ~~not~~of be‘open ~~challenged~~source’, ~~invalidated~~‘copyleft’, or ~~circumvented. Since~~similar ~~the~~licenses ~~filing~~that require as a condition of ~~some~~modification or distribution of ~~these~~software ~~patent~~subject ~~applications~~to ~~may~~such ~~have~~license(s) that ~~been,~~(i) such orsoftware ~~will~~or ~~be,~~other ~~made~~software ~~after~~combined ~~the~~or ~~date~~distributed ofwith ~~first~~such ~~sale~~software orbe ~~disclosure~~disclosed ofor distributed ~~the~~in ~~subject~~source ~~inventions~~code form, ~~patent~~ ~~protection~~or ~~may~~(ii) such ~~not~~software beor ~~available~~other ~~for~~software combined ~~these~~or ~~inventions~~distributed ~~outside~~with ~~the~~such ~~United States. Any~~software, ~~patents~~and ~~that~~any ~~may~~related ~~issue in~~intellectual ~~the~~property, ~~future~~be ~~may~~licensed ~~not~~on ~~provide~~a ~~sufficiently~~royalty-free ~~broad~~basis, ~~protection~~including orfor ~~they~~the ~~may~~purposes ~~not prove~~of tomaking beadditional ~~enforceable~~copies inor ~~actions~~derivative ~~against~~works ~~alleged~~of ~~infringers~~such software. This ~~Also,~~may weadversely ~~cannot~~affect ~~assure~~our ability to ~~you~~patent ~~that~~certain ~~any~~inventions ~~future~~or ~~service~~to ~~mark~~license or ~~trademark~~distribute ~~registrations~~certain ~~will~~products be- whether ~~issued~~by ~~for pending~~open source license or ~~future~~other ~~applications~~form orof ~~that~~license ~~any~~or ~~registered~~right ~~service~~- ~~marks~~and ormay ~~trademarks~~result ~~will~~in beliability ~~enforceable~~to orunknown ~~provide~~parties ~~adequate~~for ~~protection~~infringement of ~~our~~their ~~domestic~~patents or ~~and~~other ~~foreign~~intellectual ~~proprietary~~property rights.

We ~~have~~require ~~not~~our maintained operating controls or logs, or initiated or conducted any forensic, code history, ‘genealogy’ or other forms of audit, analysis, processes, training, or code review of software code incorporated into any Etelos product or in other products offered by Syndication Partners ~~in an~~to ~~Etelos~~indemnify ~~Marketplace.~~us Wefor ~~do not review the~~ intellectual property ~~rights related~~claims tobut ~~products~~we orcannot ~~services offered by Syndication Partners in an Etelos~~assure ~~Marketplace. These products may include code subject to various forms of ‘open source’, ‘copyleft’, or similar licenses~~ that ~~require~~these asagreements awill ~~condition of modification or distribution of software subject to such license(s) that (i) such software or other software combined or distributed with such software~~ be ~~disclosed~~ or distributed in source code form, or (ii) such software or other software combined or distributed with such software, and any related intellectual property, be licensed on a royalty-free basis, including for the purposes of making additional copies or derivative works of such softwareenforceable. This may adversely affect our ability to patent certain inventions or to license or distribute certain products - whether by open source license or other form of license or right - and may result in liability to unknown parties for infringement of their patents or other intellectual property rights.

We ~~require~~endeavor to enter into agreements with our employees ~~Syndication~~and ~~Partners~~contractors and agreements with parties with whom we do business to ~~indemnify~~limit usaccess ~~for~~to and disclosure of our proprietary information. The steps we have taken, however, may not prevent unauthorized use or the reverse engineering of our technology. Moreover, others may independently develop technologies that are competitive to ours or infringe our intellectual property. ~~claims~~Enforcement ~~but~~of weour ~~cannot~~intellectual ~~assure~~property ~~that~~rights also depends on our successful legal actions against these ~~agreements~~infringers, ~~will~~but these actions may not be successful, ~~enforceable~~even when our rights have been infringed. In addition, the legal standards relating to the validity, enforceability, and scope of protection of intellectual property rights in Internet-related industries are uncertain and still evolving.

WeAssertions ~~endeavor~~by tothird ~~enter into agreements with our employees and contractors and agreements with~~ parties ~~with whom we do business to limit access to and~~that ~~disclosure of our proprietary information. The steps~~ we ~~have taken, however, may not prevent unauthorized use or the reverse engineering of our technology. Moreover, others may independently develop technologies that are competitive to ours or~~ infringe ~~our~~their intellectual property., ~~Enforcement~~whether ~~of our intellectual property rights also depends on our~~ successful ~~legal~~or ~~actions against these infringers, but these actions may~~ not ~~be successful~~, ~~even when our rights have been~~could ~~infringed. In~~subject ~~addition,~~us ~~the legal standards relating~~ to ~~the~~costly ~~validity, enforceability,~~ and ~~scope of protection of intellectual property rights in Internet~~time-~~related~~consuming ~~industries~~litigation ~~are~~or ~~uncertain~~expensive ~~and still evolving~~licenses.

11The software and technology industries are characterized by the existence of a large number of patents, copyrights, trademarks, and trade secrets and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. As we face increasing competition, the possibility of intellectual property rights claims against us may grow; the costs of defending against such claims can be very large. Our technologies may not be able to withstand any third-party claims or rights against their use. Additionally, many of our partner and product agreements require us to indemnify our customers for certain third-party intellectual property infringement claims, which could increase our costs as a result of defending such claims and may require that we pay damages or purchase expensive licenses, if there were an adverse ruling related to any such claims. These types of claims could harm our relationships with our customers, may deter future customers from subscribing to our services, or could expose us to litigation for these claims. Even if we are not a party to any litigation between a customer and a third party, an adverse outcome in any such litigation could make it more difficult for us to defend our intellectual property in any subsequent litigation in which we are a named party.

~~Table~~Any ofintellectual ~~Contents~~property rights claim against our customers, or us, with or without merit, could be time-consuming, expensive to litigate or settle, and could divert management attention and financial resources. An adverse determination also could prevent us from offering our products to our customers and may require that we procure or develop substitute services that do not infringe.

~~Assertions~~For byany ~~third~~intellectual ~~parties~~property ~~that~~rights claim against us or against our Marketplace Partners or customers, we ~~infringe~~may ~~their~~have ~~intellectual~~substantial ~~property,~~direct ~~whether~~and ~~successful~~indirect costs. Direct costs can include a requirement to pay damages or stop using technology found to be in violation of a third party’s rights. We may have to purchase a license for the technology, which may not be available on reasonable terms, ~~could~~if ~~subject~~at all, may significantly increase our operating expenses, or may require us to ~~costly~~restrict our ~~and~~business activities in one or more respects. As a result, we may also be ~~time~~required to develop alternative non-~~consuming~~infringing ~~litigation~~technology, orwhich ~~expensive~~could ~~licenses~~require significant effort and expense. Substantial indirect costs also may be expected in the form of diversion of development and management resources in strategic planning for legal, technology, and business defenses to such claims.

~~The~~We ~~software~~rely ~~and technology industries are characterized by the existence of a large number of patents, copyrights, trademarks, and trade secrets and by frequent litigation based~~ on allegations of infringement or other violations of intellectual property rights. As we face increasing competition, the possibility of intellectual property rights claims against us may grow; the costs of defending against such claims can be very large. Our technologies may not be able to withstand any third-party claims or rights against their use. Additionally, many of our ~~partner~~management team and ~~product~~need ~~agreements require~~additional uspersonnel to ~~indemnify~~grow our ~~customers for certain third-party intellectual property infringement claims~~business, ~~which~~and ~~could~~the ~~increase~~loss ~~our costs as a result~~ of ~~defending~~ ~~such~~one ~~claims and may require that we pay damages~~ or ~~purchase expensive~~more ~~licenses,~~key ifemployees ~~there~~or ~~were an adverse ruling related to any such claims. These types of claims could harm~~ our ~~relationships~~inability ~~with our customers, may deter future customers from subscribing~~ to ~~our~~attract ~~services, or could expose us to litigation for these claims. Even if we are not a party to any litigation between a customer~~ and aretain ~~third~~qualified ~~party,~~personnel ~~an adverse outcome in any such litigation~~ could harm ~~make it more difficult for us to defend~~ our ~~intellectual property in any subsequent litigation in which we are a named party~~business.

~~Any~~Our ~~intellectual~~success ~~property~~and ~~rights~~future ~~claim~~growth ~~against~~depends ~~our~~to ~~customers,~~a ~~or us,~~significant ~~with~~degree oron ~~without~~the ~~merit~~skills and continued services of our management team, ~~could~~especially Daniel beJ.A. ~~time-consuming~~Kolke, ~~expensive~~our tointerim ~~litigate~~Chief orExecutive Officer, Acting Chief Financial ~~settle~~Officer, and ~~could~~Chairman ~~divert~~of ~~management~~the ~~attention~~Board. ~~and~~The ~~financial~~loss ~~resources.~~of Anthe services of any member of ~~adverse~~our ~~determination~~management ~~also~~team ~~could~~for ~~prevent~~any usreason ~~from~~may ~~offering~~have ~~our~~a ~~products~~material toadverse effect on our ~~customers~~business and ~~may~~prospects. We ~~require~~do ~~that~~not maintain wekey ~~procure~~man orinsurance ~~develop~~on ~~substitute~~any ~~services~~members ~~that do~~of ~~not~~our ~~infringe~~management team, including Mr. Kolke.

~~For~~We ~~any~~significantly ~~intellectual~~and ~~property~~materially ~~rights~~reduced ~~claim against us or against~~ our management ~~Marketplace~~team ~~Partners~~and ~~or customers, we may~~ have ~~substantial~~not ~~direct~~hired ~~and~~replacements ~~indirect costs. Direct~~for ~~costs~~the ~~can~~management ~~include~~team ~~a requirement to pay damages or stop using technology found to be~~ in ~~violation~~the ofpositions aof ~~third~~Vice ~~party’s~~President ~~rights.~~and WeChief ~~may~~Financial ~~have to purchase a license for the technology~~Officer, ~~which~~ ~~may~~Vice ~~not~~President be— ~~available on reasonable terms~~Marketing, ~~if at all, may significantly~~Vice ~~increase~~President ~~our~~Corporate ~~operating expenses~~Development, orand ~~may~~Vice ~~require~~President us— toHuman ~~restrict~~Resources, ~~our~~as ~~business~~well ~~activities~~as inseveral ~~one~~other orDirector-level ~~more respects. As a result~~positions, weprimarily ~~may~~in ~~also be required to develop alternative~~ non-~~infringing~~technical ~~technology, which could require significant~~positions ~~effort~~throughout ~~and~~the ~~expense~~Company. ~~Substantial~~We ~~indirect costs~~did ~~also~~not ~~may~~fill these bepositions ~~expected~~ in the ~~form~~period ofending ~~diversion~~December 31, of2009, ~~development~~ and ~~management~~ ~~resources~~we inhave ~~strategic~~not filled ~~planning~~any ~~for~~of ~~legal,~~these ~~technology,~~positions ~~and~~to ~~business defenses~~the todate ~~such~~of ~~claims~~this report.

We rely on our management team and need additional personnel to grow our business, and the loss of one or more key employees or our inability to attract and retain qualified personnel could harm our business.11

~~Our~~Table ~~success and future growth depends to a significant degree on the skills and continued services~~ of our management team, especially Daniel J.A. Kolke, our interim Chief Executive Officer, Acting Chief Financial Officer, and Chairman of the Board. The loss of the services of any member of our management team for any reason may have a material adverse effect on our business and prospects. We do not maintain key man insurance on any members of our management team, including Mr. Kolke.Contents

~~Subsequent~~Our tofuture ~~the~~success ~~termination~~also ofdepends on our ~~former~~ability ~~Chief Executive Officer~~to attract, ~~we significantly~~retain and ~~materially~~motivate ~~reduced~~highly ~~our~~skilled ~~management~~technical, ~~team~~managerial, ~~and have not hired~~sales, ~~replacements~~marketing ~~for~~and ~~the~~service ~~management~~and ~~team~~support inpersonnel, ~~the~~including ~~positions~~members of ~~Vice~~our management ~~President~~team. ~~and Chief~~Competition ~~Financial~~for ~~Officer~~sales, ~~Vice President – Marketing~~marketing, ~~Vice~~and ~~President~~technology ~~Corporate~~development ~~Development,~~personnel ~~and~~is ~~Vice~~particularly ~~President~~intense –in ~~Human~~the ~~Resources,~~software asand ~~well~~technology asindustries. ~~several other~~As ~~Director-level~~a ~~positions~~result, ~~primarily~~we inmay ~~non-technical~~be ~~positions~~unable ~~throughout~~to ~~the Company. We~~successfully ~~did~~attract ~~not~~or ~~fill~~retain ~~these positions~~qualified inpersonnel. ~~the~~Our ~~period~~inability ~~ending~~to ~~December 31,~~attract ~~2008,~~ and weretain ~~have~~the ~~not~~necessary ~~filled~~personnel ~~any of~~could ~~these~~harm ~~positions~~our ~~to the date of this report~~business.

~~Our~~If ~~future~~we ~~success~~do ~~also~~not ~~depends~~effectively ~~on our ability to attract, retain and~~expand ~~motivate highly skilled technical, managerial, sales, marketing~~ and ~~service~~train ~~and support personnel, including members of~~ our ~~management team. Competition for~~ sales, ~~marketing,~~force and ~~technology~~our ~~development~~services ~~personnel is particularly intense in the software~~ and ~~technology~~support ~~industries. As a result~~teams, then we may be unable to ~~successfully~~ ~~attract~~add ornew ~~retain~~customers ~~qualified personnel. Our inability to attract~~ and retain ~~the~~existing ~~necessary personnel could harm our business~~customers.

IfWe weplan doto ~~not~~expand ~~effectively~~our ~~expand~~sales force and ~~train~~our services and support teams to increase our customer base and revenue. We believe that there is significant competition for sales, ~~force~~service, and support personnel with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth will depend, in part, on our success in recruiting, ~~services~~training, and retaining sufficient numbers of personnel to support ~~teams~~our growth. New hires require significant training and, ~~then~~in most cases, take significant time before they achieve full productivity. Our recent hires and planned hires may not become as productive as we expect and we may be unable to ~~add~~hire ~~new~~or retain ~~customers~~sufficient ~~and~~numbers of qualified individuals in the markets where we do ~~retain~~business. ~~existing~~If ~~customers~~these expansion efforts are not successful or do not generate a corresponding increase in revenue, then our business will be harmed.

We ~~plan~~do tonot ~~expand~~have ~~our~~a ~~sales force and our services and support teams to~~dedicated ~~increase our customer base and revenue. We believe that there is significant competition for~~ sales, ~~service,~~team and ~~support personnel with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth will depend, in part, on~~ our ~~success~~revenues ~~in recruiting, training,~~ and ~~retaining~~ ~~sufficient~~operating ~~numbers~~results of personnel to support our growth. New hires require significant training and, in most cases, take significant time before they achieve full productivity. Our recent hires and planned hires may not become as productive as we expect and we may be unable to hire or retain sufficient numbers of qualified individuals in the markets where we do business. If these expansion efforts are ~~not~~substantially ~~successful or do not generate a~~dependent ~~corresponding~~on ~~increase~~third-party ~~in revenue, then our business will be harmed~~resellers.

12We do not have a dedicated sales team. Our chief executive officer and other employees attempt to identify sales opportunities and, when such opportunities materialize, attempt to market and sell our products. We are substantially dependent upon third-party resellers to market and sell our products and to generate end-user customers. We have one agreement in place at this time with a third-party reseller to market and sell our products, and that reseller has several additional reseller agreements in place. We have no control over the amount of time and resources these third-party resellers dedicate to marketing and selling our products. The loss of any third-party reseller may significantly reduce our revenues. There is no assurance that we can add additional resellers or replace our current reseller with other resellers or an in-house sales team in the event we lose our reseller or the reseller devotes inadequate time and resources to selling our products. To the extent we distribute or license our products or services directly to end-user customers, we may be in competition with our resellers. In response to future direct sales strategies or for other business reasons, our resellers may from time to time choose to resell our competitors’ products in addition to, or in place of, our products. Our revenues and financial condition may be adversely affected if our reseller stops marketing and selling our products or if the reseller is not able to generate end-user customers to purchase our products.

~~Table~~Our operating results may be subject to fluctuations that could increase the volatility of ~~Contents~~the price of our Common Stock. .

IfOur operating results may fluctuate in the future. As a result, we ~~are~~may ~~unable~~fail to ~~cost-effectively~~meet ~~market~~or ~~and~~exceed ~~distribute~~the ~~our~~expectations ~~products to~~of ~~our~~research ~~target~~analysts or ~~customers~~investors, ~~then~~which could cause our ~~ability~~stock price to ~~grow~~decline. Also period-to-period comparisons of our ~~revenue~~operating ~~quickly~~results ~~and~~may ~~become~~not be meaningful. ~~profitable~~You ~~will~~should benot ~~harmed~~rely on the results of one quarter as an indication of future performance.

~~Our~~Fluctuations in our quarterly operating results may ~~fluctuate~~be due into ~~the~~a ~~future.~~number Asof ~~a result~~factors, weincluding ~~may~~the ~~fail~~risks toand ~~meet~~uncertainties ordiscussed elsewhere ~~exceed~~in ~~the~~this ~~expectations~~report. ofFluctuations ~~research~~in ~~analysts~~our ~~or investors,~~quarterly ~~which~~operating ~~could~~results could cause our stock price to decline. ~~Also~~rapidly, ~~period~~may lead analysts to change their long-term model for valuing our common stock, could cause us to face short-~~period~~term ~~comparisons~~liquidity ofissues, may impact our ~~operating~~ability ~~results~~to ~~may~~retain ~~not~~or beattract ~~meaningful~~key personnel, or cause other unanticipated issues. ~~You~~If ~~should~~our ~~not~~quarterly ~~rely on~~operating results fall below the ~~results~~expectations of ~~one~~research ~~quarter~~analysts asor aninvestors, ~~indication~~then the price of ~~future~~our common ~~performance~~stock could decline substantially.

~~Fluctuations~~We inuse ~~our~~third-party ~~quarterly~~data ~~operating results may be due~~ centers to asupport ~~number of~~our ~~factors, including the risks and uncertainties discussed elsewhere in this report~~services. ~~Fluctuations~~Any indisruption ~~our~~of ~~quarterly~~service ~~operating~~at ~~results~~these ~~could~~facilities ~~cause our stock~~could ~~price~~interrupt toor ~~decline~~delay ~~rapidly, may lead analysts to change their long-term model for valuing~~ our ~~common~~ability ~~stock, could cause us~~ to ~~face~~deliver ~~short-term liquidity issues, may impact~~ our ~~ability~~service to ~~retain or attract key personnel, or cause other unanticipated issues. If~~ our ~~quarterly operating results fall below the expectations of research analysts or investors, then the price of our common stock could decline substantially~~customers.

We ~~use~~host many of our services and serve a significant number of our customers from third-party data ~~centers~~center tofacilities ~~support~~with ~~our~~Network OS, ~~services~~located in the greater Seattle Washington area. ~~Any~~We ~~disruption~~do not control the operation of ~~service~~these atfacilities. ~~these~~These facilities ~~could~~may ~~interrupt~~be vulnerable to damage or interruption ~~delay~~from ~~our~~earthquakes, ~~ability~~hurricanes, floods, fires, terrorist attacks, power losses, telecommunications failures, and similar events. These facilities also could be subject to ~~deliver~~break-ins, computer viruses, sabotage, intentional ~~our~~acts ~~service~~of vandalism and other misconduct. The occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice, or other unanticipated problems could result in lengthy interruptions in our ~~customers~~services.

WeOur ~~host many of our services and serve a significant number of our customers from third-party~~ data center ~~facilities~~facility ~~with~~providers ~~Network~~have ~~OS,~~no ~~located in~~obligation ~~the greater Seattle Washington area. We do not control the operation of these facilities. These facilities may be vulnerable~~ to ~~damage~~renew ortheir ~~interruption~~agreements ~~from~~with ~~earthquakes, hurricanes,~~us ~~floods,~~on ~~fires,~~commercially ~~terrorist~~reasonable ~~attacks~~terms, ~~power~~or ~~losses,~~at ~~telecommunications~~all. ~~failures,~~If ~~and~~we ~~similar~~are ~~events.~~unable ~~These facilities also could be subject~~ to ~~break-ins,~~ ~~computer~~renew ~~viruses,~~our ~~sabotage,~~agreements ~~intentional~~with ~~acts~~any offacility ~~vandalism~~provider ~~and other~~on ~~misconduct.~~commercially ~~The~~reasonable ~~occurrence of a natural disaster or an act of terrorism~~terms, ~~a decision~~then towe ~~close~~may ~~the~~experience ~~facilities~~increased ~~without~~costs ~~adequate notice,~~ or ~~other~~ ~~unanticipated~~downtime ~~problems~~in ~~could~~connection ~~result~~with inthe ~~lengthy~~transfer ~~interruptions~~to ina ~~our~~new ~~services~~data center facility.

~~Our~~Any ~~data~~errors, ~~center~~defects, ~~facility~~disruptions, ~~providers~~or ~~have~~other ~~no obligation to renew their~~performance ~~agreements~~problems with usour onservices ~~commercially~~could ~~reasonable~~harm ~~terms,~~our orreputation atand ~~all.~~may Ifdamage ~~we are~~our ~~unable~~customers’ tobusinesses. ~~renew~~Interruptions in our ~~agreements~~services ~~with~~might ~~any~~reduce ~~facility~~our ~~provider on commercially~~revenue, ~~reasonable~~cause ~~terms,~~us ~~then~~to weissue ~~may~~credits ~~experience~~to ~~increased~~customers, ~~costs~~subject orus ~~downtime~~to inpotential liability, ~~connection~~cause ~~with~~customers ~~the~~to ~~transfer~~terminate totheir asubscriptions, ~~new~~and ~~data~~harm ~~center~~our ~~facility~~renewal rates.

Any errors, defects, disruptions, or other performance problems with our services could harm our reputation and may damage our customers’ businesses. Interruptions in our services might reduce our revenue, cause us to issue credits to customers, subject us to potential liability, cause customers to terminate their subscriptions, and harm our renewal rates.12

~~Any~~Table ~~significant fluctuation in price~~ of ~~servers or related support may have a material adverse effect on the cost of our products and services.~~Contents

~~The~~Any ~~prices~~significant offluctuation servers and related support are subject to market conditions and generally we do not, and do not expect to, have long-term contracts with our suppliers for those items. While these items are generally available and we have not experienced any shortage in ~~the past, we cannot~~ ~~assure~~price ~~you~~of ~~that the necessary~~ servers or related support ~~will~~may ~~continue~~have toa bematerial ~~available to~~adverse ~~us at prices currently in~~ effect oron ~~acceptable to us. The prices for these items have varied significantly in~~ the ~~past and may vary significantly in the~~ ~~future.~~cost ~~Numerous factors, most~~ of ~~which are beyond~~ our ~~control,~~products ~~influence prices of servers~~ and ~~related support~~services. ~~These factors include general economic conditions, industry capacity utilization, vendor backlogs and delays and other uncertainties.~~

WeThe ~~may~~prices ~~not~~of beservers ~~able~~and related support are subject to ~~adjust~~market ~~our~~conditions ~~product~~and ~~prices~~generally we do not, ~~especially~~and indo ~~the~~not expect to, have ~~short~~long-term, tocontracts ~~recover~~with ~~cost~~our ~~increases~~suppliers infor ~~these~~those items. ~~Our~~While ~~future~~these ~~profitability~~items are ~~may~~generally beavailable ~~adversely~~and ~~affected~~we tohave not experienced any shortage in the ~~extent~~past, we cannot ~~are~~assure ~~unable~~you that the necessary servers or support will continue to ~~pass~~be available onto ~~higher~~us ~~server~~at prices currently in effect or acceptable to us. The prices for these items have varied significantly in the past and ~~support~~may ~~related~~vary significantly ~~costs~~in tothe future. Numerous factors, most of which are beyond our control, ~~customers~~influence prices of servers and related support. These factors include general economic conditions, industry capacity utilization, vendor backlogs and delays and other uncertainties.

We may ~~become~~not ~~liable~~be able to adjust our ~~customers~~product ~~and~~prices, especially ~~lose~~in ~~customers~~the ifshort-term, weto ~~have defects~~recover orcost ~~disruptions~~increases in ~~our~~these ~~products~~items. ~~and~~Our future ~~services~~profitability ormay ifbe adversely affected to the extent we ~~provide~~are ~~poor~~unable to ~~service~~pass on higher server and support related costs to our customers.

~~Because~~We ~~we deliver products as a service through an Etelos Marketplace, errors or defects in the Web Applications underlying the service, or a failure of our hosting infrastructure~~ may ~~make~~become ~~the~~liable ~~service unavailable~~ to our customers. ~~Because~~and ~~our~~lose customers ~~use~~if ~~the~~we ~~products~~have ~~to manage critical aspects of their business, any errors,~~ defects, ~~disruptions in service,~~ or ~~other performance~~disruptions ~~problems with the products, whether~~ in ~~connection with the day-to-day operation of the products, upgrades or otherwise, could damage~~ our ~~customers’~~ ~~businesses. If we have any errors, defects, disruptions in service, or other performance problems with the~~ products~~, then customers could elect not~~ toand ~~renew~~services ~~their subscriptions~~ or ~~delay~~if ~~or withhold payment to us. As a result,~~ we ~~could~~provide ~~lose~~poor future sales or customers may make warranty claims against us or our Syndication Partners, which could result in an increase in our provision for doubtful accounts, an increase in collection cycles for accounts receivable, or costly litigationservice.

13Because we deliver products as a service through an Etelos Marketplace, errors or defects in the Web Applications underlying the service, or a failure of our hosting infrastructure may make the service unavailable to our customers. Because our customers use the products to manage critical aspects of their business, any errors, defects, disruptions in service, or other performance problems with the products, whether in connection with the day-to-day operation of the products, upgrades or otherwise, could damage our customers’ businesses. If we have any errors, defects, disruptions in service, or other performance problems with the products, then customers could elect not to renew their subscriptions or delay or withhold payment to us. As a result, we could lose future sales or customers may make warranty claims against us or our Syndication Partners, which could result in an increase in our provision for doubtful accounts, an increase in collection cycles for accounts receivable, or costly litigation.

~~Table~~Material ofdefects ~~Contents~~or errors in the software we use to deliver our products and services and the offerings by our Marketplace and Syndication Partners could harm our reputation, result in significant costs to us, and impair our ability to distribute our services.

IfThe ~~our~~Web ~~security~~Applications ~~measures~~offered in an Etelos Marketplace are ~~breached~~inherently complex and ~~unauthorized~~may ~~access~~contain ismaterial defects or errors, particularly ~~obtained~~when tofirst aintroduced ~~customer’s~~or ~~data,~~when ~~then~~new weversions ~~may~~or ~~incur~~enhancements ~~significant~~are ~~liabilities~~released. We have, from time to time, found defects in our products and services, and new errors ~~service~~in our existing software and services may be ~~perceived~~detected asin ~~not~~the ~~being~~future. ~~secure~~We have no actual knowledge, but we reasonably expect that the products and ~~customers~~services offered by our Syndication Partners may ~~curtail~~have similar errors and/or ~~stop~~defects. Any ~~using~~errors or defects that cause interruptions to the availability of our ~~products.~~services and the services for our Marketplace Partners could result in:

~~The~~· a ~~products~~reduction ~~and services we offer~~ in ansales ~~Etelos~~or ~~Marketplace~~delay ~~involve the~~in ~~storage~~market ofacceptance ~~large amounts~~ of ~~our~~services ~~customers’~~from ~~sensitive~~us ~~and proprietary business information. If our security measures are breached as a result of third-party action, employee error, malfeasance,~~ or ~~otherwise, and someone obtains unauthorized access to~~ our ~~customers’ data, then we could incur significant liability to our Syndication and~~ Marketplace Partners, our customers, and to individuals or businesses whose information was being stored by our customers, our business may suffer and our reputation may be damaged. Because techniques used to obtain unauthorized access to, or to sabotage, systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures. If an actual or perceived breach of our security occurs, then the market perception of the effectiveness of our security measures could be harmed and we could lose sales and customers.;

If· sales wecredits ~~are unable to develop new products~~ or ~~services,~~refunds ~~distribute our products or services into new markets, or add Syndication Partners~~ to ~~offer their products or services for distribution in an Etelos Marketplace, then~~ our ~~revenue~~customers ~~growth will be harmed~~ and wecustomers ~~may~~of ~~not~~our beMarketplace ~~able to achieve profitability.~~Partners;

~~Our~~· loss ~~ability~~of ~~to attract new customers and to increase revenue from~~ existing customers ~~will depend in large part on our ability to enhance~~ and ~~improve~~difficulty our existing products and to add new Marketplace Partners and new Syndication Partners to offer their products and services and distribute into new markets. The success of any enhancement or new Syndication Partner offering depends on several factors, including the timely completion, introduction, and market acceptance of the enhancement, product or service. Any new product or service offered by a Syndication Partner or that we develop or acquire may not be introduced in aattracting ~~timely or cost-effective manner and may not achieve the broad market acceptance necessary to generate significant revenue. Any~~ new ~~markets~~ into which we attempt to distribute our products or services may not be receptive. If we are unable to successfully develop or acquire new products or services, enhance our existing products and services to meet customer requirements, or distribute our products and services into new markets, then our revenue will not grow as expected and we may not be able to achieve profitability.customers;

If· diversion we fail to maintain proper and effective internal controls or are unable to remediate the material weakness in our internal controls, then our ability to produce accurate and timely financial statements could be impaired and investors’ views of usdevelopment ~~could be harmed.~~resources;

~~Ensuring~~· harm that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to beour ~~re-evaluated~~reputation, ~~frequently.~~or ~~Our internal control over financial reporting is a process designed to provide reasonable assurance regarding~~ the ~~reliability of~~ ~~financial~~reputation ~~reporting and the preparation~~ of ~~financial~~our ~~statements~~Marketplace inPartners; ~~accordance with generally accepted accounting principles.~~and/or

~~During~~· increased ~~our~~warranty ~~audit for the year ended December 31, 2008, we identified material weaknesses in our internal controls. The material weaknesses relate to the absence of specific policies~~ and ~~procedures for some~~insurance accounting functions and the need for accounting personnel who possess the skill sets necessary to operate and report as a public company, and specifically the skills necessary to ensure that adequate review of critical account reconciliations is performed and that supporting documentation is complete, accurate, and in accordance with generally accepted accounting principlescosts. Our financial position and limited resources make it difficult for us to address these weaknesses. If we fail to address these material weaknesses or if additional material weaknesses in our internal controls are discovered in the future, then we may fail to meet our future reporting obligations, our financial statements may contain material misstatements and the price of our common stock may decline.

~~Implementing~~After ~~any~~the ~~appropriate~~release ~~changes~~of to our ~~internal controls may distract our officers and employees~~services, ~~entail~~defects ~~substantial~~or ~~costs to modify our~~errors ~~existing~~may ~~processes,~~also ~~and~~be ~~add~~identified ~~personnel~~from ~~and take significant~~ time to ~~complete. These~~time ~~changes~~by ~~may~~our ~~not,~~internal ~~however~~team, ~~be effective in maintaining the adequacy of~~ our ~~internal~~ ~~controls,~~ Marketplace and ~~any~~Syndication ~~failure to maintain that adequacy~~Partners, ~~or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs~~ and ~~harm~~by our ~~business~~customers. InThe ~~addition,~~costs ~~investors’~~incurred in ~~perceptions~~correcting ~~that~~any ~~our~~material ~~internal~~defects ~~controls are inadequate~~ or ~~that~~errors wein ~~are~~such ~~unable~~products ~~to produce~~or ~~accurate~~services ~~financial statements on a timely basis~~ may ~~harm our stock~~be ~~price~~substantial and ~~make~~could itharm ~~more difficult for us to effectively market and distribute~~ our ~~products~~operating ~~and services to new and existing customers~~results.

~~Material~~If ~~defects~~our orsecurity ~~errors~~measures inare breached ~~the~~and ~~software~~unauthorized weaccess ~~use~~is obtained to ~~deliver~~a ~~our products~~customer’s ~~and~~data, ~~services~~then ~~and~~we ~~the~~may incur ~~offerings~~significant byliabilities, our ~~Marketplace~~service ~~and~~may ~~Syndication Partners~~be ~~could~~perceived ~~harm~~as ~~our~~not ~~reputation~~being secure, ~~result~~and incustomers ~~significant~~may ~~costs~~curtail toor ~~us,~~stop ~~and impair~~using our ~~ability to distribute our services~~products.

The ~~Web~~products ~~Applications~~and ~~underlying~~services ~~the~~we ~~offerings~~offer in an Etelos ~~Marketplace~~ ~~are~~Marketplace ~~inherently~~involve ~~complex~~the ~~and~~storage ~~may~~of ~~contain~~large ~~material~~amounts ~~defects~~of orour ~~errors,~~customers’ ~~particularly~~sensitive ~~when~~and ~~first~~proprietary ~~introduced~~business orinformation. ~~when~~If ~~new~~our ~~versions~~security ormeasures ~~enhancements~~ are ~~released.~~breached Weas ~~have~~a result of third-party action, ~~from~~employee ~~time~~error, malfeasance, or otherwise, and someone obtains unauthorized access to ~~time~~our customers’ data, ~~found~~then ~~defects~~we incould incur significant liability to our ~~products~~Syndication and ~~services~~Marketplace Partners, our customers, and ~~new~~to individuals or businesses whose information was being stored ~~errors~~by inour customers, our ~~existing~~business ~~software~~may suffer and ~~services~~our reputation may be ~~detected~~damaged. Because intechniques ~~the~~used ~~future.~~to ~~We have~~obtain nounauthorized ~~actual~~access ~~knowledge~~to, ~~but~~or weto ~~reasonably~~sabotage, systems ~~expect~~change ~~that~~frequently ~~the~~and ~~products~~generally ~~and services~~are ~~offered~~not byrecognized ~~our~~until ~~Syndication~~launched against ~~Partners~~a target, we may ~~have~~be ~~similar~~unable ~~errors~~to ~~and/~~anticipate these techniques or to ~~defects~~implement adequate preventive measures. ~~Any~~If ~~errors~~an actual or ~~defects~~perceived ~~that~~breach ~~cause~~of ~~interruptions~~our security tooccurs, then the ~~availability~~market perception of ~~our~~ ~~services and~~ the ~~services~~effectiveness ~~for~~of our security ~~Marketplace~~measures ~~Partners~~could be harmed and we could ~~result~~lose ~~in:~~sales and customers.

