----

----

| 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                                                                                                                                                                             | 3                                                                                 |
|          |                                                                                                                                                                                             |                                                                                   |
|          | Condensed Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009                                                                                            |              3        |
|          |                                                                                                                                                                                             |                                                                                   |
|          | Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009 and the period from December 7, 2005 (inception) to September 30, 2010 |               4  |
|          |                                                                                                                                                                                             |                                                                                   |
|          | Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficit) for the period from December 7, 2005 (inception) to September  30, 2010                  |               5  |
|          |                                                                                                                                                                                             |                                                                                   |
|          | Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 and the period from December 7, 2005 (inception) to September 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                                                                                                      |              13       |
|          |                                                                                                                                                                                             |                                                                                   |
| Item 3.       | Quantitative and Qualitative Disclosures About Market Risk                                                                                                                                       |               23 |
|          |                                                                                                                                                                                             |                                                                                   |
| Item 4.       | Controls and Procedures                                                                                                                                                                          |               23 |
|          |                                                                                                                                                                                             |                                                                                   |
| Part II. | Other Information                                                                                                                                                                                |     24                                                        |
|          |                                                                                                                                                                                             |                                                                                   |
| Item 1.       |  Legal Proceedings                                                                                                                                                                          |              24       |
|          |                                                                                                                                                                                             |                                                                                   |
| Item 1A.      |  Risk Factors                                                                                                                                                                               |              24       |
|          |                                                                                                                                                                                             |                                                                                   |
| Item 2.       | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                                                      |              24       |
|          |                                                                                                                                                                                             |                                                                                   |
| Item 3.       | Defaults Upon Senior Securities                                                                                                                                                                  |              24       |
|          |                                                                                                                                                                                             |                                                                                   |
| Item 4.       | Submission of Matters to a Vote of Security Holders                                                                                                                                              |              24       |
|          |                                                                                                                                                                                             |                                                                                   |
| Item 5.       | Other Information                                                                                                                                                                                |              24       |
|          |                                                                                                                                                                                             |                                                                                   |
| Item 6.       | Exhibits                                                                                                                                                                                         |              25       |

----

|                                                               |   | September 30,2010 |        |   | December 31,2009 |   |
|--------------------------------------------------------------------|--------|-------------------|-------------|--------|------------------|--------|
| Assets                                                             |   | (Unaudited)       |        |   |             |   |
| Current                                                            |   |              |        |   |             |   |
| Cash                                                               |   |              |        |   |             |   |
| Cash and due from bank                                             |   | $                 | —     |   |             | $      | 32,977 |   |
| Restricted cash                                                    |   |              | 1,000       |   |             |   | 619,104 |   |
|                                                               |   |              | 1,000       |   |             |   | 652,081 |   |
| Loan receivable from employees                                     |   |              | —     |   |             |   | 19,029 |   |
| Subscriptions receivable                                           |   |              | —     |   |             |   | 15,825 |   |
| Prepaid expenses and other current assets                          |   |              | 1,353,200   |   |             |   | 71,457 |   |
| Total Current Assets                                               |   |              | 1,354,200   |   |             |   | 758,392 |   |
|                                                               |   |              |        |   |             |   |   |   |
| Property and equipment,net                                         |   |              | 344,984     |   |             |   | 482,995 |   |
| Intellectual Property                                              |   |              | 10          |   |             |   | 10 |   |
| Total Assets                                                       |   | $                 | 1,699,194   |   |             | $      | 1,241,397 |   |
|                                                               |   |              |        |   |             |   |   |   |
| Liabilities and Stockholders’ Deficit                        |   |              |        |   |             |   |   |   |
|                                                               |   |              |        |   |             |   |   |   |
| Current                                                            |   |              |        |   |             |   |   |   |
| Bank indebtedness                                                  |   | $                 | 15,118      |   |             | $      | — |   |
| Accounts payable and accrued liabilities                           |   |              | 5,977,851   |   |             |   | 4,161,061 |   |
| Notes payable to stockholders                                      |   |              | 4,487,677   |   |             |   | 3,923,262 |   |
| Deferred lease obligation                                          |   |              | 83,532      |   |             |   | 100,740 |   |
| Current portion of equipment loan                                  |   |              | —     |   |             |   | 5,740 |   |
| Total Current Liabilities                                          |   |              | 10,564,178  |   |             |   | 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 stockholder for intellectual property |   |              | 1,000,466   |   |             |   | 990,727 |   |
| Total Liabilities                                                  |   |              | 12,564,644  |   |             |   | 10,183,372 |   |
|                                                               |   |              |        |   |             |   |   |   |
| Stockholders’ Deficit                                        |   |              |        |   |             |   |   |   |
| Preferred shares (Authorized 20,000,000 w ith 2,400,000            |   |              |        |   |             |   |   |   |
| designated as Series B, Issued: 2,329,905 Series B)                |   |              | 2,330       |   |             |   | 2,330 |   |
| Common shares - (Authorized: 300,000,000                           |   |              |        |   |             |   |   |   |
| Issued September 30 2010: 146,357,456 and 2009: 84,964,793)        |   |              | 146,357     |   |             |   | 84,965 |   |
| Liquidation Preference (note 9)                                    |   |              | —     |   |             |   | — |   |
| Additional paid-in capital                                         |   |              | 56,497,958  |   |             |   | 52,311,583 |   |
| Deficit accumulated during the development stage                   |   |              | (67,512,095 | )      |             |   | (61,340,853 | ) |
| Total Stockholders’ Deficit                                  |   |              | (10,865,450 | )      |             |   | (8,941,975 | ) |
| Total Liabilities and Stockholders’ Deficit                  |   | $                 | 1,699,194   |   |             | $      | 1,241,397 |   |

