**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington
      D.C. 20549**


**________________**


**FORM
      10-KSB**






x
            ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES
                EXCHNAGE ACT OF 1934 [FEE REQUIRED]For
                the fiscal year ended September 30, 2006oro
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES
                EXCHANGE ACT OF 1934 [NO FEE REQUIRED]For
                the transition period from _____________ to
                _______________




Commission
      file number 1-12312





**CAMINOSOFT
      CORP.**


(Name
      of
      small business issuer in its charter)




**California**
            
            **95-3880130**(State
                of incorporation)
            
            (I.R.S.
                Employer Identification No.)




**600
      Hampshire Road, Suite 105, Westlake Village, California
      91361**


(Address
      of principal executive offices)




Issuer’s
      telephone number: (805) 370-3100




Securities
      registered under Section 12(b) of the Exchange Act: None


Securities
      registered under Section 12(8) of the Exchange Act: Common Stock no par
      value.





Check
      mark indicates whether the issuer is not required to file reports pursuant
      to
      Section 13 or 15(d) of the latest Exchange Act. o





Check
      mark indicates whether the issuer (1) has filed all reports required to be
      filed
      by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.




YES x   NO
o




Check
      mark indicates that the disclosure of delinquent filers pursuant to Item 405
      of
      Regulation


S-B
      is
      not contained herein, and will not be contained, to the best of registrant’s
      knowledge, in definitive proxy or information statements incorporated by
      reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
      [ ]





Check
      mark indicates whether the registrant is a shell company (as defined in Rule
      126-2 of the Exchange Act.)





YES
oNO
x





Issuer’s
      revenues for its most recent fiscal year were $1,772,671.





The
      aggregate market value of the voting stock held by non-affiliates of the
      registrant as of December 1, 2006 was approximately $750,000.





Number
      of
      shares outstanding of each of the issuer’s classes of common stock as of
      December 1, 2006: 14,258,756 shares of common stock, no par value.





The
      following documents are incorporated by reference into this report:
      None.












FORWARD-LOOKING
      STATEMENTS





In
      this
      annual report we make a number of statements, referred to as “ *forward-looking
      statements,”* which
      are intended to convey our expectations or predictions regarding the occurrence
      of possible future events or the existence of trends and factors that may impact
      our future plans and operating results. These forward-looking statements are
      derived, in part, from various assumptions and analyses we have made in the
      context of our current business plan and information currently available to
      us
      in light of our experience and perceptions of historical trends, current
      conditions and expected future developments and other factors we believe to
      be
      appropriate in the circumstances. You can generally identify forward-looking
      statements through words and phrases such as *“seek”,
      “anticipate”, “believe”, “estimate”, “intend”, “plan”, “budget”, “project”, “may
      be”, “may likely result”,* and
      similar expressions. When reading any forward looking statement you should
      remain mindful that all forward-looking statements are inherently uncertain
      as
      they are based on current expectations and assumptions concerning future events
      or future performance of our company, and that actual results or developments
      may vary substantially from those expected in or implied by that statement
      for a
      number of reasons or factors, including those expressed in the section entitled *“Management’s
      Discussion and Analysis and Plan of Operation.”*





Each
      forward-looking statement should be read in context with, and with an
      understanding of, the various other disclosures concerning our company and
      our
      business made elsewhere in this annual report as well as other public reports
      filed with the United States Securities and Exchange Commission. You should
      not
      place undue reliance on any forward-looking statement as a prediction of actual
      results or developments. We are not obligated to update or revise any
      forward-looking statement contained in this annual report to reflect new events
      or circumstances unless and to the extent required by applicable
      law.








**PART
      I**





Item
      1. DESCRIPTION
      OF BUSINESS.




BUSINESS




OVERVIEW





We
      develop and manufacture software solutions that store, manage, and safeguard
      large quantities of data created in a business and application settings. Our
      software for Microsoft Windows 2000 and 2003 and Novell NetWare environments
      enables organizations to maximize storage resources, reduce backup and recovery
      time and control file retention is available worldwide through commercial
      distributors, value-added resellers, systems integrators and Original Equipment
      Manufacturers (“O.E.M.”) partners.





CaminoSoft
      Corp. was organized in 1983 as Interscience Computer Services, Inc. to be a
      third-party provider of maintenance services for computer hardware and related
      peripheral equipment. During 1998 and 1999 the hardware maintenance and high
      speed printing toner and fusing agent businesses were sold. On September 17,
      1999, we acquired certain assets (the “Camino Assets”) from Camino Software
      Systems, Inc. (“Camino”) for 468,000 shares of our common stock and the
      assumption of $315,172 of certain Camino liabilities. The Camino Assets
      consisted of the name, Camino Software Systems, Inc., the Highway Server
      hierarchical data storage management (“HSM”) software, certain business
      contracts, and intangible personal property. On April 17, 2000, we changed
      our
      name to CaminoSoft Corp. to reflect the change to a software sales and
      development firm.





In
      November 2001, we entered into a non-exclusive licensing and distribution
      agreement with Novell, Inc., which allowed Novell and its distribution channel
      partners to sell our suite of software solutions.





In
      January 2002, our “managed server and storage server” products for Novell
      NetWare operating systems were included for distribution on the Novell product
      price list. As of June 30, 2003, the products were removed at our request from
      the Novell price list and a new agreement, allowing Novell sales personnel
      to
      sell and promote our products, is now in place. We actively participate in
      Novell’s “technology partner” and PartnerNet “marketing partner” programs.





2


In
      July
      2002, our products were certified as “ca smart,” Computer Associates’
certification for compatibility with its BrightStor Portal and ARCserve line
      of
      enterprise storage management solutions. We also became a Computer Associates
      “partner,” which opens up additional distribution channels for our products in
      conjunction with Computer Associates enterprise software.





In
      July
      2002, our Managed Server HSMTM for Windows 2000 and 2003 operating systems
      received certification for compatibility from Microsoft. We are a member of
      the
      Microsoft “certified partner” program, which allows distribution partners to
      sell and distribute our Windows 2000/2003-based products.





In
      February 2003, we entered into a licensing and distribution agreement with
      Legato Systems, Inc. for marketing, distribution, future development and
      customer service of certain Legato products for Novell NetWare operating
      systems. The products specified are “Standby ServerTM ” for NetWare,
“SnapShotServerTM ” for NetWare, and “OFFSite ArchiveTM ” for NetWare. Legato has
      transitioned all customer service to us as of February 2003. We now have a
      broad
      base of products and solutions for the Novell NetWare storage market, which
      include failover, fault tolerance, mirroring, offsite archiving, and improved
      disaster recovery. We continue to sell and service these Novell NetWare specific
      products currently.





In
      March
      2003, we entered into a distribution agreement with Ingram Micro Inc., pursuant
      to which Ingram Micro will distribute our storage management products for
      NetWare and Windows 2000/2003 and our acquired Legato products for NetWare
      in
      North America.





In
      June
      2003, we released a new version of OFFSite Archive for NetWare. OFFSite Archive
      3.0 is the first of a suite of products to be enhanced and released under the
      CaminoSoft name. The product provides a solution for offsite disaster-recovery
      for Novell server-based networks by maintaining asynchronous replicas of
      mission-critical enterprise data in a secure, offsite location, thereby keeping
      the information protected and available.





In
      February 2004, we joined EMC Corporation’s Centera Partner Program and completed
      the integration of The Managed Server storage management - Centera Edition
      with
      the EMC Centera Compliance Edition content addressed storage or CAS solution.
      EMC Centera represents an entirely new software-driven storage architecture
      specifically designed to address the information storage requirements of
      unchanging digital assets, such as print and mail electronic “reference”
documents.





In
      February 2004, we completed the development of a product named Managed Client
      HSMTM for Windows XP. Based on our Managed Server HSM for Windows 2000/2003
      solution, selected as a SIIA 2004 Codie Award “Best Storage Software” finalist,
      this innovative Windows XP-based product brings vital storage management
      capabilities to popular Microsoft desktops.





In
      May
      2004, we joined Hewlett Packard’s Information Lifecycle Management Partner
      Program. Our Managed
      Server HSM software provides a solution for automatically handling reference
      file dispersal and retention based on a consistent set of administrative
      management policies. By combining our software with the HP StorageWorks
      solutions and services portfolio, organizations may simplify and better control
      the provisioning and utilization of their data storage resources.





On
      June
      30, 2005, we signed an OEM licensing and distribution agreement with Computer
      Associates International for our Managed Server HSM for Windows 2000 and 2003,
      Managed Server Library Edition and Managed Server HSM for Windows XP products.
      The OEM agreement allows Computer Associates to distribute these products under
      the BrightStor suite of storage management products for Computer Associates.





3


In
      July
      2005, the Company certified its suite of HSM products for use with the nStor
      line of SATA based storage hardware. nStor’s hardware products are now certified
      to work with the Company’s suite of storage management products to provide
      Information Lifecycle Management storage hardware and software
      solutions.





In
      July
      2005, the Company received “Ready for IBM Tivoli Software” certification for the
      HSM suite of data management products for use with IBM Tivoli storage
      infrastructures. The Company is currently distributing Managed Server HSM Tivoli
      Edition for use in IBM Tivoli back up and storage environments.





In
      August
      2005, the Company did a second round of formal certification with EMC Centera
      compliance and non compliance storage for our Managed Server HSM products.
      The
      Company tested its software products with a third party testing firm and was
      awarded “Centera Proven Edition” status for our HSM products. This EMC
      certification signifies to storage clients, current and prospective, that our
      software is certified and approved for use with EMC Centera data storage
      devices.





In
      September 2006, the Company announced release of an upgraded version of Managed
      Server HSM - Tivoli Edition. The enhanced version of Managed Server HSM supports
      the IBM System Storage DR550. The IBM System Storage DR550 is ideal for clients
      seeking near-line storage application needs at an entry level price point while
      capitalizing on mainframe inspired levels of reliability, security, and
      functionality. The Company’s solution, which has “Ready for IBM Tivoli Software”
validation provides a straightforward, cost-effective solution for managing
      data
      storage across multiple tiers, including the DR550, IBM Tivoli storage pool
      devices, SAN’s, SATA RAID subsystems, NAS target appliances, and general purpose
      servers.





During
      September 2006, the Company released Managed Server HSM for NetApp. The NetApp
      edition runs on a Windows 2000/2003 server and provides true file system
      integration via NetApp’s FPolicy® application program interface. Key advantages
      for customers include, fast efficient recall of migrated files, reclamation
      of
      NetApp NAS data storage space for active production file usage, dramatic
      reduction in the amount of time needed for backup (and recovery in the event
      of
      an outage), and facilitation of compliance with corporate and industry
      regulations governing data file retention and deletion.





Research
      and Development





Research
      and development costs, which consist primarily of software development costs,
      are expensed as incurred and amounted to $484,043 and $473,830 for the years
      ended September 30, 2006 and 2005, respectively.





OUR
      PRODUCTS





Our
      products are designed to meet the storage management needs of small, medium,
      and
      enterprise organizations. We serve markets which produce and manage large
      amounts of data such as Banking, Financial Services, Healthcare, Legal Services,
      Engineering and Architectural Services, Federal and State Government, and Higher
      Education. We believe that our products and solutions enable organizations
      to
      (a) reclaim expensive storage resources, (b) reduce manual intervention in
      managing files, (c) reduce the amount of time needed for back-up and recovery,
      (d) establish automated policies for compliance with new laws and regulations
      governing data retention, and (e) set up data lifecycles for different types
      of
      information in production environments.





Managed
      Server HSM





Our
      Managed Server HSM software provides a solution for data management. Designed
      to
      meet the data storage management requirements for local area networks (“LAN”),
      wide area networks (“WAN”), and intranet environments, Managed Server HSM offers
      the ability to manage files on Microsoft Windows and Novell NetWare servers
      in
      environments where mass storage devices are deployed.





4


Our
      Managed Server HSM can accommodate large volumes of information. We have
      partnered with The Messaging Architects’ to provide a Novell GroupWise e-mail
      archiving solution. Their GWArchive product in conjunction with Managed Server
      HSM, addresses the archival and compliance needs of GroupWise e-mail users.
      For
      GroupWise customers who just want to manage the growth of their e-mail file
      attachments, as opposed to archiving and content searching, Managed Server
      HSM
      can manage GroupWise attachments as it does normal data files.





Our
      Managed Server HSM-Centera Proven Edition provides organizations with a storage
      hierarchy capable of significant expansion, while addressing regulatory
      requirements for data retention. Once relegated to optical disks, tape archives,
      or file cabinets, fixed content data is now being driven to Content Addressable
      Storage (“CAS”) solutions. Organizations running Novell NetWare and Microsoft
      Windows server environments can implement a structured, online data repository
      through which they can manage, access, and protect their fixed content data.
      All
      of the standard benefits of Managed Server HSM are now available for users
      of
      the EMC Centera. By applying a consistent set of policies, network system
      administrators can control the migration, location, and retention of files
      throughout their lifecycle across all storage tiers, including high-performance
      storage are network (“SAN”) and network attached storage (“NAS”) subsystems,
      general purpose disk arrays, and EMC Centera archives. Files migrated in such
      a
      way tend to become more fixed in nature over time as they move along the storage
      hierarchy. The Centera system’s combined features of fixed content optimization,
      high availability, scalability, and cost effectiveness make it very attractive
      as an archive solution for controlling the otherwise explosive growth of an
      organization’s primary storage infrastructure.





Our
      Managed Server HSM-Tivoli Edition directly operates with IBM Tivoli Storage
      Manager. It also provides a straightforward, cost effective solution for
      managing data storage across multiple tiers of storage, including Tivoli storage
      pool devices, SAN’s, RAID subsystems, NAS target appliances and general purpose
      servers. Managed Server HSM Tivoli Edition allows organizations to leverage
      existing investments in Tivoli software and hardware resources by making use
      of
      the storage capacity, high availability, security, and protection provided
      the
      Tivoli Storage Manager policies and infrastructure. It also allows organizations
      to better plan contemplated investment in Tivoli software and hardware by making
      available an automated multi-tiered storage environment based on the current
      and
      planned data growth of the organization.





StandbyServer
      for NetWare





StandbyServer
      for NetWare is a server mirroring solution for NetWare servers that connect
      one
      or more primary servers to a standby machine. If a primary server fails, due
      to
      hardware or software failure, the standby machine automatically takes over
      and
      makes the mirrored data and network services available to users in just a few
      moments. Data is mirrored between the servers using a dedicated high-speed
      link,
      creating a fully redundant system that protects users against both hardware
      and
      software failures. The StandbyServer configuration consists of three main
      elements: a primary server, a standby server, and the communications path that
      connects them. The disk devices in the standby machine are treated as external
      disk systems to the primary server.





OFFSite
      Archive for NetWare





OFFSite
      Archive for NetWare is an electronic data vaulting and disaster recovery product
      for NetWare servers that protect data in the event of a disaster by
      electronically transferring a stable point-in-time image of the data to an
      offsite location. OFFSite Archive automatically transfers data to be protected
      from a source server to a target server using the IPX or IP protocol over a
      LAN,
      WAN, or Internet connection. The latest version of OFFSite Archive allows
      multiple source servers to mirror data to a single remotely-located target
      server. OFFSite Archive uses SnapShotServer for NetWare (discussed below)
      technology to create snapshots of protected volumes of data. Each snapshot
      contains all of the data, or a pointer to the data, on the source server’s
      protected volume at the instant the snapshot was taken. This snapshot is then
      transferred from the source server to the target server. Through an initial
      synchronization, all of the data on the source server is mirrored to the target
      server. Then, after the initial synchronization, only the delta changes are
      sent
      to the target server. Since OFFSite Archive does not mirror data in real-time,
      a
      high-speed communications link is not required.





5


SnapShotServer
      for NetWare





SnapShotServer
      for NetWare gives an administrator more control of the back-up process. With
      the
      capability to capture live data at any time with SnapShotServer, open files
      or
“live” databases can be backed-up at the administrator’s convenience. The
      program creates “snapshot” images of “live” data volumes at
      administrator-defined intervals. These snapshots can then be mounted as regular
      NetWare volumes and backed up by any NetWare approved back-up utility. When
      taking a snapshot of a volume, SnapShotServer creates a virtual image of the
      volume; there is no actual duplication of the entire volume. If changes are
      made
      to the original data after taking the snapshot, the program makes a copy of
      the
      original data before it is changed and stores that copy in its buffer. This
      buffer and the unchanged portions of the disk make up the snapshot volume,
      which
      provides a virtual image of the volume as it was at the time the snapshot was
      taken. SnapShotServer works with both StandbyServer and OFFSite Archive.





OUR
      STRATEGY





Our
      goal
      is to be a leading supplier of data management solutions that work seamlessly
      with major operating system and storage vendors’ hardware and software solutions
      and deliver advanced storage management for small, medium, and enterprise
      organizations.





As
      part
      of our current strategy:





·
            We
                intend to continue to increase and leverage our base of partners,
                including OEMs, distributors, and value-added resellers (VARs).





·
            We
                intend to further expand our international presence and partner base
                worldwide.





·
            We
                intend to continue to focus on systems integrators and other strategic
                partners to open new avenues of distribution for our products and
                solutions.





·
            Working
                at the field sales level with our strategic partners, we intend to
                leverage their expertise to provide joint solutions to their customer
                base.





COMPETITION





The
      competition in the storage systems market consists of a small group of leading
      vendors, such as EMC, Hewlett Packard, IBM, Hitachi Data Systems, and Network
      Appliance, and a cadre of hardware and software companies who OEM, remarket,
      or
      aggregate storage products from third parties.


Our
      products compete in the data management software segments. The cost barriers
      for
      entry into these markets are relatively low, which means our competitors can
      range from small companies with limited resources to large, more established
      companies with substantial resources. Some competitors have substantially
      greater financial, technical, marketing, sales, distribution, and personnel
      resources.





SALES
      AND
      MARKETING STRATEGY





Our
      sales
      and marketing strategy is to further establish strong partnerships with storage
      vendors and storage channel partners worldwide in order to introduce and promote
      joint solutions. We have been targeting large Novell NetWare and GroupWise
      customers with Managed Server HSM for NetWare and are also now using the same
      strategy to target organizations using Microsoft Windows operating systems.





