UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





**FORM
      10-Q**





(Mark
      One)





x  QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
      the
      quarterly period ended **September
      30, 2008** .





OR





o  TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
      the
      period from _________   to  __________





Commission
      file number 333-142911





**STI
                GROUP, INC.**(Exact
                name of registrant as specified in its
                charter)





**Delaware**
            
            **35-2065470**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (I.R.S.
                Employer Identification No.)





**30950
                Rancho Viejo Road Suite 120**
              **San
                Juan Capistrano, CA**
            
            **92675**(Address
                of principal executive offices)
            
            (Zip
                Code)





Registrant’s
      telephone number, including area code ( **949)
      260-0150**





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




Yes
x No
o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      the definitions of “large accelerated filer,” “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act. (Check one):




Large
      Accelerated Filer o   Accelerated Filer o




Non-accelerated
      Filer o   Smaller
      reporting company x




(Do
      not
      check if a smaller reporting company)




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).




Yes o No
x







APPLICABLE
      ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE
      YEARS




Indicate
      by check mark whether the registrant has filed all documents and reports
      required by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934
      subsequent to the distribution of securities under a plan confirmed by a
      court.




Yes o No
o







APPLICABLE
      ONLY TO CORPORATE ISSUERS




State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date.




Title
                of each class
            
            Number
                of Shares Outstanding as of November 17, 2008**Common
                Stock, $.001 par value**
            
            **14,860,000**











STI
      GROUP, INC.





Form
      10-Q





INDEX


PAGE
                NUMBERPART
                I.FINANCIAL
                INFORMATION**Item
                  1**
              **Financial
                  Statements**Consolidated
                    Balance Sheets at September 30, 2008 (Unaudited) and December
                    31,
                    2007
              3Consolidated
                  Statements of Operations (Unaudited) for
                  the three and nine months ended September 30, 2008 and
                  2007
              4Consolidated
                  Statements of Cash Flows (Unaudited) for
                  the nine months ended September 30, 2008 and 2007
              5Notes
                  to Unaudited Consolidated Financial Statements
              6**Item
                  2**
              **Management’s
                  Discussion and Analysis of Financial **Condition
                  and Results of Operations****
              19**Item
                  4T**
              **Controls
                  and Procedures**
              27PART
                  II.
              OTHER
                  INFORMATION**Item
                  1**
              **Legal
                  Proceedings**
              28**Item
                  2**
              **Unregistered
                  Sales of Equity Securities and Use of Proceeds**
              28**Item
                  3**
              **Defaults****Upon
                  Senior Securities**
              28**Item
                  4**
              **Submission
                  of Matters to a Vote of Security Holders**
              28**Item
                  5**
              **Other
                  Information**
              28**Item
                  6**
              **Exhibits**
              28Signature
              29


EXHIBITS:




EX
      - 31.1
      Certification Pursuant to Section 302


EX
      - 32.1
      Certification Pursuant to Section 906


2


**ITEM
      1:**  **FINANCIAL
      STATEMENTS**


**STI
                  GROUP, INC.****CONSOLIDATED
                  BALANCE SHEETS**
  ASSETS
              
              September
                  30,
              
              December
                  31,2008
              
              2007(unaudited)Current
                  assets:Cash
              
              $
              76,830
              
              $
              21,644Accounts
                  receivable, net
              
              
              8,241
              
              
              676,315Note
                  receivable - related party
              
              
              44,866
              
              
              150,884Prepaid
                  expenses and other current assets
              
              
              970
              
              
              970Total
                  current assets
              
              
              130,907
              
              
              849,813Fixed
                  assets, net of accumulated depreciation of $911 and $0, respectively
              
              
              9,085
              
              
              -Deferred
                  financing costs, net
              
              
              6,025
              
              
              9,778Total
                  assets
              
              $
              146,017
              
              $
              859,591LIABILITIES
                  AND STOCKHOLDERS' DEFICITCurrent
                  liabilities:Accounts
                  payable
              
              $
              414,148
              
              $
              623,856Due
                  to related parties
              
              
              -
              
              
              36,000Sales
                  tax payable
              
              
              655
              
              
              13,994Accrued
                  expenses
              
              
              118,118
              
              
              151,679Convertible
                  notes payable, net of discount of $301,557 and $489,054, respectively
              
              
              448,443
              
              
              260,946Derivative
                  liabilities
              
              
              1,229,028
              
              
              1,294,161Total
                  current liabilities
              
              
              2,210,392
              
              
              2,380,636Warrant
                  liabilities
              
              
              147,084
              
              
              148,191Total
                  liabilities
              
              
              2,357,476
              
              
              2,528,827Commitments
                  and contingenciesStockholders'
                  deficit:Series
                  A convertible preferred stock; $0.001 par value; liquidation preference
                  ($10,937,200 at September 30, 2008) of $100 per share plus accrued
                  but
                  unpaid dividends; 100,000 shares authorized 100,000 shares issued
                  and
                  outstanding at September 30, 2008; 90,800 shares issued and outstanding
                  at
                  December 31, 2007
              
              
              100
              
              
              91Common
                    stock; $0.001 par value; 1,000,000,000 shares authorized; 14,860,000
                    shares issued and outstanding
              
              
              14,860
              
              
              14,860Additional
                  paid-in capital
              
              
              95,792
              
              
              73,514Accumulated
                  deficit
              
              
              (2,322,211
              )
              
              (1,757,701
              )Total
                  stockholders' deficit
              
              
              (2,211,459
              )
              
              (1,669,236
              )Total
                  liabilities and stockholders' deficit
              
              $
              146,017
              
              $
              859,591See
                  accompanying notes to consolidated financial statements




3




**STI
                  GROUP, INC.****CONSOLIDATED
                  STATEMENTS OF OPERATIONS
                  (UNAUDITED)**
  **Three
                  Months Ended**
              
              **Nine
                  Months Ended****September
                  30, 2008**
              
              **September
                  30, 2007**
              
              **September
                  30, 2008**
              
              **September
                  30, 2007**Net
                  revenues
              
              $
              26,587
              
              $
              743,454
              
              $
              1,961,311
              
              $
              1,774,733Cost
                  of revenues
              
              
              21,438
              
              
              530,369
              
              
              1,631,363
              
              
              1,297,971Gross
                  profit
              
              
              5,149
              
              
              213,085
              
              
              329,948
              
              
              476,762Selling,
                  general and administrative expenses
              
              
              187,812
              
              
              294,724
              
              
              726,696
              
              
              917,740Loss
                  from operations
              
              
              (182,663
              )
              
              (81,639
              )
              
              (396,748
              )
              
              (440,978
              )Other
                  income (expense)Change
                  in fair value of derivative and warrant liabilities
              
              
              32,454
              
              
              3,551
              
              
              66,240
              
              
              (11,235
              )Interest
                  expense, net
              
              
              (78,670
              )
              
              (75,214
              )
              
              (233,202
              )
              
              (220,575
              )Total
                  other expense, net
              
              
              (46,216
              )
              
              (71,663
              )
              
              (166,962
              )
              
              (231,810
              )Loss
                  before provision for income taxes
              
              
              (228,879
              )
              
              (153,302
              )
              
              (563,710
              )
              
              (672,788
              )Provision
                  for income taxes
              
              
              -
              
              
              -
              
              
              800
              
              
              800Net
                  loss
              
              $
              (228,879
              )
              $
              (153,302
              )
              $
              (564,510
              )
              $
              (673,588
              )Net
                  loss per share:Basic
              
              $
              (0.02
              )
              $
              (0.01
              )
              $
              (0.04
              )
              $
              (0.05
              )Diluted
              
              $
              (0.02
              )
              $
              (0.01
              )
              $
              (0.04
              )
              $
              (0.05
              )Weighted
                  average shares outstanding:Basic
              
              
              14,860,000
              
              
              14,860,000
              
              
              14,860,000
              
              
              14,860,000Diluted
              
              
              14,860,000
              
              
              14,860,000
              
              
              14,860,000
              
              
              14,860,000
  See
                  accompanying notes to consolidated financial
                  statements





4


**STI
                  GROUP, INC.****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****(unaudited)**
  **Nine
                  Months Ended****September
                  30, 2008**
              
              **September
                  30, 2007**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (564,510
              )
              $
              (673,588
              )Adjustments
                  to reconcile net loss to net cash provided by operating activities:Bad
                  debt expense
              
              
              6,078
              
              
              15,261Depreciation
                  expense
              
              
              911
              
              
              -Change
                  in fair value of derivative and warrant liabilities
              
              
              (66,240
              )
              
              11,235Amortization
                  of discount on convertible notes payable
              
              
              187,497
              
              
              187,498Amortization
                  of deferred financing costs
              
              
              3,753
              
              
              3,752Accrued
                  interest income added to principal
              
              
              (5,283
              )
              
              (7,911
              )Issuance
                  of preferred stock for services
              
              
              7,711
              
              
              29,238Stock
                  compensation
              
              
              14,576
              
              
              36,439Management
                  fee applied against note receivable - related party
              