~~· a reduction in sales or delay in market acceptance of services from us or our Marketplace Partners;~~13

14Table of Contents

~~Table~~If we are unable to develop new ofproducts ~~Contents~~or services, distribute our products or services into new markets, or add Syndication Partners to offer their products or services for distribution in an Etelos Marketplace, then our revenue growth will be harmed and we may not be able to achieve profitability.

~~· sales~~Our ~~credits~~ability orto ~~refunds~~attract tonew ~~our~~ customers and to increase revenue from existing customers ofwill depend in large part on our ability to enhance and improve our existing products and to add new Marketplace Partners; and new Syndication Partners to offer their products and services and distribute into new markets. The success of any enhancement or new Syndication Partner offering depends on several factors, including the timely completion, introduction, and market acceptance of the enhancement, product or service. Any new product or service offered by a Syndication Partner or that we develop or acquire may not be introduced in a timely or cost-effective manner and may not achieve the broad market acceptance necessary to generate significant revenue. Any new markets into which we attempt to distribute our products or services may not be receptive. If we are unable to successfully develop or acquire new products or services, enhance our existing products and services to meet customer requirements, or distribute our products and services into new markets, then our revenue will not grow as expected and we may not be able to achieve profitability.

~~· loss~~If ofwe ~~existing~~fail ~~customers~~to maintain proper and ~~difficulty~~effective internal controls or are unable to remediate the material weakness in our ~~attracting~~internal ~~new~~controls, ~~customers;~~then our ability to produce accurate and timely financial statements could be impaired and investors’ views of us could be harmed.

~~· diversion~~Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of ~~development~~financial ~~resources;~~reporting and the preparation of financial statements in accordance with generally accepted accounting principles.

~~· harm~~During toour audit for the year ended December 31, 2008, we identified material weaknesses in our ~~reputation~~internal controls. The material weaknesses relate to the absence of specific policies and procedures for some accounting functions and the need for accounting personnel who possess the skill sets necessary to operate and report as a public company, orand specifically the skills necessary to ensure that adequate review of critical ~~reputation~~account reconciliations is performed and that supporting documentation is complete, accurate, and in accordance with generally accepted accounting principles. Our financial position and limited resources make it difficult for us to address these weaknesses and we continue to have these material weaknesses as of December 31, 2009. If we fail to address these material weaknesses or if additional material weaknesses in our ~~Marketplace~~internal ~~Partners;~~controls are discovered in the future, then we may fail to meet our future reporting obligations, our financial statements may contain material misstatements and~~/or~~ the price of our common stock may decline.

~~· increased~~Implementing ~~warranty~~any appropriate changes to our internal controls may distract our officers and ~~insurance~~employees, entail substantial costs to modify our existing processes, and add personnel and take significant time to complete. These changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and harm our business. In addition, investors’ perceptions that our internal controls are inadequate or that we are unable to produce accurate financial statements on a timely basis may harm our stock price and make it more difficult for us to effectively market and distribute our products and services to new and existing customers.

~~After~~Government ~~the~~regulation ~~release~~ of ~~our services, defects or errors may also be~~the ~~identified~~Internet ~~from~~and ~~time~~e-commerce tois ~~time by our internal team~~evolving, ~~our Marketplace~~ and ~~Syndication~~ ~~Partners,~~unfavorable ~~and~~changes byor our ~~customers.~~failure ~~The costs incurred in correcting~~to ~~any~~comply ~~material~~with ~~defects~~regulations ~~or errors in such products or services may be substantial and~~ could harm our operating results.

~~Government~~As Internet commerce continues to evolve, increasing regulation by super-national, federal, state or local government agencies becomes more likely. Increased regulation in the area of data privacy, and laws and regulations applying to the ~~Internet~~solicitation, collection, processing, or use of personal or consumer information could affect our customers’ ability to use and share edata, potentially reducing demand for Web-~~commerce~~based isapplications ~~evolving~~and restricting our ability to store, process, and share our customers’ data. In ~~unfavorable~~addition, ~~changes~~taxation of services provided over the Internet or ~~our~~other ~~failure~~charges imposed toby ~~comply~~government ~~with~~agencies ~~regulations~~or by private organizations for accessing the Internet may also be imposed. Any regulation imposing greater fees for Internet access or use or restricting information exchange over the Internet could result in a decline in the use of the Internet and the viability of Web-based services, which could harm our business and operating results.

AsPrivacy ~~Internet~~concerns ~~commerce continues to evolve, increasing regulation by super-national, federal, state or local government agencies becomes more likely. Increased regulation in the area of data privacy,~~ and laws ~~and regulations applying to the solicitation, collection, processing,~~ or ~~use of~~ personal or consumer information could affect our customers’ ability to use and share data, potentially reducing demand for Web-based applications and restricting our ability to store, process, and share our customers’ data. In addition, taxation of services provided over the Internet or other ~~charges imposed~~regulations ~~by government agencies or by private organizations for accessing the Internet~~ may ~~also~~reduce ~~be imposed. Any regulation imposing greater fees for Internet access or use or restricting information exchange over~~ the ~~Internet~~effectiveness ~~could result in a decline in the use~~ of ~~the~~our ~~Internet~~products and ~~the viability of Web-based~~ services, ~~which could~~ and harm our business ~~and operating results~~.

~~Privacy~~Our ~~concerns~~customers can use the products and ~~laws~~services offered in an Etelos Marketplace to store personal or identifying information regarding their customers and contacts. Super-national, federal, state and other government bodies and agencies have adopted or are considering adoption of laws and regulations regarding the collection, use, and disclosure of personal information obtained from consumers and other individuals. The costs of compliance with, and other burdens imposed by, such laws and regulations that are applicable to the businesses of our customers may ~~reduce~~limit the use and ~~effectiveness~~adoption of our products and services and ~~harm~~reduce ~~our~~overall ~~business~~demand.

Our customers can use the products and services offered in an Etelos Marketplace to store personal or identifying information regarding their customers and contacts. Super-national, federal, state and other government bodies and agencies have adopted or are considering adoption of laws and regulations regarding the collection, use, and disclosure of personal information obtained from consumers and other individuals. The costs of compliance with, and other burdens imposed by, such laws and regulations that are applicable to the businesses of our customers may limit the use and adoption of our products and services and reduce overall demand.14

InTable addition to government activity, privacy advocacy groups and the technology and other industries are considering various new, additional, or different self-regulatory standards that may place additional burdens on us and our Marketplace and Syndication Partners. If the gathering of personal information were to be curtailed, then Web-based applications would be less effective, which may reduce demand for the products and services offered in an Etelos Marketplace and harm our business.Contents

~~Our~~In ~~operating~~addition ~~results~~to ~~may~~government beactivity, ~~harmed~~privacy ifadvocacy groups weand the technology and other industries are ~~required~~considering various new, additional, or different self-regulatory standards that may place additional burdens on us and our Marketplace and Syndication Partners. If the gathering of personal information were to ~~collect~~be ~~taxes~~curtailed, then Web-based applications would be less effective, which may reduce demand for ~~our~~the ~~subscription~~products and services offered in ~~jurisdictions~~an ~~where~~Etelos weMarketplace ~~have~~and ~~not~~harm ~~historically done~~our sobusiness.

WeOur ~~have~~operating ~~not~~results ~~collected~~may ~~any sales or other taxes from our customers or~~be ~~remitted~~harmed ~~any~~if ~~such taxes to any taxing jurisdiction where~~ we ~~may~~are be required to do ~~so.~~collect Wetaxes ~~have begun an analysis of this issue but to date have not made any accrual~~ for ~~any~~our ~~potential~~subscription ~~liability. In addition,~~services ~~additional taxing~~ in jurisdictions atwhere ~~various~~we ~~local, national and super-national levels may seek to impose sales or other tax collection obligations on us. We~~ have not ~~recorded sales~~historically ordone ~~other tax liabilities for the years ended December 31, 2008 or 2007, in respect of sales or other tax liabilities in any jurisdiction~~so. A successful assertion that we should be collecting sales or other taxes on our service could result in substantial tax liabilities for past sales, discourage customers from purchasing our products, or otherwise harm our business and operating results.

~~Changes~~We inhave ~~financial~~not ~~accounting~~collected ~~standards~~any sales or ~~practices~~other taxes from our customers or remitted any such taxes to any taxing jurisdiction where we may ~~cause~~be required to do so. We have begun an analysis of this issue but to date ~~adverse~~have not made any accrual for any potential liability. In addition, ~~unexpected~~additional ~~financial~~taxing ~~reporting~~jurisdictions at ~~fluctuations~~various local, national and super-national levels may seek to impose sales or other tax collection obligations on us. We have not recorded sales or other tax liabilities for the years ended December 31, 2009 or 2008, in respect of sales or other tax liabilities in any jurisdiction. Any determination that we should be collecting sales or other taxes on our service could result in substantial tax liabilities for past sales, discourage customers from purchasing our products, or otherwise harm our ~~operating~~business and operating results.

AChanges ~~change~~ in ~~accounting~~financial accounting standards or practices ~~could harm our operating results and~~ may ~~even~~cause ~~affect~~adverse, ~~our~~unexpected ~~reporting~~financial ~~of transactions completed before the~~reporting ~~change~~fluctuations, ~~is effective. New accounting pronouncements~~ and ~~varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may~~ harm our operating results ~~or the way we conduct our business~~.

15A change in accounting standards or practices could harm our operating results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may harm our operating results or the way we conduct our business.

~~Table~~We ofmay ~~Contents~~expand by acquiring or investing in other companies, which may divert management’s attention, result in additional dilution to our stockholders, and consume resources that are necessary to operate and sustain our business.

Although we have no ongoing negotiations or current agreements or commitments for any acquisitions, our business strategy may include acquiring complementary products, services, technologies, or businesses. We also may enter into relationships with other businesses to expand byour ~~acquiring~~product or ~~investing~~service inofferings ~~other~~or ~~companies~~our ability to provide service in foreign jurisdictions, which ~~may~~could involve preferred or exclusive licenses, additional ~~divert~~channels ~~management’s~~of ~~attention~~distribution, ~~result~~discount pricing, investments in ~~additional~~other ~~dilution~~companies, toor other ~~our~~strategies. Negotiating these transactions can be time-consuming, ~~stockholders~~difficult, and ~~consume~~expensive, ~~resources~~and our ability to close these transactions may often be subject to approvals that are ~~necessary~~beyond toour ~~operate~~control. ~~and~~Consequently, ~~sustain~~these ~~our~~transactions, ~~business~~even if undertaken and announced, may not close.

~~Although~~An weacquisition, ~~have~~investment, noor ~~ongoing~~business ~~negotiations~~relationship may orresult ~~current~~in ~~agreements~~unforeseen ~~or commitments~~operating ~~for~~difficulties ~~any~~and ~~acquisitions~~expenditures. In particular, ~~our~~we ~~business~~may ~~strategy~~encounter ~~may~~difficulties ~~include~~assimilating ~~acquiring complementary~~or ~~products,~~integrating ~~services~~the businesses, technologies, orproducts, ~~businesses.~~services Weofferings, ~~also~~personnel, ~~may~~or ~~enter~~operations ~~into~~of ~~relationships~~the ~~with~~acquired ~~other~~companies, ~~businesses~~particularly toif ~~expand~~the ~~our~~key ~~product~~personnel orof ~~service~~the ~~offerings~~acquired orcompany ~~our~~choose ~~ability~~not to ~~provide~~work ~~service~~for inus, ~~foreign~~the ~~jurisdictions,~~target’s ~~which~~software is not easily ~~could~~adapted ~~involve~~to ~~preferred~~work with ours, or ~~exclusive~~we ~~licenses,~~are ~~additional~~unable ~~channels~~to retain the customers of any ~~distribution,~~acquired ~~discount~~business ~~pricing,~~due ~~investments~~to changes in ~~other~~management ~~companies,~~ or ~~other strategies~~otherwise. ~~Negotiating~~Acquisitions ~~these~~may also ~~transactions~~disrupt ~~can~~our ~~be time-consuming~~business, ~~difficult, and~~divert ~~expensive~~our resources, and ~~our~~require ~~ability~~significant management toattention ~~close~~that ~~these~~would ~~transactions~~otherwise ~~may often~~ be ~~subject to~~available ~~approvals~~for ~~that~~operation ~~are~~and development ~~beyond~~of our ~~control~~business. ~~Consequently~~Moreover, ~~these~~the ~~transactions, even~~anticipated ifbenefits ~~undertaken~~of ~~and~~any acquisition, ~~announced~~investment, or business relationship may not ~~close~~be realized or we may be exposed to unknown liabilities. For one or more of those transactions, we may:

An· issue ~~acquisition,~~additional ~~investment,~~equity ~~or business relationship may result in~~securities unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, services offerings, personnel, or operations of the acquired companies, particularly if the key personnel of the acquired company choose not to work for us, the target’s software is not easily adapted to work with ours, or we are unable to retain the customers of any acquired business due to changes in management or otherwise. Acquisitions may also disrupt our business, divert our resources, and require significant management attention that would ~~otherwise~~ bedilute ~~available for operation and development of~~ our business. Moreover, the anticipated benefits of any acquisition, investment, or business relationship may not be realized or we may be exposed to unknown liabilities. For one or more of those transactions, we may:stockholders;

· ~~issue~~use ~~additional~~cash ~~equity~~that ~~securities~~we may need in the ~~that~~future ~~would~~to ~~dilute~~operate our ~~stockholders~~business;

· ~~use~~incur ~~cash~~debt ~~that~~on weterms ~~may~~unfavorable ~~need~~to ~~in the~~us ~~future~~or tothat ~~operate~~we ~~our~~are ~~business~~unable to repay;

· incur ~~debt~~large oncharges ~~terms unfavorable to us~~ or ~~that we are unable to repay~~substantial liabilities;

· ~~incur~~encounter ~~large~~difficulties ~~charges~~retaining key employees of the acquired company or ~~substantial~~integrating diverse software codes or ~~liabilities~~business cultures; and/or

· ~~encounter~~become ~~difficulties~~subject ~~retaining~~to ~~key~~adverse tax ~~employees~~consequences, ofsubstantial ~~the~~depreciation, ~~acquired company~~ or ~~integrating~~deferred ~~diverse~~compensation ~~software codes or business cultures; and/or~~charges.

~~· become~~Any ~~subject~~of tothese ~~adverse~~risks ~~tax consequences,~~could ~~substantial~~harm ~~depreciation,~~our orbusiness ~~deferred~~and operating ~~compensation charges~~results.

~~Any~~We ofmay ~~these~~be ~~risks~~subject ~~could~~to ~~harm~~other ~~our business and operating results~~legal claims.

WeIn the quarter ended December 31, 2009, and subsequently, we resolved a number of significant litigation items in a manner that we believe was generally favorable to the Company. See “LEGAL PROCEEDINGS” below. The settlements in several of these matters contained unsecured promissory notes and there is no assurance that we will be able to perform the payment obligations under those notes as and when they become due and payable. If we default on these payment obligations then other claims may be ~~subject~~asserted against us to collect ~~other~~on ~~legal~~those ~~claims~~promissory notes.

In June 2008, Kaufman Bros. L.P. filed suit against us in the United States District Court for the Southern District of New York (Case No. 80 CV 5716) and sought a temporary restraining order and other extraordinary relief. The complaint arose out of an advisory services agreement, pursuant to which Kaufman Bros. was to provide us with advisory services in connection with financings and strategic transactions. We notified Kaufman Bros. that we believed it had failed to provide the required services under the agreement, and that we were therefore entitled to terminate the agreement for cause. In the suit, Kaufman Bros. was seeking (i) monetary damages of $400,000 for anticipatory breach of the agreement; (ii) $73,800 in fees allegedly owed in connection with a previously closed financing transaction; (iii) and injunction prohibiting us from cancelling any shares issued to Kaufman Bros. as compensation, (iv) a declaration from the court that we are not entitled to a refund of any fees previously paid to Kaufman Bros., and (v) a declaration that we are obligated to pay Kaufman Bros. a commission on any financing or transaction that we enter into within 18 months following the termination of the agreement. On July 15, 2008, Kaufman Bros. voluntarily filed a notice of dismissal without prejudice. Settlement discussions were unsuccessful and, on July 31, 2008, Kaufman Bros. re-filed substantially the same claims in the Supreme Court of New York - County of New York (Index No. 08-602239). Effective on December 5, 2008, the Company entered into a settlement agreement with Kaufman Bros., pursuant to which (i) the Company agreed to pay to Kaufman Bros. $210,000, in twelve monthly installments of $17,500; (ii) the Company issued to Kaufman Bros. warrants to purchase 500,000 shares of the Company’s common stock at an exercise price of $0.75 per share, which warrants have a term of five years; (iii) the Company and Kaufman Bros. agreed immediately to terminate all provisions, terms and conditions of the advisory services agreement and exchanged mutual releases; and (iv) Kaufman Bros. agreed to dismiss the pending lawsuit in the Supreme Court of New York, without prejudice. Subsequent to entering into the settlement agreement, we have not fully complied with our payment obligations under the settlement agreement but, through the date of filing of this report, Kaufman Bros. has not exercised any of its remedies for default under the settlement agreement.

OnTable ~~October 31, 2008, the Company closed its offices in San Mateo, California and abandoned the leased premises~~ of its former offices there. The landlord for these premises has asserted a claim for $659 thousand for alleged unpaid rent and other amounts and filed a proceeding in the Superior Court of San Mateo County, California (Case No. CIV 479535) on December 19, 2008. This matter is pending and the Company intends to defend its position.Contents

16On December 31, 2009, we settled a judgment in the matter of Kaufman Bros., L.P. v. Etelos, Inc. in the Supreme Court of the State of New York, New York County, in the approximate amount of $186,000, for $93,000 in cash, payable in 5 installments with the final installment due June 1, 2010, and the issuance of 200,000 shares of restricted common stock. The settlement permits Kaufman Bros. to sell up to 180,000 shares from July 1, 2010, through March 2011 to recover the remaining $93,373 of the settlement; the additional 20,000 shares are designated for payment of attorneys’ fees in the event of a default in the note payments. After payment in full of the note payments, if there is no default giving rise to a claim for attorneys’ fees, those 20,000 shares will be returned to the Company and cancelled. After Kaufman Bros. recovers the remaining $93,373 from the sale of some or all of the 180,000 shares, any remaining shares will be repurchased by the Company for $0.01 and cancelled; after March 2011, any balance due on the remaining amount of the settlement will be discharged and any unsold shares will be repurchased by the Company at $0.01 per share and cancelled.

~~Table~~On October 31, 2008, the Company closed its offices in San Mateo, California. The landlord for these premises filed a complaint in the Superior Court of ~~Contents~~San Mateo County, California (Case No. CIV 479535) and trial was set for February 8, 2010. The parties went to mediation in January 2010 and subsequently entered into a settlement agreement including, inter alia, a $200,000 promissory note, with 6% interest, payable in 12 monthly payments beginning in July 2010. The settlement agreement and note were executed and delivered on February 8, 2010.

On ~~September~~October 1831, 2008, ~~the~~we ~~employment~~relocated ofour ~~Jeffrey L. Garon as~~Washington ~~president~~offices and ~~chief~~abandoned ~~executive~~the ~~officer~~sub-leased premises of ~~the~~our ~~Company~~former ~~was~~offices ~~terminated. On~~in ~~October 19~~Renton, ~~2008, Mr. Garon~~ ~~resigned from the Board of Directors~~Washington. ~~Mr. Garon and~~ ~~the~~The ~~Company~~sublease ~~entered~~for ~~into~~these anpremises ~~Employment~~runs ~~Agreement~~through ~~dated August~~June 112010. Subsequently, ~~2007,~~ ~~which~~on ~~provided certain benefits to Mr.~~March ~~Garon~~5, in2010, the ~~event of~~ ~~termination~~prime oflandlord ~~his~~filed ~~employment,~~a ~~and~~complaint ~~granted~~against tous ~~the~~for ~~Company~~breach ~~certain~~of ~~rights~~contract ~~to repurchase~~and ~~shares~~successor ~~issued on behalf of Mr~~liability. ~~Garon~~ This ~~pursuant~~matter ~~to his employment~~was ~~agreement. The~~just ~~Company~~served and ~~Mr. Garon~~ we have ~~been~~not ~~engaged~~yet inevaluated ~~discussions~~the ~~about~~claims ~~these~~made ~~benefits~~in ~~and~~this ~~rights,~~case. We ~~and~~will noneed ~~final agreement~~to ~~has~~evaluate ~~been~~and ~~reached~~defend ~~as of the filing date of this report~~these claims.

OnAs ~~October 1,~~part ~~2008,~~of ~~we relocated~~ our ~~headquarters~~reduction ~~from~~of ~~San~~monthly ~~Mateo,~~cash operating ~~California~~expenses toduring ~~Renton~~the quarter ended December 31, ~~Washington~~2008, and ~~terminated~~continuing ~~eight~~after the ~~employees~~end ~~based~~of ~~in California.~~the ~~In October 2008~~quarter, we ~~terminated~~placed ~~eight~~all ~~more~~ employees ~~employed~~ in ~~both~~Washington ~~our~~and California ~~and Washington offices.~~ on ~~None~~partial deferrals of ~~these~~salary, ~~terminated~~ranging ~~employees~~from ~~have~~10% ~~asserted~~to ~~any~~100% ~~claims~~of ~~against~~base ussalary. At the atend ~~this~~of ~~time~~that ~~but~~quarter, nountil ~~assurances~~the ~~can~~filing bedate ~~given~~of ~~that~~this ~~such~~report, ~~employees~~a ~~will~~major ~~not~~portion ~~assert~~of ~~such~~this ~~claims~~deferral inamount ~~the~~remains ~~future~~unpaid, including amounts due to employees who subsequently were terminated.

AsSince ~~part of our reduction of monthly cash operating expenses during the quarter ended December~~August 3122, 2008, ~~and continuing after the end of the quarter,~~ we ~~placed~~have ~~all~~terminated 33 employees onemployed ~~partial~~in ~~deferrals~~both ofour ~~salary,~~California ~~ranging from~~and ~~10%~~Washington ~~to 100% of base salary~~offices. AtExcept ~~the~~as ~~end~~noted, ofnone ~~the quarter, until the filing date~~ of ~~this~~these ~~report,~~terminated ~~this deferral amount remains unpaid, including amounts due to~~ employees ~~who~~have ~~subsequently~~asserted ~~were terminated. On~~any ~~December 17,~~claims ~~2008, we~~against ~~received~~us ~~notice~~at ~~that one employee has filed a claim with the California~~this ~~Labor~~time ~~Commissioner; that claim has not been resolved. No other employee has asserted a claim or demand for immediate payment of these unpaid amounts~~ but ~~the~~ ~~assertion~~no ofassurances ~~such~~can ~~claims~~be orgiven ~~demands~~that by such employees, orwill bynot ~~other~~assert such ~~governmental~~claims ~~authorities,~~in isthe ~~foreseeable~~future.

InOn ~~connection~~March 19, 2009, ~~with~~the ~~our~~Company ~~reverse~~issued ~~merger,~~an ~~multiple~~unsecured ~~financings,~~note ~~and protection~~ of ~~our~~$88 ~~intellectual~~thousand ~~property,~~for wean ~~have incurred substantial accounts~~account payable ~~to law firms that remain unpaid and overdue~~balance. We ~~have~~The ~~been~~note inbears ~~communication~~interest ~~with~~of ~~these vendors~~11% and ~~expect~~is todue ~~enter~~on ~~into negotiated payment plans with these vendors~~April 1, ~~and others~~2010, ~~but~~with ~~there~~payment isterms noof ~~assurance~~$15 ~~that~~thousand weon ~~will~~issuance beof ~~successful~~the ~~in these negotiations~~note, orand ~~that~~monthly payments weof ~~will~~$6 bethousand ~~able~~beginning toMay 1, ~~make~~2009 ~~payments~~with ~~under~~a ~~such~~final ~~plans~~payment ifon ~~and~~March 20, ~~when negotiated~~2010. ~~Therefore~~All ~~the~~payments ~~assertion of~~have ~~claims~~been bymade ~~these~~in accordance ~~vendors~~with ~~for~~the ~~these~~note ~~amounts~~to ~~due and owing could become~~ the ~~subject~~ date of ~~claims~~this ~~in litigation~~report.

~~Our~~In ~~officers~~connection with our operations, ~~directors~~reverse merger, multiple financings, and ~~affiliates~~protection ~~control~~of usour ~~through~~intellectual ~~their~~property, we have ~~positions~~incurred substantial accounts payable to a small number of vendors that remain unpaid and ~~stock~~overdue. We ~~ownership~~have been in communication with these vendors and ~~their~~have ~~interests~~entered ~~may~~into ~~differ~~payment ~~from~~plans with some of these vendors and expect to enter into negotiated payment plans with other ~~stockholders~~vendors, but there is no assurance that we will be successful in these negotiations, or that we will be able to make payments under such plans. Therefore the assertion of claims by these vendors for these amounts due and owing could become the subject of claims in litigation.

AsOur ~~of December 31, 2008, our~~ officers, directors, and ~~affiliates~~ ~~beneficially~~affiliates ~~own~~control ~~approximately~~us 72through ~~percent~~their ofpositions ~~our common stock~~ and ~~60 percent of our preferred~~ stock. Asownership ~~a result, if they act together, they are able to influence the outcome of stockholder votes on various matters, including the election of directors~~ and ~~extraordinary corporate transactions, including~~their ~~business combinations. This concentration could also have the effect of delaying or preventing a change in control that could otherwise be beneficial to our stockholders. The~~ interests ~~of our officers, directors, and affiliates~~ may differ from other stockholders. ~~Furthermore, the current ratios of ownership of our common stock reduce the public float and liquidity of our common stock, which can in turn affect the market price of our common stock.~~

WeAs of December 31, 2009, our officers, directors, and affiliates beneficially own approximately 70 percent of our common stock and 63 percent of our preferred stock. As a result, if they act together, they are ~~responsible~~able ~~for~~to influence the ~~indemnification~~outcome of stockholder votes on various matters, including the election of directors and extraordinary corporate transactions, including business combinations. This concentration could also have the effect of delaying or preventing a change in control that could otherwise be beneficial to our stockholders. The interests of our officers, directors, and ~~directors~~affiliates may differ from other stockholders. Furthermore, the current ratios of ownership of our common stock reduce the public float and liquidity of our common stock, which can in turn affect the market price of our common stock.

~~Our~~We ~~articles~~are ofresponsible ~~incorporation and bylaws provide~~ for the indemnification of our ~~directors,~~ officers, ~~employees,~~ and ~~agents, and, under certain circumstances, against costs and expenses incurred by them in any litigation to which they become a party arising from their association with or activities on our behalf~~directors. ~~Consequently, we may be required to expend substantial funds to satisfy these indemnity obligations.~~

~~The~~Our ~~market~~articles ~~price~~of incorporation and bylaws provide for the indemnification of our ~~securities~~directors, ~~could~~officers, beemployees, ~~adversely~~and ~~affected~~agents, and, under certain circumstances, against costs and expenses incurred by ~~sales~~them in any oflitigation ~~registered~~to ~~and~~which ~~restricted~~they ~~securities~~become a party arising from their association with or activities on our behalf. Consequently, we may be required to expend substantial funds to satisfy these indemnity obligations.

Actual sales or the prospect of future sales of shares of our common stock pursuant to a prospectus or under Rule 144 may have a depressive effect upon the price of, and market for, our common stock. As of December 31, 2008, 23,027,624 shares of our common stock were issued and outstanding, of which 18,017,624 are “restricted securities” and under some circumstances may, in the future, be under a registration under the Securities Act or in compliance with Rule 144 adopted under the Securities Act. In general, under Rule 144, subject to the satisfaction of other conditions, a person who has beneficially owned restricted shares of common stock for at least one year is entitled to sell, within any three month period, a number of shares that does not exceed the greater of 1 percent of the total number of outstanding shares of the same class; or if the common stock is quoted on NASDAQ or a stock exchange, the average weekly trading volume during the four calendar weeks immediately preceding the sale. We cannot predict what effect, if any, that sales of shares of common stock, or the availability of these shares for sale, will have on the market prices prevailing from time to time. Nevertheless, the possibility that substantial amounts of common stock may be sold in the public market may adversely effect prevailing prices for our common stock and could impair our ability to raise capital in the future through the sale of equity securities.16

InTable ~~addition to the 18,017,624 shares~~ of “restricted securities” that were issued and outstanding as of December 31, 2008, we have a registration statement that registers for resale an aggregate of 1,906,557 shares of our common stock. The additional overhang represented by these registered securities could also have a depressive effect on the public trading price of our common stock.Contents

17The sale of the shares of our common stock acquired in private placements could cause the price of our common stock to decline.

~~Table~~The purchasers of ~~Contents~~our outstanding convertible promissory notes, debentures, and related warrants, as well as the holders of our other outstanding convertible notes, may, subject to compliance with Rule 144, rely on the provisions of Rule 144 to resell the shares of our common stock acquired upon the conversion and exercise of such securities. We have no way of knowing whether or when such shares may be sold. Depending upon market liquidity at the time, a sale of shares by such investors at any given time could cause the trading price of our common stock to decline. The sale of substantial number of shares of our common stock, or anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales.

~~The~~In ~~sale~~connection with our January 2008 and April 2008 Debentures, in the aggregate, we issued a total of $6.3 million principal amount of convertible debentures, convertible into 4,690,695 shares of our common stock, and warrants to purchase an additional 611,111 shares of our common stock. In connection with our September 2009 Debentures and our January 2010 Debentures, we issued a total of $3.4 million principal amount of convertible debentures, convertible into 6,500,000 shares of our Common Stock and warrants to purchase an additional 5,625,000 shares of our Common Stock. The conversion or exercise into our common stock could result in a substantial increase in the number of shares in our public float. Depending upon market liquidity at the time a resale of our common stock ~~acquired~~is made by the investors in ~~private~~such private placements, such sale could cause the trading price of our common stock to decline. In addition, the sale of a substantial number of shares of our common stock, or anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales.

The purchasers of our January 2008 and April 2008 Debentures and related warrants, as well as the holders of our other outstanding convertible notes, may, subject to compliance with Rule 144, rely on the provisions of Rule 144 to resell the shares of our common stock acquired upon the conversion and exercise of such securities. We have nosignificant ~~way of knowing whether or when such shares may be sold~~indebtedness. Depending upon market liquidity at the time, a sale of shares by such investors at any given time could cause the trading price of our common stock to decline. The sale of substantial number of shares of our common stock, or anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales.

InWe ~~addition,~~have inincurred ~~connection with our January 2008 and April 2008 Debentures, in the aggregate, we issued a total of~~ $59.57 million in principal amount of indebtedness ~~convertible~~as ~~debentures,~~a ~~convertible~~result ~~into~~of ~~4,074,074~~the ~~shares~~issuance of our ~~common~~ ~~stock~~September 2009, January 2008 and ~~warrants~~April 2008 ~~to purchase an additional 611,111 shares of our common stock~~Debentures. ~~We agreed to register for resale~~ The bydebentures ~~the~~impose ~~investors~~significant ~~the~~requirements ~~shares~~on ofus, ~~common~~including, ~~stock~~among ~~issuable~~others, requirements ~~upon~~that ~~the~~we ~~conversion~~pay ofinterest ~~the debentures~~ and ~~the~~other ~~exercise~~charges ofon the ~~warrants~~debentures. Our weability ~~issued~~to incomply ~~those~~with ~~private~~these provisions ~~placements.~~may ~~The~~be ~~conversion~~affected orby ~~exercise~~changes ~~into~~in our ~~common~~business ~~stock~~condition ~~and~~or ~~the registration~~results of ~~that common stock could result in a substantial increase in the~~our ~~number~~operations, ofor ~~shares~~other inevents beyond our ~~public float~~control. ~~Depending~~We ~~upon~~have ~~market~~breached ~~liquidity~~certain atof ~~the~~these ~~time~~covenants aand ~~resale~~are ofin ~~our~~a ~~common~~default ~~stock~~under ~~is made by~~ the ~~investors in such private placements~~debentures, ~~such~~which ~~sale~~permits ~~could cause~~ the ~~trading~~ ~~price~~holders ofthereof ~~our common stock~~ to ~~decline. In~~accelerate ~~addition,~~ the ~~sale~~maturity of the adebentures ~~substantial~~and ~~number~~demand ofrepayment ~~shares~~in offull. Such ~~our~~actions ~~common stock,~~by ~~or anticipation of~~ such ~~sales,~~holders could ~~make~~impair itour ability ~~more difficult for us~~ to ~~sell~~ ~~equity~~operate or ~~equity-related~~cause ~~securities~~us ~~in the future at a time and at a price that we might otherwise wish~~ to ~~effect~~seek ~~sales~~bankruptcy protection.

WeCertain ~~have~~covenants ~~significant~~we ~~indebtedness and~~ agreed to ~~certain~~in connection ~~restrictions~~with ~~as a~~the ~~result~~debentures ofmay impair our ~~recent~~ability ~~private~~to ~~placement~~issue ofadditional ~~convertible~~debt or ~~debentures~~equity.

WeOur ~~incurred~~September 2009, ~~$5.5 million in principal amount of indebtedness as a result of the issuance of our~~ January 2008 and April 2008 Debentures~~. The~~ ~~debentures carry substantial covenants that~~ impose significant ~~restrictions~~covenants on us, including restrictions against incurring additional indebtedness, creating any liens on our property, amending our certificate of incorporation or bylaws, redeeming or paying dividends on shares of our outstanding common stock, and entering into certain related party transactions. ~~The debentures~~ ~~also~~These ~~carry substantial~~ covenants ~~that~~and ~~impose~~restrictions ~~significant requirements~~may onimpair ~~us,~~our ~~including,~~ability ~~among~~to ~~others, requirements that we pay interest~~issue ~~and~~additional ~~other~~debt ~~charges~~or onequity, ~~the~~if ~~debentures;~~necessary.

~~Our~~If ~~ability~~we toneed ~~comply~~additional ~~with these provisions may be affected by changes~~financing in ~~our~~the ~~business~~future ~~condition~~and orare ~~results~~required ofto ~~our~~issue ~~operations,~~securities orwhich ~~other~~are ~~events~~priced ~~beyond~~at less ~~our~~than ~~control. We~~the ~~have~~conversion ~~breached~~price ~~certain~~ of ~~these~~ ~~covenants~~our ~~and are in a default under the~~ debentures, ~~which~~or ~~permits~~ the ~~holders~~ ~~thereof~~exercise toprice ~~accelerate the maturity~~ of ~~the debentures and demand~~warrants ~~repayment~~sold in ~~full. Such actions by such holders could impair~~ our ~~ability~~recent toprivate ~~operate~~placements, orit ~~cause~~will usresult toin ~~seek~~additional ~~bankruptcy protection~~dilution.

