----

----

| xQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|------------------------------------------------------------------------------------|

| oTRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|-------------------------------------------------------------------------------------|

| Nevada                                         | 000-52296                | 20-2414965                           |
|------------------------------------------------|--------------------------|--------------------------------------|
| (State or other jurisdiction of incorporation) | (Commission File Number) | (I.R.S. Employer Identification No.) |

| 3500 Carillon PointKirkland, WA 98033               |
|-----------------------------------------------------|
| (Address of principal executive offices) (Zip Code) |

----

| Part I.  | Financial Information                                                                                                                                                                |                                                           |
|---------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------|
|          |                                                                                                                                                                                 |                                                           |
| Item 1.       | Financial Statements                                                                                                                                                                 |                                                           |
|          |                                                                                                                                                                                 |                                                           |
|          | Condensed Consolidated Balance Sheets as of June 30, 2010 (unaudited) and December 31, 2009                                                                                     |         3              |
|          |                                                                                                                                                                                 |                                                           |
|          | Unaudited Condensed Consolidated Statements of Operations for the three andsix months ended June 30, 2010 and 2009 and the period from December 7, 2005 (inception) to June 30, 2010 |       4                          |
|          |                                                                                                                                                                                 |                                                           |
|          | Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficit)for the period from December 7, 2005 (inception) to June  30, 2010            |          5        |
|          |                                                                                                                                                                                 |                                                           |
|          | Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009 and the period from December 7, 2005 (inception) to June 30, 2010          |          6        |
|          |                                                                                                                                                                                 |                                                           |
|          | Notes to Unaudited Condensed Consolidated Financial Statements                                                                                                                       |          7        |
|          |                                                                                                                                                                                 |                                                           |
| Item 2.       | Management’s Discussion and Analysis of Financial Condition and Results of Operations                                                                                          | 14                                                             |
|          |                                                                                                                                                                                 |                                                           |
| Item 3.       | Quantitative and Qualitative Disclosures About Market Risk                                                                                                                           |          24       |
|          |                                                                                                                                                                                 |                                                           |
| Item 4.       | Controls and Procedures                                                                                                                                                              |          24       |
|          |                                                                                                                                                                                 |                                                           |
| Part II. | Other Information                                                                                                                                                                    |                                                           |
|          |                                                                                                                                                                                 |                                                           |
| Item 1.       |  Legal Proceedings                                                                                                                                                              |          25       |
|          |                                                                                                                                                                                 |                                                           |
| Item 1A.      |  Risk Factors                                                                                                                                                                   |          25       |
|          |                                                                                                                                                                                 |                                                           |
| Item 2.       | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                                          |          25       |
|          |                                                                                                                                                                                 |                                                           |
| Item 3.       | Defaults Upon Senior Securities                                                                                                                                                      |          25       |
|          |                                                                                                                                                                                 |                                                           |
| Item 4.       | (Removed and Reserved)                                                                                                                                                               | 25                                                             |
|          |                                                                                                                                                                                 |                                                           |
| Item 5.       | Other Information                                                                                                                                                                    |           25 |
|          |                                                                                                                                                                                 |                                                           |
| Item 6.       | Exhibits                                                                                                                                                                             |          262      |

----

|                                                               |   | June 30,    |        |   | December 31, |   |
|--------------------------------------------------------------------|--------|-------------|-------------|--------|--------------|--------|
|                                                               |   | 2010        |        |   | 2009         |   |
|                                                               |   | (Unaudited) |        |   |         |   |
| Assets                                                             |   |        |        |   |         |   |
| Current                                                            |   |        |        |   |         |   |
| Cash                                                               |   |        |        |   |         |   |
|      Cash and due from bank               |   | $           | -           |   |         | $      | 32,977 |   |
| Restricted cash                                                    |   |        | 2,240       |   |         |   | 619,104 |   |
|                                                               |   |        | 2,240       |   |         |   | 652,081 |   |
| Loan receivable from employees                                     |   |        | 18,786      |   |         |   | 19,029 |   |
| Subscription receivable                                            |   |        | 57,000      |   |         |   | 15,825 |   |
| Prepaid expenses and other current assets                          |   |        | 108,684     |   |         |   | 71,457 |   |
| Total Current Assets                                               |   |        | 186,710     |   |         |   | 758,392 |   |
|                                                               |   |        |        |   |         |   |   |   |
| Property and equipment,net                                         |   |        | 391,621     |   |         |   | 482,995 |   |
| Intellectual Property                                              |   |        | 10          |   |         |   | 10 |   |
|                                                               |   |        |        |   |         |   |   |   |
| Total Assets                                                       |   | $           | 578,341     |   |         | $      | 1,241,397 |   |
|                                                               |   |        |        |   |         |   |   |   |
| Liabilities and Shareholders' Deficit                              |   |        |        |   |         |   |   |   |
|                                                               |   |        |        |   |         |   |   |   |
| Current                                                            |   |        |        |   |         |   |   |   |
| Bank indebtedness                                                  |   | $           | 47,345      |   |         | $      | - |   |
| Accounts payable and accrued liabilities                           |   |        | 5,628,407   |   |         |   | 4,161,061 |   |
| Notes payable to Shareholders                                      |   |        | 4,242,487   |   |         |   | 3,923,262 |   |
|                                                               |   |        |        |   |         |   |   |   |
| Deferred lease obligation                                          |   |        | 89,268      |   |         |   | 100,740 |   |
| Current portion of equipment loan                                  |   |        | 5,718       |   |         |   | 5,740 |   |
| Total Current Liabilities                                          |   |        | 10,013,225  |   |         |   | 8,190,803 |   |
|                                                               |   |        |        |   |         |   |   |   |
| Loan payable for equipment, net of current portion                 |   |        | -           |   |         |   | 1,842 |   |
| Deferred revenue                                                   |   |        | 1,000,000   |   |         |   | 1,000,000 |   |
| Loans payable to controlling shareholder for Intellectual Property |   |        | 1,010,178   |   |         |   | 990,727 |   |
|                                                               |   |        |        |   |         |   |   |   |
| Total Liabilities                                                  |   |        | 12,023,403  |   |         |   | 10,183,372 |   |
|                                                               |   |        |        |   |         |   |   |   |
| Shareholders' Deficit                                              |   |        |        |   |         |   |   |   |
| Preferred Shares (Authorized 20,000,000 with 2,400,000             |   |        |        |   |         |   |   |   |
| designated as Series B, Issued: 2,329,905 Series B)                |   |        | 2,330       |   |         |   | 2,330 |   |
| Common shares - (Authorized: 300,000,000                           |   |        |        |   |         |   |   |   |
| Issued June 30 2010: 141,082,440 and 2009: 84.964,793 )            |   |        | 141,082     |   |         |   | 84,965 |   |
| Liquidation Preference (note 9)                                    |   |        | -           |   |         |   | - |   |
| Additional paid-in capital                                         |   |        | 53,680,542  |   |         |   | 52,311,583 |   |
| Deficit accumulated during the development stage                   |   |        | (65,269,016 | )      |         |   | (61,340,853 | ) |
|                                                               |   |        |        |   |         |   |   |   |
| Total Shareholders' Deficit                                        |   |        | (11,445,062 | )      |         |   | (8,941,975 | ) |
| Total Liabilities and Shareholders' Deficit                        |   | $           | 578,341     |   |         | $      | 1,241,397 |   |