              
              111,301
              
              
              -Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              661,996
              
              
              880,694Prepaid
                  expenses and other current assets
              
              
              -
              
              
              (12,277
              )Accounts
                  payable and accrued expenses
              
              
              (256,608
              )
              
              (409,073
              )Due
                  to related parties
              
              
              (36,000
              )
              
              (14,000
              )Net
                  cash provided by operating activities
              
              
              65,182
              
              
              47,268Cash
                  flows from investing activities:Purchase
                  of fixed assets
              
              
              (9,996
              )
              
              -Repayment
                  of note receivable - related party
              
              
              -
              
              
              113,000Issuance
                  of note receivable - related party
              
              
              -
              
              
              (205,000
              )Net
                  cash used in investing activities
              
              
              (9,996
              )
              
              (92,000
              )Net
                  increase (decrease) in cash
              
              
              55,186
              
              
              (44,732
              )Cash,
                  beginning of period
              
              
              21,644
              
              
              286,557Cash,
                  end of period
              
              $
              76,830
              
              $
              241,825Supplemental
                  disclosure of cash flow information:Cash
                  paid for income taxes
              
              $
              800
              
              $
              800Cash
                  paid for interest
              
              $
              4,764
              
              $
              2,693
  See
                  accompanying notes to consolidated financial statements




5


STI
      GROUP, INC.


Notes
      to
      Consolidated Financial Statements


(Unaudited)




**NOTE
      1. BACKGROUND, ORGANIZATION AND BASIS OF PRESENTATION**





*Basis
      of Presentation*





The
      unaudited consolidated financial statements have been prepared in accordance
      with the instructions to Form 10-Q and Item 8-03 of Regulation S-X. Accordingly,
      they do not include all footnote disclosures required by accounting principles
      generally accepted in the United States of America. These consolidated financial
      statements should be read in conjunction with our audited consolidated financial
      statements and notes thereto for the year ended December 31, 2007 included
      in
      our Registration Statement on Form S-1 filed with the SEC on April 2, 2008.
      The
      accompanying consolidated financial statements reflect all adjustments, which,
      in the opinion of management, are necessary for a fair presentation of our
      financial position, results of operations and cash flows for the interim periods
      in accordance with accounting principles generally accepted in the United States
      of America. The results for any interim period are not necessarily indicative
      of
      the results for the entire fiscal year.





*Organization*





The
      predecessor to STI Group, Inc., MAS Acquisition VIII Corp. (“MAS”), was
      originally incorporated in October 1996 in the state of Indiana. MAS commenced
      operations in December 1999 upon the acquisition of NetStaff, Inc., an
      Internet-based business-to-business electronic commerce company. In May 2002,
      MAS changed its focus and became a provider of business consulting and
      technology service solutions for the financial services industry. In July 2002,
      MAS reincorporated as Financial Systems Group, Inc. (“FSG”) in the state of
      Delaware. Subsequently, all operations were discontinued and there were no
      operations until December 15, 2006, as discussed below.





On
      December 15, 2006, FSG acquired Solana Technologies, Inc. (“STI”). In the
      acquisition, FSG issued 60,000 shares of its Series A Preferred Stock to the
      shareholders of STI in exchange for all of STI’s common stock. In connection
      with a concurrent December 2006 secured convertible note financing, the Company
      agreed to exchange the principal amount of outstanding secured convertible
      notes
      issued by the Company to the investors in a prior financing and other securities
      of the Company for 20,000 shares of its Series A Preferred Stock and in
      consideration of the investors agreeing to waive all claims, defaults interest,
      penalties, fees, charges or other obligations accrued or owed by the Company
      to
      the investors in connection with the prior financing. As a result of the
      foregoing transactions, FSG experienced a change in voting control, senior
      management and its Board of Directors. Accordingly, the acquisition was
      accounted for as a reverse merger accompanied by a recapitalization in
      accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, *Accounting
      for Business Combinations.* Accordingly, STI was deemed to be the accounting acquirer and surviving company
      for accounting purposes. The accompanying consolidated financial statements
      are
      the historical financial statements of STI and reflect the results of operations
      of STI from September 18, 2006, the date of inception of STI, through September
      30, 2008.





Subsequently,
      the consolidated entity (the “Company”) changed its name to STI Group, Inc.





The
      Company provides a full range of services in the areas of network design and
      engineering, including hardware and software, security, project management
      and
      maintenance and support services. The Company provides these services to
      governmental and domestic public safety agencies and small to large domestic
      commercial businesses in the United States, in the communications, energy,
      financial services, education, healthcare, manufacturing, retail and
      transportation sectors.





*Principles
      of Consolidation*





The
      accompanying consolidated financial statements include the accounts and
      transactions of the Company and its subsidiary STI. All intercompany
      transactions and balances have been eliminated in consolidation.





*Going
      Concern*





The
      Company's consolidated financial statements are prepared using the accrual
      method of accounting in accordance with accounting principles generally accepted
      in the United States of America, and have been prepared on a going concern
      basis, which contemplates the realization of assets and the settlement of
      liabilities in the normal course of business. At September 30, 2008, the Company
      has an accumulated deficit of $2,322,211 and the Company’s
      current liabilities exceeded its current assets by $2,079,485. In addition,
      at
      September 30, 2008, the Company was in default on its convertible notes payable
      (see Note 5). Although no note
      holder has sent the Company a notice of acceleration of amounts owed under
      the
      secured convertible notes, there can be no assurance that the note holders
      will
      not take such action in the future.  In the event of any acceleration of
      these obligations, or i f
      the
      Company is unable to raise enough money to cover the amounts payable, it may
      be
      forced to restructure, file for bankruptcy, sell assets or cease operations.





6


In
      June
      and July 2008, the senior management and several employees of STI resigned.
      STI
      has not been able to replace the management and staff losses and has experienced
      the loss of substantially all of its revenue in since July 2008. As
      a
      result of STI’s reduced level of operations, the Company expects that their
      revenue in the fourth quarter of 2008 will be dependent on their ability to
      stabilize the operations of STI, to supplement STI’s management and staff and to
      maintain its customer relationships. However, to date, their efforts have not
      been successful and there can be no assurance that their efforts ultimately
      will
      be successful.





As
      a
      result of the recent loss of senior management and key employees and
      substantially all of the revenue of STI, the Company does not have sufficient
      capital to continue its operations beyond the end of 2008. The Company will
      require additional capital prior to year-end to continue its current business
      at
      STI or to expand its operations beyond those of STI.





In
      view
      of the matters described above, recoverability of a major portion of the
      recorded asset amounts shown in the accompanying consolidated balance sheets
      is
      dependent upon continued operations of the Company, which in turn is dependent
      upon the Company's ability to raise additional capital, obtain financing and
      succeed in its future operations. The above factors raise substantial doubt
      about the Company’s ability to continue as a going concern. The consolidated
      financial statements do not include any adjustments relating to the
      recoverability and classification of recorded asset amounts and classification
      of liabilities that might be necessary should the Company be unable to continue
      as a going concern.





**NOTE
      2.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**





*Use
      of Estimates*





The
      preparation of consolidated financial statements in conformity with accounting
      principles generally accepted in the United States of America requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities, disclosure of contingent assets and liabilities at
      the
      date of the consolidated financial statements and the reported amounts of
      revenues and expenses during the reporting period. Significant estimates include
      the collectibility of receivables, the valuation of common and preferred stock,
      the valuation of derivative and warrant liabilities, and the valuation allowance
      of the deferred tax asset. Actual results could differ from those estimates.





*Fair
      Value of Financial Instruments*





The
      Company’s consolidated financial instruments consist of cash, accounts
      receivable, note receivable from related party, accounts payable, accrued
      expenses, convertible notes payable and amounts due to related parties. Pursuant
      to SFAS No. 107, *Disclosures
      About Fair Value of Financial Instruments* ,
      the
      Company is required to estimate the fair value of all financial instruments
      at
      the balance sheet date. The Company considers the carrying values of its
      financial instruments, except for convertible notes payable, to approximate
      their fair values due to their short maturities. The fair value of the
      convertible notes payable approximates their carrying values based on rates
      currently available to the Company for similar instruments.





*Concentrations
      of Credit Risk*





The
      Company maintains its cash balances at credit-worthy financial institutions
      that
      are insured by the Federal Deposit Insurance Corporation ("FDIC") up to
      $100,000. Management believes the risk of loss of cash balances in excess of
      the
      insured limit to be low.





*Customer
      Concentrations*





As
      of
      September 30, 2008, two customers comprised 92% of the Company’s accounts
      receivable and these two customers accounted for 10% of the net revenues for
      the
      nine months ended September 30, 2008. Two customers accounted for 37% of the
      net
      revenues for the nine months ended September 30, 2008.





7


As
      of
      December 31, 2007, three customers comprised 46% of the Company’s accounts
      receivable. Two customers accounted for 70% of the net revenues for the nine
      months ended September 30, 2007.