~~Certain~~Our ~~covenants~~September 2009, weJanuary 2008 ~~agreed~~and April 2008 Debentures and the related warrants contain provisions that will require us to reduce inthe ~~connection~~conversion ~~with~~price and exercise price, as the ~~debentures~~case may be, if we issue ~~impair~~additional securities while such debentures or warrants are outstanding which contain purchase prices, conversion prices or exercise prices less than the conversion price of our ~~ability~~September 2009, January 2008 or April 2008 Debentures or the exercise price of the warrants. If this were to ~~issue~~occur, ~~additional~~current ~~debt~~investors, other orthan ~~equity~~the investors in our recent private placements, would sustain material dilution in their ownership interest.

~~Our~~Anti-takeover ~~January 2008 and April 2008 Debentures impose significant~~provisions ~~covenants~~contained ~~on us, some of which may impair our ability to issue additional debt or equity, if necessary. For example, the investors~~ in our ~~April 2008~~amended ~~Debentures~~and ~~have~~restated ~~the~~certificate ~~right~~of toincorporation ~~participate in~~and ~~any financing we undertake through the date that is the 12 month anniversary~~amended ofand ~~the~~restated ~~effectiveness~~bylaws, ofas ~~the~~well ~~registration~~as ~~statement~~provisions ~~we agreed to file for the re-sale~~ of ~~our~~Delaware ~~shares~~law, ofcould ~~common~~impair ~~stock issuable upon conversion and exercise of~~a ~~our~~takeover ~~April 2008 Debentures~~attempt.

Our ~~failure~~amended toand ~~secure~~restated certificate of incorporation, amended and ~~maintain~~restated ~~registration~~bylaws ofand Delaware law contain provisions that could have the ~~common~~effect ~~stock~~of rendering more difficult or discouraging an acquisition deemed ~~could~~undesirable ~~result~~by inour ~~substantial~~board ~~liquidated~~of ~~damages~~directors. Our corporate governance documents include provisions:

~~Under~~· authorizing ~~the~~blank ~~terms~~check ~~of the registration rights agreements we entered into~~preferred ~~with the investors in connection with our January 2008 and April 2008 Debentures, we agreed to file a registration statement covering the resale of the shares of common~~ stock ~~underlying the securities we sold in such private placements~~, ~~and~~which tocould ~~maintain~~be ~~the~~issued ~~effectiveness~~with of the registration statements (subject to certain limitations) for a period of time until the holders can sell the underlying common stock without volume restrictions under Rule 144 of the Securities Act. If the registration statement is not declared effective within an agreed to time periodvoting, ~~or if we fail to maintain the effectiveness of the registration statement~~liquidation, ~~we are required to pay to the investors partial liquidated damages. Since the registration statement was effective on July 31~~dividend, ~~2008,~~and ~~after the~~other ~~deadline in the registration~~ rights ~~agreement,~~superior weto ~~may~~our becommon ~~liable for liquidated damages, in the amount of $14.7 thousand, which we have accrued as a liability.~~stock;

18· limiting the liability of, and providing indemnification to, our directors and officers;

~~Table~~· limiting the ability of ~~Contents~~our stockholders to call and bring business before special meetings;

If· requiring weadvance ~~need~~notice ~~additional~~of stockholder ~~financing~~proposals infor ~~the~~business ~~future and are required~~ to ~~issue securities~~be ~~which~~conducted ~~are priced~~ at ~~less~~meetings ~~than the conversion price~~ of our ~~debentures~~ orstockholders ~~the~~and ~~exercise~~for ~~price~~nominations of ~~warrants~~candidates ~~sold~~for inelection to our ~~recent~~board ~~private placements, it~~of ~~will result in additional dilution.~~directors;

~~Our~~· controlling ~~January 2008 and April 2008 Debentures and~~ the ~~related warrants~~procedures ~~contain~~for ~~provisions that will require us to reduce~~ the ~~conversion price~~ conduct and ~~exercise~~scheduling price, as the case may be, if we issue additional securities while such debentures or warrants are outstanding which contain purchase prices, conversion prices or exercise prices less than the conversion price of ~~our~~board ~~January 2008 or~~and ~~April 2008~~stockholder ~~Debentures~~meetings; or the exercise price of the warrants. If this were to occur, current investors, other than the investors in our recent private placements, would sustain material dilution in their ownership interest.and

~~Anti-takeover~~· limiting, ~~provisions~~generally, ~~contained~~the infilling ~~our amended and restated~~of ~~certificate~~vacancies ofor ~~incorporation~~newly ~~and~~created ~~amended~~seats ~~and~~on ~~restated~~the ~~bylaws,~~board asto ~~well~~our ~~as provisions~~board of ~~Delaware~~directors ~~law,~~then ~~could impair a takeover attempt~~in office.

Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions:17

~~· authorizing~~Table ~~blank~~of ~~check preferred stock, which could be issued with voting, liquidation, dividend, and other rights superior to our common stock;~~Contents

~~· limiting~~These ~~the~~provisions, ~~liability~~alone ofor together, ~~and~~could delay hostile ~~providing~~takeovers ~~indemnification~~and ~~to,~~changes ~~our~~in ~~directors~~control ~~and~~or ~~officers;~~changes in our management.

~~· limiting~~Any provision of our amended and restated certificate of incorporation or bylaws or Delaware law that has the ~~ability~~effect of ~~our~~delaying or ~~stockholders~~deterring a change in control could limit the opportunity for our stockholders to ~~call~~receive a premium for their shares of our common stock, and ~~bring~~could ~~business~~also affect ~~before~~the ~~special~~price ~~meetings;~~that some investors are willing to pay for our common stock.

~~· requiring~~We ~~advance~~may ~~notice~~issue additional shares of ~~stockholder~~our ~~proposals~~capital ~~for~~stock, ~~business~~including through convertible debt securities, to befinance future ~~conducted~~operations ator ~~meetings~~complete a business combination, which would reduce the equity interest of our stockholders and ~~for~~could ~~nominations~~cause ofa ~~candidates~~change ~~for~~in ~~election~~control toof our ~~board of~~ ~~directors;~~ownership.

~~· controlling~~Although ~~the~~we ~~procedures~~have ~~for~~no commitments as of the date of this ~~conduct~~report ~~and~~to ~~scheduling~~issue any additional securities, we may issue a substantial number of additional ~~board~~shares ~~and~~of ~~stockholder~~our ~~meetings;~~common stock or preferred stock, or a combination of both, including through convertible debt securities, to finance future operations. We may not be able to obtain additional debt or equity financing on favorable terms, if at all. If we engage in debt financing, then we may be required to accept terms that restrict our ability to incur additional indebtedness and force us to maintain specified liquidity or other ratios.

~~· limiting~~Further, ~~generally,~~ the ~~filling~~issuance of additional shares of our ~~vacancies~~common stock or ~~newly~~any ~~created~~number ~~seats~~of onshares ~~the~~of ~~board~~preferred tostock, ~~our~~including ~~board~~upon conversion of ~~directors~~any ~~then~~debt ~~in office.~~securities, may:

~~These provisions, alone or together, could delay hostile takeovers and~~· significantly ~~changes~~reduce inthe ~~control~~equity orinterest ~~changes~~of in our ~~management.~~current stockholders;

~~Any~~· cause a ~~provision~~change ofin ~~our~~control ~~amended~~if ~~and~~a ~~restated~~substantial ~~certificate~~number of ~~incorporation or~~our ~~bylaws~~shares ~~or Delaware law that has the effect~~ of ~~delaying~~common stock or voting ~~deterring~~preferred astock ~~change in~~are ~~control~~issued, ~~could~~which ~~limit~~may ~~the~~affect, ~~opportunity~~among ~~for~~other things, our ability ~~stockholders~~ to ~~receive~~use ~~a premium~~our ~~for~~net ~~their~~operating ~~shares~~loss ofcarry-forwards, ~~our~~if ~~common stock~~any, and could also ~~affect the price~~ ~~that~~result ~~some~~in ~~investors~~a ~~are~~change ~~willing~~in tomanagement; ~~pay for our common stock.~~and/or

We· adversely ~~may~~affect ~~issue~~prevailing ~~additional shares of our capital stock, including through~~market ~~convertible~~prices ~~debt~~for ~~securities, to finance future operations or complete a business combination, which would reduce the equity interest of~~ our ~~stockholders and~~common ~~could cause a change in control of our ownership~~stock.

~~Although~~If we ~~have~~need noadditional ~~commitments~~capital asand ofcannot ~~the~~raise ~~date~~it ~~of this report to issue~~on ~~any~~acceptable ~~additional securities~~terms, we may ~~issue a substantial number of additional shares of our common stock or preferred stock, or a combination of both, including through convertible debt securities, to finance future operations. We may~~ not be able to ~~obtain additional debt or equity financing on favorable terms~~, ifamong ~~at all. If we engage in debt financing, then we may be required to accept terms that restrict our ability to incur additional indebtedness and force us to maintain specified liquidity or~~ other ~~ratios.~~things:

~~Further,~~· develop ~~the~~or ~~issuance~~enhance ~~of additional shares of~~ our ~~common~~products ~~stock or any~~and ~~number of shares of preferred stock, including upon conversion of any debt securities, may:~~services;

· ~~significantly~~continue ~~reduce~~to ~~the~~expand ~~equity~~our development, ~~interest~~sales ofand ~~our~~marketing ~~current stockholders~~organizations;

· ~~cause~~acquire acomplementary ~~change in control if a~~technologies, ~~substantial~~products ~~number of our shares of common stock~~ or ~~voting preferred stock are issued, which may affect, among other things, our ability to use our net operating loss carry-forwards, if any, and could also result in a change in management~~businesses; ~~and/or~~

· ~~adversely~~expand ~~affect prevailing market prices for our common stock.~~operations;

If· hire, wetrain ~~need additional capital~~ and ~~cannot~~retain ~~raise it on acceptable terms,~~employees; ~~we may not be able to, among other things:~~and/or

· ~~develop~~respond orto ~~enhance~~competitive ~~our~~pressures ~~products and~~or ~~services;~~unanticipated working capital requirements.

~~· continue~~Although we have no commitments as of the date hereof to ~~expand~~issue any additional securities, we may issue a substantial number of additional shares of our ~~development~~common stock or preferred stock, or a combination of ~~sales~~both, ~~and~~including ~~marketing~~through ~~organizations;~~convertible debt securities, to finance future operations or complete a business combination. The issuance of additional shares of our common stock or any number of shares of preferred stock, including upon conversion of any debt securities:

· ~~acquire~~may ~~complementary~~significantly ~~technologies,~~reduce the equity ~~products~~interest orof ~~businesses~~our current stockholders;

· ~~expand~~will ~~operations~~likely cause a change in control if a substantial number of our shares of common stock or voting preferred stock are issued and could also result in a change in management; and/or

· ~~hire,~~may ~~train~~adversely ~~and~~affect ~~retain employees;~~prevailing ~~and/or~~market prices for our common stock.

~~· respond~~The 2009 Equity Incentive Plan and the 2007 Stock Incentive Plan and all options currently issued pursuant to ~~competitive~~these ~~pressures~~plans and options granted outside such plans provides for accelerated vesting of all unvested options in the event of a change of control. This may be regarded as both a disincentive to acquisition of the Company as a liquidation strategy and a barrier to retention of key employees following a change-of-control acquisition and therefore make such an acquisition more costly or difficult, and therefore an ~~unanticipated~~unattractive ~~working~~strategic ~~capital~~option, ~~requirements~~for a prospective acquirer.

19We have never paid dividends on our capital stock and we do not anticipate paying any cash dividends in the foreseeable future.

~~Table~~We have paid no cash dividends on any of ~~Contents~~our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of the various Debentures prohibit us from making any dividend payment or distribution to holders of our common stock while any portion of the Debentures remain outstanding. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

~~Although~~Our ~~we have no commitments as of the date hereof to issue any additional~~ securities, we may ~~issue~~be ~~a substantial number of additional shares~~thinly oftraded ~~our~~on ~~common~~the ~~stock~~Over-the-Counter orBulletin ~~preferred stock~~Board, orwhich amay ~~combination~~not ofprovide ~~both, including~~liquidity ~~through~~for ~~convertible debt securities, to finance future operations or complete a business combination. The issuance of additional shares of~~ our ~~common stock or any number of shares of preferred stock, including upon conversion of any debt securities:~~investors.

~~· may~~Our common stock is quoted on the Over-the-Counter Bulletin Board. The Over-the-Counter Bulletin Board is an inter-dealer, over-the-counter market that provides significantly ~~reduce~~less liquidity than the NASDAQ ~~equity~~Stock Market or other national or regional exchanges. Securities traded ~~interest~~on ofthe ~~our~~Over-the-Counter ~~current~~Bulletin ~~stockholders;~~Board are usually thinly traded, highly volatile, have fewer market makers, and are not followed by analysts.

· will likely cause a change in control if a substantial number of our shares of common stock or voting preferred stock are issued and could also result in a change in management; and/or18

~~· may~~Table ~~adversely~~of ~~affect prevailing market prices for our common stock.~~Contents

The ~~2007~~SEC’s ~~Stock~~order ~~Incentive~~handling ~~Plan~~rules, ~~and~~which ~~all~~apply ~~options~~to NASDAQ-listed ~~issued~~securities, ~~under~~do ~~the~~not ~~2007 Stock~~apply ~~Incentive~~to ~~Plan~~securities ~~contain~~quoted ~~provisions~~on the Over-the-Counter Bulletin Board. Quotes for ~~acceleration~~stocks ofincluded ~~all~~on ~~unvested~~the ~~options~~Over-the-Counter Bulletin Board may not be listed in newspapers. Therefore, prices for securities traded solely on the ~~event~~Over-the-Counter ofBulletin aBoard ~~change~~may be difficult to obtain and holders of ~~control,~~our ~~which~~securities ~~might~~may be aunable ~~disincentive~~ to resell ~~acquisition~~their ofsecurities ~~the~~at ~~Company~~or asnear atheir ~~liquidation~~original ~~strategy~~acquisition price, or at any price.

~~The~~Investors ~~2007~~must ~~Stock~~contact ~~Incentive Plan and all options currently issued thereunder and options granted outside such plan provides for accelerated vesting of all unvested options in the event of~~ a ~~change of control, which is~~ ~~defined~~broker-dealer asto antrade ~~acquisition by a single person of more than 50 percent of~~ Over-the ~~total~~-Counter ~~combined~~Bulletin ~~voting~~Board ~~power of all of our outstanding~~ securities. ~~This~~As ~~may be regarded as~~ a ~~barrier to retention of key employees following a~~result, ~~change-of-control~~you ~~acquisition~~may ~~and~~not ~~therefore~~be ~~make~~able ~~such~~to anbuy ~~acquisition more costly~~ or ~~difficult,~~sell ~~and~~our ~~therefore~~common anstock ~~unattractive~~at ~~strategic~~the ~~option,~~times ~~for~~that ~~a prospective~~you ~~acquiror~~may wish.

WeEven ~~have~~though ~~never~~our ~~paid~~common ~~dividends~~stock is quoted on the Over-the-Counter Bulletin Board, the Over-the-Counter Bulletin Board may not permit our ~~capital~~investors ~~stock~~to sell securities when and wein dothe ~~not~~manner ~~anticipate~~that they wish. ~~paying~~Because ~~any~~there ~~cash~~are ~~dividends~~no automated systems for negotiating trades on the Over-the-Counter Bulletin Board, they are conducted via telephone. In times of heavy market volume, the limitations of this process may result in a significant increase in the ~~foreseeable~~time ~~future~~it takes to execute investor orders. Therefore, when investors place market orders to buy or sell a specific number of shares at the current market price it is possible for the price of a stock to go up or down significantly during the lapse of time between placing a market order and its execution.

WeOur ~~have paid no cash dividends on any of our classes of capital~~ stock to ~~date~~price ~~and~~may webe ~~currently intend to retain our future earnings, if any, to fund~~volatile ~~the development~~ and ~~growth~~you ofmay ~~our~~not ~~business. In~~be ~~addition,~~able ~~the terms of the Notes prohibit us from making any dividend payment or distribution~~ to ~~holders~~sell ~~of our common stock while any portion of the Notes remain outstanding. As a result, capital appreciation, if any, of our common stock will be~~ your ~~sole~~shares ~~source~~for ~~of gain~~more ~~for~~than ~~the~~what ~~foreseeable~~you ~~future~~paid.

Our ~~securities~~stock price is likely to be subject to significant volatility and you may not be ~~thinly~~able ~~traded~~to onsell shares of common stock at or above the ~~Over-~~price you paid for them. The market price of the~~-Counter~~ ~~Bulletin~~common stock could ~~Board~~continue to fluctuate in the future in response to various factors including, but not limited to: quarterly variations in operating results; our ability to control costs and improve cash flow; announcements of technological innovations or new products by us or our competitors; changes in investor perceptions; and new products or produce enhancements by us or our competitors. The stock market in general has continued to experience volatility, which may further affect our stock price. As such, you may not ~~provide~~be ~~liquidity~~able ~~for~~to ~~our~~resell ~~investors~~your shares of common stock at or above the price you paid for them.

Our common stock is ~~quoted~~likely onto ~~the Over-the-Counter Bulletin Board. The~~be ~~Over-the-Counter~~subject ~~Bulletin~~to ~~Board~~penny isstock ~~an inter-dealer, over-the-counter market that provides significantly less liquidity than the NASDAQ Stock Market or other national or regional exchanges~~rules. ~~Securities traded on the Over-the-Counter Bulletin Board are usually thinly traded, highly volatile, have fewer market makers, and are not followed by analysts.~~

~~The~~Our ~~SEC’s~~common ~~order~~stock ~~handling~~is ~~rules~~subject to Rule 15g-1 through 15g-9 under the Exchange Act, which ~~apply~~imposes tocertain ~~NASDAQ~~sales practice requirements on broker-~~listed~~dealers which sell our common stock to persons other than established ~~securities~~customers and “accredited investors” (generally, doindividuals ~~not~~with ~~apply~~net toworth ~~securities~~in excess ~~quoted~~of on$1 ~~the~~million ~~Over-the-Counter~~or ~~Bulletin~~annual incomes exceeding $200 thousand (or $300 ~~Board~~thousand together with their spouses). For ~~Quotes~~transactions covered by this rule, a broker-dealer must make a special suitability determination for ~~stocks~~the ~~included~~purchaser onand have received the purchaser’s ~~Over-~~written consent to the transaction prior to the sale. This rule adversely affects the ability of broker-~~Counter~~dealers ~~Bulletin~~to ~~Board~~sell ~~may~~our common stock and purchasers of our common stock ~~not~~to sell their shares of such common stock. Additionally, our common stock is likely to be subject to the SEC regulations for “penny stock.” Penny stock includes any equity security that is not listed inon ~~newspapers~~a national exchange and has a market price of less than $5.00 ~~Therefore~~per share, ~~prices~~subject ~~for~~to ~~securities~~certain exceptions. The ~~traded~~regulations ~~solely~~require onthat ~~the~~prior ~~Over~~to any non-exempt buy/sell transaction in a penny stock, a disclosure schedule set forth by the~~-Counter~~ ~~Bulletin~~SEC ~~Board~~relating ~~may~~to the penny stock market must be delivered ~~difficult~~to the purchaser of such penny stock. This disclosure must include the amount of commissions payable to ~~obtain~~both the broker-dealer and ~~holders~~the ofregistered representative and current price ~~our~~quotations ~~securities~~for ~~may~~the common stock. The regulations also require that monthly statements be ~~unable~~sent to ~~resell~~holders ~~their~~of ~~securities~~penny stock atwhich ordisclose ~~near~~recent ~~their~~price information for the penny stock and information ~~original~~of ~~acquisition~~the ~~price,~~limited ormarket atfor ~~any~~penny ~~price~~stocks. These requirements adversely affect the market liquidity of our common stock.

~~Investors~~ITEM ~~must contact a broker-dealer to trade Over-the-Counter Bulletin Board securities~~IB. ~~As a result, you may not be able to buy or sell our~~ UNRESOLVED ~~common~~STAFF ~~stock at the times that you may wish.~~COMMENTS

~~Even though our common stock is quoted on the Over-the-Counter Bulletin Board, the Over-the-Counter Bulletin Board may not permit our investors to sell securities when and in the manner that they wish~~None. Because there are no automated systems for negotiating trades on the Over-the-Counter Bulletin Board, they are conducted via telephone. In times of heavy market volume, the limitations of this process may result in a significant increase in the time it takes to execute investor orders. Therefore, when investors place market orders to buy or sell a specific number of shares at the current market price it is possible for the price of a stock to go up or down significantly during the lapse of time between placing a market order and its execution.

Our stock price may be volatile and you may not be able to sell your shares for more than what you paid.

Our stock price is likely to be subject to significant volatility and you may not be able to sell shares of common stock at or above the price you paid for them. The market price of the common stock could continue to fluctuate in the future in response to various factors including, but not limited to: quarterly variations in operating results; our ability to control costs and improve cash flow; announcements of technological innovations or new products by us or our competitors; changes in investor perceptions; and new products or produce enhancements by us or our competitors. The stock market in general has continued to experience volatility, which may further affect our stock price. As such, you may not be able to resell your shares of common stock at or above the price you paid for them.

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Our common stock is likely to be subject to penny stock rules.

Our common stock is subject to Rule 15g-1 through 15g-9 under the Exchange Act, which imposes certain sales practice requirements on broker-dealers which sell our common stock to persons other than established customers and “accredited investors” (generally, individuals with net worths in excess of $1 million or annual incomes exceeding $200 thousand (or $300 thousand together with their spouses)). For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to the sale. This rule adversely affects the ability of broker-dealers to sell our common stock and purchasers of our common stock to sell their shares of such common stock. Additionally, our common stock is likely to be subject to the SEC regulations for “penny stock.” Penny stock includes any equity security that is not listed on a national exchange and has a market price of less than $5.00 per share, subject to certain exceptions. The regulations require that prior to any non-exempt buy/sell transaction in a penny stock, a disclosure schedule set forth by the SEC relating to the penny stock market must be delivered to the purchaser of such penny stock. This disclosure must include the amount of commissions payable to both the broker-dealer and the registered representative and current price quotations for the common stock. The regulations also require that monthly statements be sent to holders of penny stock which disclose recent price information for the penny stock and information of the limited market for penny stocks. These requirements adversely affect the market liquidity of our common stock.

ITEM IB. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our corporate headquarters is located in Maple Valley, Washington, but we do not own or lease any real property and conduct the major portion of our business activities virtually: using the Internet and other telecommunications tools like those wedistributed ~~offer for distribution~~ in ~~Etelos~~ Marketplaces. Webased ~~believe~~upon ~~that~~the ~~our~~Etelos ~~existing~~Platform ~~properties~~Suite for ~~are~~SaaS indistribution. ~~good~~In ~~condition~~the ~~and~~future ~~are~~we ~~sufficient~~may ~~and~~be ~~suitable~~required ~~for~~to ~~the~~lease ~~conduct~~workspaces ~~of our~~to ~~business~~enhance productivity and collaboration. Our requirements for property are not unique or specialized; if and when the need arises, we believe that suitable space will be available to us on commercially reasonable terms.

ITEM 3. LEGAL PROCEEDINGS

From time to time, we become subject to various legal proceedings and claims, both asserted and unasserted, that arise in the ordinary course of business. Litigation in general, and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings are difficult to predict. An unfavorable resolution of one or more of these lawsuits would materially adversely affect our business, results of operations, or financial condition. We accrue legal costs when incurred. The need to defend any such claims could require payments of legal fees and our limited financial resources could severely impact our ability to defend any such claims.

In June 2008, Kaufman Bros. L.P. filed suit against us in the United States District Court for the Southern District of New York (Case No. 80 CV 5716) and sought a temporary restraining order and other extraordinary relief. The complaint arises out of an advisory services agreement, pursuant to which Kaufman Bros. was to provide us with advisory services in connection with financings and strategic transactions. We notified Kaufman Bros. that we believed it had failed to provide the required services under the agreement, and that we were therefore entitled to terminate the agreement for cause. In the suit, Kaufman Bros. was seeking (i) monetary damages of $400,000 for anticipatory breach of the agreement; (ii) $73,800 in fees allegedly owed in connection with a previously closed financing transaction; (iii) and injunction prohibiting us from cancelling any shares issued to Kaufman Bros. as compensation, (iv) a declaration from the court that we are not entitled to a refund of any fees previously paid to Kaufman Bros., and (v) a declaration that we are obligated to pay Kaufman Bros. a commission on any financing or transaction that we enter into within 18 months following the termination of the agreement. On July 15, 2008, Kaufman Bros. voluntarily filed a notice of dismissal without prejudice. Settlement discussions were unsuccessful and, on July 31, 2008, Kaufman Bros. re-filed substantially the same claims in the Supreme Court of New York - County of New York (Index No. 08-602239). Effective on December 5, 2008, the Company entered into a settlement agreement with Kaufman Bros., pursuant to which (i) the Company agreed to pay to Kaufman Bros. $210,000, in twelve monthly installments of $17,500; (ii) the Company issued to Kaufman Bros. warrants to purchase 500,000 shares of the Company’s common stock at an exercise price of $0.75 per share, which warrants have a term of five years; (iii) the Company and Kaufman Bros. agreed immediately to terminate all provisions, terms and conditions of the advisory services agreement and exchanged mutual releases; and (iv) Kaufman Bros. agreed to dismiss the pending lawsuit in the Supreme Court of New York, without prejudice. Subsequent to entering into the settlement agreement, we have not fully complied with our payment obligations under the 19

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~~settlement~~During ~~agreement~~the ~~but~~quarter ended December 31, ~~through~~2009, the Company ~~date~~entered ofinto ~~filing~~a Settlement Agreement with Jeffrey L. Garon, our former CEO; see the Company’s Form 8-K filed with the SEC on December 18, 2009. Subsequent to the end of ~~this~~the quarter, ~~report~~all payments required by the settlement agreement were made, ~~Kaufman~~whereby the ~~Bros.~~Company has ~~not~~repurchased ~~exercised~~2,356,655 ~~any~~shares of ~~its~~common ~~remedies~~stock ~~for~~previously ~~default~~issued ~~under~~to Garon at the ~~settlement~~original ~~agreement~~purchase price of approximately $175,000, and all the repurchased shares have been cancelled.

OnIn ~~October~~June 312008, Kaufman Bros. L.P. initiated litigation against us for breach of contract under an advisory services agreement and, effective on December 5, 2008, ~~the~~we ~~Company~~entered ~~closed~~into ~~its~~a ~~offices~~settlement agreement with Kaufman Bros., pursuant to which (i) we agreed to pay to Kaufman Bros. $210,000, in ~~San~~twelve ~~Mateo~~monthly installments of $17,500; (ii) we ~~California~~issued to Kaufman Bros. a warrant to purchase 500,000 shares of our common stock at an exercise price of $0.75 per share exercisable for a period of five years; (iii) we agreed with Kaufman Bros. to immediately terminate all provisions, terms and ~~abandoned~~conditions of the ~~leased~~advisory ~~premises~~services agreement and exchanged mutual releases; and (iv) Kaufman Bros. agreed to dismiss the pending lawsuit in the Supreme Court of ~~its~~New ~~former~~York, ~~offices~~without ~~there~~prejudice. ~~The~~Subsequent ~~landlord~~to ~~for~~entering ~~these~~into ~~premises~~the ~~has~~settlement agreement, ~~asserted~~we did not fully comply with our payment obligations under the settlement agreement and we received a ~~claim~~notice of default and confession of judgment against us. On December 31, 2009, we settled the judgment in the approximate amount of $186,000, for $~~659~~93,000 ~~thousand~~in ~~for~~cash, ~~alleged~~payable ~~unpaid~~in ~~rent~~5 installments ~~and~~with ~~other~~the ~~amounts~~final installment due June 1, 2010, and ~~filed~~the issuance aof ~~proceeding~~200,000 inshares ~~the~~of ~~Superior~~restricted ~~Court~~common stock. The terms of ~~San~~the ~~Mateo~~settlement agreement ~~County~~permit Kaufman Bros. to sell up to 180,000 ~~California~~shares ~~(Case~~from ~~No.~~July ~~CIV~~1, ~~479535)~~2010, onthrough ~~December~~March 192011 to recover the remaining $93,373 ~~2008~~of the settlement; the additional 20,000 shares are designated for payment of attorneys’ fees in the event of a default in the note payments. ~~This~~ After ~~matter~~payment in full of the note payments, if there is ~~pending~~no default giving rise to a claim for attorneys’ fees, those 20,000 shares will be returned to us and cancelled. After Kaufman Bros. recovers the ~~Company~~remaining ~~intends~~$93,373 from the sale of some or all of the 180,000 shares, we have a right to ~~defend~~repurchase ~~its~~any ~~position~~remaining shares for $0.01 and cancel such shares, after March 2011, any balance due on the remaining amount of the settlement will be discharged and we will repurchase any unsold shares at $0.01 per share and cancel them.

~~ITEM~~On 4October 31, 2008, we closed our offices in San Mateo, California. On ~~SUBMISSION~~or OFabout ~~MATTERS~~December 19, TO2008, the landlord for these premises filed a complaint claiming damages of $659 thousand and other amounts against the Company’s predecessor Etelos, Incorporated, a Washington corporation (“Etelos —WA”) in the Superior Court of San Mateo County, California (Case No. CIV 479535). A ~~VOTE~~default OFjudgment ~~SECURITY~~was ~~HOLDERS~~set aside because the landlord failed to properly serve either the Company or Etelos-WA. The Company was subsequently served properly and trial was set for February 8, 2010. The parties went to mediation in January 2010 and subsequently entered into a settlement agreement, including a release of claims, in which we agreed: (a) to pay $66,000 in cash within 30 days, (b) to issue a $200,000 promissory note, with 6% interest, payable in 12 monthly payments beginning in July 2010, and (c) to issue shares of Common Stock of the Company equal to $125,000 in value, based upon the closing price of the Company’s stock on January 6, 2010. The settlement agreement and note were executed and delivered on February 8, 2010, and 166,667 shares were subsequently were delivered on March 1, 2010.

~~There~~As ~~were~~part noof our reduction of monthly cash operating ~~matters~~expenses ~~submitted~~during tothe aquarter ~~vote~~ended December 31, 2008, and continuing after the end of ~~stockholders~~the ~~during~~quarter, we placed all employees in Washington and California on partial deferrals of salary, ranging from 10% to 100% of base salary. At the end ~~fourth~~of that quarter, until the filing date of ~~fiscal~~this report, a major portion of ~~year~~this ~~2008~~deferral amount remains unpaid, including amounts due to employees who subsequently were terminated.

~~PART II~~ITEM 4. REMOVED AND RESERVED

~~ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES~~PART II

~~Market~~ITEM ~~for~~5. ~~Registrant~~MARKET FOR REGISTRANT’sS ~~Common~~COMMON ~~Equity~~EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

~~Effective April 29, 2008, shares of our common stock began being~~Market ~~quoted~~for onRegistrant’s ~~the~~Common OTC Bulletin Board under the symbol “ETLO.” The OTC Bulletin Board is a regulated quotation service that displays real-time quotes, last-sale prices and volume information in over-the-counter equity securities. The OTC Bulletin Board securities are traded by a community of market makers that enter quotes and trade reports. This market is extremely limited and any prices quoted may not be a reliable indication of the value of our common stock.Equity

~~The~~Effective ~~following table sets~~April 29, ~~forth~~2008, ~~the~~shares ~~high~~of ~~and~~our ~~low~~common ~~bid~~stock ~~prices~~began ~~per~~being ~~share~~quoted ofon ~~our~~the ~~common~~OTC ~~stock~~Bulletin byBoard under the symbol “ETLO.” The OTC Bulletin Board ~~for~~is ~~the~~a ~~periods~~regulated ~~indicated~~quotation service asthat ~~reported~~displays onreal-time quotes, last-sale prices and volume information in over-the-counter equity securities. The OTC Bulletin Board securities are traded by a community of market makers that enter quotes and trade reports.

For the year ended December 31, 2008	High		Low
Fourth Quarter	$	1.25	$	0.10
Third Quarter	$	14.00	$	1.15
Second Quarter (Commencing April 29, 2008)	$	4.99	$	0.76

~~The~~Table ~~quotes represent inter-dealer prices, without adjustment for retail mark-up, markdown or commission and may not represent actual transactions. The trading volume~~ of ~~our securities fluctuates and may be limited during certain periods. As a result of these volume fluctuations, the liquidity of an investment in our securities may be adversely affected.~~Contents

~~Holders~~The following table sets forth the high and low bid prices per share of ~~Record~~our common stock by the OTC Bulletin Board for the periods indicated as reported on the OTC Bulletin Board.

As of December 31, 2008, there were 23,027,624 shares of our common stock outstanding held by approximately 145 holders of record.

For the year ended December 31, 2009	High		Low
Fourth Quarter	$	1.00	$	0.31
Third Quarter	$	0.79	$	0.25
Second Quarter	$	1.20	$	0.36
First Quarter	$	2.75	$	0.10

Transfer Agent

For the year ended December 31, 2008	High		Low
Fourth Quarter	$	1.25	$	0.10
Third Quarter	$	14.00	$	1.05
Second Quarter (Commencing April 29, 2008)	$	4.99	$	0.50

~~Our~~The ~~transfer~~quotes represent ~~agent~~inter-dealer isprices, ~~BNY~~without ~~Mellon~~adjustment ~~Shareowner~~for ~~Services~~retail mark-up, Pmarkdown or commission and may not represent actual transactions.~~O. Box~~ The trading volume of our securities ~~358016,~~fluctuates ~~Pittsburgh~~and may be limited during certain periods. As a result of these volume fluctuations, PAthe liquidity ~~15252~~of an investment in our securities may be adversely affected.

~~Dividends~~Holders of Record

WeAs ~~have~~of ~~never declared or paid any cash dividends on our common stock. For the foreseeable future~~March 16, ~~we intend to retain any earnings to~~ ~~finance the development and expansion of our business~~2010, ~~and~~there wewere ~~do not anticipate paying any cash dividends on our common stock. In addition~~23,939,810 weshares ~~are~~of ~~restricted from paying any dividends on~~ our common stock ~~under~~outstanding ~~the~~held ~~terms~~by ~~of our January debentures~~approximately ~~and~~62 ~~April debentures. Any~~holders ~~future determination to pay dividends will be at the discretion~~ of ~~our board of directors~~record.