----

|                                                                    |   | For the threemonths endedSeptember 30,2010 |        |   | For the threemonths endedSeptember 30,2009 |   |        | For the ninemonths endedSeptember 30,2010 |   |   | For the ninemonths endedSeptember 30,2009 |   |   | For the periodfromDecember 7,2005 (inception)to September30, 2010 |        |
|-------------------------------------------------------------------------|--------|--------------------------------------------|-------------|--------|--------------------------------------------|--------|-------------|-------------------------------------------|--------|--------|-------------------------------------------|--------|--------|-------------------------------------------------------------------|-------------|
|                                                                    |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |
|                                                                    |   | (Unaudited)                                |        |   | (Unaudited)                                |   |        | (Unaudited)                               |   |   | (Unaudited)                               |   |   | (Unaudited)                                                       |        |
| Operating expenses                                                      |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |
|                                                                    |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |
| Salaries and benefits                                                   |   | $                                          | (558,098    | )      |                                       | $      | (992,220    | )                                         |   | $      | (1,834,896                                | )      |   | $                                                                 | (3,661,836  | ) |   | $ | (16,609,652 | ) |
| Outside services                                                        |   |                                       | (1,119,701  | )      |                                       |   | (659,608    | )                                         |   |   | (2,637,270                                | )      |   |                                                              | (2,095,088  | ) |   |   | (11,660,753 | ) |
| Trav el, meals and entertainment                                        |   |                                       | 11,564      |   |                                       |   | (27,423     | )                                         |   |   | (101,991                                  | )      |   |                                                              | (200,138    | ) |   |   | (2,594,557 | ) |
| Office and general expense                                              |   |                                       | (268,114    | )      |                                       |   | (256,812    | )                                         |   |   | (775,004                                  | )      |   |                                                              | (901,695    | ) |   |   | (4,744,622 | ) |
|                                                                    |   | $                                          | (1,934,349  | )      |                                       | $      | (1,936,063  | )                                         |   | $      | (5,349,161                                | )      |   | $                                                                 | (6,858,757  | ) |   | $ | (35,609,584 | ) |
|                                                                    |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |   |   |   |   |   |
| Other expenses                                                          |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |   |   |   |   |   |
| Depreciation and amortization                                           |   |                                       | (46,637     | )      |                                       |   | (65,938     | )                                         |   |   | (139,910                                  | )      |   |                                                              | (221,208    | ) |   |   | (1,058,591 | ) |
| Stock-based compensation                                                |   |                                       | (144,939    | )      |                                       |   | (1,615,377  | )                                         |   |   | (429,745                                  | )      |   |                                                              | (3,672,832  | ) |   |   | (27,450,491 | ) |
|                                                                    |   | $                                          | (191,576    | )      |                                       | $      | (1,681,315  | )                                         |   | $      | (569,655                                  | )      |   | $                                                                 | (3,894,040  | ) |   | $ | (28,509,082 | ) |
|                                                                    |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |   |   |   |   |   |
| Loss from operations                                                    |   | $                                          | (2,125,925  | )      |                                       | $      | (3,617,378  | )                                         |   | $      | (5,918,816                                | )      |   | $                                                                 | (10,752,797 | ) |   | $ | (70,037,482 | ) |
|                                                                    |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |   |   |   |   |   |
| Other income (expenses)                                                 |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |   |   |   |   |   |
| Interest (expense)                                                      |   |                                       | (70,476     | )      |                                       |   | (1,088,323  | )                                         |   |   | (227,398                                  | )      |   |                                                              | (2,375,468  | ) |   |   | (3,564,742 | ) |
| Interest income                                                         |   |                                       | —     |   |                                       |   | —     |                                      |   |   | 4,790                                     |   |   |                                                              | 114,610     |   |   |   |   |   |
| Other income (expense)                                                  |   |                                       | (46,678     | )      |                                       |   | (122,215    | )                                         |   |   | (25,028                                   | )      |   |                                                              | (148,836    | ) |   |   | 56,704 |   |
|                                                                    |   | $                                          | (117,154    | )      |                                       | $      | (1,210,538  | )                                         |   | $      | (252,426                                  | )      |   | $                                                                 | (2,519,514  | ) |   | $ | (3,393,428 | ) |
|                                                                    |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |   |   |   |   |   |
| Net loss for the period                                                 |   |                                       | (2,243,079  | )      |                                       |   | (4,827,916  | )                                         |   |   | (6,171,242                                | )      |   |                                                              | (13,272,311 | ) |   |   | (67,512,095 | ) |
|                                                                    |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |   |   |   |   |   |
| Deficit, beginning of the period                                        |   |                                       | (65,269,016 | )      |                                       |   | (52,134,017 | )                                         |   |   | (61,340,853                               | )      |   |                                                              | (43,689,622 | ) |   |   | — |   |
|                                                                    |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |   |   |   |   |   |
| Deficit, end of the period                                              |   | $                                          | (67,512,095 | )      |                                       | $      | (56,961,933 | )                                         |   | $      | (67,512,095                               | )      |   | $                                                                 | (56,961,933 | ) |   | $ | (67,512,095 | ) |
|                                                                    |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |   |   |   |   |   |
| Net loss per share attributable to common stockholders                  |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |   |   |   |   |   |
|                                                                    |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |   |   |   |   |   |
| Basic and fully diluted                                                 |   | $                                          | (0.02       | )      |                                       | $      | (0.09       | )                                         |   | $      | (0.05                                     | )      |   | $                                                                 | (0.26       | ) |   |   |   |   |
|                                                                    |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |   |   |   |   |   |
| Number of w eighted average common shares outstanding basic and diluted |   |                                       | 141,767,342 |   |                                       |   | 56,498,929  |                                      |   |   | 127,974,981                               |   |   |                                                              | 50,915,156  |   |   |   |   |   |