6


Strategic
      Partnerships





To
      take
      advantage of the large NetWare customer installed base, we have partnered with
      firms such as Novell, Computer Associates, and EMC to solicit introductions
      into
      their accounts as an approved technology partner. We receive numerous leads
      generated from Novell’s website as a result of our partnership, whereby visitors
      to their website can search for third-party NetWare solutions and are provided
      access to our website link. We are also engaging Novell sales and service
      engineers at the field level to gain introductions and access to their accounts.
      Our ability to support both Netware and Windows is an advantage no matter which
      operating system an account wishes to acquire.





We
      partner with EMC to promote joint sales of their Centera (magnetic WORM
      compliance) subsystem through Managed Server HSM - Centera Proven Edition,
      which
      is EMC certified through strict independent testing. EMC selected Veritest
      to
      perform integration testing for EMC Centera, which utilize a range of rigorous
      test criteria designed by EMC and Veritest to ensure each certified partner
      meet
      a very high level of quality and operability.





The
      certification of Managed Server HSM for Windows 2000 and our partnership with
      Microsoft was another milestone in our strategic plan for multi-platform
      distribution. Adding support for Windows 2003 servers has opened up new
      partnering opportunities with other strategic storage vendors.





The
      first
      strategic partnership to specifically utilize Managed Server HSM for Windows
      technology is with CA under the OEM Licensing and Distribution Agreement signed
      on June 30, 2005. As of the date of this filing CA (formerly known as Computer
      Associates) and the Company are working on a plan to jointly sell the Company’s
      products in conjunction with CA’s line of BrightStor and Unicenter products. The
      Company will now directly sell its products into CA customer prospects needing
      the data management and data movement provided by the Company’s ILM product
      line. This will allow CA to focus on its suite of enterprise level products
      while we focus on the mutli tiered storage environment solutions within these
      joint sales.





IBM
      has
      certified our Managed Server products with Ready for IBM Tivoli Software
      validation. The Company can now offer its suite of data management solutions
      for
      use in existing and future IBM Tivoli Storage Manager environments. Managed
      Server HSM Tivoli Edition will provide users of Tivoli back up and Tivoli
      storage pools the full range of benefits provided by automated multi-tiered
      HSM.
      Our strategic plan includes leveraging these capabilities and IBM’s distribution
      channel to help the Company promote this relationship and new product offerings
      in the upcoming fiscal year.





Channel
      Partnerships





In
      addition to working with large storage vendors to gain assess to their installed
      base of customers, CaminoSoft is expanding its value added reseller (“VAR”)
      program to recruit high-end storage resellers, VARs, and Systems Integrators
      to
      do the same with their customer base. During the prior fiscal year we announced
      a Premier Reseller program to target these high-end channel partners with a
      goal
      of having broad geographic and industry coverage.





Working
      with our strategic partner storage vendors, we intend to bring on additional
      non-exclusive distributors worldwide that support our strategy and open new
      markets for our ILM solutions. The strategic partner relationships developed
      during the current fiscal year will also open additional distribution channels
      not previously available to the Company.





Major
      Customer





We
      currently rely upon one distributor for between 11-20% of our aggregate gross
      revenues. If we were to lose this distributor, our operations would be
      materially effected.





7


Technology
      Partnerships





To
      assist
      us in providing as much of a complete solution as possible for our target
      markets and clients, we will continue to establish technology partnerships
      that
      broaden our product portfolio. We signed an integration and distribution
      agreement with Pegasus Disk Technologies to distribute InveStore archive
      management software drivers for UDO, magneto-optical, and DVD management. The
      Company also completed certification testing and announced solutions combining
      Managed Server HSM for NetWare and Windows 2000/2003 with nStor’s NexStor® 4700
      Serial ATA data storage systems. The combination provides users with reliable
      lower cost storage, and increased data availability for storing migrated
      information from expensive production storage.





We
      have
      also established partnerships with two firms that provide e-mail archiving
      solutions: The Messaging Architects (Novell GroupWise e-mail systems) and
      Executive Technologies (Microsoft Exchange/Outlook email systems). Together,
      we
      provide the basic platform for e-mail and electronic document retention policy
      compliance.





We
      have
      11 full time employees and employ additional people as consultants on a full
      time basis as needed.








Item
      2. DESCRIPTION
      OF PROPERTY





As
      of
      December 1, 2006, the Company leases one office facility in Westlake Village,
      California for the Company’s executive offices pursuant to a lease extension
      expiring January 31, 2008, at a rental rate of $10,035 per month.





Item
      3. LEGAL
      PROCEEDINGS





The
      Company may, from time to time, be involved in legal proceedings, claims and
      litigation arising in the ordinary course of business. It is possible the
      outcome of such legal proceedings, claims and litigation could have a material
      effect on the operating results or cash flows when resolved in a future period.
      These matters are not expected to have a material adverse effect upon the
      Company’s financial statements.





Currently
      the Company has no ongoing legal proceedings.








Item
      4. SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS





The
      Company had no submission of matters to a vote of security holders during the
      fourth quarter of the current fiscal year.




**PART
      II**





Item
      5. MARKET
      FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER
      PURCHASES OF EQUITY SECURITIES





The
      Common Stock is currently traded in the OTC Electronic Bulletin Board under
      the
      symbol “CMSF”. The following table sets forth the high and low sales prices for
      the Common Stock during the two most recent fiscal years. The prices reflect
      inter-dealer prices without retail mark-ups, mark-downs or commission and may
      not represent actual transactions.


8
 Common
                  Stock Sales PricesSymbol
                  CMS
              High
              
              LowOctober
                  1, 2004 - December 31, 2004
              $0.85
              
              $0.35January
                  3, 2005 - March 31, 2005
              $0.75
              
              $0.42April
                  1, 2005 - June 30, 2005
              $0.68
              
              $0.35July
                  1, 2005 - September 30, 2005
              $1.90
              
              $0.55October
                  1, 2005 - December 31, 2005
              $1.40
              
              $0.97January
                  3, 2006 - March 31, 2006
              $1.14
              
              $0.76April
                  1, 2006 - June 30, 2006
              $0.78
              
              $0.40July
                  1, 2006 - September 30, 2006
              $0.40
              
              $0.27
 
 As
        of
        December 2003 the Company issued in a private placement 3,243,243 shares
        of
        common stock and 5 year warrants to purchase 3,243,243 shares with 50% of
        the
        warrants at an exercise price of $0.74 and 50% at an exercise price of $1.11
        for
        $1,200,000. The funds will be used to support business expansion and
        operations.
 
 During
        July 2004, the Company issued 5 year warrants to purchase 1,415,094 shares
        of
        common stock at $0.53 per share. The warrants were issued in conjunction
        with a
        $750,000 two year loan. The loan matures on July 19, 2006 at which time the
        unpaid principal and all accrued and unpaid interest will become due and
        payable. The note calls for monthly interest payments of 7% of the outstanding
        principal balance beginning September 1, 2004.
 
 During
        the year ended September 30, 2004, the Company issued 2,476,000 options to
        purchase the Company’s common stock at prices ranging from $0.41 to $0.63 per
        share to employees, consultants and directors under the year 2000 employee
        stock
        option plan.
 
 During
        September 2004, the Company issued 340,136 shares of stock as commitment
        shares
        as part of an equity financing. The commitment shares are part of a common
        stock
        purchase agreement which will allow the Company to draw up to $6,000,000
        through
        daily sales of its Common Stock. The Company has agreed to register 3,680,272
        shares which include the commitment shares to sell during a 30 month period.
 
 During
        October 2005, the Company negotiated an extension of the two parts or the
        convertible debenture with a total principal balance of $1,750,000. Pursuant
        to
        a Renewal and Modification agreement dated October 28, 2005, the lender agreed
        to extend the maturity date of the two 6% Convertible Debentures dated November
        27, 2002 in the aggregate principal amount of $1,750,000 to May 27, 2007.
        In
        consideration of such extension, the Company agreed to grant to the lender
        a
        five-year warrant to purchase 175,000 shares of Company Common Stock at an
        exercise price of $1.14 per share (subject to adjustment). The estimated
        value
        of the warrant ($166,093) was booked on the Company financial statements
        as debt
        discount and is being amortized over the term of the extension.
 
 During
        February 2006, the Company issued to the Renaissance Capital Group managed
        funds
        an aggregate of 150,000 warrants to purchase the Company’s common stock at $0.86
        per share in consideration of an agreement to extend the $750,000 loan payable
        maturity date for an additional 18 months. The new maturity date for the
        notes
        will be January 19, 2008. The Company will continue to pay 7% interest on
        a
        monthly basis based on the current outstanding principal balance of $750,000.
        The estimated value of the warrants of $77,663 was recorded on the Company’s
        financial statements as debt discount and will be amortized over the term
        of the
        extension.
 
 9
 All
        of
        the foregoing securities were issued pursuant to an exemption from the
        registration requirements of the Securities Act of 1933, as amended, pursuant
        to
        Section 4(2) thereof and Regulation D promulgated thereunder. No commissions
        were paid.
 
 As
        of
        September 30, 2006, there were 138 holders of record of the Company’s common
        stock. To date, the Company has not declared or paid any cash dividends with
        respect to its Common Stock, and the current policy of the Board of Directors
        is
        to retain earnings, if any, to provide for the growth of the Company.
        Consequently, no cash dividends are expected to be paid on the Common Stock
        in
        the foreseeable future.
 
 Item
        6. MANAGEMENT’S
        DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 
 The
        following discussion and analysis should be read in conjunction with the
        financial statements and notes thereto appearing elsewhere in this Annual
        Report.
  OVERVIEW
 
 CaminoSoft
        Corp. (the “Company”) previously known as Interscience Computer Corporation, was
        incorporated under the laws of the State of California on October 14, 1983,
        to
        be a third party provider of maintenance services for computer hardware and
        related peripheral equipment. On September 17, 1999, the Company acquired
        the
        assets (the “Camino Assets”) of Camino Software Systems, Inc. (“Camino”), a data
        storage company, for 468,000 shares of the Company’s common stock and assumed
        $315,172 of certain Camino liabilities. The Camino assets consisted of the
        name,
        Camino Software Systems, Inc., the data storage management software, certain
        business contracts, and intangible personal property. The Company allocated
        the
        amount paid and assumed in the amount of $502,372 to the fair value of the
        software.
 
 In
        December 2003, we completed certification of Pegasus Disk Technologies archive
        management software for use in conjunction with our data movement and lifecycle
        management solutions. The partnership allows us to create a virtualized data
        pool that expands secondary storage onto any number of archive devices while
        simplifying management of those resources. The combined solution allows
        organizations to meet strict compliance regulations and optimize storage
        investment and utilization. Also in December 2003, we announced completion
        of
        the “library edition” which allows comprehensive tape library management support
        for our information lifecycle management solutions. The Library Edition offers
        all of the features of our standard Managed Server HSM software and extends
        this
        functionality by providing the additional capability to migrate files further
        along a storage hierarchy to tape libraries, autoloaders, and jukeboxes from
        leading vendors such as Hewlett Packard, StorageTek, ADIC and Overland
        Data.
 
 In
        February 2004, we completed integration of the Managed Server HSM software
        with
        EMC Corporations Centera and Centera Compliance edition content addressable
        storage. We also entered into EMC Corporations Centera Partner Program. Our
        Managed Server HSM Centera Edition enables customers to better manage
        utilization of storage resources throughout the enterprise. Our Managed Server
        Centera package combines data management and storage scalability, which are
        requirements that are increasing in the markets we serve. Also in February
        2004,
        we released “Managed Client HSM(TM)” for Windows XP. The new product provides the
        ability to automatically migrate, recall, and delete files based on age and
        activity criteria, supporting standard Windows XP infrastructures including
        wireless communications. “Managed Client HSM(TM)” adds another dimension of
        scalability and affordability to our ILM suite of products and solutions.
        “Managed Client HSM(TM)” provides the same type of automated data movement and
        management as the managed server products while running on workstations or
        home
        user pc’s or lap tops. It allows IT administrators to now protect user
        information that was stored on the workstation in the enterprise IT storage
        environment for back up and replication.
 
 On
        June
        30, 2005, the Company signed an OEM software licensing and distribution
        agreement with Computer Associates International, Inc. (“CA”). The Company will
        provide Windows HSM, both server and client editions along with Managed Server
        Library Edition private labeled for CA’s distribution. The Company received a
        non refundable $250,000 payment in July 2005 and has delivered, with CA’s full
        acceptance, the CA branded and licensed versions of the licensed products.
        The
        agreement called for two royalty pre-payments, the first for $500,000 was
        received during October 2005. The second pre payment of $250,000 was paid
        on the
        anniversary date of the contract, June 30, 2006. As of the date of this filing,
        CA and the Company have agreed to jointly sell into CA customer prospects.
        CA
        will focus its sales on the BrightStor and Unicenter suite of products provided
        by CA, and the Company will directly sell and focus on sales of the Company’s
        ILM suite of products compatible with CA’s BrightStor suite of
        products.
 
 10
 
 Our
        software provides products and integrated solutions for addressing the
        increasing need for management of data. Today IT departments face a variety
        of
        challenges with some of the most critical relating to data storage and
        management. Two of these challenges are (1) reducing the total cost of ownership
        of data storage by better leveraging IT resources, both hardware and people,
        and
        (2) increasing productivity by enabling better access to information, thereby
        making quicker and faster decisions. Our software virtualizes pools of stored
        data both to the end-user transparently and to the IT administrator while
        integrating with most operating systems and applications. We can reduce the
        back-up window, lower the overall cost of storage and enhance the value of
        information across the organization. Our strategy is built on the benefits
        our
        technology brings, our expanding distribution channel, and our ability to
        execute. As part of our current strategy:
 
 ·
              We
                  intend to continue to expand and leverage our base of partners
                  (OEMs,
                  distributors, and value-added resellers, or VAR’s) to sell additional
                  products to end users. We intend to enhance our international presence
                  and
                  partner base as we internationalize, localize and bring to market
                  existing
                  and new products. We intend to focus on systems integrators and
                  other
                  strategic partners to open new avenues of distribution for our
                  products
                  and solutions.
 ·
              We
                  intend to focus and expand on our core strengths in today’s soft economic
                  environment. IT spending is tight and customers require products
                  and
                  solutions with attractive price points and demonstrable value.
                  We can
                  leverage success in one department or work group to demonstrate
                  the value
                  of our storage management solution, then use the success in that
                  area to
                  expand to other departments, workgroups or the enterprise. We believe
                  our
                  cost effective data management solutions can then be repeated in
                  other
                  areas of the organization for other types of information and compliance
                  requirements.
 ·
              We
                  intend to leverage our position as a provider of email storage
                  and
                  management solutions to grow in the messaging market. With Managed
                  Servers
                  extended storage functions for Novell, GroupWise email systems,
                  we have
                  taken the first step to capitalize on this growing market for automated
                  data storage management for Novell GroupWise email systems. We
                  intend to
                  utilize this same approach with other email platforms focused on
                  providing
                  automated data management for users of other email messaging systems
                  such
                  as Microsoft Exchange and Lotus Notes. We believe this vertical
                  approach
                  will broaden the adoption of our solutions in the electronic collaboration
                  market, allowing our partners to remain focused on their core strengths
                  in
                  the markets they serve.
 ·
              We
                  intend to increase our international markets. Europe, the Middle
                  East,
                  Africa, Japan and Asia represent active markets for expansion,
                  with Europe
                  representing the first market outside North America we will focus
                  on. We
                  intend to continue to internationalize and localize our products
                  and
                  solutions to penetrate this marketplace.
 
 
 RISK
        FACTORS
  **We
        have yet to establish any history of profitable operations** **.**
  We
        have
        yet to establish any history of profitable operations. We have incurred annual
        operating losses of $1,943,716 and $507,708, for fiscal years 2004 and 2005
        respectively. During the year ended September 30, 2006, we incurred an operating
        loss of $1,072,383. As a result, at September 30, 2006 we had an accumulated
        deficit of $21,537,643. Our revenues have not been sufficient to sustain
        our
        operations. Our profitability will require the successful commercialization
        of
        products, solutions and services. No assurances can be given as to if or
        when
        this will occur or that we will ever be profitable.
  11
 **We
        will require additional financing to sustain our operations and without it
        we
        will not be able to continue operations.**
  At
        September 30, 2006 we had a cash balance of $441,595. We had operating cash
        flow
        deficits of $1,866,295, $1,935,774 and $187,113 for fiscal years ended September
        30, 2003, 2004 and 2005 and for the year ended September 30, 2006, an operating
        cash flow deficit of $375,504. We will require additional financing in order
        to
        expand our business and continue operations. Our working capital requirements
        in
        the foreseeable future will depend on a variety of factors including our
        ability
        to implement our sales and marketing plan. There can be no assurance that
        we
        will be able to successfully negotiate or obtain additional financing or
        the
        terms thereof. Our ability to obtain additional capital will be dependent
        on the
        implementation of our business plan, market conditions, the national economy
        and
        other factors outside our control. If adequate funds are not available or
        are
        not available at acceptable terms, our ability to finance our expansion,
        develop
        or enhance services or products or respond to competitive pressures would
        be
        significantly limited. Without additional financing, based on our current
        level
        of negative cash flow, we may have to cease or substantially curtail our
        operations by April 1, 2006.
  **Our
        future operating results are unpredictable.**
  Our
        operating results will depend on the enhancement of our existing products
        and
        the ability to market and sell the products. Any future success that we may
        achieve will depend upon many factors including factors which may be beyond
        our
        control or which cannot be predicted at this time. Uncertainties and factors
        which could cause actual results or events to differ materially from those
        set
        forth or implied include:
 
 ·
              Inability
                  to acquire new customers;
 ·
              Inability
                  to complete successful implementation of our
                  software;
 ·
              Inability
                  to provide applications in a manner that is
                  scalable;
 ·
              Inability
                  to offer new services that complement our existing offerings;
                  or
 ·
              Inability
                  to increase awareness of our brand.
 