~~Securities Authorized for Issuance~~Transfer ~~under Equity Compensation Plans~~Agent

~~The~~Our ~~table~~transfer ~~below~~agent ~~sets~~is ~~forth~~BNY Mellon ~~information~~Shareowner asServices, ~~of December~~P.O. 31Box 358016, ~~2008~~Pittsburgh, ~~with~~ ~~respect~~PA ~~to compensation plans under which our common stock is authorized for issuance~~15252. ~~The figures related to equity compensation plans approved by security holders relate to~~

22Dividends

~~Table~~We have never declared or paid any cash dividends on our common stock. For the foreseeable future, we intend to retain any earnings to finance the development and expansion of ~~Contents~~our business, and we do not anticipate paying any cash dividends on our common stock. In addition, we are restricted from paying any dividends on our common stock under the terms of our January debentures and April debentures. Any future determination to pay dividends will be at the discretion of our board of directors.

~~options granted~~Securities ~~under~~Authorized ~~the~~for ~~1999~~Issuance ~~Stock~~under ~~Option~~Equity ~~Plan~~Compensation ~~and the 2007 Stock Incentive Plan. We do not have any equity compensation plans not approved by its security holders.~~Plans

Plan Category		Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)		Weighted-average exercise price of outstanding options, warrants and rights (b)			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column a) (c)
Equity compensation plans approved by security holders		4,086,497		$	0.26		791,145

The table below sets forth information as of December 31, 2009, with respect to compensation plans under which our common stock is authorized for issuance. The figures related to securities authorized for issuance under equity compensation plans relate to options granted under the 1999 Stock Option Plan, the 2007 Stock Incentive Plan, and the 2009 Equity Incentive Plan. The 1999 Stock Option Plan, and the 2007 Stock Incentive Plan were approved by our shareholders. Our shareholders have not approved the 2009 Equity Incentive Plan.

~~ITEM 6. SELECTED FINANCIAL DATA~~21

AsTable aof ~~smaller reporting company we are not required to provide the information required by this item.~~Contents

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column a) (c)
Equity compensation plans approved by security holders	1,089,665	$	0.31	264,542
Equity compensation plans not approved by security holders	5,025,000	$	0.51	3,975,000

~~The~~Daniel J.A. ~~following~~Kolke ~~discussion~~received ofa ~~our~~grant ~~financial condition and results~~ of ~~operations~~ ~~should~~3,433,333 beoptions ~~read~~under inhis ~~conjunction~~employment ~~with our financial statements and the~~agreement ~~related~~that ~~notes~~was ~~and~~not ~~other~~issued ~~financial~~under ~~information appearing elsewhere in this report. Readers are also urged to carefully review and consider~~ the ~~various disclosures~~terms ~~made by us which attempt to advise interested parties~~ of ~~the factors~~these ~~which~~equity ~~affect~~compensation ~~our business, including without limitation, the disclosures made under “Item 1A~~plans. ~~Risk Factors” included in Part I of this report.~~

~~Overview~~ITEM 6. SELECTED FINANCIAL DATA

WeAs ~~are~~ a ~~provider~~smaller ~~of tools and services for the development and~~reporting ~~distribution~~company ofwe ~~Web~~are ~~Applications. We generate~~not ~~revenues~~required ~~from~~to aprovide ~~share of revenues generated by~~ the ~~sales~~information ~~of subscriptions~~required ~~to use Web Applications developed~~ by usthis ~~and by our Syndication Partners, which are offered through Etelos Marketplaces developed and operated by us~~item. Our principal cost of revenue is hardware, software, and network connectivity used in connection with the delivery of our products and services. Our primary operating expenses are for personnel costs, especially in technology research and development.

~~During~~ITEM the quarter ended December 31, 2008, we took significant steps intended to improve our operating results, ranging from changing the focus of our business model from an end-user-focused model to a focus on enterprise customer sales to reducing monthly cash operating expenses by aggregate workforce reductions of over 70% and relocating our corporate headquarters to lower cost facilities7. ~~The~~ ~~shift~~MANAGEMENT’S inDISCUSSION ~~business~~AND ~~focus~~ANALYSIS isOF aFINANCIAL ~~fundamental~~CONDITION ~~change,~~AND ~~and~~RESULTS ~~the~~OF reduction of operating expenses is a one-time exercise in survival that has thus far been successful, but this exercise is not completed and has created a substantial working capital deficit that must be addressed and resolved.OPERATIONS

~~Similar~~The tofollowing ~~other~~discussion ~~companies, we have suffered the effects~~ of ~~the current adverse economic conditions. For this reason, as discussed in more detail elsewhere in this report, we have not been making recent payments due and owing on~~ our ~~outstanding~~financial ~~debt securities,~~condition ~~including our January 2008 Debentures~~ and ~~April 2008~~results ~~Debentures. As a result the holders~~ of ~~such~~operations ~~securities may~~should ~~declare us in default and demand that all amounts due thereunder~~ be ~~immediately~~ ~~paid~~read in ~~cash,~~conjunction ~~and~~ with ~~respect to~~ our ~~January Debentures~~financial statements and ~~April Debentures,~~ the ~~holders~~related ~~may~~notes ~~demand that we pay 130 percent of the outstanding principal amount~~ and ~~interest. If~~other ~~such~~financial ~~demand~~information ~~was~~appearing ~~made,~~elsewhere ~~then~~in wethis doreport. ~~not~~Readers ~~currently~~are ~~have~~also ~~the~~urged ~~financial resources~~ to ~~make~~carefully ~~the payments~~review ~~owed. In addition, the holders of our January Debentures~~ and ~~April Debentures~~ ~~may~~consider ~~have~~ the ~~right~~various todisclosures ~~foreclose~~made onby ~~substantially~~us ~~all~~which ofattempt ~~our~~to ~~assets~~advise ~~pursuant to~~interested ~~the~~parties ~~terms~~ of the ~~security~~factors ~~agreement~~which weaffect ~~entered into with such holders and they would have the right to take possession of~~ our ~~assets and operate our~~ business~~. Though~~, weincluding ~~are~~without ~~in regular communication with~~limitation, the ~~holders~~disclosures ofmade ~~our outstanding debt securities, and none of them have demanded payment or exercised other remedies due to our current default~~ under ~~such securities,~~“Item we1A. ~~can~~Risk ~~give~~Factors” noincluded ~~assurances~~in ~~that~~Part I ~~the holders will not exercise their~~of ~~remedies~~this ~~in the future~~report.

We need immediate and substantial cash to continue our operations. Management has projected that the combination of cash on hand will be sufficient to allow us to continue our operations only through June 2009, and only if the holders of our outstanding debt securities do not demand payment of such securities or exercise other remedies. If cash reserves are not sufficient to sustain operations, then we plan to raise additional capital by selling shares of our capital stock or other securities. However, there are no Overview

23We are a provider of tools and services for the development and distribution of Web Applications. We generate revenues from a share of revenues generated by the sales of subscriptions to use Web Applications developed by us and by our Syndication Partners, which are offered through Marketplaces based on the Etelos Platform Suite for SaaS distribution, that we develop and operate. We also are engaged in negotiations for the licensing of the Etelos Platform Suite for the development and operation of marketplaces by third parties. Our principal cost of revenue is hardware, software, and network connectivity used in connection with the delivery of our products and services. Our primary operating expenses are for personnel costs, especially in technology research and development.

~~Table~~During the quarter ended December 31, 2008, we took significant steps intended to improve our operating results, ranging from changing the focus of ~~Contents~~our business model from an end-user-focused model to a focus on enterprise customer sales to reducing monthly cash operating expenses by aggregate workforce reductions of over 70% and relocating our corporate headquarters to lower cost facilities. The shift in business focus was a fundamental change, and the reduction of operating expenses was a one-time exercise in survival that has thus far been successful, but this exercise is not completed and has created, and continues to create, a substantial working capital deficit that must be addressed and resolved.

~~commitments~~As ora ~~arrangements~~major ~~for~~part ~~future~~of ~~financings~~our inreduction ~~place~~of atmonthly ~~this time~~cash ~~and~~operating weexpenses ~~can~~during ~~give~~the nosix ~~assurance~~quarters ~~that~~ending ~~such~~December 31, ~~capital~~2009, ~~will~~and continuing beto ~~available~~the ondate ~~favorable terms~~of this report, orwe atplaced all~~. If~~ weremaining ~~cannot~~employees ~~obtain~~on ~~financing,~~partial ~~then~~payment weof ~~may~~salary; beall ~~forced~~except tothe ~~further~~three ~~curtail~~lowest ~~our~~paid ~~operations,~~employees ~~cease~~are ~~voluntarily~~receiving ~~filing~~payment ~~reports~~ranging ~~with~~from ~~the~~97% ~~SEC,~~to or74% ~~possibly~~of benet ~~forced~~pay. At tothe ~~evaluate~~end ~~a sale or liquidation~~ of ~~our~~the ~~assets~~quarter, orand ~~consider~~as ~~strategic~~of ~~alternatives such as~~the ~~bankruptcy. Even~~filing ifdate weof ~~are~~this ~~successful in raising additional funds~~report, ~~there~~the isamount noof ~~assurance~~this ~~regarding~~deferral, ~~the~~which ~~terms~~has ofbeen accrued, ~~any~~remains ~~additional investment~~substantially ~~and~~unpaid, ~~any~~including ~~such~~amounts ~~investment~~due orto ~~other~~employees ~~strategic~~in our ~~alternative~~California ~~would~~office ~~likely substantially~~who ~~dilute~~subsequently orwere ~~eliminate~~terminated during the ~~interests~~quarter ending ofDecember 31, ~~our stockholders~~2008.

~~Corporate~~Similar ~~Changes~~to other companies, we have suffered the effects of the current adverse economic conditions. We restructured a major portion of our debt securities on June 30, 2009, and entered into an additional long-term debt financing on September 30, 2009, which converted a series of bridge loans entered into in the first three quarters of calendar 2009, and provided for additional cash in September 2009 and in December 2009. That cash was originally intended to carry us to June 2010 but we incurred substantial unexpected expenses in connection with resolving certain litigation matters and other major creditor claims. See “LEGAL PROCEEDINGS” above.

~~During~~Our ~~the~~survival ~~last~~plan ~~quarter~~has ofcontinued ~~the~~and ~~year~~we ~~ended~~continue ~~December 31,~~to ~~2008,~~need asimmediate and ~~well~~substantial ascash ~~after~~to continue our operations. Management has projected that the combination ~~year~~of ~~ended,~~cash weon ~~took~~hand ~~various~~will ~~steps~~be sufficient to ~~reduce~~allow ~~monthly~~us to continue our operations only through early-mid 2010. If cash reserves are not ~~operating~~sufficient ~~expenses~~to ~~and~~sustain ~~bring~~operations, ~~our~~then ~~expenses~~we ~~closer~~plan into ~~line~~raise ~~with~~additional ~~available~~capital ~~working~~by selling shares of our capital ~~and~~stock ~~anticipated~~or ~~revenues~~other ~~goals,~~securities. We ~~including~~are ~~further~~presently ~~reductions~~engaged in ~~our~~active ~~workforce~~discussions for additional investments by existing and ~~the~~prospective ~~relocation~~investors but ofwe ~~our~~have ~~corporate~~no ~~headquarters~~funding ~~from~~commitments ~~space~~in ~~that~~place at this time and we ~~were~~can give no ~~already~~assurance ~~leasing~~that insuch ~~Renton~~capital will be available on favorable terms, ~~Washington~~or at all. If we cannot obtain financing, then we may be forced to afurther ~~lower~~curtail ~~cost~~our ~~space.~~operations, ~~For~~cease ~~more~~voluntarily filing ~~information~~reports ~~regarding~~with the ~~reduction~~SEC, inor ~~force~~possibly ~~and~~be ~~the~~forced ~~relocation~~to evaluate a sale or liquidation of our ~~corporate~~ ~~headquarters~~assets, ~~please~~or ~~see~~consider ~~“Note~~strategic 14alternatives such as bankruptcy. Even ~~Restructuring”~~if towe ~~our~~are ~~financial~~successful in raising additional ~~statements~~funds, ~~included~~there inis ~~this~~no ~~report~~assurance regarding the terms of any additional investment and any such investment or other strategic alternative would likely substantially dilute or eliminate the interests of our stockholders.

As part of our reduction of monthly cash operating expenses during the last two quarters of the year ended December 31, 2008, and continuing to the date of this report, we placed all employees on partial deferrals of salary, ranging from 10% to 100% of base salary. At the end of the quarter, and as of the filing date of this report, the amount of this deferral, which has been accrued, remains unpaid, including amounts due to employees in our California office who subsequently were terminated during the quarter ending September 30, 2008.22

WeTable ~~also had a number~~ of changes in our executive management team. On September 18, 2008, Jeffrey L. Garon’s employment as our president and chief executive officer was terminated, and we appointed Daniel J.A. Kolke as our interim chief executive officer. Mr. Kolke, who founded Etelos in 1999, had been and continues to be the chairman of our board of directors and our chief technology officer. Mr. Garon subsequently resigned from our board of directors on October 19, 2008. Effective October 31, 2008, David S.G. MacKenzie resigned as our vice president and chief financial officer, but he continued to serve as an advisor and consultant to us through the end of the quarter. Daniel J.A. Kolke also serves as our interim chief financial officer.Contents

OnRecent ~~October 20, 2008, the Board elected Robert L. Thordarson to fill a vacancy on our board of directors until the next shareholders’ meeting.~~Financings

Certain of the steps we have taken to reduce monthly cash operating expenses, including the termination of employment of our employees and the abandonment of office facilities, may result in claims against us from the affected parties. See the risk factor entitled, “We may be subject to other legal claims” contained in Item 1A of PartJanuary ~~I of~~2010 ~~this report.~~Debentures

~~Recent~~On ~~Financings~~January 25, 2010, we entered into a securities purchase agreement with an entity affiliated with Donald W. Morissette for the sale of 10% senior secured convertible debentures, identical to the September 2009 Debentures, in the principal amount of $250,000. In this transaction, in addition to the debentures, we issued a warrant to purchase 375,000 shares of our common stock with an exercise price of $0.60 per share and 375,000 shares of our restricted common stock, or the “closing shares.” We refer to this financing as our January 2010 financing in this report. The securities purchase agreement further provided that we had the right, subject to certain conditions, to require the investor to purchase an aggregate of $125,000 in additional principal amount of debentures between March 15 and 31, 2010. We exercised that right on March 15, 2010, and issued $125 thousand in additional debentures to the investor. Mr. Morissette, who, together with his affiliates, beneficially owns more than 10% of our outstanding common stock.

~~Series~~September A2009 ~~Financing~~Debentures

~~During~~On ~~the month of December~~September ~~2008~~29, 2009, we ~~closed~~entered into a ~~round~~securities ofpurchase ~~financing~~agreement with three accredited investors for the sale of ~~833,333~~10% ~~shares~~senior ofsecured ~~our~~convertible ~~Series A~~debentures ~~Preferred~~in ~~Stock~~the ~~at $0.75~~principal ~~per~~amount ~~share, for an aggregate purchase price~~ of $~~625~~2.0 ~~thousand,~~million. ~~and warrants to~~One ~~purchase 833,333 shares~~ of ~~common stock of~~ the ~~Company,~~investors atin anour ~~exercise price of $0.75 per share, and a three year term.~~September ~~This~~2009 financing ~~was~~is ~~led~~an byaffiliate ~~Daniel~~of ~~J.A.~~Enable Capital ~~Kolke,~~Management ~~our founder~~LLC, ~~chairman~~who, ~~chief~~ ~~executive~~together ~~officer,~~with ~~acting~~its ~~chief financial officer~~affiliates, ~~and~~beneficially ~~chief technology~~owns ~~officer,~~more ~~with~~than ~~participation~~10% ~~from two~~ of our ~~directors~~outstanding common stock and ~~other~~holds ~~prior investors~~$7.7 ~~The~~million ~~holders~~in principal amount of ~~the~~our ~~January 2008~~outstanding ~~Debentures~~debentures, ~~and~~excluding the ~~April 2008~~principal amount ~~Debentures~~of ~~consented~~the todebentures ~~this~~purchased ~~financing,~~in ~~but~~our ~~did~~September 2009 ~~not participate~~financing.

~~April~~The following summarizes ~~2008~~the ~~Debentures~~terms of the debentures we agreed to issue:

On April 22, 2008, we entered into a securities purchase agreement with two unaffiliated institutional investors for the sale of original issue discount 6 percent convertible debentures and common stock purchase warrants. We refer to these debentures as our April 2008 Debentures. In this transaction we issued an aggregate of $3.5 million principal amount of debentures and warrants to purchase an aggregate of up to 388,889 shares of our common stock. The warrants have a term of three years and an exercise price of $1.80 per share, subject to adjustment, including full-ratchet anti-dilution protection. This transaction resulted in net proceeds to us of $3.4 million.

Term:		Due and payable on the second anniversary of the date of issuance.

Interest:		Interest is payable quarterly in cash at the rate of 10% per annum beginning on January 1, 2010.

Principal Payment:		The principal amount, if not paid earlier, is due and payable on the second anniversary of the date of issuance.

Early Redemption:		We have the right to redeem the debenture before maturity by payment in cash of 100% of the then outstanding principal amount plus (i) accrued but unpaid interest, (ii) an amount equal to all interest that would have accrued if the principal amount subject to such redemption had remained outstanding through the maturity date and (iv) all liquidated damages and other amounts due in respect of the debenture. To redeem the debenture we must meet certain equity conditions. The payment of the debenture would occur on the 20th trading day following the date we gave the holder notice of our intent to redeem the debenture. We agreed to honor any notices of conversion that we receive from the holder before the date we pay off the debenture.

Voluntary Conversion:		The debenture is convertible at anytime at the discretion of the holder at a conversion price per share of $0.50, subject to adjustment including anti-dilution protection.

Covenants:		The debenture imposes certain covenants on us, including restrictions against incurring additional indebtedness, creating any liens on our property, amending our certificate of incorporation or bylaws, redeeming or paying dividends on shares of our outstanding common stock, and entering into certain related party transactions. The debentures define certain events of default, including without limitation failure to make a payment obligation, failure to observe other covenants of the debenture or related agreements (subject to applicable cure periods), breach of representation or warranty, bankruptcy, default under another significant contract or credit obligation, delisting of our common stock, a change in control, or failure to deliver share certificates in a timely manner. In the event of default, generally, the holder has the right to accelerate all amounts outstanding under the debenture and demand payment of a mandatory default amount equal to the greater of (i) the outstanding principal plus accrued and unpaid interest divided by the conversion price multiplied by the volume weighted average price of our common stock and other amounts due in respect of the debenture and (ii) 120% of the amount outstanding plus accrued interest, the amount equal to all interest that would have accrued if the principal amount of the debenture had remained outstanding through the maturity date and all liquidated damages and other amounts due in respect of the debenture.

For a more detailed discussion of our April 2008 Debentures, please see the discussion under the caption “April 2008 Debentures” under “Note 10. Convertible Notes and Debentures and Embedded Derivative and Warrant Liability” to our financial statements contained in this report.23

24Table of Contents

~~Table~~ Security: The debenture is secured by all of ~~Contents~~our assets under the terms of the security agreement we entered into with the investors dated September 29, 2009.

~~January 2008~~We refer to these debentures as our September 2009 Debentures. The summary of the financing transaction, and of the terms of the securities and agreements related to such transaction, is qualified in its entirety by reference to the form of securities purchase agreement, debenture, warrant, and security agreement, each of which is filed as an exhibit to this report and incorporated herein by this reference.

OnIn ~~January 31~~this transaction, ~~2008,~~in weaddition ~~entered~~to ~~into~~the adebentures, ~~securities~~we issued warrants to purchase ~~agreement~~3,000,000 ~~with~~shares ~~three~~of ~~unaffiliated~~our ~~institutional~~common ~~investors~~stock ~~for~~with ~~the~~an ~~sale~~exercise price of 6$0.60 ~~percent~~per share, ~~secured~~or ~~convertible~~the ~~debentures~~“September 2009 ~~and~~warrants,” a warrant to purchase 2,250,000 shares of our common stock ~~purchase~~with ~~warrants~~an exercise price of $0. We01 ~~refer~~per toshare, ~~these~~or ~~debentures~~the as“ ~~our~~September 2009 par ~~January~~value warrant,” and ~~2008~~750,000 shares of our restricted common stock, or ~~Debentures~~the “closing shares.” InOne ~~this~~of ~~transaction~~the weinvestors paid part of its subscription ~~issued~~amount anthrough ~~aggregate~~the cancellation of approximately $21.02 million worth of indebtedness we owed to such investor in principal amount and accrued interest of ~~debentures~~various short-term ~~and~~promissory ~~warrants~~notes previously issued throughout 2009. The securities purchase agreement further provided that we had the right, subject to certain conditions, to require the investors to purchase an aggregate of ~~222,222~~$1.0 ~~shares~~million ofin ~~our~~additional ~~common~~principal amount ~~stock~~of debentures. ~~This~~We ~~transaction~~exercised ~~resulted~~that right inon ~~net~~December 15, ~~proceeds~~2009, ~~to us~~and ofissued $1.90 million of additional debentures at that time.

~~The~~For ~~warrants~~a ~~are~~more detailed ~~three~~discussion ~~year~~of ~~warrants~~our toSeptember 2009 ~~purchase~~Debentures, ~~shares~~please ofsee ~~our common~~the ~~stock~~discussion atunder athe ~~price~~caption of“September 2009 ~~$1.80~~Debentures” ~~per~~under ~~share,~~“Note ~~subject~~6. Convertible toNotes ~~adjustment,~~and ~~including~~Debentures ~~full-ratchet anti-dilution~~and ~~protection. As~~embedded ofDerivative ~~December 31,~~and Warrant Liability” ~~2008,~~to ~~none~~our offinancial ~~these~~statements ~~warrants~~contained ~~had~~in ~~been~~this ~~exercised~~report.

~~For a more detailed discussion of our January~~June ~~2008~~2009 ~~Debentures, please~~Amendment see the discussion under the caption “January 2008 Debentures” under “Note 10. Convertible Notes and Debentures and Embedded Derivative and Warrant Liability” to our financial statements contained in this report.Agreement

~~Critical~~On ~~Accounting~~June 30, 2009, we ~~Policies~~entered ~~Involving~~into ~~Management~~an ~~Estimates~~amendment agreement with the holder of our outstanding 6% secured convertible debentures in an aggregate principal amount of $5.5 million issued in January 2008 and ~~Assumptions~~April 2008 and our outstanding warrants to purchase up to 666,666 shares of our common stock issued in January 2008 and April 2008.

~~Our~~With ~~discussion~~respect ~~and~~to analysis of our financial condition and results of operations is based on our financial statements. In preparing our financial statements in conformity with accounting principles generally accepted in the ~~United States,~~ ~~we must make a variety of estimates and assumptions that affect the reported amounts of assets and liabilities~~debentures, ~~the~~under ~~disclosure of contingent assets and liabilities, and~~ the ~~reported~~terms ~~amounts~~ of ~~revenues and expenses. We have identified~~ the ~~following~~amendment ~~accounting policies that we believe require application of management’s most subjective judgments~~agreement, ~~often requiring~~ the ~~need~~parties toagreed ~~make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.~~to:

~~Allowance~~· extend ~~for~~the ~~Doubtful~~date ~~Accounts~~of maturity to December 31, 2012 (with respect to the debentures issued in January 2008, the maturity date was previously January 31, 2010 and with respect to the debentures issued in April 2008, the maturity date was April 30, 2010);

We· eliminate provide, when appropriate, an allowance for doubtful accounts to ensure that our trade receivables are not overstated due to un-collectability. The collectability of our accounts receivables is evaluated based on a variety of factors, including the ~~length~~monthly ~~of time receivables are past due, indication of~~redemption the customer’s willingness to pay, significant one-time events and historical experience. We have not recorded an allowance for doubtful accounts at this time as we believe all our accounts receivable will be collected.requirement;

~~Revenue~~· require ~~Recognition~~that all future interest payments be made in cash (previously, we could make payments in shares of our common stock);

We· reduce ~~provide Web Applications as a subscription service using~~ the ~~Software-as-a-Service~~ ~~(SaaS)~~interest orrate ~~software-on-demand business model and allow third parties~~ to ~~offer~~0% ~~their~~per ~~products and service through Storefronts in an~~annum ~~Etelos~~until ~~Marketplace, and to advertise on our web site or in our annual magazine for a fee. We also license our software under perpetual and term licenses.~~September ~~Revenues are recognized on these service and licensing transactions using the criteria in Securities and Exchange Commission Staff Accounting Bulletin 104~~30, “Revenue Recognition in Financial Statements” (SAB 104) and SOP 97-2, “Software Revenue Recognition”, (SOP 97-2) respectively, which both provide that revenue may be recognized when all of the following criteria are met:2010;

· ~~Persuasive~~ defer ~~evidence~~interest ofpayments anuntil ~~arrangement exists~~January 1, 2011;

· ~~The~~ require ~~product~~all oraccrued ~~service~~but ~~has~~unpaid interest as of June 30, 2009 and interest that would have been earned under the ~~delivered~~original terms to September 30, 2010 be added to the principal amount and be payable on the date of maturity;

· ~~The~~ waive ~~fee~~any isevent ~~fixed~~of ordefault ~~determinable,~~arising out of the nonpayment of any accrued interest as of the date of the amendment agreement; and

· ~~Collection~~ modify ofthe anti-dilution protection provisions such that the ~~resulting~~conversion price will not be reduced to less than ~~receivable~~$0.10 isas ~~reasonably~~a ~~assured~~result orof ~~probable~~any subsequent equity sales.

WeThe ~~must~~reduction ~~first~~in ~~determine~~interest rate, ~~whether~~deferment ~~SAB~~of ~~104~~interest orpayments, ~~SOP~~and ~~97-2~~elimination ~~applies~~of tothe ~~our revenue~~right ~~transactions. We~~to ~~than determine~~make ifinterest ~~the~~payments ~~criteria~~in ~~above~~shares ~~have~~of ~~been~~common ~~met~~stock bysignificantly ~~assessing~~reduce the ~~SAB~~short ~~104 and SOP 97-2 and~~term ~~their~~cash ~~various~~requirements ~~interpretations~~for inour ~~view~~company ofand the ~~agreements~~potential ~~and~~for ~~other~~future ~~documentation related~~dilution to ~~the revenue transactions. The~~our ~~interpretation~~stockholders ofthat ~~the~~could ~~agreements~~have ~~often~~occurred ~~requires considerable judgment~~ as ~~well as~~a ~~determining~~result ~~what~~of ~~accounting~~the ~~literature~~issuance isof ~~appropriate~~shares ~~and how that~~of ~~literature should be applied. If~~ our ~~standard~~ ~~agreements~~common ~~are~~stock ~~used~~ to ~~establish~~meet ~~evidence~~interest ofand ~~the~~monthly ~~arrangement,~~redemption ~~then~~payment ~~our revenue is generally recognized as follows:~~obligations.

~~· For~~In ~~SaaS~~addition, ~~revenue~~under ~~transactions,~~the ~~persuasive~~terms ~~evidence~~ of anthe ~~arrangement~~amendment ~~exists~~agreement, ~~upon~~the ~~acceptance~~holder byof the ~~customer~~warrants ofwas granted the right ato ~~binding~~exchange ~~agreement~~such ~~and~~outstanding ~~authorization~~warrants byfor ~~the~~shares ~~customer~~of toour ~~charge~~common astock ~~credit~~at ~~card;~~the ~~delivery~~rate ~~generally~~of ~~occurs~~one ~~over~~share ~~the~~of ~~term~~common stock underlying such warrants for one share of common stock. In exchange, the ~~subscription~~anti-dilution ~~agreement~~protection ~~related to~~under the warrants ~~SaaS;~~was ~~and~~eliminated. Previously the ~~fee~~exercise isprice ~~fixed~~of the warrants would decrease, and ~~collection~~the ~~reasonably~~number ~~assured~~of ~~when~~shares ~~the customer’s~~issuable ~~credit~~upon ~~card~~exercise iswould ~~charged.~~ increase, ~~Accordingly~~generally, ~~revenue~~each istime ~~recognized~~we ~~over~~issued common stock or common stock equivalents at a price less than the ~~period~~exercise price of the ~~SaaS~~warrants. The isamendment agreement ~~provided~~eliminates the potential for future dilution from the warrants.

· For software licensed under term or perpetual agreements, persuasive evidence of the arrangement is evidenced by a binding agreement signed by the customer and delivery generally occurs upon delivery of the software to a common carrier. If a significant portion of a fee is due after our normal payment terms of typically 30 days, we recognize revenue as the fees become due. If we determine that collection of a fee is not reasonably assured, we defer the fees and recognize revenue upon cash receipt, provided that all other revenue recognition criteria are met.24

25Table of Contents

~~Table~~ Under the terms of ~~Contents~~the amendment agreement, the parties also agreed to terminate the registration rights agreement dated January 31, 2008, as amended on April 22, 2008, and each agreed to waive any and all defaults that may have occurred under such agreement. We further agreed to provide an additional remedy to the holder if we fail to satisfy, for any reason, the current public information requirement under Rule 144(c).

~~However,~~For ifa ~~the~~more ~~terms~~detailed discussion ~~and conditions~~ of anour ~~agreement~~April 2008 ~~are nonstandard~~Debentures, ~~then~~ ~~significant~~please ~~contract~~see ~~interpretation is sometimes required to determine~~ the ~~appropriate~~ ~~accounting~~discussion ~~for these transactions including: (1) whether an~~under ~~arrangement exists; (2) how~~ the ~~arrangement~~caption ~~consideration should be allocated among potential multiple elements; (3)~~“April ~~when~~2008 toDebentures” ~~recognize~~under ~~revenue on~~“Note ~~the deliverables; (4) whether all elements of the arrangement have been delivered; (5) whether the arrangement should be reported gross as a principal versus net as an agent; (~~6~~) whether~~. weConvertible ~~receive~~Notes ~~a separately~~and ~~identifiable~~Debentures ~~benefit~~and ~~from~~Embedded ~~the~~Derivative ~~purchase arrangements with our customer for which we can reasonably estimate fair value;~~ and ~~(7) whether~~Warrant ~~the~~Liability” ~~arrangement should~~to ~~be characterized as revenue or a reimbursement of costs incurred. In addition,~~ our ~~revenue recognition policy requires an assessment as to whether~~financial ~~collection~~statements iscontained ~~reasonably assured, which inherently requires us to evaluate the creditworthiness of our customers. Changes~~ in ~~judgments~~this ~~on these assumptions and estimates could materially impact the timing or amount of revenue recognition~~report.

~~Internal~~For ~~Use~~a ~~Software~~more detailed discussion of our January 2008 Debentures, please see the discussion under the caption “January 2008 Debentures” under “Note 6. Convertible Notes and Debentures and Embedded Derivative and Warrant Liability” to our financial statements contained in this report.

~~Under~~Series A ~~SFAS~~Preferred NO. 86, “Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed” (SFAS 86), costs incurred in the research and development of new software products are expensed as incurred until technological feasibility is established. Alternatively, Statement of Position 98-1, “Accounting for Costs of Computer Software Developed or Obtained for Internal Use” (SOP 98-1), applies to software development costs that are not related to software to be sold, licensed, leased or otherwise marketed as a separate product or as part of a product or process and are within the scope of SFAS 86. Under SOP 98-1, software development costs incurred for software that is only used internally, including costs incurred to purchase third party software, are capitalized beginning when the Company has determined certain factors are present, including among others, that technology exists to achieve the performance requirements, buy versus internal development decisions have been made, and the Company’s management has authorized the funding for the project. We must determine whether SFAS 86 or SOP 98-1 is applicable to our software development costs. We then must determine when software capitalization should begin and cease and what costs under the applicable standard can be capitalized. Both of these tasks involves considerable judgment and can result in material different amounts of software being capitalized and have a significant impact on our reported results of operations. To date, because we plan to license all our software products, we have determined that the provisions of SFAS 86 should be applied to the cost of our product development. As products and enhancements have generally reached technological feasibility and have been released for sale at substantially the same time, all research and development costs have been expensed.Financing

In December 2008 and February 2009, we closed a round of financing for the sale of 843,333 shares of our Series A Preferred Stock~~-Based~~ ~~Compensation~~at ~~Expense~~$0.75 per share, for an aggregate purchase price of $632.5 thousand, and warrants to purchase 843,333 shares of common stock of the Company, at an exercise price of $0.75 per share, and a three year term. This financing was led by Daniel J.A. Kolke, our founder, chairman, chief executive officer, acting chief financial officer, and chief technology officer, with participation from two of our directors and other prior investors. The holders of the January 2008 Debentures and the April 2008 Debentures consented to this financing, but did not participate.

~~Effective~~During ~~January 1, 2006, we adopted SFAS 123R using~~ the ~~modified prospective~~quarter ~~method~~ended and therefore have not restated prior periods’ results. Under the fair value recognition provisions of SFAS 123R, we recognize stock-based compensation expense net of an estimated forfeiture rate and therefore only recognize compensation cost for those shares expected to vest over the service period of the award.December ~~Calculating stock-based compensation expense requires the input of highly subjective assumptions~~31, ~~including the expected term of the stock-based awards~~2009, ~~stock price volatility, and the pre-vesting option forfeiture rate. We~~ ~~estimate~~holders ~~the expected life~~ of ~~options granted based on historical exercise patterns~~100,000 ~~which~~shares ~~we believe are representative~~ of ~~future behavior. We estimate the volatility of~~ our ~~common~~Series A ~~stock~~Preferred onStock ~~the~~converted ~~date of grant based on~~ the ~~historical~~ ~~volatility~~shares ofinto ~~other~~common ~~publicly traded companies in our industry. The assumptions used in calculating the fair value of~~ stock~~-based~~ ~~awards~~at ~~represent our best estimates, but these estimates involve inherent uncertainties and~~ the ~~application~~ ofconversion ~~management~~price judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate, as well as the probability that performance conditions that affect the vesting of ~~certain awards will be achieved, and only recognize expense for those shares expected to vest~~$0.75 Weper ~~estimate the forfeiture rate based on historical experience of our stock-based awards that are granted, exercised, and cancelled~~share. At If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period. The quarter ended December 31, ~~2008,~~ ~~was~~2009 awe ~~highly~~had ~~volatile period for the economy on a global basis~~743, ~~during~~333 ~~which~~shares ~~period the Company found it necessary to take drastic measures to reduce operating expenses, but the likelihood~~ of ~~success~~Series A ofPreferred ~~these~~Stock ~~efforts~~issued ~~cannot be predicted. Therefore the forfeiture rate in the quarter ended December 31, 2008,~~ and ~~for the period up to the filing date of this report, was very high~~outstanding. ~~It is not known whether this forfeiture rate will be maintained in the future; management will continue to monitor its estimates.~~

Critical Accounting ~~for~~Policies ~~Convertible~~Involving ~~Notes and Debentures,~~Management ~~Embedded~~Estimates ~~Derivatives~~ and ~~Warrants~~Assumptions

~~The~~Our discussion ~~Company~~and ~~evaluates~~analysis ~~the~~of ~~embedded~~our ~~derivatives~~financial ~~included~~condition inand ~~the~~results ~~debt~~of operations is ~~instruments~~based iton ~~issues~~our ~~under~~financial ~~the~~statements. In preparing ~~guidance~~our financial statements in ~~Statement~~conformity ofwith ~~Financial~~accounting ~~Accounting~~principles ~~Standard~~generally ~~No. 133~~accepted ~~“Accounting~~in ~~for~~the ~~Derivative Instruments~~United ~~and~~States, ~~Hedging~~we ~~Activities”~~must ~~and~~make ~~its~~a ~~related~~variety ~~guidance~~of ~~and~~estimates ~~interpretations~~and ~~(SFAS~~assumptions ~~133)~~that onaffect the ~~issuance~~reported ~~date~~amounts of ~~the~~assets ~~debt~~ and onliabilities, ~~each~~the ~~subsequent~~disclosure ~~reporting~~of ~~date~~contingent toassets ~~determine~~and ~~whether~~liabilities, ~~such~~and ~~embedded~~the ~~derivatives~~reported ~~are~~amounts of ~~clearly~~revenues and ~~closely~~expenses. We ~~related~~have identified to the ~~debt~~following ~~host. The~~accounting ~~purpose~~policies that we believe require application of ~~the~~management’s ~~evaluation~~most issubjective judgments, often requiring the need to ~~determine~~make ~~whether~~estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

26Allowance for Doubtful Accounts

~~Table~~We provide, when appropriate, an allowance for doubtful accounts to ensure that our trade receivables are not overstated due to un-collectability. The collectability of ~~Contents~~our accounts receivables is evaluated based on a variety of factors, including the length of time receivables are past due, indication of the customer’s willingness to pay, significant one-time events and historical experience. We have not recorded an allowance for doubtful accounts at this time as we believe all our accounts receivable will be collected.