----

|                                                                      |   | Common st ock -number of shares # |        |   | Common stock -amount $ |   |        | Additional Paid inCapital $ |   |   | Deficit accumulatedduring thedevel opment stage $ |   |   | Total $ |        |
|---------------------------------------------------------------------------|--------|-----------------------------------|-------------|--------|------------------------|--------|-------------|-----------------------------|--------|--------|---------------------------------------------------|--------|--------|---------|-------------|
| Balances at December 7, 2005                                              |   | $                                 | —     |   |                   | $      | —     |                        |   | $      | —                                           |   |   | $       | —     |   |   | $ | — |   |
| Shares issued in consideration of Intellectual Property(“IP”) |   |                              | 19,153,414  |   |                   |   | 19,153      |                        |   |   | (19,143                                           | )      |   |    |        |   |   |   | 10 |   |
| Shares issued f or cash during the year , net of issuance costs of NIL    |   |                              | 1,312,698   |   |                   |   | 1,313       |                        |   |   | 341,367                                           |   |   |    | —     |   |   |   | 342,680 |   |
| Stock-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 f or 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 f or 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 f or cash during the year                                   |   |                              | 1,618,204   |   |                   |   | 1,618       |                        |   |   | 8,447,028                                         |   |   |    |        |   |   |   | 8,448,646 |   |
| Issuance of preferred shares                                              |   |                              |        |   |                   |   |        |                        |   |   |                                              |   |   |    | 2,330       |   |   |   |   |   |
| Dividend of common shares                                                 |   |                              |        |   |                   |   |        |                        |   |   | (2,330                                            | )      |   |    |        |   |   |   | (2,330 | ) |
| Common share war r ants issued in connection with debt                    |   |                              |        |   |                   |   |        |                        |   |   | 1,534,260                                         |   |   |    |        |   |   |   | 1,534,260 |   |
| Shares issued in connection with exercise of war r ants                   |   |                              | 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 f or cash during the year                             |   |                              | 552,256     |   |                   |   | 552         |                        |   |   | 431,948                                           |   |   |    |        |   |   |   | 432,501 |   |
| Shares issued $0.10 f or cash during the year                             |   |                              | 14,679,904  |   |                   |   | 14,680      |                        |   |   | 1,518,196                                         |   |   |    |        |   |   |   | 1,532,876 |   |
| Shares issued $0.25 f or cash during the year                             |   |                              | 3,972,480   |   |                   |   | 3,972       |                        |   |   | 1,033,044                                         |   |   |    |        |   |   |   | 1,037,016 |   |
| Consideration received f or cancellation of IP                            |   |                              | —     |   |                   |   | —     |                        |   |   | 800,000                                           |   |   |    |        |   |   |   | 800,000 |   |
| Cancelled of share issued f or IP                                         |   |                              | (1,915,341  | )      |                   |   | (1,915      | )                           |   |   | 1,915                                             |   |   |    |        |   |   |   | (0 | ) |
| Anti dilution shares f or war r ants                                      |   |                              | 6,459,189   |   |                   |   | 6,459       |                        |   |   | (6,459                                            | )      |   |    |        |   |   |   | 0 |   |
| Share issued f or conversion of Debt                                      |   |                              | 2,214,553   |   |                   |   | 2,215       |                        |   |   | 1,732,113                                         |   |   |    |        |   |   |   | 1,734,328 |   |
| Common share war r ants issued in connection with debt                    |   |                              | 1,179,347   |   |                   |   |        |                        |   |   | 1,179,347                                         |   |   |    |        |   |   |   |   |   |
| Shares issued in connection with exercise of war r ants                   |   |                              | 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 | ) |   | $ | (8,941,977 | ) |
| Shares issued $0.25 f or cash during the year                             |   |                              | 1,781,267   |   |                   |   | 1,781       |                        |   |   | 463,219                                           |   |   |    |        |   |   |   | 465,000 |   |
| Shares issued $0.10 f or cash dur ing the year                            |   |                              | 8,735,810   |   |                   |   | 8,736       |                        |   |   | 903,457                                           |   |   |    |        |   |   |   | 912,193 |   |
| Subscriptions receivable                                                  |   |                              | 1,915,341   |   |                   |   | 1,915       |                        |   |   | (1,915                                            | )      |   |    |        |   |   |   | — |   |
| Shares issued in connection with exercise of war r ants                   |   |                              | 4,906,239   |   |                   |   | 4,906       |                        |   |   | (91                                               | )      |   |    |        |   |   |   | 4,815 |   |
| Stock-based compensation                                                  |   |                              |        |   |                   |   |        |                        |   |   | 429,745                                           |   |   |    |        |   |   |   | 429,745 |   |
| Acquisition of Wolf Resources Inc.                                        |   |                              | 38,754,000  |   |                   |   | 38,754      |                        |   |   | (91,744                                           | )      |   |    |        |   |   |   | (52,990 | ) |
| Shares issued $0.45 per share f or ser vices during the year              |   |                              | 25,000      |   |                   |   | 25          |                        |   |   | 11,225                                            |   |   |    |        |   |   |   | 11,250 |   |
| Shares issued $0.50 per share f or ser vices during the year              |   |                              | 1,450,000   |   |                   |   | 1,450       |                        |   |   | 723,550                                           |   |   |    |        |   |   |   | 725,000 |   |
| Shares issued $0.42 per share f or ser vices during the year              |   |                              | 2,200,000   |   |                   |   | 2,200       |                        |   |   | 921,800                                           |   |   |    |        |   |   |   | 924,000 |   |
| Shares issued $0.49 per share f or ser vices during the year              |   |                              | 812,503     |   |                   |   | 813         |                        |   |   | 397,314                                           |   |   |    |        |   |   |   | 398,126 |   |
| Shares issued $0.53 per share f or ser vices during the year              |   |                              | 812,503     |   |                   |   | 813         |                        |   |   | 429,814                                           |   |   |    |        |   |   |   | 430,627 |   |
| Net loss                                                                  |   |                              | (6,171,242  | )      |                   |   | (6,171,242  | )                           |   |   |                                              |   |   |    |        |   |   |   |   |   |
| Balance as September 30,2010                                              |   | $                                 | 146,357,456 |   |                   | $      | 146,357     |                        |   | $      | 56,497,958                                        |   |   | $       | (67,512,095 | ) |   | $ | (10,865,450 | ) |

