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

                                   FORM 10-QSB

         (Mark One)
|X|      QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
         ACT OF 1934

                For the quarterly period ended September 30, 2005

|_|      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

                  For the transition period from _____ to _____



                         COMMISSION FILE NUMBER 0-25675

                              PATRON SYSTEMS, INC.
        (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)

                DELAWARE                                   74-3055158
    (STATE OR OTHER JURISDICTION OF            (IRS EMPLOYER IDENTIFICATION NO.)
     INCORPORATION OR ORGANIZATION)

     500 N. MICHIGAN AVE, SUITE 300
              CHICAGO, IL                                    60611
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                   (ZIP CODE)

                                 (312) 396-4031
                           (ISSUER'S TELEPHONE NUMBER)

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes |_| No |X|

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

State the number of shares outstanding of each of the issuer's classes of common
equity,  as of the latest  practicable  date:  60,427,299 shares of common stock
outstanding as of November 11, 2005.

Transitional Small Business Disclosure Format (Check one):  Yes |_| No |X|


<PAGE>


                              PATRON SYSTEMS, INC.

                          FORM 10-QSB QUARTERLY REPORT
                       ----------------------------------

                                TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION                                              PAGE
------------------------------                                              ----

ITEM 1. FINANCIAL STATEMENTS...................................................3

Condensed Consolidated Balance Sheet at September 30, 2005 (unaudited).........3
Condensed Consolidated Statements of Operations for the
         Three and Nine Months Ended September 30, 2005 and
         2004 (unaudited)......................................................4
Condensed Consolidated Statement of Stockholders' (Deficiency)
         Equity for the Nine Months Ended September 30, 2005 (unaudited).......5
Condensed Consolidated Statements of Cash Flows for the
         Nine Months Ended September 30, 2005 and 2004 (unaudited).............6
Notes to Condensed Consolidated Financial Statements (unaudited)...............7

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS...................................32

ITEM 3. CONTROLS AND PROCEDURES...............................................44


PART II - OTHER INFORMATION
---------------------------

ITEM 1. LEGAL PROCEEDINGS.....................................................47

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS...........47

ITEM 6. EXHIBITS..............................................................48


SIGNATURES....................................................................49

                           FORWARD LOOKING STATEMENTS

The following discussion and explanations should be read in conjunction with the
financial  statements and related notes contained elsewhere in this Form 10-QSB.
Certain  statements  made in this  discussion are  "forward-looking  statements"
within the  meaning of the  Private  Securities  Litigation  Reform Act of 1995.
Forward-looking  statements  can be  identified  by  terminology  such as "may",
"will", "should", "expects", "intends", "anticipates",  "believes", "estimates",
"predicts",  or  "continue"  or the negative of these terms or other  comparable
terminology. Because forward-looking statements involve risks and uncertainties,
there are important factors that could cause actual results to differ materially
from those expressed or implied by these  forward-looking  statements.  Although
Patron  Systems  believes  that  expectations  reflected in the  forward-looking
statements are reasonable,  it cannot guarantee  future results,  performance or
achievements.  Moreover,  neither  Patron  Systems nor any other person  assumes
responsibility  for the  accuracy  and  completeness  of  these  forward-looking
statements.  Patron  Systems  is under  no duty to  update  any  forward-looking
statements  after the date of this report to conform such  statements  to actual
results.


                                       2
<PAGE>


                         PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                      PATRON SYSTEMS, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEET
                                   (unaudited)

                                                                   SEPTEMBER 30,
                                                                       2005
                                                                   ------------
ASSETS
Current Assets:
  Cash ......................................................      $     80,233
  Restricted cash ...........................................           517,003
  Accounts receivable, net ..................................           174,110
  Other current assets ......................................           186,447
                                                                   ------------
     Total current assets ...................................           957,793

Property and equipment, net .................................           160,012
Deferred financing costs ....................................             3,000
Intangible assets, net ......................................         2,851,064
Goodwill ....................................................        22,413,300
                                                                   ------------
     Total assets ...........................................      $ 26,385,169
                                                                   ============

LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities
  Accounts payable ..........................................      $  1,505,808
  Accrued payroll and related expenses ......................         1,095,191
  Accrued interest ..........................................           999,880
  Consulting agreement payable ..............................           100,000
  Demand notes payable ......................................         1,007,556
  Bridge notes payable ......................................         9,443,013
  Acquisition notes payable .................................         4,500,000
  Notes payable (to creditors of acquired business,
    including $1,655,548 to related parties) ................         2,588,000
  Expense reimbursements due to officers and
    stockholders ............................................           243,340
  Notes payable to officers and stockholders ................           284,212
  Other current liabilities .................................           977,555
  Amounts due under settlement with former officer ..........           982,123
  Deferred revenue ..........................................           265,018
                                                                   ------------
     Total current liabilities ..............................        23,991,696

Note payable - stock repurchase obligation due to
   former officer ...........................................         1,738,667
                                                                   ------------
     Total liabilities ......................................        25,730,363
                                                                   ------------

Common stock subject to put right (2,000,000 shares) ........         1,000,000
                                                                   ------------

Stockholders' Deficiency
  Preferred stock, par value $0.01 per share,
    75,000,000 shares authorized, none issued
    and outstanding .........................................              --
  Common stock, par value $0.01 per share,
    150,000,000 shares authorized, 50,219,867
    shares issued and outstanding as of September
    30, 2005 (net of 2,000,000 shares subject to
    put right) ..............................................           502,199
  Additional paid-in capital ................................        56,996,739
  Common stock to be issued (8,409,080 shares) ..............         3,558,016
  Common stock repurchase obligation ........................        (1,300,000)
  Deferred compensation .....................................          (250,250)
  Accumulated deficit .......................................       (59,851,898)
                                                                   ------------
     Total stockholders' deficiency .........................          (345,194)
                                                                   ------------
     Total liabilities and stockholders' deficiency .........      $ 26,385,169
                                                                   ============

See notes to condensed consolidated financial statements.


                                       3
<PAGE>


<TABLE>
                             PATRON SYSTEMS, INC. AND SUBSIDIARIES
                        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                          (unaudited)

<CAPTION>
                                                 NINE MONTHS ENDED              THREE MONTHS ENDED
                                                   SEPTEMBER 30,                   SEPTEMBER 30,
                                           ----------------------------    ----------------------------
                                               2005            2004            2005            2004
                                           ------------    ------------    ------------    ------------
                                                          (Development                     (Development
                                                              Stage)                           Stage)
<S>                                        <C>             <C>             <C>             <C>
Revenue ................................   $    339,212    $       --      $    152,941    $       --
                                           ------------    ------------    ------------    ------------

Cost of Sales
  Cost of products/services ............        203,934            --           116,757            --
  Amortization of technology ...........        272,792            --           133,124            --
                                           ------------    ------------    ------------    ------------
    Total cost of sales ................        476,726            --           249,881            --
                                           ------------    ------------    ------------    ------------
  Gross loss ...........................       (137,514)           --           (96,940)           --
                                           ------------    ------------    ------------    ------------

Operating Expenses
  Salaries and related expenses ........      3,314,154         620,233       1,399,189         479,745
  Consulting expense ...................      1,239,083         477,817         286,208         318,692
  Professional fees ....................        986,405         283,489         279,272         146,701
  General and administrative ...........        888,608         414,192         545,540          89,013
  Amortization of intangibles ..........         69,691            --            30,814            --
  Stock based penalties under
     accomodation agreements ...........        823,747       1,040,400         134,645         445,200
  Assessment fee .......................        370,000            --              --              --
  Loss on collateralized financing
     arrangement .......................        366,193            --              --              --
  Change in intrinsic value of common
     stock put right ...................       (300,000)           --          (300,000)
  Loss/(gain) associated with settlement
     agreements ........................       (343,571)        438,667          45,532            --
                                           ------------    ------------    ------------    ------------
     Total operating expenses ..........      7,414,310       3,274,798       2,421,200       1,479,351

Loss from operations ...................     (7,551,824)     (3,274,798)     (2,518,140)     (1,479,351)

Other Income (Expense)
  Interest income ......................         19,250          57,750            --            19,250
  Loss on sale of property and equipment           (544)           --              (544)           --
  Interest expense .....................    (12,376,904)        (99,263)    (10,159,038)        (33,087)
                                           ------------    ------------    ------------    ------------
Total Other Expense ....................    (12,358,198)        (41,513)    (10,159,582)        (13,837)
                                           ------------    ------------    ------------    ------------

Loss before income taxes ...............    (19,910,022)     (3,316,311)    (12,677,722)     (1,493,188)

  Income taxes .........................           --              --              --              --
                                           ------------    ------------    ------------    ------------
Net loss ...............................   $(19,910,022)     (3,316,311)   $(12,677,722)     (1,493,188)
                                           ============    ============    ============    ============

Net Loss Per Share - Basic and Diluted .   $      (0.35)   $      (0.09)   $      (0.21)   $      (0.04)
                                           ============    ============    ============    ============

Weighted Average Number of Shares
   Outstanding
   - Basic and diluted .................     57,284,490      38,610,646      61,499,103      39,010,560
                                           ============    ============    ============    ============
</TABLE>

See notes to condensed consolidated financial statements.


                                       4
<PAGE>


<TABLE>
                     PATRON SYSTEMS, INC. AND SUBSIDIARIES
    CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY (UNAUDITED)
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005

<CAPTION>
                                                                        ADDITIONAL       SHARES OF       VALUE OF      COMMON STOCK
                                           SHARES OF     PAR VALUE       PAID IN       COMMON STOCK    COMMON STOCK     REPURCHASE
                                         COMMON STOCK   COMMON STOCK     CAPITAL       TO BE ISSUED    TO BE ISSUED     OBLIGATION
                                         ------------   ------------   ------------    ------------    ------------    ------------
<S>                                        <C>          <C>            <C>                <C>          <C>             <C>
Balance, January 1, 2005
  (development stage) ................     37,006,212   $    370,062   $ 28,973,711       5,951,648    $  4,671,400    $ (1,300,000)

Common stock issued in purchase
  business combinations
  Complete Security Solutions, Inc. ..           --             --        6,300,000       7,500,000          75,000            --
  LucidLine, Inc. ....................           --             --        3,696,000       4,400,000          44,000            --
  Entelagent Software Corporation ....           --             --        2,520,000       3,000,000          30,000            --
Amortization of deferred stock-based
  compensation .......................           --             --             --              --              --              --
Issuance of warrants and bridge
  notes to investors 1/1/05
  through 3/31/05 ....................           --             --        1,043,860            --              --              --
Issuance of warrants issued as
  purchase consideration .............           --             --        1,912,500            --              --              --
Issuance of warrants to
  transaction advisors ...............           --             --          255,000            --              --              --
Issuance of warrants to placement
  agent - Interim Bridge Financing I .           --             --          297,500            --              --              --
Common stock to be issued under
  accommodation agreement as a penalty           --             --             --         1,350,000         745,501            --
Common stock issued under
  collateralized financing arrangement        890,500          8,905        397,300            --              --              --
Common stock to be issued under
  collateralized financing
  arrangement as a penalty ...........           --             --             --           130,587          78,247            --
Common stock issued in lieu of cash ..      1,000,000         10,000        939,000      (1,000,000)       (949,000)           --
Common stock issued in purchase
  business combinations ..............     11,323,155        113,232           --       (11,323,155)       (113,232)           --
Recission of common stock to be
  issued under consulting agreement
  payable ............................           --             --             --          (100,000)        (78,900)           --
Issuance of warrants to Bridge
  Note II investors ..................           --             --          532,723            --              --              --
Issuance of warrants to placement
  agent - Interim Bridge Financing II            --             --           80,867            --              --              --
Issuance of warrants in connection
  with bridge loan extension -
  extension warrants .................           --             --          822,500            --              --              --
Issuance of stock options to Chief
  Executive Officer ..................           --             --           30,000            --              --              --
Issuance of warrants to Bridge Note
  III investors ......................           --             --          550,778            --              --              --
Adjustment to shares issuable under
  compensation arrangement ...........           --             --          945,000      (1,500,000)       (945,000)           --
Reduction of intrinsic value of
  put right ..........................           --             --         (300,000)           --              --              --
Conversion option in connection with
  Interim Bridge Financing I .........           --             --        3,500,000            --              --              --
Conversion option in connection with
  Subordinated Notes .................           --             --        4,500,000            --              --              --
Net Loss .............................           --             --             --              --              --              --
                                         ------------   ------------   ------------    ------------    ------------    ------------
BALANCE, SEPTEMBER 30, 2005 ..........     50,219,867   $    502,199   $ 56,996,739       8,409,080    $  3,558,016    $ (1,300,000)
                                         ============   ============   ============    ============    ============    ============


<CAPTION>
                                           DEFERRED      ACCUMULATED
                                         COMPENSATION       DEFICIT          TOTAL
                                         ------------    ------------    ------------
<S>                                      <C>             <C>             <C>
Balance, January 1, 2005
  (development stage) ................   $ (1,475,333)   $(39,941,876)   $ (8,702,036)

Common stock issued in purchase
  business combinations
  Complete Security Solutions, Inc. ..           --              --         6,375,000
  LucidLine, Inc. ....................           --              --         3,740,000
  Entelagent Software Corporation ....           --              --         2,550,000
Amortization of deferred stock-based
  compensation .......................      1,239,083            --         1,239,083
Issuance of warrants and bridge
  notes to investors 1/1/05
  through 3/31/05 ....................           --              --         1,043,860
Issuance of warrants issued as
  purchase consideration .............           --              --         1,912,500
Issuance of warrants to
  transaction advisors ...............           --              --           255,000
Issuance of warrants to placement
  agent - Interim Bridge Financing I .           --              --           297,500
Common stock to be issued under
  accommodation agreement as a penalty           --              --           745,501
Common stock issued under
  collateralized financing arrangement           --              --           406,205
Common stock to be issued under
  collateralized financing
  arrangement as a penalty ...........           --              --            78,247
Common stock issued in lieu of cash ..           --              --              --
Common stock issued in purchase
  business combinations ..............           --              --              --
Recission of common stock to be
  issued under consulting agreement
  payable ............................           --              --           (78,900)
Issuance of warrants to Bridge
  Note II investors ..................           --              --           532,723
Issuance of warrants to placement
  agent - Interim Bridge Financing II            --              --            80,867
Issuance of warrants in connection
  with bridge loan extension -
  extension warrants .................           --              --           822,500
Issuance of stock options to Chief
  Executive Officer ..................        (14,000)           --            16,000
Issuance of warrants to Bridge Note
  III investors ......................           --              --           550,778
Adjustment to shares issuable under
  compensation arrangement ...........           --              --              --
Reduction of intrinsic value of
  put right ..........................           --              --          (300,000)
Conversion option in connection with
  Interim Bridge Financing I .........           --              --         3,500,000
Conversion option in connection with
  Subordinated Notes .................           --              --         4,500,000
Net Loss .............................           --       (19,910,022)    (19,910,022)
                                         ------------    ------------    ------------
BALANCE, SEPTEMBER 30, 2005 ..........   $   (250,250)   $(59,851,898)   $   (345,194)
                                         ============    ============    ============
</TABLE>

See notes to condensed consolidated financial statements.


                                       5
<PAGE>


<TABLE>
                      PATRON SYSTEMS, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)

<CAPTION>
                                                                              SEPTEMBER 30,
                                                                      ----------------------------
                                                                          2005            2004
                                                                      ------------    ------------
<S>                                                                   <C>             <C>
Cash Flows from Operating Activities
  Net loss ........................................................   $(19,910,022)   $ (3,316,311)
                                                                      ============    ============
  Adjustments to reconcile net loss to net cash used in
     operating activities:
     Depreciation and amortization ................................        382,872            --
     Amortization of deferred compensation ........................      1,239,083            --
     Accretion related to warrants issued for notes payable .......      1,927,374            --
     Amortization of deferred financing costs .....................      1,825,606            --
     Common stock issued in lieu of cash for services .............           --           477,817
     Stock based penalty on accomodation agreement ................        823,747       1,040,400
     Stock options issued to chief executive officer ..............         16,000            --
     Penalty warrants issued to bridge note holders ...............      8,000,000            --
     Reduction in intrinsic value of put right ....................       (300,000)           --
     Gain on settlement of consulting agreement payable ...........       (228,900)           --
     Loss on collateralized financing arrangement .................        366,194            --
     Gain on legal settlement .....................................       (389,103)           --
     Loss associated with settlement agreement ....................           --           438,667
     Non-cash increase in notes payable to former officer .........         17,399            --
     Non-cash interest income .....................................        (19,250)        (57,750)
     Changes in assets and liabilities:
       Restriced cash escrowed to settle liabilities assumed ......       (517,003)           --
         Prepaid expenses .........................................         51,487         (27,359)
         Accounts receivable ......................................        (38,465)           --
         Other current assets .....................................        (93,858)           --
         Accounts payable .........................................       (284,594)         (6,311)
         Accrued interest .........................................         12,202          99,263
         Deferred revenue .........................................         65,267            --
         Expense reimbursements due to officers and shareholders ..        (30,521)           --
         Accrued payroll and payroll related expenses .............     (1,043,209)        179,653
         Other current liabilities ................................        399,155            --
         Consulting agreements payable ............................        (50,000)        300,000
         Loss on sale of property and equipment ...................            544            --
         Other accrued expenses ...................................         (3,413)           --
                                                                      ------------    ------------
     Total adjustments ............................................     12,128,614       2,444,380
                                                                      ------------    ------------
NET CASH USED IN OPERATING ACTIVITIES .............................     (7,781,408)       (871,931)
                                                                      ============    ============

CASH FLOWS USED IN INVESTING ACTIVITIES
  Advances to prospective acquiree businesses .....................           --           (20,000)
  Cash payments in purchase business combinations .................       (857,633)           --
  Cash acquired in purchase business combinations .................        416,397            --
  Acquisition of intellectual property ............................        (92,547)           --
  Proceeds from sale of property and equipment ....................          1,500            --
  Purchase of fixed assets ........................................        (67,445)           --
                                                                      ------------    ------------
NET CASH USED IN INVESTING ACTIVITIES .............................       (599,728)        (20,000)
                                                                      ============    ============

CASH FLOWS FROM FINANCING ACTIVITIES
  Expenses financed by (repaid to) officers and stockholders ......       (273,223)        151,842
  Advances from stockholders ......................................           --            (8,169)
  Advances from prospective acquiree business .....................           --           135,500
  Deferred financing costs ........................................       (621,739)           --
  Repayments of amounts due under settlement with former officer ..       (200,000)           --
  Proceeds from issuance of bridge notes ..........................      7,100,000            --
  Proceeds from issuance of common stock ..........................           --           700,000
  Proceeds from issuance of notes .................................      2,543,000          41,134
  Deferred financing charges ......................................         (6,000)           --
  Repayments of advances from shareholders ........................       (126,570)           --
                                                                      ------------    ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES .........................      8,415,468       1,020,307
                                                                      ============    ============

NET INCREASE IN CASH ..............................................         34,332         128,376

CASH, beginning of period .........................................         45,901          22,957
                                                                      ============    ============
CASH, end of period ...............................................   $     80,233    $    151,333
                                                                      ============    ============

Supplemental Disclosures of Cash Flow Information:
  Issuance of note under stock repurchase obligation ..............   $  1,300,000    $       --
  Obligation to repurchase 2,000,000 shares of common stock subject
     to put right .................................................      1,000,000            --
Cash paid during the period for:
  Interest ........................................................        527,231         301,370
Supplemental non-cash investing and financial activity:
Acquisition of businesses:
    Current tangible assets acquired ..............................        300,911            --
    Non-current tangible assets acquired ..........................      2,809,689            --
    Current liabilities assumed with acquisitions .................     (8,403,374)           --
    Non-current liabilities assumed with acquisitions .............       (447,790)           --
    Intangible assets acquired ....................................      3,101,000            --
    Goodwill recognized on purchase business combinations .........     22,413,300            --
      Non-cash consideration ......................................    (19,332,500)           --
      Cash acquired in purchase business combinations .............        416,397            --
                                                                      ------------    ------------
      Cash paid to acquire businesses .............................        857,633            --
                                                                      ============    ============
</TABLE>

See notes to condensed consolidated financial statements.


                                       6
<PAGE>

                      PATRON SYSTEMS, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                               SEPTEMBER 30, 2005

NOTE A - BASIS OF INTERIM FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited Condensed Consolidated Financial Statements of Patron
Systems,  Inc. (the  "Company,"  "Patron,"  "us," or "we") have been prepared in
accordance with accounting  principles  generally  accepted in the United States
for  interim  financial   information  and  the  instructions  to  Form  10-QSB.
Accordingly,  they do not include all the information and footnotes  required by
accounting  principles  generally  accepted  in the United  States for  complete
financial  statements.  In the  opinion of  management  all  adjustments  (which
include  only normal  recurring  adjustments)  necessary  to present  fairly the
financial  position,  results  of  operations  and cash  flows  for all  periods
presented have been made.  The results of operations  for the nine-month  period
ended September 30, 2005 are not necessarily indicative of the operating results
that may be expected for the entire year ending December 31, 2005.

This form 10QSB should be read in conjunction  with the Company's  10KSB for the
year ended December 31, 2004.


NOTE B - THE COMPANY

ORGANIZATION AND DESCRIPTION OF BUSINESS

Patron Systems, Inc., ("Systems") is a Delaware corporation formed in April 2002
to provide  comprehensive,  end-to-end  information security solutions to global
corporations and government institutions.

Pursuant to an Amended and Restated Share Exchange  Agreement  dated October 11,
2002, Combined  Professional  Services ("CPS"),  Systems and the stockholders of
Systems  consummated a share  exchange  ("Share  Exchange").  As a result of the
Share  Exchange,   the  former  stockholders  of  Systems  became  the  majority
stockholders of CPS. Accordingly,  Systems became the accounting acquirer of CPS
and the exchange was accounted for as a reverse merger and  recapitalization  of
Systems.  CPS  subsequently  changed  its  name to  Patron  Systems,  Inc.  (the
"Company" or "Patron").

DEVELOPMENT STAGE OPERATIONS

In accordance with Statement of Financial Accounting Standard ("SFAS") No.7, the
Company was considered to be a development stage enterprise through December 31,
2004, as its activities  principally  consisted of raising capital and screening
potential  acquisition  candidates  in the  information  and  homeland  security
segments. As described in Note E, the Company consummated  acquisitions of three
businesses that have developed  technologies,  customer bases and are generating
revenue.  Accordingly,  the Company is no longer  considered to be a development
stage enterprise effective for the nine months ended September 30, 2005.