A
      significant portion of the Company's business is located in southern California
      and is subject to economic conditions and regulations in this geographic
      area.





*Accounts
      Receivable*





Accounts
      receivable consist of amounts billed to customers upon performance of services
      or delivery of goods and expenses incurred by the Company but not yet billed
      to
      customers for consulting services. The Company extends credit to its customers
      based upon its assessment of their credit worthiness and generally does not
      require collateral. The Company performs ongoing credit evaluations of customers
      and adjusts credit limits based upon payment history and the customers' current
      creditworthiness, as determined by its review of their current credit
      information. The Company continuously monitors collections and payments from
      its
      customers and maintains a provision for estimated credit losses based upon
      its
      historical experience and any customer-specific collection issues that it has
      identified. The allowance for doubtful accounts totaled $15,942 and $9,864
      as of
      September 30, 2008 and December 31, 2007, respectively.





*Deferred
      Financing Costs*





Deferred
      financing costs represent costs incurred in connection with obtaining debt
      financing and are capitalized and amortized over the term of the related debt
      instrument using the straight-line method, which approximates the effective
      interest method (see Note 4).





*Derivative
      Financial Instruments*





The
      Company’s derivative financial instruments consist of embedded derivatives
      related to the Callable Secured Convertible Term Notes (the “Notes”) entered
      into on December 15, 2006 (see Note 5). These embedded derivatives include
      certain conversion features, variable interest features, and default provisions.
      The accounting treatment of derivative financial instruments requires that
      the
      Company record the derivatives and related warrants at their fair values as
      of
      the inception date of the agreement and at fair value as of each subsequent
      balance sheet date. In addition, under the provisions of Emerging Issues Task
      Force (“EITF”) Issue No. 00-19, *Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company's Own Stock* ,
      as a
      result of entering into the Notes, the Company is required to classify all
      non-employee stock options and warrants as derivative liabilities and mark
      them
      to market at each reporting date. As of September 30, 2008, there were no
      non-employee options and warrants other than those issued in connection with
      the
      Notes. Any
      change in fair value will be recorded as non-operating, non-cash income or
      expense at each reporting date. If the fair value of the derivatives is higher
      at the subsequent balance sheet date, the Company will record a non-operating,
      non-cash charge. If the fair value of the derivatives is lower at the subsequent
      balance sheet date, the Company will record non-operating, non-cash income.
      The
      embedded derivatives were valued using the Black-Scholes Option Pricing Model
      with the following assumptions for 2008 and 2007, respectively: dividend yield
      of 0% and 0%; annual volatility of 205% and 205%; and risk free interest rates
      ranging from 1.78% to 2.98% and 5.0% as well as probability analysis related
      to
      trading volume restrictions and other factors.





*Revenue
      Recognition*





The
      Company’s revenues consist primarily of network software/hardware products and
      professional consulting and training services. For these sales, the Company
      utilizes written contracts or purchase orders as the means to establish the
      terms and conditions upon which its products and services are sold to its end
      customers.





For
      sales
      of network hardware and software products, revenue is recognized in accordance
      with Staff Accounting Bulletin ("SAB") 101, *Revenue
      Recognition in Financial Statements,* as
      revised by SAB 104. Accordingly, revenue is recognized at the date of shipment
      to customers when a formal arrangement exists, the price is fixed or
      determinable, the delivery is completed, no other significant obligations by
      the
      Company exist and collectibility of the receivable is reasonably assured.
      Payments received before all of the relevant criteria for revenue recognition
      are satisfied are recorded as deferred revenue. Revenues and costs of revenues
      from consulting or training contracts are recognized during the period in which
      the service is performed.





8


In
      accordance with EITF Issue No. 06-3, *How
      Taxes Collected from Customers and Remitted to Governmental Authorities Should
      Be Presented in the Income Statement (That Is, Gross Versus Net
      Presentation)* ,
      revenues are reported net of sales taxes collected.





*Net
      Loss per Share*





The
      Company adopted the provisions of SFAS No. 128, *Earnings
      Per Share* ("EPS").
      SFAS No. 128 provides for the calculation of basic and diluted earnings or
      loss
      per share. Basic loss per share includes no dilution and is computed by dividing
      loss available to common stockholders by the weighted average number of common
      shares outstanding for the period. Diluted loss per share reflects the potential
      dilution of securities that could share in the losses of the entity. Such
      amounts include shares potentially issuable pursuant to the Notes and the
      attached warrants and the convertible preferred stock (see Notes 5 and 7).
      For
      the periods ended September 30, 2008 and 2007, basic and diluted loss per share
      are the same as the potentially dilutive shares were excluded from diluted
      loss
      per share as their effect would be anti-dilutive for the periods then ended.
      Had
      such shares been included in diluted EPS, they would have resulted in
      weighted-average common shares of 654,261,818 **** and
      577,686,315 **** for
      the
      nine months ended September 30, 2008 and 2007, respectively.





*Issuance
      of Shares for Non-Cash Consideration*





The
      Company accounts for the issuance of equity instruments to acquire goods and/or
      services based on the fair value of the goods and services or the fair value
      of
      the equity instrument at the time of issuance, whichever is more reliably
      determinable.





The
      Company's accounting policy for equity instruments issued to consultants and
      vendors in exchange for goods and services follows the provisions of EITF Issue
      No. 96-18, *Accounting
      for Equity Instruments That are Issued to Other Than Employees for Acquiring,
      or
      in Conjunction with Selling, Goods or Services* and EITF
      Issue No. 00-18, *Accounting
      Recognition for Certain Transactions Involving Equity Instruments Granted to
      Other Than Employees.* The
      measurement date for the fair value of the equity instruments issued is
      determined at the earlier of (i) the date at which a commitment for performance
      by the consultant or vendor is reached or (ii) the date at which the consultant
      or vendor's performance is complete. In the case of equity instruments issued
      to
      consultants, the fair value of the equity instrument is recognized over the
      term
      of the consulting agreement.




*Stock-Based
      Compensation*




At
      September 30, 2008, the Company has one stock-based compensation
      plan.




Upon
      inception, the Company adopted SFAS No. 123 (revised 2004), *Share-Based
      Payment* ,
      ("SFAS
      123(R)") which establishes standards for the accounting of transactions in
      which
      an entity exchanges its equity instruments for goods or services, primarily
      focusing on accounting for transactions where an entity obtains employee
      services in share-based payment transactions. SFAS 123(R) requires a public
      entity to measure the cost of employee services received in exchange for an
      award of equity instruments, including stock options, based on the grant-date
      fair value of the award and to recognize it as compensation expense over the
      period the employee is required to provide service in exchange for the award,
      usually the vesting period.  In March 2005, the SEC issued Staff Accounting
      Bulletin No. 107 ("SAB 107") relating to SFAS 123(R). The Company has
      applied the provisions of SAB 107 in its adoption of SFAS 123(R).




Stock-based
      compensation expense recognized during the period is based on the value of
      the
      portion of share-based payment awards that is ultimately expected to vest during
      the period. Stock-based compensation expense recognized in the Company's
      consolidated statement of operations for the nine months ended September 30,
      2008 included compensation expense for the share-based payment awards granted
      based on the grant date fair value estimated in accordance with the provisions
      of SFAS 123(R). As stock-based compensation expense recognized in the
      consolidated statement of operations for the nine months ended September 30,
      2008 is based on awards ultimately expected to vest, it has been reduced for
      estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at
      the
      time of grant and revised, if necessary, in subsequent periods if actual
      forfeitures differ from those estimates. Stock-based compensation expense for
      the nine months ended September 30, 2008 and 2007 totaled $14,576 and $36,439,
      respectively.




SFAS
      123(R) requires the cash flows resulting from the tax benefits resulting from
      tax deductions in excess of the compensation cost recognized for those options
      to be classified as financing cash flows. Due to the Company's loss position,
      there were no such tax benefits during the nine months ended September 30,
      2008.




9


***Description
      of Plan***


The
      Company’s 2007 Stock Incentive Plan (the “2007 Plan”) was adopted by the Board
      of Directors and approved by the Company’s stockholders in May 2007. The Company
      has initially reserved 6,000,000 shares of common stock for issuance under
      the
      2007 Plan. Awards under the 2007 Plan may be made in the form of (i) incentive
      stock options (to eligible employees only); (ii) nonqualified stock options;
      (iii) restricted stock; (iv) stock awards; (v) performance shares; or (vi)
      any
      combination of the foregoing. No incentive stock options may be granted more
      than ten years after May 7, 2007. As of September 30, 2008, the Company has
      approximately 6,000,000 shares available for future issuances.