 **If
        we are unable to adapt our products to rapidly changing technology, our
        reputation and our ability to grow our revenues could be
        harmed.**
  The
        markets we serve are characterized by rapidly changing technology, evolving
        industry standards, emerging competition and the frequent introduction of
        new
        software. There is no assurance that we will be able to enhance existing
        products or develop new products that meet changing customer needs in a timely
        and cost-effective manner. Prolonged delays resulting from our efforts to
        adapt
        to rapid technological change, even if ultimately successful, could harm
        our
        reputation within our industry and our ability to grow our
        revenues.
  **We
        face significant competition from other providers of computer
        software.**
  Our
        competitors in the storage systems market consists of a small group of leading
        vendors, such as EMC, HP, IBM, Hitachi Data Systems, and Network Appliance,
        and
        a cadre of hardware and software companies who OEM, remarket, or aggregate
        storage products from third parties.
  Our
        products compete in the data management and high availability software segments.
        The cost barriers for entry into these markets are relatively low, which
        means
        our competitors range from small companies with limited resources to large,
        more
        established companies with substantial resources. However, among all of these
        competitors (and in some cases technology partners), we believe none offer
        a
        cross-platform Windows/NetWare solution to round out their Information Lifecycle
        Management (“ILM”) solution suites. Some competitors, regardless of size, have
        substantially greater financial, technical, marketing, distribution, personnel
        and other resources. It is possible that we may not have the resources to
        effectively compete with these companies.
 
 12
 **Our
        earnings are dependent upon acceptance of our products and our ability to
        increase demand for data storage and management software
        products.**
  Our
        ability to generate profits depends primarily upon market acceptance of our
        data
        storage and management software products and the continued upgrade and sale
        of
        our high availability software products. Our products may not be successfully
        marketed or achieve customer acceptance, and we may be unable to increase
        demand
        for our products. Our strategy to increase our customer base includes investment
        in programs designed to heighten consumer awareness of our products and
        services. If we do not successfully develop new products that keep pace with
        technology, our competitive position will be weakened.
  **The
        market for our products is new and emerging, and is characterized by rapid
        technological advances, changing customer needs and evolving industry standards.**
  We
        may
        not be successful in developing and marketing, on a timely and cost-effective
        basis, enhancements to our software products or new products which respond
        to
        technological advances and satisfy increasingly sophisticated customer needs.
        Our ability to meet our customers’ needs and evolving industry standards will
        depend on our:
  ·
              Ability
                  to timely develop new software products that keep pace with developments
                  in technology;
 
 ·
              Ability
                  to meet evolving customer requirements which are often
                  changing;
 
 ·
              Success
                  at enhancing our current product offerings;
                  and
 
 ·
              Delivering
                  those products through appropriate distribution
                  channels.
 
  If
        we
        fail to introduce new products or if new industry standards emerge that we
        do
        not anticipate or adapt to, our software products could be rendered obsolete
        and
        our competitive position will be weakened.
 
 **Our
        business will suffer if our software development is
        delayed.**
  Any
        failure to release new products and upgrades on time may result in:
  -
              customer
                  dissatisfaction;
  -
              cancellation
                  of orders;
  -
              negative
                  publicity;
  -
              loss
                  of revenue; and
  -
              slower
                  market acceptance.
  13
 **Our
        performance is substantially dependent on the continued services and the
        performance of our senior management and other key
        personnel.**
  Our
        performance is substantially dependent on the continued services and the
        performance of our senior management and other key personnel. Our performance
        also depends on our ability to retain and motivate our other officers and
        key
        employees. The loss of the services of any of our executive officers or other
        key employees could have a material adverse effect on our business, prospects,
        financial condition, and results of operations. Our future success also depends
        on our ability to identify, attract, hire, train, retain, and motivate other
        highly skilled technical, managerial and marketing personnel. Competition
        for
        such personnel is intense, and there can be no assurance that we can attract
        and
        retain the necessary technical, managerial and marketing personnel and this
        could have a material adverse effect on our business, prospects, financial
        condition and results of operations.
  **We
        could incur substantial costs defending our intellectual property from claims
        of
        infringement.**
  The
        software industry is characterized by frequent litigation regarding copyright,
        patent, trademark and other intellectual property rights. We may be subject
        to
        future litigation based on claims that our own intellectual property rights
        are
        invalid. We expect that software product developers will increasingly be
        subject
        to infringement claims as the number of products and competitors in our industry
        segment grows and the functionality of products overlaps. Claims of infringement
        could require us to re-engineer or rename our products or seek to obtain
        licenses from third parties in order to continue offering our products. These
        claims could also result in significant expense to us and the diversion of
        our
        management and technical resources, even if we ultimately prevail. Licensing
        or
        royalty agreements, if required, may not be available on terms acceptable
        to us
        or at all.
  **We
        may face interruption of production and services due to increased security
        measures in response to terrorism.**
  Our
        business depends on the free flow of products and services through the channels
        of commerce. Recently, in response to terrorists’ activities and threats aimed
        at the United States, transportation, mail, financial and other services
        have
        been slowed or stopped altogether. Further delays or stoppages in
        transportation, mail, financial or other services could have a material adverse
        effect on our business, results of operations and financial condition.
        Furthermore, we may experience an increase in operating costs, such as costs
        for
        transportation, insurance and security as a result of the activities and
        potential activities. We may also experience delays in receiving payments
        from
        payers that have been affected by the terrorist activities and potential
        activities. The U.S. economy in general is being adversely affected by the
        terrorist activities and potential activities and any economic downturn could
        adversely impact our results of operations, impair our ability to raise capital
        or otherwise adversely affect our ability to grow our business.
 
 CRITICAL
        ACCOUNTING POLICIES AND ESTIMATES
 
 We
        have
        identified the following critical accounting policies and estimates that
        affect
        our more significant judgments and estimates used in the preparation of our
        financial statements. The preparation of our financial statements in conformity
        with accounting principles generally accepted in the United States of America
        requires that we make estimates and judgments that affect the reported amounts
        of assets and liabilities. We evaluate those estimates on an ongoing basis,
        including those related to asset impairment, contingencies and litigation.
        These
        estimates are based on the information that is currently available to us
        and on
        various other assumptions that we believe to be reasonable under the
        circumstances. Actual results could vary from those estimates under different
        assumptions or conditions. We believe that the following critical accounting
        policies affect significant judgments and estimates used in the preparation
        of
        our financial statements.
 
 ·
              We
                  review our long-lived assets, which include property and equipment
                  and
                  capitalized software, for possible impairment whenever events or
                  changes
                  in circumstances indicate that the carrying value of an asset may
                  not be
                  recoverable. If the estimated future cash flows (undiscounted and
                  without
                  interest charges) from the use of an asset are less than its carrying
                  value, we record a write-down to reduce that asset to its estimated
                  fair
                  value. The fair value is determined based on discounted cash flows
                  or
                  appraised values depending on the nature of the
                  asset.
  14
 ·
              Research
                  and development costs, which consist primarily of software development
                  costs, are expensed as incurred. Statement of Financial Accounting
                  Standards No. 86, “Accounting for the Cost of Computer Software to be
                  Sold, Leased, or Otherwise Marketed” (“SFAS 86”), provides for the
                  capitalization of certain software development costs incurred after
                  technological feasibility of the software is established. As of
                  September
                  30, 2006, the Company has capitalized approximately $325,000 of
                  such
                  software development costs. The Company expects to continue research
                  and
                  development projects into the future along with additional capitalized
                  development as projects reach proof of concept stages of development.
                  The
                  current net balance of capitalized software is approximately $112,164.
                  In
                  the current fiscal year the Company has not capitalized any new
                  software
                  development. Software capitalized is stated at cost. Amortization
                  is
                  computed on the straight-line method based upon the estimated useful
                  life
                  of the asset, primarily seven years. During the current year the
                  Company
                  had approximately $484,000 in R & D expense compared to approximately
                  $474,000 during the prior year. The Company will continue the R
& D
                  program into the future as new products are developed and integrated
                  into
                  our data management suite of
                  solutions.
 ·
              Revenue
                  is recognized when persuasive evidence of an arrangement exists,
                  delivery
                  has occurred or services have been provided, the fee is fixed or
                  determinable, and collectibility is probable. We enter into certain
                  arrangements where we are obligated to deliver multiple products
                  and/or
                  services (multiple elements). In these transactions, we allocate
                  the total
                  revenue among the elements based on the sales price of each element
                  when
                  sold separately (vendor-specific objective
                  evidence).
 Revenue
        for products licensed to original equipment manufacturers (OEM’s), and perpetual
        licenses for current products in our server based data management suite of
        products is recognized as products are shipped. If annual service is a part
        of
        the sale agreement that portion of the revenue is recorded as unearned due
        to
        undelivered elements including, annual telephone support and the right to
        receive unspecified upgrades/updates of our data management products on a
        when-and-if-available basis. Unspecified upgrades, or patches, are included
        in
        our product support fee. The upgrades are delivered only on a
        when-and-if-available basis and as defined in SOP 97-2, are considered
        Postcontract Customer Support (“PCS”). Vendor-specific objective evidence does
        exist for these services in the aggregate; however, no vendor-specific objective
        evidence exists for the unspecified upgrades on a stand alone basis.
        When-and-if-available deliverables should be considered in determining whether
        an arrangement includes multiple elements; however, SOP 97-2 states that
        if
        sufficient vendor-specific objective evidence does not exist for the allocation
        of revenue to the various elements of the arrangement, and if the only
        undelivered element in an arrangement is PCS, the entire fee for the support
        should be recognized ratably. Because the timing, frequency, and significance
        of
        unspecified upgrades/updates can vary considerably, the point at which
        unspecified upgrades/updates are expected to be delivered should not be used
        to
        support income recognition on other than a straight-line basis. As such,
        the
        Company recognizes the product support fee consisting of PCS and unspecified
        upgrades/updates ratably over the service contract period.
 
 RESULTS
        OF OPERATIONS
 
 FISCAL
        YEARS ENDED SEPTEMER 30, 2006 AND SEPTEMBER 30, 2005
 
 During
        the current fiscal year, the Company continued to focus on development of
        features and upgrades on products, while expanding their functionalities
        to
        other operating platforms including Network Applicance filers. The Company
        has
        continued its sales and marketing strategy to focus on development and support
        for its data storage and management solutions and high availability solutions,
        while utilizing its partners’ sales, marketing and distribution channels.
        Revenues for the current fiscal year decreased by approximately 33%, from
        $2,637,000 in fiscal year 2005 to $1,773,000 for the current fiscal year.
        The
        revenue decrease was a result of multiple factors, including but not limited
        to
        transitioning the product line for enterprise selling opportunities which
        include bundling our software with partner software and hardware products.
        These
        enterprise sales have much longer sales cycles and can put the Company in
        a
        support role for the sale which can also add complexity and time to the sales
        cycle. Sales for the Company’s software products were approximately $1,026,000
        or 58% of the total revenue for the current fiscal year; annual service
        contracts constituted approximately 39% or approximately $692,000; and the
        remaining 3% of revenue was derived from installation and other services.
        The
        high availability products, StandbyServer and OFFSite Archive for NetWare
        accounted for approximately 15% of the total product sale revenue as compared
        to
        13% in the prior fiscal year, with the Company’s core HSM technology for both
        NetWare and Windows representing the other 85% of the total product sale
        revenue
        for the current fiscal year. Billings for annual service contracts decreased
        during the current fiscal year due to decreased product sales of the Company’s
        HSM product line. Deferred revenue decreased from approximately $1,278,000
        in
        the fiscal year ended September 30, 2005 to approximately $1,134,000 for
        the
        current fiscal year. The decrease in deferred revenue was due to the decrease
        in
        product sales during the current fiscal year. Cost of sales decreased from
        approximately $213,000 in the last fiscal year to approximately $157,000
        in the
        current fiscal year representing a decrease of approximately 27%. The reduction
        is due to a decrease in additional sales of partner bundled software and
        hardware during the current fiscal year, which create additional cost of
        sales
        with each sale that includes additional software or hardware. Cost of sales
        as a
        percentage of revenue increased slightly from approximately 8% in fiscal
        year
        ended September 30, 2005 to approximately 9% during the current fiscal year.
        Gross profit decreased by approximately 33% or $808,000 from $2,424,000 in
        fiscal year 2005 to $1,616,000 in fiscal year 2006. The decrease in gross
        profit
        resulted from the Company’s decreased revenue from product sales during the
        current fiscal year.
 
 15
 Selling
        and administrative expenses for the current year were approximately $2,184,000,
        a decrease of approximately $255,000 or 10% as compared to fiscal year 2005.
        The
        decrease was a result of the Company’s continued effort to minimize overhead
        expenses while maintaining sales and marketing support for our partner and
        channel distribution strategy. The change from a direct sales approach to
        one of
        a support role for the Company’s OEM partners sales forces continued during the
        fiscal year, which reduced wage expense related to direct selling, while
        increasing the expense related to marketing and sales support for our OEM
        partners distribution channels. The Company intends to continue expansion
        of the
        sales and marketing support functions for direct selling and to continue
        training for both technical support teams and sales forces of the Company’s
        current and future distribution, and business partners.
 
 Depreciation
        and amortization expense for the current fiscal year of approximately $21,000
        increased approximately 10% or $2,000 as compared to fiscal year ended September
        30, 2005. The depreciation expense increase is due to additional office and
        test
        equipment purchased at the end of fiscal 2005.
 
 Research
        and development expense for the current year was approximately $484,000 as
        compared to approximately $474,000 for fiscal year 2005. This increase is
        a
        continuation of our development strategy of adding features and upgrades
        to
        current products while continuing development integrating new partner hardware
        and software compatible versions to our HSM software products. During the
        current fiscal year, the Company completed and certified its Managed Server
        HSM
        with Network Appliance, creating Managed Server HSM NetApp Edition. During
        the
        current fiscal year the Company also certified its Managed Server HSM products
        with IBM Tivoli DR550 storage platform. The Company now offers Managed Server
        HSM Tivoli Edition compatible with the IBM DR550. The Company began new research
        and development projects during the second half of the current year and plans
        to
        continue the research and development program during the coming year. As
        projects complete and become viable the Company expects to capitalize portions
        of the development expense during the upcoming fiscal year. The Company may
        also
        add additional consulting development resources during the upcoming fiscal
        year
        which will contribute to the research and development expense during the
        upcoming fiscal year. These development project completions have added to
        the
        Company’s ability to gain additional market access through the sales and
        distribution channels of companies like EMC, IBM, Hitachi, Network Appliance
        and
        Computer Associates.
 
 There
        were no other income items during the current or prior fiscal year. The current
        fiscal year included approximately $378,000 of interest expense related to
        borrowing balances, which is an increase in interest expense of approximately
        $115,000 over fiscal year 2005. Approximately $220,000 of the total current
        fiscal year interest expense was non cash debt discount representing the
        expense
        for warrants issued with debt which is being expensed over the term of the
        debentures and loan that make up the debt. Also included in other expense
        is a
        write off of approximately $262,000 in deferred financing expense because
        the
        Company determined it was unlikely the equity would be drawn on and therefore
        the costs were impaired.
 
 16
 LIQUIDITY
        AND CAPITAL RESOURCES
 
 The
        Company incurred a net loss of $1,712,253 and $770,409 for the years ended
        September 30, 2006 and 2005, respectively, and has an accumulated deficit
        of
        $21,537,643 as of September 30, 2006. The Company will require additional
        financing in order to expand its business and continue operations. The Company’s
        working capital requirements in the foreseeable future will depend on a variety
        of factors including its ability to implement its sales and marketing plan.
        If
        adequate funds are not available or are not available at acceptable terms,
        the
        Company’s ability to finance its expansion, develop or enhance services or
        products or respond to competitive pressures would be significantly limited.
 
 During
        fiscal year 2006, the Company’s cash position increased by approximately
        $221,000, from approximately $220,000 at September 30, 2005 to $442,000 at
        September 30, 2006. The Company’s revenues decreased during the fiscal year and
        the Company is still not at a break even point operationally. The accounts
        receivable balance as of September 30, 2006 decreased by approximately $795,000
        or 76% as compared to the fiscal year ended September 30, 2005. The decrease
        in
        receivables is due to payment of $750,000 in pre-paid royalties from the
        CA
        licensing and distribution agreement, which were paid during the current
        fiscal
        year, and approximately $45,000 of the decrease was due to normal operating
        receivables in connection with decreased sales during the current fiscal
        year.
  During
        December 2003, the Company issued in a private placement, 3,243,243 shares
        of
        common stock and 5 year warrants to purchase 3,243,243 shares with 50% of
        the
        warrants at an exercise price of $0.74 and 50% at an exercise price of $1.11,
        for $1,200,000. The funds were used to support business expansion and
        operations.
 
 During
        July 2004, the Company received $750,000 from a two year secured loan from
        Renaissance Capital Group managed funds. Interest is being paid at 7% in
        monthly
        installments based on the outstanding principal balance. As part of the funding,
        the Company issued five year warrants to purchase an aggregate of 1,415,094
        shares of Common Stock at an exercise price of $0.53 per share.
 
 During
        September 2004, the Company issued 340,136 shares of common stock to Fusion
        Capital Partners, LLC. as commitment shares in conjunction with a stock purchase
        agreement with Fusion Capital Fund II, LLC pursuant to which Fusion Capital
        agreed to purchase on each trading day during the term of the agreement $10,000
        of our common stock up to an aggregate of $6,000,000. The $6,000,000 of common
        stock is to be purchased over a 30-month period, subject to a three month
        extension or earlier termination at the Company’s discretion. The purchase price
        of the shares of common stock will be equal to a price based upon the future
        market price of the common stock without any fixed discount to the market
        price.
        Fusion Capital does not have the right or the obligation to purchase shares
        of
        the Company’s common stock in the event that the market price of the common
        stock is less than $0.25 per share. Fusion’s obligations under the stock
        purchase agreement are conditioned on the Company having an effective
        registration statement covering the resale of the shares issued to Fusion
        Capital. As of the date of this filing the registration statement has been
        declared effective and the common stock purchase agreement was completed
        and
        effective by calendar year end adding a very important financing resource
        for
        the Company. The Company will utilize this financing on an as needed basis
        for
        funding of operations. During the current fiscal year the Company wrote off
        approximately $262,000 in deferred financing representing the fair value
        of the
        commitment shares related to the common stock purchase agreement. Currently
        the
        market price for the Company’s common stock is below the minimum price required
        by the agreement.
 