NOTE C - LIQUIDITY AND FINANCIAL CONDITION

The  accompanying  financial  statements  have been  prepared  assuming that the
Company will  continue as a going  concern.  The Company  incurred a net loss of
$19,910,022  for the nine months ended  September  30, 2005,  which  includes an
aggregate of  $13,661,022  net of non-cash  charges  including the fair value of
common  stock of the Company  issued as  penalties  under  certain  registration
rights  agreements,  the fair value of common stock warrants issued as penalties
to bridge note and  subordinated  note holders,  the conversion  option cost for
bridge note and  subordinated  note holders,  non-cash  interest expense and the
amortization  of  deferred   compensation   under  a  stock  based  compensation
arrangement.  The Company  used net cash flows in its  operating  activities  of
$7,781,408  during the nine months  ended  September  30,  2005.  The  Company's
working capital deficiency at September 30, 2005 amounted to $23,033,903 and the
Company is continuing to experience shortages in working capital. The Company is
also  involved  in  substantial  litigation  and is  being  investigated  by the
Securities and Exchange Commission with respect to certain of its press releases
and its use of form S-8 to  register  shares of common  stock  issued to certain


                                       7
<PAGE>


consultants  (Note Q). The Company cannot provide any assurance that the outcome
of these  matters  will not have a  material  adverse  affect on its  ability to
sustain the business.  These matters raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying financial statements do
not  include  any  adjustments   that  may  result  from  the  outcome  of  this
uncertainty.

The Company expects to continue  incurring losses for the foreseeable future due
to the  inherent  uncertainty  that is related to  establishing  the  commercial
feasibility of technological  products and developing a presence in new markets.
The  Company's  ability  to  successfully   integrate  the  acquired  businesses
described in Note E is critical to the  realization  of its business  plan.  The
Company raised  $9,643,000 of gross proceeds  ($9,015,261 net proceeds after the
payment of certain  transaction  expenses) in financing  transactions during the
nine months ended  September  30, 2005.  The Company  used  $7,781,408  of these
proceeds to fund its operations  (which includes a $1,388,000 escrow deposit for
the  payment of  liabilities  assumed in  business  combinations),  and a net of
$599,728 in investing activities,  which principally includes the cash component
of purchase business  combinations that the Company  consummated during February
and March of 2005,  (net of cash  acquired)  and the  purchase of  property  and
equipment.  In addition,  the Company repaid an aggregate of $668,093 of certain
obligations  due to  certain  officers/stockholders,  $339,256  of  which  was a
reduction of the funds held in the restricted cash escrow account established in
connection with the Entelagent Merger (Note E).

On  September  23,  2005,  the Company  offered its  creditors  and  claimants a
proposed  agreement to issue common stock for amounts owed to the holders of the
Company's  indebtedness   (including  lenders,   past-due  trade  accounts,  and
employees,  consultants and other service  providers with claims for fees, wages
or expenses) (Note S). The Company is currently unable to determine  whether any
of its creditors  will accept the Company's  proposal.  The Company is currently
unable to provide  assurance that any of its creditors will accept this proposal
or that the  acceptance of such  proposal  will  actually  improve the Company's
ability to fund the  further  development  of its  business  plan or improve its
operations.

Subsequent to September 30, 2005 the Company  raised  approximately  $820,000 in
additional gross funds in three capital financing transactions  consummated with
a related party that were used principally to fund operations (Note T).

The  Company is  currently  in the  process of  attempting  to raise  additional
capital and has taken certain steps to conserve its liquidity while it continues
to integrate  the acquired  businesses.  Although  management  believes that the
Company  has  access to capital  resources,  the  Company  has not  secured  any
commitments  for additional  financing at this time nor can the Company  provide
any  assurance  that it will be  successful  in its efforts to raise  additional
capital and/or successfully execute its business plan.


NOTE D - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated  financial  statements  include the accounts of the Company and
its wholly-owned subsidiaries, Entelagent Software Corporation, IDK Enterprises,
Inc. and LucidLine,  Inc. All significant  inter-company  transactions have been
eliminated.

CASH

The Company  considers  all highly  liquid  securities  purchased  with original
maturities of three months or less to be cash.

REVENUE RECOGNITION

The Company derives revenues from the following  sources:  (1) sales of computer
software,  which includes new software licenses and software updates and product
support  revenues and (2) services,  which  include  internet  access,  back-up,
retrieval and restoration services and professional consulting services.


                                       8
<PAGE>


The Company  applies the revenue  recognition  principles  set forth under AICPA
Statement of Position ("SOP") 97-2 "Software Revenue Recognition" and Securities
and  Exchange   Commission  Staff  Accounting   Bulletin  ("SAB")  104  "Revenue
Recognition"  with  respect  to all of its  revenue.  Accordingly,  the  Company
records  revenue when (i)  persuasive  evidence of an arrangement  exists,  (ii)
delivery has occurred, (iii) the vendor's fee is fixed or determinable, and (iv)
collectability is probable.

The Company  generates  revenues  through sales of software  licenses and annual
support subscription  agreements,  which include access to technical support and
software  updates  (if  and  when  available).  Software  license  revenues  are
generated  from  licensing the rights to use products  directly to end-users and
through third party service providers.

Revenues from software license agreements are generally recognized upon delivery
of software to the customer.  All of the Company's  software sales are supported
by a written  contract or other evidence of sale  transaction such as a customer
purchase order.  These forms of evidence  clearly  indicate the selling price to
the  customer,  shipping  terms,  payment  terms  (generally 30 days) and refund
policy,  if any. The selling  prices of these products are fixed at the time the
sale is consummated.

Revenue from post contract customer support arrangements or undelivered elements
are deferred and  recognized at the time of delivery or over the period in which
the services are performed based on vendor specific  objective  evidence of fair
value for such  undelivered  elements.  Vendor  specific  objective  evidence is
typically  based on the price charged when an element is sold  separately or, if
an element is not sold  separately,  on the price  established  by an authorized
level of management,  if it is probable that the price, once  established,  will
not change  before  market  introduction.  The Company uses the residual  method
prescribed  in SOP 98-9 to allocate  revenues to delivered  elements once it has
established vendor-specific evidence for such undelivered elements.

The Company provides its internet access and back-up,  retrieval and restoration
services  under  contractual  arrangements  with terms  ranging from 1 year to 5
years.   These  contracts  are  billed  monthly,   in  advance,   based  on  the
contractually  stated  rates.  At the  inception of a contract,  the Company may
activate the customer's account for a contractual fee that it amortizes over the
term of the  contract  in  accordance  with  Emerging  Issues  Task Force  Issue
("EITF") 00-21 "Revenue Arrangements with Multiple  Deliverables." The Company's
standard contracts are automatically renewable by the customer unless terminated
on 30 days written notice.  Early termination of the contract  generally results
in an early  termination fee equal to the lesser of six months of service or the
remaining term of the contract.

Professional  consulting  services  are  billed  based on the number of hours of
consultant   services  provided  and  the  hourly  billing  rates.  The  Company
recognizes revenue under these arrangements as the service is performed.

Revenue from the resale of third-party  hardware and software is recognized upon
delivery  provided  there are no  further  obligations  to install or modify the
hardware or software. Revenue from the sales of hardware/software is recorded at
the gross amount of the sale when the contract  satisfies  the  requirements  of
EITF 99-19.

ACCOUNTS RECEIVABLE

The  Company  adjusts  its  accounts  receivable  balances  that it  deems to be
uncollectible.  The  allowance  for  doubtful  accounts  is the  Company's  best
estimate  of the amount of  probable  credit  losses in the  Company's  existing
accounts receivable.  The Company reviews its allowance for doubtful accounts on
a monthly basis and  determines  the allowance  based on an analysis of its past
due  accounts.  All  past  due  balances  that  are  over 90 days  are  reviewed
individually  for  collectability.  Account balances are charged off against the
allowance  after all means of collection  have been  exhausted and the potential
for recovery is considered remote.

PROPERTY AND EQUIPMENT

Property and  equipment is stated at cost.  Depreciation  is computed  using the
straight-line  method over the estimated  useful lives of the assets  (generally
three to five  years).  Maintenance  and  repairs  are  charged  to  expense  as
incurred; cost of major additions and betterments are capitalized. When property
and equipment is sold or otherwise disposed of, the cost and related accumulated
depreciation  are eliminated from the accounts and any resulting gains or losses
are reflected in the statement of operations in the period of disposal.


                                       9
<PAGE>


GOODWILL

Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangible  Assets",  requires  that  goodwill be tested for  impairment  at the
reporting unit level (operating segment or one level below an operating segment)
on an annual basis  (September 30th for the Company) and between annual tests in
certain  circumstances.  Application  of the goodwill  impairment  test requires
judgment,  including the identification of reporting units, assigning assets and
liabilities  to reporting  units,  assigning  goodwill to reporting  units,  and
determining the fair value.  Significant judgments required to estimate the fair
value of  reporting  units  include  estimating  future cash flows,  determining
appropriate discount rates and other assumptions. Changes in these estimates and
assumptions  could  materially  affect the  determination  of fair value  and/or
goodwill  impairment  for each  reporting  unit.  We have  recorded  goodwill in
connection  with the  Company's  acquisitions  described  in Note E amounting to
$22,413,300. The Company has determined that no impairment charges are necessary
during the nine months ended September 30, 2005.

LONG LIVED ASSETS

The Company periodically reviews the carrying values of its long lived assets in
accordance  with  SFAS 144  "Long  Lived  Assets"  when  events  or  changes  in
circumstances would indicate that it is more likely than not that their carrying
values may exceed their  realizable  value and records  impairment  charges when
necessary.  The Company has determined that no impairment  charges are necessary
during the nine months ended September 30, 2005.

STOCK OPTION PLANS

As permitted  under SFAS No. 148  "Accounting  for  Stock-Based  Compensation  -
Transition  and  Disclosure,"   which  amended  SFAS  No.  123  "Accounting  for
Stock-Based  Compensation,"  the  Company  has elected to continue to follow the
intrinsic   value  method  in  accounting  for  its   stock-based   compensation
arrangements  as defined by Accounting  Principles  Board ("APB") Opinion No. 25
"Accounting  for  Stock  Issued  to  Employees,"  and  related   interpretations
including Financial  Accounting  Standards Board ("FASB")  Interpretation No. 44
"Accounting  for  Certain   Transactions   Involving  Stock   Compensation,"  an
interpretation of APB No. 25.

The following table  summarizes the proforma  operating  results of the Company,
had compensation  expense for stock options granted to employees been determined
in  accordance  with the fair market value based method  prescribed  by SFAS No.
123. The Company has presented the following disclosures in accordance with SFAS
No. 148.

<TABLE>
<CAPTION>
                                                NINE MONTHS ENDED              THREE MONTHS ENDED
                                                  SEPTEMBER 30,                   SEPTEMBER 30,
                                          ----------------------------    ----------------------------
                                              2005            2004            2005            2004
                                          ------------    ------------    ------------    ------------
<S>                                       <C>             <C>             <C>             <C>
Net Loss, as reported .................   $(19,910,022)   $ (3,316,311)   $(12,677,722)   $ (1,493,188)
  (+) Stock-based compensation cost
  reflected in the financial statements           --              --              --              --
  (-) Stock-based employee compensation
  expense under the fair value method.         375,000         613,333         225,000         204,444
                                          ------------    ------------    ------------    ------------
Proforma Net Loss .....................   $(20,285,022)   $ (3,929,644)   $(12,902,722)   $ (1,697,632)
                                          ============    ============    ============    ============
Net Loss per Share-
  Basic and Diluted, as reported ......   $      (0.35)   $      (0.09)   $      (0.21)   $      (0.04)
                                          ============    ============    ============    ============
  Basic and Diluted, proforma .........   $      (0.35)   $      (0.10)   $      (0.21)   $      (0.04)
                                          ============    ============    ============    ============

Weighted Average Number of Shares
Outstanding:
  Basic and Diluted ...................     57,284,490      38,610,646      61,499,103      39,010,560
                                          ============    ============    ============    ============
</TABLE>


                                       10
<PAGE>


NON-EMPLOYEE STOCK BASED COMPENSATION

The cost of stock based compensation awards issued to non-employees for services
are  recorded  at  either  the  fair  value  of  the  services  rendered  or the
instruments  issued in exchange  for such  services,  whichever  is more readily
determinable,  using the measurement  date guidelines  enumerated in EITF 96-18,
"Accounting for Equity  Instruments  That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services."

COMMON STOCK PURCHASE WARRANTS

The Company  accounts for the issuance of common stock purchase  warrants issued
with  registration  rights  in  accordance  with the  provisions  of EITF  00-19
"Accounting  for Derivative  Financial  Instruments  Indexed to, and Potentially
Settled in, a Company's Own Stock."

Based on the  provisions  of EITF 00-19,  the Company  classifies  as equity any
contracts that (i) require physical  settlement or net-share  settlement or (ii)
gives the  company a choice of  net-cash  settlement  or  settlement  in its own
shares (physical settlement or net-share settlement).  The Company classifies as
assets  or  liabilities  any  contracts  that (i)  require  net-cash  settlement
(including a requirement  to net cash settle the contract if an event occurs and
if that event is outside the control of the company) (ii) give the  counterparty
a choice of net-cash settlement or settlement in shares (physical  settlement or
net-share settlement).

INCOME TAXES

The Company accounts for income taxes pursuant to SFAS No. 109,  "Accounting for
Income  Taxes".  Deferred  taxes  arise from  temporary  differences,  primarily
attributable  to the use of the cash method for tax purposes and accrual  method
for book purposes and net operating  loss  carry-forwards.  The Company  records
valuation  allowances for deferred tax assets when circumstances  indicate it is
more  likely  than not that the  Company  will not  realize  the  benefit of its
deferred tax assets.

NET LOSS PER SHARE

Basic  net loss  per  common  share  is  computed  by  dividing  net loss by the
weighted-average  number of common shares outstanding during the period. Diluted
net loss per common share also  includes  common stock  equivalents  outstanding
during  the  period if  dilutive.  Diluted  net loss per  common  share has been
computed by dividing net loss by the  weighted-average  number of common  shares
outstanding  without an assumed increase in common shares outstanding for common
stock equivalents; as such common stock equivalents are anti-dilutive.

As a result of the  consummation of the Share Exchange  described in Note B, the
Company  included  1,200,000  stock  options with an exercise  price of $.01 per
share that it issued to certain  employees  during  2002 in its  calculation  of
weighted-average number of common shares outstanding for all periods presented.

Net loss per common share excludes the following  outstanding options,  warrants
and convertible notes as their effect would be anti-dilutive:

                                                           SEPTEMBER 30,
                                                 -------------------------------
                                                    2005                 2004
                                                 ----------           ----------
Options ..............................           11,190,000            3,925,000
Warrants .............................            9,639,080               15,000
Convertible Notes ....................           30,720,000              120,462
                                                 ----------           ----------
                                                 51,549,080            4,060,462
                                                 ==========           ==========


                                       11
<PAGE>


USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

The  carrying  amounts  reported  in  the  balance  sheet  for  cash,   accounts
receivable,  accounts payable accrued  expenses,  advances from stockholders and
all note obligations  classified as current  liabilities  approximate their fair
values  based on the  short-term  maturity of these  instruments.  The  carrying
amounts of the Company's  convertible and subordinated note  obligations,  stock
repurchase  obligation  and common stock subject to put right  approximate  fair
value as such instruments feature contractual interest rates that are consistent
with  current  market  rates  of  interest  or have  effective  yields  that are
consistent with instruments of similar risk, when taken together with any equity
instruments concurrently issued to holders.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In  January  2003,  the  Financial   Accounting   Standards  Board  issued  FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
This  interpretation  of  Accounting  Research  Bulletin  No. 51,  "Consolidated
Financial  Statements," provides guidance for identifying a controlling interest
in a variable  interest  entity  ("VIE")  established by means other than voting
interest.  FIN 46 also requires  consolidation  of a VIE by an  enterprise  that
holds such  controlling  interest.  In December  2003,  the FASB  completed  its
deliberations  regarding  the proposed  modifications  to FIN No., 46 and issued
Interpretation  Number 46R,  "Consolidation  of Variable  Interest Entities - an
Interpretation  of ARB 51" ("FIN No. 46 R"). The  decisions  reached  included a
deferral of the effective date and provisions  for additional  scope  exceptions
for certain types of variable interests.  Application of FIN No. 46R is required
in  financial  statements  of public  entities  that have  interests in VIE's or
potential  VIE's commonly  referred to as  special-purpose  entities for periods
ending after  December  15, 2003.  Application  by public  issuers'  entities is
required in all interim and annual financial statements for periods ending after
December 15,  2004.  The adoption of this  pronouncement  did not have  material
effect on the Company's financial statements.

In December  2004,  the FASB issued SFAS No. 123R "Share  Based  Payment".  This
statement is a revision of SFAS Statement No. 123,  "Accounting  for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees",  and its related  implementation  guidance.  SFAS 123R addresses all
forms of share based  payment  ("SBP")  awards  including  shares  issued  under
employee  stock  purchase  plans,  stock  options,  restricted  stock  and stock
appreciation  rights.  Under SFAS 123R, SBP awards result in a cost that will be
measured at fair value on the awards' grant date,  based on the estimated number
of awards that are  expected  to vest and will result in a charge to  operations
for  stock-based  compensation  expense.  The charge  will be  reflected  in the
Company's  Statements  of  Operations  during  periods in which such charges are
recorded,  but will not affect its Balance  Sheets or  Statements or Cash Flows.
SFAS  123R  is  effective  for  public  entities  that  file as  small  business
issuers--as  of the beginning of the first  reporting  period of the fiscal year
that begins after  December 15, 2005. The Company is currently in the process of
evaluating the effect that the adoption of this  pronouncement  will have on its
financial statements.

In December  2004,  the FASB issued SFAS No.  153,  "Exchanges  of  Non-monetary
Assets".  SFAS 153 amends APB  Opinion No. 29 to  eliminate  the  exception  for
non-monetary  exchanges  of similar  productive  assets and  replaces  it with a
general  exception  for  exchanges  of  non-monetary  assets  that  do not  have
commercial  substance.  A non-monetary  exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of SFAS 153 are effective for non-monetary asset
exchanges  occurring in fiscal periods  beginning  after June 15, 2005.  Earlier
application is permitted for  non-monetary  asset exchanges  occurring in fiscal
periods  beginning after December 16, 2004. The provisions of this statement are
intended be applied  prospectively.  The adoption of this  pronouncement  is not
expected to have a material effect on the Company's financial statements.


                                       12
<PAGE>


EITF Issue No. 04-8,  "The Effect of  Contingently  Convertible  Instruments  on
Diluted  Earnings  per Share." The EITF  reached a consensus  that  contingently
convertible  instruments,  such as contingently  convertible debt,  contingently
convertible  preferred  stock,  and other such securities  should be included in
diluted earnings per share (if dilutive)  regardless of whether the market price
trigger has been met. The  consensus  became  effective  for  reporting  periods
ending after December 15, 2004. The adoption of this  pronouncement did not have
a material effect on the Company's financial statements.


NOTE E - BUSINESS COMBINATIONS

MERGER WITH COMPLETE SECURITY SOLUTIONS, INC.

On February 25, 2005, pursuant to the filing of an Agreement and Plan of Merger,
the Company's  merger with Complete  Security  Solutions,  Inc.  ("CSSI") became
effective.  The merger was  consummated  pursuant to a  definitive  Supplemental
Agreement and the Agreement and Plan of Merger,  entered into as of February 24,
2005,  each among the Company,  CSSI  Acquisition  Co. I, Inc.,  a  wholly-owned
subsidiary  of the Company and CSSI.  Pursuant to the terms of the  Supplemental
Agreement and Agreement and Plan of Merger with CSSI,  CSSI  Acquisition  Co. I,
Inc. merged with and into CSSI, with CSSI surviving the merger as a wholly-owned
subsidiary of the Company.

CSSI sells computer software that supports real-time secure collection, delivery
and sharing of field-based  report  information for public safety agencies.  The
Company  believes  that  CSSI's   electronic   forms  technology   provides  law
enforcement and other justice  agencies with secure,  real-time  access to field
reporting  data  for  use  inside  a  department  or  in a  multi-jurisdictional
information  sharing system.  The Company acquired CSSI because it believes that
such  technologies  fit within its  strategic  plan of building a business  that
addresses the urgency of homeland and information security initiatives.

In  connection  with the CSSI merger,  the Company  issued  7,500,000  shares of
common stock in exchange for the outstanding shares of the common stock of CSSI,
and  subordinated   promissory  notes  in  the  aggregate  principal  amount  of
$4,500,000 (the "Subordinated  Notes") and warrants to purchase 2,250,000 shares
of common stock ("Purchase  Warrants") in exchange for the outstanding shares of
the preferred stock of CSSI. The Purchase Warrants have a term of 5 years and an
exercise price of $0.70 per share. The Subordinated  Notes and Purchase Warrants
were issued to Apex Investment Fund V, L.P.  ("Apex"),  The Northwestern  Mutual
Life Insurance Company ("Northwestern"),  and Advanced Equities Venture Partners
I, L.P ("Advanced Equities").

The Subordinated Notes issued to the holders of the outstanding  preferred stock
of CSSI  have an  initial  term of 120  days  (due on June 25,  2005),  with the
Company's  option to extend  the term for an  additional  60 days to August  24,
2005. The Subordinated  Notes are interest free and  automatically  convert into
the  securities  offered  by the  Company at the first  closing of a  subsequent
financing  for the Company,  for such number of offered  securities  as could be
purchased for the principal amount being converted.

The Company did not redeem the  Subordinated  Notes on August 24, 2005 and, as a
result,  the notes became  automatically  convertible into 3.84 shares of common
stock for each $1 of principal then  outstanding in accordance with the original
note agreement.  Accordingly,  the Company recorded a charge of $4,500,000 based
upon the  intrinsic  value of this  conversion  option  measured at the original
issuance  date  of the  note in  accordance  with  EITF  00-27  "Accounting  for
Convertible  Securities  with  Beneficial  Conversion  Features or  Contingently
Adjustable  Conversion  Ratios" ("EITF  00-27").  The Company has agreed to file
with the SEC, a registration  statement for the resale of the restricted  shares
of the Company's  common stock issuable upon exercise of the  conversion  option
that would be issued in this transaction, on a best efforts basis.

The Company has agreed to register the resale of the 7,500,000  shares of common
stock  issued to the  holders of the  outstanding  common  stock of CSSI and the
2,250,000  shares of common  stock  issuable  upon the  exercise of the warrants
issued to the holders of the outstanding preferred stock of CSSI at such time as
the Company next files a registration statement with the Securities and Exchange
Commission ("SEC") on a best efforts basis.