~~embedded~~Revenue derivatives, which are not clearly and closely related to the debt host, need to be bifurcated from the debt host and accounted for as a derivative at their estimated fair value as a liability or asset at the date of issuance and thereafter, adjusted to estimated fair value with a charge or credit to the Company’s statement of operations. SFAS 133 generally indicates that if the conversion features are (i) indexed to the Company’s capital stock and (ii) would be classified as equity if a freestanding derivative under the guidance in EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (EITF 00-19), then the embedded derivatives need not be bifurcated from the debt host. We also evaluate the warrants issued with the debt under EITF 00-19 to determine whether the proceeds allocated to the warrants or the fair value of the warrants should be recorded as equity or a liability, respectively, and if a liability adjusted to fair value with a charge or credit to the Company’s statement of operations. EITF 00-19 generally requires, among other factors, that (i) the Company can settle the derivative in cash or its own stock, at its option, (ii) settlement can be made in unregistered shares, and (iii) the Company has sufficient authorized shares to issue shares of its common stock for all equity instruments convertible to or which can be exercised for its capital stock. SFAS 133 also provides guidance on when put and call features included in a debt host agreement are not clearly and closely related to the debt host and must be bifurcated and recorded as liability. The guidance in SFAS 133 is complex and it has many interpretations. Accordingly, we must use judgment to apply and interpret this guidance as well as ensure we have applied the correct guidance.Recognition

IfWe provide ~~the~~Web ~~embedded~~Applications ~~derivatives~~as ora ~~warrants~~subscription ~~must~~service beusing ~~recorded~~ the Software-as -a ~~liability,~~-Service ~~then~~(SaaS) weor ~~must~~software-on-demand ~~make~~business ~~certain~~model ~~assumptions~~and toallow third ~~value~~parties ~~the~~to ~~embedded derivative. This~~offer ~~includes~~their ~~computing~~products ~~the discounted~~and ~~net~~services ~~present~~through ~~value~~Storefronts ~~(DNPV)~~in ofan Etelos ~~the~~Marketplace, ~~debt~~ and ~~making~~to ~~assumptions~~advertise ~~about interest~~on ~~rates,~~our ~~probabilities~~web ofsite ~~outcomes,~~or ~~volatility,~~in ~~fair~~our ~~value~~annual ~~of the~~magazine ~~Company’s~~for ~~stock~~a ~~prior~~fee. We toalso ~~its~~license ~~merger~~our ~~with~~software under ~~Tripath,~~perpetual and ~~discount~~term ~~rates~~licenses. ~~The~~ Revenues ~~discount~~are ~~factor~~recognized ison ~~the~~these ~~Company’s~~service ~~estimate~~and licensing transactions ofusing the ~~appropriate~~criteria ~~rate~~in ofASC ~~return~~605-10, ~~that~~“Revenue anRecognition” ~~investor~~(ASC ~~would~~605-10) ~~expect~~and ~~from a similar~~ASC ~~debenture~~985-605, ~~not~~“Software ~~taking~~Revenue ~~into~~Recognition”, ~~consideration~~(ASC ~~the~~985-605) ~~conversion~~respectively, ~~feature~~which orboth ~~warrants. All~~provide ofthat ~~these~~revenue ~~assumptions~~may ~~have a~~be ~~material~~recognized ~~impact~~when onall ~~the~~of ~~value attributed to~~ the ~~derivative~~following orcriteria ~~warrant.~~are met:

~~Results~~· Persuasive evidence of ~~Operations~~an arrangement exists,

~~Fluctuations~~· The inproduct ~~Operating~~or ~~Results~~service has been delivered,

~~Year~~· The ~~Ended~~fee ~~December 31,~~is ~~2008,~~fixed ~~Compared with~~or ~~Year Ended December 31~~determinable, ~~2007~~and

~~Revenues~~· Collection of the resulting receivable is reasonably assured or probable.

Revenues were $123 thousand and $304 thousand for the years ended December 31, 2008 and 2007, respectively. Revenues decreased by $181 thousand, or 60 percent, in the year ended December 31, 2008, compared to the same period in 2007. The decrease in revenues is due in part to reductions in revenues generated from the sale of newsletters and related hosting services and a one-time sale of software in June 2007. In the year ended December 31, 2008, and to the date of this report, we also experienced a significant decline in sales of our customer resource management product, which had been introduced in mid-2007.25

~~Cost~~Table of ~~Revenue~~Contents

~~Cost~~We must offirst ~~revenue~~determine ~~includes~~whether ~~our~~ASC ~~costs~~605-10 ofor ~~hardware,~~ASC ~~software~~985-605 ~~and~~applies ~~other resources~~to ~~used in delivery of~~ our ~~products and services~~revenue transactions. We ~~Cost~~than ofdetermine ~~revenue~~if ~~was~~the ~~$542~~criteria ~~thousand~~above ~~and~~have ~~$315~~been ~~thousand~~met ~~for~~by assessing the ~~years~~ASC ~~ended~~605-10 ~~December 31,~~and ~~2008~~ASC 985-605 and ~~2007,~~their ~~respectively.~~various ~~Cost~~interpretations ofin ~~revenue~~view ~~for~~of the ~~year~~agreements ofand ~~2008~~other ~~increased by $227~~documentation ~~thousand,~~related orto bythe 72revenue ~~percent~~transactions. The ~~increase~~ ininterpretation ~~cost~~ of ~~revenue~~the ~~from~~agreements ~~2007~~often torequires ~~2008~~considerable ~~was~~judgment ~~primarily~~as ~~attributable to the~~well ~~increased~~as ~~costs~~determining ofwhat ~~hosting~~accounting ~~and~~literature ~~Internet~~is ~~bandwidth~~appropriate ~~associated~~and ~~with~~how ~~the~~that ~~deployment~~literature ofshould ~~our~~be ~~products and services~~applied. If ~~Stated~~our asstandard agreements aare ~~percentage~~used ofto ~~revenues,~~establish ~~cost~~evidence of ~~revenue~~ ~~for~~ the ~~year ending December 31~~arrangement, ~~2008,~~then ~~was~~our ~~440 percent and for the~~revenue ~~corresponding~~is ~~period~~generally ofrecognized ~~2007~~as ~~was 103 percent.~~follows:

~~Operating~~For SaaS ~~Expenses~~revenue transactions, persuasive evidence of an arrangement exists upon acceptance by the customer of a binding agreement and authorization by the customer to charge a credit card; delivery generally occurs over the term of the subscription agreement related to the SaaS; and the fee is fixed and collection reasonably assured when the customer’s credit card is charged. Accordingly, revenue is recognized over the period the SaaS is provided.

~~Research~~For software ~~and~~licensed ~~Development. Research~~under ~~and~~term ~~development~~or ~~expenses~~perpetual ~~include primarily~~agreements, ~~employee~~persuasive ~~and~~evidence ~~employee~~of the ~~related~~arrangement ~~expenses.~~is ~~Research~~evidenced ~~and~~by ~~development expenses~~a ~~were~~binding ~~$2.6~~agreement ~~million~~signed ~~and~~by ~~$2.0 million for~~ the ~~years~~customer ~~ended December 31,~~and ~~2008~~delivery ~~and~~generally ~~2007,~~occurs ~~respectively.~~upon ~~Stated~~delivery asof athe ~~percentage~~software ofto ~~revenues,~~a ~~research~~common ~~and~~carrier. If ~~development~~a ~~expense~~significant ~~for~~portion ~~the~~of ~~corresponding~~a ~~periods~~fee ~~was~~is ~~2,151~~due ~~percent~~after ~~and~~our ~~642 percent,~~normal ~~respectively. Research~~payment ~~and~~terms of ~~development~~typically ~~expenses~~30 ~~increased~~days, bywe ~~$600~~recognize ~~thousand~~revenue oras bythe 30fees ~~percent,~~become indue. ~~the~~If ~~year~~we determine ~~ending~~that ~~December 31,~~collection ~~2008,~~of ~~compared~~a tofee ~~the~~is ~~same~~not ~~period~~reasonably inassured, ~~2007. This~~we ~~increase~~defer ~~was~~the ~~primarily~~fees ~~due~~and recognize torevenue ~~increased salary~~upon ~~and~~cash ~~benefits~~receipt, ~~expenses~~provided ~~for~~that ~~engineers~~all ~~engaged~~other inrevenue recognition ~~research~~criteria ~~and~~are ~~development~~met.

~~Sales~~However, if ~~and~~the ~~Marketing~~terms ~~Expenses. Sales~~ and ~~marketing~~conditions ~~expenses~~of ~~include~~an ~~payroll~~agreement are nonstandard, then significant ~~employee~~contract ~~benefits,~~interpretation ~~and~~is ~~other~~sometimes ~~headcount-related~~required ~~costs~~to ~~associated~~determine ~~with~~the ~~sales~~appropriate accounting ~~and~~for these transactions including: (1) whether an arrangement ~~marketing~~exists; ~~personnel~~(2) how ~~and~~the ~~travel,~~arrangement ~~advertising,~~consideration ~~promotions,~~should ~~trade~~be ~~shows,~~allocated ~~seminars,~~among ~~and~~potential ~~other~~multiple ~~programs.~~elements; ~~Sales~~(3) when ~~and~~to ~~marketing~~recognize ~~expenses~~revenue ~~were~~on ~~$1,662~~the deliverables; ~~thousand~~(4) whether ~~and~~all ~~$812 thousand~~elements ~~for~~of the ~~years~~arrangement ~~ended~~have ~~December~~been delivered; (5) ~~31,~~whether ~~2008~~the ~~and~~arrangement ~~2007,~~should ~~respectively.~~be ~~The~~reported gross as a ~~$850~~principal ~~thousand,~~versus ornet ~~105~~as ~~percent,~~an ~~increase~~agent; in(6) whether ~~sales~~we ~~and~~receive ~~marketing~~a ~~expense~~separately identifiable ~~was~~benefit ~~due~~from the purchase arrangements with our customer for which towe ~~increased~~can ~~activities~~reasonably ofestimate ~~sales~~fair value; and ~~marketing.~~(7) whether ~~Stated~~the arrangement should be characterized as revenue or a ~~percentage~~reimbursement of costs incurred. In ~~revenues~~addition, ~~sales~~our ~~and~~revenue ~~marketing~~recognition ~~expense~~policy ~~for~~requires ~~the~~an ~~corresponding~~assessment ~~periods~~as ~~was~~to 1whether collection is reasonably assured,~~351~~ which inherently requires us to evaluate the ~~percent~~creditworthiness of our customers. Changes in judgments on these assumptions and ~~267~~estimates ~~percent,~~could ~~respectively~~materially impact the timing or amount of revenue recognition.

27Internal Use Software

~~Table~~Under ASC 985-20 “Costs of ~~Contents~~Software to be Sold, Leased, or Marketed” (ASC 985-20), costs incurred in the research and development of new software products are expensed as incurred until technological feasibility is established. Alternatively, ASC 350-40 “Internal Use Software” (ASC 350-40), applies to software development costs that are not related to software to be sold, licensed, leased or otherwise marketed as a separate product or as part of a product or process and are within the scope of ASC 985-20. Under ASC 350-40, software development costs incurred for software that is only used internally, including costs incurred to purchase third party software, are capitalized beginning when the Company has determined certain factors are present, including among others, that technology exists to achieve the performance requirements, buy versus internal development decisions have been made, and the Company’s management has authorized the funding for the project. We must determine whether ASC 985-20 or ASC 350-40 is applicable to our software development costs. We then must determine when software capitalization should begin and cease and what costs under the applicable standard can be capitalized. Both of these tasks involves considerable judgment and can result in material different amounts of software being capitalized and have a significant impact on our reported results of operations. To date, because we plan to license all our software products, we have determined that the provisions of ASC 985-20 should be applied to the cost of our product development. As products and enhancements have generally reached technological feasibility and have been released for sale at substantially the same time, all research and development costs have been expensed.

~~General and Administrative. General and administrative expenses include payroll and related employee benefits, and other headcount~~Stock-~~related~~Based ~~costs associated~~Compensation with finance, facilities, legal and other administrative expenses. General and administrative expenses were $3,153 thousand and $923 thousand for the years ended December 31, 2008 and 2007, respectively. The $2,230 thousand, or 341 percent, increase in general and administrative expense was primarily attributable to increased hiring of accounting, administrative, legal, and compliance personnel and greater use of consultants and temporary personnel to support being a public company. Stated as a percentage of revenues, general and administrative expense for the corresponding periods was 25,634 percent and 303 percent, respectively.Expense

~~Restructuring~~We have adopted ASC 718-10 using the modified prospective method and therefore have not restated prior periods’ results. Under the fair value recognition provisions of ASC 718-10, we recognize stock-based compensation expense net of an estimated forfeiture rate and therefore only recognize compensation cost for those shares expected to vest over the service period of the award. Calculating stock-based compensation expense requires the input of highly subjective assumptions, including the expected term of the stock-based awards, stock price volatility, and the pre-vesting option forfeiture rate. We estimate the expected life of options granted based on historical exercise patterns, which we believe are representative of future behavior. We estimate the volatility of our common stock on the date of grant based on the historical volatility of other publicly traded companies in our industry. The assumptions used in calculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate, as well as the probability that performance conditions that affect the vesting of certain awards will be achieved, and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience of our stock-based awards that are granted, exercised, and cancelled. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period. Beginning in the quarter ended December 31, 2008, and continuing in the year ended December 31, 2009, the global economy has been highly volatile and, during this period, the Company found it necessary to take drastic measures to reduce operating expenses, but the likelihood of success of these efforts cannot be predicted. Therefore the forfeiture rate in the quarter ended December 31, 2008, was very high. The forfeiture rate declined substantially during the year ended December 31, 2009, but it is not known whether this forfeiture rate will be maintained in the future; management will continue to monitor its estimates.

Restructuring costs of $632 thousand for the year ended December 31, 2008, consisted primarily of employee related costs and $339 thousand in office rent obligations. There were no similiar costs in 2007.26

~~Other~~Table ~~Income~~of ~~(Expense)~~Contents

~~Net~~Accounting ~~other expense~~ for ~~the~~Convertible ~~year~~Notes ~~ended December 31, 2008, is $13.4 million,~~ and ~~it is related to the costs associated with completing the merger with Tripath. The merger-related costs include the value of 5~~Debentures,~~010,000 shares of~~ ~~Etelos~~Embedded ~~common~~Derivatives ~~stock paid to Tripath creditors, which were valued on April 22, 2008, at $2.63 per share for a total cost of $13.2 million,~~ and ~~legal, accounting and other professional fees paid to complete the Merger.~~ Warrants

~~Interest~~We evaluate ~~Expense~~the embedded derivatives included in the debt instruments we issue under the guidance in ASC 815-10 “Derivatives and Hedging” (ASC 815-10) on the issuance date of the debt and on each subsequent reporting date to determine whether such embedded derivatives are clearly and closely related to the debt host. The purpose of the evaluation is to determine whether the embedded derivatives, which are not clearly and closely related to the debt host, need to be bifurcated from the debt host and accounted for as a derivative at their estimated fair value as a liability or asset at the date of issuance and thereafter, adjusted to estimated fair value with a charge or credit to our statement of operations. ASC 815-10 generally indicates that if the conversion features are (i) indexed to the Company’s capital stock under the guidance in ASC 815-40-15 “Derivatives and Hedging — Contracts in Entity’s Own Equity — Scope and Scope Exceptions” (ASC 815-40-15) and (ii) would be classified as equity if a freestanding derivative under the guidance in ASC 815-40-25 “Derivatives and Hedging — Contracts in Entity’s Own Equity — Recognition” (ASC 815-40-25), then the embedded derivatives need not be bifurcated from the debt host. We also evaluate the warrants issued with the debt under ASC 815-40-25 to determine whether the proceeds allocated to the warrants or the fair value of the warrants should be recorded as equity or a liability, respectively, and if a liability adjusted to fair value with a charge or credit to our statement of operations. ASC 815-40-25 generally requires, among other factors, that (i) the Company can settle the derivative in cash or its own stock, at its option, (ii) settlement can be made in unregistered shares, and (iii) the Company has sufficient authorized shares to issue shares of its common stock for all equity instruments convertible to or which can be exercised for its capital stock. ASC 815-10 also provides guidance on when put and call features included in a debt host agreement are not clearly and closely related to the debt host and must be bifurcated and recorded as liability. The guidance in ASC 815-10 is complex and it has many interpretations. Accordingly, we must use judgment to apply and interpret this guidance as well as ensure we have applied the correct guidance.

~~Net~~If the ~~interest~~embedded ~~expense~~derivatives ~~was~~or ~~$(2,623)~~warrants ~~thousand~~must ~~for~~be ~~the~~recorded ~~year~~as ~~ended~~a ~~December 31~~liability, ~~2008,~~then ~~compared~~we must tomake ~~$362~~certain ~~thousand~~assumptions ~~for~~to value the ~~comparable~~embedded ~~period of 2007~~derivative. This ~~Interest expense~~includes ~~primarily~~computing ~~consisted~~the ofdiscounted ~~$2,872~~net present ~~thousand~~value of ~~amortization~~the ofdebt ~~notes discount,~~and ~~$991~~making ~~thousand~~assumptions ofabout ~~beneficial~~interest ~~conversion~~rates, probabilities of ~~interest~~outcomes, ~~conversion~~volatility, ~~and $479~~fair ~~thousand~~value of ~~interest~~the ~~expense~~Company’s onstock ~~convertible~~prior ~~notes~~to ~~and~~its ~~debentures~~merger with Tripath, ~~offset by~~and adiscount ~~change~~rates. The discount infactor is the ~~valuation~~Company’s estimate of ~~liability~~the ~~relating~~appropriate torate ~~embedded~~of ~~derivatives and~~return ~~warrants~~that ofan ~~$(6,965)~~investor ~~thousand~~would ~~for~~expect ~~the~~from ~~year~~a ~~ended~~similar ~~December~~debenture ~~31,~~not ~~2008,~~taking ~~compared to~~into ~~$80~~consideration ~~thousand~~the ofconversion ~~amortization~~feature ofor ~~notes~~warrants. All ~~discount~~of ~~and~~these ~~$282~~assumptions ~~thousand~~have ofa ~~interest~~material ~~expense~~impact on ~~convertible~~the ~~notes~~value ~~for~~attributed to the ~~year~~derivative ~~ended~~or ~~December 31, 2007~~warrant.

~~Net~~Our ~~Loss~~analysis and judgment may vary from quarter to quarter and changes in estimates may result in significant increases or decreases in expenses. Moreover, because of the relative size of our operations and the number of stock options and derivative instruments we have issued, income and expenses associated with changes in the value of outstanding derivative securities historically have had an overshadowing impact on our financial results. Consequently, our net income or loss for any particular period may not be indicative of the Company’s performance for that period as a result of the application of such accounting rules, and therefore should not be relied upon by any person as an accurate depiction of the true financial condition of the Company.

~~Our~~Results ~~net loss was $19.4 million and $4.0 million for the years ended December 31, 2008 and 2007, respectively, an increase~~ of $15.4 million, or 385 percent. The increase in net loss from 2007 to 2008 was primarily due to decreased revenue and increased salaries and general and administrative expenses and other employee-related costs incurred during a period of transition in which we were deeply involved in preparations for completing the reverse merger process, in addition to the Merger and interest charges explained above.Operations

~~Liquidity~~Year ~~and~~Ended ~~Capital~~December 31, ~~Resources~~2009, Compared with Year Ended December 31, 2008

On December 31, 2008, we had $7 thousand in cash and cash equivalents, net accounts receivable of $60 thousand, and prepaid expenses and other current assets of $46 thousand. Our working capital deficit at December 31, 2008, was $10.4 million, compared to a deficit of $3.5 million at December 31, 2007. The increase in working capital deficit is mainly attributable to the warrant and derivative liability recorded in prior periods and further discussed in “Note 6- Convertible Notes and Debentures and Embedded Derivative and Warrant Liability” in our financial statements included in this report.Revenues

~~Net~~Revenues were ~~cash~~$150 ~~used~~thousand byand ~~operating~~$123 ~~activities~~thousand ~~during~~for the ~~year~~years ended December 31, 2009 and 2008, ~~was~~respectively. $7Revenues ~~million,~~increased ~~compared~~by to $327 ~~million~~thousand, ~~during~~or ~~the~~22 ~~period~~percent, in the year ended December 31, 2009, compared to the same period in ~~2007~~2008. The ~~primary~~increase ~~use~~was ofdue ~~cash~~to ~~from~~a ~~operating~~few additional ~~activities~~ad ~~during~~hoc ~~the~~projects ~~year~~undertaken ~~ended~~concurrently ~~December 31, 2008,~~with ~~was~~the ~~merger-related~~transition ~~expenses~~in ofour business ~~$13~~model.~~2 million.~~

~~Net~~Cost ~~cash provided by financing activities for year ended December 31, 2008, was $6.2 million, primarily from the issuance~~ of our January 2008 Debentures and our April 2008 Debentures and the sale of the New Series A Preferred shares, further discussed in “Note 6 — Convertible Notes and Debentures and Embedded Derivative and Warrant Liability” in our financial statements included in this report.Revenue

~~Net~~Cost of ~~cash~~revenue ~~provided~~includes byour ~~financing~~costs ~~activities~~of network hardware, software and other resources used in delivery of our products and services. Cost of revenue was $268 thousand and $542 thousand for the ~~year~~years ended December 31, ~~2007~~2009 and 2008, respectively. ~~was~~Cost of revenue for the year of 2009 decreased by $~~4.0~~274 ~~million~~thousand, or ~~primarily~~by ~~from~~51 ~~the~~percent. The ~~issuance~~decrease in cost of ~~our~~revenue ~~20%~~from ~~Convertible~~2008 to 2009 was primarily attributable to the decreased costs ~~Notes~~of hosting and ~~our~~Internet 6%bandwidth ~~Convertible~~associated ~~Notes,~~with ~~further~~the ~~discussed~~transition in ~~“Note~~our business 6model. —Stated ~~Convertible~~as a percentage of revenues, cost of revenue for the ~~Notes~~year ~~and~~ending ~~Debentures~~December 31, ~~and~~2009, ~~Embedded~~was ~~Derivative~~179 percent and ~~Warrant~~for ~~Liability”~~the ~~in our~~corresponding ~~financial~~period ~~statements~~of ~~included~~2008 inwas ~~this~~440 ~~report~~percent.

We are currently in default of our September 2007 notes, January 2008 Debentures, and April 2008 Debentures for failure to make payments when due. The aggregate principal and accrued interest currently due under these debt securities as of the year ended December 31, 2008, is $7.7 million. Our January 2008 Debentures and April 2008 Debentures are secured by substantially all of our assets. If the holders of our outstanding debt securities determine to demand payment and we have insufficient cash to make the required payments, as is currently the case, the holders could force a sale of our assets for their benefit. Under such circumstances, we may need to cease operations or file for protection from claims of our creditors under the federal bankruptcy laws.27

28Table of Contents

~~Table of~~Operating ~~Contents~~Expenses

~~We need immediate~~ General and ~~substantial cash to continue our operations~~Administrative. General ~~Management has projected that the combination of cash on hand will~~and beadministrative ~~sufficient~~expenses toinclude ~~allow~~payroll usand torelated ~~continue~~employee ~~our operations only through June 2009~~benefits, ~~and~~ ~~only if the holders of our outstanding debt securities do not demand~~and ~~payment of such securities or exercise~~ other ~~remedies.~~headcount-related Ifcosts ~~cash~~associated ~~reserves~~with ~~are~~finance, ~~not sufficient to sustain operations~~facilities, ~~then~~legal ~~we plan to raise additional capital by~~and ~~selling~~other ~~shares~~administrative ofexpenses. ~~our~~General ~~capital~~and ~~stock~~administrative orexpenses ~~other~~were ~~securities~~$3. ~~However,~~1 million ~~there~~and ~~are~~$3.2 nomillion ~~commitments or arrangements~~ for ~~future~~the ~~financings~~years inended ~~place~~December 31, at2009 ~~this time~~ and ~~we can give no~~2008, ~~assurance~~respectively. ~~that~~The ~~such~~$102 ~~capital will be available on favorable terms~~thousand, or at3 ~~all. We~~percent, ~~may~~decrease ~~need~~in ~~additional~~general ~~financing thereafter~~and ~~until~~administrative weexpense ~~can~~was ~~achieve~~primarily ~~profitability. If we~~attributable ~~cannot~~to ~~obtain~~due ~~additional financing, then we may be forced~~ to ~~curtail~~decreased ~~our~~salary ~~operations,~~and ~~cease~~benefits ~~voluntarily~~expense ~~filing reports with the SEC, or possibly be forced to evaluate a sale or liquidation~~ of ~~our~~all ~~assets~~administrative ~~or consider other strategic alternatives such as bankruptcy. Even if we are successful in raising additional funds~~personnel, ~~there~~offset isby ~~no assurance~~increased ~~regarding the terms~~ use of ~~any~~consultants ~~additional~~to ~~investment~~support ~~and~~being ~~any~~a ~~such investment~~public ~~or other strategic alternative would likely substantially dilute or eliminate the interests of our stockholders~~company.

~~Subsequent~~Sales and ~~Events~~Marketing Expenses. Sales and marketing expenses include payroll, employee benefits, and other headcount-related costs associated with sales and marketing personnel and travel, advertising, promotions, trade shows, seminars, and other programs. Sales and marketing expenses were $0.8 million and $1.7 million for the years ended December 31, 2009 and 2008, respectively. The $831 thousand, or 50 percent, decrease in sales and marketing expense was due to decreased activities in direct sales and marketing.

InResearch and ~~the period after the end of the quarter ending December 31,~~Development. Research ~~2008,~~and wedevelopment ~~entered~~expenses ~~into~~include aprimarily ~~series~~employee ofand ~~bridge~~employee ~~loans with certain purchasers of our~~related ~~New~~expenses. ~~Series A~~Research ~~Preferred stock~~ and ~~with~~development ~~the~~expenses ~~holders~~were of$1.3 ~~our~~million ~~January 2008~~ and ~~April 2008 Debentures~~$2. In6 ~~the~~million ~~aggregate these bridge loans were~~ for the ~~principal~~years ~~amount~~ended ~~of $655 thousand~~December 31, ~~which~~2009 isand ~~estimated~~2008, torespectively. ~~cover~~Research and ~~our~~development ~~operating~~ expenses ~~through~~decreased ~~June 2009. These~~by ~~notes~~$1,325 ~~bear~~thousand ~~interest~~or atby ~~ten~~50 percent ~~per annum~~, ~~and~~in ~~have~~the ~~maturities~~year ~~ranging~~ending ~~from May~~December 31, 2009, ~~through~~compared ~~October 17, 2009. The notes payable~~ to the ~~holders~~same ofperiod ~~our~~in ~~New Series A Preferred stock were accompanied by 146,667 warrants to purchase shares of our Common Stock at $0~~2008.75 This ~~per~~decrease ~~share,~~was ~~with~~primarily adue ~~term of five years. The notes payable~~ to ~~the holder of our January 2008~~decreased salary and ~~April 2008~~benefits ~~Debentures~~expenses ~~are~~for ~~subject~~engineers toengaged ~~the security interest granted to those holders~~ in ~~connection~~research ~~with~~and ~~those debentures~~development.

~~Following the end of the year ended December 31, 2008, on additional 394,414 options were cancelled.~~Restructuring

~~Financing~~Restructuring costs ~~Obligations~~of $92 thousand for the year ended December 31, 2009, consisted primarily of an increase in the estimated closing costs of the San Mateo office rent obligations of $244 thousand based on the settlement reached with the landlord in January 2010, offset by a decrease in the estimated employee related costs of $175 thousand based on the settlement reached with our former CEO in December 2009. There were costs of $632 thousand in 2008, consisting primarily of employee related costs and office rent obligations.

AtOther Income ~~December 31, 2008, we had the following financing obligations:~~(Expense)

Net other expense for the year ended December 31, 2009, is $572 thousand, consisting of loss on extinguishment of debt in connection with the amendment of the January 2008 and April 2008 Debentures, and conversion of outstanding promissory notes into part of the September ~~2007~~2009 ~~Notes~~Debentures.

~~Our September 2007 notes were issued as part of a private~~Interest placement that was completed during August and September 2007. In that private placement we issued a total of approximately $3.3 million of 6% convertible notes at an original issue discount of 10% with warrants to purchase 1,080,000 shares of common stock with an exercise price of $1.20 per share. In connection with the Merger that closed on April 22, 2008, $1.5 million of these notes were converted at $0.75 per share. At the time of the Merger, 974,667 of the warrants had been exercised and the remaining 33,333 warrants expired by their terms upon closing the Merger.Expense

~~Under~~Net interest ~~the~~expense ~~terms~~was of$1.1 million for the ~~remaining~~year ended December 31, 2009, compared to interest income of $12.86 million offor the ~~notes~~comparable ~~that~~period ~~were~~of 2008. ~~not~~The ~~converted,~~increase ~~principal~~in ~~payments~~interest ~~began~~expense ~~being~~from ~~payable~~2008 onto ~~September 1, 2008,~~2009 ~~and~~of ~~will~~$3,689 ~~continue~~thousand was due to bethe ~~payable~~reduction onin the ~~last~~marked-to-market ~~day~~valuation of ~~each~~liabilities ~~calendar~~relating ~~quarter,~~to embedded derivatives and ~~interest~~warrants ~~payments~~because ~~began~~of ~~being~~the ~~payable~~stability ~~beginning~~in ~~February 1,~~the ~~2008.~~Company’s share Onprice ~~June~~between December 1531, ~~2008,~~ ~~the~~2009 ~~holders~~and of2008 ~~these~~and ~~notes~~due ~~agreed~~ to ~~either convert~~ the ~~then-accrued~~ ~~interest~~reclassification toof ~~shares~~warrants offrom ~~common~~liabilities ~~stock~~to atequity aupon ~~rate~~the restructuring of ~~one~~the ~~share~~January 2008 ~~for~~and ~~each~~April 2008 ~~$1.35~~Debentures, ~~of interest~~offset ~~owed~~by ora toreduction in ~~add~~ the ~~then-accrued~~amortization ~~interest~~of todebt discount on the ~~principal,~~January 2008 and toApril 2008 ~~waive~~Debentures ~~any~~due ~~default~~to ~~arising~~the ~~out~~acceleration in 2008 of ~~our~~the ~~failure~~unamortized todebt ~~pay~~discount because of the ~~accrued~~default ~~and~~events ~~unpaid interest~~related ~~through~~to ~~June 15,~~those ~~2008~~Debentures.

~~The principal payment amounts remaining on our September 2007~~Net ~~notes are scheduled to be paid as follows (in thousands):~~Loss

Date	September 2007 Notes
9/1/2008	$	441
9/30/2008	$	441
12/31/2008	$	441
3/31/2009	$	441
	$	1,764

Our net loss was $6.8 million and $19.3 million for the years ended December 31, 2009 and 2008, respectively, a decrease of $12.5 million, or 65 percent. The decrease in net loss from 2008 to 2009 was due primarily to the Merger costs in 2008 of $13.4 million, decreased salaries and general and administrative expenses and other operating expenses of $3.0 million, offset by the increase in interest expense, discussed above.

~~Assuming principal payments are made in accordance with the schedule~~Liquidity ~~set~~and ~~forth~~Capital ~~above, the amount of interest to be paid through the March 31, 2009, maturity date is $55.9 thousand with respect to our September 2007 notes, or on average, $3.1 thousand per month.~~Resources

AsOn December 31, of2009, ~~the~~we ~~filing~~had ~~date~~$445 ofthousand ~~this~~in ~~report,~~cash ~~the~~and ~~September 2008,~~cash ~~December 2008~~equivalents, and net ~~March 2009~~accounts ~~principal~~receivable ~~payments~~of ~~have~~$10 ~~not~~thousand, ~~been~~and ~~made~~prepaid expenses and ~~the~~other ~~Company does~~current ~~not~~assets ~~have,~~of or$16 ~~expect~~thousand. toOur ~~have,~~working ~~cash~~capital ondeficit ~~hand~~at toDecember 31, ~~make~~2009, was ~~the~~$5 ~~payments~~million, inwhich ~~the~~included ~~near future;~~$315 nothousand ~~interest~~of ~~payments~~warrant ~~have~~and ~~been~~derivative liability, ~~made~~compared ~~for~~to ~~interest~~a ~~accrued~~deficit ~~since~~of ~~June 15, 2008~~$10. We4 ~~are~~million, inincluding ~~regular~~$108 ~~communication~~thousand in ~~with~~warrant ~~the~~and ~~holders~~derivative ofliability ~~the~~at ~~September~~December ~~2007~~31, ~~notes~~2008. The ~~and~~decrease ~~none~~in ofworking ~~the~~capital ~~holders~~deficit ~~have~~is ~~demanded~~mainly ~~payment~~attributable orto ~~exercised~~the ~~other~~reclassification ~~remedies~~of ~~due~~the toJanuary 2008 ~~our~~and ~~non-payments, but no~~April 2008 ~~assurances~~Debentures ~~can~~to belong-term ~~given~~liabilities ~~that~~upon the ~~holders~~amendment ~~will~~of ~~not~~those ~~exercise~~instruments ~~their~~on ~~remedies in~~June 30, ~~the future~~2009.