----

|                             |   | Three months ended June 30, 2010 |        |   | Three months ended June 30, 2009 |   |        | Six months ended June 30, 2010 |   |   | Six months ended June 30, 2009 |   |   | For the period from December 7, 2005 (inception) to June 30, 2010 |        |
|----------------------------------|--------|---------------------------------------|-------------|--------|---------------------------------------|--------|-------------|--------------------------------|--------|--------|--------------------------------|--------|--------|-------------------------------------------------------------------|-------------|
|                             |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |
|                             |   | (Unaudited)                           |        |   | (Unaudited)                           |   |        | (Unaudited)                    |   |   | (Unaudited)                    |   |   | (Unaudited)                                                       |        |
| Operating expenses               |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |
|                             |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |
| Salaries and benefits            |   | $                                     | (648,416    | )      |                                  | $      | (1,135,492  | )                              |   | $      | (1,276,798                     | )      |   | $                                                                 | (2,669,616  | ) |   | $ | (16,051,554 | ) |
| Outside Services                 |   |                                  | (822,625    | )      |                                  |   | (778,053    | )                              |   |   | (1,517,570                     | )      |   |                                                              | (1,444,558  | ) |   |   | (10,541,055 | ) |
| Travel, meals and entertainment  |   |                                  | (62,246     | )      |                                  |   | (38,962     | )                              |   |   | (113,554                       | )      |   |                                                              | (172,716    | ) |   |   | (2,606,121 | ) |
| Office and general expense       |   |                                  | (256,644    | )      |                                  |   | (300,299    | )                              |   |   | (506,889                       | )      |   |                                                              | (644,884    | ) |   |   | (4,476,508 | ) |
|                             |   | $                                     | (1,789,931  | )      |                                  | $      | (2,252,806  | )                              |   | $      | (3,414,811                     | )      |   | $                                                                 | (4,931,774  | ) |   | $ | (33,675,238 | ) |
|                             |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| Other expenses                   |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| Depreciation and amortization    |   |                                  | (48,243     | )      |                                  |   | (73,929     | )                              |   |   | (93,198                        | )      |   |                                                              | (155,270    | ) |   |   | (1,011,954 | ) |
| Stock Based Compensation         |   |                                  | (92,504     | )      |                                  |   | (1,622,900  | )                              |   |   | (284,806                       | )      |   |                                                              | (2,033,205  | ) |   |   | (27,305,552 | ) |
|                             |   | $                                     | (140,747    | )      |                                  | $      | (1,696,829  | )                              |   | $      | (378,004                       | )      |   | $                                                                 | (2,188,475  | ) |   | $ | (28,317,506 | ) |
|                             |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| Loss from operations             |   | $                                     | (1,930,678  | )      |                                  | $      | (3,949,635  | )                              |   | $      | (3,792,815                     | )      |   | $                                                                 | (7,120,249  | ) |   | $ | (65,785,559 | ) |
|                             |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| Other income (expenses)          |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| Interest (expense)               |   |                                  | (68,304     | )      |                                  |   | (1,018,545  | )                              |   |   | (156,922                       | )      |   |                                                              | (1,575,177  | ) |   |   | (3,494,266 | ) |
| Interest income                  |   |                                  | -           |   |                                  |   | -           |                           |   |   |                           |   |   |                                                              | 4,790       |   |   |   | 114,610 |   |
| Other income (expense)           |   |                                  | 57,965      |   |                                  |   | (48,631     | )                              |   |   | 21,574                         |   |   |                                                              | (26,621     | ) |   |   | 103,382 |   |
|                             |   | $                                     | (10,339     | )      |                                  | $      | (1,067,176  | )                              |   | $      | (135,348                       | )      |   | $                                                                 | (1,597,008  | ) |   | $ | (3,276,274 | ) |
|                             |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| Net loss for the period          |   |                                  | (1,941,017  | )      |                                  |   | (5,016,811  | )                              |   |   | (3,928,163                     | )      |   |                                                              | (8,717,257  | ) |   |   | (65,269,016 | ) |
|                             |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| Deficit, beginning of the period |   |                                  | (63,327,999 | )      |                                  |   | (47,390,068 | )                              |   |   | (61,340,853                    | )      |   |                                                              | (43,689,622 | ) |   |   | - |   |
|                             |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| Deficit, end of the period       |   | $                                     | (65,269,016 | )      |                                  | $      | (52,406,879 | )                              |   | $      | (65,269,016                    | )      |   | $                                                                 | (52,406,879 | ) |   | $ | (65,269,016 | ) |
|                             |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
|                             |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| Net loss per share attributable  |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| to common stockholders           |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
|                             |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
|                             |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| Basic and fully diluted          |   | $                                     | (0.02       | )      |                                  | $      | (0.10       | )                              |   | $      | (0.03                          | )      |   | $                                                                 | (0.18       | ) |   |   |   |   |
|                             |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| Number of weighted average       |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| common shares outstanding        |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| basic and diluted                |   |                                  | 120,114,084 |   |                                  |   | 48,114,162  |                           |   |   | 120,114,084                    |   |   |                                                              | 48,114,162  |   |   |   |   |   |
|                             |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |

----

|                                                     |   | Common stock - number of shares # |        |   | Common stock - amount $ |   |    | Additional Paid in Capital $ |   |   | Deficit accumulated during development stage $ |   |   | Total $ |        |
|----------------------------------------------------------|--------|-----------------------------------|-------------|--------|-------------------------|--------|---------|------------------------------|--------|--------|------------------------------------------------|--------|--------|--------------|-------------|
|                                                     |   |                              |        |   |                    |   |    |                         |   |   |                                           |   |   |         |        |
| Balances at December 7, 2005                             |   |                              | -           |   |                    | $      | -       |                         |   | $      | -                                              |   |   | $            | -           |   |   | $ | - |   |
| Shares issued in consideration                           |   |                              | 19,153,414  |   |                    | $      | 19,153  |                         |   |   | (19,143                                        | )      |   |         |        |   |   |   | 10 |   |
| of Intellectual Property("IP")                           |   |                              |        |   |                    |   |    |                         |   |   |                                           |   |   |         |        |   |   |   |   |   |
| Shares issued for cash during                            |   |                              | 1,312,698   |   |                    |   | 1,313   |                         |   |   | 341,367                                        |   |   |         | -           |   |   |   | 342,680 |   |
| the year, net of issuance costs                          |   |                              |        |   |                    |   |    |                         |   |   |                                           |   |   |         |        |   |   |   | - |   |
| of NIL.                                                  |   |                              |        |   |                    |   |    |                         |   |   |                                           |   |   |         |        |   |   |   | - |   |
| Share based compensation                                 |   |                              |        |   |                    |   |    |                         |   |   |                                           |   |   |         |        |   |   |   | - |   |
| Net loss                                                 |   |                              | -           |   |                    |   | -       |                         |   |   |                                           |   |   |         | (64,350     | ) |   |   | (64,350 | ) |
| Balance at December 31, 2005                             |   |                              | 20,466,112  |   |                    | $      | 20,466  |                         |   | $      | 322,224                                        |   |   | $            | (64,350     | ) |   | $ | 278,340 |   |
| Shares issued in consideration of IP                     |   |                              | 7,661,365   |   |                    |   | 7,661   |                         |   |   | (7,661                                         | )      |   |         |        |   |   |   | - |   |
| Special distribution in consideration of IP              |   |                              |        |   |                    |   |    |                         |   |   | (4,000,000                                     | )      |   |         |        |   |   |   | (4,000,000 | ) |
| Shares issued for cash during                            |   |                              |        |   |                    |   |    |                         |   |   |                                           |   |   |         |        |   |   |   |   |   |
| the year                                                 |   |                              | 6,518,673   |   |                    |   | 6,519   |                         |   |   | 3,490,881                                      |   |   |         |        |   |   |   | 3,497,400 |   |
| Shares issued upon exercising of options                 |   |                              | 162,804     |   |                    |   | 163     |                         |   |   | 42,337                                         |   |   |         |        |   |   |   | 42,500 |   |
| Share based compensation                                 |   |                              |        |   |                    |   |    |                         |   |   | 234,065                                        |   |   |         |        |   |   |   | 234,065 |   |
| Net loss                                                 |   |                              | -           |   |                    |   |    |                         |   |   |                                           |   |   |         | (2,899,296  | ) |   |   | (2,899,296 | ) |
| Balance at December 31, 2006                             |   |                              | 34,808,954  |   |                    | $      | 34,809  |                         |   | $      | 81,846                                         |   |   | $            | (2,963,646  | ) |   | $ | (2,846,990 | ) |
|                                                     |   |                              |        |   |                    |   |    |                         |   |   |                                           |   |   |         |        |   |   |   |   |   |
| Shares issued for cash during                            |   |                              |        |   |                    |   |    |                         |   |   |                                           |   |   |         |        |   |   |   |   |   |
| the year                                                 |   |                              | 6,264,028   |   |                    |   | 6,264   |                         |   |   | 8,768,637                                      |   |   |         |        |   |   |   | 8,774,900 |   |
|                                                     |   |                              |        |   |                    |   |    |                         |   |   |                                           |   |   |         |        |   |   |   |   |   |
| Share based compensation                                 |   |                              |        |   |                    |   |    |                         |   |   | 17,245,216                                     |   |   |         |        |   |   |   | 17,245,216 |   |
| Net loss                                                 |   |                              |        |   |                    |   |    |                         |   |   |                                           |   |   |         | (24,382,325 | ) |   |   | (24,382,325 | ) |
| Balance at December 31, 2007                             |   |                              | 41,072,982  |   |                    | $      | 41,073  |                         |   | $      | 26,095,699                                     |   |   | $            | (27,345,971 | ) |   | $ | (1,209,198 | ) |
| Share issued in consideration of IP                      |   |                              | 1,915,341   |   |                    |   | 1,915   |                         |   |   | (1,915                                         | )      |   |         |        |   |   |   | - |   |
| Shares issued for cash during                            |   |                              |        |   |                    |   |    |                         |   |   |                                           |   |   |         |        |   |   |   |   |   |
| the year                                                 |   |                              | 1,618,204   |   |                    |   | 1,618   |                         |   |   | 8,447,028                                      |   |   |         |        |   |   |   | 8,448,646 |   |
| Subscription receipts                                    |   |                              |        |   |                    |   |    |                         |   |   |                                           |   |   |         |        |   |   |   |   |   |
| Issuance of preferred shares                             |   |                              |        |   |                    |   |    |                         |   |   |                                           |   |   |         |        |   |   |   | 2,330 |   |
| Dividend of common shares                                |   |                              |        |   |                    |   |    |                         |   |   | (2,330                                         | )      |   |         |        |   |   |   | (2,330 | ) |
| Common share warrants issued in connection               |   |                              |        |   |                    |   |    |                         |   |   |                                           |   |   |         |        |   |   |   |   |   |
| with debt                                                |   |                              |        |   |                    |   |    |                         |   |   | 1,534,260                                      |   |   |         |        |   |   |   | 1,534,260 |   |
| Shares issued in connection with exercise of             |   |                              |        |   |                    |   |    |                         |   |   |                                           |   |   |         |        |   |   |   | - |   |