----

|                                                                        |   | For the ninemonths endedSeptember 30, 2010 |       |   | For the ninemonths endedSeptember 30, 2009 |   |        | For the periodfrom December 7,2005 (Inception) toSeptember 30,2010 |   |
|-----------------------------------------------------------------------------|--------|--------------------------------------------|------------|--------|--------------------------------------------|--------|-------------|--------------------------------------------------------------------|--------|
|                                                                        |   | (Unaudited)                                |       |   | (Unaudited)                                |   |        | (Unaudited)                                                        |   |
| Operating activities                                                        |   |                                       |       |   |                                       |   |        |                                                               |   |
| Net Loss                                                                    |   | $                                          | (6,171,242 | )      |                                       | $      | (13,272,311 | )                                                                  |   | $ | (67,512,095 | ) |
|                                                                        |   |                                       |       |   |                                       |   |        |                                                               |   |   |   |   |
| Adjustments to reconcile net loss to net cash used in operating activities: |   |                                       |       |   |                                       |   |        |                                                               |   |   |   |   |
| Depreciation and amortization                                               |   |                                       | 139,910    |   |                                       |   | 221,208     |                                                               |   |   | 1,058,666 |   |
| Accretion of discounts on notes                                             |   |                                       | 15,478     |   |                                       |   | 2,279,186   |                                                               |   |   | 2,476,035 |   |
| Stock-based compensation                                                    |   |                                       | 429,745    |   |                                       |   | 3,672,832   |                                                               |   |   | 27,450,490 |   |
| Prepaid expenses and other current assets                                   |   |                                       | (1,281,743 | )      |                                       |   | (35,767     | )                                                                  |   |   | (1,353,200 | ) |
| Receivable from controlling stockholder                                     |   |                                       | —    |   |                                       |   | —     |                                                               |   |   | (32,454 | ) |
| Loans receivable from employee                                              |   |                                       | (407       | )      |                                       |   | 22,305      |                                                               |   |   | (446,082 | ) |
| Accounts payable and accrued liabilities                                    |   |                                       | 1,816,791  |   |                                       |   | 1,973,235   |                                                               |   |   | 6,446,287 |   |
| Deferred revenue                                                            |   |                                       | —    |   |                                       |   | —     |                                                               |   |   | 1,000,000 |   |
| Deferred rent obligation                                                    |   |                                       | (17,208    | )      |                                       |   | 5,538       |                                                               |   |   | 83,532 |   |
| Interest expense on notes payable to controlling stockholders               |   |                                       | 29,175     |   |                                       |   | 45,841      |                                                               |   |   | 417,873 |   |
| Other                                                                       |   |                                       | (5,740     | )      |                                       |   | 3,757       |                                                               |   |   | (220 | ) |
| Net cash used in operating activities                                       |   |                                       | (5,045,241 | )      |                                       |   | (5,084,176  | )                                                                  |   |   | (30,411,168 | ) |
|                                                                        |   |                                       |       |   |                                       |   |        |                                                               |   |   |   |   |
| Investing Activities                                                        |   |                                       |       |   |                                       |   |        |                                                               |   |   |   |   |
| Increase/(decrease) in bank deposit and restricted cash                     |   |                                       | 618,104    |   |                                       |   | 218,227     |                                                               |   |   | (1,000 | ) |
| Purchase of property and equipment                                          |   |                                       | (1,900     | )      |                                       |   | (16,972     | )                                                                  |   |   | (1,269,992 | ) |
| Increase in interest bearing deposits                                       |   |                                       | —    |   |                                       |   | 228,535     |                                                               |   |   | — |   |
