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 March 31, 2007



|_|      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)

    5775 FLATIRON PARKWAY, SUITE 230                         80301
              BOULDER, CO
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                   (ZIP CODE)

                                 (303) 541-1005
                           (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 |X| No |_|

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:  14,512,260 shares of common stock
outstanding as of May 21, 2007.

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 ..................................................4

Condensed Consolidated Balance Sheet at March 31, 2006 (Unaudited).............4
Condensed Consolidated Statements of Operations for the Three Months
         Ended March 31, 2006 and 2005 (Unaudited).............................5
Condensed Consolidated Statement of Stockholders' Equity for the
         Three Months Ended March 31, 2006 (Unaudited).........................6
Condensed Consolidated Statements of Cash Flows for the Three Months
         Ended March 31, 2006 and 2005 (Unaudited).............................7
Notes to Condensed Consolidated Financial Statements (Unaudited)...............8

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS..................................27

ITEM 3. CONTROLS AND PROCEDURES...............................................39


PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.....................................................40

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS...........41

ITEM 6. EXHIBITS..............................................................41


SIGNATURES....................................................................43


                                       2
<PAGE>


                           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.


                                       3
<PAGE>


PART I - FINANCIAL INFORMATION

ITEM 1  FINANCIAL STATEMENTS

                              PATRON SYSTEMS, INC.
                             CONDENSED BALANCE SHEET
                                   (unaudited)

                                                                     MARCH 31,
                                                                       2007
                                                                  -------------
ASSETS
Current Assets
  Cash ......................................................     $     120,004
  Accounts receivable .......................................           690,856
  Other current assets ......................................           102,803
                                                                  -------------
     Total current assets ...................................           913,663

Property and equipment, net .................................           223,867
Capitalized software development costs, net .................           444,071
Intangible assets, net ......................................           112,603
Assets held for sale ........................................           174,376
Goodwill ....................................................         9,300,000
                                                                  -------------
     Total assets ...........................................     $  11,168,580
                                                                  =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
  Accounts payable ..........................................     $     502,261
  Other current liabilities .................................         1,918,805
  Secured demand notes ......................................           625,000
  Demand notes payable ......................................           312,557
  Notes payable (to creditors of acquired business,
    including $554,202 to related parties) ..................           799,982
  Deferred revenue ..........................................           254,564
  Bridge notes payable ......................................           519,975
  Derivative conversion liability ...........................           285,874
  Liabilities of discontinued operations ....................            81,206
                                                                  -------------
     Total current liabilities ..............................         5,300,224
                                                                  -------------

Commitments and Contingencies

Stockholders' Equity
  Preferred stock, par value $0.01 per share,
     75,000,000 shares authorized,
       Series A convertible:  2,160 shares authorized;
          964 shares issued and outstanding .................                10
          liquidation preference of $6,512,959
       Series A-1 convertible: 50,000,000 authorized;
           0 issued and outstanding .........................              --
           liquidation preference of $0
       Series B convertible: 2,000 shares authorized;
          791 shares issued and outstanding;
          liquidation preference of $5,159,535 ..............                 8
  Common stock, par value $0.01 per share, 150,000,000
     shares authorized, 14,512,260 shares issued and
     outstanding ............................................           145,127
  Additional paid-in capital ................................       104,337,679
  Accumulated deficit .......................................       (98,614,468)
                                                                  -------------
     Total stockholders' equity .............................         5,868,356
                                                                  -------------
     Total liabilities and stockholders' equity .............     $  11,168,580
                                                                  =============

See notes to unaudited condensed financial statements.


                                       4
<PAGE>


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

<CAPTION>
                                                                       THREE MONTHS ENDED
                                                                           MARCH 31,
                                                                ----------------------------
                                                                    2007            2006
                                                                ------------    ------------
<S>                                                             <C>             <C>
Revenue .....................................................   $    171,218    $    179,925
                                                                ------------    ------------

Cost of Sales
  Cost of products/services .................................         37,620          29,897
  Amortization of technology ................................         27,015          27,522
                                                                ------------    ------------
    Total cost of sales .....................................         64,635          57,419
                                                                ------------    ------------
  Gross profit ..............................................        106,583         122,506
                                                                ------------    ------------

Operating Expenses
  Salaries and related expenses .............................      1,331,139         679,829
  Professional fees .........................................        204,958         658,115
  General and administrative ................................        237,934         320,576
  Stock based penalties under financing arrangements ........           --             2,852
  Gain on settlements .......................................           --          (906,987)
                                                                ------------    ------------
     Total operating expenses ...............................      1,774,031         754,385
                                                                ------------    ------------

Loss from operations ........................................     (1,667,448)       (631,879)
                                                                ------------    ------------

Other Income (Expense)
Interest income .............................................          2,120            --
Interest expense ............................................       (505,925)       (972,464)
Change in fair value of conversion option ...................          8,712            --
Gain on sale of property and equpment .......................            (42)             62
                                                                ------------    ------------
Total Other Expense .........................................       (495,135)       (972,402)
                                                                ------------    ------------
     Loss from continuing operations ........................     (2,162,583)     (1,604,281)
                                                                ------------    ------------

Income (loss) from discontinued operations ..................          4,541        (387,543)
                                                                ------------    ------------

Net loss ....................................................     (2,158,042)     (1,991,824)

Preferred stock contractual dividend ........................       (216,325)           --
                                                                ------------    ------------
Net loss available to common stockholders ...................   $ (2,374,367)   $ (1,991,824)
                                                                ------------    ------------


Net Loss Per Share - Basic and Diluted
  - Continuing operations ...................................   $      (0.16)   $      (0.77)
  - Discontinued operations .................................           --             (0.19)
                                                                ------------    ------------
  - Total net loss per share available to common stockholders   $      (0.16)   $      (0.96)
                                                                ============    ============

Weighted Average Number of Common Shares Outstanding
   - Basic and Diluted ......................................     14,512,260       2,083,954
                                                                ============    ============
</TABLE>

See notes to unaudited condensed financial statements.


                                        5
<PAGE>


<TABLE>
                              PATRON SYSTEMS, INC.
                   CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
                                   (UNAUDITED)
                    FOR THE THREE MONTHS ENDED MARCH 31, 2007

<CAPTION>
                                SHARES OF      PAR VALUE                                    SHARES OF      PAR VALUE
                                SERIES A       SERIES A       SHARES OF       PAR VALUE     SERIES B       SERIES B
                                CONVERTIBLE    CONVERTIBLE    SERIES A-1      SERIES A-1    CONVERTIBLE    CONVERTIBLE
                                PREFERRED      PREFERRED      PREFERRED       PREFERRED     PREFERRED      PREFERRED
                                  STOCK          STOCK          STOCK           STOCK         STOCK          STOCK
                               ------------   ------------   ------------   ------------   ------------   ------------
<S>                                     <C>   <C>                    <C>    <C>                     <C>   <C>
Balance - January 1, 2007 ..            964   $         10           --     $       --              791   $          8

Stock based compensation -
   employees ...............           --             --             --             --             --             --
Issuance of warrants to 2007
   Bridge Note Investors ...           --             --             --             --             --             --
Net Loss ...................           --             --             --             --             --             --
                               ------------   ------------   ------------   ------------   ------------   ------------
BALANCE - MARCH 31, 2007 ...            964   $         10           --     $       --              791   $          8
                               ============   ============   ============   ============   ============   ============


<CAPTION>
                                 SHARES OF      PAR VALUE     ADDITIONAL
                                  COMMON         COMMON        PAID IN      ACCUMULATED
                                  STOCK          STOCK         CAPITAL        DEFICIT           TOTAL
                               ------------   ------------   ------------   ------------    ------------
<S>               <C>            <C>          <C>            <C>            <C>             <C>
Balance - January 1, 2007 ..     14,512,260   $    145,127   $103,743,111   $(96,456,426)   $  7,431,830)

Stock based compensation -
   employees ...............           --             --          430,809           --           430,809
Issuance of warrants to 2007
   Bridge Note Investors ...           --             --          163,759           --           163,759
Net Loss ...................           --             --             --       (2,158,042)     (2,158,042)
                               ------------   ------------   ------------   ------------    ------------
BALANCE - MARCH 31, 2007 ...     14,512,260   $    145,127   $104,337,679   $(98,614,468)   $  5,868,356
                               ============   ============   ============   ============    ============
</TABLE>

See notes to unaudited condensed financial statements.


                                        6
<PAGE>


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

<CAPTION>
                                                                                   THREE MONTHS ENDED
                                                                                        MARCH 31,
                                                                              ----------------------------
                                                                                  2007            2006
                                                                              ------------    ------------
<S>                                                                           <C>             <C>
Cash Flows from Continuing Operating Activities
Net loss ..................................................................   $ (2,162,583)   $ (1,604,281)
                                                                              ============    ============
Adjustments to reconcile net loss to net cash used in operating activities:
  Depreciation and amortization ...........................................         51,026          34,775
  Stock based compensation ................................................        430,809         180,835
  Non cash interest expense ...............................................        458,345         543,438
  Gain on derivative conversion valuation .................................         (8,712)           --
  Stock based penalty under financing arrangements ........................           --             2,852
  Loss on issuance of preferred stock in settlement of debt ...............           --          (906,987)
  (Gain)/Loss on sale of fixed assets .....................................             42             (62)
  Changes in assets and liabilities:
    Restricted cash escrowed to settle liabilities assumed ................           --          (957,122)
    Accounts receivable ...................................................        138,019         123,085
    Other current assets ..................................................         31,038          17,809
    Accounts payable ......................................................        (32,866)       (268,700)
    Accrued interest ......................................................         40,949         429,027
    Deferred revenue ......................................................         90,269        (104,031)
    Expense reimbursements due to officers and shareholders ...............         (1,000)         (7,354)
    Accrued payroll and payroll related expenses ..........................         77,573        (311,041)
    Other current liabilities .............................................        (57,595)       (197,271)
                                                                              ============    ============
Total adjustments .........................................................      1,217,897      (1,420,747)
                                                                              ============    ============
NET CASH USED IN CONTINUING OPERATING ACTIVITIES ..........................       (944,686)     (3,025,028)
                                                                              ============    ============

CASH FLOWS USED IN CONTINUING INVESTING ACTIVITIES
  Purchase and development of technology ..................................        (41,839)        (29,660)
  Proceeds from sale of fixed assets ......................................           --             1,755
  Purchase of fixed assets ................................................        (73,130)        (12,689)
                                                                              ------------    ------------
NET CASH USED IN CONTINUING INVESTING ACTIVITIES ..........................       (114,969)        (40,594)
                                                                              ============    ============

CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES
  Payments on settlement of accommodation agreements ......................           --          (125,000)
  Deferred financing costs ................................................           --           (54,000)
  Net proceeds from issuance of Preferred Series A convertible stock ......           --         4,000,451
  Proceeds from issuance of bridge notes ..................................        625,000            --
                                                                              ------------    ------------
NET CASH PROVIDED BY CONTINUING FINANCING ACTIVITIES ......................        625,000       3,821,451
                                                                              ============    ============

CASH FLOWS FROM DISCONTINUED OPERATIONS
  Operating cash flows ....................................................         13,089        (429,779)
  Investing cash flows ....................................................           --          (184,634)
                                                                              ------------    ------------
NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS ....................         13,089        (614,413)
                                                                              ------------    ------------


NET (DECREASE) INCREASE IN CASH ...........................................   $   (421,566)   $    141,416

CASH, beginning of period .................................................   $    541,570    $         14
                                                                              ------------    ------------
CASH, end of period .......................................................   $    120,004    $    141,430
                                                                              ============    ============

Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
  Interest ................................................................   $      6,631            --

Non-cash Investing and Financing Activities
  Liabilities and claims settled in exchange for Series A-1 Preferred
     Convertible Stock ....................................................           --      $ 21,258,875
</TABLE>

See notes to unaudited condensed financial statements.


                                       7
<PAGE>


                              PATRON SYSTEMS, INC.
               NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
                                 MARCH 31, 2007

NOTE 1 - BASIS OF INTERIM FINANCIAL STATEMENT PRESENTATION

The accompanying  unaudited  Condensed  Financial  Statements of Patron Systems,
Inc.  (the  "Company,"  "Patron,"  "we," "us," or "our")  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  three-month  period
ended March 31, 2007 is not necessarily indicative of the operating results that
may be expected for the entire year ending December 31, 2007.

Amounts reflected herein for the three months ended March 31, 2006 represent the
restated  financial  information  included in the Form 10-QSB/A  which was filed
with the SEC on May 21, 2007.

This form 10-QSB should be read in conjunction with the Company's 10-KSB for the
year ended December 31, 2006.


NOTE 2 - 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. The Company was recapitalized upon its
completion of a share exchange  transaction  with an inactive  public company on
October 11, 2002.

On July 31, 2006, the Company  effectuated a 1-for-30 reverse stock split of its
common stock following the  effectiveness of the amendment to its Second Amended
and Restated  Certificate of Incorporation which was approved by stockholders at
the 2006 Annual  Meeting of  Stockholders  on July 20,  2006.  The  accompanying
financial  statements  give  retroactive  effect  to the  reverse  split for all
periods presented.


NOTE 3 - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

The Company, while undergoing the audit of its financial statements for the year
ended December 31, 2006, became aware of possible misstatements in its unaudited
condensed  consolidated  interim financial  statements filed with the Securities
and Exchange  Commission  during the year ended  December 31, 2006.  On March 6,
2007, the Company's Board of Directors  determined that certain amounts reported
in its unaudited  condensed  consolidated  interim financial  statements for the
quarters  ended March 31, 2006,  and June 30, 2006, and for the six months ended
June 30, 2006 and nine months ended  September 30, 2006 needed to be restated as
described below.