2928

Table of Contents

~~January~~Net cash used by operating activities during the year ended December 31, 2009, was $2.4 million, compared to $7 million during the year ended December 31, 2008. ~~Debentures~~The reduction in the primary use of cash from operating activities from 2008 to 2009 was due mainly to a reduction in payment of salaries and general and administrative expenses and other operating expenses of $3.0 million, and a delay in payment of accounts payable, accrued payroll, and accrued expenses of approximately $1.3 million.

InNet cash ~~January 2008,~~provided weby ~~issued~~financing ~~our~~activities ~~January 2008~~for ~~Debentures~~year ~~with an~~ended ~~aggregate~~December 31, ~~principal~~2009, was ~~amount of~~ $2.08 million., ~~Under~~primarily from the ~~terms~~issuance of ~~these~~our September 2009 ~~debentures~~Debentures, wefurther ~~were~~discussed toin ~~begin~~“Note ~~making~~6 ~~monthly~~— ~~redemption~~Convertible ~~payments~~Notes onand ~~September 1, 2008. The~~Debentures ~~maturity date of these~~and ~~debentures~~Embedded isDerivative ~~January 31,~~and ~~2010. The total~~Warrant ~~monthly~~Liability” ~~principal~~in ~~payment amounts on~~ our ~~January 2008~~financial ~~Debentures~~statements ~~are~~included ~~scheduled~~in tothis ~~be paid as follows:~~report.

~~Monthly~~Net ~~Principal~~cash ~~Payment~~provided ~~Amount~~by (financing activities for the year ended December 31, 2008, was $6.2 million, primarily from the issuance of our January 2008 Debentures and our April 2008 Debentures and the sale of the New Series A Preferred shares, further discussed in ~~thousands)~~“Note 6 — Convertible Notes and Debentures and Embedded Derivative and Warrant Liability” in our financial statements included in this report.

Date	January 2008 Debentures
9/1/2008	$	111
10/1/2008	$	111
11/1/2008	$	111
12/1/2008	$	111
1/1/2009	$	111
2/1/2009	$	111
3/1/2009	$	111
4/1/2009	$	111
5/1/2009	$	111
6/1/2009	$	111
7/1/2009	$	111
8/1/2009	$	111
9/1/2009	$	111
10/1/2009	$	111
11/1/2009	$	111
12/1/09	$	111
1/1/2010	$	111
1/31/2010	$	113
	$	2,000

Similar to other companies, we have suffered the effects of the current adverse economic conditions. We are in default of our September 2007 notes for failure to make payments when due. The aggregate principal and accrued interest currently due under these debt securities as of the year ended December 31, 2009, is $2 million. We restructured a major portion of our debt securities on June 30, 2009, and entered into an additional long-term debt financing on September 30, 2009, which converted a series of bridge loans entered into in the first three quarters of calendar 2009, and provided for additional cash in September 2009 and in December 2009. That cash was originally intended to carry us to June 2010 but we incurred substantial unexpected expenses in connection with resolving certain litigation matters and other major creditor claims.

~~Assuming~~Our ~~monthly~~survival ~~principal~~plan ~~payments~~has ~~are~~continued ~~made~~and inwe ~~accordance~~continue ~~with~~to ~~the~~need immediate and ~~schedule~~substantial ~~set~~cash ~~forth~~to ~~above,~~continue ~~the~~our ~~amount~~operations. Management has projected that the combination of ~~interest~~cash toon hand will be ~~paid~~sufficient ~~through~~to ~~the~~allow ~~January~~us to continue our operations only through early-mid 312010. If cash reserves are not sufficient to sustain operations, then we plan to raise additional capital by ~~2010~~selling shares of our capital stock or other securities. We are presently engaged in active discussions for additional investments by existing and prospective investors but we have no funding commitments in place at this time and we can give no assurance that such capital will be available on favorable terms, ~~maturity~~or ~~date~~at all. If iswe ~~$240~~cannot ~~thousand~~obtain ~~with~~financing, ~~respect~~then we may be forced to further curtail our ~~January 2008~~operations, cease voluntarily filing ~~Debentures~~reports with the SEC, or onpossibly ~~average~~be forced to evaluate a sale or liquidation of our assets, ~~$13~~or consider strategic alternatives such as bankruptcy.3 Even ~~thousand~~if ~~per~~we ~~month~~are successful in raising additional funds, there is no assurance regarding the terms of any additional investment and any such investment or other strategic alternative would likely substantially dilute or eliminate the interests of our stockholders.

AsSubsequent of the filing date of this report, we have not made any of the payments due and we do not have, or expect to have, cash on hand to make the past payments due or any payments due in the near future. We are in regular communication with the holders of the January 2008 Debentures and none of the holders have demanded payment or exercised other remedies due to our non-payment, but no assurances can be given that the holders will not exercise their remedies in the future.Events

~~April~~Subsequently, on January ~~2008~~25, 2010, we entered into a securities purchase agreement with an entity affiliated with Donald W. Morissette for the sale of 10% senior secured convertible debentures, identical to the September 2009 Debentures, in the principal amount of $250,000. In this transaction, in addition to the debentures, we issued a warrant to purchase 375,000 shares of our common stock with an exercise price of $0.60 per share and 375,000 shares of our restricted common stock, or the “closing shares.” We refer to this financing as our January 2010 financing in this report. The securities purchase agreement further provided that we had the right, subject to certain conditions, to require the investor to purchase an aggregate of $125,000 in additional principal amount of debentures between March 15 and 31, 2010. We exercised that right on March 15, 2010, and issued $125 thousand in additional debentures to an entity affiliated with Mr. Morissette. Mr. Morissette, who, together with his affiliates, beneficially owns more than 10% of our outstanding common stock.

InDuring ~~April~~the quarter ended December ~~2008~~31, 2009, we entered ~~issued~~into ~~our~~a ~~April 2008~~Settlement ~~Debentures~~Agreement with ~~an aggregate~~our ~~principal~~former ~~amount~~CEO ofJeffrey $3L.5 ~~million.~~Garon; ~~Under~~ see the ~~terms~~Company’s ofForm 8-K ~~these debentures,~~filed wewith ~~are~~the toSEC ~~begin making monthly redemption payments~~ on ~~November~~December 118, ~~2008~~ 2009. ~~The~~Subsequent ~~maturity~~to ~~date~~the end of ~~these~~the quarter, all ~~debentures~~payments isrequired ~~April 30,~~by ~~2010.~~the ~~The~~settlement ~~total~~agreement ~~monthly~~were ~~principal~~made, ~~payment~~whereby ~~amounts~~we repurchased on2,356,655 ~~our~~shares ~~April 2008~~of ~~Debentures~~common ~~are~~stock ~~scheduled~~previously issued to beGaron ~~paid~~at asthe ~~follows:~~original purchase price of approximately $175,000, and those shares were cancelled.

~~Monthly~~On October 31, 2008, we ~~Principal~~closed ~~Payment~~our ~~Amount~~offices in San Mateo, California. On or about December 19, 2008, the landlord for these premises filed a complaint claiming damages of $659 thousand and other amounts against the Company’s predecessor Etelos, Incorporated, a Washington corporation (“Etelos —WA”) in ~~thousands~~the Superior Court of San Mateo County, California (Case No. CIV 479535). A default judgment was set aside because the landlord failed to properly serve either the Company or Etelos-WA. The Company was subsequently served properly and trial was set for February 8, 2010. The parties went to mediation in January 2010 and subsequently entered into a settlement agreement, including a release of claims, in which we agreed: (a) to pay $66,000 in cash within 30 days, (b) to issue a $200,000 promissory note, with 6% interest, payable in 12 monthly payments beginning in July, 2010, and (c) to issue shares of Common Stock of the Company equal to $125,000 in value, based upon the closing price of the Company’s stock on January 6, 2010. The settlement agreement and note were executed and delivered on February 8, 2010, and 166,667 shares subsequently were delivered on March 1, 2010.

Date	April 2008 Debentures
11/1/2008	$	194
12/1/2008	$	194
1/1/2009	$	194
2/1/2009	$	195
3/1/2009	$	194
4/1/2009	$	195
5/1/2009	$	194
6/1/2009	$	195
7/1/2009	$	194
8/1/2009	$	195
9/1/2009	$	194
10/1/2009	$	195
11/1/2009	$	194
12/1/09	$	195
1/1/2010	$	194
2/1/2010	$	195
3/1/2010	$	194
4/1/2010	$	195
	$	3,500

30Table of Contents

~~Table~~In partial settlement of approximately $292 thousand of ~~Contents~~an aggregate $575 thousand in unpaid salaries due and owing to current employees of the Company as of December 31, 2009, the board of directors has authorized the registration of 500,000 shares of Common Stock previously reserved under the Company’s 2009 Equity Incentive Plan as partial payment of up to 50% of the amount of unpaid salary due and owing to each current employee. 369,078 of those shares are to be issued upon completion of the registration process at an effective price of $0.79 per share.

~~Assuming~~Commitments ~~monthly~~and principal payments are made in accordance with the schedule set forth above, the amount of interest to be paid through the April 30, 2010, maturity date is $420 thousand with respect to our April 2008 Debentures, or on average, $23.3 thousand per month.Contingencies

AsAt ofDecember 31, ~~the filing date of this report~~2009, we ~~have~~had ~~not made any of~~ the ~~payments~~ ~~due and we do not have, or expect to have, cash on hand to make the~~following ~~past~~financing due payments or any payments due in the near future. We are in regular communication with the holders of the April 2008 Debentures and none of the holders have demanded payment or exercised other remedies due to our non-payment, but no assurance can be given that the holders will not exercise their remedies in the future.obligations:

~~Because we do not meet the equity conditions that would permit us to pay interest and monthly principal payments due in respect of our January~~September ~~2008 and~~2007 April 2008 Debentures in stock, our only option at this time is to make these payments in cash, which we currently do not have the financial resources to do. We are evaluating other equity financing opportunities, the proceeds of which could be used to repay the debentures, but we have no commitments or arrangements in place for future financing at this time and we can give no assurance that such financing will be available on favorable terms, or at all.Notes

~~Because~~Our ~~we have failed to make payments when due on our~~ September 2007 notes ~~and~~were ~~our~~issued ~~January 2008~~as ~~Debentures~~part ~~and~~of ~~April 2008 Debentures, we~~a ~~are~~private ~~currently~~placement ~~in default under such securities. The holders of such securities may demand~~ that ~~all~~was ~~amounts~~completed ~~due thereunder~~during ~~be immediately paid in cash, and with respect to our January~~August ~~Debentures~~ and ~~April~~September ~~Debentures,~~2007. In ~~the~~that ~~holders~~private ~~may~~placement ~~demand that~~ we ~~pay~~issued ~~130~~a ~~percent of~~total ~~the~~of ~~outstanding~~approximately ~~principal~~$3.3 ~~amount~~million ~~and~~of ~~the~~6% ~~interest~~convertible ~~rate~~notes ~~accrues~~ at aan ~~rate~~original ~~equal~~issue todiscount ~~the lesser~~ of 1810% ~~per~~with ~~annum~~warrants orto ~~the~~purchase ~~maximum~~1,080,000 ~~rate~~shares ~~permitted~~of ~~under~~common ~~applicable law. If~~stock ~~such demand was made, then we~~with ~~would~~an ~~not~~exercise ~~currently~~price ~~have~~of ~~the~~$1.20 ~~financial~~per ~~resources to make the payments owed~~share. In ~~addition,~~connection with the ~~holders~~Merger ofthat ~~our January Debentures~~closed ~~and~~on April ~~Debentures~~22, ~~may~~2008, ~~have~~$1.5 ~~the~~million ~~right to foreclose on substantially all~~ of ~~our~~these ~~assets~~notes ~~pursuant~~were toconverted ~~the~~at ~~terms~~$0.75 ~~of the security agreement we entered into~~per ~~with~~share. ~~such~~At ~~holders and they would have~~ the ~~right~~time ~~to take possession~~ of ~~our assets and operate our business. Although we are in regular communication with~~ the ~~holders~~Merger, of974,667 ~~our outstanding debt securities and none~~ of ~~them~~the ~~have~~warrants ~~demanded~~had ~~payment~~been or exercised ~~other~~and ~~remedies~~the ~~due~~remaining ~~to our current default under such securities~~33,333 wewarrants ~~can~~expired ~~give~~by ~~no assurance~~their ~~that~~terms ~~the~~upon ~~holders~~closing ~~will not make such demands or exercise their remedies in~~ the ~~future~~ Merger.

~~Operating~~Under the terms of the remaining $1.8 million of the notes that were not converted, principal payments began being payable on September 1, 2008, and ~~Capital~~continued ~~Leases~~to be payable on the last day of each calendar quarter, and interest payments began being payable beginning February 1, 2008.

WeAll ~~have~~principal ~~non-cancelable leases for corporate facilities~~ and ~~equipment. Rent~~ ~~expense~~interest payments under the ~~leases~~September 2007 ~~totaled~~notes ~~$254~~is ~~thousand~~due and ~~$147~~payable ~~thousand~~at ~~for the periods ended~~ December 31, ~~2008~~ ~~and 2007~~2009, ~~respectively. Future minimum~~in ~~rental~~the ~~payments required under non-cancelable leases are as follows for~~approximate ~~the~~aggregate ~~twelve~~amount ~~months~~of ~~ended~~$2 ~~December 31:~~million.

	Operating Leases		Capital Leases
2009	$	241	$	21
2010	54		13
2011	6		13
2012	5		2
2013	2		—
Total minimum lease payments	$	308	$	49
Less: amount representing interest			(16		)
Present value of minimum lease payments			33
Less: current portion of capital lease obligations			(9		)
Long-term capital lease obligations			$	24

January 2008 and April 2008 Debentures

In January 2008, we issued our January 2008 Debentures with an aggregate principal amount of $2.0 million. In April 2008, we issued our April 2008 Debentures in the aggregate principal amount of $3.5 million. On June 30, 2009, we entered into an amendment agreement that modified the terms of these debentures. As modified, the debentures mature on December 31, 2012. No interest accrues under the debentures until September 30, 2010, at which time interest will accrue at 6% per annum. Semi-annual payments of interest only, in the approximate amount of $95 thousand, begin January 1, 2011, and continue until maturity.

~~Table~~September 2009 ~~of Contents~~Debentures

On ~~October~~September 3129, ~~2008~~ 2009, we ~~closed~~entered ~~our~~into ~~offices~~a insecurities ~~San~~purchase ~~Mateo, California~~agreement ~~and~~with ~~abandoned~~three ~~the~~accredited investors ~~leased~~for ~~premises~~the sale of ~~our~~10% ~~offices~~senior ~~there~~secured convertible debentures in the principal amount of $2.0 ~~Also~~million. onWe ~~October~~refer to these debentures as our September ~~31,~~2009 ~~2008,~~Debentures. In wethis ~~relocated~~transaction, ~~our~~in addition ~~Washington~~to ~~offices~~the ~~and~~debentures, ~~abandoned~~we issued to the ~~leased~~investors ~~premises~~warrants ofto purchase 3,000,000 shares of our ~~former~~common ~~offices~~stock inwith ~~Renton,~~an ~~Washington~~exercise price of $0. 60 ~~The~~per ~~landlord~~share, ~~for~~or the ~~San~~“September 2009 ~~Mateo~~warrants,” ~~California~~a ~~leased~~warrant ~~premises~~to ~~has asserted~~purchase a2,250,000 ~~claim~~shares ~~against~~of usour ~~for~~common stock with an exercise price of $~~659~~0.01 ~~thousand~~per ~~and~~share, or ~~other~~the ~~amounts~~“September 2009 par value warrant,” and 750,000 ~~filed~~shares ~~suit~~of ~~against~~our usrestricted incommon stock, or the ~~Superior~~“closing ~~Court~~shares.” One of ~~San~~the ~~Mateo~~investors paid ~~County,~~part ~~California~~of ~~(Case~~its ~~No. CIV~~subscription amount through the cancellation of approximately ~~479535)~~$1. We2 ~~intend~~million worth of short-term indebtedness we owed to ~~defend~~such ~~this claim~~investor. The ~~landlord~~securities ~~for~~purchase ~~the~~agreement ~~Renton,~~further ~~Washington~~provided ~~location~~that ~~has~~we ~~not~~had ~~yet~~the ~~asserted~~right, ~~any~~subject ~~claim~~to certain conditions, ~~but~~to require the investors ~~assertion~~to purchase an aggregate of ~~such~~$1.0 million in additional principal ~~claims~~amount of debentures. We exercised that right on December 15, 2009, and ~~the~~issued ~~need~~an ~~for~~additional us$1.0 million of debentures to ~~defend~~the ~~such~~investors ~~claims,~~on isthat ~~foreseeable~~date.

~~Off Balance Sheet Arrangements~~30

WeTable ~~did not have any off-balance sheet arrangements as~~ of ~~the period ended December 31, 2008.~~Contents

~~Going~~The ~~Concern~~following ~~Issue~~is a summary of our convertible notes and debentures obligations as of December 31, 2009:

We remain dependent on outside sources of funding until our results of operations provide positive cash flows. Our independent auditors issued a going concern explanatory paragraph in their report dated April 24, 2009. With our current level of funding, substantial doubt exists about our ability to continue as a going concern.

	Convertible Notes and Debentures

2010	$	1,764
2011	3,000
2012	6,332
2013	0
2014	0
Total convertible notes and debentures	$	11,096

~~During~~Operating ~~the year ended December 31, 2008, we have been unable to generate cash flows sufficient to support our operations~~ and ~~have~~Capital ~~been dependent on debt and equity raised from qualified individual investors.~~Leases

~~These~~Rent ~~factors~~expense ~~raise~~under ~~substantial~~leases ~~doubt~~totaled ~~about~~($13) ~~our~~thousand ~~ability to continue as~~and a$254 ~~going~~thousand ~~concern. The~~for ~~financial statements contained herein do not include any adjustments relating to~~ the ~~recoverability~~ ~~and~~periods ~~classification~~ended ofDecember 31, ~~recorded~~2009 ~~asset amounts or amounts~~ and ~~classification~~ of2008, ~~liabilities~~respectively. We ~~that~~have ~~might~~no befuture ~~necessary~~minimum ~~should~~rental ~~we be unable to~~payments ~~continue~~required inunder ~~existence. Our~~non-cancelable ~~ability~~leases ~~to continue~~ as athese ~~going~~have ~~concern~~been isrecorded ~~dependent upon our ability to generate~~as ~~sufficient~~restructuring ~~cash~~costs ~~flows~~and toare ~~meet~~included ~~our~~in ~~obligations~~other onaccrued aexpenses ~~timely basis, to obtain additional financing~~ as ~~may~~at ~~be required~~December 31, ~~and ultimately to attain profitable~~ ~~operations~~2009. ~~However,~~ ~~there~~All iscapital ~~no assurance~~leases ~~that~~were ~~profitable~~paid ~~operations~~off orin ~~sufficient~~full ~~cash~~during ~~flows~~the ~~will~~year ~~occur~~ended ~~in the~~December 31, ~~future~~2009.

WeOn ~~have~~October 31, ~~supported~~2008, ~~current~~we ~~operations~~relocated byour ~~raising additional operating~~Washington ~~cash~~offices ~~through~~and abandoned the ~~private~~sub-leased ~~sale~~premises of our ~~convertible~~former ~~debentures~~offices ~~and~~in ~~preferred~~Renton, ~~stock~~Washington. ~~This~~ ~~has~~The ~~provided~~sublease usfor ~~with~~these ~~the cash~~premises ~~inflows~~runs tothrough ~~continue~~June 2010. Subsequently, ~~our~~on ~~business~~March 5, ~~plan~~2010, ~~but~~the prime ~~has~~landlord ~~not~~filed ~~resulted~~a incomplaint ~~significant improvement~~against inus ~~our~~for ~~financial~~breach ~~position.~~of Wecontract ~~are~~and successor ~~considering~~liability. This ~~alternatives~~matter towas ~~address~~just ~~our~~served ~~cash~~and ~~flow~~we ~~situation~~have ~~that~~not ~~include:~~yet ~~(1) raising~~evaluated ~~capital~~the ~~through additional~~claims ~~sale~~made ofin ~~our~~this ~~common~~case. We ~~stock~~will ~~and/or~~need ~~debentures and (2) reducing cash operating expenses~~ to ~~levels~~evaluate ~~that~~and ~~are~~defend ~~in line with current revenues~~these claims.

~~The~~On ~~first~~or ~~alternative~~about ~~could~~December 19, 2008, ~~result~~the inlandlord ~~substantial~~for ~~dilution~~the ofSan ~~existing stockholders.~~Mateo ~~There~~premises ~~can~~filed bea nocomplaint ~~assurance~~claiming damages ~~that~~of ~~our~~$659 ~~current~~thousand ~~financial~~and ~~position~~other ~~can~~amounts against the Company’s predecessor beEtelos, ~~improved~~Incorporated, ~~that~~a weWashington ~~can~~corporation ~~raise~~(“Etelos ~~additional~~—WA”) ~~working~~in ~~capital~~the Superior Court of San Mateo County, California (Case No. CIV 479535). A default judgment was set aside because the landlord failed to properly serve either the Company or ~~that~~Etelos-WA. weThe ~~can~~Company ~~achieve~~was ~~positive~~subsequently ~~cash~~served ~~flows~~properly ~~from~~and ~~operations~~trial was set for February 8, 2010. The ~~Our~~parties ~~long-term~~went ~~viability~~to asmediation in January 2010 and subsequently entered into a ~~going~~settlement agreement, including a release of ~~concern~~claims, isin ~~dependent~~which ~~upon~~we ~~our~~agreed: ~~ability~~(a) to pay $66,000 in cash within 30 days, (b) to issue a $200,000 promissory note, with 6% interest, payable in 12 monthly payments beginning in July, 2010, and (ic) ~~locate~~to ~~sources~~issue shares of ~~debt~~Common orStock ~~equity~~of ~~funding~~the Company equal to ~~meet~~$125,000 ~~current~~in ~~commitments~~value, ~~and~~based ~~near-term~~upon ~~future~~the ~~requirements~~closing price of the ~~and~~Company’s ~~(ii)~~stock on January ~~achieve~~6, ~~profitability~~2010. The settlement agreement and ~~ultimately~~note ~~generate~~were ~~sufficient~~executed ~~cash~~and delivered on February 8, ~~flow~~2010, ~~from~~and ~~operations~~166,667 toshares ~~sustain~~subsequently ~~our~~were ~~continuing~~delivered ~~operations~~on March 1, 2010.

~~Recent~~Off ~~Accounting~~Balance ~~Pronouncements~~Sheet Arrangements

InWe ~~May 2008,~~did ~~the~~not ~~FASB issued~~have ~~SFAS~~any ~~No. 162~~off-balance ~~(“SFAS 162”), The~~sheet ~~Hierarchy~~arrangements ofas ~~Generally Accepted Accounting Principles. SFAS 162 identifies the sources~~ of ~~accounting principles and~~ the ~~framework~~period ~~for selecting~~ended principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. SFAS 162 was effective on NovemberDecember 1531, ~~2008 and upon adoption of SFAS 162 there was no material impact on our financial statements~~2009.

In March 2008, the FASB issued SFAS No. 161 (“SFAS 161”), Disclosures about Derivative Instruments and Hedging Activities-an amendment of SFAS No. 133. This new standard requires enhanced disclosures for derivative instruments, including those used in hedging activities. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. We have not yet determined the impact, if any, that the adoption of SFAS 161 will have on our financial statements and related disclosures.31

~~Effective January~~Table ~~1, 2008, the Company adopted Statements~~ of Financial Accounting Standards (“SFAS”) No.157, Fair Value Measurements, which defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. The adoption of SFAS 157 did not have an impact on the Company’s financial position, results of operations, or cash flows.Contents

~~The Company~~Going ~~also~~Concern adopted SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115, during the first quarter of fiscal 2009, but we did not elect the fair value measurement option for any eligible financial instruments as of December 31, 2008. SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities under an instrument-by-instrument election. Subsequent measurements for the financial assets and liabilities an entity elects to fair value will be recognized in earnings. SFAS 159 also establishes additional disclosure requirements. The adoption of SFAS 159 did not have any impact on the Company’s results of operations or the fair values of its financial assets and liabilities. We could elect this option for new or substantially modified assets and liabilities in the future.Issue

32During the year ended December 31, 2009, we have been unable to generate cash flows sufficient to support our operations and have been dependent on debt raised from qualified investors. We remain dependent on outside sources of funding until our results of operations provide positive cash flows. Our independent auditors issued a going concern explanatory paragraph in their report dated March 17, 2010. With our current level of funding, substantial doubt exists about our ability to continue as a going concern.

~~Table~~The financial statements contained in this report do not include any adjustments relating to the recoverability and classification of ~~Contents~~recorded asset amounts or amounts and classification of liabilities that might be necessary should we be unable to continue in existence. Our ability to continue as a going concern is dependent upon our ability to generate sufficient cash flows to meet our obligations on a timely basis, to obtain additional financing as may be required, and ultimately to attain profitable operations. However, there is no assurance that profitable operations or sufficient cash flows will occur in the future.

~~In December 2007, the FASB issued SFAS No. 141(R),~~We ~~“Business~~have ~~Combinations”~~supported ~~(FAS 141R),~~current ~~which~~operations ~~requires~~by anraising ~~acquirer~~additional tooperating ~~measure~~cash ~~the identifiable assets acquired,~~through ~~the~~bridge ~~liabilities~~loans ~~assumed,~~ and ~~any noncontrolling interest in~~ the ~~acquiree~~private ~~at their~~sale ~~fair~~of ~~values~~our onconvertible ~~the~~debentures ~~acquisition~~and ~~date, with goodwill being the excess value~~preferred ~~over the net identifiable assets acquired~~stock. This ~~FAS~~has ~~141R~~provided isus ~~effective~~with ~~for financial~~the ~~statements~~cash ~~issued~~inflows ~~for~~to ~~fiscal~~continue ~~years~~our ~~beginning~~business ~~after December 15~~plan, ~~2008. Also,~~but inhas ~~December 2007,~~not ~~the~~resulted ~~FASB issued SFAS No. 160, “Noncontrolling Interests~~ in ~~Consolidated Financial~~significant ~~Statements, an amendment of ARB~~improvement ~~No. 51” (FAS 160), which clarifies that a noncontrolling interest~~ in aour ~~subsidiary should be reported as equity in the consolidated~~ financial ~~statements~~position. ~~The~~We ~~calculation~~are ~~of earnings~~considering ~~per~~alternatives ~~share will continue~~ to ~~be based on income amounts attributable to~~ ~~the~~address ~~parent.~~our ~~FAS~~cash ~~160~~flow issituation ~~effective~~that ~~for~~include ~~financial~~raising ~~statements~~capital ~~issued~~through ~~for fiscal years~~additional ~~beginning~~sale ~~after December 15, 2008. We are currently evaluating the impact~~ of ~~adopting SFAS 141R and SFAS 160 on~~ our ~~financial~~common ~~position,~~stock ~~cash flows,~~ and ~~results~~/or ~~of operations~~debentures.

InThis could ~~June 2008,~~result ~~the~~in ~~FASB~~substantial ~~issued~~dilution ~~FSP~~of Noexisting stockholders. ~~EITF 03-6-1,~~ ~~“Determining~~There ~~Whether~~can ~~Instruments~~be no ~~Granted~~assurance inthat ~~Share-Based~~our ~~Payment~~current ~~Transactions~~financial ~~Are~~position ~~Participating~~can ~~Securities” (FSP~~be ~~EITF 03-6-1)~~improved, ~~which~~that ~~requires~~we ~~entities to apply the two-class method of~~can ~~computing~~raise ~~basic~~additional ~~and~~working ~~diluted~~capital, ~~earnings~~or ~~per share for participating securities~~ that ~~include~~we ~~awards~~can ~~that~~achieve ~~accrue~~positive cash ~~dividends (whether paid or unpaid) any~~flows ~~time~~from ~~common~~operations. ~~shareholders~~Our ~~receive~~long-term ~~dividends~~viability ~~and~~as ~~those~~a ~~dividends~~going doconcern ~~not~~is ~~need~~dependent toupon beour ~~returned~~ability to ~~the~~(i) locate ~~entity~~sources ifof ~~the~~debt ~~employee~~or ~~forfeits~~equity ~~the~~funding ~~award.~~to ~~FSP EITF 03-6-1~~meet ~~will~~current becommitments ~~effective~~and ~~for~~near-term ~~the~~future ~~Company~~requirements onand ~~January~~(ii) 1,achieve profitability ~~2009,~~ and ~~will~~ultimately ~~require retroactive~~generate ~~disclosure.~~sufficient ~~The~~cash ~~Company~~flow isfrom ~~currently~~operations ~~evaluating the impact of~~to ~~adopting~~sustain ~~FSP~~our ~~EITF~~continuing ~~03-6-1 on its financial position, cash flows, and results of~~ operations.

~~ITEM~~Recent ~~7A.~~Accounting ~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~Pronouncements

AsDuring athe ~~smaller~~third ~~reporting~~quarter ~~company~~of 2009, wethe ~~are~~Company ~~not~~adopted ~~required~~the tonew ~~provide~~Accounting Standards Codification (“ASC”) as issued by the Financial Accounting Standards Board (FASB). The ASC has ~~information~~become ~~required~~the authoritative source of US GAAP recognized by ~~this~~FASB ~~item~~to be applied by non-governmental entities. The ASC is not intended to amend or change US GAAP. The adoption of the ASC did not have a material impact on the Company’s financial statements.

~~ITEM~~In 8June 2009, the FASB issued new standards for the accounting for transfers of financial assets. ~~FINANCIAL~~These ~~STATEMENTS~~new standards ~~AND~~eliminate ~~SUPPLEMENTARY~~the ~~DATA~~concept of a qualifying special-purpose entity; remove the scope exception from applying the accounting standards that address the consolidation of variable interest entities to qualifying special-purpose entities; change the standards for de-recognizing financial assets; and require enhanced disclosure. These new standards are effective beginning in the first quarter of 2010, and are not expected to have a significant impact on the financial statements.

~~The~~In ~~following~~June 2009, the FASB issued amended standards for determining whether to consolidate a variable interest entity. These amended standards eliminate a mandatory quantitative approach to determine whether a variable interest gives the entity a controlling financial ~~statements~~interest ~~are~~in ~~included~~a ~~beginning~~variable oninterest ~~page F-1~~entity in favor of a qualitatively focused analysis, and require an ongoing reassessment of ~~this~~whether an ~~report:~~entity is the primary beneficiary. These amended standards are effective beginning in the first quarter of 2010 and are not expected to have a significant impact on the financial statements.

	Page
Report of Independent Registered Public Accounting Firm	F-1
Balance Sheets as of December 31, 2008 and 2007	F-2
Statements of Operations for the years ended December 31, 2008 and 2007	F-3
Statements of Stockholders’ Deficit for the years ended December 31, 2008 and 2007	F-4
Statements of Cash Flows for the years ended December 31, 2008 and 2007	F-5
Notes to Financial Statements	F-6

In October 2009, the FASB issued new standards for revenue recognition with multiple deliverables. These new standards impact the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. Additionally, these new standards modify the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. These new standards are required to be adopted in the first quarter of 2011; however, early adoption is permitted. The Company does not expect these new standards to significantly impact the financial statements.

~~ITEM~~In 9October 2009, the FASB issued new standards for the accounting for certain revenue arrangements that include software elements. ~~CHANGES~~These INnew ~~AND~~standards ~~DISAGREEMENTS~~amend ~~WITH~~the ~~ACCOUNTANTS~~scope ONof pre-existing ~~ACCOUNTING~~software ~~AND~~revenue ~~FINANCIAL~~guidance ~~DISCLOSURE~~by removing from the guidance non-software components of tangible products and certain software components of tangible products. These new standards are required to be adopted in the first quarter of 2011; however, early adoption is permitted. The Company does not expect these new standards to significantly impact the financial statements.

~~None~~In January 2010, the FASB issued amended standards that require additional fair value disclosures. These amended standards require disclosures about inputs and valuation techniques used to measure fair value as well as disclosures about significant transfers, beginning in the first quarter of 2010. Additionally, these amended standards require presentation of disaggregated activity within the reconciliation for fair value measurements using significant unobservable inputs (Level 3), beginning in the first quarter of 2011. The Company does not expect these new standards to significantly impact the financial statements.

~~ITEM 9A. CONTROLS AND PROCEDURES~~32

~~Evaluation~~Table of ~~Disclosure Controls and Procedures~~Contents

~~Our~~ITEM disclosure controls and procedures are designed to provide reasonable assurances that material information related to our company is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure7A. ~~Our~~QUANTITATIVE ~~Chief~~AND ~~Executive~~QUALITATIVE ~~Officer~~DISCLOSURES ~~and~~ABOUT ~~Chief~~MARKET ~~Financial Officer evaluated our disclosure controls as of December 31, 2008.~~RISK

~~Based~~Intentionally ~~on this evaluation, our Chief Executive Officer~~omitted ~~and~~pursuant ~~Chief~~to ~~Financial~~Item ~~Officer have concluded that our disclosure controls and procedures were not effective as~~ 305(e) of ~~December 31,~~Regulation ~~2008, at the reasonable assurance level for the reasons discussed below related to material weaknesses in our internal control over financial reporting~~S-K.

33ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

~~Table~~The following financial statements are included beginning on page F-1 of ~~Contents~~this report:

Management’s Annual Report on Internal Control Over Financial Reporting

	Page
Report of Independent Registered Public Accounting Firm	F-1
Balance Sheets as of December 31, 2009 and 2008	F-2
Statements of Operations for the years ended December 31, 2009 and 2008	F-3
Statements of Stockholders’ Deficit for the years ended December 31, 2009 and 2008	F-4
Statements of Cash Flows for the years ended December 31, 2009 and 2008	F-5
Notes to Financial Statements	F-6

~~Our~~ITEM ~~management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act~~9. ~~Our~~ ~~internal~~CHANGES ~~controls~~IN ~~are~~AND ~~intended to~~DISAGREEMENTS ~~provide~~WITH ~~reasonable~~ACCOUNTANTS ~~assurance~~ON ~~regarding~~ACCOUNTING ~~the~~AND ~~reliability~~FINANCIAL of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Our internal controls include policies and procedures that:DISCLOSURE

1None. pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; 2. provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and 3. provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

~~Our~~ITEM ~~management is responsible for establishing and maintaining adequate internal control over our financial reporting~~9A. ~~Under~~ ~~the~~CONTROLS ~~supervision~~AND and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under that framework, our management concluded that our internal control over financial reporting was not effective as of December 31, 2008 as a result of several material weaknesses in our internal controls.PROCEDURES

~~A material weakness is a deficiency, or a combination~~Evaluation of ~~deficiencies,~~Disclosure inControls ~~internal~~and control over financial reporting, such that there is reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. We have concluded that our internal control over financial reporting as of December 31, 2008, was not effective because of the 100% turnover in accounting department personnel. Therefore, the following material weaknesses have been identified:Procedures

1.Our wedisclosure ~~have~~controls ~~not completed the design~~ and ~~implementation of effective internal control policies and~~ procedures ~~necessary~~are todesigned to provide reasonable assurances ~~regarding~~that ~~accurate~~material ~~and~~information ~~timely~~related ~~financial accounting, recording and reporting of routine and non-routine commitments and transactions and effective management oversight of the accounting for routine and non-routine transactions, or~~ to ~~monitor the effectiveness of~~ our ~~internal~~company is ~~controls;~~recorded, 2.processed, wesummarized, ~~have not completed the design~~ and ~~implementation~~reported ofwithin ~~effective internal control policies and procedures necessary to provide reasonable assurance regarding accurate and timely period end financial closing and reporting; 3. we have not completed~~ the ~~design~~time ~~and~~periods specified ~~implementation~~in ~~of effective internal control policies and procedures related to risk assessment and fraud prevention and detection activities; 4. we have not completed~~ the ~~design~~SEC rules and ~~implementation~~forms, ~~of effective internal control policies~~ and ~~procedures necessary to provide reasonable assurance regarding the accuracy and integrity of spreadsheets and other “off system” work papers~~ that ~~are~~such ~~used~~information inis accumulated ~~the financial accounting process; 5. we have not completed the design~~ and ~~implementation~~communicated ~~of internal control policies and procedures necessary~~ to ~~provide~~our ~~reasonable~~management, ~~assurance~~including ~~with~~our ~~respect~~Chief toExecutive Officer ~~the accuracy~~ and ~~completeness~~Chief ofFinancial ~~assertions~~Officer, ~~and~~as ~~disclosures related to significant financial statement accounts~~appropriate, ~~and with respect~~ to ITallow ~~general~~timely ~~and~~decisions regarding ~~application~~required ~~controls; 6~~disclosure. weOur ~~did~~Chief ~~not~~Executive ~~maintain~~Officer ~~sufficient in-house personnel resources with the technical accounting knowledge, expertise~~ and ~~training~~Chief inFinancial Officer ~~the~~evaluated ~~selection,~~our ~~application~~disclosure ~~and~~controls ~~implementation~~as of ~~GAAP~~December 31, ~~to certain complex or non-routine transactions; and 7~~2009. ~~we did not maintain adequate segregation of duties for staff members responsible for certain financial accounting and reporting functions.~~

ItBased ison ~~possible~~this ~~that~~evaluation, ~~additional~~our ~~material~~Chief ~~weaknesses~~Executive ~~may~~Officer ~~not~~and Chief Financial Officer have ~~been~~concluded ~~identified.~~that Weour ~~are~~disclosure incontrols ~~the~~and procedures ~~process~~were not effective as of ~~attempting~~December 31, to2009, ~~remediate~~at the reasonable ~~above~~assurance ~~noted~~level ~~material~~for ~~weaknesses,~~the ~~but~~reasons ~~that~~discussed ~~remediation~~below ~~was~~related ~~not~~to ~~complete~~material ~~as of December 31,~~weaknesses ~~2008,~~in orour ~~the~~internal ~~filing~~control ~~date~~over offinancial ~~this report~~reporting.

34Management’s Annual Report on Internal Control Over Financial Reporting

~~Table~~Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal controls are intended to provide reasonable assurance regarding the reliability of ~~Contents~~financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Our internal controls include policies and procedures that:

~~Our~~1. ~~plans~~pertain to ~~remediate~~ the ~~identified~~maintenance ~~material weaknesses~~of ~~include:~~records ~~developing~~that ~~action~~in ~~plans~~reasonable todetail ~~complete~~accurately ~~the~~and ~~implementation~~fairly ~~of internal~~reflect ~~controls~~the ~~necessary~~transactions toand ~~correct~~dispositions ~~each~~of ~~such~~our ~~weakness~~assets; ~~assessing~~2. ~~the~~provide ~~need to~~reasonable ~~take~~assurance ~~additional~~that ~~actions~~transactions ~~including,~~are ~~but~~recorded ~~not~~as ~~limited,~~necessary to ~~the~~permit ~~following: evaluate~~preparation ~~accounting~~of ~~and~~financial ~~control~~statements ~~systems~~in toaccordance ~~identify~~with ~~opportunities~~GAAP, ~~for~~and ~~enhanced controls; recruit~~that our receipts and ~~hire~~expenditures ~~additional~~are ~~staff~~being tomade ~~provide~~only ~~greater~~in ~~segregation of~~accordance ~~duties; evaluate~~with the ~~need~~authorization ~~for~~of ~~other~~our ~~employee~~management ~~changes~~and directors; and ~~evaluate~~3. ~~such other~~provide ~~actions~~reasonable asassurance ~~our~~regarding ~~advisors~~prevention ~~may~~or ~~recommend. However~~timely detection of unauthorized acquisition, ~~our~~use ~~ability~~or todisposition ~~remediate~~of ~~these~~our ~~weaknesses~~assets isthat ~~substantially impaired~~could byhave ~~our~~a ~~limited~~material effect on the financial ~~resources~~statements.

~~Management~~Our ~~does~~management ~~not~~is ~~believe~~responsible ~~that~~for ~~any~~establishing and maintaining adequate internal control over our financial reporting. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the ~~Company’s~~effectiveness of our ~~annual~~internal orcontrol ~~interim~~over financial ~~statements~~reporting ~~issued~~based toon ~~date~~the ~~contain~~framework ain ~~material~~Internal ~~misstatement~~Control-Integrated asFramework aissued ~~result~~by the Committee of Sponsoring Organizations of the ~~aforementioned~~Treadway ~~weaknesses~~Commission in(COSO). Based on our ~~internal~~evaluation under that framework, our management concluded that our internal control over financial reporting was not effective as of December 31, 2009 as a result of several material weaknesses in our internal controls.

~~This~~A ~~annual~~material ~~report~~weakness ~~does~~is ~~not~~a ~~include~~deficiency, anor ~~attestation report~~a combination of ~~the~~deficiencies, ~~company’s~~in ~~registered public accounting firm regarding~~ internal control over financial reporting. , such that there ~~Management’s~~is ~~report~~reasonable ~~was~~possibility ~~not~~that ~~subject~~a tomaterial ~~attestation~~misstatement byof the ~~company~~Company’s annual ~~registered~~or ~~public~~interim ~~accounting~~financial ~~firm~~statements ~~pursuant~~will tonot ~~temporary~~be ~~rules of~~prevented ~~the~~or ~~SEC~~detected on a timely basis. We had previously concluded that our ~~permit~~internal ~~the~~control ~~company~~over tofinancial ~~provide~~reporting ~~only~~as ~~management’s~~of ~~report~~December 31, in2008, ~~this~~was not ~~annual~~effective because of a lack of resources to obtain sufficient in-house ~~report~~personnel, as described below. Therefore, we have identified the following material weaknesses:

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud1. A ~~control~~we ~~system,~~have ~~no matter how well designed and operated, can provide only reasonable,~~ not ~~absolute,~~ ~~assurance~~completed ~~that~~ the ~~control system’s objectives will be met. Further, the~~ design ~~of a control system must reflect the fact that there are resource constraints,~~ and ~~the~~implementation ~~benefits~~ of ~~controls~~ ~~must~~effective beinternal ~~considered relative to their costs. Because of the inherent limitations in all~~ control ~~systems,~~policies noand ~~evaluation~~procedures ofnecessary ~~controls~~to ~~can~~ provide ~~absolute~~reasonable ~~assurance~~assurances ~~that all~~regarding ~~control~~accurate ~~issues~~ and ~~instances~~timely offinancial ~~fraud~~accounting, ifrecording ~~any,~~and ~~within~~reporting ~~our~~of ~~company~~routine ~~have~~and ~~been detected. These inherent limitations include the realities that judgments in decision~~non-~~making~~routine ~~can~~commitments beand ~~faulty,~~transactions and ~~that breakdowns~~effective ~~can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by~~ management ~~override~~oversight of the ~~controls. The design~~accounting offor ~~any~~routine ~~system of controls is based in part upon certain assumptions about the likelihood of future events,~~ and ~~any~~non-routine ~~design may not succeed in achieving its stated goals under all potential future conditions. Over time~~transactions, ~~controls may become inadequate because of changes in conditions~~ or ~~deterioration~~to inmonitor the ~~degree~~effectiveness of ~~compliance with~~our ~~policies~~internal ~~or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.~~controls;

~~Changes In Internal Controls over Financial Reporting.~~33

WeTable ~~made the following changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)~~ of ~~the~~ ~~Exchange Act) during our most recent fiscal quarter that has materially affected, or is likely to materially affect, our internal control over financial reporting.~~Contents

~~During~~2. we have not completed the ~~year~~design ~~ended~~and ~~December 31,~~implementation ~~2008,~~of ~~our~~effective ~~vice president~~internal ~~and~~control ~~chief~~policies ~~financial~~and ~~officer~~procedures ~~resigned,~~necessary ~~effective~~to ~~October 31, 2008. He~~provide ~~remained~~reasonable anassurance ~~advisor~~regarding accurate and ~~consultant~~ totimely usperiod ~~through~~end ~~the~~financial ~~end~~closing ofand ~~the~~reporting; ~~quarter~~3. ~~However,~~ we have not ~~yet~~completed ~~appointed~~the ~~any person~~design toand ~~serve~~implementation asof ~~our~~effective ~~dedicated~~internal ~~chief~~control ~~financial~~policies ~~officer~~ and, ~~due~~procedures related to ~~our limited~~risk ~~financial~~assessment ~~resources~~and fraud prevention and detection activities; 4. we have not completed the ~~risks~~design ~~related~~and toimplementation ~~our~~of ~~ability~~effective tointernal ~~continue~~control ~~as a~~policies ~~going~~and ~~concern,~~procedures ~~there~~necessary isto noprovide reasonable assurance ~~that~~regarding ~~such~~the anaccuracy ~~appointment~~and ~~can~~integrity beof ~~made,~~spreadsheets ~~if at~~and ~~all,~~other “off system” work papers that are used in the ~~near~~financial ~~future~~accounting process; 5. ~~Our~~ ~~chief executive~~we ~~officer~~have isnot ~~currently~~completed ~~serving~~the asdesign ~~our~~and ~~acting~~implementation ~~chief~~of ~~financial officer. Therefore,~~internal wecontrol ~~are~~policies ~~unable~~and procedures necessary to ~~assure~~ ~~that~~provide wereasonable ~~have~~assurance ~~adequate~~with respect to the accuracy and ~~appropriate~~completeness ~~controls~~of inassertions ~~place~~and disclosures related to significant financial statement accounts, orand ~~that~~with ~~the~~ respect to IT general and application controls; ~~that~~6. we dodid ~~have~~not maintain sufficient in-house ~~place~~personnel ~~are~~resources ~~being~~with ~~managed~~the ~~appropriately. We~~technical ~~will~~accounting ~~attempt~~knowledge, toexpertise ~~engage~~and ~~additional appropriate~~training ~~expertise~~in tothe ~~evaluate~~selection, application and ~~manage~~implementation ~~our~~of ~~controls~~GAAP asto ~~soon~~certain ascomplex ~~financial resources~~or ~~permit,~~non-routine ~~but~~transactions; ~~there~~and is7. nowe ~~assurance~~did ~~when,~~not ormaintain ~~if,~~adequate ~~that~~segregation ~~will~~of beduties ~~possible in~~for ~~the~~staff ~~foreseeable~~members ~~future~~responsible for certain financial accounting and reporting functions.

~~ITEM~~It 9Bis possible that we may have additional material weaknesses that we have not yet identified. ~~OTHER~~We ~~INFORMATION~~are in the process of attempting to remediate the above noted material weaknesses, but that remediation was not complete as of December 31, 2009, or the filing date of this report.

~~None~~Our plans to remediate the identified material weaknesses include: developing action plans to complete the implementation of internal controls necessary to correct each such weakness; assessing the need to take additional actions including, but not limited, to the following: evaluate accounting and control systems to identify opportunities for enhanced controls; recruit and hire additional staff to provide greater segregation of duties; evaluate the need for other employee changes; and evaluate such other actions as our advisors may recommend. During 2009, we engaged outside consultants with technical accounting knowledge and expertise to advise and ensure the preparation of our financial statements in accordance with GAAP, with particular emphasis on certain complex or non-routine transactions. Nevertheless, our ability to remediate all weaknesses is substantially impaired by our limited financial resources.

~~PART III~~Management does not believe that any of the Company’s annual or interim financial statements issued to date contain a material misstatement as a result of the aforementioned weaknesses in our internal control over financial reporting.

~~ITEM~~This 10annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s ~~DIRECTORS,~~report was ~~EXECUTIVE~~not ~~OFFICERS~~subject ~~AND~~to ~~CORPORATE~~attestation ~~GOVERNANCE~~by our registered public accounting firm pursuant to temporary rules of the SEC that permit the company to provide only management’s report in this annual report.

Our ~~directors~~management, ~~are~~including ~~elected~~our byChief ~~our~~Executive ~~stockholders~~Officer and toChief aFinancial ~~term~~Officer, ofdoes ~~one~~not ~~year~~expect ~~and~~that our disclosure controls or tointernal ~~serve~~controls ~~until~~over ~~his~~financial reporting will prevent all errors or ~~her~~all instances ~~successor~~of isfraud. A ~~duly~~control ~~elected~~system, no matter how well designed and ~~qualified~~operated, orcan ~~until~~provide ~~his~~only reasonable, not absolute, ~~death~~assurance that the control system’s objectives will be met. Further, ~~resignation~~the ordesign ~~removal~~of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. ~~During~~ Because of the ~~period~~inherent ~~ending~~limitations ~~December 31~~in all control systems, no evaluation of controls can provide absolute assurance that ~~2008~~all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the ~~Board~~realities ~~elected~~that ~~Andy~~judgments ~~Liu~~in decision-making can be faulty, and ~~Robert~~that breakdowns ~~Thordarson~~can tooccur ~~fill~~because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two ~~vacancies~~or onmore people, or by management override of the ~~Board~~controls. ~~Each~~The design of ~~our~~any ~~officers~~system of controls is ~~appointed~~ bybased ~~our~~in ~~board~~part ofupon ~~directors~~certain toassumptions about athe ~~term~~likelihood of ~~one~~future ~~year~~events, and ~~serves~~any ~~until~~design ~~his~~may not succeed in ~~successor~~achieving isits ~~duly~~stated ~~elected~~goals ~~and~~under ~~qualified~~all potential future conditions. Over time, controls may become inadequate because of changes in conditions or ~~until~~deterioration ~~his~~in ~~death,~~the ~~resignation~~degree of compliance with policies or procedures. Because of ~~removal~~the ~~from~~inherent ~~office~~limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

3534

Table of Contents

~~Our bylaws provide that the number of directors which shall constitute~~Changes ~~our~~In ~~whole~~Internal ~~board~~Controls ofover ~~directors~~Financial ~~shall not be less than one or more than nine~~Reporting. ~~The number of directors is determined by resolution of our board of directors or by our stockholders at our annual meeting. Our current board of directors consists of four directors.~~

~~The~~We ~~following~~did ~~table~~not ~~sets~~make ~~forth~~any ~~certain~~changes ~~information~~in ~~regarding~~ our ~~executive~~ ~~officers~~internal ~~and~~control over ~~directors~~financial reporting (as ofdefined ~~July~~in Rules 2813a-15(f) and 15d-15(f) of the Exchange Act) during our most recent fiscal quarter that has materially affected, ~~2008:~~or is likely to materially affect, our internal control over financial reporting.

Name	Position	Age
Daniel J. A. Kolke	Chairman, Chief Executive Officer and Chief Financial Officer	38
Ronald A. Rudy	Director	66
Andy Liu	Director	32
Robert L. Thordarson	Director	42

ITEM 9B. OTHER INFORMATION

~~Daniel J~~None. ~~A. Kolke.~~

~~Mr.~~PART Kolke founded Etelos, Incorporated in May 1999. It is his vision and energy as the key architect that has driven development of the Etelos Ecosystem. Mr. Kolke has served as a member of our board of directors and as various executive officers since our inception in 1999. He has served as chairman of our board of directors since April 4, 2000. He was appointed our chief executive officer in September 2008 and as our acting chief financial officer in December 2008.III

~~Ronald~~ITEM A10. ~~Rudy.~~DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

~~Ronald~~Our A.directors ~~Rudy~~are ~~has~~elected by ~~served~~our asstockholders to a ~~director~~term ~~since~~of ~~March 1,~~one ~~2006. He~~year ~~has been an independent investor~~ and ~~consultant~~ to ~~the~~serve ~~mortgage~~until ~~industry~~his ~~since~~or ~~September 2005. He founded~~her ~~Portland~~successor ~~Mortgage~~is ~~Company~~duly inelected ~~1983~~ and ~~served~~qualified, asor ~~its~~until ~~president~~his ~~and chief executive officer after it was acquired in 2004~~death, ~~until~~resignation ~~September 2005.~~or ~~Portland Mortgage Company was the largest independent Mortgage Banking Company in Oregon and Southwest Washington~~removal. ~~Mr. Rudy~~Each ~~served as president~~ of ~~the~~our ~~Oregon Mortgage~~officers ~~Bankers~~is ~~Association~~appointed inby ~~1989~~our ~~and~~board ~~as president~~ of ~~Oregon~~directors ~~Executives~~to ina ~~2003.~~term ~~Mr. Rudy served on the Board~~ of ~~Governors~~one ~~for~~year ~~The Mortgage Bankers Association from 1996-2003~~ and onserves ~~the~~until ~~National~~his ~~Board~~successor ofis ~~Directors~~duly ofelected ~~The Mortgage~~and ~~Bankers Association in 2003-2004. He also was president of the~~qualified, ~~Portland~~or ~~Guadalajara~~until ~~Sisters~~his ~~Association~~death, inresignation ~~2000~~or ~~and~~removal ~~a member of its board of directors~~ from ~~1996-2001~~office.

~~Andy~~Our ~~Liu~~bylaws provide that the number of directors that shall constitute our whole board of directors shall not be less than one or more than nine. The number of directors is determined by resolution of our board of directors or by our stockholders at our annual meeting. Our current board of directors consists of four directors.

~~Andy~~The ~~Liu~~following ~~has~~table ~~served as a director since his appointment by the Board on~~sets ~~August 8,~~forth ~~2008. He~~certain isinformation ~~CEO~~regarding ~~of BuddyTV,~~our ~~the~~executive ~~largest~~officers ~~independently held TV site on the Internet. Prior to BuddyTV, Mr. Liu served as President~~ and ~~CEO~~directors ~~of NetConversions from 1999-2004 prior to its sale to aQuantive and served~~ as ~~VP and GM~~ of ~~its Site Optimization unit from 2004-2005. He is also a founder of a non-profit that is focused on technology in developing countries and is very passionate about entrepreneurship. Mr.~~December ~~Liu brings deep experience in building companies~~31, ~~site optimization, viral marketing, SEO, community building and product development. In 2003, he was named to Puget Sound Business Journal’s “40 Under 40.” Mr. Liu earned his MBA from Wharton.~~2009:

Robert L. Thordarson.

Name	Position	Age
Daniel J. A. Kolke	Chairman, Chief Executive Officer and Chief Financial Officer	39
Ronald A. Rudy	Director	67
Andy Liu	Director	33
Robert L. Thordarson	Director	43

~~Bob~~Daniel ~~Thordarson has served as a director since his appointment by the Board on September 24, 2008~~J. ~~He brings~~ ~~15 years of direct entrepreneurial experience to Etelos, most in the ideation, funding, launch and growth of startups within the Telecommunications and Web Services marketplace~~A. He is founder and CEO of BluCapp, a Web services startup, co-founder of Cequint, Inc., a software company revolutionizing mobile Caller ID services, and President of TechFaith America, a mobile handset ODM headquartered in Beijing (CNTF) and expanding its reach to North America. He was formerly CEO and Co-Founder of Consumerware, a telecommunications device design and manufacturing company focused on developing consumer products for North America’s largest telecommunications carriers. Mr. Thordarson brings hands-on operational and development experience to building companies, business and partner development, managing diverse and distributed teams and channel marketing. Mr. Thordarson studied Economics at the University of Washington.Kolke

~~There~~Danny ~~are~~Kolke nofounded Etelos, ~~family~~Incorporated ~~relationships~~in ~~among~~May 1999. It is his vision and energy as the key architect that has driven development of the Etelos Ecosystem. Mr. Kolke has served as a member of our board of directors orand as various executive officers~~. There~~ ~~are~~since noour ~~arrangements~~inception in 1999. He ~~between~~has ~~any~~served as chairman of our board of directors since April 4, 2000. Mr. Kolke is widely respected as an industry-leading pioneer in SaaS and ~~any~~cloud ~~other~~computing and ~~person~~makes ~~pursuant~~significant contributions to ~~which~~the ~~they~~Company ~~have~~and our board of directors ~~been~~as the key architect of the Etelos Ecosystem and as a lecturer and evangelist for SaaS and cloud computing. He was appointed toour chief executive officer in September 2008 and as our acting chief financial officer in December 2008. He attended the ~~Board~~Stanford Law School Directors College in 2008.

~~Audit~~Ronald ~~Committee~~A. Rudy

WeRonald ~~have~~A. Rudy has served as a ~~separately~~director ~~designated~~since ~~audit~~March 1, ~~committee~~2006. He has been an independent investor and consultant to the mortgage industry since September 2005. He founded Portland Mortgage Company in 1983 and served as its president and chief executive officer until it was acquired in 2004, until September 2005. Portland Mortgage Company was the largest independent Mortgage Banking Company in Oregon and Southwest Washington with over $1 billion in loan volume. Mr. Rudy was responsible for managing all financial and regulatory reporting, and the management of a $39 million warehouse line of credit and the hedging operations in connection with $100-$150 million of loans in process. His expertise in financial matters and experience in management of financial and regulatory matters make a major contribution to our board of directors. ~~Our~~Mr. Rudy ~~audit~~served ~~committee~~as ispresident of the ~~comprised~~Oregon Mortgage Bankers Association in 1989 and as president of ~~Messrs~~Oregon Executives in 2003. Mr. Rudy, served on the Board of Governors for The Mortgage Bankers Association from 1996-2003 and ~~Liu~~on the National Board of Directors of The Mortgage Bankers Association in 2003-2004. He also was president of the Portland Guadalajara Sisters Association in 2000 and a member of its board of directors from 1996-2001. Mr. Rudy is a graduate of the University of Portland and attended the Stanford Law School Directors College in 2008.

36Andy Liu

~~Table~~Andy Liu has served as a director since his appointment by the Board on August 8, 2008. He is CEO of ~~Contents~~BuddyTV, the largest independently held TV site on the Internet. Prior to BuddyTV, Mr. Liu served as President and CEO of NetConversions from 1999-2004 prior to its sale to aQuantive and served as VP and GM of its Site Optimization unit from 2004-2005. He is also a founder of a non-profit that is focused on technology in developing countries and is very passionate about entrepreneurship. Mr. Liu brings deep experience in building companies, site optimization, viral marketing, SEO, community building and product development. In 2003, he was named to Puget Sound Business Journal’s “40 Under 40.” Mr. Liu earned his MBA from Wharton.

~~Code Of Ethics~~35

~~Our~~Table ~~board~~ of directors adopted a “Code of Conduct and Policy for Reporting Possible Violations” that applies to our directors and all employees, including our executive officers. Our code of ethics can be viewed by visiting our website at www.etelos.com and clicking on “Investors.” In the event we make any amendments to, or grant any waivers of, a provision of our code of ethics that applies to our principal executive officer, principal financial officer, or principal accounting officer that requires disclosure under applicable SEC rules, we intend to disclose such amendment or waiver and the reasons therefor on a Form 8-K or on our next periodic report in accordance with SEC rules.Contents

~~Section 16(a) Beneficial Ownership Reporting~~Robert ~~Compliance~~L. Thordarson

~~Section 16(~~Bob Thordarson has served as a~~) of~~ director since his appointment by the ~~Securities~~Board ~~Exchange~~on ~~Act~~October 20, 2008. He brings 15 years of ~~1934~~direct ~~requires~~entrepreneurial ~~our~~experience ~~officers~~to ~~and~~Etelos, ~~directors~~most in the ideation, funding, launch and ~~persons~~growth ~~who~~of startups ~~own~~within ~~more~~the ~~than~~Telecommunications ~~ten~~and ~~percent~~Web ofServices amarketplace. He is ~~registered~~founder ~~class~~and CEO of ~~our securities~~BluCapp, toa ~~file~~Web ~~with~~services ~~the~~startup, ~~SEC~~and ~~reports~~co-founder of ~~ownership~~Cequint, Inc., ofa ~~our~~software ~~securities~~company ~~and~~revolutionizing ~~changes~~mobile inCaller ~~reported~~ID ~~ownership~~services. ~~Officers~~He was formerly President of TechFaith America, ~~directors~~a mobile handset ODM headquartered in Beijing (CNTF), and formerly CEO and Co-Founder of Consumerware, a telecommunications ~~greater~~device ~~than~~design ~~ten~~and ~~percent~~manufacturing ~~stockholders~~company ~~are~~focused ~~required~~on bydeveloping ~~SEC~~consumer ~~rules~~products for North America’s largest telecommunications carriers. Mr. Thordarson brings hands-on operational and development experience to ~~furnish~~building companies, usbusiness ~~with~~and ~~copies~~partner ofdevelopment, ~~all~~managing ~~Section~~diverse and distributed teams and channel marketing. Mr. ~~16(a) reports~~Thordarson ~~they~~studied ~~file~~Economics at the University of Washington.

~~Based~~There ~~solely~~are onno ~~a review of the reports furnished to us, or written~~family ~~representations~~relationships ~~from~~among ~~reporting persons that all reportable transaction were reported, we believe that during the fiscal year ended December 31, 2008,~~ our ~~officers,~~ directors and greater than ten percent stockholders timely filed all reports they were required to file under Section 16(a), except as follows: (i) on August 8, 2008, we appointed Mr. Andy Liu a director and issued 10,000 stock options to Mr. Liu in connection with his appointment; no form 3 or ~~form~~executive ~~4 was filed in connection with this transaction; (ii) on September 24, 2008, we appointed Mr~~officers. ~~Robert~~ There ~~Thordarson~~are ~~a director and issued 10,000 stock options to Mr. Thordarson in connection with his appointment;~~ no ~~form~~arrangements 3between orany ~~form 4 was filed in connection with this transaction; in addition on December 3, 2008, we completed the sale~~ of ~~33,333~~ ~~shares of~~ our ~~Series A Preferred Stock for $25 thousand and 25,000~~ ~~warrants~~directors to purchase common stock to Mr. Robert L. Thordarson; no form 4 has been filed with respect to this transaction; (iii) on December 3, 2008, we completed the sale of 333,333 shares of our Series A Preferred Stock for $250 thousand and ~~250,000~~any ~~warrants~~other toperson ~~purchase~~pursuant ~~common stock~~ to ~~Mr. Daniel J.A.~~which ~~Kolke~~they ~~our~~have ~~Chief Executive Officer and Chairman; no form 4 has~~ been ~~filed with~~appointed ~~respect~~ to ~~this transaction; and (iv) on December 3, 2008, we~~ ~~completed~~ the ~~sale of 133,333 shares of our Series A Preferred Stock for $100 thousand and 100,000 warrants to purchase common stock to Mr~~Board. ~~Ronald A Rudy a director; no form 4 has been filed with respect to this transaction.~~

~~ITEM~~Audit ~~11. EXECUTIVE COMPENSATION~~Committee

~~Summary~~We ~~Compensation~~have a separately designated audit committee of our board of directors, established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our audit committee is comprised of Messrs. Rudy and Thordarson. The audit committee is responsible for the appointment, compensation, retention and oversight of our independent registered public accounting firm. In addition, the committee reviews with our management and its independent auditors financial information that will be provided to stockholders and others, the systems of internal controls which management and our board have established and our audit and financial reporting processes. The committee operates under a written Audit Committee Charter adopted by our board, a copy of which can be found under the “Investor Information — Corporate Governance — Board Committee Charters” section of our website at www.etelos.com. Our audit committee met in April 2009 in connection with the audit of our 2008 financial statements, and met three times in 2009. Our board of directors has chosen to use the independence standards of the Nasdaq Stock Market to evaluate the independence of its audit committee members. Our board of directors has determined that all current members of the audit committee are “independent” as that term is defined in the current applicable rules of the Nasdaq Stock Market and also meet the additional criteria for independence of audit committee members under the applicable rules of the Exchange Act. In addition, our board of directors believes that Mr. Rudy is an “audit committee financial expert” as defined in Item 407(d) of Regulation S-B. Mr. Rudy has served as President & Chief Executive Officer of a major regional mortgage company, where he was responsible for managing all financial and regulatory reporting, and the management of $1 billion in loan volume, a $39 million warehouse line of credit, and the hedging operations in connection with over $100-$150 million of loans in process. As a result of the successful management of these responsibilities, Mr. Rudy has extensive experience analyzing and evaluating financial statements, an understanding of generally accepted accounting principles, an understanding of internal control over financial reporting and an understanding of audit committee functions. Mr. Rudy is a graduate of the University of Portland and attended the Stanford Law School Directors College in 2008.

~~The~~Code ~~Summary Compensation Table below summarizes the total compensation paid or earned by each~~ of our named executive officers during the years ended December 31, 2008 and 2007. Throughout this prospectus, the individuals included in the Summary Compensation Table set forth below are referred to as the “named executive officers.”Ethics

~~Summary~~Our board of directors adopted a “Code of Conduct and ~~Compensation~~Policy ~~Table~~for Reporting Possible Violations” that applies to our directors and all employees, including our executive officers. Our code of ethics can be viewed by visiting our website at www.etelos.com and clicking on “Investors.” In the event we make any amendments to, or grant any waivers of, a provision of our code of ethics that applies to our principal executive officer, principal financial officer, or principal accounting officer that requires disclosure under applicable SEC rules, we intend to disclose such amendment or waiver and the reasons therefore on a Form 8-K or on our next periodic report in accordance with SEC rules.

Name and Principal Position	Year	Salary ($)	Bonus ($)	Stock Awards (4) ($)	Option Awards (5) ($)	All Other Compensation ($)	Total ($)
Daniel J.A. Kolke (1)	2008	130,594	—	—	—	—	130,594
Chief Executive Officer	2007	127,158	—	—	182,100	—	309,256
David MacKenzie (2)	2008	84,375	—	—	294,880	—	379,255
Former Chief Financial Officer	2007	—	—	—	—	—	—
Jeffrey L. Garon (3)	2008	117,807	—	—	—	—	117,807
Former Chief Executive Officer	2007	67,813	—	121,550	—	—	189,363

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(1a) ~~Mr. Kolke~~of ~~was~~the ~~appointed~~Securities ~~Chief~~Exchange ~~Executive~~Act ~~Officer~~of in1934 ~~September 2008~~requires our officers and directors, ~~prior~~and persons who own more than ten percent of a registered class of our securities, to ~~that~~file ~~time~~with hethe ~~served~~SEC asreports of ownership of our ~~Chief~~securities and changes in reported ownership. Officers, ~~Technology~~directors ~~Officer~~and greater than ten percent stockholders are required by SEC rules to furnish us with copies of all Section 16(a) reports they file.

~~(2) Mr. MacKenzie served~~Based assolely ~~our~~on ~~Chief~~a ~~Financial~~review ~~Officer~~of the reports furnished to us, or written representations from ~~March 2008~~reporting ~~until~~persons hethat ~~resigned~~all onreportable ~~October~~transaction were reported, we believe that during the fiscal year ended December 31, 2009, ~~2008;~~our officers, directors and greater than ten percent stockholders timely filed all ~~his~~reports ~~options~~they were ~~forfeited~~required to file under Section 16(a).

~~(3) Mr. Garon served as our Chief Executive Officer from August 2007 until his employment was terminated on September 18, 2008.~~36

~~(4) This represents~~Table ~~the fair market value, as determined by independent appraisal,~~ of ~~2,383,333~~ ~~shares issued to Mr. Garon pursuant to his employment agreement.~~Contents

~~(5) Represents the~~ITEM ~~amount recognized for financial statement reporting purposes in respect of outstanding option awards in accordance with SFAS 123(R)~~11. ~~The~~EXECUTIVE assumptions made in valuing option awards reported in this column are discussed in Note 4, “Summary of Business and Significant Accounting Policies” under “Stock-Based Compensation” and Note 7, “Accounting for Share-Based Compensation” to our financial statements included in this report.COMPENSATION

37Summary Compensation

~~Table~~The Summary Compensation Table below summarizes the total compensation paid or earned by each of ~~Contents~~our named executive officers during the years ended December 31, 2009 and 2008. Throughout this prospectus, the individuals included in the Summary Compensation Table set forth below are referred to as the “named executive officers.”

~~Employment~~Summary Compensation ~~Agreements~~Table

Under the terms of the agreement between us and Mr. Garon regarding his employment as our chief executive officer, Mr. Garon was entitled to receive base salary in the amount of $175,000 payable in accordance with our payroll policies. In addition, in connection with his employment, on August 11, 2007, we issued Mr. Garon a restricted stock award of 2,383,333 shares of common stock, of which 595,833 shares vested upon grant, another 595,833 shares vested on August 11, 2008, and the balance vested ratably during the period following August 11, 2008. When Mr. Garon’s employment with us was terminated, the unvested portion of the restricted stock award was forfeited.