| Net Cash from/(Used In) Investing Activities                                |   |                                       | 616,204    |   |                                       |   | 429,790     |                                                               |   |   | (1,270,992 | ) |
|                                                                        |   |                                       |       |   |                                       |   |        |                                                               |   |   |   |   |
|                                                                        |   |                                       |       |   |                                       |   |        |                                                               |   |   |   |   |
| Financing Activities                                                        |   |                                       |       |   |                                       |   |        |                                                               |   |   |   |   |
| Proceeds from issuance of common shares                                     |   |                                       | 3,818,022  |   |                                       |   | 4,634,024   |                                                               |   |   | 27,435,114 |   |
| Subscriptions receivable                                                    |   |                                       | 15,825     |   |                                       |   | —     |                                                               |   |   | — |   |
| Bank Indebtedness                                                           |   |                                       | 15,118     |   |                                       |   | —     |                                                               |   |   | 15,118 |   |
| Repayment of equipment loan                                                 |   |                                       | (1,842     | )      |                                       |   | (9,092      | )                                                                  |   |   | (1,842 | ) |
| Proceeds from notes payable to controlling stockholder                      |   |                                       | —    |   |                                       |   | (800,000    | )                                                                  |   |   | (130,138 | ) |
| Preceeds from loan to related party                                         |   |                                       | 3,887      |   |                                       |   | —     |                                                               |   |   | 48,331 |   |
| Proceeds from notes payable to stockholders                                 |   |                                       | 545,050    |   |                                       |   | 499,686     |                                                               |   |   | 4,455,690 |   |
| Proceeds of loans                                                           |   |                                       | —    |   |                                       |   | —     |                                                               |   |   | 13,324 |   |
| Payment on obligation under capital lease                                   |   |                                       | —    |   |                                       |   | —     |                                                               |   |   | (153,437 | ) |
| Net Cash from Financing Activities                                          |   |                                       | 4,396,060  |   |                                       |   | 4,324,618   |                                                               |   |   | 31,682,159 |   |
|                                                                        |   |                                       |       |   |                                       |   |        |                                                               |   |   |   |   |
| Decrease in cash for the period                                             |   |                                       | (32,977    | )      |                                       |   | (329,768    | )                                                                  |   |   | — |   |
|                                                                        |   |                                       |       |   |                                       |   |        |                                                               |   |   |   |   |
| Cash, beginning of period                                                   |   |                                       | 32,977     |   |                                       |   | 329,036     |                                                               |   |   | — |   |
|                                                                        |   |                                       |       |   |                                       |   |        |                                                               |   |   |   |   |
| Cash, end of period                                                         |   | $                                          | —    |   |                                       | $      | (732        | )                                                                  |   | $ | — |   |

----

| 1.   |  Organization |
|----------------|--------------------|

----

|                           |   | September 30, 2010 |      |   | December 31, 2009 |   |
|--------------------------------|--------|--------------------|-----------|--------|-------------------|--------|
| Computer equipment             |   | $                  | 905,117   |   |              | $      | 905,117 |   |
| Office equipment               |   |               | 265,379   |   |              |   | 265,379 |   |
| Vehicle                        |   |               | 28,706    |   |              |   | 28,706 |   |
| Computer softw are             |   |               | 115,040   |   |              |   | 113,141 |   |
|                           |   |               | 1,314,242 |   |              |   | 1,312,343 |   |
| Less: accumulated depreciation |   |               | (969,258  | )      |              |   | (829,348 | ) |
|                           |   | $                  | 344,984   |   |              | $      | 482,995 |   |