The specific errors that came to management's  attention relate to the Company's
accounting for certain transactions that occurred during the quarter ended March
31, 2006 and the quarter ended June 30, 2006. Upon review of these transactions,
Company  management  discovered  that  the  accounting  for  these  transactions
resulted in a  $2,408,250  overstatement  of its loss for the  quarterly  period
ended March 31, 2006 and a $593,765  overstatement of its loss for the quarterly
period ended June 30, 2006,  which also resulted in an overstatement of the year
to date  losses  in the six and nine  month  periods  ended  June  30,  2006 and
September 30, 2006, respectively.

Specifically,  the Company  recorded  for the three months ended March 31, 2006,
(1) a net loss of $858,213 on the  settlement of various  liabilities  under its
creditor  and  claimant  liabilities  restructuring  program when it should have
recorded a net gain of  approximately  $906,987,  (2) recorded  excess  non-cash
interest of $358,000 with respect to a


                                       8
<PAGE>


conversion  option  that  became  effective  under  two  of its  Interim  Bridge
Financing III notes and (3) charged, as interest expense, a $285,050 fee paid to
the placement agent in its Series A Preferred stock financing  transaction  that
should have been recorded as a reduction of the offering proceeds. The nature of
the adjustments required in the creditor and claimant liabilities  restructuring
relate to an  overvaluation  of the Series A-1  preferred  shares  issued in the
exchange  offer  offset  by  gains on the  extinguishment  of  liabilities  that
originated in connection with obligations to issue or repurchase stock.

On May 18, 2007, the Board of Directors of the Company  determined  that certain
amounts reported in its audited financial statements for the year ended December
31, 2006 need to be restated as described below.

The Company, while undergoing a review of its financial statements for the three
month  period  ended March 31,  2007,  became  aware of a possible  error in its
accounting  for a deemed  dividend it recorded  during the fourth quarter of its
year ended December 31, 2006. Upon review of this transaction Company management
specifically  determined  that there was an error in the accounting for a deemed
dividend that was  recognized  upon a reduction in the  conversion  price of the
Company's  Series A Preferred  Stock that  occurred on November  16,  2006.  The
reduction  in the  conversion  price  occurred  upon the  Company's  issuance of
additional  convertible  securities  featuring a conversion price lower than the
conversion price embedded in the Series A Preferred. The Company, in calculating
the deemed  dividend,  originally  determined that the net loss available to its
common stockholders should be increased by $589,175, The Company reevaluated its
computations during the quarter ended March 31, 2007 and determined that the net
loss  available  to its  common  stockholders  should  have  been  increased  by
$3,759,059.  The nature of the  adjustment  relates to the  Company's  use of an
incorrect price for the value of its common stock when it computed the intrinsic
value of the conversion  feature embedded in the Series A Preferred stock at the
time of the reduction in the conversion price.

The  effect  of the  restatement  on the  Company's  previously  issued  audited
financial statements is as follows:

                                                 As Previously         As
                                                   Reported         Reported
                                                 -------------    -------------

Additional paid in capital ...................   $ 100,573,227    $ 103,743,111
Accumulated deficit ..........................     (93,286,542)     (96,456,426)

Preferred stock deemed divident ..............      (2,413,606)      (5,583,490)

Net loss available to common stockholders ....   $  (9,344,431)   $ (12,514,315)

Net Loss Per Share - Basic and Diluted
  - Continuing operations ....................   $       (0.98)   $       (1.41)
  - Discontinued operations ..................           (0.29)           (0.29)
                                                 -------------    -------------
  - Total Net Loss per share available to
    common stockholders ......................   $       (1.27)   $       (1.70)
                                                 =============    =============


The effect on our financial  statements for the year ended December 31, 2006 was
to  increase  additional  paid in  capital,  accumulated  deficit  and net  loss
available  to  common  stockholders  by  $3,169,884,  net  loss  per  share  for
continuing  operations by $0.43 and total net loss per share available to common
stockholders by $0.43.  There was no effect on the Company's net loss.


NOTE 4 - GOING CONCERN, 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 from
continuing  operations of $2,162,583  for the three months ended March 31, 2007,
which includes an aggregate of $931,468 of non-cash charges  including  non-cash
interest expense, depreciation and amortization, stock based compensation net of
a change in the fair value of a conversion option. The Company's working capital
deficiency  at  March  31,  2007  amounted  to  $4,386,561  and the  Company  is
continuing  to  experience  shortages  in working  capital.  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.


                                       9
<PAGE>


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 market its software products, grow revenue
and generate cash flows is critical to the realization of its business plan. The
Company  raised  $625,000 of bridge  financing  through the  issuance of secured
demand  notes during the three months ended March 31, 2007 (Note 8). The Company
used $510,031 of these  proceeds to fund its operations and a net of $114,969 in
investing  activities.  Subsequent to March 31, 2007,  the Company has raised an
additional  $417,000 of bridge financing  through the issuance of secured demand
notes (Note 20).

The  Company is  currently  in the  process of  attempting  to raise  additional
capital  and has  taken  certain  steps  to  conserve  its  liquidity.  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 5 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONCENTRATION OF CREDIT RISK

The Company maintains cash with major financial institutions. Cash is insured by
the  Federal  Deposit  Insurance  Corporation  ("FDIC")  up to  $100,000 at each
institution.  From time to time amounts may exceed the FDIC limits. At March 31,
2007 the uninsured bank cash balances were  approximately  $35,000.  The Company
has not experienced any losses on these accounts.

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.

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 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 reasonably assured.

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, "Modification of SOP 97-2, Software


                                       10
<PAGE>


Revenue Recognition With Respect to Certain Transaction" to allocate revenues to
delivered elements once it has established vendor-specific objective evidence of
fair value for such undelivered elements.

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.

GOODWILL

The Company  accounts for  Goodwill and  Intangible  Assets in  accordance  with
Statement  of  Financial   Accounting  Standards  ("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.  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.  In  accordance  with SFAS 142, the Company  conducted its
annual impairment review of goodwill for the year ended December 31, 2006, which
resulted in a goodwill  impairment charge of $210,716.  This 2006 charge,  which
principally  represents  goodwill  remaining from the PolicyBridge  business the
Company  acquired from Entelagent is classified in discontinued  operations as a
result of its decision to exit that business.  The remaining amount of goodwill,
which  amounts  to  $9,300,000  at March  31,  2007,  relates  to the  Company's
acquisition  of CSSI in  February  2005 from  which  the  Company  acquired  the
FormStream software technology,  its sole line of business.  The Company engaged
an outside  specialist to assist the Company with performing its annual goodwill
impairment  tests.  These tests were made using a discounted  cash flow model to
value  the  business.  This  approach  requires  the  Company  to  forecast  its
expectation  of  revenues  and cash flows in future  periods and to work with an
independent  specialist on developing assumptions relating to the risk that such
cash flows may or may not materialize in future periods.

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.  Critical accounting policies requiring the use of estimates are revenue
recognition  for software  products  with multiple  deliverables,  allowance for
doubtful  accounts,  goodwill,   intangibles  other  than  goodwill,  which  are
associated  with its  continuing  operations,  impairment  charges,  convertible
instruments, freestanding derivatives, and share based payments.

CONVERTIBLE INSTRUMENTS

The Company  evaluates  and  accounts  for  conversion  options  embedded in its
convertible  instruments  in  accordance  with  SFAS  No.  133  "Accounting  for
Derivative  Instruments  and  Hedging  Activities"  ("SFAS  133") and EITF 00-19
"Accounting  for Derivative  Financial  Instruments  Indexed to, and Potentially
Settled in, a Company's Own Stock" ("EITF 00-19").

SFAS 133 generally  provides three criteria that, if met,  require  companies to
bifurcate conversion options from their host instruments and account for them as
free standing  derivative  financial  instruments in accordance with EITF 00-19.
These  three  criteria   include   circumstances   in  which  (a)  the  economic
characteristics and risks of the embedded derivative  instrument are not clearly
and  closely  related  to the  economic  characteristics  and  risks of the host
contract,  (b) the hybrid instrument that embodies both the embedded  derivative
instrument and the host contract is not remeasured at fair value under otherwise
applicable  generally accepted accounting  principles with changes in fair value
reported in earnings as they occur and (c) a separate  instrument  with the same
terms as the embedded  derivative  instrument  would be  considered a derivative
instrument subject to the requirements of SFAS 133. SFAS 133 and EITF 00-19 also
provide  an  exception  to this  rule when the host  instrument  is deemed to be
conventional (as that term is described in the  implementation  guidance to SFAS
133 and further clarified in EITF 05-2 "The Meaning of "Conventional Convertible
Debt Instrument" in Issue No. 00-19).


                                       11
<PAGE>


The Company  accounts for convertible  instruments  (when it has determined that
the  embedded  conversion  options  should  not be  bifurcated  from  their host
instruments)  in accordance  with the  provisions of EITF 98-5  "Accounting  for
Convertible  Securities with Beneficial  Conversion Features," ("EITF 98-5") and
EITF  00-27  "Application  of EITF  98-5 to  Certain  Convertible  Instruments."
Accordingly,  the Company records when necessary  discounts to convertible notes
for the intrinsic value of conversion options embedded in debt instruments based
upon the  differences  between the fair value of the underlying  common stock at
the commitment date of the note  transaction and the effective  conversion price
embedded in the note. Debt discounts under these arrangements are amortized over
the term of the related debt to their earliest date of  redemption.  The Company
also  records  when  necessary  deemed  dividends  for the  intrinsic  value  of
conversion  options  embedded in  preferred  shares  based upon the  differences
between the fair value of the underlying  common stock at the commitment date of
the note transaction and the effective conversion price embedded in the note.

As  described  in Note 8,  the  Company  completed  a  $625,000  interim  bridge
financing   transaction   in  which   convertible   notes  were   deemed  to  be
non-conventional instrument in accordance with SFAS 133 and EITF 05-2.

COMMON STOCK PURCHASE WARRANTS AND OTHER DERIVATIVE FINANCIAL INSTRUMENTS

The Company  accounts  for the issuance of common  stock  purchase  warrants and
other free standing  derivative  financial  instruments  in accordance  with the
provisions of EITF 00-19. The Company performs classification assessments of its
derivative  financial  instruments  at each balance sheet date as required under
EITF 00-19.  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) or (ii)
gives the  counterparty a choice of net-cash  settlement or settlement in shares
(physical settlement or net-share  settlement).  The Company has determined that
its common stock purchase  warrants,  are equity  instruments  since they do not
provide any cash settlement alternatives outside of the Company's control.

As described in Note 8, the Company has determined  that the  conversion  option
embedded in the 2007 Interim Bridge  Financing  notes is a derivative  financial
instrument  requiring  liability  classification  in accordance  with EITF 00-19
since it is exercisable for indeterminate number of shares. The note was amended
in May  2007  to  establish  a  minimum  conversion  price  of $.05  per  share.
Accordingly,  the Company  intends to reclassify this derivative to stockholders
equity in its June 30, 2006  balance  sheet  assuming all other  conditions  for
equity classification under EITF 00-19 are met at that time.

STOCK BASED COMPENSATION

Effective  January 1, 2006,  the Company  adopted  SFAS No.  123R  "Share  Based
Payment." This statement is a revision of SFAS Statement No. 123, and supersedes
APB Opinion No. 25, 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 is
measured at fair value on the awards' grant date,  based on the estimated number
of  awards  that  are  expected  to  vest.  The  Company  adopted  the  modified
prospective  method with respect to accounting for its transition to SFAS 123(R)
and  measured   unrecognized   compensation   cost  as  described  in  Note  17.
Accordingly,  the  Company  recognized  in salaries  and related  expense in the
statement  of  operations,  $430,809  and  $180,835  for the fair value of stock
options expected to vest during the three month periods ended March 31, 2007 and
2006, respectively.

INCOME TAXES

The Company  accounts for income taxes in accordance with Statement of Financial
Accounting  Standards No. 109,  "Accounting  for Income Taxes" ("SFAS No. 109").
SFAS No. 109 requires the recognition of deferred tax assets and liabilities for
both the expected impact of differences between the financial statements and tax
basis of assets and  liabilities  and for the expected  future tax benefit to be
derived from tax loss and tax credit carry forwards.  SFAS No. 109  additionally
requires the establishment of a valuation allowance to reflect the likelihood of
realization of deferred tax assets.


                                       12
<PAGE>


The  Company  has  not  recognized  any  income  tax  expense  (benefit)  in the
accompanying  financial statements for the three months ended March 31, 2007 and
2006.  Deferred tax assets,  which  principally arise from net operating losses,
are fully reserved due to  management's  assessment  that it is more likely than
not that the benefit of these assets will not be realized in future periods.

As  describe  in Note 16,  the  Company  adopted  FASB  Interpretation  No. 48 -
"Accounting  for  Uncertainty  in  Income  Taxes  - an  interpretation  of  FASB
Statement  No. 109" ("FIN 48"),  effective  January 1, 2007. A discussion of the
effect of having adopted FIN 48 is also described in Note 12.

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,  if required,
would be 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.

The Company has included  40,001 stock  options with an exercise  price of $0.30
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
and 10,306 shares  to-be-issued  under a stock pledge agreement  entered into in
2004.

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

                                                             MARCH 31,
                                                   -----------------------------
                                                      2007               2006
                                                   ----------         ----------

Options ..................................          5,734,519            438,090
Warrants .................................          5,097,590          1,289,909
Series A Preferred Stock .................         12,051,254          1,860,650
Series A-1 Preferred Stock ...............               --           11,140,063
Series B Preferred Stock .................          4,820,417               --
Convertible Notes ........................          1,202,921               --
                                                   ----------         ----------
                                                   28,906,701         14,728,712
                                                   ==========         ==========


RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS 157 - "Fair Value  Measurements"  ("SFAS
157"),  which defines fair value,  establishes  a framework  for measuring  fair
value, and expands disclosures about fair value measurements.  The provisions of
SFAS 157 are effective for the first fiscal year beginning  after November 2007.
The  Company is  currently  evaluating  the impact of  adopting  SFAS 157 on its
financial statements.