                                       13
<PAGE>


MERGER WITH LUCIDLINE, INC.

On February 25, 2005, pursuant to the filing of an Agreement and Plan of Merger,
the Company's merger with LucidLine,  Inc.  ("LucidLine") became effective.  The
merger was consummated pursuant to a definitive  Supplemental  Agreement and the
Agreement  and Plan of Merger  entered into as of February 24, 2005,  each among
the Company,  LL Acquisition I Corp.,  a wholly-owned  subsidiary of the Company
and LucidLine. Pursuant to the terms of the Supplemental Agreement and Agreement
and Plan of Merger with LucidLine,  LL Acquisition I Corp.  merged with and into
LucidLine,  with LucidLine surviving the merger as a wholly-owned  subsidiary of
the Company.

LucidLine  provides  high-speed  Internet access,  synchronized  remote back-up,
retrieval,  and  restoration  services  to small and  mid-size  businesses.  The
Company  acquired  LucidLine  because it believes that  LucidLine's  information
protection  technologies  fit within its  strategic  plan of building a business
that addresses the urgency of homeland and information security initiatives.

In connection with the LucidLine merger,  the Company issued 4,400,000 shares of
common stock and $200,000 of cash, in exchange for all of the outstanding shares
of  LucidLine's  common stock.  The Company has agreed to register the resale of
the shares of common stock issued to the holders of the outstanding common stock
of  LucidLine at such time as the Company  next files a  registration  statement
with the SEC on a best efforts basis.

MERGER WITH ENTELAGENT SOFTWARE CORP.

On  November  24,  2002,  the  Company,  ESC  Acquisition,  Inc.,  a  California
corporation and wholly-owned subsidiary of Patron ("Entelagent  Mergerco"),  and
Entelagent Software Corp., a California corporation ("Entelagent"), entered into
an Agreement and Plan of Merger,  (the "Entelagent  Merger  Agreement")  whereby
Entelagent  Mergerco would be merged with and into  Entelagent  with  Entelagent
surviving as a wholly-owned subsidiary of the Company (the "Entelagent Merger").
The Company, Entelagent Mergerco and Entelagent also concurrently entered into a
Supplemental Agreement (the "Entelagent Supplemental Agreement").

On February 24, 2005, the Company entered into a definitive Amended and Restated
Supplemental  Agreement  pursuant to which Entelagent  Mergerco would merge with
and into  Entelagent,  with  Entelagent  surviving the merger as a  wholly-owned
subsidiary  of the  Company.  On March 30,  2005,  pursuant  to the filing of an
Amended  and  Restated  Agreement  and  Plan of  Merger,  Patron's  merger  with
Entelagent  became  effective.  The Amended and Restated  Agreement  and Plan of
Merger amended and restated the Entelagent Merger Agreement.

Entelagent   provides  flexible  and  scalable  real-time   content-aware  email
monitoring and  post-event  review of e-mail  messages and their  attachments as
well as infrastructure for knowledge  management of archived e-mail messages and
attachments  in all media.  Entelagent's  e-mail content  monitoring  technology
addresses the need for  comprehensive  internal  security  measures to safeguard
company  intellectual  capital.  The  Company  acquired  Entelagent  because  it
believes that Entelagent's  information surveillance and protection technologies
fit within its strategic  plan of building a business that addresses the urgency
of homeland and information security initiatives.

In connection with the Entelagent Merger, the Company issued 3,000,000 shares of
the Company's common stock in exchange for all of the outstanding  shares of the
capital  stock of  Entelagent.  The Company has agreed to register the resale of
the  3,000,000  shares of common stock issued to the holders of the  outstanding
capital  stock  of  Entelagent  at  such  time  as  the  Company  next  files  a
registration  statement  with  the SEC on a best  efforts  basis.  In  addition,
pursuant to the terms of the Amended and Restated  Supplemental  Agreement,  the
Company also agreed to (i) issue to certain  officers,  directors,  stockholders
and creditors of Entelagent,  in  consideration of amounts owed by Entelagent to
such parties,  promissory notes in the aggregate principal amount of $2,640,000,
with  interest  payable  thereon at a rate of 8% per annum and maturing one year
after the  completion  of the  merger  and (ii) pay  $1,388,000  in  outstanding
liabilities of Entelagent from the net proceeds of the Interim Bridge  Financing
I completed on February 28, 2005. Accordingly,  the Company placed $1,388,000 of
the  proceeds  it  received  from  the  Interim  Bridge  Financing  I  financing
transaction in an escrow account to be specifically used for the payment of such
liabilities.  The non-disbursed  funds as of September 30, 2005 are presented as
restricted cash in the accompanying balance sheet.


                                       14
<PAGE>


Subsequent  to the date of the  acquisition,  the Company  modified its purchase
price allocation to offset approximately $52,000 of previously existing advances
against the note, which reduced the aggregate balance of the note to $2,588,000.

BUSINESS COMBINATION ACCOUNTING

The Company  accounted for its  acquisitions  of CSSI,  LucidLine and Entelagent
using the purchase  method of  accounting  prescribed  under SFAS 141  "Business
Combinations."  Under the purchase method, the acquiring  enterprise records any
purchase  consideration  issued to the sellers of the acquired business at their
fair values. The aggregate of the fair value of the purchase  consideration plus
any  direct  transaction  expenses  incurred  by  the  acquiring  enterprise  is
allocated  to  the  assets  acquired  (including  any  separately   identifiable
intangibles)  and liabilities  assumed based on their fair values at the date of
acquisition. The excess of cost of the acquired entities over the fair values of
identifiable  assets acquired and liabilities  assumed was recorded as goodwill.
The results of operations for each of the acquired companies following the dates
of each business  combination is included in the Company consolidated results of
operations for the quarter ended September 30, 2005.

The Company  evaluated each of the  aforementioned  transactions to identify the
acquiring entity as required under SFAS 141 for business  combinations  effected
through an exchange of equity  interests.  Based on such  evaluation the Company
determined  that  it  was  the  acquiring   entity  in  each   transaction  (and
cumulatively  for all  transactions)  as (1) the larger  portion of the relative
voting  rights  in the  Company  after  each  combination  was  retained  by its
previously  existing  stockholders,  (2) the previously  existing  stockholders,
through their retention of a majority of voting rights,  retained the ability to
elect or appoint a voting majority of the governing body of the combined entity,
and (3) under the terms of the exchange of equity securities, the Company paid a
premium over the market value of the equity  securities  of the other  combining
entities.

The following  table  provides a breakdown of the purchase  price  including the
fair value of  purchase  consideration  issued to the  sellers  of the  acquired
business and direct  transaction  expenses incurred by the Company in connection
with consummating these transactions:

<TABLE>
<CAPTION>
                                    CSSI       LUCIDLINE     ENTELAGENT       TOTAL
                                -----------   -----------   -----------   -----------
<S>                             <C>           <C>           <C>           <C>
Cash ........................   $      --     $   200,000   $      --     $   200,000
Common Stock ................     6,375,000     3,740,000     2,550,000    12,665,000
Subordinated promissory notes     4,500,000          --            --       4,500,000
Common stock warrants .......     1,912,500          --            --       1,912,500
Transaction expenses ........       398,128       154,611       359,894       912,633
                                -----------   -----------   -----------   -----------
   Total Purchase Price .....   $13,185,628   $ 4,094,611   $ 2,909,894   $20,190,133
                                ===========   ===========   ===========   ===========
</TABLE>

The fair value of common stock  issued to the sellers as purchase  consideration
was determined in accordance with the provisions of EITF 99-12 "Determination of
the  Measurement  Date for the Market Price of Acquirer  Securities  Issued in a
Purchase Business  Combination." The fair value of subordinated  notes issued to
the  sellers  as  purchase  consideration  is  considered  to be  equal to their
principal  amounts  due to the  short-term  maturity of those  instruments.  The
Company  calculated the fair value of common stock purchase  warrants  issued to
the sellers as purchase  consideration  using the  Black-Scholes  option-pricing
model.

Transaction expenses, which include legal fees and transaction advisory services
directly  related to the  acquisitions  amount to  $912,633.  Such fees  include
$657,633  paid in cash and $255,000  for the fair value of 300,000  common stock
purchase  warrants  issued  to  Laidlaw  & Company  UK Ltd.  ("Laidlaw")  in its
capacity as a transaction advisor.

PRELIMINARY PURCHASE PRICE ALLOCATION

Under business combination accounting,  the total preliminary purchase price was
allocated to CSSI's and  LucidLine's  net tangible and  identifiable  intangible
assets based on their estimated fair values as of February 25,


                                       15
<PAGE>


2005. The total  preliminary  purchase price  allocation  for  Entelagent's  net
tangible and  identifiable  intangible  assets was based on their estimated fair
values as of March 30, 2005.  The  preliminary  allocation of the purchase price
for these three  acquisitions  is set forth  below.  The excess of the  purchase
price over the net tangible and identifiable  intangible  assets was recorded as
goodwill.

The  Company  assumed  $476,594  of  payroll  and sales tax  liabilities  in its
acquisition of Entelagent  that were in arrears at the date the  transaction was
consummated  (Note M). These liabilities have been estimated at their fair value
in the preliminary purchase price allocation. The settlement of these amounts is
in negotiation  and could change,  as the outcome of any proposed  settlement is
unknown at the date of acquisition.

<TABLE>
<CAPTION>
                                     CSSI         LUCIDLINE       ENTELAGENT         TOTAL
                                 ------------    ------------    ------------    ------------
<S>                              <C>             <C>             <C>             <C>
Fair value of tangible assets:
 Cash ........................   $    399,636    $      9,563    $      7,198    $    416,397
 Accounts receivable .........         27,791          22,936          84,918         135,645
 Employee receivables ........        111,773           2,000          27,500         141,273
 Other current assets ........         45,177             326           5,990          51,493
                                 ------------    ------------    ------------    ------------
   Total current assets ......        584,377          34,825         125,606         744,808
 Property and Equipment ......         62,000          61,000          12,000         135,000
 Other assets ................           --              --              --              --
 Advances to prospective
    affiliates ...............      2,674,689            --              --         2,674,689
                                 ------------    ------------    ------------    ------------
   Total tangible assets .....      3,321,066          95,825         137,606       3,554,497

Liabilities assumed:
 Accounts payable ............       (128,854)        (32,473)       (345,769)       (507,096)
 Advances from prospective
    affiliate ................           --          (829,032)     (2,363,359)     (3,192,391)
 Accrued expenses and other
    current liabilities ......       (391,141)           --        (4,340,246)     (4,731,387)
                                 ------------    ------------    ------------    ------------
   Total current liabilities .       (519,995)       (861,505)     (7,049,374)     (8,430,874)
 Long term liabilities .......           --          (102,460)       (345,330)       (447,790)
                                 ------------    ------------    ------------    ------------
   Total liabilities assumed .       (519,995)       (963,965)     (7,394,704)     (8,878,664)
                                 ------------    ------------    ------------    ------------
Net tangible assets acquired .      2,801,071        (868,140)     (7,257,098)     (5,324,167)

Value of excess allocated to:
 Developed technology ........        670,000            --         1,900,000       2,570,000
 Customer relationships ......        180,000            --              --           180,000
 Trademarks and tradenames ...         55,000            --           106,000         161,000
 In-process research and
    development ..............        190,000            --              --           190,000
 Goodwill ....................      9,289,557       4,962,751       8,160,992      22,413,300
                                 ------------    ------------    ------------    ------------
Purchase Price ...............   $ 13,185,628    $  4,094,611    $  2,909,894    $ 20,190,133
                                 ============    ============    ============    ============
</TABLE>

The purchase price  allocation is preliminary,  based on management's  estimates
and a valuation  study performed by an independent  outside  appraisal firm that
has not yet been finalized.  The Company considered its intention for future use
of the acquired assets, analyses of the historical financial performance of each
of the acquired  businesses and estimates of future performance of each acquired
businesses'  products and services.  The Company made certain adjustments during
the  nine  months  ended  September  30,  2005 to its  original  purchase  price
allocation as a result of having negotiated  settlements of certain  liabilities
that it assumed in its business combination with Entelagent and reevaluating the
carrying amounts of certain accounts  receivable  balances  recorded in purchase
accounting.  These  changes  resulted  in a net  decrease  of  $110,663  to  the
Company's previous  determination of goodwill. In addition,  the Company reduced
both  other  current  assets  and  current  liabilities  by  $27,500 to offset a
prepayment of a liability that occurred prior to the acquisition.  The Company's
final determination of the purchase price allocation could


                                       16
<PAGE>


result  in  additional  changes  to the  amounts  reflected  in its  preliminary
estimate.  The Company is in the process of finalizing the information  required
to file its Form 8-K with the SEC and will do so as soon as practicable.

The Company,  as of September 30, 2005,  evaluated  the carrying  amounts of its
goodwill and other  intangible  assets it recorded in its business  combinations
with  Entelagent,  LucidLine  and  CSSI.  The  Company  made its  evaluation  to
determine  whether  conditions  exist that would indicate that reductions in the
carrying amounts of these assets would be required. The Company concluded, based
upon  (a) its  hiring  of a  full-time  sales  staff  and (b)  recent  marketing
initiatives  it has  undertaken  as part of its plan to  integrate  the acquired
business, that demand for its products is significant.  Accordingly, the Company
believes  there are  currently no conditions  that would  indicate that carrying
amounts of its goodwill and amortizable intangible assets is impaired.

The  Company  has  established  December  31, as the date to perform  its annual
evaluation of goodwill and  intangible  assets in  accordance  with SFAS 142 and
SFAS 144, which valuation will be formally  conducted by an outside  specialist.
The Company intends to continue  monitoring the carrying amounts of these assets
to determine whether  circumstances change and, if necessary,  record impairment
charges if required.

PROFORMA FINANCIAL INFORMATION

The unaudited  financial  information in the table below summarizes the combined
results of operations of the Company and CSSI,  LucidLine and  Entelagent,  on a
proforma  basis,  as if the  companies  had been combined as of the beginning of
each of the periods presented.

The unaudited proforma financial information for the nine months ended September
30, 2005  combines the  historical  results for Patron for the nine months ended
September  30, 2005 and the  historical  results for CSSI and  LucidLine for the
period from January 1, 2005 to February 24, 2005 and the historical  results for
Entelagent  for the period from January 1, 2005 to March 30, 2005. The unaudited
proforma financial results for the nine months ended September 30, 2004 combines
the historical  results for Patron for this period with the  historical  results
for CSSI, Entelagent and LucidLine for the nine months ended September 30, 2004.

                                                     2005               2004
                                                 ------------      ------------
Total revenues .............................     $    498,172      $    940,208
Net loss ...................................      (21,276,483)       (6,244,863)
Weighted average shares outstanding
   on a proforma basis .....................       60,703,538        55,610,931
Proforma net loss per share, basic
   and diluted .............................     $      (0.35)     $      (0.11)


The proforma financial information is presented for informational  purposes only
and is not indicative of the results of operations that would have been achieved
if the acquisitions of these three companies had taken place at the beginning of
each of the periods presented.


NOTE F - OTHER CURRENT ASSETS

Other current assets consist of the following:

                                                             SEPTEMBER 30,
                                                                 2005
                                                              ----------
Employee receivables ...................................      $   18,371
Prepaid expenses .......................................         140,055
Deposits ...............................................          28,021
                                                              ----------
  Other current assets .................................      $  186,447
                                                              ==========


NOTE G - PROPERTY AND EQUIPMENT

                                                             SEPTEMBER 30,
                                                                 2005
                                                              ----------
Computers ..............................................      $  160,197
Furniture and Fixtures .................................          39,949
                                                              ----------
    sub-total ..........................................         200,146
less: accumulated depreciation .........................         (40,134)
                                                              ----------
    Property and equipment, net ........................      $  160,012
                                                              ==========

Depreciation expense for the nine months ended September 30, 2005 was $40,389.


                                       17
<PAGE>


NOTE H - DEFERRED FINANCING COSTS

Deferred   financing  costs,  which  amount  to  $3,000  are  presented  net  of
amortization and include the following:

<TABLE>
<CAPTION>
                                                     Interim Bridge Financing
                                    --------------------------------------------------------
                                      Bridge I      Bridge II     Bridge III        Total
                                    -----------    -----------    -----------    -----------
<S>                                 <C>            <C>            <C>            <C>
Cash fees paid to agent and
  investor to originate loans ...   $   316,579    $   305,160    $     6,000    $   627,739

Fair value of warrants issued to:
  Placement agent ...............       297,500         80,867           --          378,367
  Investors upon the extension
    of due dates ................       822,500           --             --          822,500
                                    -----------    -----------    -----------    -----------
                                      1,436,579        386,027          6,000      1,828,606
Accumulated amortization ........    (1,436,579)      (386,027)        (3,000)    (1,825,606)
                                    -----------    -----------    -----------    -----------
Deferred financing costs, net ...   $      --      $      --      $     3,000    $     3,000
                                    ===========    ===========    ===========    ===========
</TABLE>

The  Company  incurred  $316,579  of cash fees and  $297,500  of  non-cash  fees
representing the fair value of 350,000 common stock purchase  warrants issued to
Laidlaw in its capacity as the placement agent in the $3,500,000  Interim Bridge
Financing I completed in February  2005.  Fees incurred in  connection  with the
Interim  Bridge 1 financing  were fully  amortized  during the nine months ended
September 30, 2005.

On June 28,  2005,  the  Company  elected to extend the due date of the  Interim
Bridge  Financing I notes in exchange  for  1,750,000  additional  common  stock
purchase  warrants (the "Bridge I Extension  Warrants")  that were issued to the
investors in this transaction.  The aggregate fair value of the warrants,  which
amounted to $822,500  was  recorded as a deferred  financing  cost and was fully
amortized over the 60-day extension period, which ended on August 27, 2005.

The  Company  incurred  cash  fees of  $305,160  and  non-cash  fees of  $80,867
representing the fair value of 152,580 common stock purchase  warrants issued to
Laidlaw & Company  (UK)  Ltd.  in its  capacity  as the  placement  agent in the
$2,543,000  Interim Bridge Financing II (Note K). These deferred financing costs
were fully amortized during the nine months ended September 30, 2005.

The Company  paid $6,000 to Advanced  Equities on July 29, 2005 with  respect to
transaction  services  performed in connection with the Interim Bridge Financing
III completed in September  2005. The fees are being  amortized over the term of
the note to November 25, 2005.

The fair value of all of the  aforementioned  warrants was determined  using the
Black-Scholes  option-pricing model. Aggregate amortization expense with respect
to deferred  financing  costs  amounted to $1,825,606  for the nine months ended
September  30, 2005 and is included  as a component  of interest  expense in the
accompanying statement of operations.


NOTE I - INTANGIBLE ASSETS

The  components of  intangible  assets as of September 30, 2005 are set forth in
the following table:


                                       18
<PAGE>


                                                        NET BOOK    ESTIMATED
                             FAIR VALUE    ACCUMULATED  VALUE AT      USEFUL
                           AND ADDITIONS  AMORTIZATION  9/30/2005      LIFE
                             ----------   ----------   ----------   ----------
Developed technology .....   $2,662,547   $  272,792   $2,389,755   5 years
Customer relationships ...      180,000       26,250      153,750   4 years
Trademarks and tradenames       161,000       21,272      139,728   4 years
In-process research and
   development ...........      190,000       22,169      167,831   5 years
                             ----------   ----------   ----------
                             $3,193,547   $  342,483   $2,851,064
                             ==========   ==========   ==========

The Company  classifies  amortization of developed  technology as a component of
cost of sales.

AMORTIZATION OF INTANGIBLE ASSETS

The  amortization of intangible  assets will result in the following  additional
expense by year:

                                           INTANGIBLE
                                          AMORTIZATION
                                          ------------
        October 1, 2005 to
        December 31, 2005                 $  193,186

     YEARS ENDED DECEMBER 31:
     ------------------------
               2006                          655,759
               2007                          655,759
               2008                          655,759
               2009                          584,718
               2010                          105,883
                                          -----------
                                          $2,851,064
                                          -----------


NOTE J - DEMAND NOTES PAYABLE

Through  December 31, 2004, the Company borrowed an aggregate amount of $695,000
from four unrelated parties. These notes are payable on demand and bear interest
at the rate of 10% per  annum.  Interest  expense  on these  notes  amounted  to
$53,625  for  each of the  nine  months  ended  September  30,  2005  and  2004,
respectively.

Demand  notes  also  include  a  note  payable  to  Lok  Technology  secured  by
Entelagent's accounts receivable. At September 30, 2005, the balance outstanding
on this note is $312,556.  The note bears interest at 15% per annum. Interest on
this note amounted to $25,163 for the nine months ended September 30, 2005.


NOTE K - BRIDGE NOTES PAYABLE

INTERIM BRIDGE FINANCING I

On February 28, 2005, the Company completed a $3,500,000 financing (the "Interim
Bridge Financing I") through the issuance of 10% Senior  Convertible  Promissory
Notes (the "Bridge I Notes") and warrants to purchase up to 1,750,000  shares of
the Company's common stock ("Bridge I Warrants").  The warrants have a term of 5
years and an exercise price of $0.70 per share.  The aggregate fair value of the
Bridge I Warrants amounts to $1,487,500.  Prior to final maturity,  the Bridge I
Notes may be  converted  into  securities  that would be  issuable  at the first
closing of a subsequent  financing  by the  Company,  for such number of offered
securities that could be purchased for the principal amount being converted. The
Bridge I Notes  had an  initial  term of 120 days  (due on June 28,  2005)  with


                                       19
<PAGE>


interest at a  contractual  rate of 10% per annum and featured an option for the
Company to extend the term for an additional 60 days to August 27, 2005.

In accordance with APB 14, the Company  allocated  $2,456,140 of the proceeds to
the Bridge I Notes and  $1,043,860  of proceeds  to the Bridge I  Warrants.  The
difference  between  the  carrying  amount  of the  Bridge  I  Notes  and  their
contractual redemption amount was accreted as interest expense to June 28, 2005,
their  earliest date of  redemption.  Accretion of the  aforementioned  discount
amounted to  $1,043,860  for the nine  months  ended  September  30, 2005 and is
included as a component  of interest  expense in the  accompanying  statement of
operations.

On June 28, 2005, the Company elected to extend the contractual maturity date of
the Bridge I Notes for an  additional  60 days to August 27, 2005,  which caused
the  contractual  interest rate to increase to 12% per annum.  In addition,  the
Company was required to issue the 1,750,000  additional  warrants (the "Bridge I
Extension  Warrants") to purchase such number of shares of common stock equal to
1/2 of a share for each  $1.00 of  principal  amount  outstanding.  The Bridge I
Extension  Warrants  have a term of 5 years and an  exercise  price of $0.70 per
share.  The Bridge I Warrants are included in Deferred  Financing Costs at their
fair value, which amounts to $822,500.