***Summary
      of Assumptions and Activity***


The
                fair value of stock-based awards to employees and directors is calculated
                using the Black-Scholes option pricing model even though the model
                was
                developed to estimate the fair value of freely tradeable, fully
                transferable options without vesting restrictions, which differ
                significantly from the Company's stock options. The Black-Scholes
                model
                also requires subjective assumptions, including future stock price
                volatility and expected time to exercise, which greatly affect the
                calculated values. The expected term of options granted is derived
                from
                historical data on employee exercises and post-vesting employment
                termination behavior. The risk-free rate selected to value any particular
                grant is based on the U.S. Treasury rate that corresponds to the
                pricing
                term of the grant effective as of the date of the grant. The expected
                volatility is based on the historical volatility of comparable publicly
                traded companies as the Company’s stock is not traded. These factors could
                change in the future, affecting the determination of stock-based
                compensation expense in future periods.
              
              A
                summary of option activity as of September 30, 2008 and changes during
                the
                nine month period then ended, is presented as
                below:









There
      were no options granted during the nine months ended September 30, 2008. The
      Company granted 2,972,000 options during the nine months ended September 30,
      2007.  Upon the exercise of options, the Company issues new shares from its
      authorized shares.




As
      of
      September 30, 2008, there was no unrecognized compensation cost related to
      employee stock option compensation arrangements. The total fair value of shares
      vested during the nine months ended September 30, 2008 and 2007 was $14,576
      and
      $36,439, respectively, which was recorded as selling, general and administrative
      expenses in the accompanying consolidated statements of operations.





*Income
      Taxes*





The
      Company accounts for income taxes under the provisions of SFAS No. 109, *Accounting
      for Income Taxes* .
      Under
      SFAS No. 109, deferred tax assets and liabilities are recognized for future
      tax
      benefits or consequences attributable to temporary differences between the
      financial statement carrying amounts of existing assets and liabilities and
      their respective tax bases. Deferred tax assets and liabilities are measured
      using enacted tax rates expected to apply to taxable income in the years in
      which those temporary differences are expected to be recovered or settled.
      A
      valuation allowance is provided for significant deferred tax assets when it
      is
      more likely than not that such assets will not be realized through future
      operations.





10


*Recently
      Adopted Accounting Pronouncements*





In
      December 2006, the Financial Accounting Standards Board (“FASB”) issued a FASB
      Staff Position (“FSP”) EITF Issue No. 00-19-2, *Accounting
      for Registration Payment Arrangements* (“FSP
      00-19-2”) which addresses an issuer’s accounting for registration payment
      arrangements. FSP 00-19-2 specifies that the contingent obligation to make
      future payments or otherwise transfer consideration under a registration payment
      arrangement, whether issued as a separate agreement or included as a provision
      of a financial instrument or other agreement, should be separately recognized
      and measured in accordance with FASB Statement No. 5, *Accounting
      for Contingencies* .
      The
      guidance in FSP 00-19-2 amends FASB Statements No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* ,
      and No.
      150, *Accounting
      for Certain Financial Instruments with Characteristics of both Liabilities
      and
      Equity* ,
      and
      FASB Interpretation No. 45, *Guarantor’s
      Accounting and Disclosure Requirements for Guarantees, Including Indirect
      Guarantees of Indebtedness of Others,* to
      include scope exceptions for registration payment arrangements. FSP 00-19-2
      is
      effective immediately for registration payment arrangements and the financial
      instruments subject to those arrangements that are entered into or modified
      subsequent to the issuance of FSP 00-19-2. For registration payment arrangements
      and financial instruments subject to those arrangements that were entered into
      prior to the issuance of FSP 00-19-2, this is effective for financial statements
      issued for fiscal years beginning after December 15, 2006, and interim periods
      within those fiscal years. The Company entered into a Registration Rights
      Agreement on December 15, 2006 (see Note 5). All of the Company’s obligations
      under the Registration Rights Agreement, as amended, have been met and the
      Company has determined that no accrual is necessary as of September 30, 2008
      as
      it is not considered probable that the Company will make any payments under
      the
      applicable provisions of the Registration Rights Agreement.




In
      July 2006, the FASB issued FASB Interpretation No. 48 *,
      Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement
      No. 109* (“FIN
      48”), which clarifies the accounting and disclosure for uncertainty in tax
      positions, as defined. FIN 48 seeks to reduce the diversity in practice
      associated with certain aspects of the recognition and measurement related
      to
      accounting for income taxes. The Company adopted the provisions of FIN 48 as
      of
      January 1, 2007, and believes that its income tax filing positions and
      deductions will be sustained on audit and does not anticipate any adjustments
      that will result in a material change to its financial position. Therefore,
      no
      reserves for uncertain income tax positions have been recorded pursuant to
      FIN
      48. In addition, the Company did not record a cumulative effect adjustment
      related to the adoption of FIN 48. The Company’s policy for recording interest
      and penalties associated with income-based tax audits is to record such items
      as
      a component of income taxes.





*Recent
      Accounting Pronouncements*





In
      September 2006, the FASB adopted SFAS No. 157, *Fair
      Value Measurements.* SFAS No.
      157 establishes a framework for measuring fair value and expands disclosure
      about fair value measurements. Specifically, this standard establishes that
      fair
      value is a market-based measurement, not an entity specific measurement. As
      such, the value measurement should be determined based on assumptions the market
      participants would use in pricing an asset or liability, including, but not
      limited to assumptions about risk, restrictions on the sale or use of an asset
      and the risk of nonperformance for a liability. The expanded disclosures include
      disclosure of the inputs used to measure fair value and the effect of certain
      of
      the measurements on earnings for the period. SFAS No. 157 is effective for
      fiscal years beginning after November 15, 2007. In February 2008, the FASB
      issued FSP 157-2, *Effective
      Date of FASB Statement No. 157* ,
      which
      delays the effective date of SFAS No. 157 for non-financial assets and
      liabilities to fiscal years beginning after November 15, 2008.  The
      adoption of SFAS No. 157 related to financial assets and liabilities did
      not have a material impact on the Company's consolidated financial
      statements.  The Company is currently evaluating the impact, if any, that
      SFAS No. 157 may have on its future consolidated financial statements related
      to
      non-financial assets and liabilities.





In
      October 2008, the FASB issued FSP No. 157-3, *Determining
      the Fair Value of a Financial Asset When the Market for That Asset is Not
      Active* .
      FSP No.
      157-3 clarifies the application of SFAS No. 157 in a market that is not active,
      and provides an illustrative example intended to address certain key application
      issues. FSP No. 157-3 is effective immediately, and applies to the Company’s
      September 30, 2008 financial statements. The Company has concluded that the
      application of FSP No. 157-3 did not have a material impact on its consolidated
      financial position and results of operations as of and for the periods ended
      September 30, 2008.





11


On
      February 15, 2007, the FASB, issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Liabilities—Including an Amendment of
      SFAS 115* .
      This
      standard permits an entity to choose to measure many financial instruments
      and
      certain other items at fair value. This option is available to all entities.
      Most of the provisions in SFAS 159 are elective; however, an amendment to SFAS
      115 *“Accounting
      for Certain Investments in Debt and Equity Securities”* applies
      to all entities with available for sale or trading securities. SFAS 159 is
      effective as of the beginning of an entity’s first fiscal year that begins after
      November 15, 2007. The adoption of SFAS No. 159 did not have a material
      impact on the Company’s consolidated financial position or results of
      operations.




In
      December 2007, the FASB issued SFAS No. 141(R), *Business
      Combinations* .
      SFAS
      No. 141(R) establishes principles and requirements for how an acquirer
      recognizes and measures in its financial statements the identifiable assets
      acquired, the liabilities assumed, and any non-controlling interest in the
      acquiree and recognizes and measures the goodwill acquired in the business
      combination or a gain from a bargain purchase.  SFAS No. 141(R) also
      sets forth the disclosures required to be made in the financial statements
      to
      evaluate the nature and financial effects of the business combination. SFAS
      No.
      141(R) applies prospectively to business combinations for which the acquisition
      date is on or after the beginning of the first annual reporting period beginning
      on or after December 15, 2008. Accordingly, the Company will adopt this standard
      in fiscal 2009.  The Company is currently evaluating the potential
      impact of the adoption of SFAS No. 141(R) on its consolidated financial
      statements.





In
      December 2007, the FASB issued SFAS No. 160, *Non-controlling
      Interests in Consolidated Financial Statements, an amendment of ARB No.
      51* .
      SFAS
      No. 160 will change the accounting and reporting for minority interests,
      which will be recharacterized as non-controlling interests (NCI) and classified
      as a component of equity. This new consolidation method will significantly
      change the accounting for transactions with minority interest
      holders.  SFAS No. 160 requires retroactive adoption of the
      presentation and disclosure requirements for existing minority interests. All
      other requirements of SFAS No. 160 shall be applied
      prospectively.  SFAS No. 160 is effective for fiscal years
      beginning after December 15, 2008 and, as such, the Company will adopt this
      standard in fiscal 2009.  The Company is currently evaluating the
      potential impact of the adoption of SFAS No. 160 on its consolidated
      financial statements.