In  November  2006,  the EITF  reached  a final  consensus  in EITF  Issue  06-6
"Debtor's  Accounting  for a  Modification  (or  Exchange) of  Convertible  Debt
Instruments"   ("EITF  06-6").   EITF  06-6  addresses  the  modification  of  a
convertible  debt  instrument  that  changes  the  fair  value  of  an  embedded
conversion  option and the subsequent  recognition  of interest  expense for the
associated  debt  instrument  when the  modification  does not  result in a debt
extinguishment  pursuant to EITF 96-19,  "Debtor's Accounting for a Modification
or Exchange of Debt  Instruments."  The consensus  applies to  modifications  or
exchanges of debt instruments  occurring in interim or annual periods  beginning
after  November  29,  2006.  The  adoption  of EITF 06-6 did not have a material
impact on the Company's consolidated  financial position,  results of operations
or cash flows.

In November 2006, the FASB ratified EITF Issue No. 06-7, Issuer's Accounting for
a Previously  Bifurcated Conversion Option in a Convertible Debt Instrument When
the Conversion Option No Longer Meets the Bifurcation


                                       13
<PAGE>


Criteria in FASB Statement No. 133,  Accounting for Derivative  Instruments  and
Hedging  Activities  ("EITF  06-7").  At  the  time  of  issuance,  an  embedded
conversion  option  in a  convertible  debt  instrument  may be  required  to be
bifurcated  from the debt  instrument and accounted for separately by the issuer
as a  derivative  under  FAS  133,  based  on the  application  of  EITF  00-19.
Subsequent to the issuance of the convertible  debt,  facts may change and cause
the embedded  conversion  option to no longer meet the  conditions  for separate
accounting as a derivative  instrument,  such as when the bifurcated  instrument
meets the  conditions of Issue 00-19 to be classified in  stockholders'  equity.
Under EITF 06-7, when an embedded conversion option previously  accounted for as
a derivative  under FAS 133 no longer meets the bifurcation  criteria under that
standard,  an issuer  shall  disclose a  description  of the  principal  changes
causing the embedded  conversion  option to no longer require  bifurcation under
FAS 133 and the amount of the liability for the conversion  option  reclassified
to  stockholders'  equity.  EITF  06-7  applies  to  all  previously  bifurcated
conversion  options in  convertible  debt  instruments  that no longer  meet the
bifurcation  criteria in FAS 133 in interim or annual  periods  beginning  after
December 15, 2006,  regardless of whether the debt  instrument  was entered into
prior or  subsequent to the  effective  date of EITF 06-7.  The adoption of EITF
06-7 did not have a  material  impact on the  Company's  consolidated  financial
position, results of operations or cash flows.

In December 2006, the FASB issued FSP EITF 00-19-2, "Accounting for Registration
Payment  Arrangements."  FSP EITF 00-19-2  addresses an issuer's  accounting for
registration  payment  arrangements.   This  pronouncement  specifies  that  the
contingent   obligation   to  make  future   payments  or   otherwise   transfer
consideration  under a  registration  payment  arrangement,  whether issued as a
separate agreement or included as a provision of a financial instrument,  should
be separately  recognized and accounted for as a contingency in accordance  with
SFAS 5  "Accounting  for  Contingencies."  FSP EITF  00-19-2  amending  previous
standards  relating to rights  agreements  became effective on December 21, 2006
with respect to arrangements entered into or modified beginning on such date and
for the first  fiscal year  beginning  after  December  15, 2006 with respect to
those arrangements  entered into prior to December 21, 2006. The adoption of FSP
EITF  00-19-2  did  not  have  a  material  effect  on the  Company's  financial
statements.

In February 2007, the FASB issued SFAS 159, "The Fair Value Option for Financial
Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 provides companies with
an option to report selected  financial assets and liabilities at fair value and
establishes  presentation  and  disclosure  requirements  designed to facilitate
comparisons between companies that choose different  measurement  attributes for
similar types of assets and liabilities.  SFAS 159 is effective for fiscal years
beginning  after  November 15, 2007. The Company is in the process of evaluating
the  impact of the  adoption  of this  statement  on the  Company's  results  of
operations and financial condition.

Other  accounting  standards  that have been  issued or  proposed by the FASB or
other standards-setting  bodies that do not require adoption until a future date
are not  expected  to  have a  material  impact  on the  consolidated  financial
statements upon adoption.


NOTE 6 - CAPITALIZED SOFTWARE

Capitalized software development costs are as follows:

Beginning of the year ............................     $ 414,560
Capitalized ......................................        41,839
Amortization .....................................       (12,328)
                                                       ---------
  Balance at March 31, 2007 ......................     $ 444,071
                                                       =========


The Company  classifies  amortization of developed  technology as a component of
cost of sales.  Amortization  expense  amounted  to $12,328  and $37,022 for the
three months ended March 31, 2007 and 2006, respectively.

AMORTIZATION OF CAPITALIZED SOFTWARE

The amortization of capitalized software for reporting subsequent to the quarter
ended March 31, 2007 is as follows:


                                       14
<PAGE>


                                                                SOFTWARE
                                                              AMORTIZATION
                                                              ------------
   Period of April 2, 2007 through December 31, 2007          $     65,028

               YEARS ENDED DECEMBER 31:
               ------------------------
                         2008                                      105,402
                         2009                                      105,403
                         2010                                       73,733
                         2011                                       66,460
                         2012                                       28,045
                                                              ------------
                                                              $    444,071
                                                              ============


NOTE 7 - AMORTIZABLE INTANGIBLE ASSETS

The  components of  intangible  assets as of March 31, 2007 are set forth in the
following table:

                                                                  MARCH 31, 2007
                                                                 --------------
Customer relationships .......................................   $      180,000
Trademarks and tradenames ....................................           55,000
                                                                 --------------
                                                                        235,000
less: accumulated amortization ...............................         (122,397)
                                                                 --------------
     Amortizable intangible assets, net ......................   $      112,603
                                                                 ==============


Intangible  amortization  expense  amounted to $14,687 and $21,312 for the three
months ended March 31, 2007 and 2006, respectively.

AMORTIZATION OF INTANGIBLE ASSETS

The  amortization of intangible  assets for reporting  subsequent to the quarter
ended March 31, 2007 is as follows:

                                                                 INTANGIBLE
                                                                AMORTIZATION
                                                                ------------
   Period of April 2, 2007 through December 31, 2007            $     44,063

                YEARS ENDED DECEMBER 31:
                ------------------------
                         2008                                         58,750
                         2009                                          9,790
                                                                ------------
                                                                $    112,603
                                                                ============


NOTE 8 - SECURED DEMAND NOTES PAYABLE

On February 20, 2007, the Company signed a secured  convertible  promissory note
("2007 Interim Bridge  Financing")  with Apex  Investment Fund V, LP in exchange
for working capital advances made to the Company.  The Company received advances
of $200,000 on February 20, 2007;  $100,000 on March 2, 2007;  $160,000 on March
20, 2007; and $165,000 on March 27, 2007 for a total of $625,000  advanced as of
March 31, 2007.

The Company signed a Security  Agreement  granting Apex a security  interest and
lien in and upon all of Debtors' assets including,  without  limitation,  all of
Debtor's  right,  title and  interest  in and to all  accounts,  chattel  paper,


                                       15
<PAGE>


documents,  general  intangibles,  instruments,  goods and  money,  whether  now
existing or hereafter created and whether now owned or hereafter  acquired,  and
all proceeds of all of the foregoing.

The 2007 Interim Bridge Financing note is due on demand and bears interest at 9%
per annum  ("2007  Bridge  Note").  The 2007 Bridge Note can be converted at the
option of the Holder at any time,  into that  number of shares of the  Company's
voting common stock (the "Conversion  Shares"),  either a) equal to the quotient
of the principal and accrued interest being  converted,  divided by the offering
price  per share  ("Offering  Price")  associated  with any  offering  of equity
securities  made by the Company or b) equal to the quotient of the principal and
accrued  interest  being  converted,  divided by the Fair  Market  Value of such
shares.

In conjunction with the 2007 Interim Bridge Financing, the Company issued common
stock  purchase  warrants  to Apex.  The Company  issued  200,000  common  stock
purchase  warrants  with an exercise  price of $1.00 per share on  February  20,
2007; 100,000 common stock purchase warrants with an exercise price of $1.25 per
share on March 2, 2007;  160,000 common stock purchase warrants with an exercise
price of $1.14 per share on March 19, 2007;  and 168,000  common stock  purchase
warrants  with an  exercise  price of $0.69  per share on March  27,  2007.  The
200,000  warrants  issued on  February  20,  2007 have a relative  fair value of
$134,419;  the  100,000  warrants  issued on March 2, 2007 have a relative  fair
value of $83,984;  the 160,000 warrants issued on March 19, 2007 have a relative
fair value of $122,225; and the 165,000 warrants issued on March 27, 2007 have a
relative fair value of $76,167.  The Company  estimated the fair values of these
warrants  using  the  Black-Scholes  option  pricing  model  with the  following
assumptions:  fair value of common stock from $1.00 to $0.55; risk-free interest
rate of 4.92% to 5.05%;  expected dividend yield zero percent;  expected warrant
life of five years; and current volatility of 125%.

In accordance with APB 14, the Company allocated $166,655 of the proceeds to the
2007  Bridge  Note and  $458,345  of  proceeds  to the  warrants  based upon the
relative fair values of these instruments. The portion of the proceeds allocated
to the warrants was recorded as an increase to additional  paid in capital.  The
difference  between  the  carrying  amount  of the 2007  Bridge  Note and  their
contractual  redemption  amount  ($458,345) was immediately  charged as interest
expense in the  accompanying  statement of operations for the three months ended
March 31,  2007 since the notes are  payable on  demand.  Accordingly,  the 2007
Bridge Notes are presented in the accompanying  balance sheet at their principal
amount.  Contractual interest expense on the 2007 Bridge Note amounted to $2,903
during the three months ended March 31, 2007.

As described in Note 3, the Company evaluated the conversion options embedded in
the 2007 Bridge Notes and determined  that since the  conversion  prices are not
fixed, such conversion options should be bifurcated from the notes and accounted
for as free standing  derivatives in accordance  with SFAS 133. The  derivatives
have been classified as liability instruments in the accompanying balance sheet.
Apex has agreed that (i) in the event the holders of other derivative securities
elect to convert or  exercise,  Apex will permit the  conversion  or exercise of
such derivative  securities prior to the conversion of the 2007 Bridge Notes and
(ii) in the  event  that  the  Company  does  not have a  sufficient  number  of
authorized  but  unissued  and  unreserved  share of common  stock to permit the
conversion of all of the 2007 Bridge Notes,  Apex will convert only such portion
of the 2007  Bridge  Note that  will  result in the  issuance  of the  available
authorized  but  unissued  and  unreserved  shares  of common  stock,  provided,
however,  that the  Company  will  take all  reasonable  steps to  increase  the
authorized  but  unissued  and  unreserved  shares of common stock to permit the
conversion  of the  remaining  portion  of the  2007  Bridge  Notes  as  soon as
practicable  thereafter.  The aggregate fair value of the derivative  conversion
options, at their respective dates of issuance amounted to $294,586. The Company
estimated  the fair  values  of these  options  using the  Black-Scholes  option
pricing  model with the following  assumptions:  fair value of common stock from
$0.55 to $1.00; risk-free interest rate of from 4.90% to 5.04% expected dividend
yield zero percent, expected term of 0.9 to 1.0 year.; and current volatility of
125%.

The aggregate fair value of the derivative  conversion  option at March 31, 2007
amounts to $285,874.  The Company  recognized a gain of $8,712 at March 31, 2007
on the valuation of this derivative conversion option. The Company estimated the
fair values of these warrants using the Black-Scholes  option pricing model with
the  following  assumptions:  fair value of common  stock from $0.55;  risk-free
interest rate of 4.90%;  expected dividend yield zero percent,  expected term of
0.89 years. The change in fair value of the conversion option,  which amounts to
$8,712,  is  presented  as a change in fair  value of  conversion  option in the
accompanying statement of operations for the three months ended March 31, 2007.


                                       16
<PAGE>


Subsequent  to March 31,  2007,  Apex agreed to  establish a minimum  conversion
price of $0.05 per share to be utilized  in the  calculation  of the  Conversion
Shares.  This conversion floor  explicitly  limits the number of shares issuable
upon  conversion  of the notes to a maximum of  12,500,000  shares for which the
Company has sufficient  authorized but unissued and unreserved capital available
to net share settle the derivative.


NOTE 9 -DEMAND NOTES PAYABLE

The demand note at March 31, 2007, which amounts to $312,557,  is payable to Lok
Technology and is secured by Entelagent's accounts receivable, which approximate
$55,000  and $51,000 at March 31,  2007 and 2006,  respectively.  The note bears
interest at 15% per annum.  Interest on this demand note amounted to $11,721 and
$11,721 for the three  months  ended March 31, 2007 and 2006,  respectively.  As
described  in Note 14, on May 4, 2006,  the Company  became aware of a complaint
that Lok  Technologies,  Inc.  had filed in the  Superior  Court of  California,
County of Santa Clara on or about March 30, 2006 against the Company, Entelagent
Software Corp. and unnamed defendants.


NOTE 10 - BRIDGE NOTES PAYABLE

The Company  completed  three bridge note financing  transactions  in 2005 - the
Bridge I Notes were completed for $3,500,000; the Bridge II Notes were completed
for $2,543,000; and the Bridge III Notes were completed for $5,234,000.