| warrants                                                 |   |                              | 29,707      |   |                    |   | 30      |                         |   |   | 280                                            |   |   |         |        |   |   |   | 310 |   |
| Shares issued upon exercising of options                 |   |                              | 19,153      |   |                    |   | 19      |                         |   |   | 19,981                                         |   |   |         |        |   |   |   | 20,000 |   |
| Share based compensation                                 |   |                              |        |   |                    |   |    |                         |   |   | 3,742,156                                      |   |   |         |        |   |   |   | 3,742,156 |   |
| Net loss                                                 |   |                              |        |   |                    |   |    |                         |   |   |                                           |   |   |         | (16,343,658 | ) |   |   | (16,343,658 | ) |
| Balance at December 31, 2008                             |   |                              | 44,655,388  |   |                    | $      | 44,655  |                         |   | $      | 39,835,159                                     |   |   | $            | (43,689,629 | ) |   | $ | (3,807,485 | ) |
| Shares issued $0.75 for cash during                      |   |                              |        |   |                    |   |    |                         |   |   |                                           |   |   |         |        |   |   |   |   |   |
| the year                                                 |   |                              | 552,256     |   |                    |   | 552     |                         |   |   | 431,948                                        |   |   |         |        |   |   |   | 432,501 |   |
| Shares issued $0.10 for cash during                      |   |                              |        |   |                    |   |    |                         |   |   |                                           |   |   |         |        |   |   |   |   |   |
| the year                                                 |   |                              | 14,679,904  |   |                    |   | 14,680  |                         |   |   | 1,518,196                                      |   |   |         |        |   |   |   | 1,532,876 |   |
| Shares issued $0.25 for cash during                      |   |                              |        |   |                    |   |    |                         |   |   |                                           |   |   |         |        |   |   |   |   |   |
| the year                                                 |   |                              | 3,972,480   |   |                    |   | 3,972   |                         |   |   | 1,033,044                                      |   |   |         |        |   |   |   | 1,037,016 |   |
| Consideration received for cancellation of IP            |   |                              | -           |   |                    |   | -       |                         |   |   | 800,000                                        |   |   |         |        |   |   |   | 800,000 |   |
| Cancelled of share issued for IP                         |   |                              | (1,915,341  | )      |                    |   | (1,915  | )                            |   |   | 1,915                                          |   |   |         |        |   |   |   | (0 | ) |
| Anti dilution shares for warrants                        |   |                              | 6,459,189   |   |                    |   | 6,459   |                         |   |   | (6,459                                         | )      |   |         |        |   |   |   | 0 |   |
| Share issued for conversion of Debt                      |   |                              | 2,214,553   |   |                    |   | 2,215   |                         |   |   | 1,732,113                                      |   |   |         |        |   |   |   | 1,734,328 |   |
| Common share warrants issued in connection               |   |                              |        |   |                    |   |    |                         |   |   |                                           |   |   |         |        |   |   |   | - |   |
| with debt                                                |   |                              |        |   |                    |   |    |                         |   |   | 1,179,347                                      |   |   |         |        |   |   |   | 1,179,347 |   |
| Shares issued in connection with exercise of             |   |                              |        |   |                    |   |    |                         |   |   |                                           |   |   |         |        |   |   |   |   |   |
| warrants                                                 |   |                              | 5,248,493   |   |                    |   | 5,248   |                         |   |   | (3,891                                         | )      |   |         |        |   |   |   | 1,357 |   |
| Share based compensation                                 |   |                              | 9,097,871   |   |                    |   | 9,098   |                         |   |   | 5,790,211                                      |   |   |         |        |   |   |   | 5,799,309 |   |
| Net loss                                                 |   |                              |        |   |                    |   |    |                         |   |   |                                           |   |   |         | (17,651,225 | ) |   |   | (17,651,225 | ) |
| Balance at December 31, 2009                             |   |                              | 84,964,793  |   |                    | $      | 84,965  |                         |   | $      | 52,311,583                                     |   |   | $            | (61,340,853 | ) |   | $ | (8,941,976 | ) |
| Shares issued $0.25 per share for cash during            |   |                              |        |   |                    |   |    |                         |   |   |                                           |   |   |         |        |   |   |   |   |   |
| the year                                                 |   |                              | 1,781,267   |   |                    |   | 1,781   |                         |   |   | 463,219                                        |   |   |         |        |   |   |   | 465,000 |   |
| Shares issued $0.10 per share  for cash during |   |                              |        |   |                    |   |    |                         |   |   |                                           |   |   |         |        |   |   |   |   |   |
| the year                                                 |   |                              | 6,765,881   |   |                    |   | 6,766   |                         |   |   | 648,428                                        |   |   |         |        |   |   |   | 655,194 |   |
| Subscription receivable                                  |   |                              | 3,885,270   |   |                    |   | 3,885   |                         |   |   | 53,115                                         |   |   |         |        |   |   |   | 57,000 |   |
| Shares issued in connection with exercise of             |   |                              |        |   |                    |   |    |                         |   |   |                                           |   |   |         |        |   |   |   |   |   |
| warrants                                                 |   |                              | 4,906,229   |   |                    |   | 4,906   |                         |   |   | (91                                            | )      |   |         |        |   |   |   | 4,815 |   |
| Stock based compensation                                 |   |                              |        |   |                    |   |    |                         |   |   | 306,423                                        |   |   |         |        |   |   |   | 306,423 |   |
| Acquisition of Wolf Resources Inc.                       |   |                              | 38,754,000  |   |                    |   | 38,754  |                         |   |   | (91,744                                        | )      |   |         |        |   |   |   | (52,990 | ) |
| Shares issued $ 0.45 per share for services              |   |                              |        |   |                    |   |    |                         |   |   |                                           |   |   |         |        |   |   |   |   |   |
| during the period                                        |   |                              | 25,000      |   |                    |   | 25      |                         |   |   | 11,225                                         |   |   |         |        |   |   |   | 11,250 |   |
| Net loss                                                 |   |                              |        |   |                    |   |    |                         |   |   |                                           |   |   |         | (3,928,163  | ) |   |   | (3,928,163 | ) |
| Balance as June 30,2010                                  |   |                              | 141,082,440 |   |                    |   | 141,082 |                         |   |   | 53,702,159                                     |   |   |         | (65,269,016 | ) |   |   | (11,423,444 | ) |