In
      March
      2008, the FASB issued SFAS No. 161, *Disclosures
      about Derivative Instruments and Hedging Activities* .
      SFAS
      No. 161 is intended to improve financial reporting about derivative instruments
      and hedging activities by requiring enhanced disclosures to enable investors
      to
      better understand their effects on an entity's financial position, financial
      performance, and cash flows. The provisions of SFAS No. 161 are effective for
      the quarter ending March 31, 2009. The Company is currently evaluating the
      impact of the provisions of SFAS No. 161.





**NOTE
      3. NOTE RECEIVABLE - RELATED PARTY**





The
      Company has a revolving note receivable from Strands Management Company, LLC
      (“Strands”), formerly known as Monarch Bay Management Company, LLC. David
      Walters, the Company’s chief executive officer and chairman of the board, is a
      50% owner of Strands. The note receivable is intended to provide working capital
      to Strands, as needed, in amounts up to $500,000. The note bears interest at
      the
      greater of 8% or $150 per annum and matures on December 31, 2008. In the event
      of default, the interest rate may increase by 3% at the option of the Company.
      The balance of the note receivable as of September 30, 2008 was $44,017, plus
      accrued interest receivable of $849. Interest income on the note receivable
      was
      $5,283 and $7,911 for the nine months ended September 30, 2008 and 2007,
      respectively.





**NOTE
      4. DEFERRED FINANCING COSTS**





Deferred
      financing costs as of September 30, 2008 and December 31, 2007 are as follows:








Amortization
        of deferred financing costs was $3,753 and $3,752 for the nine months ended
        September 30, 2008 and 2007, respectively, and is included in interest expense,
        net in the accompanying consolidated statements of operations.


12




**NOTE
      5. CONVERTIBLE NOTES PAYABLE**





On
      December 15, 2006, the Company entered into a Securities Purchase Agreement
      (the
“SPA”) with AJW Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC
      and New Millennium Capital Partners II, LLC (collectively, the “Investors”) for
      the sale of (i) $750,000 in Notes that mature three years from the date of
      issuance and (ii) warrants to purchase 6,000,000 shares of the Company’s common
      stock at an exercise price of $0.03 per share.





The
      Notes
      bear interest at 6% per annum. However, no interest will be due and payable
      for
      any month in which the intraday trading price as quoted on the Over-the-Counter
      Bulletin Board (“OTCBB”) is greater than $0.025 for each trading day during the
      month.




The
      Notes
      are convertible into the Company’s common stock, at the Investors' option, at
      the lower of $0.025 per share or the variable conversion price (the “Variable
      Price”) of 55% of the average of the three lowest intraday trading prices for
      the common stock as quoted on the OTCBB for the 20 trading days preceding,
      but
      not including, the conversion date. If, after receipt of a notice of conversion,
      there are not sufficient authorized but unissued shares to effect such
      conversion, the Variable Price will be the lower of 50% of the average of the
      three lowest intraday trading prices for the common stock as quoted on the
      OTCBB
      for the 20 days preceding (i) the date on which the notice of conversion is
      given and (ii) the date on which the Company has sufficient authorized shares
      to
      effect the conversion.





In
      the
      event that the Company’s shares of common stock are trading at or below $0.025
      and subject to certain conditions, the Company has the right to prepay the
      Notes
      at 130% of the outstanding principal balance plus accrued interest, default
      interest, if any, and any other amounts due and payable under various damages
      provisions in the SPA.





In
      the
      event that the Company’s shares of common stock are trading at an average daily
      trading price of the volume weighted average price for the five days immediately
      preceding December 15, 2006 ($0.025) for each day of the month ending on the
      date of prepayment, the Company may prepay a portion of the outstanding
      principal balance multiplied by 102% plus the interest due on the Notes for
      the
      following month. In such event, the Investors may not convert the Notes in
      the
      month subsequent to the prepayment.





If
      the
      shares of common stock pursuant to a conversion are not delivered to the
      Investors within two days from the date the conversion notice is given for
      any
      reason other than the deficiency in the number of authorized shares to effect
      the conversion, the Company will pay to the Investors a penalty of $2,000 per
      day. The penalty is payable in cash or may be added to the principal balance
      at
      the option of the Investors. Any amounts added to the principal balance will
      be
      convertible into shares of common stock in accordance with the terms of the
      Notes.





In
      addition, upon a conversion default, the Company shall pay the Investors
      interest at the rate of 15% on all outstanding principal, accrued interest
      and
      default interest (if any) from the date of default until the date there are
      sufficient authorized shares.





In
      the
      event the Investors have converted 19.99% of the number of shares of common
      stock outstanding on December 15, 2006, the Company must either eliminate the
      prohibition on conversions in excess of 19.99% or pay to the Investors 130%
      of
      the principal outstanding at that time plus accrued interest and default
      interest, if any.





The
      Company granted the Investors a security interest in substantially all of its
      assets and intellectual property. The Company was also required to file a
      registration statement with the Securities and Exchange Commission by April
      30,
      2007 to register the shares of common stock underlying the Notes and the
      warrants. The Company entered into an amendment to the SPA which extended the
      date to file a registration statement to May 31, 2007. If the registration
      statement was not declared effective by June 30, 2008, the Company was required
      to pay a penalty to the Investors of 0.002% of the outstanding principal balance
      on the Notes per month or the pro rata portion thereof until the registration
      statement was declared effective. Such payment was payable in cash or shares
      of
      common stock at the option of the Company. On April 15, 2008, the registration
      statement covering a portion of the shares issuable under the SPA was declared
      effective. In the event the Company breaches any representation or warranty
      in
      the SPA, the Company is required to pay a penalty in shares or cash, at the
      election of the Investors, in an amount equal to 3% of the outstanding principal
      amount of the Notes per month plus accrued and unpaid interest.





The
      full
      principal amount of the Notes is due upon a default under the terms of the
      SPA
      at the greater of (i) 130% of the outstanding principal balance plus accrued
      interest and default interest, if any or (ii) the highest number of shares
      of
      common stock issuable on conversion treating the trading day immediately
      preceding the date of default as the conversion date for purposes of determining
      the lowest applicable conversion price.





13


In
      conjunction with the Notes, the Company issued warrants to purchase 6,000,000
      shares of its common stock. The warrants are exercisable until seven years
      from
      the date of issuance at an exercise price of $0.03 per share. The Investors
      may
      exercise the warrants on a cashless basis if the shares of common stock
      underlying the warrants are not then registered pursuant to an effective
      registration statement. In the event the Investors exercise the warrants on
      a
      cashless basis, the Company will not receive any proceeds. In addition, the
      exercise price of the warrants will be adjusted in the event the Company issues
      common stock at a price below market, with the exception of any securities
      issued as of the date of the warrants or issued in connection with the Notes
      issued pursuant to the SPA. In addition to all other available remedies at
      law
      or in equity, if the Company fails to deliver certificates for the shares of
      common stock underlying the warrants within three business days after the
      warrant is exercised, then the Company shall pay to the holder in cash a penalty
      (the “Penalty”) equal to 2% of the number of shares of common stock to which the
      holder is entitled multiplied by the average of the last reported trading prices
      for the five trading days preceding the exercise date for each day that the
      Company fails to deliver certificates for the shares of common stock underlying
      the warrants.





The
      Investors have agreed to restrict their ability to convert their Notes or
      exercise their warrants and receive shares of the Company’s common stock such
      that the number of shares of common stock held by them in the aggregate and
      their affiliates after such conversion or exercise does not exceed 4.99% of
      the
      then issued and outstanding shares of the Company’s common stock.





The
      Notes
      include certain features that are considered embedded derivative financial
      instruments, such as a variety of conversion options, a variable interest rate
      feature, events of default and a variable liquidated damages clause. These
      features are described below, as follows:


·
              The
                  Notes’ conversion features are identified as embedded derivatives and
                  have
                  been bifurcated and recorded on the Company’s consolidated balance sheet
                  at their fair value;
 ·
              Annual
                  interest on the Notes is equal to 6% provided that no interest
                  shall be
                  due and payable for any month in which the Company’s trading price is
                  greater than $0.025 for each trading day of the month, which potential
                  interest rate reduction is identified as an embedded derivative
                  but has a
                  nominal value and has not been included in this analysis;
 ·
              The
                  Notes contain a non-standard anti-dilution provision which provides
                  for an
                  adjustment of the fixed conversion price in the event the Company
                  issues
                  or grants any warrants, rights or options at a price less than
                  the fixed
                  conversion price then in effect, which is identified as an embedded
                  derivative but has a nominal value and has not been included in
                  this
                  analysis;
 ·
              The
                  SPA includes a penalty provision based on any failure to meet registration
                  requirements for shares issuable under the conversion of the note
                  or
                  exercise of the warrants, which represents an embedded derivative,
                  but
                  such derivative has not been included in this analysis at September
                  30,
                  2008 because this derivative has a nominal value and the Company’s
                  assessment of the likelihood of not meeting the registration requirements
                  is remote; and
 ·
              The
                  SPA contains certain events of default including not having adequate
                  shares registered to effectuate allowable conversions; in that
                  event, the
                  Company is required to pay a conversion default payment at 15%
                  interest,
                  which is identified as an embedded derivative but has a nominal
                  value and
                  has not been included in this
                  analysis.