The  Company  did not redeem the  Bridge I Notes on August  27,  2005 and,  as a
result,  the notes became  automatically  convertible into 3.84 shares of common
stock for each $1 of principal then  outstanding in accordance with the original
note agreement.  Accordingly,  the Company recorded a charge of $3,500,000 based
upon the  intrinsic  value of this  conversion  option  measured at the original
issuance date of the note in accordance with EITF 00-27.  The Company has agreed
to file with the SEC, a registration  statement for the resale of the restricted
shares of the Company's  common stock  issuable upon exercise of the  conversion
option that would be issued in this transaction, on a best efforts basis.

Contractual  interest expense on the Bridge I Notes amounted to $204,167 for the
nine months ended  September 30, 2005 and is included as a component of interest
expense in the accompanying statement of operations.

The  Company  sold  these  securities  to  thirty-three   accredited   investors
introduced by Laidlaw, the placement agent in the Interim Bridge Financing I. As
described in Note H, the Company  incurred  $614,079 of fees in connection  with
this transaction  including  $297,500 for the fair value of warrants to purchase
up to  350,000  shares of the  Company's  common  stock  (the  "Placement  Agent
Warrants") at an exercise price of $0.70 per share.

INTERIM BRIDGE FINANCING II

On June 6, 2005,  the Company  completed a $2,543,000  financing  (the  "Interim
Bridge  Financing  II")  through  the  issuance  of (i) 10%  Junior  Convertible
Promissory  Notes (the  "Bridge II Notes")  and (ii)  warrants to purchase up to
1,271,500 shares of common stock (the "Bridge II Warrants"). The warrants have a
term of 5 years and an exercise  price of $0.60 per share.  The  aggregate  fair
value of the Bridge II Warrants  amounts to  $673,895.  Prior to  maturity,  the
Junior Convertible Promissory Notes may be converted into the securities offered
by the Company at the first  closing of a subsequent  financing for the Company,
for such number of offered  securities  as could be purchased  for the principal
amount being converted.

In accordance with APB 14, the Company  allocated  $2,010,277 of the proceeds to
the Bridge II Notes and  $532,723  of proceeds  to the Bridge II  Warrants.  The
difference  between  the  carrying  amount  of the  Bridge  II Notes  and  their
contractual  redemption  amount is being accreted as interest expense to October
3, 2005,  their  earliest date of  redemption.  Accretion of the  aforementioned
discount  amounted to $532,723 for the nine months ended  September 30, 2005 and
is included as a component of interest expense in the accompanying  statement of
operations.

The  Bridge II Notes  have an  initial  term of 120 days (due on  various  dates
beginning  October 3, 2005) with interest at 10% per annum and feature an option
for the Company to extend the term for an  additional  60 days to various  dates
beginning  December 2, 2005.  Upon the  extension  of the  maturity  date of the
Bridge II Notes, the contractual  interest rate would increase to 12% per annum,
and the Company  would be required to issue  warrants  (the "Bridge II Extension
Warrants") to purchase such number of shares of the Company's common stock equal
to one-half of a share for each $1.00 of principal then outstanding.  The Bridge
II Extension Warrants issuable upon extension of the maturity date of the Junior
Convertible  Promissory notes feature a term of 5 years and an exercise price of
$0.60 per


                                       20
<PAGE>


share. In addition, if the Bridge II Notes are not paid in full on or before the
extended  maturity date, each note becomes  convertible  into 3.84 shares of the
Company's  common  stock  for each  $1.00 of  principal  then  outstanding.  The
intrinsic value of this  conversion  option measured at the issuance date of the
notes  amounts to  $2,543,000  and would be  recognized  as interest  expense in
accordance  with EITF  00-27.  The  Company  has  agreed to file with the SEC, a
registration  statement  for the resale of the  restricted  shares of its common
stock issuable upon exercise of the conversion  option that would be issuable in
this transaction, on a best efforts basis.

The Company sold these  securities to seven accredited  investors  introduced by
Laidlaw,  placement  agent in the Interim  Bridge  Financing II. As described in
Note  H,  the  Company  incurred  $386,027  of  fees  in  connection  with  this
transaction  including a cash fee of $305,160  and $80,867 for the fair value of
warrants to purchase 152,580 shares of the Company's common stock at an exercise
price of $0.60 per share.

As  described  in Note T, the  Company  elected to extend the due dates of these
notes by an additional 60 days to various dates beginning December 2, 2005.

INTERIM BRIDGE FINANCING III

Beginning on July 1, 2005,  and  continuing  through  September  30,  2005,  the
Company  completed a $3,600,000  financing (the "Interim Bridge  Financing III")
through the issuance of (i) 10% Junior Convertible Promissory Notes (the "Bridge
III Notes") and (ii) warrants to purchase up to 1,800,000 shares of common stock
(the "Bridge III Warrants"). The warrants have a term of 5 years and an exercise
price of $0.60 per share.  The  aggregate  fair value of the Bridge III Warrants
amounts to $550,778.  Prior to maturity, the Junior Convertible Promissory Notes
may be converted into the securities offered by the Company at the first closing
of a subsequent financing for the Company, for such number of offered securities
as could be purchased for the principal amount being converted.

In accordance with APB 14, the Company  allocated  $3,049,222 of the proceeds to
the Bridge III Notes and  $550,778 of proceeds to the Bridge III  Warrants.  The
difference  between  the  carrying  amount  of the  Bridge  III  Notes and their
contractual  redemption  amount is being accreted as interest expense to various
dates from November 1, 2005, their earliest date of redemption. Accretion of the
aforementioned discount amounted to $350,791 for the nine months ended September
30, 2005 and is included as a component of interest  expense in the accompanying
statement of operations.

The  Bridge III Notes  have an  initial  term of 120 days (due on various  dates
beginning October 28, 2005) with interest at 10% per annum and feature an option
for the Company to extend the term for an  additional  60 days to various  dates
beginning  December 28,  2005.  Upon the  extension of the maturity  date of the
Bridge III Notes, the contractual interest rate would increase to 12% per annum,
and the Company  would be required to issue  warrants (the "Bridge III Extension
Warrants") to purchase such number of shares of the Company's common stock equal
to one-half of a share for each $1.00 of principal then outstanding.  The Bridge
III  Extension  Warrants  issuable  upon  extension of the maturity  date of the
Junior  Convertible  Promissory  Notes feature a term of 5 years and an exercise
price of $0.60 per share.  In addition,  if the Bridge III Notes are not paid in
full on or before the extended maturity date, each note becomes convertible into
3.84  shares of the  Company's  common  stock for each $1.00 of  principal  then
outstanding.  The  intrinsic  value of this  conversion  option  measured at the
issuance  date of the notes  amounts to  $3,600,000  and would be  recognized as
interest  expense in accordance with EITF 00-27.  The Company has agreed to file
with the SEC, a registration  statement for the resale of the restricted  shares
of its common stock issuable upon exercise of the  conversion  option that would
be issuable in this transaction, on a best efforts basis.

The Company sold these securities to Apex, Northwestern,  and Advanced Equities.
Funding  for the Bridge III Notes  included  the  conversion  of  $1,650,000  of
stockholder advances made during the period March 30, 2005 to June 30, 2005 into
Bridge III Notes. In conjunction  with Bridge III Notes,  Advanced  Equities was
paid a fee of $6,000 as described in Note H.


                                       21
<PAGE>


NOTE L - RELATED PARTY TRANSACTIONS

EXPENSE REIMBURSEMENTS DUE TO OFFICERS AND STOCKHOLDERS

Certain  stockholders  and  officers  of the Company  have paid  expenses on the
Company's behalf since its inception,  of which $243,340 remains  outstanding at
September 30, 2005. The amounts  payable to such officers and  stockholders  are
due on demand.

NOTES PAYABLE TO OFFICERS AND STOCKHOLDERS

Notes  payable to officers and  stockholders,  which  amount to  $284,212,  bear
interest at 10% per annum and are due on demand. Interest expense on these notes
amounted to $19,314 for the nine months ended September 30, 2005.

CONSULTING AGREEMENT PAYABLE

On June 8, 2005,  the Company  negotiated a settlement  regarding the consulting
agreement  payable with a related party.  The terms of the settlement  agreement
terminates the prior agreement and reduces the remaining  payments due under the
contract  to  $150,000  including  a  $50,000  payment  that was  made  upon the
execution of the agreement and two additional  $50,000 payments including one to
be made upon the completion of a follow-on-financing  by the Company and one not
later than September 30, 2005.  The $150,000  reduction in payments was recorded
as a reduction of general and  administrative  expense  during the quarter ended
June 30, 2005.  Additionally,  the settlement agreement terminates an obligation
for the  Company  to issue  100,000  shares of  unrestricted  stock.  This stock
issuable  under this  commitment  was recorded in 2004 as "Stock to be issued in
lieu of cash for  services" in the amount of $78,900 and the 100,000  shares was
classified  as shares  to be  issued.  The  termination  of the  stock  issuance
obligation  resulted  in an  additional  reduction  of $78,900  in  general  and
administrative expenses during the quarter ended June 30, 2005.

The payment due on September  30, 2005 was not made by the Company.  The balance
due under this  arrangement is included in the liabilities  that the Company has
offered  to  settle  under  the  proposed  creditor  and  claimant   liabilities
restructuring described in Note S.

NOTES PAYABLE (TO CREDITORS OF ACQUIRED BUSINESS)

The  notes  issued to  creditors  of  Entelagent  described  in Note E,  include
$1,655,548  payable to related parties for settlement of accrued payroll,  notes
payable and expense  reimbursements.  In addition, the Company offset $52,000 of
previously  existing  advances made to certain of the parties to reduce the note
to an aggregate  carrying amount of $2,588,000.  Aggregate  interest  expense on
this note amounts to $98,962 for the nine months ended September 30, 2005.

RELATED PARTY PAYMENTS

During the nine months ended  September  30, 2005,  the Company made payments of
$514,867 to related  parties from the $1,388,000  restricted cash escrow account
established  in connection  with the  Entelagent  Merger (Note E). Such payments
reduced certain  outstanding  liabilities of Entelagent  including advances from
shareholders, accounts payable and payroll liabilities.

During the nine months ended  September  30,  2005,  the Company made a $200,000
payment to Patrick J. Allin and the Allin  Dynastic Trust under the terms of the
settlement agreement reached on June 6, 2005 (Note O).


NOTE M - OTHER CURRENT LIABILITIES

Other current  liabilities  principally  consists of $476,594 of accrued payroll
and sales tax  liabilities,  the  settlement of which is being  negotiated,  and
estimated  penalties that the Company  assumed in its  acquisition of Entelagent
(Note E). These  liabilities are intended to be paid from restricted  cash. Also
included  in this  balance is  $469,622  related to two  judgments  against  the
Company (Note Q).


                                       22
<PAGE>


NOTE N - DEFERRED REVENUE

Deferred revenue  includes (1) $123,287 for the fair value of remaining  service
obligations on maintenance and support  contracts and (2) $141,730 for contracts
on which the revenue  recognition is deferred until contract  deliverables  have
been completed.


NOTE O - SETTLEMENT WITH PATRICK J. ALLIN, FORMER CHIEF EXECUTIVE OFFICER

On June 6, 2005, the Company entered into a settlement of certain employment and
indemnification related claims brought by Patrick J. Allin, the Company's former
Chief Executive Officer and a former member of the Company's Board of Directors,
against the Company  during the year ended  December 31,  2004.  Pursuant to the
Settlement  Agreement and Mutual Release dated June 2, 2005,  among the Company,
Mr. Allin and The Allin Dynastic Trust,  the Company agreed to pay to Mr. Allin,
in settlement of Mr.  Allin's  claims,  an aggregate  payment of One Million One
Hundred Fifty Thousand  Dollars  ($1,150,000)  payable as follows:  (i) $200,000
that was paid upon execution of the Settlement  Agreement and Mutual Release and
(ii) Nine Hundred Fifty  Thousand  Dollars  ($950,000)  payable in cash and/or a
promissory note upon the consummation of a  follow-on-financing  by the Company.
The parties  also  agreed to release  all claims  existing as of the date of the
Settlement  Agreement and Mutual  Release.  The Settlement  Agreement and Mutual
Release  featured a provision to terminate on August 15, 2005 if the Company did
not  consummate a  follow-on-financing  by such date. As described  herein,  the
Company and Mr. Allin agreed to extend the  termination  date for an  additional
120 days to December 13, 2005.  The Company  accrued an aggregate of $927,167 in
amounts  repayable  to Mr.  Allin  up  through  the date of his  termination  in
February  2004.  The  difference  between  the  amounts  accrued  and  the  cash
settlement,  which difference  amounts to $216,507,  was recorded in general and
administrative  expense in the  quarter  ended  March 31,  2004.  The  remaining
amounts  payable  to Mr.  Allin  under  this  provision  of the  settlement  are
presented  net of the  $200,000  payment  made to him upon the  execution of the
agreement and includes  $46,845 of interest accrued during the nine months ended
September 30, 2005.

Pursuant to the Settlement Agreement and Mutual Release, the Company also agreed
to purchase  from Mr.  Allin and The Allin  Dynastic  Trust an aggregate of four
million  (4,000,000)  shares of the Company's  common stock as follows:  (i) two
million  (2,000,000)  shares (the  "Initial  Shares")  through  the  issuance of
promissory  notes in the aggregate  principal  amount of One Million Six Hundred
Thousand  Dollars  ($1,600,000)  and (ii) two  million  (2,000,000)  shares (the
"Remainder   Shares")   through  a  cash   payment   from  the   proceeds  of  a
follow-on-financing  by the Company, at a price per share equal to the lesser of
(a) $.50 per share or (b) 90% of the issue  price or  conversion  price,  as the
case may be, of the security issued in a  follow-on-financing,  provided however
that in the event that 90% of the issue price or conversion  price,  as the case
may be, of the security issued in the  follow-on-financing is less than $.50 per
share, Mr. Allin and/or The Allin Dynastic Trust may, at their option, refuse to
sell any or all of the Remainder  Shares to the Company.  The Initial Shares are
to be held in escrow pursuant to a mutually  agreed upon Escrow  Agreement to be
subsequently  entered into between the parties.  Each of Mr. Allin and The Allin
Dynastic  Trust have agreed to lock-up their shares until the shorter of (y) the
six month period subsequent to the consummation of a follow-on-financing and (z)
the date on which the next  registration  statement filed by the Company becomes
effective.

The  promissory  notes issued to purchase the Initial Shares bear interest at an
annual rate of 8%,  with  interest  payments  due and payable on the last day of
August, November, February and May during the term of the promissory notes, with
a maturity  date of June 30,  2006.  In  addition,  if the  Company  defaults on
certain terms under the promissory  notes,  and such default remains uncured for
five days, all payments under the  promissory  notes  accelerate and the Company
agrees to confess to a judgment against the Company in a court of the promissory
note holder's choosing in Cook County, Illinois. In the alternative, the holders
of the promissory  notes may demand that the shares  purchased by the promissory
notes be  returned  in  fulfillment  of all  obligations  remaining  under  such
promissory notes.

As a result of this  agreement  to  repurchase  shares of common  stock from Mr.
Allin and The Allin Dynastic Trust, the Company has recorded certain liabilities
and adjustments to stockholders'  deficiency  retroactively to the quarter ended
March 31, 2004.


                                       23
<PAGE>


For the Initial  Shares the Company  recorded a  $1,738,667  note payable to Mr.
Allin with a corresponding  increase of $1,600,000 in  stockholders'  deficiency
and a $138,667  charge to operations for interest  payable through June 6, 2006.
For the  Remainder  Shares,  the  Company  recorded  a  $1,000,000  put right as
temporary  equity with a  corresponding  $300,000  charge to operations  for the
intrinsic  value of the put right on June 6, 2005 (fair value of common stock of
$.65 per share  less the  minimum  conversion  price of $50.  per  share)  and a
$700,000 net  increase in  stockholders'  deficiency.  The  aggregate  charge of
$438,667 for the  interest  and the  intrinsic  value of the  conversion  option
embedded  in the  remainder  shares is  presented  as a  litigation  loss in the
statement of  operations  for the six months  ended June 30, 2004.  Common stock
outstanding in the accompanying  balance sheet is presented net of the 2 million
Initial Shares that are subject to the repurchase obligation.

As of September 30, 2005, the Company's fair value of its common stock was $0.14
per share,  which resulted in a reduction of the charge for the intrinsic  value
of the put right granted on June 6, 2005 to $0. Such reduction is presented as a
change in the  intrinsic  value of put right in the  accompanying  statement  of
operations for the nine months ended September 30, 2005.

On August 15,  2005,  the Company and Patrick J. Allin  ("Allin")  and the Allin
Dynastic Trust ("Allin  Trust") entered into an agreement to provide the Company
with up to an additional 120 days to arrange the  follow-on-financing  described
under  the  terms  of the  original  settlement.  Under  the  terms  of the time
extension,  1) the Company  agrees that the 6 month lockup  period for the Allin
and Allin Trust  shares  shall begin  August 15,  2005;  2) the Company will pay
Allin a penalty of $500 per day for each day after  August 15 that the  $950,000
remains  unpaid;  3) the  Company  will also pay the Allin  Trust a $100 per day
penalty for each day after August 31 that the interest on the promissory note to
purchase  the Allin Trust shares  remains  unpaid  provided  that $8,000 of this
interest is paid by September  15,  2005.  If the  September  15th amount is not
paid,  the Company  will pay a $250 per day penalty  commencing  August 31, 2005
with   all   overdue   interest   and   penalties   to  be   paid   out  of  the
follow-on-financing.  If the promissory note interest of $16,000 due on November
30, 2005 is not paid by that date,  an  additional  $250 per day penalty will be
paid;  4) the Company  shall pay Allin a $100 per day penalty for each day after
August 31 that the interest on the promissory  note to purchase the Allin shares
remains  unpaid  provided  that $8,000 of this interest is paid by September 15,
2005. If the September  15th amount is not paid, the Company will pay a $250 per
day penalty  commencing  August 31, 2005 with all overdue interest and penalties
to be paid out of the  follow-on-financing.  If the promissory  note interest of
$16,000 due on November 30, 2005 is not paid by that date,  an  additional  $250
per day penalty will be paid; and 5) At the end of the 120 day extension period,
if the Company has not completed its  follow-on-financing  and made all payments
to Allin and the Allin  Trust due and owing  under the  amended  agreement,  all
payments  under the amended  agreement  will become  immediately  due and owing.
Allin and the Allin  Trust  will have the  option of  keeping  the  Initial  and
Remainder Shares or demanding  payment of the associated notes. The Company will
confess to a judgment in a court of Allin's  choosing  for the  $950,000 and the
promissory  notes for purchase of the Allin Trust shares (if payment is demanded
for the notes to purchase  shares).  Any actions that would preclude the Company
making the payments under this  agreement  will  accelerate all payments due and
the Company  will confess to judgment.  As of September  30, 2005,  the $950,000
promissory  note has not be repaid,  interest on the promissory note to purchase
the Allin  Trust  shares has not been paid,  nor has the  September  15th amount
totaling $8,000 been paid.

Additional  interest and penalties  under this  arrangement  amounted to $55,900
during the nine months ended September 30, 2005.


NOTE P - ACCOMMODATION AGREEMENT

In November 2002, the Company entered into a financing  arrangement with a third
party financial institution (the "Lender"),  pursuant to which the Company would
borrow  $950,000  under a note to be  collateralized  by the  pledge of  950,000
shares of registered stock from five different stockholders.  In connection with
this arrangement, the Company executed a series of Accommodation Agreements with
these stockholders  wherein each stockholder  pledged their shares in return for
the right to receive on or before  November  17,  2003 the return of the pledged
shares,  or replacement  shares in the event of foreclosure,  and one additional
share of common stock for every four shares pledged as compensation. The Company
also  agreed  to use  "best  efforts"  to  register  these  shares  with  the US
Securities and Exchange Commission 12 months from the date of issue.


                                       24
<PAGE>


In December 2002, the Company received  approximately $450,000 of proceeds under
the note and  provided  the  Lender the  pledged  shares.  Since  that date,  no
additional  proceeds were provided by the Lender and repeated attempts were made
by the Company to secure the additional  proceeds.  The Company has  effectively
accounted  for the Lender's  failure to fund the facility and return the pledged
shares  as a  foreclosure  on the  loan  collateral.  Accordingly,  the  Company
recorded a $1,047,728 loss during the year ended December 31, 2002.

On March 13,  2003,  the Company  issued  1,200,000  replacement  shares with an
aggregate fair value of $3,708,000 to the  stockholders who pledged their shares
under  the  Accommodation  Agreements.  Accordingly,  the  Company  recorded  an
additional  loss of $2,210,272  during the year ended  December 31, 2003 for the
difference  between the loss the Company recorded upon the Lender's  foreclosure
of the collateral and the aggregate fair value of the replacement shares.

In  addition,  the  Accommodation  Agreements  provided for the Company to pay a
penalty  in the  event of its  failure  to cause  the  replacement  shares to be
registered on or before March 31, 2003.  As a result,  the Company has accrued a
penalty of 450,000 shares per quarter, which penalty amounted to $118,500 in the
three  months  ended  September  30, 2005 and  $745,501 in the nine months ended
September 30, 2005.

STOCK PLEDGE ARRANGEMENT

In April 2004, a stockholder  of the Company  entered into a one-year stock loan
financing  arrangement ("Stock Financing Facility") with a third party financial
institution,  pursuant to which such  stockholder  committed to obtain financing
for the Company under a credit facility  collateralized by the pledge of 685,000
shares of registered  stock (the  "Pledged  Stock") that was pledged by a second
stockholder (the "Pledging  Stockholder").  In connection with this arrangement,
the Company  executed an accommodation  agreement with the Pledging  Stockholder
committing to issue 685,000 shares of restricted stock (the "Replacement Stock")
on April 2, 2005 (the "Termination  Date") in the event of a loss of the Pledged
Stock, plus a premium of 205,500 shares (the "Premium Shares") for entering into
the agreement.  The Company also agreed to register 300,000 shares of restricted
stock held by the Pledging  Stockholder (the "Held Stock") within thirty days of
the  agreement  and to use its best  efforts  register  with  the SEC,  both the
Replacement Stock and Premium Stock within 12 months from their date of issue.