 17
 On
        March
        17, 2005, the Company received $125,000 from a four month secured loan from
        an
        individual investor. On July 29, 2005, the Company paid in full the principal
        and all accrued and unpaid interest due under the terms of the loan agreement.
        After completion of its payment obligations, the Company did not renew
        additional financing or an extension of this loan.
 
 During
        October 2005, the Company negotiated an extension of the two parts of the
        convertible debenture with a total principal balance of $1,750,000. Pursuant
        to
        a Renewal and Modification agreement dated October 28, 2005, the lender agreed
        to extend the maturity date of the two 6% Convertible Debentures dated November
        27, 2002 in the aggregate principal amount of $1,750,000 to May 27, 2007.
        In
        consideration of such extension, the Company agreed to grant to the lender
        a
        five-year warrant to purchase 175,000 shares of Company Common Stock at an
        exercise price of $1.14 per share (subject to adjustment). The estimated
        value
        of the warrant ($166,093) was recorded on the Company financial statements
        as
        debt discount and is being amortized over the term of the
        extension.
 
 During
        February 2006, the Company issued to BFS US Special Opportunities Trust PLC
        and
        Renaissance US Growth & Income Trust PLC an aggregate of 697,674 shares of
        common stock at a price of $0.86 per share in a private placement for $600,000.
        The Company agreed to register the resale of its shares as soon as practicable.
 
 If
        the
        Company’s revenue projections for 2007 are not met, the operating plan calls for
        expense reductions in all non-technical and sales related functions. Without
        an
        increase in revenues during fiscal year 2007, the Company will reduce expenses
        to compensate for lack of continued revenue growth. No assurances can be
        given
        that the Company will increase revenues or achieve profitability in 2007.
        The
        Company will require additional financing in order to expand its business
        and
        continue operations. Our working capital requirements in the foreseeable
        future
        will depend on a variety of factors including our ability to implement our
        sales
        and marketing plan. There can be no assurance that we will be able to
        successfully negotiate or obtain additional financing or the terms thereof.
        Our
        ability to obtain additional capital will be dependent on the implementation
        of
        our business plan, market conditions, the national economy and other factors
        outside our control. If adequate funds are not available or are not available
        at
        acceptable terms, our ability to finance our expansion, develop or enhance
        services or products or respond to competitive pressures would be significantly
        limited. The failure to secure necessary financing will have a material adverse
        effect on our business, prospects, financial condition and results of
        operations.
 
 CONTRACTUAL
        OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
 
 The
        following summarizes our contractual obligations at September 30, 2006 and
        the
        effects such obligations are expected to have on liquidity and cash flow
        in
        future periods
  Payments
                    due by PeriodTotal
                
                
                Less
                      than1-year
                
                
                1-3Years
                
                
                4-5Years
                
                
                After
                  5
                    YearsNotes
                    payable
                
                $
                2,500,000
                
                $
                1,750,000
                
                $
                750,000
                
                $
                —
                
                $
                —Interest
                    notesPayable
                
                
                140,000
                
                
                122,500
                
                
                17,500EmploymentAgreements
                
                
                159,000
                
                
                159,000Operating
                    leases
                
                
                164,182
                
                
                122,835
                
                
                41,347
                
                
                —
                
                
                —$
                2,963,182
                
                $
                2,154,335
                
                $
                808,847
                
                $
                —
                
                $
                —
  Except
          for the operating leases and employment agreements above, the Company has
          no
          off-balance sheet arrangements that have or are reasonably likely to have
          a
          current or future effect on the Company’s financial condition, changes in
          financial condition, revenues, expenses, results of operations, liquidity,
          capital expenditures or capital resources.
 
 18
 NEW
          ACCOUNTING PRONOUNCEMENTS
  In
          July
          2006, the FASB issued interpretation No. 48 (“FIN 48”), “Accounting for
          Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in
          income taxes recognized in the financial statements in accordance with
          FASB
          Statement No. 109, “Accounting for Income Taxes.” FIN 48 provides guidance on
          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, disclosures, and transition. FIN 48 is effective for fiscal years
          beginning after December 15, 2006. Accordingly, FIN 48 will be adopted
          commencing in the first quarter of the Company’s fiscal year 2008.
 
 In
          September 2006, the Financial Accounting Standards Board issued Statement
          No.
          157 (“SFAS 157”), “Fair Value Measurements.” FAS 157 establishes a formal
          framework for measuring fair value under GAAP. It defines and codifies
          the many
          definitions of fair value included among various other aurthoritative
          literature, clarifies and, in some instances, expands on the guidance for
          implementing fair value measurements, and increases the level of disclosure
          required for fair value measurements. Although SFAS No. 157 applies to
          and
          amends the provisions of existing FASB and AICPA pronouncements, it does
          not, of
          itself, require any new fair value measurements, nor does it establish
          valuation
          standards. SFAS No. 157 applies to all other accounting pronouncements
          requiring
          or permitting fair value measurements, except for: SFAS No. 123 (R), share-based
          payment and related pronouncements, the practicability exceptions to fair
          value
          determinations allowed by various other authoritative pronouncements, and
          AICPA
          Statements of Position 97-2 and 98-9 that deal with software revenue
          recognition. This statement is effective for financial statements issued
          for
          fiscal years beginning after November 15, 2007, and interim periods within
          those
          fiscal years.
 
 In
          September 2006, the Financial Accounting Standards Board issued Statement
          No.
          158 (“SFAS 158”), “Accounting for Defined Benefit Pension and Other
          Postretirement Plans.” SFAS No. 158 requires that for public companies the full
          funding status of defined benefit pension and other postretirement plans
          be
          recognized on the balance sheet as an asset (for overfunded plans) or as
          a
          liability (for underfunded plans). In addition, SFAS No. 158 calls for
          recognition in other comprehensive income or gains or losses any prior
          service
          costs or credits that are not yet included as components of periodic benefit
          expense. Finally, SFAS No. 158 requires that the measurement of defined
          benefit
          plan assets and obligations be as of the balance sheet date. The Company
          plans
          to adopt the recognition provisions of SFAS No. 158 as of the end of the
          fiscal
          year end after December 15, 2006 and the measurement date provisions as
          of the
          balance sheet date for fiscal years ending after December 15, 2008.
 
 The
          Company does not believe that the adoption of the above recent pronouncements
          will have a material effect on the Company’s consolidated financial position or
          results of operations.
 
 19
 Item
          7. FINANCIAL
          STATEMENTS
 
 The
          following is a list of financial statements filed herewith:
 
 Consolidated
          Balance Sheets as of September 30, 2006 and September 30, 2005
 
 Consolidated
          Statements of Operations for the years ended September 30, 2006 and
          2005
 
 Consolidated
          Statements of Shareholders’ Deficiency for the years ended September 30, 2006
          and 2005
 
 Consolidated
          Statements of Cash Flows for the years ended September 30, 2006 and
          2005
 
 Notes
          to
          Consolidated Financial Statements
 
 
 Item
          8. CHANGES
          IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
          ACCOUNTING AND FINANCIAL DISCLOSURE
 
 On
          October 25, 2005 the Audit Committee of the Company’s Board of Directors
          dismissed BDO Seidman, LLP (“BDO”) as its independent accountants. On October
          25, 2005, the Audit Committee of the Company’s Board of Directors engaged
          Weinberg & Company, P.A. (“Weinberg”) to serve as the Company’s independent
          accountants and to audit its financial statements for the fiscal year ended
          September 30, 2005. During the Company’s fiscal year ended September 30, 2006,
          there were no disagreements with Weinberg on any matter of accounting principles
          or practices, financial statement disclosure, or auditing scope of procedure,
          which disagreements if not resolved to the satisfaction of Weinberg would
          have
          caused it to make reference thereto in its reports on the Company’s financial
          statements. During the Company’s two prior fiscal years and the period from
          October 1, 2005 through the date of its dismissal, there have been no
          disagreements with BDO on any matter of accounting principles or practices,
          financial statement disclosure, or auditing scope or procedure, which
          disagreements if not resolved to the satisfaction of BDO would have caused
          it to
          make reference thereto in its reports on the Company’s financial statements. In
          addition, for the same periods, there have been no reportable events (as
          defined
          in Regulation S-B Item 304(a)(1)(iv)(B)).
 
 Item
          8
          A.  CONTROLS
          AND PROCEDURES
 
 (a)
              Evaluation
                  of Disclosure Controls and Procedures 
 Disclosure
          Controls and procedures are designed to ensure that information required
          to be
          disclosed in the reports filed or submitted under the Exchange Act is recorded,
          processed, summarized and reported, within the time periods specified in
          the
          SEC’s rules and forms. Disclosure controls and procedures include, without
          limitation, controls and procedures designed to ensure that information
          required
          to be disclosed in the reports filed under the Exchange Act is accumulated
          and
          communicated to management, including the Chief Executive Officer and Chief
          Financial Officer, as appropriate, to allow timely decisions regarding
          required
          disclosures.
 
 The
          Company carried out an evaluation, under the supervision and with the
          participation of the Company’s management, including the Company’s Chief
          Executive Officer and Chief Financial Officer, of the effectiveness of
          the
          design and operation of the Company’s disclosure controls and procedures as of
          the end of the period covered by this report. Based upon and as of the
          date of
          that evaluation, the Chief Executive Officer and Chief Financial Officer
          concluded that the Company’s disclosure controls and procedures are effective to
          ensure that the information required to be disclosed in the reports the
          Company
          files and submits under the Exchange Act is recorded, processed, summarized,
          and
          reported as and when required.
 
 20
 (b)
              Changes
                  in Internal Controls 
 There
          were no changes in the Company’s internal control over financial reporting or in
          other factors that occurred during the Company’s last fiscal quarter that has
          materially affected, or is reasonably likely to materially affect, the
          Company’s
          internal control over financial reporting.
 
 **PART
          III**
 
 Item
          9.   DIRECTORS,
          EXECUTIVE OFFICERS, PROMOTERS AND CONTOL PERSONS;
 COMPLIANCE
          WITH SECTION 16(a) OF THE EXCHANGE ACT
 
 As
          of
          September 30, 2006, the directors and executive officers of the Company
          are as
          follows:
  Name
                
                Age
                
                PositionRobert
                  Pearson
                
                70
                
                DirectorRobert
                    Degan
                
                67
                
                Chairman
                    of the BoardStephen
                    Crosson
                
                47
                
                Chief
                    Financial Officer, Chief Operating Officer,Secretary
                    & DirectorRussell
                    Cleveland
                
                67
                
                DirectorMichael
                    Skelton
                
                58
                
                Chief
                    Executive Officer, DirectorLee
                    Pryor
                
                69
                
                Director
 
  Robert
          Pearson. Mr. Pearson, who became a director in 1997, has been associated
          with
          Renaissance Capital Group (“RCG”) since April 1994. RCG is the investment
          advisor of the largest shareholders of the Company. Presently, Mr. Pearson
          serves as a Senior Vice President and Director of Corporate Finance of
          RCG. He
          served as Executive Vice President of the Thomas Group from May 1990 to
          March
          1994. For 25 years, Mr. Pearson held various senior management positions
          at
          Texas Instruments, including Vice President of Finance from October 1983
          to June
          1985. Mr. Pearson holds directorships in the following companies: Poore
          Brothers, a manufacturer of snack food products; Advanced Power Technology,
          Inc., a power semiconductor manufacturer; eOriginal, Inc., a privately
          owned
          developer of technology and software for creation of electronic contracts;
          Laserscope, Inc., a marketer and manufacturer of lasers for medial use;
          and
          Simtek Corporation, a fables semiconductor company that designs and markets
          non-volatile static random access memories.
  Robert
          Degan. Mr. Degan became a director in January 2001 and was named Chairman
          in
          March 2006. From 1989 to 1996, Mr. Degan was President and Chief Executive
          Officer of Tylink Corporation, a private company, which designs, manufactures
          and markets digital access products. In August, 1996, Tylink Corporation
          was
          acquired by Sync Research a public company. From August 1996 to December
          1996
          Mr. Degan was Executive Vice President of Sync Research. From 1997 to 1998,
          Mr.
          Degan was Chairman, President and Chief Executive Officer of Summa Four
          Inc., a
          public company, which is a leading provider of switching platforms. In
          1998
          Summa Four, Inc. was acquired by Cisco Systems, Inc. and from November
          1998
          through December 1999 Mr. Degan was General Manager of the Enhanced Services
          and
          Migration business unit of Cisco Systems, Inc. From January 2000 to the
          present,
          Mr. Degan has been a private investor. Mr. Degan holds a directorship with
          Overland Storage, a data storage manufacturing firm and Flexi International,
          both NASDAQ companies.
  21
 Stephen
          Crosson. Mr. Crosson joined the Company in March 1985 and was manager of
          accounting and government contracts and logistics. In September 1989, Mr.
          Crosson became a financial analysis officer with First Interstate Banks
          Controller’s office. In March 1992, Mr. Crosson returned to the Company as
          Director of Operations. In April 1995, he became Vice President of Operations.
          In January of 1997, Mr. Crosson became Corporate Secretary and in April
          1998 he
          became Chief Operating Officer and Treasurer. In January 2003, Mr. Crosson
          became the Chief Executive Officer, and in August 2003, Mr. Crosson was
          elected
          a director. In April 2004, Mr. Crosson became the Chief Financial Officer.
          Currently Mr. Crosson is the Chief Financial Officer, Chief Operating Officer
          and Corporate Secretary.
 
 Russell
          Cleveland. Mr. Cleveland became a director in February 2004. Mr. Cleveland
          is
          the President, Chief Executive Officer, sole director, and the majority
          shareholder of the RENN Capital Group, Inc. Mr. Cleveland has been with
          RENN
          Group in these capacities for over ten years since the first fund was formed
          in
          1994. He is a Chartered Financial Analyst with more than 35 years experience
          as
          a specialist in investments for smaller capitalization companies. A graduate
          of
          the Wharton School of Business, Mr. Cleveland serves on the Boards of Directors
          of Renaissance US Growth Investment Trust PLC, BFS US Special Opportunities
          Trust PLC, Renaissance Capital Growth & Income Fund III, Inc., Integrated
          Security Systems, Inc., Tutogen Medical, Inc., Digital Recorders, Inc.,
          and
          Cover-All Technologies, Inc.
 
 Michael
          Skelton. Mr. Skelton joined the Company in April 2004 as the Chief Executive
          Officer. From August 2001 to April 2004, Mr. Skelton was an interim executive
          management consultant working with public and private technology companies.
          From
          1987 to 1992, Mr. Skelton was Vice President and General Manager of TAB
          Products
          Co., a records management company. From 1993 to 1995, Mr. Skelton was Vice
          President of Sales and Marketing for SCO Inc., a company that provides
          UNIX
          operating system software. From 1996 to 1997, Mr. Skelton was President
          and
          C.E.O. of TracePoint Technology, Inc., a provider of software developer
          tools.
          From 1998 to 1999, Mr. Skelton was Vice President of Sales for NetManage,
          Inc.,
          a provider of enterprise application integration software and services.
          From
          January 2000 to July 2001, Mr. Skelton was President and C.E.O. of Menta
          Software, Ltd., which provided technology to web enable Microsoft Windows
          applications.
 
 Lee
          Pryor. Mr. Pryor became a director in March 2006. Mr. Pryor is founder
          and chief
          executive officer of Interventures, LLC, an advisory and coaching services
          firm
          assisting start-up and late-stage entrepreneurial companies. During the
          past
          five years Mr. Pryor has provided advisory services to businesses for strategy
          evaluation, marketing programs and management best practices. Mr. Pryor
          also
          gives speeches on management and entrepreneurship and provides seminars
          and
          workshops on the topics of management, marketing and strategy to his clients.
          Mr. Pryor attended Johns Hopkins University, the U.S. Naval Academy, and
          Northwestern University. He is a frequent speaker at venture capital
          conferences, association meetings, and business schools on such topics
          as
          strategy, leadership, and managing for success.
  FAMILY
          RELATIONSHIPS
 
 There
          are
          no family relationships between or among the directors, executive officers
          or
          persons nominated or charged by us to become directors or executive
          officers.
  MEETINGS;
          ATTENDANCE; COMMITTEES
 
 The
          Board
          has an Audit Committee. The duties of the Audit Committee include (i)
          recommending to the Board the engagement of the independent auditors, (ii)
          reviewing the scope and results of the yearly audit by the independent
          auditors,
          (iii) reviewing our system of internal controls of procedures, and (iv)
          investigating, when necessary, matters relating to the audit functions.
          It
          reports to the Board concerning its activities. The current members of
          this
          Committee are Messrs.Degan and Pryor. The Board of Directors has determined
          that
          Robert Degan is the Audit Committee Financial Expert and Mr. Degan is deemed
          to
          be independent under applicable rules. Mr. Degan serves as the audit committee
          chairman. The audit committee held four meetings during the current fiscal
          year.
 
 22
 The
          Board
          also has a Compensation Committee. The Compensation Committee makes
          recommendations to the Board concerning compensation and other matters
          relating
          to employees. The Committee also grants options under, and administers,
          our
          Stock Option Plan. The current members of the Committee are Messrs. Degan
          and
          Pryor. Mr. Pryor serves as chairman of the compensation committee. The
          Compensation Committee held two meetings during the current fiscal year.
  DIRECTOR
          COMPENSATION
 
 Directors
          do not receive any annual compensation. Outside directors receive $1,000
          each
          for each meeting attended and reimbursement for out-of-pocket expenses
          for
          attending meetings. Mr. Pearson and Mr. Cleveland have waived the meeting
          fees.
          The board held seven meetings during the current fiscal year.
 
 EMPLOYMENT
          AGREEMENTS
 
 During
          the fiscal year ended September 30, 2004, the Company entered into an employment
          agreement with Michael Skelton (C.E.O. & Director). Mr. Skelton will receive
          $14,000 per month salary for an indeterminate period of time. The contract
          may
          be terminated by the Company or Mr. Skelton at any time. If Mr. Skelton
          is
          terminated without cause he will receive salary and benefits for up to
          6 months
          after termination. During the fiscal year ended September 30, 2005, the
          Company
          reimbursed Mr. Skelton $24,000 for apartment rental expense. The rental
          expense
          reimbursement expired during October 2005.
 