----

|                                                        |   | For the six months ended June 30, 2010 |       |   | For the six months ended June 30, 2009 |   |       | For the period from December 7, 2005 (Inception) to June 30, 2010 |   |
|-------------------------------------------------------------|--------|----------------------------------------|------------|--------|----------------------------------------|--------|------------|-------------------------------------------------------------------|--------|
|                                                        |   | (Unaudited)                            |       |   | (Unaudited)                            |   |       | (Unaudited)                                                       |   |
|                                                        |   |                                   |       |   |                                   |   |       |                                                              |   |
| Operating activities                                        |   |                                   |       |   |                                   |   |       |                                                              |   |
| Net (Loss)                                                  |   | $                                      | (3,928,163 | )      |                                   | $      | (8,717,256 | )                                                                 |   | $ | (65,290,633 | ) |
|                                                        |   |                                   |       |   |                                   |   |       |                                                              |   |   |   |   |
| Adjustments to reconcile net loss to net cash from          |   |                                   |       |   |                                   |   |       |                                                              |   |   |   |   |
| operating activities:                                       |   |                                   |       |   |                                   |   |       |                                                              |   |   |   |   |
| Depreciation and amortization                               |   |                                   | 93,198     |   |                                   |   | 155,270    |                                                              |   |   | 1,011,954 |   |
| Accretion of discounts on notes                             |   |                                   | 15,478     |   |                                   |   | 879,070    |                                                              |   |   | 2,476,035 |   |
| Options issued for services rendered                        |   |                                   | 284,806    |   |                                   |   | 2,033,204  |                                                              |   |   | 27,305,551 |   |
| Prepaid expenses and other current assets                   |   |                                   | (37,227    | )      |                                   |   | (170,888   | )                                                                 |   |   | (108,684 | ) |
| Receivable from controlling shareholder                     |   |                                   |       |   |                                   |   |       |                                                              |   |   | (32,454 | ) |
| Loans receivable from employee                              |   |                                   | 243        |   |                                   |   | 22,305     |                                                              |   |   | (445,432 | ) |
| Accounts payable and accrued liabilities                    |   |                                   | 1,467,345  |   |                                   |   | 1,387,084  |                                                              |   |   | 6,096,841 |   |
| Deferred revenue                                            |   |                                   | -          |   |                                   |   | -          |                                                              |   |   | 1,000,000 |   |
| Deferred rent obligation                                    |   |                                   | (11,472    | )      |                                   |   | 3,692      |                                                              |   |   | 89,268 |   |
| Interest expense on note payable to controlling shareholder |   |                                   | 19,450     |   |                                   |   | -          |                                                              |   |   | 408,148 |   |
| Subscription receivable                                     |   |                                   | (41,175    | )      |                                   |   | 30,000     |                                                              |   |   | (57,000 | ) |
| Other                                                       |   |                                   | (23        | )      |                                   |   | 0          |                                                              |   |   | 5,497 |   |
| Net Cash (used in) operating activities                     |   |                                   | (2,137,539 | )      |                                   |   | (4,377,518 | )                                                                 |   |   | (27,540,908 | ) |
|                                                        |   |                                   |       |   |                                   |   |       |                                                              |   |   |   |   |
| Investing Activities                                        |   |                                   |       |   |                                   |   |       |                                                              |   |   |   |   |
| Increase (drecrease) in bank deposit & restricted cash  |   |                                   | 616,864    |   |                                   |   | 354,062    |                                                              |   |   | (2,240 | ) |
| Proceeds/(repayment) from Loan - Ford                       |   |                                   | (1,842     | )      |                                   |   | (5,334     | )                                                                 |   |   | (1,842 | ) |
