UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2010

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file number 000-51995

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, including area code)

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

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). Yes o No 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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o

Non-accelerated filer o		Smaller reporting company x

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

As of March 31, 2010, 24,116,477 shares of the issuer’s common stock, par value $0.01 per share, were outstanding.

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Etelos, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended March 31, 2010

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		Page

FORWARD LOOKING STATEMENTS		1

PART I —FINANCIAL INFORMATION		3

Item 1.	FINANCIAL STATEMENTS (UNAUDITED)	3

Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	24

Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	40

Item 4.	CONTROLS AND PROCEDURES	40

PART II —OTHER INFORMATION		41

Item 1.	LEGAL PROCEEDINGS	41

Item 1A.	RISK FACTORS	42

Item 6.	EXHIBITS	59

SIGNATURES		60

EXHIBIT INDEX		61

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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 Quarterly Report on Form 10-Q 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.” 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. Examples of forward-looking statements include, but are not limited to, statements we make regarding raising additional capital, the acceptance of our products and services by the marketplace and our belief that we have sufficient liquidity to fund our currently planned level of operations through mid-2010. The foregoing is not an exclusive list of all forward-looking statements we make.

You should be aware that our actual results could differ materially from those contained in the forward-looking statements we make in this report due to a number of factors that could cause actual results to differ materially from historical results or anticipated results, including:

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

· the exercise of rights and remedies by the holders of our outstanding promissory notes under the terms of which we are currently in default;

· 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;

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

· the risks described in Item 1A “Risk Factors” of Part II 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.

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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 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.

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—FINANCIAL INFORMATION

ITEM 1. - FINANCIAL STATEMENTS

ETELOS, INC.

CONDENSED BALANCE SHEETS

(in thousands, except share data)

	March 31, 2010			December 31, 2009
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	12		$	445
Accounts receivable, net	46			10
Prepaid expenses and other current assets	13			16
Accretion of interest on convertible notes payable	169			250
Total current assets	240			721

Property and equipment, net	39			46
Debt issuance costs	26			30
Other assets	2			2

Total assets	$	307		$	799

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	875		$	1,120
Accounts payable related parties	34			27
Accrued payroll and related expenses	1,149			1,029
Other accrued expenses	1,042			1,229
Deferred revenue	50			8
Current portion convertible notes payable, net of discounts	1,689			1,764
Current portion notes payable	241			110
Current portion notes payable to related parties	68			108
Derivative liability	306			315
Total current liabilities	5,454			5,710

Long-term convertible notes payable, net of premiums and discounts, less current portion	7,433			7,214
Long-term note payable	50			—
Long-term notes payable to related parties, less current portion	286			286

Total liabilities	13,223			13,210

Commitments and contingencies

Stockholders’ deficit:
Preferred stock, $0.01 par value: 50,000,000 shares authorized with liquidation preferences:
New Series A: 3,333,333 shares authorized; issued and outstanding: 666,666 shares at March 31, 2010 and 743,333 shares at December 31, 2009	6			7
Common stock, $0.01 par value: 250,000,000 shares authorized; issued and outstanding -24,116,477 shares at March 31, 2010 and 23,398,143 shares at December 31, 2009	241			234
Additional paid-in capital	24,611			23,903
Accumulated deficit	(37,774		)	(36,555		)
Total stockholders’ deficit	(12,916		)	(12,411		)

Total liabilities and stockholders’ deficit	$	307		$	799

The accompanying notes are an integral part of these condensed interim financial statements.

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ETELOS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)

	Three Months Ended
	March 31,
	2010			2009

Revenue	2			58
Cost of revenue	9			93
Gross loss	(7		)	(35		)

Operating expenses:
Research and development	264			255
Sales and marketing	166			160
General and administrative	366			1,736
Change in valuation of liability related to warrants from settlement, financing, and consulting services	—			2,155
Total operating expenses	796			4,306

Loss from operations	(803		)	(4,341		)

Interest income (expense):
Interest expense, net	(124		)	(127		)
Amortization of notes discount and debt issuance costs and accretion of notes premium, net	(308		)	(13		)
Change in valuation of liability relating to embedded derivatives and warrants	16			(1,954		)
Total interest income (expense)	(416		)	(2,094		)

Loss before taxes	(1,219		)	(6,435		)

Provision for income taxes	—			—

Net loss	$	(1,219	)	$	(6,435	)

Basic and diluted net loss	$	(0.05	)	$	(0.28	)

Weighted average number of common shares used in computing basic and diluted net loss per share	23,726			23,367

The accompanying notes are an integral part of these condensed interim financial statements.

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ETELOS, INC.

CONDENSED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(in thousands, except share data)

(Unaudited)

	Preferred Stock								Total
	New Series A					Common Stock			Additional Paid		Accumulated			Stockholders’
	Shares		Amount			Shares	Amount		in Capital		Deficit			Deficit

Balance at December 31, 2009	743,333		$	7		23,398,143	$	234	$	23,903	$	(36,555	)	$	(12,411	)

Issuance of common stock upon conversion of Preferred New Series A	(76,667	)	(1		)	76,667	1		—		—			—
Issuance of common stock and Series I Warrants with Senior Secured Debentures	—		—			375,000	3		133		—			136
Issuance of common stock for other accrued expenses	—		—			166,667	2		123		—			125
Issuance of common stock upon conversion of notes payable	—		—			100,000	1		74		—			75
Beneficial Conversion upon issuance of Senior Secured Debentures	—		—			—	—		232		—			232
Stock Based Compensation	—		—			—	—		146		—			146
Net Loss	—		—			—	—		—		(1,219		)	(1,219		)
Balance at March 31, 2010	666,666		$	6		24,116,477	$	241	$	24,611	$	(37,774	)	$	(12,916	)

The accompanying notes are an integral part of these condensed interim financial statements.

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ETELOS, INCORPORATED

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Three Months Ended
	March 31,
	2010			2009

Cash flows from operating activities:
Net loss	$	(1,219	)	$	(6,435	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	7			10
Amortization (accretion) of notes discount (premium)	223			13
Accretion of interest	81			—
Stock based compensation	146			44
Consulting expenses paid through issuance of common stock and warrants	—			1,511
Change in valuation of embedded derivatives and warrant liability	(16		)	4,110
Changes in operating assets and liabilities:
Accounts receivable, net	(36		)	50
Prepaid expenses and other current assets	3			(49		)
Accounts payable	(245		)	6
Accounts payables related parties	7			(25		)
Accrued payroll and related expenses	120			398
Other accrued expenses	138			152
Deferred revenues	42			(3		)
Net cash used in operating activities	(749		)	(218		)
Cash flows from investing activities:
Purchases of property and equipment	—			—
Net cash used in investing activities	—			—
Cash flows from financing activities:
Proceeds from notes payable	375			170
Payments of notes payable	(19		)	—
Proceeds from issuance of common stock	—			2
Proceeds from issuance of preferred stock	—			7
Proceeds from notes payable to related parties	—			100
Payments of notes payable to related parties	(40		)	—
Payment on capital lease	—			(2		)
Net cash provided by financing activities	316			277

Net increase (decrease) in cash and cash equivalents	(433		)	59

Cash and cash equivalents at beginning of year	445			7

Cash and cash equivalents at end of period	$	12		$	66

Supplemental disclosures of cash flow information:
Cash paid for interest	—			—

Supplemental disclosures of non-cash financing activities:
Issuance of note payable for other accrued expenses	200			—
Issuance of common stock for other accrued expenses	125			—
Issuance of common stock for convertible notes and debentures	75			—
Issuance of warrants and embedded derivatives as liabilities	7			120

The accompanying notes are an integral part of these condensed interim financial statements.

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NOTES TO FINANCIAL STATEMENTS

1. Organization

As used herein, unless the context requires otherwise, the terms “we”, “us”, “our”, the “Company” or “Etelos” refers to Etelos, Inc., the corporation that survived the merger described in Note 1 Organization, below.

Etelos, Incorporated, a Washington corporation (“Etelos-WA”) was the predecessor to the Company. On April 22, 2008, Etelos-WA merged with Tripath Technology Inc., a Delaware corporation (“Tripath”) as part of Tripath’s Plan of Reorganization under Chapter 11 of the Bankruptcy Code (the “Merger”).

On April 23, 2008, Tripath filed a Current Report on Form 8-K announcing, among other things, the Merger, and that the surviving corporation changed its name to Etelos, Inc. and its fiscal year end to December 31. In connection with the Merger, all outstanding shares of Etelos-WA common stock were converted into shares of the Company’s common stock on a three for one ratio: one share of the Company’s 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 the Company’s common stock, (ii) the Company 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 Technology were cancelled. Also on April 23, 2008, the Company amended its articles 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.

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 was treated as a recapitalization of Etelos-WA with Etelos-WA as the acquirer (a reverse acquisition). The operations of the Company subsequent to the Merger include only those of Etelos-WA.

The 5,010,000 shares of the Company’s common stock were valued at $2.63 per share, the estimated fair value of the common stock on the date of the Merger, which resulted in a charge to operations of $13.2 million in 2008. The Company believes that these shares were issued primarily for past services provided to Etelos-WA by the secured creditors and the release of the secured and unsecured creditors claims against Tripath.

2. Description of Business

Etelos has a Web Application distribution platform delivering Web Applications for businesses. Etelos provides 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, Etelos enables 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.

Etelos has 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

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also support the English Application Scripting Engine (EASETM), an open standards-based scripting language that we 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.

The Company’s business model focuses on the sales and operation of private-label Web application marketplaces, including provision of the professional services required to develop, deploy and operate such marketplaces, and the launch of offerings of the Etelos Platform SuiteTM. The Etelos Platform Suite is designed to allow Independent Software Vendors (ISVs) to implement a SaaS delivery version of their existing applications, whether or not those applications are already Web Applications, and to syndicate the offering of those applications through multiple private label marketplaces. In these difficult economic times, the Company believes 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 Etelos Platform Suite also 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.

3. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed financial statements include our accounts as of March 31, 2010, and December 31, 2009, and for the three months ended March 31, 2010 and 2009. The accompanying condensed balance sheet as of December 31, 2009, has been derived from the audited balance sheet in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2009. These condensed financial statements have been prepared by management, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“USGAAP”) have been condensed or omitted pursuant to such rules and regulations. The Company has performed an evaluation of subsequent events through the date of filing of the financial statements.

In the opinion of management, all adjustments (which consist of normal recurring adjustments, except as disclosed herein) necessary to fairly present the financial position, results of operations and cash flows for the interim periods presented have been included. The results of operations for the quarter ended March 31, 2010, are not necessarily indicative of the results to be expected for the full year or for any future periods.

The preparation of financial statements in conformity with USGAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and such differences could affect the results of operations reported in future periods and such differences could be material. These financial statements should be read in conjunction with the audited financial statements and accompanying notes included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2009. Certain prior period amounts have been reclassified to conform to the present period presentation.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash, cash equivalents, and accounts receivable. Cash and cash equivalents are maintained in federally-insured

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banks in the United States of America. Deposits in such banks may exceed federally-insured limits and be subject to the current risks and uncertainties of dealing with such banks. Etelos maintains the majority of cash balances and all short-term investments with one financial institution.

The Company’s accounts receivables are derived primarily from customers. For the three months ended March 31, 2010, no single customer accounted for more than 10% of the Company’s revenue in the period. Two customers accounted for 91% of the Company’s accounts receivable as of March 31, 2010.