During 2006,  $3,180,025 of the Bridge I Notes were  surrendered  as payment for
3,975,031  shares of Series  A-1  Preferred  stock as part of the  creditor  and
claimant liabilities  restructuring (Note 15). As of March 31, 2007, $319,975 of
Bridge I Notes remain outstanding.  Contractual interest expense on the Bridge I
Notes  amounted to $9,467 and $103,562 for the three months ended March 31, 2007
and 2006,  respectively,  and is included as a component of interest  expense in
the accompanying statement of operations.

During 2006,  $2,343,000 of the Bridge II Notes were  surrendered as payment for
2,928,750  shares of Series  A-1  Preferred  stock as part of the  creditor  and
claimant liabilities  restructuring (Note 15). As of March 31, 2007, $200,000 of
the Bridge II Notes  remain  outstanding.  Contractual  interest  expense on the
Bridge II Notes  amounted to $5,918 and $75,245 for the three months ended March
31, 2007 and 2006,  respectively  and is  included  as a  component  of interest
expense in the accompanying statement of operations.

During  2006,  all of the  Bridge  III Notes were  surrendered  as  payment  for
6,542,500  shares of Series  A-1  Preferred  stock as part of the  creditor  and
claimant  liabilities  restructuring (Note 15).  Contractual interest expense on
the Bridge III Notes  amounted to $0 and  $153,036  for the three  months  ended
March  31,  2007 and 2006,  respectively,  and is  included  as a  component  of
interest expense in the accompanying statement of operations.


NOTE 11 - RELATED PARTY TRANSACTIONS

NOTES PAYABLE (TO CREDITORS OF ACQUIRED BUSINESS)

The notes issued to creditors of Entelagent (in connection  with the acquisition
of  Entelagent  Software  Corp.)  include  $554,202  that is  payable to related
parties for  settlements  of accrued  payroll,  notes payable and other payables
that remain  outstanding at March 31, 2007.  The original  amount of these notes
amounted to $2,602,913.  Aggregate  interest  expense on these notes amounted to
$16,000  and  $52,058  for the  three  months  ended  March  31,  2007 and 2006,
respectively.

During 2006,  $1,795,930 of the notes payable to creditors of acquired  business
were  surrendered  as payment for Series A-1 Preferred  stock under the creditor
and claimant liabilities restructuring (Note 15). As of March 31, 2007, $799,982
of the notes payable remain outstanding.


                                       17
<PAGE>


NOTE 12 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following:

                                                                  MARCH 31, 2007
                                                                  --------------
Payroll and payroll related expenses ..........................   $      659,797
Accrued interest ..............................................          670,280
Reserve for preacquisition tax contingencies ..................          336,828
Other current liabilities .....................................          242,942
Expense reimbursement payable .................................            8,958
                                                                  --------------
                                                                  $    1,918,805
                                                                  ==============


NOTE 13 - DEFERRED REVENUE

Deferred  revenue at March 31, 2007  includes  (1) $42,177 for the fair value of
remaining  service  obligations  on  maintenance  and support  contracts and (2)
$212,387  for  contracts  on which the revenue  recognition  is  deferred  until
contract deliverables have been completed.


NOTE 14 - COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

On January 5, 2006,  Mark P. Gertz,  Trustee in  bankruptcy  for Arter & Hadden,
LLP,  filed an Adversary  Complaint  for Recovery of Assets of the Estate in the
United  States  Bankruptcy  Court  Northern  District of Ohio Eastern  Division,
against  the  Company as  successor  in merger to  Entelagent.  Mr.  Gertz seeks
$32,278 plus  interest  accruing at the  statutory  rate since July 15, 2003 for
services rendered by Arter & Hadden,  LLP to Entelagent.  On September 11, 2006,
the Company entered into a settlement and release  agreement with Mark P. Gertz,
Trustee in  bankruptcy  for Arter & Hadden,  LLP which called for the payment of
$32,500 in 13 installments of $2,500.

On May 4, 2006,  Patron  became  aware that Lok  Technologies,  Inc. had filed a
complaint on or about March 30, 2006 against the  Company,  Entelagent  Software
Corp.  and unnamed  defendants in the Superior  Court of  California,  County of
Santa Clara alleging  breach of contract,  breach of duty of good faith and fair
dealing and unjust enrichment and seeking damages, interest, disgorgement of any
unjust  enrichment,  attorneys fees and cost. Prior to receipt of this notice of
litigation,  the Company  had  recorded a liability  of  $320,000  plus  accrued
interest of $159,432. The Company believes that it has defenses to these claims.
The Company cannot  provide any assurance  that the ultimate  settlement of this
claim will not have a material adverse affect on its financial condition.


NOTE 15 - CREDITOR AND CLAIMANT LIABILITIES RESTRUCTURING

On January 12, 2006, the Company issued a Stock Subscription  Agreement & Mutual
Release ("the Original Release") to each creditor and claimant ("Subscriber") of
the Company for purposes of entering  into a final and binding  settlement  with
respect to any and all claims,  liabilities,  demands,  causes of action, costs,
expenses,  attorneys fees, damages,  indemnities,  and obligations of every kind
and  nature  that  the  creditor  and/or  claimant  may have  with  the  Company
("Subscriber  Claims").  Under terms of this agreement,  the Company sold to the
Subscriber and the Subscriber purchased from the Company shares ("Stock") of its
Series A-1 Preferred stock at a price of $0.80 per share. The aggregate purchase
price was equivalent to the value of the Subscriber Claims being settled through
this  settlement  and release.  Subscriber was deemed to have paid for the Stock
through the settlement and release of Subscriber Claims. Each share of Stock was
automatically  convertible into 1/3 share of the Company's common stock upon the
effectiveness  of an amendment to the  Company's  certificate  of  incorporation
which provided for a sufficient number of authorized but unissued and unreserved
shares of the Company's common stock


                                       18
<PAGE>


to permit the  conversion  of all issued  and  outstanding  shares of Series A-1
Preferred.  The Company  issued the Series A-1  Preferred  shares  following the
final determination of the claims and acceptance by the Company of each claimant
submitted   Stock   Subscription    Agreement   and   Mutual   Release   through
countersignature thereof.

The  following  table  provides  a summary  as of March 31,  2006 of all  claims
settled by category with the (gain) loss recognized on the settlement:

<TABLE>
<CAPTION>
                                             SERIES A-1       CLAIM      FAIR VALUE
          SETTLEMENT CATEGORY               STOCK ISSUED      AMOUNT      OF STOCK     GAIN/(LOSS)
------------------------------------------   -----------   -----------   -----------   -----------
<S>                                           <C>          <C>           <C>           <C>
General Creditors ........................    20,358,589   $16,476,818   $12,201,308   $ 4,275,510
Stockholders under Accommodation Agreement     3,000,000     2,400,000     2,400,000          --
Mr. Allin and the Allin Dynastic Trust ...     2,500,000     1,317,089     1,500,000      (182,911)
Other Claimants ..........................     7,381,489     1,243,282     4,428,894   $(3,185,612)
                                             -----------   -----------   -----------   -----------
                                              33,240,078   $21,437,189   $20,530,202   $   906,987
                                             -----------   -----------   -----------   -----------
</TABLE>

The fair value of the Series A-1 shares issued in  settlements  reached prior to
March  31,  2006  amounted  to $0.60 per  share,  based on a  comparison  of the
features  of  these  shares  to  similar   shares  sold  in  private   placement
transactions  to  unrelated  parties  for  cash  and the  trading  price  of the
Company's  shares at the time of the  settlements.  Series A-1 shares  issued in
settlements  reached in July 2006,  which  principally  includes  the  Company's
former non-executive  chairman, were valued at $0.80 per share commensurate with
an increase in the trading price of the Company's common stock. These agreements
effectuated a complete settlement of these debts, claims and liabilities and the
mutual release of the parties with respect thereto.

The Company accounted for the  extinguishment of liabilities  payable to general
creditors in accordance  with SFAS 15  "Accounting  by Debtors and Creditors for
Troubled Debt  Restructurings,"  due to the fact that the holders of these notes
granted to Company  concessions  intended to alleviate its  immediate  liquidity
constraints. These concessions that the creditors granted to the Company enabled
it to (a) effectuate their settlement through an exchange of equity instead of a
use of cash and (b) consummate a private  placement of equity  securities  (Note
16) that resulted in an infusion of cash that was needed to sustain operations.

Claimants other than Mr. Allin and the Allin Dynastic Trust that participated in
the  settlement   include  certain  parties  that  were  previously  engaged  in
litigation with the Company  including the Sherleigh  Associates  Profit Sharing
Plan to which the  Company  issued  2,312,500  shares for a  settlement  loss of
$1,387,500,  Richard Linting to whom the Company issued  1,777,261  shares for a
settlement  loss of  approximately  $773,000  and the holders of the Marie Graul
claim to whom the  Company  issued  1,164,461  shares for a  settlement  loss of
approximately $698,000.


NOTE 16 - INCOME TAXES

As  described in Note 5, the Company  adopted FIN 48 effective  January 1, 2007.
FIN 48 requires companies to recognize in the financial  statements,  the impact
of a tax position,  if that position is more likely than not of being  sustained
on audit,  based on the technical  merits of the  position.  FIN 48 prescribes a
recognition  threshold and  measurement  attribute  for the financial  statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return.  FIN 48 also  provides  guidance on  derecognition,  classification,
interest  and  penalties,  accounting  in interim  periods and  disclosure.  The
Company's policy is to classify penalties and interest associated with uncertain
tax positions, if required as a component of its income tax provision.

The Company  has filed  federal  and  various  state  income tax returns for the
period ended December 31, 2002, and for the years ended December 31, 2003,  2004
and 2005  (for  which the 2005  return  was  consolidated  with the  returns  of
acquired  businesses)  during  2006.  These  income tax  returns  and returns of
acquired businesses filed prior to 2006 have not been examined by the applicable
Federal and State tax authorities.  The Company's tax returns and certain of the
returns of the acquired business were not filed timely. Accordingly, statutes of
limitation with respect to certain of these returns  commenced  during 2006. The
Company has not yet filed its income tax returns for the year ended December 31,
2006.


                                       19
<PAGE>


Management  does not believe  that the Company has any  material  uncertain  tax
position  requiring  recognition or measurement in accordance with the provision
of FIN 48. At December 31, 2006,  the Company had  approximately  $30 million of
net deferred tax assets,  of which $11.8  million  relates to the tax effects of
net operating losses.

The Company's net operating losses amounted to  approximately  $31 million as of
December 31, 2006 and expire at various  times  through the year ended  December
31, 2026. The Company's  determination of the amount of its net operating losses
includes  approximately  $11 million  associated  with business  acquired during
2005. In addition,  the Company  estimated  that a  substantial  majority of the
remaining $20 million of NOL's are subject to  limitations  due to the change in
ownership  provisions  under  Section 382 of the Internal  Revenue  Code.  After
giving  effect to such  changes,  the Company  estimates  that its net operating
losses   available  to  offset  future  taxable   income,   if  any,  amount  to
approximately $13 million.  Accordingly, the Company reduced the carrying amount
of its net deferred tax asset and related reserve by approximately  $6.7 million
for the tax effects having  reduced net operating  losses by  approximately  $18
million.

The  utilization  of the  remaining  net  operating  losses  may be  subject  to
substantial  limitations  in  future  periods  due to the  change  in  ownership
provisions  under Section 382 of the Internal  Revenue Code and separate  return
loss year  limitations  under  Section  1502 of the  Internal  Revenue  Code and
similar  state  provisions.  The Company,  as a result of having  evaluated  all
available  evidence  as  required  under SFAS 109,  fully  reserved  for its net
deferred  tax assets since it is more likely than not that the benefits of these
deferred tax assets will not be realized in future periods.


NOTE 17 - PREFERRED STOCK

AMENDMENT TO CERTIFICATE OF INCORPORATION AND AUTHORIZED SHARE CAPITAL

On March 1, 2006,  the  Company  filed with the  Delaware  Secretary  of State a
Certificate of Designation of  Preferences,  Rights and  Limitations of Series A
Convertible   Preferred  Stock  and  Series  A-1  Convertible   Preferred  Stock
designating  the rights,  preferences and privileges of 2,160 shares of Series A
Convertible  Preferred  Stock and  50,000,000  shares of Series A-1  Convertible
Preferred Stock.

On October 12, 2006,  the Company  filed with the Delaware  Secretary of State a
Certificate of Designation of  Preferences,  Rights and  Limitations of Series B
Convertible  Preferred Stock designating the rights,  preferences and privileges
of 2,000 shares of Series B Convertible  Preferred  Stock.  The  Certificate  of
Designation  of  Preferences,  Rights and  Limitations  of Series B  Convertible
Preferred Stock was amended on January 24, 2007.

A description of each class of the Company's  authorized capital stock following
the most recent amendment to its Certificate of Incorporation is as follows:

SERIES A PREFERRED STOCK

The Series A Preferred  Stock has a stated value of $5,000 per share and carries
a dividend of 10% per annum with such dividend  accruing on a cumulative  basis.
The dividend is payable  only (i) at such time as declared  payable by the Board
of Directors of the Company or (ii) in the event of liquidation,  as part of the
liquidation preference amount ("Liquidation Preference Amount"). Accumulated but
unpaid dividends on the Series A Preferred,  which have not been declared by the
board of  directors,  amount to $487,333 of which  $118,962 is  presented in the
accompanying statement of operations as an increase in the net loss available to
common stockholders.