The  Company  received  $40,012 of funds but was unable to recover  the  Pledged
Stock on the Termination Date. In addition, due to a delay in registering all of
the  shares  under  this  arrangement,  the  Company  entered  into a  secondary
agreement  with  the  Pledging  Stockholder  providing  for:  (1) the  immediate
issuance of the Replacement  Shares and Premium Shares;  (2) registration of the
Replacement Shares,  Premium Shares and Held Shares; (3) the retroactive accrual
of a penalty  from May 2, 2004  through the date the  registration  statement is
filed  payable in such  number of shares  that is equal to 15% of the Held Stock
(prorated  for each  fraction of a year);  and (4) the accrual of an  additional
penalty from April 2, 2005 through the date the registration  statement is filed
equal to 15% of the  Replacement  Stock and  Premium  Stock  (prorated  for each
fraction of a year).

The Company  recorded a charge of $406,205 for the fair value of the Replacement
Stock and Premium  Stock  (890,500  shares)  issued to the Pledging  Stockholder
under this arrangement.  Such charge,  net of $40,012 of advances  received,  is
presented as a loss on collateralized  financing arrangement in the accompanying
statement of  operations.  The Company also recorded a $78,247 charge during the
nine months ended  September 30, 2005 and $17,145  during the three months ended
September 30, 2005 for the fair value of 130,587 shares issuable to the Pledging
Stockholder  as penalties for the delays in registering  the stock.  The charges
associated  with the  penalties  are  included  in stock based  penalties  under
accommodation agreements in the accompanying statements of operations.


                                       25
<PAGE>


NOTE Q - COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

Sherleigh  Associates Inc. Profit Sharing Plan  ("Sherleigh")  filed a complaint
against the  Company,  Patrick  Allin,  former  Chief  Executive  Officer of the
Company, and Robert E. Yaw, the Company's non-executive Chairman, on February 3,
2004, in the United States District Court for the Southern  District of New York
(the "Court")  alleging common law fraud.  The complaint  alleged that Sherleigh
was  fraudulently  induced into  purchasing  1,000,000  shares of Company common
stock in reliance  upon certain of the  Company's  press  releases and allegedly
false  statements by Mr. Allin and Mr. Yaw,  concerning  the Company's  plans to
acquire  two target  companies,  TrustWave  Corporation  (currently  a strategic
partner of the Company) and  Entelagent  (a current  subsidiary of the Company),
and its financing  arrangements  regarding those  acquisitions.  Sherleigh seeks
rescission of its purchase agreement and return of its $2,000,000 purchase price
or compensatory damages to be proven at trial. Mr. Allin recently entered into a
settlement  agreement with Sherleigh and is requesting that the Court include in
its  dismissal  order  a  finding  that  the  settlement  is  reasonable  and  a
prohibition  against any claims by the Company or Mr. Yaw against Mr.  Allin for
contribution or indemnification  with respect to Sherleigh's claims. The Company
has opposed Mr. Allin's request.  The Court has not yet issued any ruling on Mr.
Allin's request. Discovery has been completed, but no trial date has been set by
the Court.  The Company  believes the  Plaintiff's  claims are without merit and
intends to continue to defend  against them through  trial,  if  necessary.  The
amount of loss,  if any,  with  respect  to the claim  cannot  be  predicted  or
quantified  at this time and,  therefore,  no amounts have been  recorded on the
books of the Company.

In April of 2005,  Richard  L.  Linting,  a former  President  of the  Company's
Professional Services Group, filed a complaint against the Company and Robert E.
Yaw, II, the  Company's  non-executive  Chairman,  in the Circuit  Court of Cook
County,  Illinois  alleging  breach of his  purported  employment  contract  and
seeking  sums  allegedly  owed under the  employment  contract  in the amount of
$1,321,809,  plus court costs and fees.  On August 22, 2005,  the  Company,  Mr.
Linting and Mr. Yaw entered into a Settlement  Agreement and Release whereby Mr.
Linting agreed to release all claims against the Company and Mr. Yaw existing as
of that date in consideration  for (i) the payment by the Company to Mr. Linting
of $100,000 in cash, (ii) the issuance by the Company of an aggregate of 422,827
shares ("Linting  Shares") of the Company's common stock (equivalent to $192,809
divided by $0.456) to be  transferred to Mr. Linting in such numbers and at such
times as directed by Mr. Linting  subsequent to the  registration of the Linting
Shares, (iii) the Company's agreement to register the Linting Shares through the
filing of a registration statement on or before September 30, 2005, and (iv) the
Company's  affirmation  of the  validity  of  options  previously  issued to Mr.
Linting and agreement to permit exercises of those options for 100,000 shares in
each calendar  month over a period of 3 years.  The Company and Mr. Linting also
agreed  to the  filing of a  stipulation  to  dismiss  Mr.  Linting's  suit with
prejudice and without costs with the court  retaining  jurisdiction to reinstate
the case and enforce the terms of the  Settlement  Agreement  and Release in the
event the Company  defaulted on its obligations  under the Settlement  Agreement
and  Release,  and to enter  judgment,  by motion,  against  the Company for the
balance due or appropriate relief. The Company did not make the $100,000 payment
required  under the  Settlement  Agreement and Release,  erroneously  issued the
Linting  Shares to Mr.  Linting,  and did not file a  registration  statement to
register  the Linting  Shares on or before  September  30, 2005.  Subsequent  to
September  30, 2005,  Mr.  Linting  obtained a judgment  against the Company for
$100,452 in cash and 422,827  shares of the Company's  common stock to be issued
to Mr.  Linting at his  determination  upon  registration  thereof.  The Company
continues to negotiate with Mr. Linting regarding the amounts owed to him.

In December of 2004, Marie Graul, the Company's former Chief Financial  Officer,
informed the Company of her  intention to assert a claim against the Company for
sums allegedly owed under her employment  agreement with the Company.  On August
31, 2005,  the Company and Ms. Graul  entered  into a Settlement  Agreement  and
Mutual  Release  whereby  Ms.  Graul  agreed to release  all claims  against the
Company  arising from any act or omission  occurring on or prior to that date in
consideration  of (i) the payment by the Company to Ms. Graul of an aggregate of
$176,458  no later  than  September  30,  2005,  $1,458 of which was  payable on
execution of the Settlement Agreement and Mutual Release, and (ii) the Company's
affirmation  of the  validity of options  previously  issued to Ms.  Graul.  The
Company  also agreed to confess to a judgment  against the Company in a court of
Ms.  Graul's  choosing in the event of the  Company's  breach of the  Settlement
Agreement and Mutual Release.  The Company did not make the payments required by
the Settlement  Agreement and Mutual Release.  Subsequent to September 30, 2005,
Ms. Graul


                                       26
<PAGE>


obtained a judgment  against  the  Company  for  $176,853  in cash.  The Company
continues to negotiate with Ms. Graul regarding the amounts owed to her.

In the event the Company is required to pay damages in  connection  with any one
or more of the claims  asserted  in these  actions,  such  payment  could have a
material adverse effect on the Company's business and operations.

SETTLEMENT WITH COOK ASSOCIATES, INC.

On June 29, 2005, the Company  entered into a settlement  with Cook  Associates,
Inc. ("Cook  Associates")  to settle all claims and potential  claims related to
the  lawsuit  that had been  filed by Cook  Associates  against  the  Company in
October  2004.  Under the terms of the  settlement,  Cook  Associates  agreed to
dismiss its lawsuit and associated claim for $528,081 in damages and the Company
agreed to remove  any and all  conditions/restrictions  that would  prevent  the
600,000  shares of Company  common  stock  owned by Cook  Associates  from being
freely traded. The Company had previously  recorded $389,103 of payables to Cook
Associates  that it reversed  following  its  execution of the  settlement.  The
reversal was  recorded as a gain and is included in  loss/(gain)  on  settlement
agreements in the  accompanying  statements  of  operations  for the nine months
ended September 30, 2005.

SEC INVESTIGATION

Pursuant  to  Section  20(a)  of the  Securities  Act and  Section  21(a) of the
Securities Exchange Act, the staff of the SEC (the "Staff"), issued an order (In
the Matter of Patron Systems, Inc. - Order Directing a Private Investigation and
Designating  Officers to Take  Testimony  (C-03739-A,  February 12,  2004)) (the
"Order")  that a  private  investigation  (the "SEC  Investigation")  be made to
determine whether certain actions of, among others, the Company,  certain of its
officers  and  directors  and  others  violated  Section  5(a)  and  5(c) of the
Securities Act and/or Section 10 and Rule 10b-5  promulgated  under the Exchange
Act.  Generally,  the Order  provides,  among  other  things,  that the Staff is
investigating (i) the legality of two (2) separate Registration Statements filed
by the Company on Form S-8,  filed on December 20, 2002 and on April 2, 2003, as
amended on April 9, 2003 (collectively, the "Registration Statements"), covering
the resale of, in the  aggregate,  4,375,000  shares of common  stock  issued to
various  consultants  of the Company,  and (ii) whether in  connection  with the
purchase or sale of shares of common  stock,  certain  officers and directors of
the Company and others (a) sold common  stock in  violation  of Section 5 of the
Securities Act and/or, (b) made misrepresentations  and/or omissions of material
facts and/or  employed  fraudulent  devices in  connection  with such  purchases
and/or sales  relating to certain of the  Company's  press  releases  regarding,
among  other  items,   proposed  mergers  and   acquisitions   that  were  never
consummated.  If the SEC brings an action  against the Company,  it could result
in,  among  other  items,  a  civil  injunctive   order  or  an   administrative
cease-and-desist  order being  entered  against the Company,  in addition to the
imposition of a  significant  civil  penalty.  Moreover,  the SEC  Investigation
and/or a subsequent SEC action could affect  adversely the Company's  ability to
have its common stock become  listed on a stock  exchange  and/or  quoted on the
NASD Bulletin  Board or NASDAQ,  the Company  being able to sell its  securities
and/or  have its  securities  registered  with the SEC and/or in various  states
and/or the  Company's  ability to implement  its  business  plan.  To date,  the
Company's legal counsel  representing  the Company in such matters has indicated
that the SEC Investigation is ongoing and the Staff has not indicated whether it
will or will not recommend that the SEC bring an enforcement  action against the
Company, its officers, directors and/or others.

ROBERT CROSS, CHIEF EXECUTIVE OFFICER - EMPLOYMENT AGREEMENT

On  July  1,  2005,  the  Company  entered  into an  employment  agreement  (the
"Employment  Agreement") with Robert W. Cross ("Mr. Cross"), the Company's Chief
Executive  Officer.  The  term of the  Employment  Agreement  is one  year  with
automatic  one-year  renewal unless Mr. Cross is provided with written notice of
non-renewal  90 days prior to expiration  of the current term of the  Employment
Agreement.  The Employment  Agreement provides for a base salary of $200,000 per
year with a  non-recoverable  draw of $100,000 (grossed up for taxes) during the
first six months of the Agreement.  The Employment Agreement also provides for a
performance  bonus  determined in accordance with quarterly  revenue  milestones
that are yet to be established by the Board of Directors.  Mr. Cross is eligible
to  receive  a bonus  of up to 100% of base  salary  for each  quarter  that the
Company  achieves  the  agreed  upon  revenue  milestones.   Additionally,   the
Employment  Agreement  provides for the grant of 1,000,000  stock  options at an
exercise price of $0.65 per share with the options  vesting 25% on July 1, 2005,
25% on September  30, 2005,  25% on December 31, 2005 and 25% on March 31, 2006.
The options expire on June 30, 2012.


                                       27
<PAGE>


LEASE AGREEMENT

On August 24, 2005, the Company entered into an office lease agreement for 4,876
square feet of space for its office in Boulder, Colorado. The lease commences on
October 1, 2005 and has a term of fifty-four  months including a six-month lease
abatement.  The minimum rental payments,  beginning April 2006, amount to $4,063
per month.  In  addition,  the Company was  required to make a $19,995  security
deposit at the inception of the lease.

The future minimum rental commitments under the terms are as follows:

            For the period of October 1, 2005 through
                December 31, 2005                              $      -

            For the year ended December 31,
                                2006                             36,567
                                2007                             48,756
                                2008                             48,756
                                2009                             48,756
                                2010                             12,189
                                                               --------
                               Total                           $195,024


NOTE R - STOCKHOLDERS' DEFICIENCY

ISSUANCE OF COMMON STOCK AS PURCHASE CONSIDERATION

On February 25, 2005 the Company  committed to issue an aggregate of  11,900,000
shares of its  common  stock with an  aggregate  fair  value of  $10,115,000  as
purchase  consideration  to the  sellers  of CSSI and  LucidLine  (Note  E).  On
February 28, 2005, the Company committed to issue an additional 3,000,000 shares
of its common  stock with an  aggregate  fair value of  $2,550,000  as  purchase
consideration  to  the  sellers  of  Entelagent  (Note  E).  The  aforementioned
transactions  were  recorded as common  stock to be issued in the  statement  of
stockholder's  (deficiency).  The Company  issued  11,323,155 of these shares to
certain of the selling  stockholders  during the nine months ended September 30,
2005 and the remaining  shares are presented as common stock to be issued in the
accompanying balance sheet at September 30, 2005.

ISSUANCE OF COMMON STOCK PURCHASE WARRANTS

On February  25,  2005,  the Company  issued  2,250,000  common  stock  purchase
warrants  with a term of 5 years and an  exercise  price of $0.70 per share as a
portion  of  purchase  consideration  associated  with  the  acquisition  of the
preferred  stock of CSSI (Note E). The  aggregate  fair value of these  warrants
amounted to $1,912,500.

On February 28, the Company issued  warrants to purchase up to 1,750,000  shares
of its common stock to the Bridge Notes investors  described in Note K. The fair
value of the warrants amounted to $1,054,860.  Additionally,  the Company issued
350,000 common stock purchase  warrants with an aggregate fair value of $297,500
to the Placement Agent in the Interim Bridge Financing I transaction.

On February 28, the Company also issued  warrants for 300,000  shares at a $0.70
per share exercise price to Laidlaw & Company and/or its designees in connection
with the receipt of acquisition  related services for the Entelagent,  LucidLine
and CSSI mergers (Note E). The aggregate fair value of these  warrants  amounted
to $255,000.

On June 6, 2005, the Company issued warrants to purchase up to 1,271,500  shares
of its common  stock at $0.60 per share  exercise  price to the  Interim  Bridge
Financing  II  investors  described  in Note K. The fair  value of the  warrants
amounted to $532,732.

On June 30, 2005 the Company  issued  warrants for 152,580 shares at a $0.60 per
share exercise price to Laidlaw in connection with the Interim Bridge  Financing
II financing. The aggregate fair value of these warrants amounted to $80,867 and
was accounted for as deferred financing costs.


                                       28
<PAGE>


On June 29, 2005, the Company issued warrants to purchase up to 1,750,000 shares
of its  common  stock at $0.70 per share  exercise  price,  as Bridge  Extension
Warrants, to the investors in Interim Bridge Financing I as described in Note K.
The fair value of the warrants, which amounted to $822,500, was accounted for as
a deferred financing cost.

On July 1, 2005, the Company  issued  warrants for 925,000 shares at a $0.60 per
share exercise  price to Apex and  Northwestern  in connection  with the Interim
Bridge  Financing  III  financing.  The aggregate  fair value of these  warrants
amounted to $415,891.

On July 29, 2005, the Company  issued  warrants for 50,000 shares at a $0.60 per
share exercise price to Advanced  Equities in connection with the Interim Bridge
Financing III financing. The fair value of these warrants amounted to $22,481.

On August 19, 2005,  the Company  issued  warrants for 225,000 shares at a $0.60
per share exercise price to Apex in connection with the Interim Bridge Financing
III financing. The fair value of these warrants amounted to $55,263.

On September 30, 2005 the Company issued  warrants for 600,000 shares at a $0.60
per share exercise price to Apex in connection with the Interim Bridge Financing
III financing. The fair value of these warrants amounted to $57,143.

All of the aforementioned warrants,  unless otherwise noted, are reflected as an
increase to additional  paid-in  capital in the  accompanying  balance sheet and
statement of stockholders' deficiency at September 30, 2005.

ISSUANCE OF COMMON STOCK AS PENALTY UNDER AN ACCOMMODATION AGREEMENT

The  Accommodation  Agreements  (Note P) provided for a penalty in the event the
Company failed to register the  replacement  shares on or before March 31, 2003.
The  replacement  shares were not  registered  on or before March 31, 2003. As a
result,  the Company has accrued a penalty of 450,000 shares per quarter for the
five  stockholders,  in the aggregate.  The Company recorded charges of $745,501
for the nine months ended September 30, 2005. The Company intends to include the
replacement and penalty shares in a registration  statement to be filed in 2005,
at which time the penalty will cease to accrue. The penalty shares are presented
as common stock to be issued in the accompanying balance sheet and statements of
stockholders' deficiency at September 30, 2005.

STOCK ISSUED UNDER STOCK PLEDGE ARRANGEMENT

The Company issued an aggregate of 890,500  shares of common stock  (Replacement
Shares and Premium Shares) with an aggregate fair value of $406,205 and recorded
a commitment to issue an additional 130,587 shares of stock with a fair value of
$78,247 as penalties for the delays in registering  the stock under the original
agreement (Note P).

STOCK ISSUED IN LIEU OF CASH FOR SERVICES

On June 8, 2005,  the Company  negotiated a settlement  regarding the Consulting
Agreement Payable with a related party. As part of this agreement, an obligation
to issue 100,000 shares of unrestricted  common stock previously recorded in the
quarter ended September 30, 2004 was terminated.  This termination resulted in a
reduction in general and administrative expenses of $78,900 and the reduction of
100,000 shares from the Shares to be Issued classification.

ISSUANCE OF EMPLOYEE STOCK OPTIONS

During the three  months ended  September  30,  2005,  the Company  issued stock
options to employees to purchase 5,265,000 shares. These options include a grant
to purchase  1,000,000 shares at $0.65 per share to the Chief Executive  Officer
of the Company,  Mr. Robert Cross. Mr. Cross' option grant resulted in a $30,000
expense related to the intrinsic value of the options versus the market price on
the date of grant.  This amount is being amortized over the vesting period.  For
the nine months  ended  September  30,  2005,  the Company  recorded  $16,000 of
compensation  expense  related to Mr.  Cross'  options and  recorded  $14,000 to
deferred compensation at September


                                       29
<PAGE>


30, 2005.  The  remaining  options were granted at the closing sale price on the
date immediately prior to the date of grant, $0.35 per share.


NOTE S - PROPOSED CREDITOR AND CLAIMANT LIABILITIES RESTRUCTURING

On  September  23,  2005,  the Company  mailed a package  containing  a proposed
arrangement to (a) restructure approximately $26,000,000 of obligations that the
Company  owes to a  majority  of its  creditors,  and (b) settle  $2,000,000  of
contingent  liabilities  under the legal proceedings with Sherleigh as described
in  Note  O.  The  proposal  was  delivered  to the  holders  of  the  Company's
indebtedness  (including  certain  lenders,  all past-due trade  creditors,  and
employees,  consultants and other service  providers with claims for fees, wages
or expenses).  Under the proposed  arrangement,  all creditors with acknowledged
balances and all claimants with agreed claims would promptly be issued one share
of Patron  common stock for each $0.18 of such  balances or claims.  The Company
would endeavor to register such shares under applicable securities laws promptly
following the  conclusion  of this  settlement  program.  There would be no cash
available  to pay any of the  indebtedness,  and there would be no  preferential
payments.  All creditors  and claimants  would be treated the same on a pro rata
basis.

The  Company is  presently  in the  process of  contacting  such  creditors  and
claimants  to explain  the  proposal  and to solicit  responses.  Certain of the
creditors and claimants responded  subsequent to September 30, 2005 (Note T). If
the requisite  agreements  and approvals are obtained,  the Company  anticipates
issuing  the  shares  following  the  final  determination  of  the  claims  and
subsequently  filing a  registration  statement  to register  such shares  under
applicable securities laws.

The Company is currently  unable to determine  whether any of its creditors will
accept  the  Company's  proposal.  The  Company is  currently  unable to provide
assurance  that any of its  creditors  will  accept  this  proposal  or that the
acceptance of such proposal will actually improve the Company's  ability to fund
the further development if its business plan or improve its operations.


NOTE T - SUBSEQUENT EVENTS

ADVANCES FROM STOCKHOLDERS

On October 17,  2005,  the Company  received a $360,000  advance  from Apex,  on
October 25, 2005, the Company  received an additional  $75,000 advance from Apex
and on October 31, 2005,  the Company  received an additional  $385,000  advance
from  Apex.  Apex is a current  stock and  warrant  holder  of the  Company.  No
expenses were incurred in connection with these transactions.

These  funds will be  included  in the  Interim  Bridge III  Financing  and will
receive identical terms as described in Note K above. Under terms of the Interim
Bridge  III  Financing,  Apex will be  issued a total of  217,500  common  stock
purchase  warrants.  These  warrants will have a term of 5 years and an exercise
price of $0.60 per share.

EXTENSION OF THE INTERIM BRIDGE II FINANCING

On October 4, 2005, the Company elected to extend the contractual  maturity date
of the Interim  Bridge II Financing  for an  additional 60 days to various dates
beginning December 2, 2005.  Exercise of the extension  provision of the Interim
Bridge II Financing caused the contractual  interest rate to increase to 12% per
annum.  In  addition,  the Company  was  required to issue to the holders of the
notes issued in the Bridge II Financing,  the 1,271,500 additional warrants (the
"Bridge II Extension  Warrants") to purchase  1,271,500  shares of common stock.
The Bridge II  Extension  Warrants  were  equivalent  to 1/2 of a share for each
$1.00 of principal amount  outstanding.  The Bridge II Extension Warrants have a
term of 5 years and an exercise price of $0.60 per share.

EXTENSION OF THE INTERIM BRIDGE III FINANCING - FIRST TWO FUNDINGS

On October 4, 2005, the Company elected to extend the contractual  maturity date
of the first two fundings of the Interim  Bridge III Financing for an additional
60 days to December 28, 2005. Exercise of the extension provision of


                                       30
<PAGE>


the  Interim  Bridge III  Financing  causes  the  contractual  interest  rate to
increase to 12% per annum. In addition, the Company was required to issue to the
holders of the notes issued in the Bridge III Financing,  the 925,000 additional
warrants (the "Bridge III Extension  Warrants")  to purchase  925,000  shares of
common  stock.  The Bridge III Extension  Warrants  were  equivalent to 1/2 of a
share for each $1.00 of principal amount  outstanding.  The Bridge III Extension
Warrants have a term of 5 years and an exercise price of $0.60 per share.