Allowance for Doubtful Accounts

The Company provides, when appropriate, an allowance for doubtful accounts to ensure trade receivables are not overstated due to un-collectability. The collectability of the Company’s 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. As of March 31, 2010, and December 31, 2009, the Company determined that an allowance for doubtful accounts was not necessary or warranted.

Deferred Revenue

Deferred revenue represents money received or promised but not recognized as revenue because the work has not been completed or the software subscription has not been fully delivered, and therefore is deferred until the revenue recognition is appropriate when it is then transferred to the appropriate revenue account.

Property and Equipment

Property, furniture, and equipment are stated at historical cost less accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets, which the Company currently believes are three to five years.

Fair Value of Financial Instruments

The carrying value of financial instruments, which include cash, accounts receivable, accounts payable, accrued expenses, and accrued liabilities, approximates the fair value for these financial instruments because of their short-term maturities and the relatively stable interest rate environment.

Research and Development and Software Development Costs

Research and development expenses consist primarily of salaries, payroll taxes, benefits, and related expenditures for technology, software development, project management, and support personnel. Costs related to the research and development of new products, services and enhancements to existing products are expensed as provided for by ASC 985-20 “Costs of Software to be Sold, Leased, or Marketed” (ASC 985-20). Under ASC 985-20, costs incurred in the research and development of new software products are expensed as incurred until technological feasibility is established. Research and development costs are capitalized beginning when a product’s technological feasibility has been established and ending when the product is available for general release to customers. Technological feasibility is reached when the product reaches the working model stage. To date, products and enhancements have generally reached technological feasibility and have been released for sale at substantially the same time and all research and development costs have been expensed.

ASC 350-40 “Internal-Use Software” (ASC 350-40), which applies to SaaS business model, are met for the capitalization of software development cost. Under ASC 350-40, software development costs, including costs

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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. Capitalization of software development costs ceases when the software is substantially complete and is ready for its intended use. To date, no software development costs incurred have met the criteria set forth in ASC 350-40 for capitalization.

Revenue Recognition

Etelos distributes Web Applications and its Marketplace Platform as a subscription service using the SaaS or software-on-demand business model and allow third parties to offer their products or services through storefronts in an Etelos Marketplace, and to advertise on its web site for a fee. It also licenses certain of its software products under perpetual and term licenses. Revenues are recognized on these service and licensing transactions using the criteria in ASC 605-10, “Revenue Recognition”, (ASC 605-10) and ASC 985-605, “Software Revenue Recognition” (ASC 985-605), respectively, which both provide that revenue may be recognized when all of the following are met:

· persuasive evidence of an arrangement exists,

· the product or service has been delivered,

· the fee is fixed or determinable, and

· collection of the resulting receivable is reasonably assured or probable.

For the SaaS business model, persuasive evidence is generally an 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.

For software licensed under term or perpetual agreements, persuasive evidence of an 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, then we recognize revenue as the fees become due. If the Company determines that collection of a fee is not reasonably assured, then it defers the fees and recognizes revenue upon cash receipt, provided that all other revenue recognition criteria are met.

Arrangements for which the fees are not deemed reasonably assured for collection are recognized upon cash collection.

Stock Based Compensation

The Company accounts for its stock based compensation in accordance with ASC 718-10, “Compensation — Stock Compensation” (ASC 718-10) using the Black-Scholes Merton model to value all stock based compensation awards. The Company has recorded compensation cost in the statement of operations based on the fair value of the award for the requisite service period. The Company also estimates forfeitures in calculating the expense relating to share-based compensation as opposed to only recognizing these forfeitures and the corresponding reduction in expense as they occur. This resulted in $146 thousand and $44 thousand of expense for the three months ended March 31, 2010 and 2009, respectively.

ASC 718-10 requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options to be classified as financing cash flows. Due to its loss

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position, there were no such tax benefits during the three months ended March 31, 2010 and 2009. Prior to the adoption of ASC 718-10, those benefits would have been reported as operating cash flows had we received any tax benefits related to stock option exercises.

Income Taxes

The Company accounts for income taxes in accordance with ASC 740-10, “Income Taxes” (ASC 740-10) which utilizes the liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The tax years of 2005 through 2009 remain open and subject to examination by appropriate governmental agencies in the United States.

The Company has adopted the provisions of ASC 740-10-25, “Income Taxes — Overall — Recognition” (ASC 740-10-25). The Company did not have any unrecognized tax benefits and there was no effect on its financial condition or results of operations as a result of implementing ASC 740-10-25.

The Company files income tax returns in the United States of America federal jurisdiction and various state jurisdictions in the United States of America. The Company does not believe that there will be any material changes in its unrecognized tax positions over the next twelve months. The Company believes that its income tax filing positions and deductions would be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on the Company’s financial position, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740-10-25. In addition, the Company did not record a cumulative effect adjustment related to the adoption of ASC 740-10-25.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of the adoption of ASC 740-10-25, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any such interest expense recognized during the three months ended March 31, 2010 and 2009, or the year ended December 31, 2009. The Company’s effective tax rate differs from the federal statutory rate primarily due to increases in its deferred income tax valuation allowance.

Net Income (Loss) per Share

Basic net income (loss) per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period, excluding any unvested restricted stock that is subject to repurchase. Diluted net income per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of unvested restricted stock (using the treasury stock method), the incremental common shares issuable upon the exercise of stock options and warrants (using the treasury stock method) and the conversion of the Company’s convertible notes and debentures (using the if-converted method). As their effect is antidilutive, 9,547,998 and 4,794,830 shares of common stock exercisable under outstanding employee stock options, 10,239,444 and 4,114,444 shares of common stock exercisable under outstanding warrants, 13,921,802 and 6,426,074 shares of common stock issuable upon conversion of the outstanding convertible notes payable and debentures, as of, and for the three months ended March 31, 2010 and 2009, respectively, have been excluded from this calculation. The average exercise price of outstanding employee stock options to purchase the Company’s common stock is $0.32 and $0.24, respectively, at March 31, 2010 and 2009.

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The following table sets forth the computation of basic and diluted net loss per share for the periods presented (in thousands, except per share amounts):

	For the Three Months Ended March 31,
	2010			2009

Numerator:
Net income (loss)	$	(1,219	)	$	(6,435	)

Net income (loss) - diluted	$	(1,219	)	$	(6,435	)

Denominator:
Weighted average common stock	23,726			23,367

Weighted average common stock - diluted	23,726			23,367

Net income (loss) per share:
Basic	$	(0.05	)	$	(0.28	)
Diluted	$	(0.05	)	$	(0.28	)

Use of Estimates

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

Segment Reporting

The Company has one operating segment because the Company is not organized into multiple segments for the purpose of making operating decisions or for assessing performance. The chief operating decision maker evaluates performance, makes operating decisions, and allocates resources based on financial data consistent with the presentation in the accompanying financial statements.

4. Going Concern

The financial statements have been prepared with the assumption that the Company will continue as a going concern. The Company has experienced net losses of $1.2 million and $6.4 million for the three months ended March 31, 2010 and 2009, respectively, and has a total stockholders’ deficit of $12.9 million and $12.4 million, as of March 31, 2010, and December 31, 2009, respectively, all of which raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might arise should it be unable to continue as a going concern.

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Management has supported current operations by raising additional operating cash through the private sale of convertible debentures and notes payable and preferred stock. This has provided the cash inflows to continue the Company’s business plan, but has not resulted in significant improvement in its financial position or results of operations. Management also has substantially reduced operating expenses by termination of employees and other reductions in operating expenses. Alternatives being pursued to improve the Company’s cash flow used in operations include (1) raising additional working capital through additional sale of preferred stock, common stock and/or debt and (2) reducing cash operating expenses to levels that are in line with current revenues. The first alternative could result in substantial dilution to existing shareholders. There can be no assurance that the Company’s current financial position can be improved, that it can raise additional working capital, or that it can achieve positive cash flows from operations. The Company’s long-term viability as a going concern is dependent upon its ability to (1) locate sources of debt or equity funding to meet current commitments and near-term future working capital requirements and (2) achieve profitability and ultimately generate sufficient cash flow from operations to sustain its continuing operations.

The Company’s cash balance including proceeds from its recent debt financings and preferred stock financing may not be sufficient to fund operations beyond mid 2010. If cash reserves are not sufficient to sustain operations, then management plans to further reduce operating expenses and/or raise additional capital by selling shares of capital stock or other securities that could result in substantial dilution to existing shareholders. However, there are no commitments or arrangements for future financings in place at this time and the Company can give no assurance that such capital will be available on favorable terms, or at all. The Company may need additional financing thereafter until it can achieve profitability. If it cannot, then it will be forced to further curtail operations or possibly be forced to evaluate a sale or liquidation of assets. Even if it is successful in raising additional funds, there is no assurance regarding the terms of any additional investment.

5. Recently Issued Accounting Standards

In October 2009, the Financial Accounting Standards Board (“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.

In October 2009, the FASB issued new standards for the accounting for certain revenue arrangements that include software elements. These new standards amend the scope of pre-existing software revenue guidance 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.

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. The Company adopted these amended standards on January 1, 2010, and there was no impact to the financial statements upon adoption. 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.

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In February 2010, the FASB issued amended guidance on subsequent events to alleviate potential conflicts between FASB guidance and SEC requirements. Under this amended guidance, SEC filers are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. This guidance was effective immediately and we adopted these new requirements for the period ended March 31, 2010. The adoption of this guidance did not have a material impact on our financial statements.

6. Convertible Notes and Debentures and Embedded Derivative and Warrant Liability

The following table summarizes information relative to the Company’s outstanding convertible notes and debentures at December 31, 2009 and March 31, 2010 (in thousands):

	March 31, 2010			December 31, 2009
6% Convertible Notes	$	1,689		$	1,764
January 2008 Debentures	2,320			2,320
April 2008 Debentures	4,012			4,012
10% Senior Secured Debentures	3,375			3,000
	11,396			11,096
Plus (less) premium (discount) on notes payable	(2,274		)	(2,118		)

	9,122			8,978
Less current portion of convertible notes payable	(1,689		)	(1,764		)

Long term convertible notes payable, net of premium (discount), less current portion	$	7,433		$	7,214

6% Convertible Notes

During the quarter ended March 31, 2010, $75 thousand of the principal amount of 6% convertible notes originally issued in August 2007 were converted into 100 thousand shares of the Company’s common stock and $1,689 thousand remain outstanding. The Company did not make the interest and principal payments on these notes during the quarter ended March 31, 2010, and such payments have not been made through the date of this report. Accordingly, the Company is in default under the terms of these notes, and all principal and interest related to these convertible notes is due and payable to the holders. As a result, the Company has accrued interest on these notes at the default rate of 8% and classified all amounts due related to these notes as current liabilities.

10% Senior Secured Debentures

During the quarter ended March 31, 2010, in exchange for $375 thousand in cash, the Company issued a 10% Senior Secured Debentures with an aggregate principal amount of $375 thousand, a warrant to purchase 375,000 shares of the Company’s common stock, and 375,000 shares of the Company’s common stock to an entity affiliated with Donald W. Morissette, who, together with his affiliates, beneficially owns more than 10% of the Company’s outstanding common stock.