| Purchase of intellectual property                           |   |                                   |       |   |                                   |   |       |                                                              |   |   | (10 | ) |
| Purchase of property and equipment                          |   |                                   | (1,824     | )      |                                   |   | (17,390    | )                                                                 |   |   | (1,269,916 | ) |
| Net Cash from Investing Activities                          |   |                                   | 613,198    |   |                                   |   | 331,337    |                                                              |   |   | (1,274,008 | ) |
|                                                        |   |                                   |       |   |                                   |   |       |                                                              |   |   |   |   |
|                                                        |   |                                   |       |   |                                   |   |       |                                                              |   |   |   |   |
| Financing Activities                                        |   |                                   |       |   |                                   |   |       |                                                              |   |   |   |   |
|                                                        |   |                                   |       |   |                                   |   |       |                                                              |   |   |   |   |
| Proceed from issuance of common shares                      |   |                                   | 1,140,272  |   |                                   |   | 3,929,953  |                                                              |   |   | 24,778,991 |   |
| Bank Indebtedness                                           |   |                                   | 47,345     |   |                                   |   | -          |                                                              |   |   | 47,345 |   |
| Proceeds on notes payable to controlling shareholder        |   |                                   | -          |   |                                   |   | 151,201    |                                                              |   |   | (130,138 | ) |
| Preceeds from loan to related party                         |   |                                   | 39,846     |   |                                   |   | -          |                                                              |   |   | 84,290 |   |
| Proceeds/(Repayment) of Notes Payable to Shareholders       |   |                                   | 263,901    |   |                                   |   | (358,350   | )                                                                 |   |   | 4,174,541 |   |
| Proceeds/(Repayment) of loans                               |   |                                   | -          |   |                                   |   | -          |                                                              |   |   | 13,324 |   |
| Payment on obligation under capital lease                   |   |                                   | -          |   |                                   |   | (5,097     | )                                                                 |   |   | (153,437 | ) |
| Net Cash from Financing Activities                          |   |                                   | 1,491,364  |   |                                   |   | 3,717,707  |                                                              |   |   | 28,814,916 |   |
|                                                        |   |                                   |       |   |                                   |   |       |                                                              |   |   |   |   |
| Increase/(decrease in cash for the period                   |   |                                   | (32,977    | )      |                                   |   | (328,474   | )                                                                 |   |   | (0 | ) |
|                                                        |   |                                   |       |   |                                   |   |       |                                                              |   |   |   |   |
| Cash, beginning of period                                   |   |                                   | 32,977     |   |                                   |   | 329,036    |                                                              |   |   | - |   |
|                                                        |   |                                   |       |   |                                   |   |       |                                                              |   |   |   |   |
| Cash, end of period                                         |   | $                                      | 0          |   |                                   | $      | 562        |                                                              |   | $ | (0 | ) |

----

----

|                           |   |          |      |   |              |   |
|--------------------------------|--------|---------------|-----------|--------|-------------------|--------|
|                           |   | June 30, 2010 |      |   | December 31, 2009 |   |
| Computer equipment             |   | $             | 905,117   |   |              | $      | 905,117 |   |
| Office equipment               |   |          | 265,379   |   |              |   | 265,379 |   |
| Vehicle                        |   |          | 28,706    |   |              |   | 28,706 |   |
| Computer software              |   |          | 115,040   |   |              |   | 113,141 |   |
|                           |   |          | 1,314,242 |   |              |   | 1,312,343 |   |
| Less: accumulated depreciation |   |          | (922,621  | )      |              |   | (829,348 | ) |
|                           |   | $             | 391,621   |   |              | $      | 482,995 |   |

----

----

| June 30,        |   | Total  |      |
|-----------------|--------|--------|-----------|
|            |   |   |      |
| 2010, remaining |   | $      | 365,467   |   |
| 2011            |   |   | 733,399   |   |
| 2012            |   |   | 610,744   |   |
| 2013            |   |   | 99,031    |   |
| 2014            |   |   | 44,364    |   |
| Thereafter      |   |   |  -   |   |
|            |   | $      | 1,853,005 |   |