The
      initial fair value assigned to the embedded derivatives was $1,324,777, which
      consisted of the fair values of the conversion-related derivatives of $1,175,945
      and the fair value of the warrants of $148,832. The Company recorded the first
      $750,000 of fair value of the derivatives and warrants to debt discount (equal
      to the total proceeds received as of December 31, 2006), which will be amortized
      to interest expense over the term of the Notes. The remaining balance of
      $574,777 was recorded as interest expense for the period ended December 31,
      2006.





As
      of
      September 30, 2008, the carrying amount of the Notes was $448,443, net of the
      unamortized debt discount of $301,557. Interest expense on the Notes totaled
      $232,423 for the nine months ended September 30, 2008, which consisted of the
      amortization of the debt discount of $187,497, amortization of debt issuance
      costs of $3,753 and interest accrued at the face rate of $33,781 plus $7,392
      of
      default interest as the Company failed to make the quarterly interest payments
      (see below). Interest expense on the Notes totaled $224,908 for the nine months
      ended September 30, 2007, which consisted of the amortization of the debt
      discount of $187,498, amortization of debt issuance costs of $3,752 and interest
      accrued at the face rate of $33,658.





14


The
      Company is not in compliance with the obligation to pay interest when due on
      the
      Notes. The Notes provide for a default interest rate of 15% per annum on the
      outstanding due but unpaid interest amounts. As of September 30, 2008, the
      Company has accrued $11,330 in default interest under the Notes. The failure
      to
      comply with the obligations relating to these Notes exposes the Company to
      demands for immediate repayment (at a premium to outstanding principal) as
      well
      as default interest and liquidated damages claims by the Note holders. As the
      Company is in default of its obligations under its convertible notes payable
      as
      of September 30, 2008 and December 31, 2007, all principal and accrued interest,
      and related derivative liabilities related to the convertible notes payable
      have
      been classified as current liabilities in the accompanying consolidated balance
      sheets at September 30, 2008 and December 31, 2007.





The
      changes in the fair value of the derivative and warrant liabilities for the
      nine
      months ended September 30, 2008 and 2007 have been reflected on the consolidated
      statements of operations.




The
      market price of the Company’s common stock significantly impacts the extent to
      which the Company may be required or may be permitted to convert the
      unrestricted and restricted portions of the Notes into shares of the Company’s
      common stock. The lower the market price of the Company’s common stock at the
      respective times of conversion, the more shares the Company will need to issue
      to convert the principal and interest payments then due on the Notes. If the
      market price of the Company’s common stock falls below certain thresholds, the
      Company will be unable to convert any such repayments of principal and interest
      into equity, and the Company will be forced to make such repayments in cash.
      The
      Company’s operations could be materially adversely impacted if the Company is
      forced to make repeated cash payments on the Notes.





**NOTE
      6. COMMITMENTS AND CONTINGENCIES**





**Operating
      Lease**




The
      Company conducts its operations in a facility leased under the terms of a
      non-cancelable operating lease at a monthly rent of $3,800 through December
      31,
      2008. Rent expense for the leased facility was $26,600 and $34,200 for the
      nine
      months ended September 30, 2008 and 2007, respectively. In October 2008, the
      Company entered into a settlement and release agreement with the lessor whereby
      the Company is obligated to make payments totaling $2,500 in exchange for a
      a
      release of all obligations due under the lease.





*Consulting
      Agreements*





The
      Company has entered into a variety of consulting agreements for services to
      be
      provided to the Company in the ordinary course of business. These agreements
      call for expense reimbursement and various payments upon performance of
      services.





Legal
      Services Agreement





On
      October 1, 2006, the Company entered into an agreement for legal services to
      be
      performed through December 31, 2007. The term will automatically be extended
      for
      successive three-month periods unless either party gives written notice within
      90 days of the expiration of the term or extended term. The agreement requires
      monthly payments of $3,000. In addition, the attorney will earn a fee equal
      to
      the greater $15,000 or 0.5% of the amount of any completed financing or
      re-financing transaction and 1.0% of the acquisition price of any completed
      merger or acquisition. During the nine months ended September 30, 2008 and
      2007,
      the Company incurred $27,000 in connection with the agreement which is included
      in selling, general and administrative expenses in the accompanying consolidated
      statements of operations. This agreement was terminated effective November
      1,
      2008.





*Indemnities
      and Guarantees*





The
      Company has an indemnification agreement with David Walters, its majority
      beneficial shareholder (see Note 8) and chief executive officer, under which
      the
      Company will indemnify him to the fullest extent permitted by law in connection
      with his provision of services to the Company. Specifically, the Company is
      obligated to indemnify him for the following:




15




·
              Acts,
                  omissions or transactions for which he is prohibited from receiving
                  indemnification under applicable
                  law.
 ·
              Claims
                  initiated or brought voluntarily by him and not by way of defense,
                  except
                  for claims brought to establish or enforce a right to indemnification
                  or
                  in specific cases if the Board of Directors has approved the initiation
                  or
                  bringing of such claim, or as otherwise required under the Delaware
                  General Corporation Law, regardless of whether he ultimately is
                  determined
                  to be entitled to such indemnification, advance expense payment
                  or
                  insurance recovery, as the case may
                  be.
 ·
              Any
                  proceeding instituted by him to enforce or interpret his indemnification
                  agreement, if a court of competent jurisdiction determines that
                  each of
                  the material assertions made by him in such proceeding was not
                  made in
                  good faith or was frivolous.
 ·
              Violations
                  of Section 16(b) of the Exchange Act or any similar successor
                  statute.


The
      Company has also made certain indemnities and guarantees, under which it may
      be
      required to make payments to a guaranteed or indemnified party in relation
      to
      certain actions or transactions. The Company indemnifies its directors,
      officers, employees, consultants and agents, as permitted under the laws of
      the
      State of Delaware. In connection with its facility lease, the Company has
      indemnified its lessor for certain claims arising from the use of the
      facilities. Pursuant to the terms of the Notes, the Company is also required
      to
      indemnify the Investors for damages resulting from various circumstances,
      including breach of representation or warranty. The duration of the guarantees
      and indemnities varies, and is generally tied to the life of the agreement.
      These guarantees and indemnities do not provide for any limitation of the
      maximum potential future payments the Company could be obligated to make.





Historically,
      the Company has not been obligated nor incurred any payments for these
      obligations and, therefore, no liabilities have been recorded for these
      indemnities and guarantees in the accompanying consolidated balance
      sheets.





*Legal
      Proceedings*





In
      September 2008, STI filed suit against its former senior management and their
      new employer in the case Solana Technologies, Inc. v. Ipkeys Technologies,
      LLC,
      et al. (Superior Court of California, County of San Diego). In the case, STI
      alleged misappropriation of trade secrets, unfair competition, breach of loyalty
      and other claims. In November 2008, the defendants filed a counter-complaint
      against STI, the Company, our Chairman and Chief Executive Officer and another
      individual alleging intentional and negligent misrepresentation and breach
      of
      contract. No amounts have been accrued as of September 30, 2008.





In
      November 2008, a vendor of STI filed a request for entry of default judgment
      in
      the case TriGeo Network Security, Inc. v. Solana Technologies, Inc. (Superior
      Court of California, County of San Diego). The plaintiff in the case alleged
      breach of contract and sought payment of $35,613, plus interest and attorneys’
fees. STI does not have adequate funding to engage counsel and assert a defense
      in the matter or to pay the amount of any judgment obtained in the case. The
      Company has accrued $35,613 in accounts payable as of September 30,
      2008.





**NOTE
      7. STOCKHOLDERS’ DEFICIT**





*Series
      A Preferred Stock*





The
      Company is authorized to issue up to 20 million shares of preferred stock,
      of
      which 100,000 shares have been designated as Series A preferred stock with
      a par
      value of $0.001 per share. Holders of Series A preferred stock are entitled
      to
      receive cumulative dividends of $6.00 per share per annum, payable quarterly,
      when and if declared by the board of directors, prior to and in preference
      to
      any declaration or payment of a dividend, other than dividends payable in shares
      of common stock. Holders of Series A preferred stock are also entitled to a
      liquidation preference of $100 per share plus accrued but unpaid dividends
      to be
      paid prior to any distributions to the holder of common stock. Each share of
      Series A preferred stock is convertible into the number of common shares
      determined by dividing the liquidation preference plus any accrued but unpaid
      dividends divided by the conversion price. The conversion price is the lesser
      of
      (i) $0.025 or (ii) 75% of the average of the three lowest trading prices of
      the
      common stock for the 20 trading days ending one day prior to the conversion.
      The
      holders of Series A preferred stock have the right to convert their shares
      such
      that the holder would not beneficially own in excess of 4.99% of the number
      of
      common shares outstanding immediately after giving effect to the conversion.
      Each holder of Series A preferred stock is entitled to vote on all matters
      and
      shall be entitled to the number of votes per share a holder of the common stock
      into which the Series A preferred stock is convertible, taking into account
      the
      applicable ownership limitations. So long as 50% of the issued Series A
      preferred shares are outstanding, the Company must first obtain the approval
      of
      the Series A preferred stockholders to change the capital structure of the
      Company, pay dividends or sell or encumber a substantial amount of the Company’s
      property.