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The Company failed to make the required interest payments on the 10% Senior Secured Debentures during the quarter ended March 31, 2010, and through the date of this report. In exchange for the holders of the 10% Senior Secured Debentures agreeing to waive their remedies in the event of this default, the Company’s board of directors, in April, authorized the Company to issue 50,484 shares of common stock to the holders of the 10% Senior Secured Debentures in consideration of their agreement to waive the default, for the quarter ending March 31, 2010. Under the terms of that agreement, covering all periods through July 1, 2010, the Company continues to accrue interest at the stated interest rate, which interest will be payable at maturity, and to classify the 10% Senior Secured Debentures as long-term liabilities in the Company’s financial statements.

Embedded Derivatives

The Company has evaluated the embedded derivatives included in the 6% Convertible Notes, the January 2008 Debentures, the April 2008 Debentures, and the 10% Senior Secured Debentures, consisting of the conversion features and certain put and call features, under the guidance in ASC 815-10 “Derivatives and Hedging” (ASC 815-10) on the issuance date of the various financial instruments and on each subsequent reporting date. The purpose of the evaluation is to determine whether the embedded derivatives need to be bifurcated from the debt host and accounted for as a derivative at their estimated fair value as a liability at the date of issuance and thereafter, adjusted to estimated fair value with a charge or credit to the Company’s 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. 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 must be bifurcated and recorded as a liability. The January 2008, April 2008 and 10% Senior Secured Debentures include put and call features.

Embedded Derivatives — 6% Convertible Notes

As of March 31, 2010, the Company continues to conclude that the conversion features embedded in the 6% Convertible Notes meet the criteria in ASC 815-10 to be accounted for as an equity instrument.

Embedded Derivatives — January 2008 and April 2008 Debentures

As of March 31, 2010, the Company continues to conclude that the conversion features embedded in the January 2008 and April 2008 Debentures meet the criteria in ASC 815-10 to be accounted for as an equity instrument.

As of March 31, 2010, the Company concluded that the put and call features embedded in the January 2008 and April 2008 Debentures continue to be not clearly and closely related to the debt host and therefore should be bifurcated from the debt host and recorded as a liability at their estimated fair value. The Company determined the net fair value of the put and call as of March 31, 2010 to be $90 thousand and $155 thousand for the January 2008 and April 2008 Debentures, respectively, with the related credit of $3 thousand and $6 thousand, respectively, included in the Company’s statement of operations in interest expense for the quarter ended March 31, 2010. The Company determined the estimated fair value of the put on March 31, 2010, using the Black-Scholes Merton valuation model and the following assumptions: fair value and exercise price of the put embedded in the January 2008 and April 2008 Debentures equivalent to 130% of the outstanding principal and

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accrued interest of $3,016 thousand and $5,216 thousand , respectively; term of 2.75 years to the maturity date of December 31, 2012; risk free interest rate of 1.46%; and volatility of 16.78% which was determined using the volatility of the Bank Prime Lending Rate. The Company determined the estimated fair value of the call on March 31, 2010, using the Black-Scholes Merton valuation model and the following assumptions: fair value and exercise price of the call embedded in the January 2008 and April 2008 Debentures equivalent to 100% of the outstanding principal and accrued interest of $2,320 thousand and $4,012 thousand , respectively; term of 2.75 years to the maturity date of December 31, 2012; risk free interest rate of 1.46%; and volatility of 16.78% which was determined using the volatility of the prime rate charged by banks in the United States.

Embedded Derivatives — 10% Senior Secured Debentures

Upon the issuance of the 10% Senior Secured Debentures on each of January 25, 2010 and March 15, 2010, the Company concluded that the conversion features embedded in the 10% Senior Secured Debentures met the criteria in ASC 815-10 to be accounted for as an equity instrument even though the 10% Senior Secured Debentures include a reset provision on the conversion price and is considered non-conventional debt, because the Company has control to ensure the sufficiency of its authorized shares of common stock, as the debentures include a floor on the conversion price adjustment, and because the conversion features are not required to be settled in registered shares. The Company also concluded that the put and call in the 10% Senior Secured Debentures were embedded derivatives that were not clearly and closely related to the debt host and therefore should be bifurcated from the debt host and recorded as a liability at their estimated fair value at issuance.

The Company determined the net fair value of the put and call embedded in the 10% Senior Secured Debentures on January 25, 2010, to be $5 thousand, and recorded a discount on the debentures that will be amortized as interest expense over the life of the debentures using the interest method. The Company determined the estimated fair value of the put on January 25, 2010, using the Black-Scholes Merton valuation model and the following assumptions: fair value and exercise price of the put embedded in the 10% Senior Secured Debentures equivalent to 120% of the outstanding principal and accrued interest expected to be earned to maturity of $342 thousand; term of 1.67 years to the maturity date of September 30, 2011; risk free interest rate of 0.67%; and volatility of 17.66% which was determined using the volatility of the prime rate charged by banks in the United States. The Company determined the estimated fair value of the call on January 25, 2010, using the Black-Scholes Merton valuation model and the following assumptions: fair value and exercise price of the call embedded in the 10% Senior Secured Debentures equivalent to 100% of the outstanding principal and accrued interest expected to be earned to maturity of $291,750; term of 1.67 years to the maturity date of September 30, 2011; risk free interest rate of 0.67%; and volatility of 17.66% which was determined using the volatility of the prime rate charged by banks in the United States

The Company determined the net fair value of the put and call embedded in the 10% Senior Secured Debentures on March 15, 2010 to be $2 thousand, and recorded a discount on the debentures that will be amortized as interest expense over the life of the debentures using the interest method. The Company determined the estimated fair value of the put on March 15, 2010, using the Black-Scholes Merton valuation model and the following assumptions: fair value and exercise price of the put embedded in the 10% Senior Secured Debentures equivalent to 120% of the outstanding principal and accrued interest expected to be earned to maturity of $169,250; term of 1.54 years to the maturity date of September 30, 2011; risk free interest rate of 0.60%; and volatility of 18.53% which was determined using the volatility of the Bank Prime Lending Rate. The Company determined the estimated fair value of the call on March 15, 2010, using the Black-Scholes Merton valuation model and the following assumptions: fair value and exercise price of the call embedded in the 10% Senior Secured Debentures equivalent to 100% of the outstanding principal and accrued interest expected to be earned to maturity of $144,250; term of 1.54 years to the maturity date of September 30, 2011; risk free interest rate of 0.60%; and volatility of 18.53% which was determined using the volatility of the Bank Prime Lending Rate.

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As of March 31, 2010, the Company concluded that the put and call features embedded in all of the 10% Senior Secured Debentures continue to be not clearly and closely related to the debt host and therefore should be bifurcated from the debt host and recorded as a liability at their estimated fair value. The Company determined the net fair value of the puts and calls to be $61 thousand for all 10% Senior Secured Debentures, with the related credit of $7 thousand included in the Company’s statement of operations in interest expense for the quarter ended March 31, 2010. The Company determined the estimated fair value of the puts on March 31, 2010, using the Black-Scholes Merton valuation model and the following assumptions: fair value and exercise price of the puts embedded in the 10% Senior Secured Debentures equivalent to 120% of the outstanding principal and accrued interest of $4,725,000; term of 1.5 years to the maturity date of September 30, 2011; risk free interest rate of 0.87%; and volatility of 17.22% which was determined using the volatility of the Bank Prime Lending Rate. The Company determined the estimated fair value of the calls on March 31, 2010, using the Black-Scholes Merton valuation model and the following assumptions: fair value and exercise price of the calls embedded in the 10% Senior Secured Debentures equivalent to 100% of the outstanding principal and accrued interest of $4,050,000; term of 1.5 years to the maturity date of September 30, 2011; risk free interest rate of 0.87%; and volatility of 17.22% which was determined using the volatility of the Bank Prime Lending Rate.

Warrants Issued in Connection with January 2008 and April 2008 Debentures

In connection with the issuance of the January 2008 and April 2008 Debentures, the Company issued warrants to purchase 222,222 and 388,889 shares, respectively, of the Company’s common stock at an exercise price of $1.80 per share, subject to adjustment, which warrants have a term of three years.

As of March 31, 2010, these warrants remain outstanding and exercisable, and the Company continues to conclude that these warrants meet the criteria in ASC 815-10 to be accounted for as an equity instrument.

Warrants Issued in Connection with 10% Senior Secured Debentures

In connection with the issuance of the 10% Senior Secured Debentures in September 2009, the Company issued Series I and Series II warrants to purchase 3,000,000 and 2,250,000 shares, respectively, of the Company’s common stock at exercise prices of $0.60 and $0.01 per share, respectively, subject to adjustment, and with terms of five and seven years, respectively.

In connection with the issuance of the 10% Senior Secured Debentures in January 2010, the Company issued Series I warrants to purchase 375,000 shares of the Company’s common stock at an exercise price of $0.60 per share, subject to adjustment, and with a term date of September 30, 2014.

The Company evaluated the terms and conditions of the warrants issued with all of the 10% Senior Secured Debentures under the guidance in ASC 815-40-25 and ASC 815-40-15 to determine whether the detachable warrants should be accounted for as equity or a liability and thereafter adjusted to their respective estimated fair value at each reporting date. The Company concluded that the Series I warrants issued with the 10% Senior Secured Debentures in each of September 2009 and March 2010 met the criteria in ASC 815-40-25 and ASC 815-40-15 at issuance, and therefore, were accounted for as equity because the warrants could only be settled by issuance of the Company’s common stock, the common stock could be unregistered, and the sufficiency of the authorized shares was under the Company’s control. The Company determined the fair value of the Series I warrants issued in January 2010, to be $103 thousand and recorded a discount on the debentures with which will be amortized as interest expense over the life of such debentures using the interest method.

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The Company determined the estimated fair value of the Series I warrants issued in January 2010, using the Black-Scholes Merton valuation model and the following assumptions: fair value of the Company’s common stock of $0.69; exercise price of $0.60; term of 4.67 years; risk free interest rate of 2.23%; and volatility of 37.02%.

As of March 31, 2010, all of the warrants remain outstanding and exercisable, and the Company continues to conclude that such warrants meet the criteria in ASC 815-10 to be accounted for as an equity instrument.

Warrants Issued in Connection with Other Notes Payable and Notes Payable to Related Parties

In connection with the issuance of promissory notes in February, March, and July 2009, the Company issued warrants to purchase 26,667, 133,333, and 500,000 shares, respectively, of the Company’s common stock at an exercise price of $0.75 per share, which warrants have a term of three, three, and five years, respectively.

Warrants issued with New Series A Preferred Stock

In connection with the issuance of shares of New Series A Preferred Stock in December 2008 and January 2009, the Company issued warrants to purchase 833,333 and 10,000 shares of common stock of the Company, respectively, at an exercise price of $0.75 per share, and a three year term. The lead investor in this financing was Daniel J.A. Kolke, the Company’s founder, chairman, chief executive officer, acting chief financial officer, and chief technology officer, with participation from two of the Company’s directors and other prior investors.

Warrant Issued in Connection with Litigation Settlement

In December 2008, the Company entered into a settlement agreement with Kaufman Bros., pursuant to which the Company issued to Kaufman Bros. a warrant to purchase 500,000 shares of the Company’s common stock at an exercise price of $0.75 per share, which warrant has a term of five years.

As of March 31, 2010, this warrant remains outstanding and exercisable, and the Company continues to conclude that this warrant meets the criteria in ASC 815-10 to be accounted for as an equity instrument.