The Series A Preferred is convertible,  at the option of the holder, into shares
of the Company's  common stock  ("Conversion  Shares") at an initial  conversion
price ("Initial  Conversion Price") of $2.40 per share based on the stated value


                                       20
<PAGE>


of the Series A Preferred,  subject to adjustment  for stock splits,  dividends,
recapitalizations,  reclassifications, payments made to Common Stock holders and
other similar  events and for issuances of additional  securities at prices more
favorable than the conversion  price at the date of such issuance.  As described
below,  the conversion price was reduced to $0.90 per share on November 16, 2006
when the Company's  issued  Series B Preferred  Stock  convertible  at $0.90 per
share with warrants  exercisable  at $1.03 per share,  and to $0.40 per share on
January 24, 2007 when the Company issued  employee stock options  exercisable at
$0.40 per share.

The Series A Preferred is mandatorily  convertible  into shares of the Company's
common stock at the Initial  Conversion Price, which is subject to adjustment as
described above, on the date that: (i) there shall be an effective  registration
statement covering the resale of the Conversion Shares, (ii) the average closing
price of the Company's common stock, for a period of 20 consecutive trading days
is at least 250% of the then applicable  Conversion Price, and (iii) the average
daily  trading  volume of the  Company's  common stock for the same period is at
least 8,334 shares.

The Series A Preferred Liquidation Preference Amount is equal to 125% of the sum
of: (i) the stated  value of any then  unconverted  shares of Series A Preferred
and (ii) any accrued and unpaid dividends thereon. An event of liquidation means
any liquidation,  dissolution or winding up of the Company, whether voluntary or
involuntary,  as well as any change of control of the Company which includes the
sale by the  Company  of  either  (x)  substantially  all its  assets or (y) the
portion of its assets which comprises its core business technology,  products or
services.

SERIES B PREFERRED STOCK

We have designated  2,000 shares of preferred stock as Series B Preferred Stock.
The Series B  Preferred  Stock has a stated  value of $5,000  per share,  has no
maturity date,  carries a dividend of 10% per annum, with such dividend accruing
on a cumulative  basis and is payable only (i) at such time as declared  payable
by the board of  directors or (ii) in the event of  liquidation,  as part of the
liquidation preference amount ("Liquidation Preference Amount"). The Liquidation
Preference  Amount is equal to 125% of the sum of: (i) the  stated  value of any
then  unconverted  shares of Series B  Preferred  Stock and (ii) any accrued and
unpaid  dividends  thereon.  An  event of  liquidation  means  any  liquidation,
dissolution or winding up of the Company,  whether voluntary or involuntary,  as
well as any change of  control of the  Company  which  includes  the sale by the
Company of either  (x)  substantially  all its assets or (y) the  portion of its
assets which comprises its core business technology,  products or services.  The
Series B Preferred  Stock is junior to the Series A Preferred Stock with respect
to liquidation  and dividend  rights.  Accumulated  and unpaid  dividends on the
Series B  Preferred,  which have not been  declared  by the board of  directors,
amount to $174,912 of which $97,363 is presented in the  accompanying  statement
of operations as an increase in the net loss available to common stockholders.

The Series B Preferred Stock is convertible,  at the option of the holder,  into
shares of Common  Stock  ("Conversion  Shares") at an initial  conversion  price
("Initial  Conversion  Price) of $0.82 based on the stated value of the Series B
Preferred   Stock,   subject  to  adjustment   for  stock   splits,   dividends,
recapitalizations,  reclassifications, payments made to Common Stock holders and
other similar  events and for issuances of additional  securities at prices more
favorable  than  the  conversion  price  at the  date of such  issuance.  We are
obligated to register the Conversion  Shares within 90 days of completion of the
issuance of the Series B Preferred Stock.

The Series B Preferred  Stock is mandatorily  convertible at the then applicable
conversion  price  ("Conversion  Price") into shares of Common Stock at the then
applicable  Conversion  Price on the date that:  (i) there shall be an effective
registration  statement covering the resale of the Conversion  Shares,  (ii) the
average  closing price of Common Stock,  for a period of 20 consecutive  trading
days is at least 250% of the then  applicable  Conversion  Price,  and (iii) the
average  daily  trading  volume of Common  Stock for the same period is at least
8,334 shares.

The Series B Preferred Liquidation Preference Amount is equal to 125% of the sum
of: (i) the stated  value of any then  unconverted  shares of Series A Preferred
and (ii) any accrued and unpaid dividends thereon. An event of liquidation means
any liquidation,  dissolution or winding up of the Company, whether voluntary or
involuntary,  as well as any change of control of the Company which includes the
sale by the  Company  of  either  (x)  substantially  all its  assets or (y) the
portion of its assets which comprises its core business technology,  products or
services.


                                       21
<PAGE>


PRIVATE PLACEMENTS OF CONVERTIBLE PREFERRED STOCKS

PRIVATE PLACEMENT OF SERIES A CONVERTIBLE PREFERRED STOCK AND WARRANTS

Beginning  on March  27,  2006 and  completed  on April  2,  2006,  the  Company
consummated the Series A Preferred  Financing with the closing of funds totaling
$4,820,501,  resulting in the issuance of 964 shares of Series A Preferred Stock
and 669,539  common stock  purchase  warrants to the  purchasers of the Series A
Preferred  Stock  ("Investor  Warrants").  The Company also issued  common stock
purchase  warrants  to  Laidlaw as  placement  agent in this  financing  ("Agent
Warrants") exercisable for 198,375 shares of common stock. The Investor Warrants
and the Agent Warrants have a term of 5 years and an exercise price of $1.46 per
share.


Pursuant to the Certificate of Designation for the Series A Preferred  Stock, in
the event  that  additional  shares of common  stock are  issued or deemed to be
issued at an  effective  price  that is lower than the  conversion  price of the
Series A Preferred  Stock, the conversion price for the Series A Preferred Stock
shall be reduced to the effective price of such issuance.  On November 16, 2006,
the Series B Preferred  Financing was  completed at a conversion  price of $0.82
per share as compared to the $2.40 per share  conversion  price for the Series A
Preferred Stock. Pursuant to the terms of the Certificate of Designation for the
Series A Preferred  Stock the conversion  price of the Series A Preferred  Stock
was adjusted to $0.90 per share. This change resulted in an additional 3,347,571
shares of Common Stock being  reserved for issuance  upon the  conversion of the
Series A Preferred Stock.  The Company  recorded  $3,795,059 of deemed dividends
which is equal to the full amount of proceeds  allocable to the preferred shares
based  on  computations  made to  determine  the  relative  fair  values  of the
preferred  shares and warrants and the effective  conversion price of the shares
in accordance with EITF 00-27.

On January 24, 2007, the Company issued 5,270,553 stock options under the Patron
Systems Inc. 2006 Stock Incentive Plan.  These options have an exercise price of
$0.40 per share.  This  issuance has resulted in the  adjustment of the Series A
Preferred  conversion price to $0.40 per share and has resulted in an additional
6,695,116 shares of Common Stock being reserved for issuance upon the conversion
of the Series A  Preferred  Stock.  The  Company  was not  required to record an
additional  deemed dividend since the deemed dividend  recorded in November 2006
was equal to the proceeds  allocable to the preferred  shares at their  original
dates of issuance.  As of March 31,  2007,  the 964 shares of Series A Preferred
Stock outstanding are convertible, as described above, into 12,051,254 shares of
Common Stock.

PRIVATE PLACEMENT OF SERIES B CONVERTIBLE PREFERRED STOCK AND WARRANTS

On October 13, 2006 and November 16, 2006, the Company  consummated two closings
of the Series B Preferred  Financing  through  the sale of Units,  at a per Unit
price of $100,000,  consisting of (i) 20 shares of Series B Preferred  Stock and
(ii) Series B Investor  Warrants to purchase shares of Common Stock in an amount
equal to 50% of the shares  issuable  upon  conversion of the Series B Preferred
Stock,  in the  aggregate  amount of  $3,952,716.  The  closings of the Series B
Preferred  Financing  resulted  in the  issuance  of  790.54  shares of Series B
Preferred Stock with a conversion price of $0.82 and Series B Investor  Warrants
to purchase  2,410,222  shares of Common Stock at an exercise price of $1.03 per
share. The Series B Investor Warrants have a term of 5 years.

 In  connection  with the Series B Preferred  Financing,  the  Company  retained
Laidlaw as its  non-exclusive  placement  agent  ("Series B Preferred  Placement
Agent"). The Company paid Laidlaw a fee of $352,569 and issued to Laidlaw common
stock purchase warrants, the Series B Agent Warrants, to purchase 723,065 shares
of Common Stock for its services as the Series B Preferred  Placement  Agent and
paid $32,750 of Laidlaw's legal expenses  associated with the Series B Preferred
Financing. The Series B Agent Warrants have a term of 5 years.

The Company is obligated to register  the shares of Common Stock  issuable  upon
exercise of the Series B Investor  Warrants and the Series B Agent  Warrants and
conversion of the Series B Preferred  Stock within 90 days after the  completion
of the Series B Preferred Financing.

As of November 16, 2006, the 790.54 shares of Series B Preferred are convertible
into 4,820,417 shares of Common Stock.


                                       22
<PAGE>


NOTE 18 - STOCKHOLDERS' EQUITY

ISSUANCE OF COMMON STOCK PURCHASE WARRANTS

On February 20, 2007,  the Company  issued  common stock  purchase  warrants for
200,000  shares at an  exercise  price of $1.00 per share to Apex in  connection
with the 2007  Interim  Bridge  Financing.  The  aggregate  fair  value of these
warrants amounted to $134,419 (Note 8).

On March 2, 2007, the Company issued common stock purchase  warrants for 100,000
shares at an exercise  price of $1.25 per share to Apex in  connection  with the
2007  Interim  Bridge  Financing.  The  aggregate  fair value of these  warrants
amounted to $83,984 (Note 8).

On March 19, 2007, the Company issued common stock purchase warrants for 160,000
shares at an exercise  price of $1.14 per share to Apex in  connection  with the
2007  Interim  Bridge  Financing.  The  aggregate  fair value of these  warrants
amounted to $122,225 (Note 8).

On March 27, 2007, the Company issued common stock purchase warrants for 165,000
shares at an exercise  price of $0.69 per share to Apex in  connection  with the
2007  Interim  Bridge  Financing.  The  aggregate  fair value of these  warrants
amounted to $76,167 (Note 8).

SHARE-BASED COMPENSATION ARRANGEMENTS

The Company,  since its  inception  has granted  non-qualified  stock options to
various employees and non-employees at the discretion of the Board of Directors.
Substantially all options granted to date have exercise prices equal to the fair
value of underlying  stock at the date of grant and terms of ten years.  Vesting
periods range from fully vested at the date of grant to four years.

On July 21,  2006,  the  stockholders  of the Company  approved  the 2006 Patron
Systems,  Inc. Stock Incentive Plan (the "2006 Stock Plan"). The 2006 Stock Plan
provides  for the  granting of  incentive  stock  options to  employees  and the
granting of  nonstatutory  stock options to employees,  non-employee  directors,
advisors,  and  consultants.  The 2006  Stock Plan also  provides  for grants of
restricted stock, stock appreciation  rights and stock unit awards to employees,
non-employee directors, advisors and consultants. The 2006 Stock Plan authorizes
and reserves  5,600,000 shares for issuance of options that may be granted under
plan.

As described  in Note 5, the fair value of all awards was  estimated at the date
of grant using the Black-Scholes option pricing model.

During the three months ended March 31, 2007,  the Company  issued stock options
to employees to purchase  5,270,553  shares.  These  options  include a grant to
purchase  2,047,121 shares at an exercise price of $0.40 per share,  with a fair
value of $663,267,  to the Chief  Executive  Officer of the Company,  Mr. Braden
Waverley, to conform to his employment agreement requirements. Additionally, the
Company granted options to purchase 731,114 shares at an exercise price of $0.40
per  share,  with a fair  value of  $236,881,  to Mr.  Martin  T.  Johnson,  the
Company's Chief Financial Officer, to conform with his employment agreement with
the  Company.  The  Company  granted  options to purchase  757,318  shares at an
exercise price of $.40 per share, with a fair value of $245,371 to Robert Cross,
Chairman of the Board.  The Company granted options to purchase 50,000 shares at
an  exercise  price of $.40 per share  with a fair  value of  $16,200  to George
Middlemas,  a director of the Company.  The Company  also granted  options to 26
employees  for a total of  1,685,000  shares at an  exercise  price of $0.40 per
share with a fair value of $545,940.  Assumptions relating to the estimated fair
value of these  warrants  are as  follows:  fair  value of common  stock  $0.40;
risk-free interest rate of 5.0%; expected dividend yield zero percent;  expected
warrant life of four years; and current volatility of 125%.

The risk-free  rate is based on the U.S.  Treasury  yield curve in effect at the
time of grant. The Company has not paid dividends to date and does not expect to
pay  dividends  in the  foreseeable  future due to its  substantial  accumulated
deficit and limited capital  resources.  Accordingly,  expected dividends yields
are currently zero.  Historical  cancellations  and forfeitures of stock options
granted  through  December  31,  2004  have  been  insignificant.  However,  the
Company's operations and the nature of its business changed substantially.


                                       23
<PAGE>


Accordingly,  the  Company  considers  more  recent  data  relating  to employee
turnover rates to be indicative of future vesting.  Based on available data, the
Company has assumed  that  approximately  84% of  outstanding  options will vest
annually. No options have been exercised to date. The Company will prospectively
monitor employee terminations, exercises and other factors that could affect its
expectations  relating to the vesting of options in future periods.  The Company
will adjust its assumptions  relating to its  expectations of future vesting and
the terms of options at such times that  additional  data indicates that changes
in these assumptions are necessary.  Expected volatility is principally based on
the historical volatility of the Company's stock.