 During
          the fiscal year ended September 30, 2003, the Company entered into a two
          year
          employment agreement with Mr. Stephen Crosson to be Chief Executive Officer
          of
          the Company reporting to the Chairman of the Board of Directors. The contract
          was for two years beginning August 1, 2003, with an annual salary of $150,000
          per year with the possibility of bonuses at the discretion of the Board
          of
          Directors. The agreement was amended on April 19, 2004. Mr. Crosson is
          currently
          the Chief Financial Officer and Chief Operating Officer of the Company
          and will
          receive $12,500 per month for an indeterminate period of time. The contract
          includes a bonus fee of 1% of any acquisition price or licensing fee over
          $1,000,000 paid to the Company. If Mr. Crosson is terminated without cause
          he
          will receive salary and benefits for up to 6 months after termination.
  COMPLIANCE
          WITH SECTION 16(a) -
 
 Section
          16(a) of the Securities Exchange Act of 1934, as amended, requires the
          Company’s
          executive officers and directors and persons who own more than 10% of a
          registered class of the Company’s equity securities to file with the Securities
          and Exchange Commission initial statements of beneficial ownership, reports
          of
          changes in ownership and annual reports concerning their ownership of common
          stock and other equity securities of the Company, on Forms 3, 4 and 5
          respectively. Executive officers, directors and greater than 10% shareholders
          are required by Commission regulations to furnish the Company with copies
          of all
          Section 16(a) reports they file. During the current fiscal year, the Chief
          Executive Officer and the Chief Operating Officer filed amended form 4A
          and form
          5 with the Commission for bonus shares received from the Company. These
          filings
          were not filed timely as required by Section 16(a) of the Securities and
          Exchange Act of 1934, as amended.
 
 CODE
          OF
          ETHICS
 
 The
          Company has adopted a code of ethics that applies to the Company’s principal
          executive officer, principal financial officer and principal accounting
          officer.
          We have previously filed a copy of our Code of Ethics as an Exhibit to
          our
          Annual Report on Form 10-KSB for our fiscal year 2004, and the same is
          incorporated herein by this reference. In addition, a copy of our code
          of ethics
          can be obtained by writing our company at 600 Hampshire Road, Suite 105,
          Westlake Village, California 91361.
 
 23
 Item
          10.   EXECUTIVE
          COMPENSATION
 
 The
          following table sets forth the compensation paid by the Company for its
          fiscal
          years ended September 30, 2006, 2005, and 2004 to its Chief Executive Officer
          and Chief Financial Officer (the “Named Executive Officers”). No other executive
          officer received compensation which exceeded $100,000 for the fiscal year
          ended
          September 30, 2006.
 Long
                      TermCompensationAwardsANNUAL
                      COMPENSATION
                  
                  
                  SecuritiesFISCAL
                      YEAR
                  
                  
                  
                  
                  
                  
                  
                  
                  ALL
                  
                  
                  UnderlyingNAME
                      AND
                  
                  
                  ENDED
                  
                  
                  
                  
                  
                  
                  
                  
                  OTHER
                  
                  
                  OptionsPRINCIPAL
                      POSITION
                  
                  
                  SEPTEMBER
                      30,
                  
                  
                  SALARY
                  
                  
                  BONUS
                  
                  
                  COMPENSATION
                  
                  
                  SARsMichael
                      Skelton,
                  
                  
                  2006
                  
                  $
                  168,000
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Chief
                      Executive Officer
                  
                  
                  2005
                  
                  $
                  168,000
                  
                  
                  39,000
                  
                  
                  —
                  
                  
                  —&
                      Director
                  
                  
                  2004
                  
                  $
                  168,000
                  
                  
                  —
                  
                  
                  —
                  
                  
                  1,400,000Stephen
                      Crosson,
                  
                  
                  2006
                  
                  $
                  150,000
                  
                  
                  —
                  
                  
                  —
                  
                  
                  100,000Chief
                      Financial Officer,
                  
                  
                  2005
                  
                  $
                  150,000
                  
                  
                  39,000
                  
                  
                  —
                  
                  
                  —Chief
                      Operating Officer,
                  
                  
                  2004
                  
                  $
                  150,000
                  
                  
                  —
                  
                  
                  —
                  
                  
                  385,000Corporate
                      Secretary &
   The
            remuneration described in the above table does not include our cost of
            benefits
            furnished to the named executive officers, including premiums for health
            insurance and other personal benefits provided to such individuals that
            are
            extended to all of our employees in connection with their employment.
            Perquisites and other personal benefits, securities, or property received
            by an
            executive officer are either the lesser of $50,000 or 10% of the total
            salary
            and bonus reported for each named executive officer, except as otherwise
            disclosed.
  OPTION
            GRANTS IN 2006
 
 The
            following table sets forth certain information regarding option grants
            to the
            Named Executive Officers during the fiscal year ended September 30,
            2006.
  Number
                        of
                    
                    Percentage
                        ofSecurities
                    
                    Total
                        Options
                    
                    AverageUnderlying
                    
                    Granted
                        to
                    
                    ExerciseOptions
                    
                    Employees
                    
                    Price
                    
                    ExpirationNAME
                    
                    Granted
                    
                    In
                        2006
                    
                    Per
                        Share
                    
                    DateMichael
                        Skelton
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —Stephen
                        Crosson
                    
                    
                    100,000
                    
                    
                    30.21
                    %
                    $
                    1.14
                    
                    
                    12/8/09
 
  OPTION
              EXERCISES AND FISCAL YEAR-END VALUES
 
 The
              following table sets forth the number of common stock options, both
              exercisable
              and unexercisable, held by each of our Named Executive Officers and
              the value of
              any in-the-money options at September 30, 2006, utilizing a value of
              $0.27 per
              share, the closing price of the Company’s common stock on the OTC Bulletin Board
              on September 30, 2006.
 Number
                        of Securities
                    
                    Value
                        ofShares
                    
                    
                    
                    Underlying
                        Unexercised
                    
                    Unexercised
                        in the MoneyAcquired
                    
                    Value
                    
                    Options
                        at Year-End
                    
                    Options
                        at Year-EndName
                    
                    On
                        Exercise
                    
                    Realized
                    
                    Exercisable
                    
                    Unexercisable
                    
                    Exercisable
                    
                    UnexercisableMichael
                      Skelton
                    
                    
                    —
                    
                    
                    —
                    
                    
                    700,000
                    
                    
                    700,000
                    
                    
                    —
                    
                    
                    —Stephen
                        Crosson
                    
                    
                    —
                    
                    
                    —
                    
                    
                    983,000
                    
                    
                    100,000
                    
                    
                    —
                    
                    
                    —


24




There
        were no options exercised by the Named Executive Officers during fiscal year
        2006.
  Item
        11. SECURITY
        OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
        MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
 The
        following table sets forth certain information regarding the beneficial
        ownership of the Company’s Common Stock as of September 30, 2006 by (I) each
        person who is known by the Company to own beneficially more than 5% of the
        Company’s outstanding Common Stock; (ii) each of the Company’s directors; (iii)
        the named Executive Officers; and (iv) executive officers and directors of
        the
        Company as a group:
 
 COMMON
                      STOCK (1)NUMBER
                      OF
                  
                  
                  PERCENTAGE
                      OFNAME
                      AND ADDRESS (2)
                  
                  
                  SHARES
                  
                  
                  OUTSTANDING
                      (3)Robert
                      Pearson    
                      (4)
                  
                  
                  —
                  
                  
                  —Robert
                      Degan
                  
                  
                  268,000
                      (5
                  )
                  
                  1.85Russell
                      Cleveland (4)
                  
                  
                  —
                  
                  
                  —Lee
                      Pryor
                  
                  
                  —
                  
                  
                  —Stephen
                      Crosson
                  
                  
                  1,205,770
                      (6
                  )
                  
                  7.91Michael
                      Skelton
                  
                  
                  741,785
                      (7
                  )
                  
                  4.96Renaissance
                      Capital Growth &Income
                      Fund III, Inc
                  
                  
                  5,321,226
                      (8
                  )
                  
                  33.178080
                      N. Central ExpresswaySuite
                      210Dallas,
                      Texas 75206Renaissance
                      US Growth &Income
                      Trust PLC
                  
                  
                  4,667,698
                      (9
                  )
                  
                  29.328080
                      N. Central ExpresswaySuite
                      210Dallas,
                      Texas 75206BFSUS
                      Special OpportunitiesTrust
                      PLC
                  
                  
                  7,062,282
                      (10
                  )
                  
                  37.158080
                      N. Central ExpresswaySuite
                      210Dallas,
                      Texas 75206All
                      executive officers anddirectors
                      as a group(5
                      persons)
                  
                  
                  2,215,555
                  
                  
                  13.68







(1)
            As
                used herein, the term beneficial ownership is defined by Rule 13d-3
                under
                the Securities Exchange Act of 1934 as consisting of sole or shared
                voting
                power and/or sole or shared investment power subject to community
                property
                laws where applicable.


(2)
            Except
                as indicated, the address of each person is c/o the Company at 600
                Hampshire Road, #105, Westlake Village, California
                91361.




25




(3)
            Based
                on 14,258,756 shares of Common Stock outstanding, as of September
                30,
                2006.


(4)
            Does
                not include any shares owned by the Renaissance Funds described in
                the
                table. Mr. Pearson is an executive officer of Renaissance Capital
                Group,
                Inc. (“RCG”) which is the investment advisor to the Renaissance Funds and
                BFS US and the investment manager of Renaissance U.S.


(5)
            Includes
                four year non-qualified options from the Company to purchase 50,000
                shares
                at $.95 per share, 35,000 shares from the Company at $.61 per share,
                85,000 shares from the Company at $.44 per share and options to purchase
                85,000 shares from the Company at $0.41 per share, does not include
                35,000
                options not currently exercisable.


(6)
            Includes
                currently exercisable options to purchase 48,000 shares from the
                Company
                at $.56 per share, 120,000 shares from the Company at $3.87 per share,
                60,000 shares from the Company at $5.00 per share, 120,000 shares
                from the
                Company at $1.55 per share, 50,000 shares from the Company at $.95
                per
                share, 100,000 shares from the Company at $.61 per share, 100,000
                shares
                from the Company at $.44 per share, options to purchase 300,000 shares
                at
                $0.55 per share,options to purchase 85,000 shares at $0.41 per share
                and
                does not include 100,000 options not currently exercisable.


(7)
            Includes
                currently exercisable options from the Company to purchase 700,000
                shares
                at $0.63 per share. Does not include 700,000 options not currently
                exercisable.


(8)
            RCG
                is the investment advisor of the Renaissance Funds. The Common Shares
                deemed to be beneficially owned by the Renaissance Capital Growth
                and
                Income Fund III, are comprised of 3,539,414 shares of our Common
                Stock,
                options to purchase 26,500 shares at $0.95 per share, options to
                purchase
                18,550 shares at $0.61 per share, options to purchase 38,250 shares
                at
                $0.44 per share, options to purchase 37,400 shares at $0.41 per share,
                warrants to purchase 540,541 shares at $0.74 per share, warrants
                to
                purchase 540,540 shares at $1.11 per share, warrants to purchase
                471,698
                shares at $0.53 per share, warrants to purchase 58,333 shares at
                $1.14 per
                share and warrants to purchase 50,000 shares at $0.86 per share.
                All of
                such securities are owned by the Renaissance Funds as described
                herein.


(9)
            RCG
                is the Investment Manager of Renaissance US. The Common Shares deemed
                to
                be beneficially owned by the Renaissance US Fund are comprised of
                3,006,585 shares of our Common Stock and warrants to purchase 540,541
                shares at $0.74 per share, warrants to purchase 540,540 shares at
                $1.11
                per share, warrants to purchase 471,698 shares at $0.53 per share,
                warrants to purchase 58,334 shares at $1.14 per share and warrants
                to
                purchase 50,000 shares at $0.86 per
                share.


(10)
            RCG
                is the Investment Advisor for BFS US. The Common Shares deemed to
                be
                beneficially owned by BFS US are comprised of 2,312,818 shares of
                Common
                Stock and 3,088,352 shares of Common Stock issuable upon conversion
                of an
                aggregate of $1,750,000 of 6% Convertible Debenture at a weighted
                average
                conversion price of $0.63 per share. Also includes warrants to purchase
                540,541 shares at $0.74 per share, warrants to purchase 540,540 shares
                at
                $1.11 per share, warrants to purchase 471,698 shares at $0.53 per
                share,
                warrants to purchase 58,333 shares at $1.14 per share and warrants
                to
                purchase 50,000 shares at $0.86 per
                share.








Equity
      Compensation Plan Information





The
      following table sets forth certain information regarding the Company’s 2000
      Stock Option Plan. All information set forth below is as of September 30, 2006,
      pursuant to applicable regulations.




Number
                  of securities remainingavailable
                  for futureissuance
                  underequity
                  compensationNumber
                  of Securities to
              
              Weighted-average
              
              plans
                  (excludingBe
                  issued upon exercise
              
              exercise
                  price of
              
              securities
                  warrants andOf
                  outstanding options,
              
              outstanding
                  options,
              
              rights
                  warrantsWarrants
                  and rights
              
              warrants
                  and rights
              
              and
                  rights reflected in(a)
              
              (b)
              
              (a))
                  (a) (b)(c)Equity
                  compensationPlans
                  approved by
              
              
              9,906,837
              
              $
              0.96
              
              
              1,096,500Security
                  holdersEquity
                  compensationPlans
                  not approved by
              
              
              —
              
              
              —
              
              
              —HoldersTOTAL
              
              
              9,906,837
              
              $
              0.96
              
              
              1,096,500
 
 26
  Shareholder
        Approved Plans:
 
 The
        2000
        Stock Option Plan
 
 The
        Company’s shareholders approved the 2000 Stock Option Plan as amended (the
“Plan”) in April 2001. Currently, the Plan authorizes the grant of options to
        purchase up to 6,000,000 shares of the Company’s Common Stock, of which options
        to purchase 1,096,500 shares were available for future issuance as of September
        30, 2006.
 
 Non-Shareholder-Approved
        Plans:
 
 There
        are
        no Non-Shareholder Approved Plans as of September 30, 2006 .
 
 Item
        12. CERTAIN
        RELATIONSHIPS AND RELATED TRANSACTIONS
  On
        November 27, 2002, the Company entered into a $1,000,000 6% Convertible
        Debenture Agreement with BFS US (the “BFS US Debenture”). The full amount was
        drawn during the fiscal year ended September 30, 2003. Interest of 6% per
        annum
        will be paid in monthly installments for three years based on the unpaid
        principal balance. The BFS US Debenture originally matured on November 27,
        2005,
        at which time the unpaid Principal Amount, and all accrued and unpaid interest
        and other charges, fees, and payments was due and payable. The conversion
        price
        is set at $1.00 unless, however, the five (5)-day average closing price for
        the
        Company’s common stock immediately prior to a disbursement is below $1.00, in
        which case, such five (5)-day average shall become the Conversion Price.
        As of
        September 30, 2005, we had a note payable principal balance of $1,000,000
        in
        connection with this convertible debenture and no further funds available
        to
        borrow on this debenture. The debenture has certain non-operating covenants
        associated with the loan. During the fiscal year and as of September 30,
        2006,
        the Company was in compliance with these covenants.
 
 During
        July 2003, the BFS US entered into a $750,000 6% Convertible Debenture with
        the
        Company. The full amount was drawn during the fiscal year ended September
        30,
        2003. Interest at a rate of 6% per annum is payable in monthly installments
        for
        26 months based on the unpaid principal balance. The debenture originally
        matured on November 27, 2005, at which time the unpaid Principal Amount,
        and all
        accrued and unpaid interest and other charges, fees, and payments then due
        under
        the debenture was due and payable in full. The debenture is convertible,
        at the
        option of the holder into shares of the Company’s common stock, with an initial
        conversion price of $0.50 per share. However, if the five (5)-day average
        closing price for the Common Stock immediately prior to each disbursement
        is
        below the $0.50 initial conversion price, the average closing price for such
        period shall become the conversion price. As of September 30, 2004, we had
        a
        note payable principal balance of $750,000 in connection with this convertible
        debenture and no further funds available to borrow on this debenture. The
        debenture has certain non-operating covenants associated with the loan. During
        the fiscal year and as of September 30, 2006, the Company was in compliance
        with
        these covenants.
 
 During
        October 2005, the Company negotiated an extension of the two parts of the
        Convertible Debenture with a total principal balance of $1,750,000. Pursuant
        to
        a Renewal and Modification agreement dated as of October 28, 2005, the lender
        agreed to extend the maturity date of certain 6% Convertible Debentures in
        the
        aggregate principal amount of $1,750,000 to May 27, 2007. In consideration
        of
        such extension, the Company agreed to grant lender a five-year warrant to
        purchase 175,000 shares of Company Common Stock at an exercise price of $1.14
        per share (subject to adjustment). The estimated value of the warrant ($166,093)
        was recorded on the Company financial statements as debt discount, and is
        being
        amortized over the term of the extension.
 
 27
 On
        December 18, 2003 the Company issued to the Renaissance Funds, BFS US and
        Renaissance US in a private placement an aggregate of 3,243,243 shares of
        common
        stock and 5-year warrants to purchase an aggregate of 3,243,243 shares with
        50%
        of the warrants at an exercise price of $0.74 per share and 50% at an exercise
        price of $1.11 per share for $1,200,000. The investors are affiliated with
        Renaissance Capital Group, Inc. See “Security Ownership of Certain Beneficial
        Owners and Management and Related Stockholder Matters.”
 
 During
        July 2004, the Company received $750,000 from a two year secured loan from
        Renaissance Capital Group, Inc. managed funds. Interest is payable at 7%
        per
        annum in monthly installments based on the outstanding principal balance.
        As
        part of the funding, the Company issued five year warrants to purchase an
        aggregate of 1,415,094 shares of Common Stock at an exercise price of $0.53
        per
        share.
 
 On
        February 21, 2006, the Company issued to Renaissance Capital, BFS US and
        Renaissance US an aggregate of 150,000 warrants to purchase shares of common
        stock at $0.86 per share in consideration of the agreement to extend notes
        payable to Renaissance Capital, BFS US and Renaissance US in the aggregate
        principal amount of $750,000 for an 18 month extension of the maturity date.
        The
        new maturity date for the notes will be January 19, 2008. The Company will
        continue to pay 7% interest on a monthly basis based on the current outstanding
        principal balance of $750,000.
 