Warrant Issued in Connection with Consulting Agreement

In March 2009, the Company entered into a consulting agreement with Salzwedel Financial Communications, Inc., pursuant to which the Company issued a warrant to purchase 2,000,000 shares of the Company’s common stock at an exercise price of $0.01 per share, which warrant has a term of five years.

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The following is a summary of the movement related to embedded derivatives liabilities during the quarter ended March 31, 2010 (in thousands):

	Embedded derivatives			Total

Balance as of December 31, 2009	$	315		$	315

Fair value of embedded derivatives issued with 10% Senior Secured Debentures	7			7
Change in marked-to-market value of January 2008 Debentures	(3		)	(3		)
Change in marked-to-market value of April 2008 Debentures	(6		)	(6		)
Change in marked-to-market value of 10% Senior Secured Debentures	(7		)	(7		)

Balance as of March 31, 2010	$	306		$	306

7. Notes Payable to Related Parties

The Company previously entered into a series of loan transactions with the parents and two brothers of Mr. Daniel J.A. Kolke, the Company’s founder, chairman, chief executive officer, acting chief financial officer, and chief technology officer. In connection with settlement of these loans, the Company issued three unsecured promissory notes in the aggregate principal amount of $815.8 thousand which will become secured by certain of the Company’s presently unidentified assets if and when Mr. Kolke is no longer neither an employee nor a member of the Company’s board of directors. The unsecured promissory notes bear interest at 7.5 percent. On December 22, 2009, the board of directors, with Daniel J.A. Kolke abstaining, approved the issuance of 434,754 shares of common stock of the Company to Daniel and 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 aggregate amount outstanding as of March 31, 2010, under all of these promissory notes was $353 thousand.

In December 2009, the Company entered into a promissory note with Daniel J.A. Kolke in the principal amount of $40 thousand, bearing interest of 6% per annum. All principal on this note was paid in full in January 2010.

8. Notes Payable

In February 2010, the Company issued an unsecured note of $200 thousand in partial settlement of litigation related to real property the Company leased in San Mateo, California. The note bears interest of 6% and is due on June 30, 2011. Accrued interest is due on March 31, 2010 and June 30, 2010, and monthly payments of principal of $16,667 along with accrued interest begin on July 31, 2010.

9. Equity

Common Stock

The Company has 24,116,477 shares of common stock outstanding as of March 31, 2010, from a total of 250,000,000 authorized shares.

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Preferred Stock

The Company had 743,333 shares of New Series A Preferred Stock par value of $0.01 per share outstanding at December 31, 2009, from a total of 3,333,333 authorized shares. During the quarter ended March 31, 2010, 76,667 shares of New Series A Preferred Stock were converted into common stock.

The rights, preferences, and privileges of the New Series A Preferred stock are as follows:

Voting Rights. The New Series A Preferred Stock and common stock vote as a single class upon any matter submitted to the stockholders for a vote and the holder of each share of Series A Preferred Stock has the right to one vote for each share of common stock into which such share of Series A Preferred Stock could then be converted.

Liquidation. The New Series A Preferred Stock is entitled to a liquidation preference before any distribution or payment is made in respect to the common stock of 120% of the stated value. All remaining assets of the Company, if any, shall be distributed to the holders of common stock.

Conversion. Each share of New Series A Preferred Stock is convertible, at the option of the holder, into the number of fully paid and nonassessable shares of common stock determined by dividing the stated value of $0.75 per share by the then applicable conversion price, which is currently $0.75 per share.

Warrants

As of March 31, 2010, warrants to purchase up to 10,239,444 shares of our common stock were exercisable as set forth in the following table:

Issue Date		# of Shares of Common Stock subject to Warrants	Exercise price		Expiration date

	Jan-08	222,222	$	1.80	Jan-11
	Apr-08	388,889	$	1.80	Apr-11
	Dec-08	833,333	$	0.75	Dec-11
	Dec-08	500,000	$	0.75	Dec-13
	Feb-09	36,667	$	0.75	Feb-12
	Mar-09	2,000,000	$	0.01	Mar-12
	Mar-09	133,333	$	0.75	Mar-12
	Jul-09	500,000	$	0.75	Jul-14
	Sep-09	3,375,000	$	0.60	Sep-14
	Sep-09	2,250,000	$	0.01	Sep-16
Total		10,239,444

The Company determined the estimated fair value of its warrants issued by using the Black-Scholes Merton model. See discussion, supra, Note 6. The average exercise price of outstanding warrants to purchase the Company’s common stock is $0.46 and $0.55, respectively, at March 31, 2010 and 2009.

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Shares reserved

As of March 31, 2010, the Company has the following shares of Common Stock reserved:

Options Issued		9,547,998
Option Plan Available		4,239,542
Debenture Conversion(s)		13,692,695
Debenture Interest Conversion		229,107
Warrants Issued		10,239,444
Total		37,948,786

10. Accounting for Share-Based Compensation

The following table summarizes stock option activity under the Company’s stock option plans (in thousands, except share and per share data):

Options	Shares	Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
Outstanding at December 31, 2009	9,547,998	$	0.32	8.9	$	4,175
Granted	—	$	—
Exercised	—	$	—
Canceled	—	$	—
Outstanding at March 31, 2010	9,547,998	$	0.32	8.60	$	9,824
Exercisable at March 31, 2010	4,494,865	$	0.20	8.00	$	5,164
Unvested at March 31, 2010	5,053,133	$	0.43	9.14	$	4,659

Aggregate intrinsic value was determined based upon the closing price of the Company’s common stock price on March 31, 2010, of $1.35 per share. The average exercise price of outstanding employee stock options to purchase the Company’s common stock is $0.32 and $0.24, respectively, at March 31, 2010 and 2009.

No options were exercised during the three months ended March 31, 2010. There were no equity instruments granted under share-based payment arrangements and therefore there was no cash used to settle any equity instrument. The Company does not plan to repurchase any shares during the upcoming annual period.

11. Restructuring

On October 1, 2008, the Company relocated its headquarters from San Mateo, California to Renton, Washington and terminated eight employees based in California. On October 31, 2008, the Company closed its offices in San Mateo, California and abandoned the leased premises of its former offices there. Effective on October 31, 2008, David S.G. MacKenzie resigned his position as vice president and chief financial officer and the Company has not yet appointed any person to serve separately as its chief financial officer. On October 31, 2008, the Company relocated its headquarters and abandoned the subleased premises of its former offices in Renton, Washington. In October 2008, the Company terminated eight more employees employed in both its California and Washington offices. In connection with this restructuring plan, the Company has accrued or incurred one-time restructuring costs in the amount of $632 thousand during the quarter and year ended December 31, 2008. In 2009, the Company revised these restructuring costs based on updated information from settlements entered into with the landlord of the San Mateo leased premises and the Company’s former chief executive officer.

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As part of its reduction of monthly cash operating expenses during the quarter ended September 30, 2008, and continuing through the date of this report, the Company placed all employees on partial deferrals of salary, ranging from 10% to 100% of base salary and accrued these deferrals. At March 31, 2010, and as of the date of this report, this deferral amount remains unpaid, including amounts due to former employees who were employed in the Company’s California office.

The following summarizes the Company’s restructuring charges:

	Office & Equipment Leases			Employee Termination Costs		Other		Total

Balance: December 31, 2009	$	633		$	—	$	73	$	706

Less: Payments	(325		)	—		—		(325		)

Balance: March 31, 2010	$	308		$	—	$	73	$	381

The above restructuring cost liabilities as of March 31, 2010 are included in Other Accrued Expenses in the Company’s balance sheet.

On October 31, 2008, the Company closed its offices in San Mateo, California. In December 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 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 the Company agreed: (a) to pay $66,000 in cash within 30 days, (b) to issue a promissory note in the principal amount of $200,000, which bears 6% interest, and is 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 common stock on January 6, 2010. The settlement agreement and promissory note were executed and delivered on February 8, 2010, and 166,667 shares subsequently were delivered on March 1, 2010. The $66,666 payment was made on April 6, 2010.

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12. Commitments and Contingencies

Financing Obligations

The following is a summary of the maturity schedule of our convertible notes and debentures obligations as of March 31, 2010:

	Convertible Notes and Debentures		Notes Payable		Total
2010	$	1,689	$	258	$	1,947
2011	3,375		100		3,475
2012	6,332		—		6,332
2013	—		—		—
2014 and thereafter	—		286		286
Total	$	11,396	$	644	$	12,040

Operating and Capital Leases

All capital leases were paid off in full during the year ended December 31, 2009.

See Note 13, Subsequent Events, for a discussion regarding the Company’s subleased premises in Renton, Washington.

Other Commitments

On September 9, 2009, the Company entered into a Master Agreement with Renovatix Solutions, LLC to market private label marketplaces directly and through resellers. As part of that Agreement, the Company agreed to issue up to 1 million shares of its common stock to Renovatix Solutions LLC as bonus compensation for achievement of mutually agreed sales goals, which have not yet been established.

See Note 13, Subsequent Events, for a discussion regarding unpaid salaries due to current employees.

13. Subsequent Events

On October 31, 2008, the Company relocated it Washington offices and abandoned the sub-leased premises of its former offices in Renton, Washington. The sublease for these premises runs through June 2010. On March 5, 2010, the prime landlord filed a complaint for breach of contract and successor liability. (King County (WA) Superior Court No. 10-2-09385-1 KNT). On March 26, 2010, the Company filed an answer and counterclaim and asserted affirmative defenses against the prime landlord, including that the prime landlord is not a party to the sublease for the premises. Subsequently, on April 8, 2010, the sub-landlord served a third party complaint against the Company relating to the same subleased premises, in a proceeding filed against the sub-landlord by the prime landlord (King County (WA) Superior Court No. 10-2- 09840-2 KNT), in which the sub-landlord asserted affirmative defenses and counterclaims against the prime landlord, including that, beginning in December 2008, the premises were unusable due to water damage and lack of maintenance or repairs by the prime landlord. The Company has accrued the rent expense according to the terms of the sublease as restructuring charges since 2008 and the liability balance remains unpaid and accrued as of March 31, 2010. These matters are being evaluated.

On April 5, 2010, the Company was served with a summons and complaint for breach of contract and unjust enrichment by Lakebay Technologies LLC (King County (WA) Superior Court No. 10-2-10054-7). This matter is currently being evaluated by the Company.

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In partial settlement of approximately $273 thousand of an aggregate $574 thousand in unpaid salaries due and owing to current employees of the Company as of December 31, 2009, the board of directors 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. Of those 500,000 shares, 346,123 are to be issued at an effective price of $0.79 per share, under the registration statement filed on April 9, 2010.

On March 31, 2010, the board of directors authorized a warrant replacement financing, whereby holders of existing warrants that paid cash to exercise their warrants prior to April 30, 2010, would receive a new warrant in substantially identical form as the exercised warrant, with an exercise price equal to the closing price of the Company’s common stock on the date of exercise. Since March 31, 2010, the Company has received $125 thousand from the exercise of warrants to purchase 166,667 shares of common stock with an average exercise price of $0.75 per share.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The following discussion of our financial condition and results of operations should be read in conjunction with our condensed financial statements and the related notes and other financial information appearing elsewhere in this report. Readers are also urged to carefully review and consider the various disclosures we make regarding the factors that affect our business, including without limitation, the disclosures made under “Item 1A. Risk Factors” included in Part II of this report.

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 our English Application Scripting Engine (EASETM), an open standards-based scripting language we 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.