A summary of option  activity  for the three  months  ended March 31, 2007 is as
follows:

                                                                    WEIGHTED-
                                                     WEIGHTED-       AVERAGE
                                                      AVERAGE       REMAINING
                                                      EXERCISE     CONTRACTUAL
             OPTIONS                   SHARES          PRICE          TERM
---------------------------------- ---------------- ------------- --------------
Outstanding at January 1, 2007            532,636       $16.34       6.5 years
---------------------------------- ---------------- ------------- --------------
Granted                                 5,270,553       $ 0.40
---------------------------------- ---------------- ------------- --------------
Exercised                                    --            --
---------------------------------- ---------------- ------------- --------------
Forfeited or expired                      (28,669)      $ 9.48
---------------------------------- ---------------- ------------- --------------
Outstanding at March 31, 2007           5,774,520       $ 1.83       9.5 years
---------------------------------- ---------------- ------------- --------------
Exercisable at March 31, 2007           1,546,692       $ 5.47       8.8 years
---------------------------------- ---------------- ------------- --------------

At March 31, 2007,  the aggregate  intrinsic  value of options  outstanding  and
options  exercisable,  based on the March 30, 2007 closing  price of the Company
common stock ($0.55 per share) amounted to $800,583 and $222,274,  respectively.
In addition the table includes  206,670 fully vested and  non-forfeitable  stock
options  outstanding that it issued to non-employees  through March 31, 2007. As
of March 31, 2007,  these  options  have a weighted  average  exercise  price of
$13.77,  weighted  average  remaining  contractual  term  of  5.1  years  and an
aggregate intrinsic value of $0. The fair value of the unvested portion of stock
options  at March  31,  2007 is  $1,677,013  with a  weighted-average  remaining
vesting period of 3.6 years.

The  weighted-average  grant-date  fair  value of the  5,270,553  stock  options
granted  during  the three  month  period  ended  March  31,  2007  amounted  to
$1,707,659  or $0.32 per share.  There have also not been any exercises of stock
options to date.  The total fair value of options vested during the three months
ended March 31, 2007  amounted to  $430,303.  Additionally,  the Company did not
capitalize the cost associated with stock based compensation.

Aggregate stock based  compensation  to employees and non employees  amounted to
$430,809 for the three months ended March 31, 2007.


NOTE 19 - DISCONTINUED OPERATIONS

LucidLine,  Inc.  ("LucidLine") was a provider of bundled and branded high speed
Internet access and synchronized remote data back-up, retrieval, and restoration
services.  The  acquisition of LucidLine was intended to supply the expertise to
establish  the  homeland  security  architecture,  the  risk  and  vulnerability
assessment evaluation services and the development and operation of the homeland
security data center  solutions  necessary to implement our former business plan
to offer model homeland security architecture with state-of-the-art  prevention,
response and information management capabilities. The Company was unable to find
any parties interested in its homeland security data center solutions,  its risk
and vulnerability  assessment  services and its homeland  security  architecture
business. The Company decided in the first quarter of 2006 to sell the LucidLine
business.

On April 18, 2006,  the Company  entered into a Stock  Purchase  Agreement  with
Walnut Valley,  Inc.,  pursuant to which the Company sold all of the outstanding
shares of LucidLine to Walnut Valley,  Inc. in consideration  for a cash payment
of $25,000 and the  issuance of a  Promissory  Note in the  principal  amount of
$25,000 by Walnut Valley in favor of the Company.


                                       24
<PAGE>


                                                                JANUARY 1, 2006
                                                                     THROUGH
                                                                 MARCH 31, 2006
                                                                ---------------

Revenue ....................................................    $        99,167
Cost of Sales ..............................................             91,601
                                                                ---------------
   Gross Profit ............................................              7,566
Operating expenses .........................................            111,992
                                                                ---------------
   Loss from operations ....................................           (104,426)

Other expense ..............................................               (538)
                                                                ---------------
   Loss before income taxes ................................           (104,964)
Income taxes ...............................................               --
                                                                ---------------
   Net loss ................................................    $      (104,964)
                                                                ===============


During  December  2006,  the Company  made an  affirmative  decision to exit and
actively pursue a plan to sell its PolicyBridge  software product business. As a
result of this decision,  the Company has classified its  PolicyBridge  software
product business as a discontinued  operation in its financial  statements as of
March 31, 2007 and 2006 in accordance with SFAS 144. While management  continues
to search for a buyer of this  business,  the Company  will  continue to provide
services  under  the  existing   maintenance  and  support   agreements  to  its
PolicyBridge customers.

                                                       THREE MONTHS ENDED
                                                MARCH 31, 2007   MARCH 31, 2006
                                                --------------   --------------
Revenue .....................................   $       61,751   $       81,860
Cost of Sales ...............................             --             34,147
                                                --------------   --------------
   Gross Profit .............................           61,751           47,713
Operating expenses ..........................           57,210          330,292
                                                --------------   --------------
 Gain (loss) from operations ................            4,541         (282,579)

Other income/(expense)
                                                --------------   --------------
   Income (loss) before income taxes ........            4,541         (282,579)
Income taxes ................................             --               --
                                                --------------   --------------
   Net income (loss) ........................   $        4,541   $     (282,579)
                                                ==============   ==============


NOTE 20 - SUBSEQUENT EVENTS

ENGAGEMENT OF FIRST ANALYSIS SECURITIES CORPORATION

On April 18, 2007,  the Company  announced that it has entered into an agreement
with  First  Analysis  Securities   Corporation   ("FASC"),   a  research-driven
investment bank, to provide strategic counsel on identifying acquisition targets
and support for future capital raising activities.  FASC shall be paid a $20,000
per month fee. In the event that FASC  facilitates  i) an equity,  debt or other
capital  investment  in the Company by a third party;  facilitates  an alliance,
partnership,  joint venture or other related event with a third party;  or ii) a
merger, combination, reorganization,  recapitalization, business combination, or
the purchase of all or substantially all of the assets of the Company by a third
party,  then a cash transaction fee shall be paid equal to 6% of the transaction
value as defined in the  agreement  or $300,000  whichever  is greater  upon the
closing of a transaction. FASC shall be paid an Alliance Fee if FASC facilitates
an alliance,  partnership,  joint venture or other related event which generates
at least $2 million in  additional  revenues  for the Company,  warrants  with a
value of $300,000 shall be issued to FASC.

MODIFICATION  OF THE  CERTIFICATE OF DESIGNATION OF THE SERIES A PREFERRED STOCK
AND THE SERIES B PREFERRED STOCK

On April 12, 2007, the Board of Directors  approved the amendment of each of the
Certificate of Designation of  Preferences,  Rights and  Limitations of Series A
Convertible Preferred Stock and Series A-1 Convertible Preferred Stock of Patron
Systems,  Inc. (the "Series A Certificate of Designation"),  and the Certificate
of Designation of  Preferences,  Rights and  Limitations of Series B Convertible
Preferred  Stock  of  Patron  Systems,   Inc.  (the  "Series  B  Certificate  of
Designation"  and together with the Series A  Certificate  of  Designation,  the
"Certificates  of  Designation"),  to remove  the  limitation  on the  Company's
ability to issue funded debt over $1,000,000. On May 1,


                                       25
<PAGE>


2007, the Board of Directors  approved the amendment of the Series A Certificate
of  Designation  to increase the  limitation on the  Company's  ability to issue
funded debt to a limit of $3,000,000 from the current limit of $1,000,000.

MODIFICATION OF THE CERTIFICATE OF DESIGNATION OF THE SERIES B PREFERRED STOCK

On May 2, 2007,  the  Company  filed with the  Secretary  of State of Delaware a
Certificate of Amendment of the Series B Certificate of  Designation.  On May 8,
2007 the Company filed a Certificate  of Correction  with the Secretary of State
of Delaware to correct an error in the previously filed Certificate of Amendment
of the Series B Certificate of Designation.  The Amended Series B Certificate of
Designation removes the limitation on the Company's ability to issue funded debt
over $1,000,000.

ADDITIONAL ADVANCES UNDER THE 2007 INTERIM BRIDGE FINANCING

On April 4,  2007,  April 19,  2007 and May 7,  2007 the  Company  was  advanced
$168,000,  $99,000, and $150,000 respectively,  from Apex under the 2007 Interim
Bridge  Financing (Note 8). In conjunction  with the April 4, 2007 advance,  the
Company  issued to Apex 168,000  common stock  purchase  warrants at an exercise
price of $0.69 per share.  In conjunction  with the April 19, 2007 advance,  the
Company  issued to Apex 99,000  common  stock  purchase  warrants at an exercise
price of $0.94 per  share.  In  conjunction  with the May 7, 2007  advance,  the
Company  issued to Apex 150,000  common stock  purchase  warrants at an exercise
price of $1.25 per share. These warrants have a term of 5 years.


                                       26
<PAGE>


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


                              PATRON SYSTEMS, INC.

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS
                                 MARCH 31, 2007

The following  discussion and analysis  should be read in  conjunction  with the
Annual  Report on Form  10-KSB,  including  the  financial  statements,  and the
related notes thereto,  for the year ended December 31, 2006 of Patron  Systems,
Inc.  (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

From our inception  through  December 31, 2004, we were  principally  engaged in
developing  our  business  plan,   raising  capital,   identifying   merger  and
acquisition candidates and negotiating merger and acquisition  transactions that
we closed  during  the  first  quarter  of  2005.In  2005,  we  consummated  the
acquisitions of Complete Security Solutions,  Inc. ("CSSI") and LucidLine,  Inc.
("LucidLine")  and  Entelagent  Software  Corp.  ("Entelagent").  In April 2006,
LucidLine was sold and is classified  as a  discontinued  operation for 2006. In
December 2006,  management  decided to exit the PolicyBridge  business which was
acquired in the Entelagent acquisition and these assets and liabilities are held
for sale at March 31, 2007.

Patron  Systems,  Inc.  provides  application  software and services  focused on
business process management (BPM) in the public sector. Our current  application
software offering,  FormStream,  is an open standards  information  sharing tool
that addresses the need for law  enforcement and public safety agencies to share
information  between  local,  state and federal  law  enforcement  and  homeland
security agencies. FormStream is a mobile electronic forms (e-forms) application
which provides a highly scalable, open standard,  network independent method for
the  distribution  and  synchronization  of  e-forms  to  mobile  devices.   The
implementation  of  FormStream  allows its user agencies to update and modernize
their  business  processes  to  utilize  the  sophisticated  form and user based
business  rules and  process  routing  capabilities  of  FormStream  to increase
officer and supervisor productivity, increase officer availability in the field,
reduce  back-office  workloads  involved  with  entry of data and review of data
entered,  provide real-time  information  sharing of field generated reports and
other field  generated  information  to officers and users within the  agency(s)
served by a particular  FormStream  installation  and provide the ability for an
agency to meet the federally  mandated  requirements  to provided police reports
and other  information to the state and federal  governments in standard formats
for information sharing purposes.  FormStream  addresses mobile e-form creation,
capture and sharing over wireless networks and manages data in industry standard
formats  (forms:  .pdf,  XDP and XML; law  enforcement:  Global Justice XML data
model (GJXDM) and National Information Exchange Model (NIEM)).

By  improving  the  information  flow  and the  business  processes  within  law
enforcement and public safety agencies, FormStream allows these agencies to much
more cost  effectively  serve their  constituents and provide improved local law
enforcement as well as enhanced local, regional and national homeland security.


                                       27
<PAGE>


CRITICAL ACCOUNTING POLICIES

The  preparation of our  consolidated  financial  statements in conformity  with
accounting  principles  generally  accepted  in the  United  States  of  America
requires management to exercise its judgment.  We exercise considerable judgment
with respect to establishing  sound  accounting  polices and in making estimates
and assumptions  that affect the reported amounts of our assets and liabilities,
our  recognition of revenues and expenses,  and  disclosures of commitments  and
contingencies at the date of the financial statements.

On an ongoing basis, we evaluate our estimates and judgments.  Areas in which we
exercise  significant  judgment include, but are not necessarily limited to, our
valuation of accounts  receivable,  recoverability of long-lived assets,  income
taxes,  equity transactions  (compensatory and financing) and contingencies.  We
have also adopted  certain  polices with respect to our  recognition  of revenue
that we believe are consistent with the guidance  provided under  Securities and
Exchange  Commission  Staff  Accounting  Bulletin No. 104 and estimate values of
delivered and undelivered elements.

We base our  estimates  and  judgments  on a variety  of factors  including  our
historical  experience,  knowledge  of our business  and  industry,  current and
expected  economic  conditions,  the  composition  of our  products,  regulatory
environment,  and in  certain  cases,  the  results of  outside  appraisals.  We
constantly  re-evaluate  our  estimates  and  assumptions  with respect to these
judgments and modify our approach when circumstances indicate that modifications
are necessary.

While we believe that the factors we evaluate provide us with a meaningful basis
for  establishing and applying sound  accounting  policies,  we cannot guarantee
that the  results  will always be  accurate.  Since the  determination  of these
estimates  requires the exercise of judgment,  actual  results could differ from
such estimates.

A  description  of  significant  accounting  polices  that  require  us to  make
estimates and  assumptions  in the  preparation  of our  consolidated  financial
statements are as follows:

ACCOUNTS RECEIVABLE AND REVENUE RECOGNITION

We derive  our  revenues  from the  following  sources:  (1)  sales of  computer
software,  which includes new software licenses and software updates and product
support revenues and (2) 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 its  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 reasonably
assured.

We also accrue unbilled revenue under software  licenses and services  delivered
under  contractual  arrangements  which  provide  for  billings  to be  made  at
intervals that may differ from the periods of delivery or performance.

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 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


                                       28
<PAGE>


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,  "Modification  of SOP 97-2,  Software  Revenue
Recognition  With  Respect to  Certain  Transaction"  to  allocate  revenues  to
delivered elements once it has established vendor-specific objective evidence of
fair value for such undelivered elements.

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.