 On
        February 21, 2006, the Company issued to BFS US and Renaissance US an aggregate
        of 697,674 shares of common stock at a price of $0.86 per share in a private
        placement for $600,000.
 
 Item
        13. EXHIBITS
        AND REPORTS ON FORM 8-K
 
 (a)
            Exhibits  Exhibit31Certification
              Pursuant to Section 302 of the Sarbanes-OxleyAct
              of 2002  Exhibit 32Certification
              Pursuant to Section 906 of the Sarbanes-OxleyAct
              of 2003  (b)
            Reports on Form 8-K.  None  Item
        14 PRINCIPAL
        ACCOUNTANT FEES AND SERVICES
 
 AUDIT
        FEES
 
 During
        the Company’s prior fiscal year, Weinberg & Company, P.A., was the principal
        accountant and billed $68,177 for professional services for the audit of
        the
        Company’s annual financial statements and review of the Company’s financial
        statements included in the Company’s Form 10-QSB’s. The estimated fees for
        professional services associated with the audit of the Company’s annual
        financial statements and review of the Company’s financial statements included
        in the Company’s Form 10-QSB’s for the upcoming fiscal year are $70,000.
 
 The
        Audit
        Committee approves in advance audit and non-audit services to be provided
        by
        Weinberg & Co. P.A. In other cases, in accordance with Rule 2-01(c)(7) of
        Securities and Exchange Commission Regulation S-X, the Audit Committee has
        delegated pre-approval authority to the Chairman of the Audit Committee for
        matters which arise or otherwise require approval between regularly scheduled
        meetings of the Audit Committee, provided that the Chairman report such
        approvals to the Audit Committee at the next regularly scheduled meeting
        of the
        Audit Committee.
 
 28
 SIGNATURES
 
 In
        accordance with Section 13 or 15 (d) of the Securities Exchange Act of 1934,
        the
        registrant has duly caused this report to be signed on its behalf by the
        undersigned, thereunto duly authorized.
  CAMINOSOFT
                  CORPBy:
              /s/ STEPHEN
                CROSSONChief
                  Financial OfficerDate:
                  December 27, 2006  Signature
                  
                  Capacity
                  
                  Date/s/
                      ROBERT DEGAN
                  
                  Chairman
                      of the Board
                  
                  December
                      27, 2006Robert
                      Degan/s/
                      ROBERT PEARSON
                  
                  Director
                  
                  December
                      27, 2006Robert
                      Pearson/s/
                      STEPHEN CROSSON
                  
                  Chief
                      Financial Officer,Chief
                      Operating Officer
                  
                  December
                      27, 2006Stephen
                      Crosson
                  
                  Secretary,
                      Treasurerand
                      Director/s/
                      RUSSELL CLEVELAND
                  
                  Director
                  
                  December
                      27, 2006Russell
                      Cleveland/s/
                      MICHAEL SKELTON
                  
                  Chief
                      Executive Officer, Director
                  
                  December
                      27, 2006Michael
                      Skelton/s/
                      LEE PRYOR
                  
                  Director
                  
                  December
                      27, 2006Lee
                      Pryor
  
 29
   CAMINOSOFT
          CORP
 
 CONTENTS
 
 
 Report
                    of Independent Registered Public Accounting Firm
                F-2Consolidated
                    Balance Sheets as of September 30, 2006and
                    September 30, 2005
                F-3Consolidated
                    Statements of Operations for the years endedSeptember
                    30, 2006 and 2005
                F-4Consolidated
                    Statements of Shareholders’ Deficiency for theyears
                    ended September 30, 2006 and 2005
                F-5Consolidated
                    Statements of Cash Flows for the years endedSeptember
                    30, 2006 and 2005
                F-6Notes
                    to Consolidated Financial Statements
                F-7
  F-1
 
 
  **REPORT
          OF INDEPENDENT REGISTERED ACCOUNTING FIRM**
 
 
 To
          the
          Board of Directors of
 CaminoSoft
          Corp.:
 
 
 We
          have
          audited the accompanying consolidated balance sheets of CaminoSoft Corp.
          and
          Subsidiary (the "Company"), as of September 30, 2006 and 2005 and the related
          consolidated statements of operations, changes in shareholders' deficiency
          and
          cash flows for the years then ended. These consolidated financial statements
          are
          the responsibility of the Company’s management. Our responsibility is to express
          an opinion on these consolidated financial statements based on our
          audits.
 
 We
          conducted our audits in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audits to obtain reasonable assurance about whether the
          financial statements are free of material misstatement. An audit includes
          examining, on a test basis, evidence supporting the amounts and disclosures
          in
          the financial statements. An audit also includes assessing the accounting
          principles used and significant estimates made by management, as well as
          evaluating the overall financial statement presentation. We believe that
          our
          audits provide a reasonable basis for our opinion.
 
 In
          our
          opinion, the consolidated financial statements referred to above present
          fairly
          in all material respects, the financial position of CaminoSoft Corp. and
          Subsidiary as of September 30, 2006 and 2005, and the results of their
          operations and their cash flows for the years then ended, in conformity
          with
          accounting principles generally accepted in the United States of
          America.
 
 The
          accompanying consolidated financial statements have been prepared assuming
          that
          the Company will continue as a going concern. As discussed in Note 1 to
          the
          consolidated financial statements the Company incurred a net loss of $1,712,253
          and a negative cash flow from operating activities of $375,504 for the
          year
          ended September 30, 2006, and had a working capital deficiency of $1,869,675
          and
          a shareholders’ deficiency of $2,868,551 at September 30, 2006. These factors
          raise substantial doubt about the Company’s ability to continue as a going
          concern. Management’s plans concerning this matter are also described in Note 1.
          The accompanying consolidated financial statements do not include any
          adjustments to reflect the possible future effects on the recoverability
          and
          classification of assets or the amounts and classification of liabilities
          that
          may result from the outcome of this uncertainty.
   WEINBERG
          & COMPANY, P.A.
 
 
 Los
          Angeles, CA
 December
          5, 2006
  F-2


CAMINOSOFT
                CORP.CONSOLIDATED
                BALANCE SHEETSSeptember
                30,
            
            September
                30,2006
            
            2005ASSETSCurrent
                Assets:Cash
                and cash equivalents
            
            $
            441,595
            
            $
            220,186Accounts
                receivable, net of allowance of $20,000 and $20,000
            
            
            248,672
            
            
            1,043,176Total
                Current Assets
            
            
            690,267
            
            
            1,263,362Property
                and Equipment, net of accumulated depreciation of
            
            
            18,304
            
            
            36,147$71,608
                and $50,678Software,
                net of accumulated amortization of
            
            
            112,164
            
            
            230,349$715,226
                and $597,041Deposits
            
            
            9,582
            
            
            11,282Deferred
                Financing Costs
            
            
            —
            
            
            262,075Total
                Assets
            
            $
            830,317
            
            $
            1,803,215LIABILITIES
                AND SHAREHOLDERS' DEFICIENCYCurrent
                Liabilities:Accounts
                payable
            
            $
            183,144
            
            $
            191,285Accrued
                liabilities
            
            
            49,430
            
            
            116,238Deferred
                revenues
            
            
            721,908
            
            
            1,278,290Notes
                payable, current portion, net of discountof
                $144,540 and $129,980
            
            
            1,605,460
            
            
            620,020Total
                Current Liabilities
            
            
            2,559,942
            
            
            2,205,833Notes
                payable, net of discountof
                $23,574 and $14,689
            
            
            726,426
            
            
            1,735,311Deferred
                revenues
            
            
            412,500
            
            
            —Total
                Liabilities
            
            
            3,698,868
            
            
            3,941,144Shareholders'
                DeficiencyCommon
                stock, no par value; authorized 100,000,000 shares;issued
                and outstanding 14,258,756 and 13,551,082 shares
            
            
            18,669,092
            
            
            17,687,461Accumulated
                Deficit
            
            
            (21,537,643
            )
            
            (19,825,390
            )Total
                Shareholders' Deficiency
            
            
            (2,868,551
            )
            
            (2,137,929
            )Total
                Liabilities and Shareholders' Deficiency
            
            $
            830,317
            
            $
            1,803,215See
                accompanying notes to Consolidated Financial
                Statements






F-3


CAMINOSOFT
                CORP.CONSOLIDATED
                STATEMENTS OF OPERATIONSYears
                EndedSeptember
                30,2006
            
            2005SALES
            
            $
            1,772,671
            
            $
            2,637,201COST
                OF SALES
            
            
            156,523
            
            
            213,423GROSS
                PROFIT
            
            
            1,616,148
            
            
            2,423,778OPERATING
                EXPENSESSales
                and administrative
            
            
            2,183,558
            
            
            2,438,708Depreciation
            
            
            20,930
            
            
            18,948Research
                & Development
            
            
            484,043
            
            
            473,830Total
                Operating Expenses
            
            
            2,688,531
            
            
            2,931,486Loss
                From Operations
            
            
            (1,072,383
            )
            
            (507,708
            )OTHER
                INCOME (EXPENSE)Interest
                expense
            
            
            (377,811
            )
            
            (262,717
            )Interest
                income
            
            
            16
            
            
            16Write
                off of deferred financing costs
            
            
            (262,075
            )
            
            —Total
                Other Expense
            
            
            (639,870
            )
            
            (262,701
            )Net
                Loss
            
            
            ($1,712,253
            )
            
            ($770,409
            )Weighted
                average number of common shares outstanding:(basic
                and diluted):
            
            
            13,978,763
            
            
            13,506,795Net
                loss per common share:(basic
                and diluted)
            
            
            ($0.12
            )
            
            ($0.06
            )See
                accompanying notes to Consolidated Financial Statements




F-4






CAMINOSOFT
                CORPCONSOLIDATED
                STATEMENTS OF SHAREHOLDERS' DEFICIENCYCommon
                Stock
            
            AccumulatedShares
            
            Amount
            
            Deficit
            
            TotalBalance
                at October 1, 2004
            
            
            13,462,750
            
            $
            17,650,361
            
            
            ($19,054,981
            )
            
            ($1,404,620
            )Common
                stock issued for legal services
            
            
            4,762
            
            
            2,000
            
            
            —
            
            
            2,000Common
                stock issued for employee bonus
            
            
            83,570
            
            
            35,100
            
            
            —
            
            
            35,100Net
                loss for the year ended September 30, 2005
            
            
            —
            
            
            —
            
            
            (770,409
            )
            
            (770,409
            )Balance
                at October 1, 2005
            
            
            13,551,082
            
            
            17,687,461
            
            
            (19,825,390
            )
            
            (2,137,929
            )Warrant
                issued for debenture financing extension
            
            
            —
            
            
            166,093
            
            
            —
            
            
            166,093Fair
                value of options issued to employees and consultants
            
            
            —
            
            
            133,575
            
            
            —
            
            
            133,575Private
                placement common stock
            
            
            697,674
            
            
            600,000
            
            
            —
            
            
            600,000Warrant
                issued for loan extension
            
            
            —
            
            
            77,663
            
            
            —
            
            
            77,663Common
                stock issued to consultant for services
            
            
            10,000
            
            
            4,300
            
            
            —
            
            
            4,300Net
                loss for the year ended September 30, 2006
            
            
            —
            
            
            —
            
            
            (1,712,253
            )
            
            (1,712,253
            )Balance
                at September 30, 2006
            
            
            14,258,756
            
            $
            18,669,092
            
            
            ($21,537,643
            )
            
            ($2,868,551
            )See
                accompanying notes to Consolidated Financial
                Statements






F-5


CAMINOSOFT
                CORP.CONSOLIDATED
                STATEMENTS OF CASH FLOWSYears
                EndedSeptember
                30,2006
            
            2005CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                loss
            
            
            ($1,712,253
            )
            
            ($770,409
            )Adjustments
                to reconcile net loss to net cash used inoperating
                activities:Common
                stock issued for services and bonus
            
            
            4,300
            
            
            37,100Depreciation
                and amortization
            
            
            139,115
            
            
            137,160Fair
                value of common stock options issued to employeesand
                consultants
            
            
            133,575
            
            
            -Write
                off deferred financing fees
            
            
            262,075
            
            
            -Amortization
                of debt discount
            
            
            220,311
            
            
            214,717Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            794,504
            
            
            (829,498
            )Prepaid
                expense
            
            
            -
            
            
            (75,000
            )Accounts
                payable and accrued liabilities
            
            
            (74,949
            )
            
            70,471Deposits
            
            
            1,700
            
            
            360Deferred
                revenue
            
            
            (143,882
            )
            
            1,027,986Net
                cash used in operating activities
            
            
            (375,504
            )
            
            (187,113
            )CASH
                FLOWS FROM INVESTING ACTIVITIESAcquisition
                of fixed assets
            
            
            (3,087
            )
            
            (14,045
            )Net
                cash used in investing activities
            
            
            (3,087
            )
            
            (14,045
            )CASH
                FLOWS FROM FINANCING ACTIVITIESBorrowing
                on note payable
            
            
            —
            
            
            125,000Repayment
                on notes payable
            
            
            —
            
            
            (125,000
            )Proceeds
                from the issuance of common stock
            
            
            600,000
            
            
            —Net
                cash provided by financing activities
            
            
            600,000
            
            
            —NET
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            221,409
            
            
            (201,158
            )CASH
                AND CASH EQUIVALENTS, beginning of year
            
            
            220,186
            
            
            421,344CASH
                AND CASH EQUIVALENTS, end of year
            
            $
            441,595
            
            $
            220,186Cash
                paid for:Interest
            
            $
            157,500
            
            $
            161,510Income
                taxes
            
            $
            1,600
            
            $
            —Supplemental
                non-cash financing and investing activitiesDuring
                the year ended September 30, 2006, the Company issuedwarrants
                valued at $243,756 for debt extensions, whichhave
                been accounted for as discount to long term debtSee
                accompanying notes to Consolidated Financial Statements  F-6


CAMINOSOFT
        CORP.
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
        ENDED SEPTEMBER 30, 2006 AND 2005





Note
      1 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





DESCRIPTION
      OF BUSINESS AND NATURE OF OPERATIONS





CaminoSoft
      Corp. (the “Company”) previously known as Interscience Computer Corporation, was
      incorporated under the laws of the State of California on October 14, 1983,
      to
      be a third party provider of maintenance services for computer hardware and
      related peripheral equipment. On September 17, 1999, the Company acquired the
      assets (the “Camino Assets”) of Camino Software Systems, Inc. (“Camino”), a data
      storage company. The Camino assets consisted of the name, Camino Software
      Systems, Inc., the data storage management software, certain business contracts
      and intangible personal property.





During
      the year ended September 30, 2000, the Company changed its name to CaminoSoft
      Corp. to reflect the focus on the data management software business. The Company
      is now distributing and developing data management software purchased from
      Camino, which will work with Windows 2000 and Novell operating systems and
      with
      Computer Associates, Veritas, EMC, IBM and other enterprise
      software.





The
      Company is primarily engaged in the business of developing and marketing data
      management software. The Company’s product line includes multiple versions of
      our core HSM technology compatible with operating systems from Novell,
      Microsoft, Network Appliance and for use with a variety of computer hardware
      storage devices, including products from EMC, IBM, HP, Hitachi, NetWork
      Appliance, Dell and others. The Company sells and distributes its products
      through major technology distribution partners including Ingram Micro, Business
      Union in the UK, Orchestra in Germany, Amitron in the Netherlands and many
      other
      resellers and value added distributors.





In
      July
      2003, the Company incorporated a subsidiary CM Medical Systems, Inc., under
      the
      General Corporation Law of California. Currently the subsidiary has no
      employees, has not issued stock and has not begun operations.





GOING
      CONCERN





The
      accompanying consolidated financial statements have been prepared in conformity
      with accounting principles generally accepted in the United States of America,
      which contemplates continuation of the Company as a going concern. The Company
      had a net loss of $1,712,253 and utilized cash of $375,504 in operating
      activities during the year ended September 30, 2006, and had a working capital
      deficiency of $1,869,675 and shareholders’ deficiency of $2,868,551 at September
      30, 2006. These factors raise substantial doubt about the Company’s ability to
      continue as a going concern. The financial statements do not include any
      adjustments relating to the recoverability and classification of recorded asset
      amounts, or amounts and classification of liabilities that might result from
      this uncertainty.




The
      Company’s working capital requirements in the foreseeable future will depend on
      a variety of factors including its ability to implement its sales and marketing
      plan. The Company plans to continue to focus on the integration of its products
      and solutions with O.E.M. partner products for sales and distribution. This
      includes selling products through the distribution channels of the partners.
      The
      Company has new arrangements, which it believes will generate higher levels
      of
      revenue in fiscal 2007. Management has developed additional contingency plans
      to
      ensure expenses can be reduced and brought in line with revenues achieved during
      2007, allowing the Company to extend the operating capital. The Company
      currently expects that new financing will provide sufficient cash to fund its
      projected operations for the immediately foreseeable future and believes
      additional financing will be available if and when needed. If the Company is
      unable to achieve projected operating results and/or obtain such additional
      financing if and when needed, management will be required to curtail growth
      plans and scale back development activities. No assurances can be given that
      the
      Company will achieve increased revenues. Further, no assurances can be given
      that the Company’s current financing will be sufficient to support the Company’s
      planned level of operations. If adequate funds are not available or are not
      available at acceptable terms, the Company’s ability to finance its expansion,
      develop or enhance services or products or respond to competitive pressures
      would be significantly limited.




USE
        OF
        ESTIMATES
 
 The
        preparation of financial statements in conformity with generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect certain reported amounts of assets and liabilities and disclosures
        of
        contingent assets and liabilities at the date of the financial statements
        and
        the reported amounts of assets and liabilities, revenues and expenses during
        the
        reporting period. Accordingly, actual results could differ from those estimates.
 
 CASH
        AND
        CASH EQUIVALENTS
 
 The
        Company considers all highly liquid investments with an original maturity
        of
        three months or less when purchased to be cash equivalents.
 
 TRADE
        RECEIVABLES
 
 Trade
        receivables are recorded at net realizable value consisting of the carrying
        amount less an allowance for uncollectible accounts, as needed.
 