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Our business model focuses on the sales and operation of private-label Web application marketplaces, including provision of the professional services required to develop, deploy and operate such marketplaces, and the launch of offerings of the Etelos Platform Suite™. The Etelos Platform Suite is designed to allow Independent Software Vendors (ISVs) to implement a SaaS delivery version of their existing applications, whether or not those applications are already Web Applications, and 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 broader distribution. The Etelos Platform Suite also 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.

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. These benefits are as follows:

· This strategy will expose the core Etelos platform to more ISVs for greater benefit to their end users and the creation of a larger pool of applications for syndication.

· 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.

· This two-pronged go-to-market strategy is offered on a revenue-sharing basis, which reduces barriers to acceptance by eliminating up front costs for Syndication Partners to offer their products through multiple Marketplace Partners, and by paying Marketplace Partners only for sales success.

· 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.

In addition to revenues from consulting services, we receive a transaction fee or subscription fee for transactions that occur within these private-label Web 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 sale of subscriptions to Syndication Partner offerings in private-label Web application marketplaces operating on the Etelos Platform Suite.

History

We were originally organized as Etelos, Incorporated, a Washington corporation on May 5, 1999. We have been engaged in the business of web application development and services since our inception.

On February 8, 2007, Tripath Technology Inc., a Delaware corporation 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 Tripath’s 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 April 22, 2008, we completed the merger with and into Tripath, changed the name of the surviving entity to Etelos, Inc., and changed our fiscal year end to December 31.

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Recent Developments

Financings

On June 30, 2009, we restructured the convertible 6% secured debentures we issued in January 2008 and April 2008 in the principal amount of $5.5 million. Under the terms of the restructuring, the terms of the debentures were extended to December 31, 2012, interest accrues at 0% from the date of the restructuring until October 1, 2010, and at 6% thereafter. All accrued but unpaid interest as of June 30, 2009, and interest due to be earned to September 30, 2010 under the original terms of the debentures was added to the principal amount and is payable on the date of maturity. Our obligation to make monthly amortizing redemption payments was terminated; we will make semi-annual interest payments only. We also agreed to terminate the registration rights agreement entered into with the debentures and to to exchange for no cash consideration, all or a portion of the warrants issued in connection with these debentures for shares of our Common Stock, at a ratio of one share of common stock for each share of common stock underlying such warrant being exchanged.

On September 29, 2009, we entered into a securities purchase agreement with three accredited investors for the sale of 10% senior secured convertible debentures in the aggregate principal amount of $2.0 million. In this transaction, in addition to the debentures, we issued to the investors warrants to purchase 3,000,000 shares of our common stock with an exercise price of $0.60 per share, a warrant to purchase 2,250,000 shares of our common stock with an exercise price of $0.01 per share, and 750,000 shares of our restricted common stock. One of the investors paid part of its subscription amount through the cancellation of approximately $1.2 million of short-term indebtedness we owed to such investor. The securities purchase agreement further provided that we had the right, subject to certain conditions, to require the investors to purchase an aggregate of $1.0 million in additional principal amount of debentures. We exercised that right on December 15, 2009, and issued an additional $1.0 million of debentures to the investors on that date.

On January 25, 2010, we entered into a securities purchase agreement with an entity affiliated with Donald W. Morissette, who, together with his affiliates, beneficially owns more than 10% of our outstanding common stock, for the sale of a 10% senior secured convertible debenture, identical to the debentures we issued in September 2009, in the principal amount of $250 thousand. 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. The securities purchase agreement further provided that we had the right, subject to certain conditions, to require the investor to purchase an additional debenture in the principal amount of $125 thousand between March 15 and 31, 2010. We exercised that right on March 15, 2010, and issued an additional debenture in the principal amount of $125 thousand to an entity affiliated with Mr. Morissette. See “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Liquidity and Capital Resources” below for a description of the terms of all of our outstanding debentures.

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Business

On November 6, 2008, we announced changes to our business model to focus on the sales and operation of private label Web application marketplaces, including provision of the professional services required to develop, deploy and operate such marketplaces, and the launch of offerings of the Etelos Platform Suite™. The Etelos Platform Suite focuses on enabling Independent Software Vendors (ISVs) to implement SaaS delivery of their existing applications, whether or not those applications are already Web Applications, and syndicating 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 broader distribution. The Etelos Platform Suite also 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.

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 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.

During the period ended December 31, 2008, we began to implement this shift and, during the periods up to the date of this report, we have entered into new Syndication Partner agreements with ISVs to deliver SaaS-enabled versions of their products and to syndicate those apps for distribution through a number of third party-branded SaaS marketplaces. In the interim periods, we have launched third party private labeled marketplaces and we have announced agreements to market and launch additional third party private label marketplaces, including to third parties not traditionally regarded as technology providers. We expect to make further such announcements reflecting this shift during the coming months but we do not have an estimate or projection of how, or when, or if, the benefits, if any, of this shift will be reflected in our operating results.

In 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 6-16 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 approximately $175 thousand. See “LEGAL PROCEEDINGS” below.

In addition, payment schedules for approximately $300 thousand in long overdue accounts payable have been negotiated for payment over the next 6-12 months.

In partial settlement of approximately $273 thousand of an aggregate $574 thousand in unpaid salaries due and owing to current employees of the Company as of December 31, 2009, the board of directors 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. Of those 500,000 shares, 346,123 shares are to be issued at an effective price of $0.79 per share, under the registration statement filed on April 9, 2010.

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On March 31, 2010, the board of directors authorized a warrant replacement financing, whereby holders of warrants that paid cash to exercise their warrants prior to April 30, 2010, would receive an replacement warrant in substantially identical form as the exercised warrant, with an execicse price equal to the closing price of the Company’s common stock on the date of exercise. See Subsequent Events.

Industry Background

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 applications were internally managed and maintained by enterprise customers, requiring increasingly large staffs to support complex information technology infrastructures. Most importantly, the applications generally were provided by multiple vendors, with each application providing only a departmental view of the enterprise. To gain an enterprise-wide view, organizations attempted to tie together their various incompatible packaged applications through long, complex, and costly integration efforts. 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 sized Businesses (SMBs), which we define as businesses with up to 1,000 employees, have application software requirements that are similar, in many respects, to large enterprises because their core business processes are substantially the same. These requirements include the integration of back-office activities, such as managing payroll and tracking inventory; front-office activities, including order management and customer support; and, increasingly, sophisticated e-commerce capabilities. According to a 2006 forecast for the CRM market and 2007 forecasts for the ERP and supply chain management, or SCM, markets from Gartner, Inc., companies in North America spent approximately $13.7 billion on ERP, CRM, and SCM software applications in 2006, of which SMBs accounted for $4.4 billion, or 32 percent. Gartner projects that SMB spending on these applications will grow 8.7 percent annually from 2006 to 2010, compared to 5.7 percent for large businesses.

SMBs are generally less capable than large enterprises of performing the costly, complex, and time-consuming 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.

Recently, SMBs have begun to benefit from the development of the on-demand SaaS model. SaaS uses the 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 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.

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To date, the on-demand software model has been applied to a variety of types of business software applications, including CRM, security, accounting, human resources management, messaging, and others, and it has been broadly adopted by a wide variety of businesses. IDC estimates worldwide on-demand enterprise software vendor revenues were approximately $3.7 billion in 2006 and that they will grow 32 percent annually through 2011 to $14.8 billion.

While SaaS applications have enabled SMBs to benefit from enterprise-class capabilities, most are still products that require extensive, costly, and time-consuming integration to work with other applications. SMBs generally have been unable to implement a comprehensive set of business management products at an affordable level of cost that will enable them to run their businesses using a single system of records, provide real-time views of their operations, and be readily customizable and rapidly deployed and implemented, especially in a geographically dispersed organization.

Etelos™ Products and Services

We have developed and offer a range of products and services for developers and for consumers of Web Applications. Our product offerings are grouped into two basic programs: the Etelos Ecosystem™ and the Etelos Platform Suite™.

The Etelos Ecosystem. The Etelos Ecosystem is a dynamic development, distribution, and consumption environment for scaling applications and providing business solutions to common business problems. Our ecosystem is constantly being improved and expanded to contain the tools and support programs that help foster continued development of a network of added value development and distribution partners.

Our 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.

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 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.

An Etelos Marketplace enables rapid adoption of Web Applications by giving customers freedom of choice to select from a wide array of 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.

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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 highly flexible business solutions. Not only can businesses easily choose from a range 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-a-Suite™ concept is ideally tailored for particular business needs and building scalable solutions.

Etelos Platform Suite

The Etelos Platform Suite allows third parties to use our software platforms and our services to develop and operate private label applications and marketplaces. We began working with third parties on private label solutions in November 2008 and our first customers launched their private label marketplaces in mid-fiscal 2009.

There are four components to the Etelos Platform Suite:

· The SaaS Application Platform enables technology providers to move their non-Web Application or service to web-based SaaS distribution;

· The SaaS Marketplace Platform enables third parties to offer a variety of syndicated Web Applications and services in a third party-branded SaaS marketplace;

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

· The SaaS Syndication Platform lets SaaS providers distribute their Web Applications and services through a network of third party-branded marketplaces.

The Etelos Platform Suite allows 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.

Etelos Web Application Hosting. By using almost any programming language a developer chooses, including our own EASE language, and by hosting Web Applications wherever users want, utilizing our Etelos Application Server, the Etelos Development Environment allows our partners to extend 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 Web Applications and those of our developers, distributors 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, a third party co-location and hosting provider, located 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 that the failure of any single device will not cause a broad service outage.

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Professional Services.

We are developing repeatable, cost-effective consulting and implementation services to assist our customers with integrating Web Applications, using them on and off-line and importing data from other systems. We provide support services to aid in changing their business processes to take advantage of the enhanced flexibility enabled by our Build-a-Suite concept. Build-a-Suite enables our 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.

Our consulting and implementation methodology leverages the nature of our on-demand Web Application software architecture, the industry-specific expertise of our professional services employees, and the design of the Etelos ecosystem and Private-label Web application marketplaces operating on the Etelos Platform Suite. They are used to simplify, reduce costs and expedite the 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 generally offered on a fixed price basis. Our network of partners also provides professional services to our customers.

Customer Support and Management.

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 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.

Etelos Benefits

The advantages of our products and services are:

Open Standards. Products distributed in an Etelos Marketplace are developed on open standards. This foundation makes the products easy to develop, easy to adopt and integrate with other Web Applications, and easy to swap or modify to meet specific customer needs. The use of open standards for business applications distinguishes the products in an Etelos Marketplace not only from comprehensive product suites from such vendors of proprietary software as Microsoft, Oracle, and SAP, but also from products offered by other SaaS vendors such as salesforce.com or NetSuite, that require developers of Web Applications to adopt a high-cost proprietary foundation for their products, resulting in higher costs to both developers and their customers.

On-Demand Delivery Model. 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 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

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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.

Rapid Implementation. The Internet-based on-demand delivery model implemented by an Etelos Marketplace enables remote deployment and eliminates many of the steps and costs typically associated with on-premise installations. Syndication Partners and their customers can implement our offerings themselves, or work with our development partners or our professional services organization to meet their specific needs.

Security, 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.

Sales and Marketing

We 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, including resellers, with additional development, distribution, and business relationships being developed in North America, South America, Europe, and the Asia-Pacific region.