We adjust our accounts receivable balances that we deem to be uncollectible. The
allowance  for doubtful  accounts is our best estimate of the amount of probable
credit losses in our existing accounts  receivable.  We review our allowance for
doubtful  accounts on a monthly  basis to determine  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. An allowance for doubtful accounts
is not provided because in our opinion,  all accounts  recorded are deemed to be
collectible.

INCOME TAXES

We are required to determine the aggregate  amount of income tax expense or loss
based upon tax statutes in jurisdictions in which we conduct business. In making
these estimates,  we adjust our results  determined in accordance with generally
accepted  accounting  principles  for items that are treated  differently by the
applicable taxing authorities.  Deferred tax assets and liabilities, as a result
of  these  differences,  are  reflected  on  our  balance  sheet  for  temporary
differences  loss and credit  carry  forwards  that will  reverse in  subsequent
years. We also establish a valuation  allowance against deferred tax assets when
it is more likely than not that some or all of the  deferred tax assets will not
be realized.  Valuation  allowances  are based,  in part,  on  predictions  that
management must make as to our results in future periods.  The outcome of events
could differ over time which would  require us to make changes in our  valuation
allowance.

GOODWILL AND INTANGIBLE ASSETS

We account for Goodwill and  Intangible  Assets in accordance  with Statement of
Financial  Accounting  Standards ("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.
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. In accordance
with SFAS 142, we  conducted  our annual  impairment  review of goodwill for the
year ended December 31, 2006, which resulted in a goodwill  impairment charge of
$210,716. This 2006 charge, which principally represents goodwill remaining from
the  PolicyBridge   business  we  acquired  from  Entelagent  is  classified  in
discontinued  operations as a result of our decision to exit that business.  The
remaining  amount of goodwill,  which  amounts to  $9,300,000 at March 31, 2007,
relates to our  acquisition  of CSSI in February 2005 from which we acquired the
FormStream software technology, our sole line of business. We engaged an outside
specialist to assist us with  performing our annual goodwill  impairment  tests.
These tests were made using a discounted  cash flow model to value the business.
This approach requires us to forecast our expectation of revenues and cash flows
in future  periods  and to work with an  independent  specialist  on  developing
assumptions relating to the risk that such cash flows may or may not materialize
in future periods.

SHARE BASED PAYMENTS AND OTHER EQUITY TRANSACTIONS

Effective  January 1, 2006, we adopted SFAS No. 123R "Share Based Payment." This
statement is a revision of SFAS  Statement No. 123, and  supersedes  APB Opinion
No. 25, 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 is measured at fair
value on the awards' grant date,  based on the  estimated  number of awards that


                                       29
<PAGE>


are expected to vest. We adopted the modified prospective method with respect to
accounting  for  our  transition  to  SFAS  123(R)  and  measured   unrecognized
compensation cost. Under this method of accounting,  we are required to estimate
the  fair  value  of  share  based  payments  that we make to our  employees  by
developing  assumptions  regarding  expected  holding  terms of  stock  options,
volatility  rates and  expectation  of  forfeitures  and future vesting that can
significantly  impact the amount of compensation  cost that we recognize in each
reporting period.

We are also  required to apply  complex  accounting  principles  with respect to
accounting  for  financing  transactions  that we have  consummated  in order to
sustain our business. These transactions, which generally consist of convertible
debt and equity instruments,  require us to use significant judgment in order to
assess the fair values of these instruments at their dates of issuance, which is
critical to making a reasonable  presentation  of our financing costs and how we
finance our business.

Formulating  estimates  in  any of  the  above  areas  requires  us to  exercise
significant  judgment.  It is at least reasonably possible that the estimates of
the effect on the  financial  statements  of a condition,  situation,  or set of
circumstances  that  existed  at the date of the  financial  statements  that we
considered in formulating our estimates could change in the near term due to one
or more future  confirming  events.  Accordingly,  the actual results  regarding
estimates  of any of the  above  items as they are  presented  in the  financial
statements could differ materially from our estimates.



                              RESULTS OF OPERATIONS

THREE MONTHS  ENDED MARCH 31, 2007  COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2006.

For the three  months ended March 31,  2007,  our revenues  amounted to $171,218
compared to $179,925 for the three months ended March 31, 2006.

Cost of Sales for the three  months  ended  March 31,  2007  amounted to $64,635
compared to $57,419 for the three  months  ended March 31,  2006.  Cost of sales
during the three months ended March 31, 2007 and March 31, 2006 includes $27,015
and  $27,522,  respectively,  associated  with  the  amortization  of  developed
technology.

Operating  expenses  amounted to $1,774,031 for the three months ended March 31,
2007 as compared to  $754,385  for the three  months  ended March 31,  2006,  an
increase of $1,019,646.  The increase in operating expenses includes an increase
of approximately  $250,000 for employee stock option  compensation  expense,  an
increase of  approximately  $401,000  associated with increased  staffing in the
Company's  engineering,  support  and  professional  services  functions  and  a
increase of approximately $907,000 associated with the 2006 gain associated with
the  settlements  under the  creditor  and  claimant  liabilities  restructuring
program.  These  increases  were  offset by  approximately  $83,000  for reduced
salaries  associated  with a reduction in the number of employees,  primarily in
general and  administrative  functions,  an  approximately  $3,000  reduction in
expense  associated with stock based penalties under financing  arrangements and
an approximately $453,000 reduction in legal and professional fees.

Our loss from  continuing  operations  for the three months ended March 31, 2007
amounted to $2,162,583  compared to a loss of $1,604,281  for the same period in
2006. Our loss increased as a result of the increased operating expenses and the
non-recurrence of settlement gains.

Interest  expense  during the three  months  ended  March 31,  2007  amounted to
$505,925 as compared to $972,464 for the three months ended March 31, 2006.  The
reduction  is  principally  related to the  issuance,  in the three months ended
March 31,  2006,  of the Bridge  III Notes and the  associated  amortization  of
deferred  financing costs and the accretion of debt discounts incurred with that
financing  being  incurred in the three months ended March 31, 2007 at a reduced
total expense  associated with the 2007 Interim Bridge Financing.  Additionally,
the interest expense  associated with the outstanding  Acquisition Notes and the
Bridge I,  Bridge II and Bridge III Notes in the three  months  ended  March 31,
2006 was reduced with the exchange of a  substantial  portion of these notes for
Series A-1 Preferred Stock.  Non-cash  interest  relating to the amortization of
deferred  financing costs,  valuation of a derivative  conversion option and the
accretion  of debt  discounts  during  the three  months  ended  March 31,  2007
amounted  to  $458,345  compared  to  $303,038  in  the  same  period  in  2006.
Amortization of deferred  finance charges which have been classified as interest
expense was $0 in the three months ended March 31, 2007  compared to $282,129 in


                                       30
<PAGE>


the same period in 2006.  Accretion  of debt  discounts  during the three months
ended  March 31,  2007 were  $163,759  compared to $20,909 in the same period in
2006.  The  change  in the  fair  value  of the  derivative  conversion  option,
presented in the  statement of  operations  for the three months ended March 31,
2007 amounted to $8,712. The Company did not have any free standing  derivatives
requiring  liability  classification  and  periodic  adjustment  to market value
outstanding  during the three months ended March 31, 2006.  Interest income, was
$2,120 and $0 in the three months ended March 31, 2007 and 2006, respectively.

During  the  three  months  ended  March 31,  2007,  the  Company's  contractual
dividends on its Series A Preferred and Series B Preferred was $216,325.

For the three  months  ended March 31,  2007,  the net loss  available to common
stockholders was $2,374,367 or $(0.16) per share on 14,512,260  weighted average
common  shares   outstanding   compared  to  a  net  loss  available  to  common
stockholders  of $1,991,824 or $(0.96) per share on 2,083,954  weighted  average
common shares outstanding for the three months ended March 31, 2006.


LIQUIDITY AND CAPITAL RESOURCES

We incurred a net loss from  continuing  operations of $2,162,583  for the three
months  ended March 31,  2007,  which  includes  $931,510  of  non-cash  charges
including  non-cash  charges  associated with the accretion  related to warrants
issued  in  conjunction   with  notes  payable   ($458,345),   depreciation  and
amortization  ($51,026), a charge for stock option based compensation ($430,809)
and a gain on the derivative conversion liability valuation of $8,712. Including
the amounts  above,  we used net cash in our  operating  activities  of $944,686
during the three months ended March 31, 2007. Our working capital  deficiency at
March  31,  2007  amounts  to  $4,386,561and  we are  continuing  to  experience
shortages in working  capital.  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
raised  $625,000 of bridge  financing  through  issuance of secured demand notes
during the three months ended March 31, 2007 The Company used  $510,031 of these
proceeds to fund its operations and a net of $114,969 in investing activities.

We are currently in the process of attempting  to raise  additional  capital and
have taken  certain  steps to conserve our  liquidity.  Subsequent  to March 31,
2007,  the  Company  has been  advanced an  additional  $417,000  under the 2007
Interim  Bridge  Financing.  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.

OFF-BALANCE SHEET ARRANGEMENTS

At  March  31,  2007,  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.


                                       31
<PAGE>


RISKS RELATED TO OUR COMMON STOCK

THERE IS SUBSTANTIAL 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
may become insolvent. As of March 31, 2007, our cash balance was $120,004 and we
had a working capital deficit of $4,386,561. 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.

We have restructured  approximately $24.5 million of our previously  outstanding
claims,  liabilities,  demands,  causes of action, costs,  expenses,  attorneys'
fees,  damages,  indemnities,  and  obligations  of every kind and  nature  that
certain  creditors  and  claimants  had with us  pursuant  to our  creditor  and
claimant liabilities restructuring described elsewhere in this annual report. We
are currently  unable to provide  assurance  that the acceptance of the creditor
and claimant liabilities restructuring will actually improve our ability to fund
the further  development  of our business  plan or improve our  operations.  Our
failure to fund the further  development  of our  business  plan and  operations
would materially adversely affect 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.  We were incorporated in Delaware in
2002. Significant business operations only began with the acquisitions completed
in  February  and March  2005.  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 have generated  limited revenues and have 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 March 31, 2007,  we had an  accumulated
deficit of approximately  $98.6 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.

THE  AUTOMATIC  CONVERSION  OF OUR SERIES A-1  PREFERRED  STOCK HAS  RESULTED IN
SIGNIFICANT DILUTION TO OUR EXISTING STOCKHOLDERS AND A CHANGE IN CONTROL OF OUR
COMPANY,  AND COULD ALSO  RESULT IN  ADDITIONAL  VOLATILITY  IN THE PRICE OF OUR
COMMON STOCK.

The  automatic  conversion  of our Series A-1  Preferred  Stock on July 31, 2006
resulted in significant  dilution to our existing  stockholders  and resulted in
our former creditors and claimants owning approximately 85.0% of our outstanding
shares of common stock. These creditors and claimants, to the extent they act in
concert, would be able to determine all actions brought before our stockholders.
As a result of the automatic  conversion of our Series A-1 Preferred Stock, each


                                       32
<PAGE>


of Per  Gustafsson,  Arco van Nieuwland and Sherleigh  Associates,  Inc.  Profit
Sharing Plan became  greater than five percent  beneficial  owners of our common
stock.

Upon the  registration  of the shares of common stock issued upon the conversion
of our Series A-1 Preferred Stock,  there will be a substantial amount of shares
eligible  for sale in the  public  market.  If former  holders of our Series A-1
Preferred  Stock decide to sell their  shares of  registered  stock,  such sales
could result in  significant  volatility in the market price of our common stock
and would likely cause the market price of our common stock to decline.

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.

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.

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 May 4, 2007,  there were  14,512,260
shares of common stock outstanding,  of which 1,365,601 shares were beneficially
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
arrangements and Rule 144 under the Securities Act.

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


                                       33
<PAGE>


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.

As our  common  stock is  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.

Our business plan is dependent upon the acquisition and integration of companies
that have previously operated independently.  To date we have experienced delays
in  implementing  our business  plan as a result of limited  capital  resources,
which have had a material adverse effect on our business.  Further delays in 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.


                                       34
<PAGE>


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.  Our 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 could cause us 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.


                                       35
<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 EXPERIENCED ISSUES WITH OUR FINANCIAL  SYSTEMS,  CONTROLS AND OPERATIONS
THAT COULD HARM OUR 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.  Through
the  quarter  ended  March 31,  2007,  our  Chief  Executive  Officer  and 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 controls.  These material weaknesses related
to the fact that that our  overall  financial  reporting  structure  and current
staffing  levels were not  sufficient to support the complexity of our financial
reporting requirements. We currently lack the expertise we need to apply complex
accounting   principles  relating  to  our  business   combinations  and  equity
transactions and have  experienced  difficulty in applying income tax accounting
principles. Although we have taken steps to correct these previous deficiencies,
including  the  hiring  of a  Chief  Financial  Officer,  and are  currently  in
compliance  with the  SEC's  reporting  requirements,  additional  time is still
required to test and document our internal and disclosure  control  processes to
ensure  their  operating  effectiveness.  In addition,  we have limited  capital
resources  and are still at risk for the loss of key  personnel  in our  finance
department.  The loss of key personnel in our finance  department,  or any other
conditions that could disrupt our operations in this area, could have a material
adverse affect on our ability to communicate  critical information to management
and our  investors,  raise  capital  and/or  maintain  compliance  with  our SEC
reporting obligations. These circumstances, if they arise, could have a material
adverse affect on our business.

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.

WE MAY NOT BE ABLE  TO  IMPLEMENT  SECTION  404 OF THE  SARBANES-OXLEY  ACT ON A
TIMELY BASIS.