----

----

|                                    |   | Shares under option |       |   | Weighted Average Exercise Price |   |   | Average Remaining Contractual Life (Years) |   |   | Weighted Average Grant Date Fair Value |   |
|-----------------------------------------|--------|---------------------|------------|--------|---------------------------------|--------|--------|--------------------------------------------|--------|--------|----------------------------------------|--------|
| Outstanding at December 31, 2009        |   |                | 9,004,997  |   |                            | $      | 0.26   |                                       |   |   | 5.20                                   |   |   | $ | 2.18 |   |
| Exercisable at December 31, 2009        |   |                | 5,884,246  |   |                            | $      | 0.26   |                                       |   |   | 5.00                                   |   |   | $ | 2.54 |   |
|                                    |   |                |       |   |                            |   |   |                                       |   |   |                                   |   |   |   |   |   |
|      Granted   |   |                | 4,841,025  |   |                            | $      | 0.26   |                                       |   |   | 5.00                                   |   |   | $ | 0.06 |   |
|      Exercised |   |                | -          |   |                            | $      | -      |                                       |   |   | -                                      |   |   | $ | - |   |
|      Cancelled |   |                | -          |   |                            | $      | -      |                                       |   |   | -                                      |   |   | $ | - |   |
|      Forfeited |   |                | -          |   |                            | $      | -      |                                       |   |   | -                                      |   |   | $ | - |   |
| Outstanding at June 30, 2010            |   |                | 13,846,022 |   |                            | $      | 0.26   |                                       |   |   | 5.20                                   |   |   | $ | 1.38 |   |
| Exercisable at June 30, 2010            |   |                | 8,745,447  |   |                            | $      | 0.26   |                                       |   |   | 5.00                                   |   |   | $ | 1.97 |   |

----

----

----

----

----

|                             |   | Three months ended June 30, 2010 |        |   | Three months ended June 30, 2009 |   |        | Six months ended June 30, 2010 |   |   | Six months ended June 30, 2009 |   |   | For the period from December 7, 2005 (inception) to June 30, 2010 |        |
|----------------------------------|--------|---------------------------------------|-------------|--------|---------------------------------------|--------|-------------|--------------------------------|--------|--------|--------------------------------|--------|--------|-------------------------------------------------------------------|-------------|
|                             |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |
|                             |   | (Unaudited)                           |        |   | (Unaudited)                           |   |        | (Unaudited)                    |   |   | (Unaudited)                    |   |   | (Unaudited)                                                       |        |
| Operating expenses               |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |
|                             |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |
| Salaries and benefits            |   | $                                     | (648,416    | )      |                                  | $      | (1,135,492  | )                              |   | $      | (1,276,798                     | )      |   | $                                                                 | (2,669,616  | ) |   | $ | (16,051,554 | ) |
| Outside Services                 |   |                                  | (822,625    | )      |                                  |   | (778,053    | )                              |   |   | (1,517,570                     | )      |   |                                                              | (1,444,558  | ) |   |   | (10,541,055 | ) |
| Travel, meals and entertainment  |   |                                  | (62,246     | )      |                                  |   | (38,962     | )                              |   |   | (113,554                       | )      |   |                                                              | (172,716    | ) |   |   | (2,606,121 | ) |
| Office and general expense       |   |                                  | (256,644    | )      |                                  |   | (300,299    | )                              |   |   | (506,889                       | )      |   |                                                              | (644,884    | ) |   |   | (4,476,508 | ) |
|                             |   | $                                     | (1,789,931  | )      |                                  | $      | (2,252,806  | )                              |   | $      | (3,414,811                     | )      |   | $                                                                 | (4,931,774  | ) |   | $ | (33,675,238 | ) |
|                             |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| Other expenses                   |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| Depreciation and amortization    |   |                                  | (48,243     | )      |                                  |   | (73,929     | )                              |   |   | (93,198                        | )      |   |                                                              | (155,270    | ) |   |   | (1,011,954 | ) |
| Stock Based Compensation         |   |                                  | (92,504     | )      |                                  |   | (1,622,900  | )                              |   |   | (284,806                       | )      |   |                                                              | (2,033,205  | ) |   |   | (27,305,552 | ) |
|                             |   | $                                     | (140,747    | )      |                                  | $      | (1,696,829  | )                              |   | $      | (378,004                       | )      |   | $                                                                 | (2,188,475  | ) |   | $ | (28,317,506 | ) |
|                             |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| Loss from operations             |   | $                                     | (1,930,678  | )      |                                  | $      | (3,949,635  | )                              |   | $      | (3,792,815                     | )      |   | $                                                                 | (7,120,249  | ) |   | $ | (65,785,559 | ) |
|                             |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| Other income (expenses)          |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| Interest (expense)               |   |                                  | (68,304     | )      |                                  |   | (1,018,545  | )                              |   |   | (156,922                       | )      |   |                                                              | (1,575,177  | ) |   |   | (3,494,266 | ) |
| Interest income                  |   |                                  | -           |   |                                  |   | -           |                           |   |   |                           |   |   |                                                              | 4,790       |   |   |   | 114,610 |   |
| Other income (expense)           |   |                                  | 57,965      |   |                                  |   | (48,631     | )                              |   |   | 21,574                         |   |   |                                                              | (26,621     | ) |   |   | 103,382 |   |
|                             |   | $                                     | (10,339     | )      |                                  | $      | (1,067,176  | )                              |   | $      | (135,348                       | )      |   | $                                                                 | (1,597,008  | ) |   | $ | (3,276,274 | ) |
|                             |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| Net loss for the period          |   |                                  | (1,941,017  | )      |                                  |   | (5,016,811  | )                              |   |   | (3,928,163                     | )      |   |                                                              | (8,717,257  | ) |   |   | (65,269,016 | ) |
|                             |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| Deficit, beginning of the period |   |                                  | (63,327,999 | )      |                                  |   | (47,390,068 | )                              |   |   | (61,340,853                    | )      |   |                                                              | (43,689,622 | ) |   |   | - |   |
|                             |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| Deficit, end of the period       |   | $                                     | (65,269,016 | )      |                                  | $      | (52,406,879 | )                              |   | $      | (65,269,016                    | )      |   | $                                                                 | (52,406,879 | ) |   | $ | (65,269,016 | ) |
|                             |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
|                             |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| Net loss per share attributable  |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| to common stockholders           |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
|                             |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
|                             |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| Basic and fully diluted          |   | $                                     | (0.02       | )      |                                  | $      | (0.10       | )                              |   | $      | (0.03                          | )      |   | $                                                                 | (0.18       | ) |   |   |   |   |
|                             |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| Number of weighted average       |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| common shares outstanding        |   |                                  |        |   |                                  |   |        |                           |   |   |                           |   |   |                                                              |        |   |   |   |   |   |
| basic and diluted                |   |                                  | 120,114,084 |   |                                  |   | 48,114,162  |                           |   |   | 120,114,084                    |   |   |                                                              | 48,114,162  |   |   |   |   |   |