----

----

| September 30,   |   | Total  |      |
|-----------------|--------|--------|-----------|
| 2010, remaining |   | $      | 185,491   |   |
| 2011            |   |   | 733,399   |   |
| 2012            |   |   | 610,744   |   |
| 2013            |   |   | 99,031    |   |
| 2014            |   |   | 44,364    |   |
| Thereafter      |   |   | —   |   |
|            |   | $      | 1,673,029 |   |

----

----

|                              |   |   |       |   |           |   |    | Average          |   |   |            |   |
|-----------------------------------|--------|--------|------------|--------|----------------|--------|---------|------------------|--------|--------|-----------------|--------|
|                              |   | Shares |       |   | Weighted       |   |    | Remaining        |   |   | Weighted        |   |
|                              |   | under  |       |   | Average        |   |    | Contractual Life |   |   | Average Grant   |   |
|                              |   | option |       |   | Exercise Price |   |    | (Years)          |   |   | 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    |             |   |   | 10.00           |   |   | $ | 0.06 |   |
| Exercised                         |   |   | —    |   |           | $      | — |             |   |   | —         |   |   | $ | — |   |
| Cancelled                         |   |   | (2,659,710 | )      |           | $      | — |             |   |   | —         |   |   | $ | — |   |
| Forfeited                         |   |   | —    |   |           | $      | — |             |   |   | —         |   |   | $ | — |   |
| Outstanding at September 30, 2010 |   |   | 11,186,312 |   |           | $      | 0.26    |             |   |   | 5.51            |   |   | $ | 1.64 |   |
| Exercisable at September 30, 2010 |   |   | 8,142,923  |   |           | $      | 0.26    |             |   |   | 4.64            |   |   | $ | 2.03 |   |