                                       36
<PAGE>


The SEC, as directed by Section 404 of the  Sarbanes-Oxley  Act of 2002, adopted
rules generally  requiring each public company to include a report of management
on the company's internal controls over financial reporting in its annual report
on Form 10-KSB that contains an assessment by management of the effectiveness of
the company's internal controls over financial  reporting  beginning in the year
ended  December 31, 2007.  In addition,  the  company's  independent  registered
accounting  firm must  attest to and report on  management's  assessment  of the
effectiveness of the company's internal controls over financial reporting.  This
requirement  will first apply to our annual report on Form 10-KSB for the fiscal
year  ending  December  31,  2008.  We have  not yet  developed  a  Section  404
implementation  plan.  We have in the  past  discovered,  and may in the  future
discover,  areas of our internal controls that need  improvement.  How companies
should be implementing these new requirements including internal control reforms
to comply with Section  404's  requirements  and how  independent  auditors will
apply  these  requirements  and  test  companies'  internal  controls,  is still
reasonably  uncertain.  We  expect  that  we may  need  to  hire  and/or  engage
additional  personnel and incur  incremental costs in order to complete the work
required by Section 404. We can not guarantee that we will be able to complete a
Section 404 plan on a timely basis.  Additionally,  upon completion of a Section
404  plan,  we may  not be able to  conclude  that  our  internal  controls  are
effective,  or in the event that we  conclude  that our  internal  controls  are
effective,  our independent accountants may disagree with our assessment and may
issue a report that is  qualified.  Any  failure to  implement  required  new or
improved controls, or difficulties  encountered in their  implementation,  could
negatively  affect  our  operating  results  or  cause  us to fail  to meet  our
reporting obligations.

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  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.  In  addition,  we will become  subject to the  internal
control reporting requirement specified in Section 404 of the Sarbanes-Oxley Act
of 2002 beginning in the year ended December 31, 2007,  which will require us to
expend substantial  financial  resources in order to become compliant with these
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 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


                                       37
<PAGE>


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.

OUR 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. Our  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


                                       38
<PAGE>


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 Company  management,  including the Chief Executive Officer and Chief
Financial  Officer,  evaluated the effectiveness of our disclosure  controls and
procedures,  as defined by  paragraph  (e) of  Exchange  Act Rules  13(a)-15  or
15(d)-15 for the three months ended March 31, 2007,  the period  covered by this
report.  Based  on that  evaluation,  the  Chief  Executive  Officer  and  Chief
Financial Officer concluded that, as of March 31, 2007 the Company's  disclosure
controls and procedures were not effective.

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 Chief  Financial
Officer,   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.

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 year ended December 31, 2007.  Nevertheless,  we
identified  certain matters that constitute  material weakness (as defined under
the Public Company  Accounting  Oversight Board Auditing  Standard No. 2) in our
internal controls over financial reporting.

In previous  periods,  we reported that we had identified  certain  matters that
constituted  material  weakness (as defined under the Public Company  Accounting
Oversight Board Auditing Standard No. 2) in our internal controls over financial
reporting.  The material  weaknesses that we identified related to the fact that
that our overall financial  reporting structure and current staffing levels were
not   sufficient  to  support  the   complexity   of  our  financial   reporting
requirements.  We  currently  lack  the  expertise  we  need  to  apply  complex
accounting   principles  relating  to  our  business   combinations  and  equity
transactions and have  experienced  difficulty in applying income tax accounting
principles.  As a result, our internal controls have not reduced to a reasonably
low level,  the risk of material  misstatement to our financial  statements.  We
also, until recently, lacked the structure we needed to ensure the timely filing
of our tax returns.

Although we believe  that we have made  various  improvements  in our  financial
reporting  processes  additional time is still required to test and document our
internal  and   disclosure   control   processes   to  ensure  their   operating
effectiveness.  As a  result,  our  internal  controls  have  not  reduced  to a
reasonably  low  level,  the  risk of  material  misstatement  to our  financial
statements.

On March 6,  2007,  our  board of  directors  determined  that  certain  amounts
reported  in its  unaudited  condensed  interim  financial  statements  for  the
quarters  ended March 31, 2006 and June 30,  2006,  and for the six months ended
June 30, 2006 and nine months ended  September 30, 2006 needed to be restated as
described below.


                                       39
<PAGE>


While  performing  their audit of our  financial  statements  for the year ended
December 31, 2006,  Marcum & Kliegman LLP ("M&K"),  our  independent  registered
public accounting firm,  discovered that the accounting for certain transactions
occurring during the quarter ended March 31, 2006 and the quarter ended June 30,
2006,  may have been in error.  M&K  informed  our  management  of the  possible
misstatements.  Upon review of these transactions our management discovered that
the accounting for these transactions resulted in a $2,408,250  overstatement of
its  loss  for  the  quarterly  period  ended  March  31,  2006  and a  $593,765
overstatement  of its loss for the quarterly  period ended June 30, 2006,  which
also resulted in an overstatement of the year to date losses in the six and nine
month  periods  ended  June  30,  2006 and  September  30,  2006,  respectively.
Specifically,  we recorded for the three months ended March 31, 2006,  (1) a net
loss of $858,213 on the settlement of various liabilities under our creditor and
claimant  liabilities  restructuring  program when we should have recorded a net
gain of approximately  $906,987,  (2) excess non-cash  interest of $358,000 with
respect to a conversion  option that became  effective  under two of our Interim
Bridge Financing III notes and (3) charged,  as interest expense, a $285,050 fee
paid  to  the  placement  agent  in  our  Series  A  Preferred  stock  financing
transaction  that should  have been  recorded  as a  reduction  of the  offering
proceeds.  For the three months  ended June 30, 2006,  we recorded a net gain of
$371,616  on the  settlement  of  various  liabilities  under our  creditor  and
claimant  liabilities  restructuring  program when we should have recorded a net
gain of approximately  $965,381.  The nature of the adjustments  required in the
creditor and claimant liabilities  restructuring in the quarters ended March 31,
2006 and June 20, 2006,  relate to an  overvaluation of the Series A-1 Preferred
shares  issued in the exchange  offer offset by gains on the  extinguishment  of
liabilities   that  originated  in  connection  with  obligations  to  issue  or
repurchase stock.

On May 18, 2007, our board of directors determined that certain amounts reported
in our December 31, 2006 financial  statements  included in form 10KSB needed to
be restated as described below.

The specific error that came to management's attention relates to our accounting
for a deemed  dividend that was  recognized  upon a reduction in the  conversion
price of our Series A Preferred  Stock that  occurred on November 16, 2006.  The
reduction in the  conversion  price  occurred  upon our  issuance of  additional
convertible  securities  featuring a conversion  price lower than the conversion
price embedded in the Series A Preferred. In calculating the deemed dividend, we
originally  determined  that the net loss  available to our common  stockholders
should be increased by $589,175,  We  reevaluated  this  computation  during the
quarter ended March 31, 2007 and  determined  that the net loss available to our
common  stockholders  should have be increased by $3,759,059.  The nature of the
adjustment  relates to our having used an  incorrect  price for the value of our
common  stock when we computed the  intrinsic  value of the  conversion  feature
embedded in our Series A  Preferred  stock at the time of the  reduction  in the
conversion price.

We are  continuing  to  evaluate  potential  changes  to make  in our  financial
reporting procedures to enable us to reduce financial reporting risks that exist
as a result of our limited  resources.  We are  continuing to evaluate our risks
and  resources.  We will  seek  to  make  additional  changes  in our  financial
reporting  systems and procedures  wherever  necessary and appropriate to ensure
their effectiveness in future periods.


PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On May 4,  2006,  we  became  aware  that Lok  Technologies,  Inc.  had  filed a
complaint on or about March 30, 2006 against us,  Entelagent  Software Corp. and
unnamed  defendants in the Superior Court of  California,  County of Santa Clara
alleging  breach of contract,  breach of duty of good faith and fair dealing and
unjust enrichment  related to a license agreement and certain  promissory notes,
and seeking damages, interest, disgorgement of any unjust enrichment, attorneys'
fees and cost in an amount to be  provided.  Prior to receipt of this  notice of
litigation,  we had  recorded a note  payable  of  approximately  $320,000  plus
accrued interest of $159,432.  We believe that we have defenses to these claims.
We cannot provide any assurance that the ultimate  settlement of this claim will
not have a material adverse affect on our financial condition.

The Company was previously  subject to an  investigation by the SEC. On February
1, 2007, the Securities and Exchange  Commission  issued a letter to the Company
indicating that the SEC's  investigation  of the Company has been terminated and
that no enforcement action has been recommended to the Commission.


                                       40
<PAGE>


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

The  following  unregistered  securities  have been sold by us during the period
from January 1, 2007 to March 31, 2007:

<TABLE>
<CAPTION>
                  TITLE AND AMOUNT OF SECURITIES       NAME OF          NAME OR CLASS OF
DATE OF GRANT       GRANTED/EXERCISE PRICE IF         PRINCIPAL       PERSONS WHO RECEIVED    CONSIDERATION
                            APPLICABLE               UNDERWRITER           SECURITIES           RECEIVED
-------------     ------------------------------     -----------     ----------------------   -------------
<S>                <C>                                   <C>         <C>                        <C>
February 2007      200,000/Common Stock Purchase         None        Apex Investment Fund V,    $0.00(1)
                             Warrants                                          L.P.
 March 2007        100,000/Common Stock Purchase         None        Apex Investment Fund V,    $0.00(2)
                             Warrants                                          L.P.
 March 2007        160,000/Common Stock Purchase         None        Apex Investment Fund V,    $0.00(3)
                             Warrants                                          L.P.
 March 2007        165,000/Common Stock Purchase         None        Apex Investment Fund V,    $0.00(4)
                                Warrants                                       L.P.
</TABLE>

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 as such securities  were issued to accredited  investors and were
not issued pursuant to any general solicitation or advertisement.


ITEM 6. EXHIBITS

See attached Exhibit Index.


--------

(1)      On  February  20,  2007,  we issued  warrants to purchase up to 200,000
         shares  of our  common  stock  to  Apex  Investment  Fund  V,  L.P.  in
         conjunction  with the 2007 Interim Bridge  Financing  transaction.  The
         warrants  have a term of 5 years  and an  exercise  price of $1.00  per
         share. The aggregate fair value of these warrants amounted to $134,419.

(2)      On March 2, 2007, we issued  warrants to purchase up to 100,000  shares
         of our common stock to Apex Investment Fund V, L.P. in conjunction with
         the 2007 Interim Bridge Financing transaction. The warrants have a term
         of 5 years and an exercise price of $1.25 per share. The aggregate fair
         value of these warrants amounted to $83,984.

(3)      On March 19, 2007, we issued  warrants to purchase up to 160,000 shares
         of our common stock to Apex Investment Fund V, L.P. in conjunction with
         the 2007 Interim Bridge Financing transaction. The warrants have a term
         of 5 years and an exercise price of $1.14 per share. The aggregate fair
         value of these warrants amounted to $122,225.

(4)      On March 27, 2007, we issued  warrants to purchase up to 165,000 shares
         of our common stock to Apex Investment Fund V, L.P. in conjunction with
         the 2007 Interim Bridge Financing transaction. The warrants have a term
         of 5 years and an exercise price of $0.69 per share. The aggregate fair
         value of these warrants amounted to $76,167.


                                       41
<PAGE>


                                  EXHIBIT INDEX


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

10.1     First    Amendment   to   Executive    Employment    Agreement    dated
         Februaryf17,12006,  entered  into on January 24, 2007,  between  Patron
         Systems, Inc. and Braden Waverley. Incorporated by reference to Exhibit
         10.40 to the Annual Report on Form 10-KSB filed on April 10, 2007.*

10.2     First  Amendment to Executive  Employment  Agreement dated February 17,
         2006,  entered into on January 24, 2007,  between Patron Systems,  Inc.
         and Martin T.  Johnson.  Incorporated  by reference to Exhibit 10.41 to
         the Annual Report on Form 10-KSB filed on April 10, 2007.*

10.3     Secured Convertible  Promissory note dated February 20, 2007, issued by
         Patron  Systems,  Inc.  in  favor  of  Apex  Investment  Fund  V,  L.P.
         Incorporated by reference to Exhibit 10.42 to the Annual Report on Form
         10-KSB filed on April 10, 2007.

10.4     Security  Agreement  dated February 20, 2007,  between Patron  Systems,
         Inc.  and Apex  Investment  Fund V, L.P.  Incorporated  by reference to
         Exhibit  10.43 to the Annual  Report on Form 10-KSB  filed on April 10,
         2007.

10.5     Form of  Warrant  issued  by  Patron  Systems,  Inc.  in  favor of Apex
         Investment  Fund V, L.P.  Incorporated by reference to Exhibit 10.44 to
         the Annual Report on Form 10-KSB filed on April 10, 2007.

31.1     Certification  of Principal  Executive  Officer  pursuant to Securities
         Exchange  Act Rules  13a-14(a)  and  15d-14(a)  as adopted  pursuant to
         Section 302 of the Sarbanes-Oxley Act of 2002.

31.2     Certification  of Principal  Financial  Officer  pursuant to Securities
         Exchange  Act Rules  13a-14(a)  and  15d-14(a)  as adopted  pursuant to
         Section 302 of the Sarbanes-Oxley Act of 2002.

32.1     Certification  of  Principal  Executive  Officer  pursuant to 18 U.S.C.
         Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley
         Act of 2002.

32.2     Certification  of  Principal  Financial  Officer  pursuant to 18 U.S.C.
         Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley
         Act of 2002.

* Indicates a management contract or compensatory plan.


                                       42
<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: May 21, 2007                      PATRON SYSTEMS, INC.
                                        --------------------
                                        (Registrant)


                                        /s/ Braden Waverley
                                        ----------------------------------------
                                        By:    Braden Waverley
                                        Its:   Chief Executive Officer


                                        /s/ Martin T. Johnson
                                        ----------------------------------------
                                        By:    Martin T. Johnson
                                        Its:    Chief Financial Officer


                                       43