OFFICE LEASE AGREEMENT

On October 5, 2005, the Company entered into an office lease agreement providing
the Company with 1,269 square feet of space for a sales office in Dallas, Texas.
The lease commences on October 24, 2005 and has a term of 12 months. The minimum
rental  payments,  beginning  October  2005,  amount to  $1,851  per  month.  In
addition,  the Company was  required  to make a $2,035  security  deposit at the
inception of the lease.

STATUS OF PROPOSED CREDITOR AND CLAIMANT LIABILITIES RESTRUCTURING

During  November  2005,  the Company  reevaluated  its  proposal  regarding  the
restructuring  of creditor and claimant  liabilities.  Due to a reduction in the
price per share of the  Company's  common stock since the original  proposal was
issued to creditors and  claimants,  the Company  repriced the proposal to $0.10
per share and will be  issuing  new  documents  to all  creditors  that have not
already  accepted the offer.  All claimants that have already accepted the offer
will  automatically  receive the revised proposal pricing.  Of the approximately
$26,000,000  of claims,  approximately  $15,000,000  is  represented  by current
Company shareholders.

CONSULTING AGREEMENT

On October 28, 2005, the Board of Directors  authorized the  establishment  of a
consulting agreement with an investor relations  consultant.  Under terms of the
agreement,  the Company will issue,  as payment for the  consultant's  services,
200,000 shares of the common stock of the Company and the Company will grant the
consultant  a three-year  stock  option to purchase up to 200,000  shares of the
common stock of the Company at an exercise price of $0.25 per share.

ISSUANCE OF EMPLOYEE STOCK OPTIONS

On October  28, the  Company  issued  stock  options to an  employee to purchase
50,000  shares.  The options  were granted at market price on the date of grant,
$0.09 per share.

STATUS OF LEGAL PROCEEDINGS

On November 2, 2005,  Mr.  Linting  obtained a judgment  against the Company for
$100,452 in cash and 422,827  shares of the Company's  common stock to be issued
to Mr.  Linting at his  determination  upon  registration  thereof.  The Company
continues to negotiate with Mr. Linting regarding the amounts owed to him.

On October  27,  2005,  Ms.  Graul  obtained a judgment  against the Company for
$176,853 in cash. The Company  continues to negotiate  with Ms. Graul  regarding
the amounts owed to her.


                                       31
<PAGE>


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS


                      PATRON SYSTEMS, INC. AND SUBSIDIARIES

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS
                               SEPTEMBER 30, 2005

The following  discussion and analysis  should be read in  conjunction  with the
Annual Report on Form 10-KSB,  including the consolidated  financial statements,
and the related notes thereto,  for the years ended December 31, 2004,  2003 and
2002 of Patron  Systems,  Inc.  and  subsidiaries  (collectively  referred to as
"Patron,"  the  "Company,"   "we,"  "us,"  or  "our").   Except  for  historical
information  contained herein,  the matters discussed below are  forward-looking
statements made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such statements  involve risks and uncertainties,
including, but not limited to, economic,  governmental,  political,  competitive
and technological factors affecting our operations,  markets,  products,  prices
and other factors discussed  elsewhere in this report and other reports filed by
us with the Securities and Exchange Commission ("SEC").  These factors may cause
results  to  differ  materially  from  the  statements  made in this  report  or
otherwise made by or on our behalf.

OVERVIEW

On February 25, 2005,  we  consummated  the  acquisitions  of Complete  Security
Solutions,  Inc.  ("CSSI") and  LucidLine,  Inc.  ("LucidLine")  pursuant to the
filings of Agreements  and Plans of Merger with the  Secretaries of State of the
States of Delaware and  Illinois,  respectively.  On February  28, 2005,  Patron
Systems,  Inc.  consummated a private placement with accredited investors in the
amount of $3.5 million.  On March 30, 2005, we  consummated  the  acquisition of
Entelagent Software Corp.  ("Entelagent") pursuant to the filing of an Agreement
and Plan of Merger with the Secretary of State of the State of California.  From
March 31, 2005 to September 30, 2005, we borrowed $3,300,000 from a shareholder,
Apex  Investment Fund V, LP. During the three months ended September 30, 2005 we
raised  approximately  $3,600,000  in  additional  gross  funds in five  capital
financing  transactions,  which includes converting  $1,650,000 in advances from
stockholders  into Bridge  Notes.  Net  proceeds  from all of these  transaction
amounted to $3,594,000, which were used principally to fund operations and repay
certain  liabilities.  We discuss these  transactions  in further detail in this
report.

Our  acquisitions  have  allowed us to develop a platform  for trusted  security
services and next generation  integrated  security products,  which we intend to
deliver to global  corporations and government  institutions.  We intend to work
with  organizations  to ensure that  global  enterprises  implement  information
security policies,  procedures and products that result in "trusted" information
environments.

We currently offer software solutions that fit into overall corporate compliance
and data protection initiatives by automatically finding, archiving and applying
persistent  protection  to sensitive  data - beyond  authentication  - whenever,
wherever and however sensitive data is shared, accessed and stored. Additionally
we offer software solutions that support real-time secure  collection,  delivery
and  sharing  of  field-based  report  information.  This  software  allows  law
enforcement  and  public-safety  agencies  to have  real-time  access  to  field
reporting  data  for  use  inside  a  department  or  in a  multi-jurisdictional
information sharing system.

We also offer a range of services to corporate and government entities utilizing
fiber optics and data replication technologies to provide secure robust off-site
data  backup,  recovery,   restoration,  and  retrieval  services  coupled  with
high-speed  data  communication  turnkey  solutions.  Our  secure  and  scalable
high-speed data communication solutions facilitate seamless instantaneous backup
of  mission  critical  business  data and  enable  immediate  access to data and
real-time  restoration  of  critical  business  functionality  in the event of a
crisis or disaster.  Additionally, we offer our clients a comprehensive Risk and
Vulnerability  Assessment  (RAVA)  evaluation  service.  This  service  provides
security and  business  impact  assessments,  which  evaluate an  organization's
compliance with both Homeland Security and NTSA standards.


                                       32
<PAGE>


Furthermore,  we intend to address the homeland  security  requirements that are
being imposed on state, county and municipal  governments.  The Company believes
that we offer state, county and municipal  governments a unique group of product
and service offerings  focused on their specific  homeland security  information
infrastructure  issues.  This is accomplished by utilizing the full range of our
capabilities for evaluating and assessing  information  infrastructure risks and
vulnerabilities,  combined with our  experience in designing,  implementing  and
managing large, secure information  infrastructure systems. Also contributing is
our extensive experience in implementing  real-time,  secure data collection and
the   multi-jurisdictional   sharing  of  law  enforcement   and   public-safety
information  combined with our experience in developing  and deploying  software
solutions which provide secure data and content delivery and management.

CRITICAL ACCOUNTING POLICIES

The  preparation of financial  statements and related  disclosures in conformity
with  accounting  principles  generally  accepted in the United States  requires
management to make estimates and assumptions that affect the amounts reported in
the  Condensed   Consolidated   Financial  Statements  and  Notes  thereto.  Our
application  of accounting  policies  affects these  estimates and  assumptions.
Actual results could differ from these estimates under different  assumptions or
conditions.

REVENUE RECOGNITION

We derive revenues from the following  sources:  (1) sales of computer software,
which includes new software  licenses and software  updates and product  support
revenues and (2) services, which include internet access, back-up, retrieval and
restoration services and professional consulting services.

We apply the revenue  recognition  principles set forth under AICPA Statement of
Position ("SOP") 97-2 "Software Revenue Recognition" and Securities and Exchange
Commission Staff  Accounting  Bulletin  ("SAB") 104 "Revenue  Recognition"  with
respect  to all  of  our  revenue.  Accordingly,  we  record  revenue  when  (i)
persuasive evidence of an arrangement exists, (ii) delivery has occurred,  (iii)
the vendor's fee is fixed or determinable, and (iv) collectability is probable.

We generate  revenues  through  sales of software  licenses  and annual  support
subscription  agreements which include access to technical  support and software
updates (if and when  available).  Software  license revenues are generated from
licensing the rights to use our products directly to end-users and through third
party service providers.

Revenues from software license agreements are generally recognized upon delivery
of  software to the  customer.  All of our  software  sales are  supported  by a
written  contract  or other  evidence  of sale  transaction  such as a  customer
purchase order.  These forms of evidence  clearly  indicate the selling price to
the  customer,  shipping  terms,  payment  terms  (generally 30 days) and refund
policy,  if any. The selling  prices of these products are fixed at the time the
sale is consummated.

Revenue from post contract customer support arrangements or undelivered elements
are deferred and  recognized at the time of delivery or over the period in which
the services are performed based on vendor specific  objective  evidence of fair
value for such  undelivered  elements.  Vendor  specific  objective  evidence is
typically  based on the price charged when an element is sold  separately or, if
an element is not sold  separately,  on the price  established  by an authorized
level of management,  if it is probable that the price, once  established,  will
not change before market introduction.  We use the residual method prescribed in
SOP 98-9 to allocate  revenues to  delivered  elements  once it has  established
vendor-specific evidence for such undelivered elements.

We provide internet access and back-up, retrieval and restoration services under
contractual  arrangements  with  terms  ranging  from 1 year to 5  years.  These
contracts are billed  monthly,  in advance,  based on the  contractually  stated
rates.  At the inception of a contract,  we may activate the customer's  account
for a  contractual  fee  that it  amortizes  over the  term of the  contract  in
accordance  with  Emerging  Issues  Task Force  Issue  ("EITF")  00-21  "Revenue
Arrangements   with   Multiple   Deliverables."   Our  standard   contracts  are
automatically  renewable by the customer  unless  terminated  on 30 days written
notice.  Early  termination  of  the  contract  generally  results  in an  early
termination  fee equal to the lesser of six  months of service or the  remaining
term of the contract.


                                       33
<PAGE>


Professional  consulting  services  are  billed  based on the number of hours of
consultant  services provided and the hourly billing rates. We recognize revenue
under these arrangements as the service is performed.

Revenue from the resale of third-party  hardware and software is recognized upon
delivery  provided  there are no  further  obligations  to install or modify the
hardware or software. Revenue from the sales of hardware/software is recorded at
the gross amount of the sale when the contract  satisfies  the  requirements  of
EITF 99-19.

BUSINESS COMBINATIONS

In accordance  with business  combination  accounting,  we allocate the purchase
price of acquired  companies  to the tangible and  intangible  assets  acquired,
liabilities  assumed,  as well as in-process  research and development  based on
their  estimated  fair values.  We have engaged a third-party  appraisal firm to
assist  management in determining the fair values of certain assets acquired and
liabilities  assumed.  Such a valuation requires  management to make significant
estimates and assumptions, especially with respect to intangible assets.

Management makes estimates of fair value based upon  assumptions  believed to be
reasonable.  These estimates are based on historical  experience and information
obtained from the management of the acquired  companies.  Critical  estimates in
valuing certain of the intangible  assets include but are not limited to: future
expected  cash  flows  from  license  sales,  maintenance  agreements,  customer
contracts and acquired  developed  technologies;  expected  costs to develop the
in-process  research and development  into  commercially  viable  products;  the
acquired  company's brand awareness and market position,  as well as assumptions
about the  period of time the  acquired  brand will  continue  to be used in the
combined  company's product  portfolio;  and discount rates. These estimates are
inherently  uncertain  and  unpredictable.  Assumptions  may  be  incomplete  or
inaccurate,  and  unanticipated  events and  circumstances  may occur  which may
affect  the  accuracy  or  validity  of such  assumptions,  estimates  or actual
results.

GOODWILL AND INTANGIBLE ASSETS

We account for Goodwill and Intangible  Assets in accordance  with SFAS No. 141,
"Business  Combinations"  and SFAS  No.  142,  "Goodwill  and  Other  Intangible
Assets." Under SFAS No. 142,  goodwill and  intangibles  that are deemed to have
indefinite  lives are no longer  amortized but,  instead,  are to be reviewed at
least annually for impairment.  Intangible  assets continue to be amortized over
their estimated useful lives.

INCOME TAXES

We account for income  taxes  pursuant to SFAS No. 109,  "Accounting  for Income
Taxes". Deferred taxes arise from temporary differences,  primarily attributable
to the use of the cash  method  for tax  purposes  and  accrual  method for book
purposes  and net  operating  loss  carry-forwards.  The  Company  reserves  for
deferred tax assets when more likely than not, the benefit of the asset will not
be realized in the future.

NET LOSS PER SHARE

Basic  net loss  per  common  share  is  computed  by  dividing  net loss by the
weighted-average  number of common shares outstanding during the period. Diluted
net loss per common share also  includes  common stock  equivalents  outstanding
during  the  period if  dilutive.  Diluted  net loss per  common  share has been
computed by dividing net loss by the  weighted-average  number of common  shares
outstanding  without an assumed increase in common shares outstanding for common
stock equivalents; as such common stock equivalents are anti-dilutive.

STOCK OPTION PLANS

As permitted  under SFAS No. 148  "Accounting  for  Stock-Based  Compensation  -
Transition  and  Disclosure,"   which  amended  SFAS  No.  123  "Accounting  for
Stock-Based  Compensation,"  we have elected to continue to follow the intrinsic
value method in accounting  for our  stock-based  compensation  arrangements  as
defined by Accounting  Principles  Board ("APB")  Opinion No. 25 "Accounting for
Stock Issued to  Employees,"  and related  interpretations  including  Financial
Accounting  Standards  Board  ("FASB")  Interpretation  No. 44  "Accounting  for
Certain Transactions Involving Stock Compensation," an interpretation of APB No.
25.


                                       34
<PAGE>


NON-EMPLOYEE STOCK BASED COMPENSATION

We record the cost of stock  based  compensation  awards  that we have issued to
non-employees  for services at either the fair value of the services rendered or
the instruments issued in exchange for such services,  whichever is more readily
determinable,  using the measurement  date guidelines  enumerated in EITF 96-18,
"Accounting for Equity  Instruments  That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services."


                              RESULTS OF OPERATIONS

THREE  MONTHS  ENDED  SEPTEMBER  30,  2005  COMPARED TO THE THREE  MONTHS  ENDED
SEPTEMBER 30, 2004.

For the three  months  ended  September  30,  2005,  our  consolidated  revenues
amounted to $152,941  compared to $0 for the three  months ended  September  30,
2004.  The increase is the result of business  combinations  that we consummated
with CSSI and LucidLine in February 2005 and Entelagent in March 2005.

Cost of Sales for the three months ended September 30, 2005 amounted to $249,881
compared to $0 for the three months  ended  September  30,  2004.  Cost of sales
during the three months ended  September 30, 2005 includes  $133,124  associated
with the  amortization  of developed  technology  that we acquired from CSSI and
Entelagent.

Operating  expenses  amounted to $2,421,200 for the three months ended September
30, 2005 as compared to  $1,479,351  for the three  months ended  September  30,
2004,  an increase of  $941,849.  The increase in  operating  expenses  includes
approximately $919,000 for salaries associated with an increase in the number of
employees  from  acquired  businesses,  approximately  $133,000  for  legal  and
professional  fees that we incurred  principally in connection with bringing the
Company into  compliance with its Securities and Exchange  Commission  reporting
obligations,  approximately  $31,000 for  amortization  of  acquired  intangible
assets,  and  approximately  $456,000 for increased  general and  administrative
expenses associated with the acquired businesses. These increases were partially
offset by an  approximately  $32,000  reduction in expense  associated  with the
amortization of stock-based  compensation  arrangements,  a $300,000 gain on the
reduction in  intrinsic  value of a stock put right and  approximately  $311,000
reduction in expense  associated  with a penalty  provision of an  Accommodation
Agreement.

Our  consolidated  loss from operations for the three months ended September 30,
2005 amounted to $2,518,140 compared to a loss of $1,479,351 for the same period
in 2004. Our loss  increased as a result of the increases in operating  expenses
discussed above.

Interest  expense  during the three months ended  September 30, 2005 amounted to
$10,159,038  as compared to $33,087 for the three  months  ended  September  30,
2004.  The  increase  is  directly  related  to our  issuances  of notes and the
increased borrowings that we made to finance our acquisitions of CSSI, LucidLine
and Entelagent and fund our working capital needs. Non cash interest relating to
the amortization of deferred financing costs,  penalty warrants issued to bridge
note holders and the accretion of debt  discounts  during the three months ended
September 30, 2005 amounted to approximately  $9,853,000  compared to $0 in same
period in 2004.  The intrinsic  value of the  conversion  option for bridge note
holders and  subordinated  note holders,  which has been  classified as interest
expense  amounted to  $8,000,000  for the three months ended  September 30, 2005
compared to $0 in the same  period in 2004.  Amortization  of  deferred  finance
charges  which  have been  classified  as  interest  expense  was  approximately
$1,115,000  in the three months ended  September  30, 2005 compared to $0 in the
same period in 2004.  Accretion of debt discounts  during the three months ended
September 20, 2005 were approximately $750,000 compared to $0 in the same period
in 2004. Interest income, was $0 and $19,250 in the three months ended September
30, 2005 and 2004, respectively.  Interest income represents the interest earned
from loans that we made to Entelagent  prior to our acquisition of that business
on March 30, 2005.

For the three months ended  September 30, 2005, the net loss was  $12,677,722 or
$(0.21) per share on 61,499,103 weighted average shares outstanding  compared to
a net loss of  $1,493,188 or $(0.04) per share on  39,010,560  weighted  average
shares outstanding for the three months ended September 30, 2004.


                                       35
<PAGE>


NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2004.

For the nine months ended September 30, 2005, our consolidated revenues amounted
to $339,212  compared to $0 for the nine months ended  September  30, 2004.  The
increase is the result of business  combinations  that we consummated  with CSSI
and LucidLine in February 2005 and Entelagent in March 2005.

Cost of Sales for the nine months ended  September 30, 2005 amounted to $476,726
compared to $0 for the nine  months  ended  September  30,  2004.  Cost of sales
during the nine months ended  September  30, 2005 includes  $272,792  associated
with the  amortization  of developed  technology  that we acquired from CSSI and
Entelagent.

Operating  expenses  amounted to $7,414,310 for the nine months ended  September
30, 2005 as compared to $3,274,798 for the nine months ended September 30, 2004,
an increase in  operating  expenses of  $4,139,512.  The  increase in  operating
expenses  includes  approximately  $2,694,000  for salaries  associated  with an
increase in the number of  employees  from  acquired  businesses,  approximately
$761,000  for the  amortization  of a  stock  based  compensation  arrangements,
approximately  $703,000  for  legal  and  professional  fees  that  we  incurred
principally  in connection  with bringing the Company into  compliance  with its
Securities and Exchange Commission reporting obligations,  approximately $70,000
for  amortization  of acquired  intangible  assets,  approximately  $474,000 for
increased  general and  administrative  expenses  associated  with the  acquired
businesses, $366,193 loss on collateralized financing arrangement and a $370,000
expense  associated  with the  preparation  of a homeland  security  operational
requirements assessment related to Will County,  Illinois.  These increases were
partially offset by an approximate $217,000 reduction in expense associated with
the stock based  penalties  under an  accommodation  agreement,  an  approximate
$439,000  reduction  in  expense  associated  with  losses  taken on  settlement
agreements, and a gain of approximately $344,000 on settlement of legal claims.

Our  consolidated  loss from  operations for the nine months ended September 30,
2005 amounted to $7,551,824 compared to a loss of $3,274,798 for the same period
in 2004.  Our loss  increased  as a result  of the  increases  in our  operating
expenses discussed above.

Interest  expense  during the nine months ended  September  30, 2005 amounted to
$12,376,904 as compared to $99,263 for the nine months ended September 30, 2004.
The increase is directly  related to our  issuances  of notes and the  increased
borrowings  that we made to finance  our  acquisitions  of CSSI,  LucidLine  and
Entelagent and to fund our working capital needs.  Non-cash interest relating to
the amortization of deferred financing costs,  penalty warrants issued to bridge
note and  subordinated  note holders and the accretion of debt discounts  during
the nine months ended September 30, 2005 amounted to  approximately  $11,740,000
compared to $0 in same period in 2004.  Amortization of deferred finance charges
which have been classified as interest expense was  approximately  $1,826,000 in
the nine months ended  September  30, 2005  compared to $0 in the same period in
2004.  The  intrinsic  value of the  conversion  feature  on  bridge  notes  and
subordinated  notes,  which has been classified as interest  expense amounted to
$8,000,000  for the nine months ended  September  30, 2005 compared to $0 in the
same period in 2004.  Accretion of debt  discounts  during the nine months ended
September  30,  2005 were  approximately  $1,927,000  compared to $0 in the same
period in 2004.  Interest  income,  was  $19,250  and $57,750 in the nine months
ended September 30, 2005 and 2004, respectively.  Interest income represents the
interest  earned from loans that we made to Entelagent  prior to our acquisition
of that business on March 30, 2005.

For the nine months ended  September 30, 2005,  the net loss was  $19,910,022 or
$(0.35) per share on 57,284,490 weighted average shares outstanding  compared to
a net loss of  $3,316,311 or $(0.09) per share on  38,610,646  weighted  average
shares outstanding for the nine months ended September 30, 2004.

LIQUIDITY AND CAPITAL RESOURCES

We incurred a net loss of  $19,910,022  for the nine months ended  September 30,
2005, which includes  $14,598,275 of non-cash  charges  associated with the fair
value of common stock we issued as penalties under certain  registration  rights
agreements  ($823,747),  fair value of common stock warrants issued as a penalty
to bridge note and  subordinated  note  holders  ($8,000,000),  amortization  of
deferred compensation under a stock based compensation arrangement ($1,239,083),
accretion   related  to  warrants  issued  in  conjunction  with  notes  payable
($1,927,374),  amortization of deferred financing costs ($1,825,606),  loss on a
collateralized financing arrangement ($366,194),


                                       36
<PAGE>


non-cash increase in notes payable to a former officer  ($17,399),  depreciation
and  amortization  ($382,872)  and a  charge  for the  intrinsic  value of stock
options  ($16,000).  The  non-cash  charges  were  offset by  non-cash  gains of
$228,900 associated with the settlement of a related party consulting agreement,
a gain on  reduction in  intrinsic  value of a put right of $300,000,  a gain on
legal settlement of $389,103 and $19,250 non-cash interest income. Including the
amounts above, we used net cash flows in our operating  activities of $7,781,408
during the nine months ended September 30, 2005. Our working capital  deficiency
at September 30, 2005 amounts to $23,033,903 and we are continuing to experience
shortages in working capital. We are also involved in substantial litigation and
are being investigated by the Securities and Exchange Commission with respect to
certain  of our press  releases  and our use of form S-8 to  register  shares of
common stock that we issued to certain  consultants in prior periods.  We cannot
provide any assurance that the outcome of these matters will not have a material
adverse  affect on our  ability to sustain the  business.  These  matters  raise
substantial doubt about our ability to continue as a going concern.