16


On
      May 1,
      2008, the Company issued 5,000 shares of its Series A Preferred Stock as a
      non-refundable retainer for the services provided by Strands under the Support
      Services Agreement (see Note 8). These shares were valued at $4,191 and are
      included in selling, general and administrative expenses for the nine months
      ended September 30, 2008.





On
      May 1,
      2008, the Company issued 4,200 shares of its Series A Preferred Stock as a
      non-refundable retainer for the services provided by MBA under the Placement
      Agency and Advisory Services Agreement (see Note 8). These shares were valued
      at
      $3,520 and are included in selling, general and administrative expenses for
      the
      nine months ended September 30, 2008.





*Common
      Stock*





The
      Company is authorized to issue up to 1,000,000,000 shares of its $0.001 par
      value common stock. Holders of common stock are entitled to one vote per share
      and may participate ratably in dividends when and if declared by the board
      of
      directors.





*Warrants*





See
      Note
      5.





**NOTE
      8.**  **RELATED
      PARTY TRANSACTIONS**





On
      October 1, 2006, the Company entered into an agreement with Monarch Bay Capital
      Group (“MBCG”) for corporate development and chief financial officer services at
      the rate of $20,000 per month plus reimbursement of certain out-of-pocket
      expenses. The initial term of the agreement expires on December 31, 2008 and
      continues thereafter on a month-to-month basis unless terminated by either
      party. On May 1, 2007, this agreement was terminated by mutual consent. The
      Company incurred $80,000 under the terms of the agreement for the nine months
      ended September 30, 2007 which is included in selling, general, and
      administrative expenses in the accompanying consolidated statement of
      operations. No amounts were outstanding as of December 31, 2007.





On
      February 1, 2007, the Company entered into an agreement with Strands for
      corporate development strategy and execution services and for chief financial
      officer services. Under the agreement with Strands, the Company will pay to
      Strands a fee of 5% of the Company’s total revenue from any product development
      relationship, licensing relationship, distribution relationship or any other
      similar transaction or relationship involving the Company and a partner or
      customer introduced by Strands. The fee will be due and payable in cash when
      the
      associated revenue from the transaction is collected by the Company. The initial
      term of the agreement expires on December 31, 2008 and continues thereafter
      on a
      month-to-month basis unless terminated by either party. On May 1, 2007, this
      agreement was terminated by mutual consent. No amounts were incurred or paid
      under this agreement during the nine month periods in 2007 or 2008.





On
      May 1,
      2007, the Company entered into a Support Services Agreement with Strands. Under
      the Support Services Agreement, Strands will provide the Company with financial
      management services, facilities and administrative services, business
      development services, creditor resolution services and other services as agreed
      by the parties. As a retainer for the services provided by Strands under the
      Support Services Agreement, the Company issued to Strands 5,000 shares of its
      Series A Preferred Stock. The Company will also pay to Strands monthly cash
      fees
      of $22,000 for the services. In addition, Strands will receive fees equal to
      (a)
      6% of the revenue generated from any business development transaction with
      a
      customer or partner introduced to the Company by Strands and (b) 20% of the
      savings to the Company from any creditor debt reduction resolved by Strands
      on
      behalf of the Company. The initial term of the Support Services Agreement
      expired May 1, 2008. This agreement was renewed on May 1, 2008. As a retainer
      for the services provided by Strands under the renewed Support Services
      Agreement, the Company issued to Strands 5,000 shares of its Series A Preferred
      Stock (see Note 7). The Company will pay to Strands monthly cash fees of $23,100
      for the services. In addition, Strands will receive fees equal to (a) 6% of
      the
      revenue generated from any business development transaction with a customer
      or
      partner introduced to the Company by Strands and (b) 20% of the savings to
      the
      Company from any creditor debt reduction resolved by Strands on behalf of the
      Company. The renewed Support Services Agreement expires May 1, 2009. The Company
      incurred $203,500 and $110,000 under the terms of the agreement for the nine
      months ended September 30, 2008 and 2007, respectively, which is included in
      selling, general, and administrative expenses in the accompanying consolidated
      statements of operations. The March through July 2008 fees of $111,301 were
      not
      paid to Strands, rather the fee was applied to outstanding interest and
      principal due on the revolving note receivable from Strands (see Note 3). No
      amounts were outstanding under this agreement as of September 30,
      2008.





17


On
      May 1,
      2007, the Company entered into a Placement Agency and Advisory Services
      Agreement with Monarch Bay Associates (“MBA”). MBA is a FINRA member firm. David
      Walters, the Company’s chief executive officer and chairman of the board, is a
      50% owner of MBA. Under the agreement, MBA will act as the Company’s placement
      agent on an exclusive basis with respect to private placements of the Company’s
      capital stock and as the Company’s exclusive advisor with respect to
      acquisitions, mergers, joint ventures and similar transactions. As a retainer
      for the services provided by MBA under the Placement Agency and Advisory
      Services Agreement, the Company issued to MBA 5,000 shares of its Series A
      Preferred Stock. In addition, MBA will receive fees equal to (a) 9% of the
      gross
      proceeds raised by the Company in any private placement (plus warrants to
      purchase 9% of the number of shares of common stock issued or issuable by the
      Company in connection with the private placement) and (b) a success fee equal
      to
      3% of the total consideration paid or received by the Company or stockholders
      in
      an acquisition, merger, joint venture or similar transaction. The initial term
      of the Placement Agency and Advisory Services Agreement expired May 1, 2008.
      On
      May 1, 2008, the Company renewed the Placement Agency and Advisory Services
      Agreement with MBA. As a retainer for the services provided by MBA under the
      renewed Placement Agency and Advisory Services Agreement, the Company issued
      to
      MBA 4,200 shares of its Series A Preferred Stock (see Note 7). In addition,
      MBA
      will receive fees equal to (a) 9% of the gross proceeds raised by the Company
      in
      any private placement (plus warrants to purchase 9% of the number of shares
      of
      common stock issued or issuable by the Company in connection with the private
      placement) and (b) a success fee equal to 3% of the total consideration paid
      or
      received by the Company or stockholders in an acquisition, merger, joint venture
      or similar transaction. The renewed Placement Agency and Advisory Services
      Agreement expires May 1, 2009. On August 20, 2008, the Company entered into
      Amendment No. 1 of the Placement Agency and Advisory Services Agreement to
      include strategic acquisition of operating companies and related transactions.
      As a retainer for the services provided by MBA under the amended Placement
      Agency and Advisory Services Agreement, the Company will pay MBA a monthly
      retainer of $5,000 in cash. The Company incurred $10,000 and $0 under the terms
      of the agreement during the nine months ended September 30, 2008 and 2007,
      respectively, which is included in selling, general, and administrative expenses
      in the accompanying consolidated statement of operations. No amounts were
      outstanding as of September 30, 2008.




In
      March,
      June, and September 2008, the Company entered into a quarterly engagement
      agreement with Strands to perform valuation services on the embedded derivative
      features within the convertible notes. The Company incurred $10,500 for services
      performed under this agreement during the nine months ended September 30, 2008.
      Amounts outstanding under these agreements totaled $3,500 and $3,500 as of
      September 30, 2008 and December 31, 2007, respectively.




On
      December 28, 2007, the Company borrowed $29,000 from Service Advantage
      International, Inc. (“SAI”) for working capital purposes. Keith Moore is a 50%
      owner of Strands and MBA. Keith Moore beneficially owns 49.5% of SAI. The
      Company incurred interest at the rate of 14.25% per annum. As of December 31,
      2007, accrued interest payable on the loan was $34 and is included in accrued
      expenses in the accompanying consolidated balance sheet. Interest expense on
      this loan was $604 for the nine months ended September 30, 2008. The outstanding
      balance and accrued interest was repaid in full on February 28,
      2008.





**NOTE
      9.** **EMPLOYEE
      SAVINGS PLAN**





During
      2007, the Company established an employee savings plan pursuant to Section
      401(k) of the Internal Revenue Code. The plan allows participating employees
      to
      deposit into tax deferred investment accounts up to 90% of their salary, subject
      to annual limits. The Company, at its option, may make contributions under
      the
      plan. The Company did not make any contributions to the plan during 2007 or
      2008.





**NOTE
      10. SUBSEQUENT EVENTS**





In
      October 2008, STI entered into a settlement and release agreement with a lessor
      whereby STI is obligated to make payments totaling $2,500 in exchange for a
      release of all obligations due under the lease.