Our Web Applications and Hosting sales activities generally are the result of word of 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 Application, the scope of any customization desired, and the scope of any professional services required to meet specific customer requirements.

Our sales process for Custom Products and 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.

We tailor our marketing efforts around relevant application categories, customer sizes, and 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.

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Critical Accounting Policies Involving Management Estimates and Assumptions

Our discussion and 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, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. We have identified the following accounting policies that we believe require application of management’s most subjective judgments, often requiring the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

Allowance for Doubtful Accounts

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 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.

Revenue Recognition

We provide Web Applications as a subscription service using the Software-as-a-Service (SaaS) or software-on-demand business model and allow third parties to offer their products and service through Storefronts in an Etelos 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. Revenues are recognized on these service and licensing transactions using the criteria in ASC 605-10, “Revenue Recognition” (ASC 605-10) and ASC 985-605, “Software Revenue Recognition”, (ASC 985-605) respectively, which both provide that revenue may be recognized when all of the following criteria are met:

· Persuasive evidence of an arrangement exists,

· The product or service has been delivered,

· The fee is fixed or determinable, and

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

We must first determine whether ASC 605-10 or ASC 985-605 applies to our revenue transactions. We than determine if the criteria above have been met by assessing the ASC 605-10 and ASC 985-605 and their various interpretations in view of the agreements and other documentation related to the revenue transactions. The interpretation of the agreements often requires considerable judgment as well as determining what accounting literature is appropriate and how that literature should be applied. If our standard agreements are used to establish evidence of the arrangement, then our revenue is generally recognized as follows:

For SaaS 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.

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.

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However, if the terms and conditions of an agreement are nonstandard, then significant contract interpretation is sometimes required to determine the appropriate accounting for these transactions including: (1) whether an arrangement exists; (2) how the arrangement consideration should be allocated among potential multiple elements; (3) when to recognize revenue on 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 we receive a separately identifiable benefit from the purchase arrangements with our customer for which we can reasonably estimate fair value; and (7) whether the arrangement should be characterized as revenue or a reimbursement of costs incurred. In addition, our revenue recognition policy requires an assessment as to whether collection is reasonably assured, which inherently requires us to evaluate the creditworthiness of our customers. Changes in judgments on these assumptions and estimates could materially impact the timing or amount of revenue recognition.

Internal Use Software

Under ASC 985-20 “Costs of 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.

Stock-Based Compensation Expense

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

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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 quarter ended March 31, 2010, 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 three months ended March 31, 2010, but it is not known whether this forfeiture rate will be maintained in the future; management will continue to monitor its estimates.

Accounting for Convertible Notes and Debentures, Embedded Derivatives and Warrants

We evaluate 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.

If the embedded derivatives or warrants must be recorded as a liability, then we must make certain assumptions to value the embedded derivative. This includes computing the discounted net present value of the debt and making assumptions about interest rates, probabilities of outcomes, volatility, fair value of the Company’s stock prior to its merger with Tripath, and discount rates. The discount factor is the Company’s estimate of the appropriate rate of return that an investor would expect from a similar debenture not taking into consideration the conversion feature or warrants. All of these assumptions have a material impact on the value attributed to the derivative or warrant.

Our 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.

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Results of Operations

Three Months Ended March 31, 2010, Compared with Three Months Ended March 31, 2009

Revenues

Revenues were $2 thousand and $58 thousand for the quarters ended March 31, 2010 and 2009, respectively. Revenues decreased by $56 thousand, or 97 percent, in the three months ended March 31, 2010, compared to the same period in 2009. This decrease was due to our focus on the implementation of longer-term projects without immediate cash flow. In the year ended December 31, 2009, and through 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.

Cost of Revenue

Cost of revenue includes our costs of hardware, software and other resources used in delivery of our products and services. Cost of revenue was $9 thousand and $93 thousand for the quarters ended March 31, 2010 and 2009, respectively. Cost of revenue for the three months ended March 31, 2010, decreased by $84 thousand, or by 90 percent. The decrease in cost of revenue was primarily attributable to the decreased costs of hosting and Internet bandwidth associated with the deployment of our products and services. Stated as a percentage of revenues, cost of revenue for the three months ended March 31, 2010, was 450 percent and for the corresponding period of 2009 was 160 percent.

Operating Expenses

Research and Development. Research and development expenses include primarily employee and employee related expenses. Research and development expenses were $264 thousand and $255 thousand for the quarters ended March 31, 2010 and 2009, respectively. Stated as a percentage of revenues, research and development expenses for the corresponding periods were 13,200 percent and 440 percent, respectively. Research and development expenses increased by $9 thousand or by 4 percent, in the three months ended March 31, 2010, compared to the same period in 2009. This increase was primarily due to increased salary and benefits expenses for engineers engaged in research and development.

Sales and 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 $166 thousand and $160 thousand for the quarters ended March 31, 2010 and 2009, respectively. The $6 thousand, or 4 percent, increase in sales and marketing expenses was due to increased activities of sales and marketing during this period. Stated as a percentage of revenues, sales and marketing expenses for the corresponding periods was 8,300 percent and 276 percent, respectively.

General and Administrative. General and administrative expenses include payroll and related employee benefits, and other headcount-related costs associated with finance, facilities, legal and other administrative expenses. General and administrative expenses were $366 thousand and $1,736 thousand for the quarters ended March 31, 2010 and 2009, respectively. The $1,370 thousand, or 79 percent, decrease was primarily attributable to a one time expense in the quarter ended March 31, 2009 regarding a consulting agreement paid by the issuance of shares and warrants valued at approximately $1.5 million, offset by an increase of approximately

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$100 thousand due to the use of consultants and temporary personnel for accounting, administrative and legal purposes. Stated as a percentage of revenues, general and administrative expense for the corresponding periods was 18,300 percent and 2,993 percent, respectively.

Interest Expense

Interest expense was $416 thousand for the three months ended March 31, 2010, compared to $2,094 thousand for the comparable period of 2009, and consists primarily of interest expense on convertible notes and debentures, amortization of discounts on convertible notes and debentures, and the change in mark-to-market valuation of derivative and warrant liabilities. The decrease of $1,678 thousand in interest expense from 2009 to 2010 primarily related to the reduction in the mark-to-market valuation of warrant liabilities due to their reclassification from liabilities to equity upon the restructuring of the January 2008 and April 2008 Debentures in June 2009.

Net Loss

Our net loss was $1.2 million for the quarter ending March 31, 2010, compared to net loss of $6.4 million for the quarter ending March 31, 2009, a decrease of $5.2 million. The decrease from 2009 to 2010 was primarily due to the $4.2 million change in the mark-to-market valuation of derivative and warrant liabilities primarily due to the decrease in the Company’s stock price at March 31, 2009, from December 31, 2008, and a decrease in operating expenses of $1.4 million as noted above.

Liquidity and Capital Resources

On March 31, 2010, we had $12 thousand in cash and cash equivalents, net accounts receivable of $46 thousand, and prepaid expenses and other current assets and other receivables of $182 thousand. Our working capital deficit at March 31, 2010, was $5.3 million, compared to a deficit of $5.0 million at December 31, 2009. The increase in working capital deficit was due to payment obligations of structured liabilities in addition to our recurring quarterly operating expenses.

Net cash used by operating activities during the three months ended March 31, 2010, was $749 thousand, compared to $218 thousand during the three months ended March 31, 2009. The primary use of cash from operating activities during the three months ended March 31, 2010, was related to payment of expenses relating to accounting and compliance.

Investing activities did not provide any cash during the three months ended March 31, 2010. At that date we did not have any significant commitments for capital expenditures.

Net cash provided by financing activities during the three months ended March 31, 2010, was $316 thousand, primarily from the issuance of various promissory notes and the 10% Senior Secured Debentures, in the aggregate amount of $375 thousand, net of loan payment of $59 thousand. See “ — Recent Developments” above.

We need immediate and substantial cash to continue our operations. Management has projected that the cash on hand will be sufficient to allow us to continue our operations only through mid 2010. 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 commitments or arrangements for future financings in place at this time and we can give no assurance that such capital will be available on favorable terms, or at all. We may need additional financing thereafter until we can achieve profitability. We are considering alternatives to address our

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cash flow situation that include: (1) raising capital through additional sale of our common stock and/or debentures and (2) reducing cash operating expenses to levels that are in line with current revenues. If we cannot obtain additional financing, then we may be forced to curtail our operations, cease voluntarily filing reports with the SEC, or possibly be forced to evaluate a sale or liquidation of our assets or consider other strategic alternatives such as bankruptcy. Even if we 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.

September 2007 Notes

Our September 2007 notes were issued as part of a private 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 into shares of common stock at $0.75 per share. At the time of the merger, all of the warrants had been exercised or expired by their terms upon closing the Merger.

Under the terms of the remaining $1.8 million of the notes that were not converted, periodic principal payments were payable beginning on September 1, 2008. On June 15, 2008, the holders of these notes agreed to either convert the then-accrued interest to shares of common stock at a rate of one share for each $1.35 of interest owed or to add the then-accrued interest to the principal, and to waive any default arising out of our failure to pay the accrued and unpaid interest through June 15, 2008.

As of the filing date of this report, none of the required principal payments have been made and we do not have, or expect to have, cash on hand to make the payments in the near future; no interest payments have been made for interest accrued since June 15, 2008. We are in regular communication with the holders of the September 2007 notes and none of the holders have demanded payment or exercised other remedies due to our non-payments, but no assurances can be given that the holders will not exercise their remedies in the future.

January 2008 Debentures

In January 2008, we issued our January 2008 Debentures with an aggregate principal amount of $2.0 million. Under the terms of these debentures, we were to begin making monthly redemption payments on September 1, 2008, through the maturity date of January 31, 2010.

On March 2, 2009, Enable Growth Partners LP purchased the January 2008 Debentures then held by Hudson Bay Fund LTD and its affiliate; price terms were not disclosed. As a result of this transaction, Enable Growth Partners LP and its affiliates own all of the January 2008 Debentures.

On June 30, 2009, we executed an agreement to restructure our January 2008 Debentures; see “April 2008 Debentures” below.

April 2008 Debentures

In April 2008, we issued our April 2008 Debentures with an aggregate principal amount of $3.5 million. Under the terms of these debentures, we were to begin making monthly redemption payments on November 1, 2008, through the maturity date of April 30, 2010.

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On March 2, 2009, Enable Growth Partners LP purchased the April 2008 Debentures then held by Hudson Bay Overseas Fund LTD; price terms were not disclosed. As a result of this transaction, Enable Growth Partners LP owns all of the April 2008 Debentures.

On June 30, 2009, we executed an agreement to restructure our January 2008 and April 2008 Debentures, which have an aggregate principal amount of $5.5 million. Under the terms of the agreement, the terms of the debentures were extended to December 31, 2012, interest accrual will be at 0% from the date of the agreement until October 1, 2010, and all accrued interest as of October 1, 2010, has been added to principal to be paid at maturity. Our obligations to make monthly amortizing redemption payments has been terminated; we are required to make semi-annual interest payments only, beginning January 1, 2011. The registration rights agreement entered into in connection with the debentures was terminated and we agreed to exchange, for no cash consideration, all or a portion of the warrants issued in connection with these debentures for shares of our Common Stock, at a ratio of one share of common stock for each share of common stock underlying such warrant being exchanged..

10% Senior Secured Debentures

See “ — Recent Developments” above.

Operating and Capital Leases

All operating and capital leases were paid off in full during the year ended December 31, 2009.