We expect to continue  incurring  losses for the  foreseeable  future due to the
inherent uncertainty that is related to establishing the commercial  feasibility
of  technological  products  and  developing  a  presence  in new  markets.  The
Company's ability to successfully integrate the acquired businesses described in
Note E is critical to the  realization  of its business plan. The Company raised
$9,643,000  of gross  proceeds  ($9,015,261  net  proceeds  after the payment of
certain transaction  expenses) in financing  transactions during the nine months
ended  September 30, 2005. The Company used $7,781,408 of these proceeds to fund
its operations  (which  includes a $1,388,000  escrow deposit for the payment of
liabilities  assumed  in  business  combinations),  and a  net  of  $599,728  in
investing activities,  which principally includes the cash component of purchase
business combinations that the Company consummated (during February and March of
2005),  net of cash  acquired in the business  combinations  and the purchase of
property and equipment. In addition, the Company repaid an aggregate of $668,093
of certain  obligations due to certain  officer/stockholders,  $339,256 of which
was a  reduction  of the  funds  held  in the  restricted  cash  escrow  account
established  in connection  with the Entelagent  Merger (Note E).  Subsequent to
September 30, 2005 the Company raised approximately $820,000 in additional gross
funds in three capital financing  transactions  consummated with a related party
that were used principally to fund operations (Note T).

We are currently in the process of attempting  to raise  additional  capital and
have  taken  certain  steps to  conserve  our  liquidity  while we  continue  to
integrate  the acquired  businesses.  Although we believe that we have access to
capital resources,  we have not secured any commitments for additional financing
at this time nor can we provide any assurance  that we will be successful in our
efforts to raise  additional  capital and/or  successfully  execute our business
plan. In an effort to secure additional  financing,  the Company has, subsequent
to September 30, 2005,  offered its creditors and claimants a proposed agreement
to  issue  common  stock  for  amounts  owed  to the  holders  of the  Company's
indebtedness  (including  lenders,   past-due  trade  accounts,  and  employees,
consultants and other service providers with claims for fees, wages or expenses)
(see Note S).

OFF-BALANCE SHEET ARRANGEMENTS

At September 30, 2005,  we did not have any  relationships  with  unconsolidated
entities  or  financial  partnerships,  such as  entities  often  referred to as
structured finance,  variable interest or special purpose entities,  which would
have  been  established  for  the  purpose  of  facilitating  off-balance  sheet
arrangements or other contractually narrow or limited purposes.  As such, we are
not exposed to any financing,  liquidity, market or credit risk that could arise
if we had engaged in such relationships.

CAUTIONARY STATEMENTS AND RISK FACTORS

The risks noted below and  elsewhere  in this report and in other  documents  we
file  with the SEC are risks  and  uncertainties  that  could  cause our  actual
results   to  differ   materially   from  the   results   contemplated   by  the
forward-looking  statements contained in this report and other public statements
we make.

RISKS RELATED TO OUR COMMON STOCK

THERE IS DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.

We  currently  have a number of  obligations  that we are unable to meet without
generating  additional  revenues  or raising  additional  capital.  If we cannot
generate  additional revenues or raise additional capital in the near future, we


                                       37
<PAGE>


may become insolvent. As of September 30, 2005, our cash balance was $80,233 and
we had a working capital deficit of $23,033,903.  This raises  substantial doubt
about our ability to continue as a going concern.  Historically,  we have funded
our capital  requirements with debt and equity financing.  Our ability to obtain
additional equity or debt financing depends on a number of factors including our
financial  performance and the overall conditions in our industry. If we are not
able to raise  additional  financing or if such  financing  is not  available on
acceptable  terms, we may liquidate  assets,  seek or be forced into bankruptcy,
and/or  continue  operations  but suffer  material  harm to our  operations  and
financial condition.  These measures could have a material adverse affect on our
ability to continue as a going concern.

INVESTORS MAY NOT BE ABLE TO ADEQUATELY  EVALUATE OUR BUSINESS AND PROSPECTS DUE
TO OUR  LIMITED  OPERATING  HISTORY,  LACK  OF  REVENUES  AND  LACK  OF  PRODUCT
OFFERINGS.

We are at an early stage of executing  our business  plan and have no history of
offering information security  capabilities.  Combined Professional Services was
incorporated in Nevada in 1995 and Patron was  incorporated in Delaware in 2002.
We have not had significant business operations since inception.  As a result of
our limited history,  it may be difficult to plan operating expenses or forecast
our revenues accurately.  Our assumptions about customer or network requirements
may be wrong.  The revenue and income  potential of these  products is unproven,
and the markets  addressed by these products are volatile.  If such products are
not successful, our actual operating results could be below our expectations and
the expectations of investors and market analysts,  which would likely cause the
price of our common stock to decline.

We generated no revenue from operations  through December 31, 2004 and relied on
financing   generated   from  our  capital   raising   activities  to  fund  the
implementation  of our business plan. We have incurred  operating and net losses
and negative cash flows from operations since our inception. As of September 30,
2005,  we had an  accumulated  deficit  of  approximately  $60  million.  We may
continue to incur  operating  and net losses,  due in part to  implementing  our
acquisitions  strategy,  engaging in financing  activities  and expansion of our
personnel and our business  development  capabilities.  We will continue to seek
financing for the acquisition of other acquisition  targets that we may identify
in the future.  We continue to believe that we will secure financing in the near
future, but there can be no assurance of our success. If we are unable to obtain
the  necessary  funding,  it will  materially  adversely  affect our  ability to
execute our business plan and to continue our operations.

In addition, we may not be able to achieve or maintain profitability,  and, even
if we do  achieve  profitability,  the  level  of any  profitability  cannot  be
predicted and may vary significantly from quarter to quarter.

THERE CAN BE NO GUARANTY  THAT A MARKET WILL  DEVELOP FOR THE PRODUCTS WE INTEND
TO OFFER.

We currently have a limited offering of products.  We intend to acquire products
through the acquisition of existing businesses. There is no guarantee,  however,
that a market will develop for Internet security solutions of the type we intend
to  offer.  We cannot  predict  the size of the  market  for  Internet  security
solutions,  the rate at which the  market  will  grow,  or  whether  our  target
customers will accept our acquired products.

OUR  OPERATING  RESULTS  MAY  FLUCTUATE  SIGNIFICANTLY,   WHICH  MAY  RESULT  IN
VOLATILITY OR HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF OUR COMMON STOCK.

The  market  prices  of the  securities  of  technology-related  companies  have
historically  been  volatile and may continue to be volatile.  Thus,  the market
price of our common stock is likely to be subject to wide  fluctuations.  If our
revenues do not grow or grow more slowly than we  anticipate,  if  operating  or
capital   expenditures   exceed   our   expectations   and   cannot  be  reduced
appropriately,  or if some other event adversely affects us, the market price of
our common stock could decline.  Only a small public market currently exists for
our common stock and the number of shares eligible for sale in the public market
is currently  very limited,  but is expected to increase.  Sales of  substantial
shares in the future would depress the price of our common  stock.  In addition,
we currently do not receive any stock market research coverage by any recognized
stock  market  research  or  trading  firm and our  shares are not traded on any
national  securities  exchange.  A larger and more active  market for our common
stock may not develop.


                                       38
<PAGE>


Because of our limited  operations  history  and lack of assets and  revenues to
date, our common stock is believed to be currently  trading on speculation  that
we will be successful in implementing  our  acquisition  and growth  strategies.
There can be no assurance  that such  success  will be achieved.  The failure to
implement our acquisitions  and growth  strategies would likely adversely affect
the  market  price  of  our  common  stock.  In  addition,  if  the  market  for
technology-related stocks or the stock market in general experiences a continued
or greater loss in investor  confidence or otherwise  fails, the market price of
our common stock could decline for reasons unrelated to our business, results of
operations  and financial  condition.  The market price of our common stock also
might decline in reaction to events that affect other  companies in our industry
even if these events do not directly  affect us.  General  political or economic
conditions, such as an outbreak of war, a recession or interest rate or currency
rate  fluctuations,  could also cause the  market  price of our common  stock to
decline.  Our  common  stock  has  experienced,  and is likely  to  continue  to
experience, these fluctuations in price, regardless of our performance.

WE ARE CURRENTLY SUBJECT TO AN SEC INVESTIGATION.

Pursuant  to  Section  20(a)  of the  Securities  Act and  Section  21(a) of the
Securities  Exchange Act of 1934, as amended (the "Exchange  Act"), the staff of
the SEC (the "Staff"),  issued an order (In the Matter of Patron Systems, Inc. -
Order  Directing  a  Private  Investigation  and  Designating  Officers  to Take
Testimony  (C-03739-A,   February  12,  2004))  (the  "Order")  that  a  private
investigation (the "SEC  Investigation") be made to determine whether certain of
our actions,  among others, certain of its officers and directors and others (as
described  below)  violated  Section 5(a) and 5(c) of the  Securities Act and/or
Section 10 and Rule 10b-5  promulgated  under the Exchange Act.  Generally,  the
Order  provides,  among other things,  that the Staff is  investigating  (i) the
legality of two (2) separate  Registration  Statements  filed by us on Form S-8,
filed on  December  20,  2002 and on April 2, 2003,  as amended on April 9, 2003
(collectively,  the "Registration  Statements"),  covering the resale of, in the
aggregate,   4,375,000   shares  of  common  stock  issued  to  various  of  our
consultants,  and (ii) whether in connection with the purchase or sale of shares
of common stock,  certain of our officers,  directors and others (a) sold common
stock  in  violation  of  Section  5 of the  Securities  Act  and/or,  (b)  made
misrepresentations and/or omissions of material facts and/or employed fraudulent
devices in connection  with such  purchases  and/or sales relating to certain of
our  press  releases  regarding,   among  other  items,   proposed  mergers  and
acquisitions  that were never  consummated.  If the SEC brings an action against
us, it could  result in,  among  other  items,  a civil  injunctive  order or an
administrative  cease-and-desist  order being entered against us, in addition to
the imposition of a significant civil penalty.  Moreover,  the SEC Investigation
and/or a subsequent  SEC action could affect  adversely  our ability to have our
common stock listed on a stock exchange and/or quoted on the NASD Bulletin Board
or  NASDAQ,  our  ability  to sell our  securities  and/or  have our  securities
registered with the SEC and/or in various states and/or our ability to implement
its business  plan. To date, our legal counsel  representing  us in such matters
has  indicated  that the SEC  Investigation  is  ongoing  and the  Staff has not
indicated  whether  it  will  or will  not  recommend  that  the  SEC  bring  an
enforcement action against us, our officers, directors and/or others.

THE  CONCENTRATION  OF OUR CAPITAL  STOCK  OWNERSHIP  WITH INSIDERS IS LIKELY TO
LIMIT THE ABILITY OF OTHER STOCKHOLDERS TO INFLUENCE CORPORATE MATTERS.

As of  September  30,  2005,  the  executive  officers,  directors  and entities
affiliated with any of them together  beneficially own  approximately 17% of our
outstanding  common  stock.  As a  result,  these  stockholders  may be  able to
exercise control over matters requiring approval by our stockholders,  including
the election of directors and approval of  significant  corporate  transactions.
This  concentration  of  ownership  might  also have the effect of  delaying  or
preventing a change in our control that might be viewed as  beneficial  by other
stockholders.

FUTURE SALES OF SHARES BY EXISTING  STOCKHOLDERS  COULD CAUSE OUR STOCK PRICE TO
DECLINE.

If our  existing  or  future  stockholders  sell,  or  are  perceived  to  sell,
substantial  amounts of our common stock in the public market,  the market price
of our  common  stock  could  decline.  As of  September  30,  2005,  there  are
60,427,299  shares of common stock outstanding and shares to be issued, of which
all but 49,998,049  shares are held by directors,  executive  officers and other
affiliates,  the sale of which are subject to volume limitations under Rule 144,
various  vesting  agreements  and our  quarterly and other  "blackout"  periods.
Furthermore,  shares  subject to  outstanding  options and  warrants  and shares
reserved for future  issuance  under our stock option plan will become  eligible
for sale in the  public  market to the extent  permitted  by the  provisions  of
various  vesting  agreements,  the  lock-up  agreements  and Rule 144  under the
Securities Act.


                                       39
<PAGE>


THE  UNPREDICTABILITY  OF AN ACQUIRED COMPANY'S  QUARTERLY RESULTS MAY CAUSE THE
TRADING PRICE OF OUR COMMON STOCK TO DECLINE.

The quarterly  revenues and  operating  results of companies we may acquire will
likely continue to vary in the future due to a number of factors,  many of which
are outside of our control.  Any of these  factors  could cause the price of our
common stock to decline. The primary factors that may affect future revenues and
future operating results include the following:

o        the demand for our  subsidiaries'  current  product  offerings  and our
         future products;
o        the length of sales cycles;
o        the timing of recognizing revenues;
o        new product introductions by us or our competitors;
o        changes  in  our  pricing  policies  or  the  pricing  policies  of our
         competitors;
o        variations in sales channels, product costs or mix of products sold;
o        our  ability  to  develop,  introduce  and ship in a timely  manner new
         products and product enhancements that meet customer requirements;
o        our ability to obtain  sufficient  supplies  of sole or limited  source
         components for our products;
o        variations in the prices of the components we purchase;
o        our  ability to attain and  maintain  production  volumes  and  quality
         levels  for  our  products  at  reasonable  prices  at our  third-party
         manufacturers;
o        our ability to manage our customer  base and credit risk and to collect
         our accounts receivable; and
o        the financial strength of our value-added resellers and distributors.

Our  operating  expenses are largely  based on  anticipated  revenues and a high
percentage  of our  expenses  are,  and will  continue to be, fixed in the short
term. As a result,  lower than  anticipated  revenues for any reason could cause
significant  variations  in our  operating  results from quarter to quarter and,
because of our rapidly growing operating  expenses,  could result in substantial
operating losses.

OUR  COMMON  STOCK  IS  SUBJECT  TO THE  SEC'S  PENNY  STOCK  RULES.  THEREFORE,
BROKER-DEALERS MAY EXPERIENCE DIFFICULTY IN COMPLETING CUSTOMER TRANSACTIONS AND
TRADING ACTIVITY IN OUR SECURITIES MAY BE ADVERSELY AFFECTED.

If at any time a company has net tangible  assets of  $5,000,000 or less and the
common  stock has a market price per share of less than $5.00,  transactions  in
the common stock may be subject to the "penny stock" rules promulgated under the
Exchange Act. Under these rules, broker-dealers who recommend such securities to
persons other than institutional accredited investors must:

o        make a special written suitability determination for the purchaser;
o        receive the  purchaser's  written  agreement to a transaction  prior to
         sale;
o        provide the purchaser  with risk  disclosure  documents  which identify
         certain risks  associated  with  investing in "penny  stocks" and which
         describe the market for these "penny  stocks" as well as a  purchaser's
         legal remedies; and
o        obtain  a  signed   and  dated   acknowledgment   from  the   purchaser
         demonstrating  that the  purchaser  has actually  received the required
         risk disclosure document before a transaction in a "penny stock" can be
         completed.

If our common stock becomes subject to these rules,  broker-dealers  may find it
difficult  to  effectuate  customer  transactions  and  trading  activity in our
securities  may be  adversely  affected.  As a result,  the market  price of our
securities may be depressed, and stockholders may find it more difficult to sell
their shares of our common stock.

RISKS RELATED TO OUR BUSINESS

WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE ACQUIRED BUSINESSES.


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<PAGE>


Our business plan is dependent upon the acquisition and integration of companies
that have previously  operated  independently.  The process of integrating could
cause an interruption of, or loss of momentum in, the activities of our business
and the loss of key personnel.  The diversion of management's  attention and any
delays  or  difficulties  encountered  in  connection  with our  integration  of
acquired  operations  could have an adverse  effect on our business,  results of
operations, financial condition or prospects.

WE CURRENTLY DO NOT HAVE SUFFICIENT  REVENUES TO SUPPORT OUR BUSINESS ACTIVITIES
AND IF OPERATING LOSSES CONTINUE,  WILL BE REQUIRED TO OBTAIN ADDITIONAL CAPITAL
THROUGH FINANCINGS WHICH WE MAY NOT BE ABLE TO SECURE.

To achieve our intended growth, we will require substantial  additional capital.
We have  encountered  difficulty  and delays in raising  capital to date and the
market   environment  for  development  stage  companies,   like  ours,  remains
particularly challenging. There can be no assurance that funds will be available
when  needed or on  acceptable  terms.  Technology  companies  in  general  have
experienced difficulty in recent years in accessing capital. Inability to obtain
additional financing may require us to delay, scale back or eliminate certain of
our growth plans which could have a material and adverse effect on our business,
financial condition or results of operations or to cease operations.  Even if we
are able to obtain additional  financing,  such financing could be structured as
equity  financing that would dilute the ownership  percentage of any investor in
our securities.

DOWNTURNS IN THE INTERNET  INFRASTRUCTURE,  NETWORK SECURITY AND RELATED MARKETS
MAY DECREASE OUR REVENUES AND MARGINS.

The  market  for our  current  products  and other  products  we intend to offer
depends on economic  conditions  affecting the broader Internet  infrastructure,
network  security  and related  markets.  Downturns  in these  markets may cause
enterprises  and  carriers to delay or cancel  security  projects,  reduce their
overall or security-specific  information technology budgets or reduce or cancel
orders for our current  products and other products we intend to offer.  In this
environment, customers such as distributors,  value-added resellers and carriers
may  experience  financial  difficulty,  cease  operations and fail to budget or
reduce  budgets for the  purchase of our current  products or other  products we
intend to offer.  This,  in turn,  may lead to longer  sales  cycles,  delays in
purchase  decisions,  payment  and  collection,  and may  also  result  in price
pressures,  causing us to realize  lower  revenues,  gross margins and operating
margins.  In  addition,   general  economic   uncertainty  caused  by  potential
hostilities involving the United States,  terrorist  activities,  the decline in
specific markets such as the service  provider market in the United States,  and
the general  decline in capital  spending in the information  technology  sector
make it difficult to predict changes in the purchase and network requirements of
our potential  customers and the markets we intend to serve. We believe that, in
light of these events, some businesses may curtail or eliminate capital spending
on  information  technology.  A decline in capital  spending  in the  markets we
intend to serve may  adversely  affect our future  revenues,  gross  margins and
operating margins and make it necessary for us to gain significant  market share
from our future  competitors in order to achieve our financial goals and achieve
profitability.

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

The market for network security  products is highly  competitive,  and we expect
competition  to intensify in the future.  Competitors  may gain market share and
introduce new competitive  products for the same markets and customers we intend
to serve with our products.  These products may have better  performance,  lower
prices and broader  acceptance than the products we currently offer or intend to
offer.

Many of our potential competitors have longer operating histories,  greater name
recognition,   large  customer  bases  and  significantly   greater   financial,
technical,  sales, marketing and other resources than we have. In addition, some
of our  potential  competitors  currently  combine  their  products  with  other
companies'  networking and security products.  These potential  competitors also
often combine their sales and marketing  efforts.  Such activities may result in
reduced  prices,  lower gross and operating  margins and longer sales cycles for
the  products  we  currently  offer and  intend to offer.  If any of our  larger
potential  competitors were to commit greater  technical,  sales,  marketing and
other  resources to the markets we intend to serve,  or reduce  prices for their
products over a sustained  period of time, our ability to successfully  sell the
products  we intend to offer,  increase  revenue or meet our or market  analysts
expectations could be adversely affected.


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<PAGE>


FAILURE TO ADDRESS  EVOLVING  STANDARDS  IN THE NETWORK  SECURITY  INDUSTRY  AND
SUCCESSFULLY  DEVELOP AND INTRODUCE NEW PRODUCTS OR PRODUCT  ENHANCEMENTS  WOULD
CAUSE OUR REVENUES TO DECLINE.

The market for network security products is characterized by rapid technological
change, frequent new product introductions, changes in customer requirements and
evolving   industry   standards.   We  expect  to  introduce  our  products  and
enhancements  to existing  products to address  current  and  evolving  customer
requirements and broader networking trends and  vulnerabilities.  We also expect
to develop products with strategic partners and incorporate third-party advanced
security  capabilities  into  our  intended  product  offerings.  Some of  these
products and enhancements  may require us to develop new hardware  architectures
that involve complex and time-consuming processes. In developing and introducing
our  intended  product  offerings,  we have  made,  and will  continue  to make,
assumptions with respect to which features,  security  standards and performance
criteria will be required by our potential customers.  If we implement features,
security  standards  and  performance  criteria  that are  different  from those
required by our potential  customers,  market acceptance of our intended product
offerings may be significantly reduced or delayed,  which would harm our ability
to penetrate existing or new markets.

Furthermore,  we may not be able to develop new products or product enhancements
in a timely  manner,  or at all. Any failure to develop or  introduce  these new
products and product  enhancements  might cause our existing products to be less
competitive, may adversely affect our ability to sell solutions to address large
customer  deployments  and, as a  consequence,  our  revenues  may be  adversely
affected.  In addition,  the introduction of products embodying new technologies
could render existing  products we intend to offer obsolete,  which would have a
direct,  adverse  effect on our market  share and  revenues.  Any failure of our
future products or product enhancements to achieve market acceptance could cause
our revenues to decline and our operating  results to be below our  expectations
and the expectations of investors and market analysts,  which would likely cause
the price of our common stock to decline.

WE HAVE  MATERIAL  WEAKNESSES IN OUR FINANCIAL  SYSTEMS,  INTERNAL  CONTROLS AND
OPERATIONS  THAT  COULD  HAVE A  MATERIAL  ADVERSE  EFFECT  ON  OUR  OPERATIONS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Our ability to sell our intended  product  offerings  and implement our business
plan successfully in a volatile and growing market requires effective management
and financial  systems and a system of financial  processes  and  controls.  Our
Chief  Executive  Officer  and Acting  Chief  Financial  Officer  evaluated  the
effectiveness  of our  disclosure  controls and  procedures in  accordance  with
Exchange Act Rules 13a-15 or 15d-15 and  identified  material  weaknesses in our
internal  control  relating to, among other things,  our limited  segregation of
duties,  ability to identify and record complex  transactions  including capital
financing  transactions  and  business  combinations  and  timely  file  our tax
returns.  The  identification  of these  material  weaknesses  has led our Chief
Executive  Officer  and Acting  Chief  Financial  Officer to  conclude  that our
disclosure  controls and  procedures  are currently not adequate to enable us to
record, process, summarize and report information required to be included in our
periodic SEC filings within the required time period.