----

----

----

----

|                                                                   |   | For the threemonths endedSeptember 30,2010 |        |   | For the threemonths endedSeptember 30,2009 |   |        | For the ninemonths endedSeptember 30,2010 |   |   | For the ninemonths endedSeptember 30,2009 |   |   | For the periodfromDecember 7,2005 (inception)to September30, 2010 |        |
|------------------------------------------------------------------------|--------|--------------------------------------------|-------------|--------|--------------------------------------------|--------|-------------|-------------------------------------------|--------|--------|-------------------------------------------|--------|--------|-------------------------------------------------------------------|-------------|
|                                                                   |   | (Unaudited)                                |        |   | (Unaudited)                                |   |        | (Unaudited)                               |   |   | (Unaudited)                               |   |   | (Unaudited)                                                       |        |
| Operating expenses                                                     |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |
|                                                                   |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |
| Salaries and benefits                                                  |   | $                                          | (558,098    | )      |                                       | $      | (992,220    | )                                         |   | $      | (1,834,896                                | )      |   | $                                                                 | (3,661,836  | ) |   | $ | (16,609,652 | ) |
| Outside services                                                       |   |                                       | (1,119,701  | )      |                                       |   | (659,608    | )                                         |   |   | (2,637,270                                | )      |   |                                                              | (2,095,088  | ) |   |   | (11,660,753 | ) |
| Trav el, meals and entertainment                                       |   |                                       | 11,564      |   |                                       |   | (27,423     | )                                         |   |   | (101,991                                  | )      |   |                                                              | (200,138    | ) |   |   | (2,594,557 | ) |
| Office and general expense                                             |   |                                       | (268,114    | )      |                                       |   | (256,812    | )                                         |   |   | (775,004                                  | )      |   |                                                              | (901,695    | ) |   |   | (4,744,622 | ) |
|                                                                   |   | $                                          | (1,934,349  | )      |                                       | $      | (1,936,063  | )                                         |   | $      | (5,349,161                                | )      |   | $                                                                 | (6,858,757  | ) |   | $ | (35,609,584 | ) |
|                                                                   |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |   |   |   |   |   |
| Other expenses                                                         |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |   |   |   |   |   |
| Depreciation and amortization                                          |   |                                       | (46,637     | )      |                                       |   | (65,938     | )                                         |   |   | (139,910                                  | )      |   |                                                              | (221,208    | ) |   |   | (1,058,591 | ) |
| Stock-based compensation                                               |   |                                       | (144,939    | )      |                                       |   | (1,615,377  | )                                         |   |   | (429,745                                  | )      |   |                                                              | (3,672,832  | ) |   |   | (27,450,491 | ) |
|                                                                   |   | $                                          | (191,576    | )      |                                       | $      | (1,681,315  | )                                         |   | $      | (569,655                                  | )      |   | $                                                                 | (3,894,040  | ) |   | $ | (28,509,082 | ) |
|                                                                   |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |   |   |   |   |   |
| Loss from operations                                                   |   | $                                          | (2,125,925  | )      |                                       | $      | (3,617,378  | )                                         |   | $      | (5,918,816                                | )      |   | $                                                                 | (10,752,797 | ) |   | $ | (70,037,482 | ) |
|                                                                   |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |   |   |   |   |   |
| Other income (expenses)                                                |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |   |   |   |   |   |
| Interest (expense)                                                     |   |                                       | (70,476     | )      |                                       |   | (1,088,323  | )                                         |   |   | (227,398                                  | )      |   |                                                              | (2,375,468  | ) |   |   | (3,564,742 | ) |