----

----

----

----

----

| June 30,        |   | Total  |      |
|-----------------|--------|--------|-----------|
|            |   |   |      |
| 2010, remaining |   | $      | 365,467   |   |
| 2011            |   |   | 733,399   |   |
| 2012            |   |   | 610,744   |   |
| 2013            |   |   | 99,031    |   |
| 2014            |   |   | 44,364    |   |
| Thereafter      |   |   | -         |   |
|            |   | $      | 1,853,005 |   |

----

----

----

----

| Exhibit No. |   | Description                                                                                                                                                                                                                        |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                               |
| 2.1         |   | Share Exchange Agreement by and between the Company, AISystems and the AISystems Shareholders, dated March 19, 2010 (incorporated by reference in the Form 8K filed with the SEC on March 22, 2010)                                |
|        |   |                                                                                                                                                                                                                               |
| 3.1         |   | Articles of Incorporation (incorporated by reference in the Registration Statement on Form SB-2 filed with the SEC on September 30, 2005)                                                                                          |
|        |   |                                                                                                                                                                                                                               |
| 3.2         |   | Amended and Restated Articles of Incorporation (incorporated by reference in the Registration Statement on Form S-1 filed with the SEC on May 28, 2008)                                                                            |
|        |   |                                                                                                                                                                                                                               |
| 3.3         |   | Bylaws (incorporated by reference in the Registration Statement on Form SB-2 filed with the SEC on September 30, 2005)                                                                                                             |
|        |   |                                                                                                                                                                                                                               |
| 3.4         |   | Certificate of Designation of the Series B Preferred Stock filed with the Nevada Secretary of State on March 22, 2010. (incorporated by reference in the Form 8K filed with the SEC on March 22, 2010)                        |
|        |   |                                                                                                                                                                                                                               |
| 10.1        |   | Stephen C. Johnston Employment Agreement (incorporated by reference in the Form 8K filed with the SEC on March 22, 2010)                                                                                                           |
|        |   |                                                                                                                                                                                                                               |
| 10.2        |   | Office Lease Agreement between Carillon Properties and Airline Intelligence Systems, Inc. (incorporated by reference in the Form 8K filed with the SEC on March 22, 2010)                                                          |
|        |   |                                                                                                                                                                                                                               |
| 10.3        |   | Lease between SITQ National Inc. and Airline Intelligence Systems Corp. (incorporated by reference in the Form 8K filed with the SEC on March 22, 2010)                                                                            |
|        |   |                                                                                                                                                                                                                               |
| 10.5        |   | Software Licensing Agreement with AeroMexico as amended (incorporated by reference in the Form 8K filed with the SEC on March 22, 2010)                                                                                            |
|        |   |                                                                                                                                                                                                                               |
| 10.6        |   | License Agreement between Dynamic Intelligence, Inc. and Airline Intelligence Systems, Inc. as amended (incorporated by reference in the Form 8K filed with the SEC on March 22, 2010)                                             |
|        |   |                                                                                                                                                                                                                               |
| 10.7        |   | Master Services Agreement between Dynamic Intelligence, Inc., Airline Intelligence Systems, Inc. (US) and Airline Intelligence Systems, Inc. (CA). (incorporated by reference in the Form 8K filed with the SEC on March 22, 2010) |
|        |   |                                                                                                                                                                                                                               |
| 10.8        |   | Exchange Right Agreement between Airline Intelligence Systems, Inc. and Merus Capital I, L.P. (incorporated by reference in the Form 8K filed with the SEC on March 22, 2010)                                                      |
|        |   |                                                                                                                                                                                                                               |
| 31.1        |   | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted under Section 302 of the Sarbanes-Oxley Act of 2002                                                                         |
|        |   |                                                                                                                                                                                                                               |
| 31.2        |   | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted under Section 302 of the Sarbanes-Oxley Act of 2002                                                                         |
|        |   |                                                                                                                                                                                                                               |
| 32.1        |   | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                         |
|        |   |                                                                                                                                                                                                                               |
| 32.2        |   | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                         |
|        |   |                                                                                                                                                                                                                               |

----

|                  | AI SYSTEMS INC. |                          |
|-----------------------|-----------------|-------------------------------|
|                  |            |                          |   |
| Date: August 23, 2010 | By:             |  /s/ Stephen C. Johnston |   |
|                  |            | Stephen C. Johnston           |   |
|                  |            | Chief Executive Officer       |   |