We have  limited  management  resources to date and are still  establishing  our
management and financial systems.  Growth, to the extent it occurs, is likely to
place a considerable strain on our management resources,  systems, processes and
controls.  To address  these  issues,  we will need to  continue  to improve our
financial and managerial  controls,  reporting systems and procedures,  and will
need to continue to expand, train and manage our work force worldwide. If we are
unable to maintain an adequate level of financial processes and controls, we may
not be able to accurately report our financial performance on a timely basis and
our business and stock price would be harmed.

IF OUR FUTURE  PRODUCTS DO NOT  INTEROPERATE  WITH OUR END CUSTOMERS'  NETWORKS,
INSTALLATIONS WOULD BE DELAYED OR CANCELLED,  WHICH COULD  SIGNIFICANTLY  REDUCE
OUR ANTICIPATED REVENUES.

Future  products will be designed to interface with our end customers'  existing
networks,  each of which have  different  specifications  and  utilize  multiple
protocol standards. Many end customers' networks contain multiple generations of
products  that  have  been  added  over time as these  networks  have  grown and
evolved.  Our future products must  interoperate with all of the products within
these  networks  as well as with  future  products  that might be added to these
networks in order to meet end customers' requirements.  If we find errors in the
existing  software used in our end customers'  networks,  we may elect to modify
our  software  to fix or  overcome  these  errors  so  that  our  products  will
interoperate and scale with their existing software and hardware.  If our future
products do not


                                       42
<PAGE>


interoperate with those within our end customers' networks,  installations could
be  delayed  or  orders  for  our  products  could  be  cancelled,  which  could
significantly reduce our anticipated revenues.

AS A PUBLIC  COMPANY,  WE MAY  INCUR  INCREASED  COSTS AS A RESULT  OF  RECENTLY
ENACTED AND  PROPOSED  CHANGES IN LAWS AND  REGULATIONS  RELATING  TO  CORPORATE
GOVERNANCE MATTERS AND PUBLIC DISCLOSURE.

Recently  enacted and  proposed  changes in the laws and  regulations  affecting
public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and
rules adopted or proposed by the SEC will result in increased costs for us as we
evaluate the  implications of these laws,  regulations and standards and respond
to their  requirements.  These laws and regulations could make it more difficult
or more costly for us to obtain certain types of insurance,  including  director
and officer liability  insurance,  and we may be forced to accept reduced policy
limits and  coverage or incur  substantially  higher costs to obtain the same or
similar  coverage.  The impact of these events could also make it more difficult
for us to  attract  and  retain  qualified  persons  to  serve  on our  board of
directors,  board  committees or as executive  officers.  We cannot estimate the
amount or timing of additional  costs we may incur as a result of these laws and
regulations.

WE WILL DEPEND ON OUR KEY  PERSONNEL  TO MANAGE OUR  BUSINESS  EFFECTIVELY  IN A
RAPIDLY  CHANGING MARKET,  AND IF WE ARE UNABLE TO HIRE ADDITIONAL  PERSONNEL OR
RETAIN EXISTING PERSONNEL, OUR ABILITY TO EXECUTE OUR BUSINESS STRATEGY WOULD BE
IMPAIRED.

Our  future  success  depends  upon  the  continued  services  of our  executive
officers. The loss of the services of any of our key employees, the inability to
attract  or  retain  qualified  personnel  in the  future,  or  delays in hiring
required  personnel,  could  delay the  development  and  introduction  of,  and
negatively impact our ability to sell, our intended product offerings.

WE MIGHT HAVE TO DEFEND  LAWSUITS OR PAY DAMAGES IN CONNECTION  WITH ANY ALLEGED
OR ACTUAL FAILURE OF OUR PRODUCTS AND SERVICES.

Because our intended product  offerings and services provide and monitor network
security and may protect valuable information,  we could face claims for product
liability,  tort or breach of  warranty.  Anyone who  circumvents  our  security
measures could misappropriate the confidential  information or other property of
end  customers  using our  products,  or  interrupt  their  operations.  If that
happens,  affected  end  customers  or others may sue us.  Defending  a lawsuit,
regardless of its merit, could be costly and could divert management  attention.
Our business  liability  insurance coverage may be inadequate or future coverage
may be unavailable on acceptable terms or at all.

WE COULD BECOME SUBJECT TO LITIGATION  REGARDING  INTELLECTUAL  PROPERTY  RIGHTS
THAT COULD BE COSTLY AND RESULT IN THE LOSS OF SIGNIFICANT RIGHTS.

In recent  years,  there has been  significant  litigation  in the United States
involving patents and other intellectual  property rights. We may become a party
to litigation in the future to protect our intellectual  property or as a result
of an alleged infringement of another party's intellectual property.  Claims for
alleged infringement and any resulting lawsuit, if successful,  could subject us
to significant liability for damages and invalidation of our proprietary rights.
These lawsuits,  regardless of their success, would likely be time-consuming and
expensive  to  resolve  and would  divert  management  time and  attention.  Any
potential intellectual property litigation could also force us to do one or more
of the following:

o        stop or delay  selling,  incorporating  or using  products that use the
         challenged intellectual property; and/or
o        obtain from the owner of the infringed  intellectual  property  right a
         license to sell or use the relevant technology, which license might not
         be  available on  reasonable  terms or at all; or redesign the products
         that use that technology.

If we are forced to take any of these  actions,  our business might be seriously
harmed.  Our insurance may not cover potential claims of this type or may not be
adequate to indemnify us for all liability that could be imposed.


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<PAGE>


THE INABILITY TO OBTAIN ANY THIRD-PARTY LICENSE REQUIRED TO DEVELOP NEW PRODUCTS
AND PRODUCT  ENHANCEMENTS  COULD REQUIRE US TO OBTAIN  SUBSTITUTE  TECHNOLOGY OF
LOWER QUALITY OR PERFORMANCE STANDARDS OR AT GREATER COST, WHICH COULD SERIOUSLY
HARM OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

From time to time, we may be required to license  technology  from third parties
to develop new products or product enhancements. Third-party licenses may not be
available to us on  commercially  reasonable  terms or at all. The  inability to
obtain any  third-party  license  required  to develop  new  products or product
enhancements  could require us to obtain substitute  technology of lower quality
or  performance  standards or at greater cost,  which could  seriously  harm our
business, financial condition and results of operations.

GOVERNMENTAL  REGULATIONS  AFFECTING  THE  IMPORT OR EXPORT  OF  PRODUCTS  COULD
NEGATIVELY AFFECT OUR REVENUES.

Governmental  regulation  of imports  or  exports or failure to obtain  required
export approval of our encryption  technologies could harm our international and
domestic sales.  The United States and various foreign  governments have imposed
controls,  export license  requirements and restrictions on the import or export
of some technologies,  especially encryption technology.  In addition, from time
to time, governmental agencies have proposed additional regulation of encryption
technology,  such as requiring the escrow and  governmental  recovery of private
encryption keys.

In particular,  in light of recent terrorist  activity,  governments could enact
additional regulation or restrictions on the use, import or export of encryption
technology.  Additional  regulation  of  encryption  technology  could  delay or
prevent the  acceptance and use of encryption  products and public  networks for
secure  communications.  This might  decrease  demand for our  intended  product
offerings and services.  In addition,  some foreign  competitors  are subject to
less stringent controls on exporting their encryption technologies. As a result,
they may be able to compete  more  effectively  than we can in the  domestic and
international network security market.

MANAGEMENT COULD INVEST OR SPEND OUR CASH OR CASH EQUIVALENTS AND INVESTMENTS IN
WAYS THAT MIGHT NOT ENHANCE OUR RESULTS OF OPERATIONS OR MARKET SHARE.

We have  made no  specific  allocations  of our  cash  or cash  equivalents  and
investments.  Consequently,  management  will  retain a  significant  amount  of
discretion over the application of our cash or cash  equivalents and investments
and could spend the proceeds in ways that do not improve our  operating  results
or increase our market share. In addition, these proceeds may not be invested to
yield a favorable rate of return.


ITEM 3.  CONTROLS AND PROCEDURES

Members of our  management,  including  our Chief  Executive  Officer and Acting
Chief  Financial  Officer,  have evaluated the  effectiveness  of our disclosure
controls  and  procedures,  as defined by  paragraph  (e) of Exchange  Act Rules
13a-15 or 15d-15.  Based on that evaluation and the material weakness  described
below, our Chief Executive  Officer and Acting Chief Financial Officer concluded
that our disclosure  controls and  procedures  were not adequate to enable us to
record, process, summarize and report information required to be included in our
periodic SEC filings within the required time period.

DISCLOSURE CONTROLS AND INTERNAL CONTROLS

Disclosure  controls  are  procedures  that are designed  with the  objective of
ensuring  that  information  required to be disclosed in our reports filed under
the  Securities  Exchange  Act of 1934,  as  amended,  such as this  Report,  is
recorded,  processed,  summarized and reported within the time periods specified
in the SEC's rules and forms.  Disclosure  controls are also  designed  with the
objective of ensuring that such  information is accumulated and  communicated to
our management, including our Chief Executive Officer and Senior Vice President,
Finance and Administration,  as appropriate, to allow timely decisions regarding
required  disclosure.  Internal  controls are procedures which are designed with
the  objective of  providing  reasonable  assurance  that our  transactions  are
properly  authorized,  recorded  and  reported  and our assets  are  safeguarded
against unauthorized or improper use, to permit the preparation of our financial
statements in conformity with generally accepted accounting principles.


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<PAGE>


Our company is not an "accelerated filer" (as defined in the Securities Exchange
Act) and is not  required  to deliver  management's  report on control  over our
financial reporting until our fiscal year ended December 31, 2006. Nevertheless,
we identified  certain  matters that would  constitute  material  weaknesses (as
defined under the Public Company  Accounting  Oversight Board Auditing  Standard
No. 2) in our internal controls over financial reporting.

We have identified  deficiencies in our system of internal  controls,  which are
considered to be material  weaknesses.  These material weaknesses have led us to
conclude  that we currently  have an  inadequate  structure  with respect to our
financial  reporting  systems.  Until March of 2005, we had no central corporate
accounting  department.  Each of our subsidiaries  separately maintained its own
books and records and independently  controlled its cash  disbursements and cash
receipts.   The  decentralized  nature  of  our  accounting  system  limits  the
effectiveness  of our  internal  control  procedures  and our  ability to detect
potential  misstatements and incorrect accounting and financial  reporting.  The
subsidiary  accounting  departments do not have the sophistication to critically
evaluate  and  implement  new   accounting   pronouncements,   and  stock  based
transactions for options, warrants and common stock. At times these transactions
were not recorded properly and required additional  procedures and review and we
were  required  to record  adjustments  proposed by our  independent  registered
public accounting firm.

Certain  of  the  material  weaknesses  we  identified  relate  to  our  limited
segregation  of duties.  Segregation of duties within our company is limited due
to the fact that we have not had (until recently) any full-time  employees since
February 10, 2004 and, until the completion of business  combinations during the
quarter  ended March 31, 2005,  our  Company's  affairs have been managed by our
non-executive  Chairman and Sole  Director  Robert E, Yaw, II. In addition,  our
financial  records up until that time were  maintained by a former  employee who
had been providing  these services to us on a consulting  basis.  This condition
constituted a material  weakness in our financial  reporting system and a system
of internal  controls that has affected our ability to timely close our books on
a quarterly and annual basis.

The second  material  weakness we  identified is in our ability to implement the
requirements of complex accounting  pronouncements.  We have had difficulty with
ensuring that the accounting for our  equity-based  transactions is accurate and
complete.  Since April 30, 2002  (Inception),  we have  consummated  a series of
complex equity  transactions  involving the  application  of highly  specialized
accounting principles. The equity based transactions that we have had difficulty
with specifically relate to stock to be issued under consulting agreements,  the
penalty shares to be issued in connection with the Accommodation Agreements, and
the common  stock to be  repurchased  in  connection  with the Allin  Settlement
Agreement. We also experienced difficulty with applying the requirements of SFAS
141  "Business  Combinations"  and  related  pronouncement  as it relates to our
acquisitions of CSSI, LucidLine and Entelagent. Although we believe that certain
of these events are unique and that our equity based  transactions in the future
are likely to be substantially  reduced,  we are evaluating  certain  corrective
measures  to  provide  us with the  structure  we need at such times that we may
engage  in  equity  based  transactions  and  consummate   additional   business
combinations in the future.

The third  material  weakness we identified is in our ability to implement a tax
reporting  structure to file, on a timely basis,  Federal and state tax returns.
This material  weakness is primarily due to our limited  segregation  of duties.
Through  our   acquisitions  of  CSSI,   LucidLine  and   Entelagent,   we  have
significantly  increased  the number of  employees  working for us and intend to
implement a tax reporting structure to address this deficiency.

We believe these material  weaknesses  resulted from continued  working  capital
deficiencies and a failure to generate cash flows from  operations.  Immediately
following our acquisitions,  we appointed a Chief Executive Officer/Acting Chief
Financial  Officer who is principally  responsible  for overseeing our financial
affairs. In addition, we increased our number of employees with our acquisitions
of  Entelagent,  LucidLine  and CSSI and have  begun the  process  of  screening
candidates  for key  positions  in our finance  department.  We believe that the
expansion of our  operations and increase in the number of employees will enable
us  to  take  corrective   measures  once  we  finish  evaluating  our  existing
capabilities  and our  available  resources  to take such  corrective  measures.
Additionally,  we expect to hire a Chief  Financial  Officer with public company
experience within the next twelve months and relieve our Chief Executive Officer
of his current Acting Chief Financial Officer duties.

We believe that any such risks are  partially  mitigated by the fact that we had
minimal  assets  and  activities  during  our  most  recent  reporting  periods,
recordkeeping  and  authorization  function were not being performed by the same
individual  and the  non-executive  Chairman  reviewed  and  approved all of our
transactions. However, we


                                       45
<PAGE>


acknowledge that additional  control procedures are necessary to ensure that our
transactions  are  properly  recorded  and that  our  assets  are  appropriately
safeguarded.

INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in our  internal  control over  financial  reporting or in
other factors identified in connection with the evaluation required by paragraph
(d) of Exchange Act Rules 13a-15 or 15d-15 that occurred  during the nine months
ended  September 30, 2005 or the four quarters ended December 31, 2004 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.


                                       46
<PAGE>


PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

In April of 2005,  Richard  L.  Linting,  a former  President  of the  Company's
Professional Services Group, filed a complaint against the Company and Robert E.
Yaw, II, the  Company's  non-executive  Chairman,  in the Circuit  Court of Cook
County,  Illinois  alleging  breach of his  purported  employment  contract  and
seeking  sums  allegedly  owed under the  employment  contract  in the amount of
$1,321,809,  plus court costs and fees.  On August 22, 2005,  the  Company,  Mr.
Linting and Mr. Yaw entered into a Settlement  Agreement and Release whereby Mr.
Linting agreed to release all claims against the Company and Mr. Yaw existing as
of that date in consideration  for (i) the payment by the Company to Mr. Linting
of $100,000 in cash, (ii) the issuance by the Company of an aggregate of 422,827
shares ("Linting  Shares") of the Company's common stock (equivalent to $192,809
divided by $0.456) to be  transferred to Mr. Linting in such numbers and at such
times as directed by Mr. Linting  subsequent to the  registration of the Linting
Shares, (iii) the Company's agreement to register the Linting Shares through the
filing of a registration statement on or before September 30, 2005, and (iv) the
Company's  affirmation  of the  validity  of  options  previously  issued to Mr.
Linting and agreement to permit exercises of those options for 100,000 shares in
each calendar  month over a period of 3 years.  The Company and Mr. Linting also
agreed  to the  filing of a  stipulation  to  dismiss  Mr.  Linting's  suit with
prejudice and without costs with the court  retaining  jurisdiction to reinstate
the case and enforce the terms of the  Settlement  Agreement  and Release in the
event the Company  defaulted on its obligations  under the Settlement  Agreement
and  Release,  and to enter  judgment,  by motion,  against  the Company for the
balance due or appropriate relief. The Company did not make the $100,000 payment
required  under the  Settlement  Agreement and Release,  erroneously  issued the
Linting  Shares to Mr.  Linting,  and did not file a  registration  statement to
register  the Linting  Shares on or before  September  30, 2005.  Subsequent  to
September  30, 2005,  Mr.  Linting  obtained a judgment  against the Company for
$100,452 in cash and 422,827  shares of the Company's  common stock to be issued
to Mr.  Linting at his  determination  upon  registration  thereof.  The Company
continues to negotiate with Mr. Linting regarding the amounts owed to him.

In December of 2004, Marie Graul, the Company's former Chief Financial  Officer,
informed the Company of her  intention to assert a claim against the Company for
sums allegedly owed under her employment  agreement with the Company.  On August
31, 2005,  the Company and Ms. Graul  entered  into a Settlement  Agreement  and
Mutual  Release  whereby  Ms.  Graul  agreed to release  all claims  against the
Company  arising from any act or omission  occurring on or prior to that date in
consideration  of (i) the payment by the Company to Ms. Graul of an aggregate of
$176,458  no later  than  September  30,  2005,  $1,458 of which was  payable on
execution of the Settlement Agreement and Mutual Release, and (ii) the Company's
affirmation  of the  validity of options  previously  issued to Ms.  Graul.  The
Company  also agreed to confess to a judgment  against the Company in a court of
Ms.  Graul's  choosing in the event of the  Company's  breach of the  Settlement
Agreement and Mutual Release.  The Company did not make the payments required by
the Settlement  Agreement and Mutual Release.  Subsequent to September 30, 2005,
Ms.  Graul  obtained a judgment  against the Company for  $176,853 in cash.  The
Company continues to negotiate with Ms. Graul regarding the amounts owed to her.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In connection  with the Settlement  Agreement and Release entered into among the
Company,  Robert E. Yaw, II and Richard Linting,  the Company erroneously issued
422,827 shares of its common stock to Mr.  Linting.  The Company is exerting all
efforts to obtain the return of the shares.


                                       47
<PAGE>


The following unregistered  derivative securities (warrants) have been issued by
us during the period from July 1, 2005 to September 30, 2005:

<TABLE>
<CAPTION>
                                                           NAME OF          NAME OR CLASS OF
 DATE OF GRANT     TITLE AND AMOUNT OF SECURITIES         PRINCIPAL       PERSONS WHO RECEIVED     CONSIDERATION
 DATE OF GRANT   GRANTED/EXERCISE PRICE IF APPLICABLE    UNDERWRITER           SECURITIES             RECEIVED
 -------------  ------------------------------------     -----------           ----------             --------
 <S>            <C>                                         <C>         <C>                           <C>
     July           925,000/Common Stock Purchase           None         2 Accredited Investors       $0.00(1)
     2005                     Warrants                                     in Interim Bridge
                                                                             Financing III
     July       50,000/Common Stock Purchase Warrants       None           Advanced Equities          $0.00(2)
     2005                                                                 Venture Partners I,
                                                                                  L.P.
    August          225,000/Common Stock Purchase           None        Apex Investment Fund V,       $0.00(3)
     2005                     Warrants                                            L.P.
    August        13,440,000/Common Stock Purchase          None        33 Accredited Investors       $0.00(4)
     2005                     Warrants                                     in Interim Bridge
                                                                              Financing I
    August        17,280,000/Common Stock Purchase          None         3 Accredited Investors       $0.00(5)
     2005                     Warrants                                    holding Subordinated
                                                                                 Notes
   September        600,000/Common Stock Purchase           None        Apex Investment Fund V,       $0.00(6)
     2005                     Warrants                                            L.P.
</TABLE>

1.       On July 1, 2005, we issued warrants to purchase up to 925,000 shares of
         our common stock to 2 accredited  investors who invested in our Interim
         Bridge  Financing  III.  The  warrants  have a term of 5  years  and an
         exercise price of $0.60 per share.
2.       On July 29, 2005, we issued warrants to purchase up to 50,000 shares of
         our common  stock to  Advanced  Equities  Investment  Fund V, L.P.  who
         invested in our Interim Bridge  Financing III. The warrants have a term
         of 5 years and an exercise price of $0.60 per share.
3.       On August 19, 2005, we issued warrants to purchase up to 225,000 shares
         of our common stock to Apex Investment Fund V, L.P. who invested in our
         Interim  Bridge  Financing III. The warrants have a term of 5 years and
         an exercise price of $0.60 per share.
4.       On August 28,  2005,  we issued  warrants to purchase up to  13,440,000
         shares of our common stock to 33  accredited  investors who invested in
         our Interim Bridge Financing I. The warrants have a term of 5 years and
         may be exercised only by the  presentation of the  outstanding  Interim
         Bridge Financing I note in payment of the exercise price.
5.       On August 25,  2005,  we issued  warrants to purchase up to  17,280,000
         shares of our  common  stock to 3  accredited  investors  who  received
         Subordinated  Notes in  conjunction  with our  acquisition  of Complete
         Security Solutions, Inc. The warrants have a term of 5 years and may be
         exercised  only by the  presentation  of the  outstanding  Subordinated
         Notes in payment of the exercise price.
6.       On  September  30, 2005,  we issued  warrants to purchase up to 600,000
         shares of our common stock to Apex Investment Fund V, L.P. who invested
         in our Interim  Bridge  Financing  III. The  warrants  have a term of 5
         years and an exercise price of $0.60 per share.

The above unregistered  securities were issued pursuant to an exemption from the
registration  requirements  of the  Securities  Act  under  Section  4(2) of the
Securities Act.

ITEM 6. EXHIBITS

EXHIBIT
NUMBER                           DESCRIPTION OF EXHIBIT
-------  -----------------------------------------------------------------------

10.1     Lease Agreement dated August 31, 2005, between Patron Systems, Inc. and
         Flatiron Boulder Office, Inc.

31.1     Certification  of  principal  executive  officer  and acting  principal
         financial officer pursuant to Section 302 of the  Sarbanes-Oxley Act of
         2002.

32.1     Certification  Pursuant to 18 U.S.C.  Section 1350. as Adopted Pursuant
         to Section 906 of the Sarbanes-Oxley Act of 2002


                                       48
<PAGE>


                                   SIGNATURES

In accordance with the  requirements of the Exchange Act, the registrant  caused
this  report to be  signed on its  behalf  by the  undersigned,  thereunto  duly
authorized.


Date: November 21, 2005            PATRON SYSTEMS, INC.
                                   --------------------
                                   (Registrant)


                                   /S/ ROBERT CROSS
                                   --------------------------------------------
                                   By:    Robert Cross
                                   Its:   Chief Executive Officer and
                                          Acting Chief Financial Officer


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