Off Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of the period ended March 31, 2010.

Going Concern Issue

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.

During the quarter ended March 31, 2010, we have been unable to generate cash flows sufficient to support our operations and have been dependent on debt raised from qualified investors.

These factors raise substantial doubt about our ability to continue as a going concern. The financial statements contained herein do not include any adjustments relating to the recoverability and classification of 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.

We have supported current operations by raising additional operating cash through bridge loans and the private sale of our convertible debentures and preferred stock. This has provided us with the cash inflows to continue our business plan, but has not resulted in significant improvement in our financial position. We are considering alternatives to address our cash flow situation that include raising capital through additional sale of our common stock and/or debentures.

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This could result in substantial dilution of existing stockholders. There can be no assurance that our current financial position can be improved, that we can raise additional working capital, or that we can achieve positive cash flows from operations. Our long-term viability as a going concern is dependent upon our ability to (i) locate sources of debt or equity funding to meet current commitments and near-term future requirements and (ii) achieve profitability and ultimately generate sufficient cash flow from operations to sustain our continuing operations.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“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. The Company adopted these amended standards on January 1, 2010, and there was no impact to the financial statements upon adoption. 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Intentionally omitted pursuant to Item 305(e) of Regulation S-K.

Item 4. CONTROLS AND PROCEDURES

Disclosure controls and procedures are controls and other procedures that are designed to ensure that the information required to be disclosed by a company in the reports that it files or submits under the Securities and Exchange Act of 1934, or the “Exchange Act,” is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that a company files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive officer and principal accounting officer, as appropriate to allow timely decisions regarding required disclosure.

We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2010, the end of the period covered by this report. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of March 31, 2010, because of certain material weaknesses in our internal control over financial reporting.

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Because of these weaknesses, we cannot provide reasonable assurances that all information required to be disclosed in our reports filed with the SEC will be accumulated and communicated to our management to allow for timely decisions regarding required disclosure. Please see the internal control over financial reporting discussion in our Form 10-K that we filed with the SEC on April 29, 2009 for more information regarding the weaknesses in our internal control over financial reporting.

Furthermore, due to the resignation of our vice president and chief financial officer, and the lack of a replacement at this time, we are unable to assure that we have adequate and appropriate controls in place, or that the controls that we do have in place are being managed appropriately. We will attempt to engage additional appropriate professionals to evaluate and manage our controls as soon as financial resources permit, but there is no assurance when, or if, that will be possible in the foreseeable future.

Changes In Internal Controls Over Financial Reporting.

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.

During the quarter, in the process of reviewing our internal controls over financial accounting, we reassigned certain duties of personnel, in order to more appropriately segregate certain financial accounting functions.

Limitations On Disclosure Controls And Procedures.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. The design of any system of controls is based in part upon a cost-benefit analysis and certain assumptions about the likelihood of future events and any design may not succeed in achieving its stated goals under all potential future conditions. While our management does not believe that our controls will prevent all errors or all instances of fraud, our disclosure controls and procedures are designed to provide a reasonable assurance of achieving their objectives.

PART II—OTHER INFORMATION

Item 1. 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.

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On October 31, 2008, the Company relocated its Washington offices and abandoned the sub-leased premises of its former offices in Renton, Washington. The sublease for these premises runs through June 2010. On March 5, 2010, the prime landlord filed a complaint for breach of contract and successor liability. (King County (WA) Superior Court No. 10-2-09385-1 KNT). On March 26, 2010, the Company filed an answer and counterclaim and asserted affirmative defenses against the prime landlord, including that the prime landlord is not a party to the sublease for the premises. Subsequently, on April 8, 2010, the sub-landlord served a third party complaint against the Company relating to the same subleased premises, in a proceeding filed against the sub-landlord by the prime landlord (King County (WA) Superior Court No. 10-2- 09840-2 KNT), in which the sub-landlord asserted affirmative defenses and counterclaims against the prime landlord, including that, beginning in December 2008, the premises were unusable due to water damage and lack of maintenance or repairs by the prime landlord. These matters are being evaluated.

As part of our reduction of monthly cash operating expenses during the quarter ended December 31, 2008, and continuing after the end of the 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 of that quarter, until the filing date of this report, a major portion of this deferral amount and all related taxes remains unpaid, but accrued, including amounts due to employees who subsequently were terminated.

In connection with our reverse merger, multiple financings, and protection of our intellectual property, we have incurred substantial accounts payable to law firms that remain unpaid and overdue. We have been in communication with these vendors and expect to enter into negotiated payment plans with these vendors, and others, 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 if and when negotiated. Therefore the assertion of claims by these vendors for these amounts due and owing could become the subject of claims in litigation.

Item 1A. RISK FACTORS.

Investment in our common stock involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included in this report before making an investment decision. If any of the following risks actually occur, our business, financial condition or results of operations could suffer. In that case, the market price of our common stock could decline, and you may lose all or part of your investment.

Our current cash will fund our business as currently planned only through mid 2010. We need additional funding or we will be forced to curtail or cease operations.

We need immediate and substantial cash to continue our operations. Management has projected that cash on hand will be sufficient only to allow us to continue our operations through mid 2010. We are presently engaged in active discussions for additional investments by existing and prospective investors but we currently have no funding commitments. We have not made required payments under our outstanding debt securities and the holders of our outstanding debt securities have the right to demand payment of the amounts currently due under such securities or exercise their other remedies, such as foreclosing on our assets. We also need to make

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payments and negotiate payment plans for certain notes payable and other payables and there is a risk that trade creditors will not accept deferred payment and may exercise other remedies to collect balances due and owing. We therefore will need additional funding, either through equity or debt financings, or we will be forced to curtail or cease operations or consider other strategic alternatives such as bankruptcy.

We have a substantially reduced employment force and have challenges meeting our operating demands.

We have decreased our number of full-time employees from 46 at June 30, 2008, to 13 as of March 31, 2010. All except the three lowest paid current employees are being paid less than full salary, ranging from 97% to 74% of net salary, and there is no assurance that any of these personnel will be able to continue 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.

We 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.

We have not been profitable on an annual or quarterly basis since our formation. We incurred net losses of $1.2 million and $6.4 million for the quarters ended March 31, 2010 and 2009, respectively, and have an accumulated deficit of $36.6 million at December 31, 2009 and $37.8 million at March 31, 2010. 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.

Our limited operating history may not serve as an adequate basis to judge our future prospects and results of operations.

We began our operations in 1999 but we did not adopt the SaaS on-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:

· maintain and improve our technology;

· expand our product and service offerings and maintain the high quality of products and services offered;

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

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

· obtain sufficient working capital to support our expansion and to fill customers’ orders in time;

· maintain adequate control of our expenses;

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

· anticipate and adapt to changing conditions in the markets in which we operate as well as the impact of any changes in government regulation, mergers and acquisitions involving our competitors, technological developments, and other significant competitive and market dynamics.

If we are not successful in addressing any or all of these risks, then our business may be materially and adversely affected.

We may encounter substantial competition in our business and our failure to compete effectively may adversely affect our ability to generate revenue.

We believe that existing and new competitors will continue to improve the design and performance of their products and to introduce new products with competitive price and performance characteristics. We expect that we will be required to 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 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.

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 competition 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.

The market for on-demand Web Applications may develop more slowly than we expect.

Our success will depend, to a large extent, on the willingness of individuals and SMBs 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 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 Web Applications.

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

· minimize the time and resources required to implement products distributed through an Etelos Marketplace;

· maintain high levels of customer satisfaction;

· implement upgrades and other changes to our products without disrupting our service; and/or

· provide rapid response time during periods of intense activity on customer websites.

In addition, market acceptance of our Web Applications may be affected by:

· the security capabilities, reliability, and availability of on-demand services;

· customer concerns with entrusting a third party to store and manage their data, especially confidential or sensitive data;

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

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

Our inability to fund our capital to meet our expenditure requirements may adversely affect our growth and profitability.

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, and conditions in relevant financial markets. If we are unable to obtain financing, as needed, on a timely basis and on acceptable terms, our financial position, competitive position, growth, and profitability may be adversely affected. The current state of the US and global economy raises substantial doubts, especially about our ability to raise the additional capital that we will need to sustain our business 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 Etelos Marketplaces to individuals, SMBs, and divisions of large companies. To grow our revenue quickly, we must add new customers, sell 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 products. Further, individuals and SMBs often require higher sales, marketing, and support expenditures by vendors that sell to them per revenue dollar generated for those vendors.

Many 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.

Many of 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

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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.

We may not be able to prevent others from unauthorized use of our patents and other intellectual property, which could harm our business and competitive position.

Our success depends, in part, on our ability to protect our proprietary technologies. We rely on a combination of patent, copyright, trademark, and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our intellectual property rights on a global basis, all of which provide only limited protection.

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. 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 issued to us will not be challenged, invalidated, or circumvented. Since the filing of some of these patent 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.

We do not analyze the software that we distribute from our ISV Syndication Partners to determine the adequacy of their intellectual property rights. We have not 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 our ISV Syndication Partners in any Etelos Marketplace. These products may include code subject to various forms of ‘open source’, ‘copyleft’, or similar licenses that require as a 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 software. 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 our Syndication Partners to indemnify us for intellectual property claims but we cannot assure that these agreements will be enforceable.

We endeavor to enter into agreements with our employees and contractors and agreements with parties with whom we do business to limit access 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.

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Enforcement of our intellectual property rights also depends on our successful legal actions against these infringers, but these actions may not be successful, 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.

Assertions by third parties that we infringe their intellectual property, whether successful or not, could subject us to costly and time-consuming litigation or expensive licenses.

The 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.

Any intellectual 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.

For any intellectual property rights claim against us or against our Marketplace Partners or customers, we may have substantial direct and 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, if at all, may significantly increase our operating expenses, or may require us to restrict our business activities in one or more respects. As a result, we may also be required to develop alternative non-infringing technology, which could 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.

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.

Our 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.

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Subsequent to the termination of our former Chief Executive Officer, we significantly and materially reduced our management team and have not hired replacements for the management team in the positions of Vice President and Chief Financial Officer, Vice President — Marketing, Vice President Corporate Development, and Vice President — Human Resources, as well as several other Director-level positions, primarily in non-technical positions throughout the Company. We did not fill these positions in the period ending March 31, 2010, and we have not filled any of these positions to the date of this report.

Our future success also depends on our ability to attract, retain and motivate highly skilled technical, managerial, sales, marketing and service and support personnel, including members of our management team. Competition for sales, marketing, and technology development personnel is particularly intense in the software and technology industries. As a result, we may be unable to successfully attract or retain qualified personnel. Our inability to attract and retain the necessary personnel could harm our business.

If we do not effectively expand and train our sales force and our services and support teams, then we may be unable to add new customers and retain existing customers.

We plan to expand our sales force and our services and support teams to increase our customer base and revenue. We believe that there is significant competition for sales, 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, training, and retaining sufficient numbers 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 successful or do not generate a corresponding increase in revenue, then our business will be harmed.

We do not have a dedicated sales team and our revenues and operating results are substantially dependent on third-party resellers.

We 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.

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

Our operating results may fluctuate in the future. As a result, we may fail to meet or exceed the expectations of research analysts or investors, which could cause our stock price to decline. Also period-to-period comparisons of our operating results may not be meaningful. You should not rely on the results of one quarter as an indication of future performance.