 The
        Company uses the allowance method to account for uncollectible trade receivable
        balances. Under the allowance method, if needed, an estimate of uncollectible
        customer balances is made based upon specific account balances that are
        considered uncollectible. Factors used to establish an allowance include
        the
        credit quality of the customer and whether the balance is significant. At
        September 30, 2006 and 2005, trade receivables


F-7
 
 CAMINOSOFT
          CORP.
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
          ENDED SEPTEMBER 30, 2006 AND 2005







had
      a net
      balance in the amount of $248,672 and $1,043,176 net of allowances of $20,000
      and $20,000, respectively.





PROPERTY
      AND EQUIPMENT





Property
      and equipment is stated at cost. Depreciation is calculated using accelerated
      methods based upon the estimated useful lives of the related assets, primarily
      three years.





SOFTWARE





Software
      capitalization is stated at cost. Amortization is computed on the straight-line
      method based upon the estimated useful life of the asset, primarily seven years.
      Statement of Financial Accounting Standards No. 86, “Accounting for the Cost of
      Computer Software to be Sold, Leased, or Otherwise Marketed”, provides for the
      capitalization of certain software development costs incurred after
      technological feasibility of the software is established. The Company
      capitalized no development costs during the years ended September 30, 2006
      and
      September 30, 2005.





DEFERRED
      FINANCING COSTS





The
      Company capitalizes costs incurred related to an equity financing until such
      time as the stock is issued, or the equity financing is abandoned or unlikely
      to
      be used by the Company. These costs include attorney’s and accountant’s fees
      directly related to the financing and the related issuance of common stock.
      During the year ended September 30, 2006, the deferred financing costs of
      $262,075 were deemed impaired and were written off. (see Note 5 - Shareholders’
Deficiency)





IMPAIRMENT
      OF LONG-LIVED ASSETS





Management
      regularly reviews long-lived assets for possible impairment. This review occurs
      annually, or more frequently if events or changes in circumstances indicate
      the
      carrying amount of the asset may not be recoverable. If there is an indication
      of impairment, management prepares an estimate of future cash flows
      (undiscounted and without interest charges) expected to result from the use
      of
      the asset and its eventual disposition. If these cash flows are less than the
      carrying amount of the asset, an impairment loss is recognized to write down
      the
      asset to its estimated fair value.





During
      the year ended September 30, 2006, the deferred financing costs of $262,075
      were
      deemed impaired and were written off. (see Note 5 - Shareholders’
Deficiency)





INCOME
      TAXES





The
      Company uses the asset and liability method of accounting for income taxes.
      Deferred income taxes are recognized based on the differences between financial
      statement and income tax valuations of assets and liabilities using applicable
      tax rates for





F-8





CAMINOSOFT
      CORP.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


YEARS
      ENDED SEPTEMBER 30, 2006 AND 2005






the
      year
      in which the differences are expected to reverse. Valuation allowances are
      established, when necessary, to reduce deferred tax asset amounts to the amount
      expected to be realized. The provision for income taxes represents the tax
      payable (or benefit) for the period and the change in deferred tax assets and
      liabilities during the year.





REVENUE
      RECOGNITION





Revenue
      is recognized when persuasive evidence of an arrangement exists, delivery has
      occurred or services have been rendered, the fee is fixed or determinable,
      and
      collectibility is probable. We enter into certain arrangements where we are
      obligated to deliver multiple products and/or services (multiple elements).
      In
      these transactions, we allocate the total revenue among the elements based
      on
      the sales price of each element when sold separately (vendor-specific objective
      evidence).





Revenue
      for products licensed to original equipment manufactures (OEM’s), and perpetual
      licenses for current products in our server based data management suite of
      products is recognized as products are shipped or electronically delivered,
      the
      fees are fixed or determinable, collection of the resulting receivable is
      probable and not other significant obligations remain undelivered. If annual
      service is a part of the sale agreement that portion of the revenue is recorded
      as unearned due to undelivered elements including, annual telephone support
      and
      the right to receive unspecified upgrades/updates of our data management
      products on a when-and-if-available basis. Unspecified upgrades, or patches,
      are
      included in our product support fee. The upgrades are delivered only on a
      when-and-if-available basis and as defined in SOP 97-2, are considered,
      Postcontract Customer Support (“PCS”). Vendor-specific objective evidence does
      exist for these services in the aggregate; however, no vendor-specific objective
      evidence exists for the unspecified upgrades on a stand-alone basis.
      When-and-if-available deliverables should be considered in determining whether
      an arrangement includes multiple elements; however, SOP 97-2 states that if
      sufficient vendor-specific objective evidence does not exist for the allocation
      of revenue to the various elements of the arrangement, and if the only
      undelivered element in an arrangement is PCS, the entire fee for the support
      should be recognized ratably. Because the timing, frequency, and significance
      of
      unspecified upgrades/updates can vary considerably, the point at which
      unspecified upgrades/updates are expected to be delivered should not be used
      to
      support income recognition on other than a straight-line basis. As such, the
      Company recognizes the product support fee consisting of PCS and unspecified
      upgrades/updates ratably over the service contract period.





Revenues
      from services are comprised of consulting and implementation services, and
      to a
      limited extent training. Services are generally charged on a time-and-materials
      or fixed fee basis and include a range of services including, installation
      of
      software, establishing software policies and limited training. Services are
      generally separable from the other elements under the arrangement since the
      performance of the services is not essential to the functionality of any other
      element of the transaction. Revenues for services are recognized as the services
      are performed.






F-9
 
 CAMINOSOFT
          CORP.
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
          ENDED SEPTEMBER 30, 2006 AND 2005


RESEARCH
      AND DEVELOPMENT





Research
      and development costs, which consist primarily of software development costs,
      are expensed as incurred and amounted to $484,043 and $473,830 for the years
      ended September 30, 2006 and 2005, respectively.





ADVERTISING





Advertising
      costs are charged to expense as incurred and such costs were $3,750 and $30,017
      for the years ended September 30, 2006 and 2005, respectively.





STOCK-BASED
      COMPENSATION





Statement
      of Financial Accounting Standards No. 123, “Accounting for Stock-Based
      Compensation” (“SFAS No. 123”), established a fair value method of accounting
      for stock-based compensation plans and for transactions in which an entity
      acquires goods or services from non-employees in exchange for equity
      instruments. SFAS No. 123 was amended by Statement of Financial Accounting
      Standards No. 148, “Accounting for Stock-Based Compensation - Transition and
      Disclosure”, which required companies to disclose in interim financial
      statements the pro forma effect on net income (loss) and net income (loss)
      per
      common share of the estimated fair market value of stock options or warrants
      issued to employees. Through December 31, 2005, the Company accounted for
      stock-based compensation utilizing the intrinsic value method prescribed in
      Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
      Employees” (“APB No. 25”), with pro forma disclosures of net income (loss) as if
      the fair value method had been applied. Accordingly, compensation cost for
      stock
      options was measured as the excess, if any, of the fair market price of the
      Company’s stock at the date of grant over the amount an employee must pay to
      acquire the stock.





As
      the
      exercise price of stock options and warrants issued to employees was not less
      than the fair market value of the Company’s common stock on the date of grant,
      and in accordance with the accounting for such options utilizing the intrinsic
      value method, there was no related compensation expense recorded in the
      Company’s prior consolidated financial statements. The fair value of stock
      options and warrants issued to officers, directors and employees at not less
      than fair market value of the Company’s common stock on the date of grant was
      estimated using the Black-Scholes option-pricing model, and the effect on the
      Company’s results of operations was shown in a footnote as if such stock options
      and warrants had been accounted for pursuant to SFAS No. 123.





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      123 (revised 2004), “Share Based Payment” (“SFAS No. 123R”), a revision to SFAS
      No. 123, “Accounting for Stock-Based Compensation”. SFAS No. 123R, superseded
      APB No. 25 and amended SFAS No. 95, “Statement of Cash Flows”. Effective January
      1, 2006, SFAS No. 123R requires that the Company measure the cost of employee
      services received in exchange for equity awards based on the grant date fair
      value of the





F-10
 
 CAMINOSOFT
          CORP.
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
          ENDED SEPTEMBER 30, 2006 AND 2005


awards,
      with the cost to be recognized as compensation expense in the Company’s
      financial statements over the vesting period of the awards.





Accordingly,
      the Company will recognize compensation cost for equity-based compensation
      for
      all new or modified grants issued after December 31, 2005. In addition,
      commencing January 1, 2006, the Company is required to recognize the unvested
      portion of the grant date fair value of awards issued prior to adoption of
      SFAS
      No. 123R based on the fair values previously calculated for disclosure purposes
      over the remaining vesting period of the outstanding stock options and
      warrants.





The
      Company adopted SFAS No. 123R effective January 1, 2006, and is using the
      modified prospective method in which compensation cost is recognized beginning
      with the effective date (a) based on the requirements of SFAS No. 123R for
      all
      share-based payments granted after the effective date and (b) based on the
      requirements of SFAS No. 123R for all awards granted to employees prior to
      the
      effective date of SFAS No. 123R that remain unvested on the effective
      date.





Prior
      to
      the adoption of SFAS 123R, all stock options and warrants issued to employees
      and others had an exercise price not less than the fair market value of the
      Company’s common stock on the date of the grant, and in accordance with
      accounting for such options utilizing the intrinsic value method there was
      no
      related compensation expense recorded in the Company’s financial statements. Had
      compensation cost for the stock-based compensation been determined based on
      the
      fair value of the grant dates consistent with the method of SFAS 123, the
      Company’s net loss and loss per share for the years ended September 30, 2005
      would have been increased to the pro forma amount presented.





2005Net
                  loss, as reported
              
              $
              (770,409
              )Add:
                  Stock-based employee compensationincluded
                  in reported net loss
              
              
              --Deduct:
                  Total stock-basedemployee
                  compensation expense determinedunder
                  the fair value based method for all awards
              
              
              (180,650
              )Net
                  loss, pro forma
              
              $
              (951,059
              )Basic
                  and diluted net loss per common share,As
                  reported
              
              $
              (.06
              )Pro
                  forma
              
              $
              (.07
              )
 
 F-11


CAMINOSOFT
        CORP.
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
        ENDED SEPTEMBER 30, 2006 AND 2005


The
      fair
      value of option grants is estimated on the date of grant utilizing the
      Black-Scholes option-pricing model with the following weighted average
      assumptions for grants in 2006, expected life of options were between 3 years
      and 5 years, expected volatility ranged from 81.5% to 102.5%, respectively,
      risk-free interest rate of 4.32% to 4.88% and a 0% dividend yield.





CONSOLIDATION





The
      accompanying consolidated financial statements include the accounts of the
      Company and its wholly owned subsidiary. Intercompany balances and transactions
      have been eliminated in consolidation.





FAIR
      VALUE OF FINANCIAL INSTRUMENTS





Statement
      of Financial Accounting Standards No. 107, “Disclosures About Fair Value of
      Financial Instruments,” requires disclosure of the fair value of certain
      financial instruments. Cash and cash equivalents, accounts receivable,
      accounts payable, accrued liabilities and deferred revenues as reflected in
      the
      financial statements approximate fair value because of the short-term maturity
      of these instruments. The estimated fair value of notes payable is based on
      borrowing rates currently available to the Company for loans with similar terms
      and maturities.





CONCENTRATIONS





The
      Company’s cash balances on deposit with banks are guaranteed by the Federal
      Deposit Insurance Corporation up to $100,000. The Company may be exposed to
      risk
      for the amount of funds held in one bank in excess of the insurance limit.
      In
      assessing the risk, the Company’s policy is to maintain cash balances with high
      quality financial institutions. The Company had cash balances in excess of
      the
      $100,000 guarantee as of and during the year ended September 30,
      2006.





During
      the years ending September 30, 2006 and 2005, the Company had one and two major
      customers respectively, whose revenue volume comprised approximately 11% and
      58%, respectively, of the Company’s total revenue. As of September 30, 2006 and
      2005 the amounts due from these customers was $75,090 and $53,340, respectively.




EARNINGS
      (LOSS) PER SHARE





The
      Company computes earnings (loss) per common share under Statement of Financial
      Accounting Standards No. 128, “Earnings per Share” (SFAS No. 128), which
      requires presentation of Basic and Diluted earnings (loss) per share. Basic
      earnings (loss) per share is computed by dividing income (loss) available to
      common shareholders by the weighted average number of common shares outstanding
      for the period. Diluted earnings per share reflects the potential dilution
      of
      securities that could share in the earnings of an entity, such as stock options,
      warrants or convertible debentures, unless antidilutive.





F-12


CAMINOSOFT
        CORP.
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
        ENDED SEPTEMBER 30, 2006 AND 2005


At
      September 30, 2006 and 2005, options, warrants and convertible debentures to
      purchase 12,995,189 and 12,369,939 shares, respectively, were outstanding,
      but
      were not included in the computation of diluted loss per common share as the
      effect would be antidilutive.





REPORTING
      SEGMENT





Statement
      of Financial Accounting Standards No. 131, “Disclosures about Segments of an
      Enterprise and Related Information,” (“SFAS No. 131”) requires certain
      disclosures of operating segments, as defined in SFAS No. 131. Management has
      determined that the Company has only one operating segment and therefore is
      not
      required to disclose operating segment information. The Company does not account
      for the net sales of its various products separately, and the disclosure
      required by SFAS No. 131 of product revenue is not presented because it would
      be
      impracticable to do so.





COMPREHENSIVE
      INCOME





A
      statement of comprehensive income is not presented in our financial statements
      since we do not have any of the items of other comprehensive income in any
      period presented.





RECENT
      ACCOUNTING PRONOUNCEMENTS




In
      July
      2006, the FASB issued interpretation No. 48 (“FIN 48”), “Accounting for
      Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in
      income taxes recognized in the financial statements in accordance with FASB
      Statement No. 109, “Accounting for Income Taxes.” FIN 48 provides guidance on
      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, disclosures, and transition. FIN 48 is effective for fiscal years
      beginning after December 15, 2006. Accordingly, FIN 48 will be adopted
      commencing in the first quarter of the Company’s fiscal year 2008.





F-13
 
 CAMINOSOFT
          CORP.
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
          ENDED SEPTEMBER 30, 2006 AND 2005


In
      September 2006, the Financial Accounting Standards Board issued Statement No.
      157 (“SFAS No. 157”), “Fair Value Measurements.” SFAS No. 157 establishes a
      formal framework for measuring fair value under GAAP. It defines and codifies
      the many definitions of fair value included among various other authoritative
      literature, clarifies and, in some instances, expands on the guidance for
      implementing fair value measurements, and increases the level of disclosure
      required for fair value measurements. Although SFAS No. 157 applies to and
      amends the provisions of existing FASB and AICPA pronouncements, it does not,
      of
      itself, require any new fair value measurements, nor does it establish valuation
      standards. SFAS No. 157 applies to all other accounting pronouncements requiring
      or permitting fair value measurements, except for SFAS No. 123 (R), share-based
      payment and related pronouncements, the practicability exceptions to fair value
      determinations allowed by various other authoritative pronouncements, and AICPA
      Statements of Position 97-2 and 98-9 that deal with software revenue
      recognition. This statement is effective for financial statements issued for
      fiscal years beginning after November 15, 2007, and interim periods within
      those
      fiscal years.





In
      September 2006, the Financial Accounting Standards Board issued Statement No.
      158 (“SFAS No. 158”), “Accounting for Defined Benefit Pension and Other
      Postretirement Plans.” SFAS No. 158 requires that for public companies the full
      funding status of defined benefit pension and other postretirement plans be
      recognized on the balance sheet as an asset (for overfunded plans) or as a
      liability (for underfunded plans). In addition, SFAS No. 158 calls for
      recognition in other comprehensive income or gains or losses any prior service
      costs or credits that are not yet included as components of periodic benefit
      expense. Finally, SFAS No. 158 requires that the measurement of defined benefit
      plan assets and obligations be as of the balance sheet date. The Company plans
      to adopt the recognition provisions of SFAS No. 158 as of the end of the fiscal
      year end after December 15, 2006 and the measurement date provisions as of
      the
      balance sheet date for fiscal years ending after December 15, 2008.





The
      Company does not believe that the adoption of the above recent pronouncements
      will have a material effect on the Company’s consolidated financial position or
      results of operations.




NOTE
      2 -
      PROPERTY AND EQUIPMENT





Property
      and equipment consists of the following:





September
              30,2006
            
            2005Furniture
                and fixtures
            
            $
            13,084
            
            $
            13,084Test
                and training equipment
            
            
            76,828
            
            
            73,74189,912
            
            
            86,825Less
                accumulated depreciation
            
            
            (71,608
            )
            
            (50,678
            )$
            18,304
            
            $
            36,147


F-14




CAMINOSOFT
          CORP.
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
          ENDED SEPTEMBER 30, 2006 AND 2005





Depreciation
      expense was $20,930 and $18,948 for the years ending September 30, 2006 and
      2005, respectively.





NOTE
      3 -
      SOFTWARE





On
      September 17 1999, the Company acquired the assets (the “Camino Assets”) of
      Camino Software Systems, Inc. (“Camino”) for 468,000 shares of the Company’s
      common stock valued at $187,200 and assumed $315,172 of certain Camino
      liabilities. The Camino Assets consisted of the name, Camino Software Systems,
      Inc., the data storage management software, certain business contracts and
      intangible personal property. The Company has allocated the amounts paid and
      assumed in the amount of $502,372 to the fair value of the software acquired.
      The software is being amortized on a straight line basis over seven years.
      Net
      book value of the original purchased software at September 30, 2006 and 2005
      is
      $0 and $71,745, respectively.





During
      the years ended September 30, 2006 and 2005 there was no development cost
      capitalized. The net book value for software at September 30, 2006 and 2005
      is
      $112,164 and $230,349, respectively, which includes the original software
      purchase of the Camino Assets plus additional capitalization prior to fiscal
      year 2003.





September
                30,2006
              
              2005Software
              
              $
              827,390
              
              $
              827,390Less
                  accumulated amortization
              
              
              (715,226
              )
              
              (597,041
              )$
              112,164
              
              $
              230,349


Amortization
      expense was $118,185 and $118,212 for the years ending September 30, 2006 and
      2005, respectively.