| Interest income                                                        |   |                                       | —     |   |                                       |   | —     |                                      |   |   | 4,790                                     |   |   |                                                              | 114,610     |   |   |   |   |   |
| Other income (expense)                                                 |   |                                       | (46,678     | )      |                                       |   | (122,215    | )                                         |   |   | (25,028                                   | )      |   |                                                              | (148,836    | ) |   |   | 56,704 |   |
|                                                                   |   | $                                          | (117,154    | )      |                                       | $      | (1,210,538  | )                                         |   | $      | (252,426                                  | )      |   | $                                                                 | (2,519,514  | ) |   | $ | (3,393,428 | ) |
|                                                                   |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |   |   |   |   |   |
| Net loss for the period                                                |   |                                       | (2,243,079  | )      |                                       |   | (4,827,916  | )                                         |   |   | (6,171,242                                | )      |   |                                                              | (13,272,311 | ) |   |   | (67,512,095 | ) |
|                                                                   |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |   |   |   |   |   |
| Deficit, beginning of the period                                       |   |                                       | (65,269,016 | )      |                                       |   | (52,134,017 | )                                         |   |   | (61,340,853                               | )      |   |                                                              | (43,689,622 | ) |   |   | — |   |
|                                                                   |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |   |   |   |   |   |
| Deficit, end of the period                                             |   | $                                          | (67,512,095 | )      |                                       | $      | (56,961,933 | )                                         |   | $      | (67,512,095                               | )      |   | $                                                                 | (56,961,933 | ) |   | $ | (67,512,095 | ) |
|                                                                   |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |   |   |   |   |   |
| Net loss per share attributable                                        |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |   |   |   |   |   |
| to common stockholders                                                 |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |   |   |   |   |   |
|                                                                   |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |   |   |   |   |   |
|                                                                   |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |   |   |   |   |   |
| Basic and fully diluted                                                |   | $                                          | (0.02       | )      |                                       | $      | (0.09       | )                                         |   | $      | (0.05                                     | )      |   | $                                                                 | (0.26       | ) |   | @ |   |
|                                                                   |   |                                       |        |   |                                       |   |        |                                      |   |   |                                      |   |   |                                                              |        |   |   |   |   |   |
| Number of weighted average common shares outstanding basic and diluted |   |                                       | 141,767,342 |   |                                       |   | 56,498,929  |                                      |   |   | 127,974,981                               |   |   |                                                              | 50,915,156  |   |   | @ |   |

----

----

----

----

----

| September 30,   |   | Total  |      |
|-----------------|--------|--------|-----------|
| 2010, remaining |   | $      | 185,491   |   |
| 2011            |   |   | 733,399   |   |
| 2012            |   |   | 610,744   |   |
| 2013            |   |   | 99,031    |   |
| 2014            |   |   | 44,364    |   |
| Thereafter      |   |   | —   |   |
|            |   | $      | 1,673,029 |   |

----

----

----

----

| Exhibit No. |   | Description                                                                                                                                                                                                                        |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                               |
| 2.1         |   | Share Exchange Agreement by and between the Company, AISystems and the AISystems Stockholders, 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: November 15, 2010 | By:             | /s/ Stephen C. Johnston                   |   |
|                    |            | Stephen C. Johnston                            |   |
|                    |            | Chief Executive OfficerChief Financial Officer |   |