Name and Principal Position	Year	Salary ($)	Bonus ($)	Stock Awards ($)	Option Awards (2) ($)	All Other Compensation ($)	Total ($)
Daniel J.A. Kolke (1)	2009	200,489	—	—	518,874	—	719,363
Chief Executive Officer	2008	130,594	—	—	—	—	130,594

~~Under the terms of the agreement between us and Mr.~~(1) ~~Kolke regarding his employment as our chief technology officer,~~ Mr. Kolke ~~is entitled~~was toappointed ~~receive~~Chief ~~base salary in the amount of $175,000 payable in accordance~~Executive ~~with~~Officer ~~our payroll policies. In addition,~~ in ~~connection with his employment, on August~~September ~~11, 2007,~~2008 weand ~~granted~~Chief ~~Mr. Kolke~~Financial anOfficer ~~option~~in ~~to purchase up to 3,433,333 shares of common stock at an exercise price of $0.051 per share, of which 858,333 options vested upon grant, 858,333 options vest on August~~November ~~11,~~ 2008~~, and the~~; ~~balance~~prior ~~vest~~to ~~ratably~~that ~~during~~time ~~the~~he 24served ~~months~~as ~~following~~our ~~August 11,~~Chief ~~2008.~~Technology ~~If not exercised, the option expires on August 11, 2017~~Officer.

~~Outstanding~~(2) Represents ~~Equity~~the amount ~~Awards~~recognized atfor ~~Fiscal~~financial ~~Year~~statement ~~End~~reporting purposes in respect of outstanding option awards in accordance with ASC 718. The assumptions made in valuing option awards reported in this column are discussed in Note 3, “Summary of Significant Accounting Policies” under “Stock-Based Compensation” and Note 12, “Accounting for Share-Based Compensation” to our financial statements included in this report.

~~The following table sets forth information concerning unexercised~~Employment ~~options, stock that has not vested and equity incentive plan awards for each named executive officer outstanding as of December 31, 2008:~~Agreement

~~Outstanding~~Under the terms of the ~~Equity~~agreement ~~Awards~~between us and Mr. Kolke regarding his employment, Mr. Kolke is entitled to receive base salary in the amount of $175,000 payable in accordance with our payroll policies. In addition, in connection with his employment, on August 11, 2007, we granted Mr. Kolke an option to purchase up to 3,433,333 shares of common stock at ~~Fiscal~~an ~~Year-End~~exercise price of $0.051 per share, of which 858,833 vested on the date of grant, 858,833 vested on the one year anniversary of August 11, 2008, and the balance vest ratably during the 24 months following August 11, 2008. If not exercised, the option expires on August 11, 2017. On October 2, 2009, Mr. Kolke was granted an additional option to purchase 1,700,000 shares of common stock at an exercise price of $0.51 per share, of which 425,000 vested upon grant, 425,000 will vest on October 2, 2010, and the balance will vest ratably during the 24 months following October 2, 2010. If not exercised, then these options expire on October 2, 2019.

	Option Awards					Stock Awards
Name	Number of Securities Underlying Unexercised Options exercisable (1)	Number of Securities Underlying Unexercised Options unexercisable (2)	Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options	Option Exercise Price ($)	Option Expiration Date	Number of Shares or Units of Stock That Have Not Vested (3)	Market Value of Shares or Units of Stock That Have Not Vested ($)(4)	Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested	Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)
Daniel J.A. Kolke	2,002,778	1,430,555	—	0.051	08-11-2017	—	—	—	—
David MacKenzie	65,972	—		1.20	03-18-2018	—	—	—	—
Jeffrey L. Garon	—	—	—	—	—	1,241,320	409,636	—	—

Outstanding Equity Awards at Fiscal Year End

~~(1) Consists of~~The ~~(i) the~~following ~~vested~~table ~~portion~~sets forth ofinformation concerning unexercised options, ~~granted~~stock tothat ~~Mr. Kolke~~has ~~pursuant~~not tovested and ~~his~~equity ~~employment~~incentive ~~agreement,~~plan ~~and~~awards ~~(ii) fully-vested~~for ~~options~~each ~~issued~~named toexecutive ~~Mr.~~officer outstanding as of December ~~MacKenzie.~~31, 2009:

~~(2) Consists~~Outstanding ofEquity ~~the~~Awards unvested portion of options issued to Mr. Kolke pursuant to his employment agreement, which vest over 36 months from August 2007. Mr. MacKenzie terminated his employment with us on October 31, 2008, and any unvested options were forfeited at ~~that~~ ~~time.~~Fiscal Year-End

(3) Consists of shares issued to Mr. Garon subject to repurchase by us pursuant to his employment agreement, which vest over 36 months from August 2007. Mr. Garon’s employment was terminated on September 18, 2008, at that point in time 1,142,013 of a total of 2,383,333 shares had vested.

	Option Awards					Stock Awards
Name	Number of Securities Underlying Unexercised Options exercisable (1)	Number of Securities Underlying Unexercised Options unexercisable (2)	Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options	Option Exercise Price ($)	Option Expiration Date	Number of Shares or Units of Stock That Have Not Vested	Market Value of Shares or Units of Stock That Have Not Vested ($)	Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested	Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)
Daniel J.A. Kolke	2,861,111	572,222	—	0.051	08-11-2017	—	—	—	—
Daniel J.A. Kolke	425,000	1,275,000	—	0.51	10-02-2019	—	—	—	—

(41) ~~Based~~Consists onof the ~~$0.33~~vested ~~per~~portion ~~share—the~~of ~~closing~~options ~~price~~granted ~~for~~to ~~our~~Mr. Kolke ~~common~~pursuant ~~stock~~to onhis ~~December~~August ~~31,~~2007 ~~2008~~and October 2009 stock option grants.

38(2) Consists of the unvested portion of options granted to Mr. Kolke, pursuant to his August 2007 or October 2009 stock option grants. The unvested options granted in August 2007 vest monthly at the rate of 71,528 options per month, until August 2010. The unvested options granted in October 2009 vest (a) 425,000 options on October 2, 2010, and (b) thereafter at 35,417 shares per month until October 2012.

~~Table~~Director ~~of Contents~~Compensation

~~Director~~On ~~Compensation~~March 5, 2008, our board of directors adopted a board compensation plan providing for (a) existing non-executive board members to receive options to acquire up to 10,000 shares of our common stock at an exercise price of $1.20 per share, which vest as to 50 percent on the 12 month anniversary of the date of grant and the remaining 50 percent on the 24 month anniversary of the date of grant; (b) new non-executive board members to receive options to acquire up to 10,000 shares of our common stock at an exercise price equal to the fair market value of our common stock on the date of grant, which vest as to 50 percent on the 12 month anniversary of the date of grant and the remaining 50 percent on the 24 month anniversary of the date of grant; (c) all re-elected board members to receive, upon their re-election, options to acquire up to 10,000 shares of our common stock at an exercise price equal to the fair market value of our common stock on the date of grant, which vest as to 100 percent on the 12 month anniversary of the date of grant; and (d) a quarterly payment of $1.5 thousand to each non-executive member of the board for their expenses in connection with attendance at quarterly board meetings and periodic board committee meetings. In September 2009, our board of directors increased the annual grant size for non-executive directors to 100,000 options.

OnThe ~~March 5,~~table ~~2008,~~below ~~our~~sets ~~board of directors adopted a board~~forth compensation plan providing for (a) existing non-executive board members to receive options to acquire up to 10,000 shares of our common stock at an exercise price of $1.20 per share, which vest as to 50 percent on the 12compensation ~~month anniversary of~~ the ~~date~~member of ~~grant~~our ~~and the remaining 50 percent on the 24 month anniversary of the date of grant; (b) new non-executive~~ board ~~members to receive options to acquire up to 10,000 shares~~ of ~~our~~directors ~~common~~received ~~stock~~during ~~at an exercise price equal to~~ the ~~fair market value of our common stock on the date~~ offiscal ~~grant,~~year ~~which~~ended ~~vest as to 50 percent on the 12 month anniversary of the date of grant and the remaining 50 percent on the 24 month anniversary of the date of grant; (c)~~December ~~all re-elected board members to receive~~31, upon their re-election, options to acquire up to 10,000 shares of our common stock at an exercise price equal to the fair market value of our common stock on the date of grant, which vest as to 100 percent on the 12 month anniversary of the date of grant; and (d) a quarterly payment of $12009.~~5 thousand to each non-executive member of the board for their expenses in connection with attendance at quarterly board meetings and periodic board committee meetings.~~

~~The table below sets forth the compensation the member of our board of~~Director ~~directors received during the fiscal year ended December 31, 2008.~~Compensation

Director Compensation

Name	Fees Earned or Paid in Cash ($)	Option Awards ($)(1)	All Other Compensation ($)	Total ($)
Ronald A. Rudy	6,000	30,522	0	36,522
Andy Liu	6,000	30,522	0	36,522
Robert L. Thordarson	6,000	30,522	0	36,522

Name	Fees Earned or Paid in Cash ($)	Option Awards ($)(4)	All Other Compensation ($)	Total ($)
Ronald A. Rudy	0	12,000	0	12,000
Andy Liu (1)	0	62,500	0	62,500
Robert L. Thordarson (2)	0	16,500	0	16,500
Gregory Ruff (3)	0		0	0

(1) Represents the amount recognized for financial statement reporting purposes in respect of outstanding option awards in accordance with ASC 718. The assumptions made in valuing option awards reported in this column are discussed in Note 3, “Summary of Significant Accounting Policies” under “Stock-Based Compensation” and Note 12, “Accounting for Share-Based Compensation” to our financial statements included in this report. At December 31, 2009, the following option awards were outstanding: (a) Ronald Rudy 120,000 options, of which 10,000 have vested as of the date of this report; (b) Andy Liu 110,000 options, 5,000 of which have vested; and (c) Robert L. Thordarson 110,000 options, 5,000 of which have vested.

~~(1)~~10,000 of the options issued to Mr. Liu were amended by action of the board of directors, Mr. Liu abstaining, on October 2, 2009, which amended all ~~was~~unexpired ~~appointed~~or aforfeited ~~director~~options inpreviously granted on August 8, 2008, to revise the exercise price from $5.93 to $0.51, the closing price of the Company’s common stock on October 2, 2009.

We plan to enter into indemnification agreements with each of our directors (2and our executive officers) ~~Mr. Thordardson~~ on terms ~~was~~that ~~appointed~~we abelieve ~~director~~are reasonable, customary, and comparable to those entered into by other publicly traded companies in ~~September 2008~~the United States.

~~(3) Mr. Ruff resigned from our board of directors in August 2008, and his options were forfeited.~~37

~~(4) Represents~~Table ~~the amount recognized for financial statement reporting purposes in respect~~ of ~~outstanding option awards~~ in accordance with SFAS 123(R). The assumptions made in valuing option awards reported in this column are discussed in Note 4, “Summary of Business and Significant Accounting Policies” under “Stock-Based Compensation” and Note [7], “Accounting for Share-Based Compensation” to our financial statements included in this report. At December 31, 2008, the following option awards were outstanding: (a) Ronald Rudy 10,000 options, of which 50% have vested as of the date of this report; (b) Andy Liu 10,000 options, none of which had vested; (a) Robert L. Thordarson 10,000 options, none of which had vested.Contents

WeITEM ~~plan~~12. toSECURITY ~~enter~~OWNERSHIP ~~into~~OF ~~indemnification agreements~~CERTAIN ~~with~~BENEFICIAL ~~each~~OWNERS ofAND ~~our~~MANAGEMENT ~~directors~~AND ~~(and~~RELATED ~~our~~STOCKHOLDER ~~executive officers) on terms that we believe are reasonable, customary, and comparable to those entered into by other publicly traded companies in the United States.~~MATTERS

~~ITEM~~The 12following table sets forth certain information with respect to the beneficial ownership of our common stock as of March 16, 2010, by (i) any person or group owning more than 5 percent of our common stock, (ii) each director, (iii) each of our named executive officers, and (iv) all named executive officers and directors as a group. As ~~SECURITY~~of ~~OWNERSHIP~~March 16, OF2010, ~~CERTAIN~~we ~~BENEFICIAL~~had ~~OWNERS~~23,939,810 ~~AND~~shares ~~MANAGEMENT~~of ~~AND~~common ~~RELATED~~stock ~~STOCKHOLDER~~issued ~~MATTERS~~and outstanding and 743,333 shares of Series A Preferred stock issued and outstanding. Beneficial ownership is determined in accordance with Rule 13d-3(d) promulgated by the SEC under the Exchange Act and includes shares that can be acquired within 60 days through exercise or conversion of a security. Unless otherwise stated, each beneficial owner has sole power to vote and dispose of the shares and the address of such person is c/o Etelos, Inc., 26828 Maple Valley Highway #297, Maple Valley, Washington 93038.

The following table sets forth certain information with respect to the beneficial ownership of our common stock as of March 31, 2009, by (i) any person or group owning more than 5 percent of our common stock, (ii) each director, (iii) each of our named executive officers, and (iv) all named executive officers and directors as a group. As of March 31, 2009, we had 23.027,064 shares of common stock issued and outstanding and 833,333 shares of New Series A Preferred stock issued and outstanding. Beneficial ownership is determined in accordance with Rule 13d-3(d) promulgated by the SEC under the Exchange Act and includes shares which can be acquired within 60 days through exercise or conversion of a security. Unless otherwise stated, each beneficial owner has sole power to vote and dispose of the shares and the address of such person is c/o Etelos, Inc., 26828 Maple Valley Highway #297, Maple Valley, Washington, 93038.

Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership		Percentage of Class Beneficially Owned
Officers and Directors
Daniel J. A. Kolke	6,134,213	(1)	20.63	%
Ronald A. Rudy	1,390,272	(2)	5.71	%
Andy Liu	110,000	(3)	0.46	%
Robert L. Thordarson	176,667	(4)	0.73	%
Directors and Officers as a group	7,811,152	(5)	25.69	%
5% Stockholders (other than officers or directors)
Don Morissette	10,853,650	(6)	43.30	%
Enable Capital Management LLC	3,703,217	(7)	15.47	%
Salzwedel Financial Communications, Inc.	3,000,000	(8)	11.57	%

39(1) Consists of (i) 260,629 shares of common stock, (ii) 5,133,333 shares of common stock issuable upon exercise of options, (iii) 333,333 shares of common stock issuable upon conversion of Series A Preferred Stock, (iv) 333,333 shares of common stock issuable upon exercise of warrants, and (v) 73,585 shares of common stock held by Mr. Kolke’s spouse.

~~Table~~(2) Consists of ~~Contents~~(i) 980,273 shares of common stock, (ii) 110,000 shares of common stock issuable upon exercise of options, (iii) 133,333 shares of common stock issuable upon conversion of Series A Preferred Stock, and (iv) 166,666 shares of common stock issuable upon exercise of warrants.

Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership		Percentage of Class Beneficially Owned
Officers and Directors
Daniel J. A. Kolke	3,309,631	(1)	12.8	%
David S. G. MacKenzie	1,000		0.00	%
Jeffrey L. Garon	2,384,333		10.4	%
Ronald A. Rudy	991,894	(2)	4.3	%
Andy Liu	—		0.0	%
Robert L. Thordarson	37,500	(3)	0.0	%
Directors and Officers as a group	6,550,773	(4)	25.6	%
5% Stockholders (other than officers or directors)
Don Morissette	9,353,650		40.6	%
Enable Capital Management LLC	5,735,051	(5)	23.1	%

(3) Consists of 110,000 shares of common stock issuable upon exercise of options.

(14) Consists of (i) ~~500~~33,~~629~~334 shares of common stock, (ii) 2110,~~360,417~~ 000 shares of common stock issuable upon exercise of ~~outstanding~~ options, and (iii) ~~187~~33,~~500~~ 333 shares ~~issuable upon conversion~~ of ~~outstanding~~common ~~Series A~~stock ~~Preferred Stock, (iv) 187,500 shares~~ issuable upon exercise ~~of outstanding warrants, and (v) 73,585~~ ~~shares~~ of ~~common stock held by Mr~~warrants. ~~Kolke’s spouse.~~

(25) Consists of (i) ~~836~~1,~~894~~373,603 shares of common stock, (ii) 56,~~000~~ 495,999 shares of common stock issuable upon exercise of ~~outstanding~~ options, (iii) 75466,~~000~~ 666 shares of common stock issuable upon conversion of ~~outstanding~~ Series A Preferred Stock, and (iv) 75533,~~000~~332 shares of common stock issuable upon ~~exercise~~conversion of ~~outstanding~~ warrants.

(36) ~~Consists~~Don ofMorissette and Don Morissette, LLC collectively hold (i) 189,~~750~~728,650 shares ~~issuable~~of ~~upon~~common stock, (ii) 375,000 ~~conversion~~shares of ~~outstanding~~common ~~Series A~~stock ~~Preferred~~issuable ~~Stock,~~upon exercise of warrants and (iviii) ~~18,~~750,000 shares of common stock issuable upon ~~exercise~~conversion of ~~outstanding~~a ~~warrants~~debenture. Mr. Morissette may be contacted at 4230 Galewood, Suite 100, Lake Oswego, Oregon 97035.

(47) ~~Consists~~Based ofsolely upon information filed by this stockholder in a Form 4 filed with the SEC on January 12, 2010. Enable Growth Partners, L.P., a Delaware limited partnership (“EGP”), Enable Opportunity Partners, L.P., a Delaware limited partnership (“EOP”), and Pierce Diversified Strategy Master Fund, LLC, a Delaware limited liability company (“Pierce”, and together with EOP and EGP, the “Investors”), collectively hold (i) 3,~~722~~707,~~856~~084 shares of our common stock, (ii) 2warrants to purchase 444,~~365,417~~444 shares ~~issuable~~of ~~upon~~our common stock at an exercise price of ~~outstanding~~$0.75 ~~options~~per share, subject to certain adjustments (the “Enable Warrants”), (iii) ~~281~~a 6% convertible note (“Note 1”) in the aggregate principal amount of $924,~~250~~000, which is convertible into shares of our common stock at a conversion rate of $0.75 per share, (iv) a 6% convertible note (“Note 2”) in the aggregate principal amount of $440,000, which is convertible into shares ~~issuable~~of ~~upon~~our common stock at a conversion rate of $0.75 ~~outstanding~~per ~~Series~~share, (v) Aa ~~Preferred~~6% ~~Stock~~convertible note (“Note 3”) in the principal amount of $1,000,000, which is convertible into shares of our common stock at a conversion rate of $0.75 per share, and (ivvi) ~~281~~a 6% convertible note (“Note 4”,~~250~~ and together with Note 1, Note 2, and Note 3, the “Notes”) in the principal amount of $3,000,000, which is convertible into shares ~~issuable~~of ~~upon~~our common stock at a conversion rate of $0.75 per share. Note 3, Note 4, and the Enable Warrants each contain an issuance limitation prohibiting the Investors from exercising or converting those securities to the extent that such exercise would result in beneficial ownership by the Investors of more than 4.99% of the Shares then issued and outstanding. Enable ~~warrants~~Capital Management, LLC (“ECM”) is the investment manager and general partner of EOP and EGP. ECM also serves as the investment manager of Pierce. Mitchell S. Levine is the Managing Member of ECM and has voting and investment power over the securities held by the Investors. Thus, for the purposes of Reg. Section 240.13d-3, EGP, EOP, Pierce, ECM and/or Mr. Levine may be deemed to be beneficial owners of more than 10% of the shares. Mr. Levine holds 73,333 shares in his individual capacity. Accordingly, this table reflects the aggregate holdings of EGP, EOP, Pierce and Mr. Levine. Other than the shares held by Mr. Levine in his individual capacity, ECM and Mr. Levine do not hold directly any of the securities or derivative securities with respect thereto, and disclaim any beneficial ownership of any of the securities or derivative securities reported or excluded herein for purposes of Rule 16a-1(a) under the Exchange Act, except for their pecuniary interest therein. ECM may be contacted at One Ferry Building Ste. 225, San Francisco, California 94111.

(58) ~~Enable Capital Management, LLC (“ECM”) acts as the~~ Consists ~~investment manager~~ of ~~Enable Growth Partners LP~~ (~~“EGP”~~i) 1, ~~Enable Opportunity Partners LP (“EOP”)~~000,000 ~~and~~shares ~~Pierce Diversified Strategy Master Fund LLC, Ena (“Pierce”). By virtue~~ of ~~having~~common ~~the~~stock ~~same investment manager, EGP, EOP,~~ and ~~Pierce may be deemed to be affiliated entities. Mitchell S. Levine~~ (~~“Mr. Levine” and together with ECM, EGP, EOP, and Pierce, the “Investors”~~ii) ~~is the Managing Member of ECM and has delegated voting and dispositive power over the securities held by EGP, EOP, and Pierce. Thus for the purposes of Reg. Section~~ ~~240.13d-3~~2, ~~EGP~~000,000 ~~EOP, EOM, Pierce, and/or Mr. Levine may be deemed to be beneficial owners of more than 10% of the~~ shares~~. Mr. Levine holds~~ ~~73,333 shares in his individual capacity. Accordingly, this table reflects the aggregate holdings~~ of ~~EGP, EOP, Pierce and Mr. Levine. Other~~ ~~than~~common ~~the~~stock ~~shares~~issuable ~~held~~upon byexercise ~~Mr. Levine in his individual capacity, ECM and Mr. Levine do not hold directly any~~ of the securities or derivative securities with respect thereto, and disclaim any beneficial ownership of any of the securities or derivative securities reported or excluded herein for purposes of Rule 16a-1(a) under the Exchange Act, except for their pecuniary interest thereinoptions. ~~ECM may be contacted at One Ferry Building Ste. 225, San Francisco, California 94111.~~

ECM, EGP, EOP, and Pierce collectively hold (i) 3,916,384 shares of the common stock, (ii) warrants to purchase 444,444 shares of common stock at an exercise price of $0.75 per share, subject to adjustments, (iii) a 6% convertible note (“Note 1”) in the aggregate principal amount of $924,000, which is convertible into Shares at a conversion rate of $0.75 per share, (iv) a 6% convertible note (“Note 2”) in the aggregate principal amount of $440,000, which is convertible into Shares at a conversion rate of $0.75 per share, (v) a 6% convertible note (“Note 3”) in the aggregate principal amount of $1,000,000, which is convertible into Shares at a conversion rate of $0.75 per share, and (vi) a a 6% convertible note (“Note 4”, and together with Note 1, Note 2 and Note 3, collectively the “Notes”) in the aggregate principal amount of $3,000,000, which is convertible into Shares at a conversion rate of $0.75 per share. Note 3, Note 4, and the Warrants each contain an issuance limitation prohibiting the Investors from exercising or converting the securities to the extent that such exercise would result in beneficial ownership by the Investors of more than 4.99% of the Shares then issued and outstanding. Accordingly, Note 3, Note 4, and the Warrants are not included in this table.38

~~ITEM~~Table ~~13.~~of ~~CERTAIN RELATIONSHIPS AND RELATED TRANSACTION, AND DIRECTOR INDEPENDENCE~~Contents

~~Related~~ITEM ~~Transactions~~13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION, AND DIRECTOR INDEPENDENCE

40Related Transactions.

~~Table~~We previously entered into a series of ~~Contents~~loan transactions with the parents and two brothers of our chairman and chief executive officer, Mr. Daniel J.A. Kolke. In connection with the settlement of these loans on December 30, 2007, we issued three unsecured promissory notes in the aggregate principal amount of $815.8 thousand which will become secured by certain of our presently unidentified assets if and when Mr. Kolke is no longer neither an employee nor a member of our board of directors. The unsecured promissory notes bear interest at 7.5 percent. On December 22, 2009, our board of directors, with Daniel J.A. Kolke abstaining, approved the issuance of 434,754 shares of common stock of the company to Daniel & Selma Kolke, as payment of 45% of principal and 100% of accrued interest due on their note, as of December 31, 2009, at a value of $0.75 per share, or approximately $326 thousand. The balance due on the note to Daniel & Selma Kolke as of December 31, 2009, was $324 thousand, and the principal amount outstanding under the other two promissory notes, in the aggregate, as of December 31, 2009, was $30 thousand.

OnIn ~~December~~March 32009, ~~2008,~~ we entered into a promissory ~~Securities~~note ~~Purchase~~with ~~Agreement~~Ronald inA. ~~which~~Rudy, wea ~~sold~~member ~~an aggregate~~ of ~~$575,000~~our Board of ~~Series A~~Directors, ~~Preferred~~in ~~Stock (~~the ~~“Series A~~ ~~Preferred~~principal ~~Stock”)~~amount ~~and~~of ~~warrants~~$100 tothousand, ~~purchase~~bearing ~~shares~~interest of ~~the~~10% ~~Company’s~~per ~~Common Stock (the “Warrants”)~~annum. ~~Investors~~On ~~in the Series~~December ~~A Preferred~~22, ~~Stock included Daniel J.A. Kolke~~2009, our ~~founder~~board ~~and CEO, who purchased~~of ~~$250~~directors,~~000~~ ofwith ~~Series A Preferred Stock and Warrants~~Mr. ~~Other investors included Ronald A.~~ Rudy ~~and Robert L. Thordarson~~abstaining, ~~members~~approved ofthe ~~our~~issuance ~~Board~~ of ~~Directors who purchased $100~~143,~~000~~379 ~~and~~shares ~~$25,000~~ of ~~Series A~~our ~~Preferred~~common ~~Stock~~stock ~~and~~to ~~Warrants, respectively~~Mr. ~~The~~ Rudy ~~sales~~as topayment ~~our~~in ~~CEO~~full of all principal and ~~Directors~~accrued ~~were~~interest ~~made~~ due on the ~~same~~promissory ~~terms~~note ~~and~~as ~~conditions~~of asDecember 31, ~~other~~2009, at ~~investors~~a invalue ~~the~~of ~~offering~~$0.75 per share.

WeOn ~~previously~~December 18, 2009, we entered into a promissory ~~series~~note ~~of loan transactions~~ with ~~the parents and two brothers of our chairman and chief executive officer, Mr.~~ Daniel J.A. Kolke~~. In~~, ~~connection~~our ~~with settlement of these loans~~chairman, ~~we issued three unsecured promissory notes~~ in the ~~aggregate~~ principal amount of $~~815.8~~40 thousand ~~which~~, ~~will~~bearing ~~become secured by certain of our presently unidentified assets if and when Mr. Kolke is no longer neither an employee nor a member of our board of directors. The unsecured promissory notes bear~~ interest at ~~7.5~~6% ~~percent~~per annum. ~~The~~All ~~amount outstanding as of December 31, 2008 under the promissory notes was $685 thousand which was the largest aggregate~~ principal ~~amount~~on ~~outstanding during~~ the ~~year. No~~note ~~principal or interest~~ was paid onin ~~these promissory~~full ~~notes during the quarter ended December~~on January 314, ~~2008~~2010.

Parent Companies.

We do not have a parent company.

Director Independence.

Our board of directors currently consists of four members, Daniel J. A. Kolke, Ronald A. Rudy, Andy Liu and Robert L. Thordarson. Messrs. Rudy, Liu, and Thordarson are considered independent under the definition of independence established by The Nasdaq Stock Market.

~~ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES~~39

WeTable ~~have selected Stonefield Josephson, Inc. as our independent registered public accounting firm for 2009. The audit committee~~ of our board of directors intends to meet with the auditor in June 2009 to discuss the terms of the audit engagement for fiscal 2009. Stonefield Josephson was our principal accountant for the fiscal year ended December 31, 2008. Representatives from Stonefield Josephson have been invited to attend the annual meeting. If they attend, they will be provided the opportunity to make a statement if they desire to do so, and are expected to be available to answer appropriate questions.Contents

~~For~~ITEM ~~purposes~~14. ofPRINCIPAL ~~the~~ACCOUNTANT ~~tables~~FEES ~~below:~~AND SERVICES

Audit Fees		include fees and expenses for professional services rendered for the audits of our annual financial statements for the applicable year and for the review of the financial statements included in our quarterly reports on Form 10-Q for the applicable year.
Audit-Related Fees		consist of fees billed for assurance and related services that are related to the performance of the audit or review of our financial statements and registration filings with the SEC and are not reported as audit fees.
Tax Fees		consist of preparation of our federal and state tax returns, review of quarterly estimated payments, and consultation concerning tax compliance issues.
All Other Fees		include any fees for services not covered above. [Fees noted for both annual periods primarily represent fees associated with communications and attendance at meetings with management, the board of directors, and the audit committee of the board of directors.

We have selected Stonefield Josephson, Inc. as our independent registered public accounting firm for 2009. The audit committee of our board of directors intends to meet with the auditor in June 2010 to discuss the terms of the audit engagement for fiscal 2010. Stonefield Josephson was our principal accountant for the fiscal year ended December 31, 2008. Representatives from Stonefield Josephson have been invited to attend the annual meeting. If they attend, they will be provided the opportunity to make a statement if they desire to do so, and are expected to be available to answer appropriate questions.

~~The~~For purposes ~~following~~of ~~table sets forth~~ the ~~aggregate~~tables ~~fees billed for services from January 1, 2008, to December 31, 2008, by Stonefield Josephson~~below:

Audit Fees	$include fees and expenses for professional services rendered for the audits of our annual financial statements for the applicable year and for the review of the financial statements included in our quarterly reports on Form 10-Q for the applicable year.	~~330,000~~
Audit Related Fees	$	218,000
Audit-Related Fees	consist of fees billed for assurance and related services that are related to the performance of the audit or review of our financial statements and registration filings with the SEC and are not reported as audit fees.
Tax Fees	$consist of preparation of our federal and state tax returns, review of quarterly estimated payments, and consultation concerning tax compliance issues.	~~41,000~~
All Other Fees	$includes any fees for services not covered above. Fees noted for both annual periods primarily represent fees associated with communications and attendance at meetings with management, the board of directors, and the audit committee of the board of directors.	~~13,000~~
Total	$	602,000

41The following table sets forth the aggregate fees billed for services from January 1, 2009, to December 31, 2009, by Stonefield Josephson:

Table of Contents

Audit Fees	$	247,000
Audit Related Fees	$	—
Tax Fees	$	10,000
All Other Fees	$	4,000

Total	$	261,000

The following table sets forth the aggregate fees billed for services from January 1, ~~2007~~2008, to December 31, ~~2007~~2008, by Stonefield Josephson:

Audit Fees	$	0330,000
Audit Related Fees	$	0218,000
Tax Fees	$	041,000
All Other Fees	$	013,000
Total	$	0602,000

Audit Committee Pre-Approval Policies and Procedures

The policy of the audit committee of our board of directors is to pre-approve all audit and permissible non-audit services provided by our independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services. The independent auditor and management are required to periodically report to the audit committee regarding the extent of services provided by the independent auditor in accordance with ~~this~~ this pre-approval. All of our audit ~~expenses~~ expenses incurred in 2008 were pre-approved by our Audit Committee.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) Documents filed as part of this Report:

(1) Financial Statements—all financial statements of the Company as set forth under Item 8, on page F-1 of this Report.

(2) Financial Statement Schedules—Asas a smaller reporting company we are not required to provide the information required by this item.

(3) Exhibits

~~EXHIBIT INDEX~~40

Exhibit No.		Description
2.1		Plan Proponents’ Third Amended Plan of Reorganization for the Debtor dated December 20, 2007 (1)
2.2		Agreement and Plan of Merger dated April 22, 2008 between Tripath Technology Inc. and Etelos, Incorporated (1)
3.1		Amended and Restated Certificate of Incorporation (1)
3.2		Bylaws (1)
3.3		Certificate of Designation For Series A Preferred Stock (3)
4.1		Form of common stock purchase warrant issued in connection with the January 2008 financing (1)
4.2		Form of original issue discount 6.0% senior secured convertible debenture issued in connection with the January 2008 financing (1)
4.3		Form of common stock purchase warrant issued in connection with the April 2008 financing (2)
4.4		Form of original issue discount 6.0% senior secured convertible debenture issued in connection with the April 2008 financing (2)
4.5		Form of convertible promissory note issued by Etelos, Incorporated in August and September 2007 (2)
4.6		Form of three year Common Stock Purchase Warrant dated December 3, 2008 (3)
10.1		Loan and Security Agreement by and among Etelos, Incorporated and Bridge Bank, National Association dated October 5, 2007 (1)
10.2		The anti-dilution agreement entered between Etelos, Incorporated and each of Don Morissette and Ronald A. Rudy, as amended, dated March 6, 2008 (1)
10.3		Settlement Agreement and General Release of Claims dated December 30, 2007, among (i) Etelos, Incorporated, (ii) Robyn and Daniel J.A. Kolke, (iii) Selma and Daniel A. Kolke, (iv) Kristin and Desmond D. Kolke, and

Table of Contents

42EXHIBIT INDEX

Table of Contents

Exhibit No.		Description
2.1		Plan Proponents’ Third Amended Plan of Reorganization for the Debtor dated December 20, 2007 (incorporated by reference to the registrant’s Current Report on Form 8-K filed on April 23, 2008)
2.2		Agreement and Plan of Merger dated April 22, 2008 between Tripath Technology Inc. and Etelos, Incorporated (incorporated by reference to the registrant’s Current Report on Form 8-K filed on April 23, 2008)
3.1		Amended and Restated Certificate of Incorporation (incorporated by reference to the registrant’s Current Report on Form 8-K filed on April 23, 2008)
3.2		Bylaws (incorporated by reference to the registrant’s Current Report on Form 8-K filed on April 23, 2008)
3.3		Certificate of Designation For Series A Preferred Stock (incorporated by reference to the registrant’s Current Report on Form 8-K filed on December 5, 2008)
4.1		Form of common stock purchase warrant issued in connection with the January 2008 financing (incorporated by reference to the registrant’s Current Report on Form 8-K filed on April 23, 2008)
4.2		Form of original issue discount 6.0% senior secured convertible debenture issued in connection with the January 2008 financing (incorporated by reference to the registrant’s Current Report on Form 8-K filed on April 23, 2008)
4.3		Form of common stock purchase warrant issued in connection with the April 2008 financing (incorporated by reference to the registrant’s Registration Statement on Form S-1 filed on May 8, 2008)
4.4		Form of original issue discount 6.0% senior secured convertible debenture issued in connection with the April 2008 financing (incorporated by reference to the registrant’s Registration Statement on Form S-1 filed on May 8, 2008)
4.5		Form of convertible promissory note issued by Etelos, Incorporated in August and September 2007 (incorporated by reference to the registrant’s Registration Statement on Form S-1 filed on May 8, 2008)
4.6		Form of three year Common Stock Purchase Warrant dated December 3, 2008 (incorporated by reference to the registrant’s Current Report on Form 8-K filed on December 5, 2008)
4.7		Form of 10% Senior Secured Convertible Debenture issued in connection with September 2009 financing (incorporated by reference to the registrant’s Current Report on Form 8-K filed on September 30, 2009)
4.8		Form of warrant issued in connection with September 2009 financing with an exercise price of $0.60 per share (incorporated by reference to the registrant’s Current Report on Form 8-K filed on September 30, 2009)
4.9

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