NOTE
      4 -
      NOTES PAYABLE







In
      December 2002, the Company issued a 6% unsecured convertible debenture for
      $1,000,000. Interest of 6% per annum will be paid in monthly installments for
      three years based on the unpaid principal balance. The full $1,000,000 was
      borrowed during







F-15


CAMINOSOFT
          CORP.
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
          ENDED SEPTEMBER 30, 2006 AND 2005


the
      year
      ended September 30, 2003 and was outstanding as of September 30, 2006 and 2005.
      The debenture matured on November 27, 2005, at which time the unpaid principal
      amount and all accrued and unpaid interest would have become due and payable
      in
      full. The debenture is convertible, at the option of the holder, into shares
      of
      the Company’s common stock, with a conversion price of $0.62 per share. As part
      of the funding during fiscal year ended September 30, 2003, the Company issued
      5
      year warrants to the lender to purchase 500,000 shares of the Company’s common
      stock. The warrants were valued at $176,224 and recorded as debt discount,
      and
      are being amortized over the life of the loan. During the years ended September
      30, 2006 and 2005, $14,685 and $58,741, respectively, of discount was amortized
      and included in the statement of operations.





During
      July 2003, the Company issued another 6% unsecured convertible debenture for
      up
      to $750,000. Interest at a rate of 6% per annum is payable in monthly
      installments for 26 months based on the unpaid principal balance. The debenture
      matured on November 27, 2005, at which time the unpaid principal amount and
      all
      accrued and unpaid interest would have become due and payable in full. The
      debenture is convertible, at the option of the holder, into shares of the
      Company’s common stock, with a conversion price of $0.41 per share. At September
      30, 2006, the Company had borrowed $750,000, the entire amount
      available.





Pursuant
      to a Renewal and Modification agreement dated October 28, 2005, the Company
      negotiated an extension of the two convertible debentures referenced above
      with
      a total principal balance of $1,750,000. The lender agreed to extend the
      maturity date of the two 6% Convertible Debentures dated November 27, 2002
      in
      the aggregate principal amount of $1,750,000 to May 27, 2007. In consideration
      of such extension, the Company granted the lender a five-year warrant to
      purchase 175,000 shares of the Company’s common stock at an exercise price of
      $1.14 per share (subject to adjustment). The estimated value of the warrant
      of
      $166,093 was recorded on the Company’s financial statements as debt discount and
      is being amortized over the term of the extension. During the year ended
      September 30, 2006, $92,274 of discount was amortized and included in the
      statement of operations.




During
      July 2004, the Company received $750,000 from a two year secured loan from
      Renaissance Capital Group managed funds. Interest is paid at 7% in monthly
      installments based on the outstanding principal balance. As part of the funding,
      the Company issued five-year warrants to purchase an aggregate of 1,415,094
      shares of common stock at an exercise price of $0.53 per share. The estimated
      value of the warrants of $311,953 was recorded on the Company’s financial
      statements as debt discount and is being amortized over the life of the loan.
      During the years ended September 30, 2006 and 2005, $92,168 and $155,977,
      respectively, of discount was amortized and included in the statement of
      operations.





During
      February 2006, the Company issued to the Renaissance Capital Group managed
      funds
      an aggregate of 150,000 warrants to purchase the Company’s common stock at





F-16
 
 CAMINOSOFT
            CORP.
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
            ENDED SEPTEMBER 30, 2006 AND 2005


$0.86
      per
      share in consideration of an agreement to extend the $750,000 loan payable
      maturity date for an additional 18 months. The new maturity date for the notes
      is January 19, 2008. The Company will continue to pay 7% interest on a monthly
      basis based on the current outstanding principal balance of $750,000. The
      estimated value of the warrants of $77,663 was recorded on the Company’s
      financial statements as debt discount and is being amortized over the term
      of
      the extension. During the year ended September 30, 2006, $21,181 of discount
      was
      amortized and included in the statement of operations.








Annual
      principal payments for fiscal years 2006 and 2007 are as follows:





Year
                  ending September 30,
              
              
              Principal
              
              
              Debt
                  Discount
              
              
              Net2007
              
              $
              1,750,000
              
              
              144,540
              
              $
              1,605,4602008
              
              
              750,000
              
              
              23,574
              
              
              726,426Total
              
              $
              2,500,000
              
              
              168,114
              
              $
              $2,331,886


NOTE
      5 -
      SHAREHOLDER’S DEFICIENCY





During
      September 2004, the Company issued 340,136 shares of stock as commitment shares
      as part of an equity financing. The commitment shares are part of a common
      stock
      purchase agreement which will allow the Company to draw up to $6,000,000 through
      daily sales of the Common Stock. The Company has agreed to register 3,680,272
      shares which include the commitment shares to sell during a 30 month period.
      The
      fair value of the issued shares was $187,075, based upon the fair value of
      the
      common stock at the date of issuance. The fair value of the shares issued in
      September 2004, and $75,000 of legal and professional fees incurred in fiscal
      2005 relating the registration, were recorded as deferred financing costs on
      the
      Company’s financial statements. During the current fiscal year the deferred
      financing balance of $262,075 was written off to other expense because the
      Company determined it was unlikely the equity line would be drawn on and
      therefore the costs were impaired. The minimum floor market price of the
      Company’s common stock per the agreement is $0.25 per share, and currently the
      market price for the Company’s common stock is below this minimum.





During
      the year ended September 30, 2005, the Company issued 4,762 shares of restricted
      common stock for legal services rendered. The fair value of the issued shares
      was $2,000, and this amount was recorded as legal expense on the Company’s
      financial statements. During the year ended September 30, 2005, the Company
      issued 85,370 shares of restricted common stock to the named executives as
      bonus
      compensation. The fair value of the issued shares was $35,100, and this amount
      was recorded as compensation expense on the Company’s financial
      statements.





F-17


CAMINOSOFT
          CORP.
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
          ENDED SEPTEMBER 30, 2006 AND 2005




During
      June of 2006, the Company issued 10,000 shares of restricted common stock for
      invester relations services rendered. The fair value of the issued shares was
      $4,300; this amount was recorded as investor relations expense on the Company’s
      financial statements.





On
      February 21, 2006, the Company issued to BFS US Special Opportunities Trust
      PLC
      and Renaissance US Growth & Income Trust PLC an aggregate of 697,674 shares
      of common stock at a price of $0.86 per share in a private placement for
      $600,000. The stock purchase also included a registration rights agreement
      requiring the Company to file a registration statement within 180 days of the
      closing of the purchase agreement. The registration rights agreement included
      certain penalties payable in shares of stock if the Company did not file within
      the 180 day period. The Company and the purchasers agreed to amend the
      registration rights agreement to remove the penalty clause from the registration
      rights agreement. The Company has agreed to register the resale of its shares
      as
      soon as practicable.








STOCK
      OPTIONS AND WARRANTS





During
      the year ended September 30, 2006, the Company issued 655,000 options to
      purchase the Company’s common stock at prices ranging from $0.62 to $1.14 to
      employees, directors and others under the year 2000 employee stock option plan.
      The aggregate value of the options vesting from January 1, 2006 to September
      30,
      2006 was $133,575 and has been reflected as compensation cost. As of September
      30, 2006, the aggregate value of unvested options was $740,822, which will
      be
      amortized as compensation cost as the options vest. During the year ended
      September 30, 2006, the Company also granted 325,000 warrants in relation to
      the
      extension of debt. (See note 4) The Company granted no options or warrants
      during the fiscal year ended September 30, 2005.





The
      Company has 6,000,000 shares approved for issuance as part of the employee
      stock
      option plan of which approximately 1,096,000 shares remain available for option
      grant under the plan. Upon exercise and payment of a vested option the Company
      would issue the shares for exercise of the option. Each option grant has an
      individual letter agreement outlining terms of the plan, option and exercise
      instructions and option termination conditions. The plan was approved by
      shareholders and is governed by the board of directors and compensation
      committee of the Company.





The
      option summary and changes during the year are presented below:




F-18


CAMINOSOFT
            CORP.
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
            ENDED SEPTEMBER 30, 2006 AND 2005


WeightedAverageNumber
                  of
              
              Exercise
              
              IntrinsicShares
              
              Price
              
              ValueOptions
                  outstandingAt
                  October 1, 2004
              
              
              4,984,000
              
              $
              1.07Options
                  granted
              
              
              --
              
              
              --Options
                  expired
              
              
              (380,750
              )
              
              1.10Options
                  outstandingAt
                  September 30, 2005
              
              
              4,603,250
              
              
              1.06Options
                  granted
              
              
              655,000
              
              
              1.04Options
                  expired
              
              
              (354,750
              )
              
              0.56Options
                  outstandingAt
                  September 30, 2006
              
              
              4,903,500
              
              $
              1.10Options
                  exercisableAt
                  September 30, 2006
              
              
              3,467,000
              
              $
              1.21
              
              $
              0.27Options
                  exercisableAt
                  September 30, 2005
              
              
              3,359,500
              
              $
              1.23
              
              $
              0.27


Options
      outstanding




The
      following table summarizes information about employee’s stock options
      outstanding at September 30, 2006.


Outstanding
              
              
              
              
              
              ExercisableWeighted
                  Average
              
              
              
              
              
              
              
              
              Weighted
                  AverageExercise
              
              
              
              
              
              Life
              
              
              Exercise
              
              
              
              
              
              ExercisePrice
              
              
              Options
              
              
              (Months)
              
              
              Price
              
              
              Options
              
              
              Price$0.41
              
              
              438,000
              
              
              39
              
              $
              0.41
              
              
              389,000
              
              $
              0.410.44
              
              
              388,000
              
              
              39
              
              
              0.44
              
              
              371,000
              
              
              0.440.52
              
              
              85,000
              
              
              39
              
              
              0.52
              
              
              85,000
              
              
              0.520.55
              
              
              302,000
              
              
              39
              
              
              0.55
              
              
              301,000
              
              
              0.550.56
              
              
              146,000
              
              
              39
              
              
              0.56
              
              
              146,000
              
              
              0.560.61
              
              
              305,000
              
              
              39
              
              
              0.61
              
              
              305,000
              
              
              0.610.62
              
              
              70,000
              
              
              43
              
              
              0.62
              
              
              ----
              
              
              0.620.63
              
              
              1,400,000
              
              
              39
              
              
              0.63
              
              
              700,000
              
              
              0.630.87
              
              
              2,000
              
              
              51
              
              
              0.87
              
              
              ----
              
              
              0.870.90
              
              
              70,000
              
              
              39
              
              
              0.90
              
              
              52,500
              
              
              0.900.95
              
              
              259,000
              
              
              39
              
              
              0.95
              
              
              259,000
              
              
              0.951.01
              
              
              205,000
              
              
              51
              
              
              1.01
              
              
              ----
              
              
              1.011.14
              
              
              375,000
              
              
              39
              
              
              1.14
              
              
              ----
              
              
              1.141.25
              
              
              25,000
              
              
              39
              
              
              1.25
              
              
              25,000
              
              
              1.251.30
              
              
              15,000
              
              
              39
              
              
              1.30
              
              
              15,000
              
              
              1.301.55
              
              
              300,000
              
              
              39
              
              
              1.55
              
              
              300,000
              
              
              1.553.38
              
              
              2,000
              
              
              39
              
              
              3.38
              
              
              2,000
              
              
              3.383.56
              
              
              52,000
              
              
              39
              
              
              3.56
              
              
              52,000
              
              
              3.563.87
              
              
              314,500
              
              
              39
              
              
              3.87
              
              
              314,500
              
              
              3.875.00
              
              
              150,000
              
              
              39
              
              
              5.00
              
              
              150,000
              
              
              5.
                  00$0.41-$5.00
              
              
              4,903,500
              
              
              
              
              $
              1.10
              
              
              3,467,000
              
              $
              1.21





F-19


CAMINOSOFT
              CORP.
 NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
              ENDED SEPTEMBER 30, 2006 AND 2005


The
      warrant summary and changes during the year are presented below:






WeightedAverageNumber
                  of
              
              
              ExerciseShares
              
              
              PriceWarrants
                outstandingAt
                  October 1, 2004
              
              
              5,305,337
              
              $
              0.84Warrants
                  granted
              
              
              --
              
              
              --Warrants
                  expired
              
              
              (627,000
              )
              
              1.09Warrants
                  outstandingAt
                  September 30, 2005
              
              
              4,678,337
              
              
              0.80Warrants
                  granted
              
              
              325,000
              
              
              1.01Warrants
                  expired
              
              
              --
              
              
              --Warrants
                  outstandingAt
                  September 30, 2006
              
              
              5,003,337
              
              $
              0.82Warrants
                  exercisableAt
                  September 30, 2006
              
              
              5,003,337
              
              $
              0.82Warrants
                  exercisableAt
                  September 30, 2005
              
              
              4,678,337
              
              $
              0.80




The
      following table summarizes information about warrants outstanding at September
      30, 2006.







Outstanding
                  and ExercisableWeighted
                  AverageExercise
              
              
              
              
              
              Life
              
              
              ExercisePrice
              
              
              Warrants
              
              
              (Months)
              
              
              Price0.51
              
              
              20,000
              
              
              9
              
              $
              0.510.53
              
              
              1,415,094
              
              
              34
              
              
              0.530.74
              
              
              1,621,623
              
              
              27
              
              
              0.740.86
              
              
              150,000
              
              
              53
              
              
              0.861.11
              
              
              1,621,620
              
              
              27
              
              
              1.111.14
              
              
              175,000
              
              
              49
              
              
              1.14$0.51
                  - $1.14
              
              
              5,003,337
              
              
              
              
              $
              0.82




NOTE
      6 -
      RELATED PARTY TRANSACTION





During
      the fiscal year ended September 30, 2003, the Company signed a consulting
      agreement with Mr. Walter Kornbluh (director), to provide consulting services
      to
      the Company reporting to the Chairman of the Board of Directors and the Chief
      Executive Officer. The contract is for two years beginning August 1, 2003,
      at a
      rate of $2,500 per month. During the fiscal years ended September 30, 2005
      and
      2006, the Company paid Mr. Kornbluh $29,450 and $0 in consulting fees,
      respectively.





During
      the fiscal years ended September 30, 2005 and 2006, the Company paid Mr. Steven
      Spector, Chairman of the Board consulting fees of $19,250 and $0 for services
      rendered during the fiscal year, respectively.





NOTE
      7 -
      COMMITMENTS AND CONTINGENCIES





OPERATING
      LEASES





F-20
 
 CAMINOSOFT
                CORP.
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
                ENDED SEPTEMBER 30, 2006 AND 2005


The
      Company leases its facilities under noncancelable operating leases expiring
      at
      various dates through 2008. Future minimum rental payments required under
      noncancelable operating leases at September 30, 2006 are as
      follows:





Year
                  Ending September 30,
              
              Amount2007
              
              
              122,8352008
              
              
              41,347$
              164,182




Total
      rent expense for the years ended September 30, 2006 and 2005 amounted to
      $129,142 and $163,667, respectively.








EMPLOYMENT
      CONTRACTS





During
      the fiscal year ended September 30, 2003, the Company signed a two year
      employment agreement with Mr. Stephen Crosson to be the Chief Executive Officer
      of the Company reporting to the Chairman of the Board of Directors. The contract
      is for two years beginning August 1, 2003, with an annual salary of $150,000
      per
      year and the possibility of bonuses at the discretion of the Board of Directors.
      The agreement was amended on April 19, 2004. Mr. Crosson will receive $12,500
      per month for an indeterminate period of time and will receive a bonus fee
      of 1%
      of any acquisition price or licensing fee over $1,000,000 paid to the Company.
      If Mr. Crosson is terminated without cause he will receive salary and benefits
      for up to 6 months after termination.





During
      the Fiscal year ended September 30, 2004, the Company entered into an at will
      employment agreement with Michael Skelton (C.E.O. & Director). Mr. Skelton
      will receive $14,000 per month salary for an indeterminate period of time.
      The
      contract may be terminated by the Company or Mr. Skelton at any time. If Mr.
      Skelton is terminated without cause he will receive salary and benefits for
      up
      to 6 months after termination. During the fiscal year ended September 30, 2005,
      the Company reimbursed Mr. Skelton $24,000 for apartment rental expense. The
      rental expense reimbursement expired during October 2005.





LITIGATION





The
      Company may, from time to time, be involved in legal proceedings, claims and
      litigation arising in the ordinary course of business. It is possible the
      outcome of such legal proceedings, claims and litigation could have a material
      effect on the operating results or cash flows when resolved in a future period.
      These matters are not expected to have a material adverse effect upon the
      Company’s financial statements.





F-21


CAMINOSOFT
              CORP.
 NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
              ENDED SEPTEMBER 30, 2006 AND 2005




NOTE
      8 -
      INCOME TAXES





The
      Company’s net deferred tax assets (using a federal corporate income rate of 34%)
      consist of the following at September 30, 2006 and 2005:




2006
            
            
            2005Benefit
                of operating loss carryforward
            
            $
            7,400,000
            
            $
            6,500,000Valuation
                allowance
            
            
            (7,400,000
            )
            
            (6,500,000)
            )Net
                deferred tax asset
            
            $
            -
            
            $
            -







The
      effective tax rate on loss before income taxes differed from the federal
      statutory tax rate. The following summary reconciles income taxes at the federal
      statutory tax rate with the actual taxes and the effective tax
      rate:




September
                  30,2006
              
              2005Federal
                  statutory tax rate
              
              
              (34
              %)
              
              (34
              %)State
                  tax, net of federal benefit
              
              
              (5
              %)
              
              (5
              %)Permanent
                  differences
              
              
              (1
              %)
              
              (1
              %)40
              %
              
              40
              %Change
                  in valuation allowance
              
              
              40
              %
              
              40
              %Effective
                  tax rate
              
              
              -
              %
              
              -
              %


At
      September 30, 2006, the Company has available net operating loss carry-forwards
      of approximately $19,000,000 for federal income tax purposes which expire in
      varying amounts through 2026. The Company’s ability to utilize NOL
      carry-forwards may be limited in the event that a change in ownership, as
      defined in the Internal Revenue Code, has or does occur in the future.





Deferred
      tax assets, before valuation allowance, as of September 30, 2006 were
      approximately $7,400,000 and primarily arise from the Company’s net operating
      loss carry forwards. A valuation allowance of approximately $7,400,000 was
      provided because management believes that the deferred tax assets are more
      likely than not to be unrealized.




F-22