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Fluctuations in our quarterly operating results may be due to a number of factors, including the risks and uncertainties discussed elsewhere in this report. Fluctuations in our quarterly operating results could cause our stock price to decline rapidly, may lead analysts to change their long-term model for valuing our common stock, could cause us to face short-term liquidity issues, may impact our ability 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.

We use third-party data centers to support our services. Any disruption of service at these facilities could interrupt or delay our ability to deliver our service to our customers.

We host many of our services and serve a significant number of our customers from third-party data center facilities with Network OS, located in the greater Seattle Washington area. We do not control the operation of these facilities. These facilities may be vulnerable to damage or interruption from earthquakes, hurricanes, floods, fires, terrorist attacks, power losses, telecommunications failures, and similar events. These facilities also could be subject to break-ins, computer viruses, sabotage, intentional acts 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 services.

We owe substantial amounts to our data center facility providers and they have no obligation to continue their services or renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew our agreements with any facility provider on commercially reasonable terms, then we may experience increased costs or downtime in connection with the transfer to a new data center facility.

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.

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

The prices of 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 you that the necessary servers or support will continue to be available to us at prices currently in effect or acceptable to us. The prices for these items have varied significantly in the past and may vary significantly in the future. Numerous factors, most of which are beyond our control, 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 not be able to adjust our product prices, especially in the short-term, to recover cost increases in these items. Our future profitability may be adversely affected to the extent we are unable to pass on higher server and support related costs to our customers.

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We may become liable to our customers and lose customers if we have defects or disruptions in our products and services or if we provide poor service.

Because 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.

Material defects 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.

The Web Applications offered in an Etelos Marketplace are inherently complex and may contain material defects or errors, particularly when first introduced or when new versions or enhancements are released. We have, from time to time, found defects in our products and services, and new errors in our existing software and services may be detected in the future. We have no actual knowledge, but we reasonably expect that the products and services offered by our Syndication Partners may have similar errors and/or defects. Any errors or defects that cause interruptions to the availability of our services and the services for our Marketplace Partners could result in:

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

· sales credits or refunds to our customers and customers of our Marketplace Partners;

· loss of existing customers and difficulty in attracting new customers;

· diversion of development resources;

· harm to our reputation, or the reputation of our Marketplace Partners; and/or

· increased warranty and insurance costs.

After the release of our services, defects or errors may also be identified from time to time by our internal team, our Marketplace and Syndication Partners, and by our customers. The costs incurred in correcting any material defects or errors in such products or services may be substantial and could harm our operating results.

If our security measures are breached and unauthorized access is obtained to a customer’s data, then we may incur significant liabilities, our service may be perceived as not being secure, and customers may curtail or stop using our products.

The products and services we offer in an Etelos Marketplace involve the storage of large amounts of our customers’ sensitive 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.

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If we are unable to develop new products 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.

Our ability to attract new customers and to increase revenue from existing customers will 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.

If 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 us could be harmed.

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 financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles.

During our audit for the years ended December 31, 2008 and 2009, we identified material weaknesses in our 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, 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 principles. 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 any appropriate changes to our internal controls may distract our officers and 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.

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Government regulation of the Internet and e-commerce is evolving, and unfavorable changes or our failure to comply with regulations could harm our operating results.

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 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 by government agencies 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.

Privacy concerns and laws or other regulations may reduce the effectiveness of our products and services and harm our business.

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.

In 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.

Our operating results may be harmed if we are required to collect taxes for our subscription services in jurisdictions where we have not historically done so.

We have not collected any sales or other taxes from our customers or remitted any such taxes to any taxing jurisdiction where we may be required to do so. We have begun an analysis of this issue but to date have not made any accrual for any potential liability. In addition, additional taxing jurisdictions at 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 any prior periods, including the quarters ended March 31, 2010 or 2009, in respect of sales or other tax liabilities in any jurisdiction. 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 in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations, and harm our operating results.

A 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.

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We may 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 our product or service offerings or our ability to provide service in foreign jurisdictions, which could involve preferred or exclusive licenses, additional channels of distribution, discount pricing, investments in other companies, or other strategies. Negotiating these transactions can be time-consuming, difficult, and expensive, and our ability to close these transactions may often be subject to approvals that are beyond our control. Consequently, these transactions, even if undertaken and announced, may not close.

An acquisition, investment, or business relationship may result in 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 be 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:

· issue additional equity securities that would dilute our stockholders;

· use cash that we may need in the future to operate our business;

· incur debt on terms unfavorable to us or that we are unable to repay;

· incur large charges or substantial liabilities;

· encounter difficulties retaining key employees of the acquired company or integrating diverse software codes or business cultures; and/or

· become subject to adverse tax consequences, substantial depreciation, or deferred compensation charges.

Any of these risks could harm our business and operating results.

We may be subject to other legal claims.

We have entered into litigation settlement agreements that include promissory notes payable over several months in 2010. There is a risk that we may not be able to pay these obligations as they become due and that the parties to these notes may exercise their rights to recover the amounts of these notes, and other remedies.

As part of our reduction of monthly cash operating expenses during the quarter ended September 30, 2008, and continuing after the end of the quarter ended March 31, 2010, and to the filing 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, until the filing date of this report, this deferral amount remains unpaid, including amounts due to employees who subsequently were terminated. Two former employees have asserted claims with the California Labor Commission for payment of these unpaid amounts and the assertion of such claims or demands by other terminated or current employees, or by other governmental authorities, is foreseeable.

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On October 31, 2008, the Company relocated it Washington offices and abandoned the sub-leased premises of its former offices in Renton, Washington. The sublease for these premises runs through June 2010. On March 5, 2010, the prime landlord filed a complaint for breach of contract and successor liability. (King County (WA) Superior Court No. 10-2-09385-1 KNT). On March 26, 2010, the Company filed an answer and counterclaim and asserted affirmative defenses against the prime landlord, including the fact that the prime landlord is not a party to the sublease for the premises. Subsequently, on April 8, 2010, the sub-landlord served a third party complaint against the Company relating to the same subleased premises, in a proceeding filed against the sub-landlord by the prime landlord (King County (WA) Superior Court No. 10-2- 09840-2 KNT), in which the sub-landlord asserted affirmative defenses and counterclaims against the prime landlord, including the fact that, beginning in December 2008, the premises were unusable due to water damage and lack of maintenance or repairs by the prime landlord. These matters are being evaluated and the Company will vigorously defend itself.

On April 5, 2010, the Company was served with a summons and complaint for breach of contract and unjust enrichment by Lakebay Technologies LLC. (King County (WA) Superior Court No. 10-2-10054-7). This matter was just served and is being evaluated by the Company.

Our officers, directors, and affiliates control us through their positions and stock ownership and their interests may differ from other stockholders.

As of March 31, 2010, our officers, directors, and affiliates beneficially own approximately 72 percent of our common stock and 60 percent of our preferred stock. As 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 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.

We are responsible for the indemnification of our officers and directors.

Our articles of 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. Consequently, we may be required to expend substantial funds to satisfy these indemnity obligations.

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

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

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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.

In addition, in connection with our January 2008 and April 2008 Debentures and 10% Senior Secured Debentures, in the aggregate, we owe a total of $9.7 million principal amount of these convertible debentures, convertible into 11,440,695 shares of our common stock, and warrants to purchase an additional 6,236,111 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 is made by the investors in 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.

We have significant indebtedness.

We have incurred $9.7 million in principal amount of indebtedness as a result of the issuance of our 10% Senior Secured Debentures, January 2008 and April 2008 Debentures. The debentures impose significant requirements on us, including, among others, requirements that we pay interest and other charges on the debentures. Our ability to comply with these provisions may be affected by changes in our business condition or results of our operations, or other events beyond our control.

Certain covenants we agreed to in connection with the debentures may impair our ability to issue additional debt or equity.

Our September 2009, January 2008 and April 2008 Debentures impose significant 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. These covenants and restrictions may impair our ability to issue additional debt or equity, if necessary.

If we need additional financing in the future and are required to issue securities which are priced at less than the conversion price of our debentures or the exercise price of warrants sold in our recent private placements, it will result in additional dilution.

Our September 2009, January 2008 and April 2008 Debentures and the related warrants contain provisions that will require us to reduce the conversion price and exercise 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 September 2009, January 2008 or April 2008 Debentures 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.

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Anti-takeover provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt.

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:

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

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

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

· requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;

· controlling the procedures for the conduct and scheduling of board and stockholder meetings; and

· limiting, generally, the filling of vacancies or newly created seats on the board to our board of directors then in office.

These provisions, alone or together, could delay hostile takeovers and changes in control or changes in our management.

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

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

Although we have no commitments as of the date of this report to issue any additional securities, 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, 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.

Further, the issuance of additional shares of our common stock or any number of shares of preferred stock, including upon conversion of any debt securities, may:

· significantly reduce the equity interest of our current stockholders;

· cause a change in control if a substantial 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; and/or

· adversely affect prevailing market prices for our common stock.

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If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:

· develop or enhance our products and services;

· continue to expand our development, sales and marketing organizations;

· acquire complementary technologies, products or businesses;

· expand operations;

· hire, train and retain employees; and/or

· respond to competitive pressures or unanticipated working capital requirements.

Although we have no commitments as of the date hereof to issue any additional securities, 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 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:

· may significantly reduce the equity interest of our current stockholders; and

· 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/or may adversely affect prevailing market prices for our common stock.

The 2007 Stock Incentive Plan and all options issued under the 2007 Stock Incentive Plan contain provisions for acceleration of all unvested options in the event of a change of control, which might be a disincentive to acquisition of the Company as a liquidation strategy.

The 2009 Equity Incentive Plan and the 2007 Stock 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. 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 unattractive strategic option, for a prospective acquirer.

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

We have paid no cash dividends on any of 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 Notes prohibit us from making any dividend payment or distribution to holders 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 source of gain for the foreseeable future.

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Our securities are thinly traded on the Over-the-Counter Bulletin Board, which may not provide liquidity for our investors.

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 less liquidity than the NASDAQ Stock Market or other national or regional exchanges. 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 SEC’s order handling rules, which apply to NASDAQ-listed securities, do not apply to securities quoted on the Over-the-Counter Bulletin Board. Quotes for stocks included on the Over-the-Counter Bulletin Board may not be listed in newspapers. Therefore, prices for securities traded solely on the Over-the-Counter Bulletin Board may be difficult to obtain and holders of our securities may be unable to resell their securities at or near their original acquisition price, or at any price.

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

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. 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.

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

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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 6. EXHIBITS

See the exhibit index immediately following the signature page of this report.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ETELOS, INC.


	/s/ Daniel J.A. Kolke
Date: April 26, 2010	Daniel J.A. Kolke, Chief Executive Officer
	(Duly Authorized Officer and Principal Executive Officer)

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EXHIBIT INDEX

Exhibit No.		Description
4.1 (1)		Form of 10% Senior Secured Debenture issued in connection with January 2010 financing
4.2 (1)		Form of Warrant issued in connection with January 2010 financing, with an exercise price of $0.60 per share
10.1(1)		Form of Securities Purchase Agreement dated January 25, 2010
10.2(1)		Form of Amendment to Security Agreement dated January 25, 2010
31.1*		Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*	Filed with this report
**	Furnished with this Report
(1)	Incorporated by reference to the Registrant’s Form 8-K filed on January 26, 2010.

ETELOS, INC. 10-Q