In
      November 2008, a vendor of STI filed a request for entry of default judgment
      in
      the case TriGeo Network Security, Inc. v. Solana Technologies, Inc. (Superior
      Court of California, County of San Diego). The plaintiff in the case alleged
      breach of contract and sought payment of $35,613, plus interest and attorneys’
fees. STI does not have adequate funding to engage counsel and assert a defense
      in the matter or to pay the amount of any judgment obtained in the case. The
      Company has accrued $35,613 in accounts payable as of September 30,
      2008.





18





**MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS**





The
      following discussion should be read in conjunction with our consolidated
      financial statements and related notes for the year ended December 31, 2007
      and
      the other financial information included elsewhere in this report and in our
      Registration Statement on Form S-1 filed with the Securities and Exchange
      Commission on April 2, 2008.





**Information
      Regarding Forward-Looking Statements**





Our
      Management’s Discussion and Analysis and Plan of Operation contains not only
      statements that are historical facts, but also statements that are
      forward-looking.




The
      forward-looking statements generally include our management's plans and
      objectives for future operations, including plans, objectives and expectations
      relating to our future economic performance, business prospects, revenues,
      working capital, liquidity, ability to obtain financing, generation of income
      and actions of secured parties not to foreclose on our assets. The
      forward-looking statements may also relate to our current beliefs regarding
      revenues we might earn if we are successful in implementing our business
      strategies. The forward-looking statements generally can be identified by the
      use of the words "believe," "intend," "plan," "expect," "forecast," "project,"
      "may," "should," "could," "seek," "pro forma," "estimate," "continue,"
      "anticipate" and similar words. The forward-looking statements and associated
      risks may include, relate to, or be qualified by other important factors,
      including, without limitation:




-
      anticipated trends in our financial condition and results of operations
      (including expected changes in our gross margin and selling, general and
      administrative expenses);




-
      our
      ability to finance our working capital and other cash requirements;




-
      our
      business strategy for organic and acquired growth; and




-
      our
      ability to distinguish ourselves from our current and future
      competitors.





Although
      the forward-looking statements in this Form 10-Q reflect the good faith judgment
      of our management, such statements can only be based on facts and factors
      currently known by them. Consequently, and because forward-looking statements
      are inherently subject to risks and uncertainties, the actual results and
      outcomes may differ materially from the results and outcomes discussed in the
      forward-looking statements. You are urged to carefully review and consider
      the
      various disclosures made by us in this report and in our other reports as we
      attempt to advise interested parties of the risks and factors that may affect
      our business, financial condition, and results of operations and
      prospects *.*





**Overview**





We
      provide a full range of services in the areas of network design and engineering,
      including hardware and software, security, project management and maintenance
      and support services for advanced communications networks. We provide these
      services to governmental and public safety agencies and medium to large
      commercial businesses, in the United States, in the communications, energy,
      financial services, education, healthcare, manufacturing, retail and
      transportation sectors.





Our
      objective is to grow our core business through a combination of internal and
      acquired growth. The key elements to our strategy are:


·
              Further
                  penetrate markets in which we have existing customers. We have
                  developed
                  relationships with customers in selected markets, such as municipal
                  and
                  public safety. We are using our relationships with these customers
                  and our
                  knowledge of their needs to attract other potential customers in
                  these
                  markets. We intend to use this same approach to enter new markets.
 
 ·
              Exploit
                  opportunities to sell additional products and services to our existing
                  customers. We plan to focus our sales efforts toward our existing
                  customers to expand the scope of the solutions we provide to them.
 
 ·
              Enhance
                  our sales and customer support infrastructure. We intend to continue
                  making investments in our corporate infrastructure, including sales,
                  marketing, implementation, and customer
                  support.
 
 ·
              Acquire
                  complementary businesses and technologies. We intend to build our
                  revenue
                  base and solutions by selectively acquiring complementary businesses
                  and
                  technologies. We target companies with the following characteristics:
                  (1)
                  an established market presence in their respective fields, (2)
                  a loyal
                  customer base that can be used to sell other products and services,
                  and
                  (3) products and services that provide recurring, predictable service
                  and
                  maintenance revenue streams.






19


While
      these are the key elements of our current strategy, there can be no guarantees
      that our strategy will not change, or that we will succeed in achieving these
      goals individually or collectively.





As
      a
      result of the recent loss of senior management and key employees at our sole
      operating subsidiary Solana Technologies, Inc. (discussed in more detail below),
      we are in the process of reevaluating our growth strategy with respect to both
      our existing operations and the potential for new lines of
      business.





On
      December 15, 2006, we acquired Solana Technologies, Inc. (“STI”). In the
      acquisition, we issued 60,000 shares of our Series A Preferred Stock to the
      shareholders of STI in exchange for all of STI’s common stock and experienced a
      change in voting control, senior management and the Board of Directors. As
      a
      result, the acquisition was accounted for as a reverse merger accompanied by
      a
      recapitalization in accordance with Statement of Financial Accounting Standards
      (“SFAS”) No. 141, *Accounting
      for Business Combinations.* STI was
      deemed to be the accounting acquirer and surviving company for accounting
      purposes. The accompanying consolidated financial statements are the historical
      financial statements of STI and reflect the results of operations of STI from
      September 18, 2006, the date of inception of STI through September 30, 2008.





STI
      provides network design, engineering, project management and maintenance and
      support services for advanced communications networks. The key employees of
      STI
      had operated a similar business, either on a standalone basis or as part of
      a
      larger company, since 1986, and have provided IT products and engineering
      services to over 1,200 companies during that time span. These employees joined
      STI in September of 2006 upon termination of their employment with their
      previous employer who was unable to meet payroll obligations or provide adequate
      working capital for their operation. Although STI had no customer contractual
      relationships at its inception, its key employees contacted prior client
      contacts and were able to generate immediate new contracts and revenue.





In
      June
      and July 2008, the senior management and several employees of STI resigned.
      STI
      has not been able to replace the management and staff losses and has experienced
      the loss of substantially all of its revenue in since July 2008. As
      a
      result of STI’s reduced level of operations, we expect that our revenue in the
      fourth quarter of 2008 will be dependent on our ability to stabilize the
      operations of STI, to supplement STI’s management and staff and to maintain its
      customer relationships. However, to date, our efforts have not been successful
      and there can be no assurance that our efforts ultimately will be successful.





The
      Company's consolidated financial statements are prepared using the accrual
      method of accounting in accordance with accounting principles generally accepted
      in the United States of America, and have been prepared on a going concern
      basis, which contemplates the realization of assets and the settlement of
      liabilities in the normal course of business. At September 30, 2008, the Company
      has an accumulated deficit of $2,322,211 and the
      Company’s current liabilities exceeded its current assets by $2,079,485. In
      addition, at September 30, 2008, the Company was in default on its convertible
      notes payable. Although no note
      holder has sent the Company a notice of acceleration of amounts owed under
      the
      secured convertible notes, there can be no assurance that the note holders
      will
      not take such action in the future.  In the event of any acceleration of
      these obligations, or i f
      the
      Company is unable to raise enough money to cover the amounts payable, it may
      be
      forced to restructure, file for bankruptcy, sell assets or cease operations.





As
      a
      result of the recent loss of senior management and key employees and
      substantially all of the revenue of STI, the Company does not have sufficient
      capital to continue its operations beyond the end of 2008. We will require
      additional capital prior to year-end to continue our current business at STI
      or
      to expand our operations beyond those of STI.





In
      view
      of the matters described above, recoverability of a major portion of the
      recorded asset amounts shown in the accompanying consolidated balance sheets
      is
      dependent upon continued operations of the Company, which in turn is dependent
      upon the Company's ability to raise additional capital, obtain financing and
      to
      succeed in its future operations. The above factors, among others, raise
      substantial doubt about the Company’s ability to continue as a going concern.
      The consolidated financial statements do not include any adjustments relating
      to
      the recoverability and classification of recorded asset amounts and
      classification of liabilities that might be necessary should the Company be
      unable to continue as a going concern.





20


**December
      2006 Secured Convertible Note Financing**





In
      December 2006, we entered into a securities purchase agreement with four
      accredited investors, under which we sold for $750,000 in proceeds secured
      convertible notes having an aggregate principal amount of $750,000, a 6% annual
      interest rate (payable quarterly), and a term of three years. We also sold
      warrants to purchase up to an aggregate of 6,000,000 shares of our Common Stock
      at $0.03 per share. **** The
      four
      accredited investors, AJW Partners, LLC, AJW Qualified Partners, LLC, AJW
      Offshore, Ltd. and New Millennium Capital Partners II, LLC subscribed for and
      purchased 6.7%, 12.1%, 80.0% and 1.2%, respectively, of the total offering.





In
      connection with the December 2006 securities purchase agreement, the Company
      agreed to exchange the principal amount of outstanding secured convertible
      notes
      issued by the Company to the investors in a prior financing and other securities
      of the Company for 20,000 shares of our Series A Preferred Stock. In addition,
      the investors agreed to waive all claims, defaults, interest, penalties, fees,
      charges or other obligations accrued or owed by the Company to the investors
      in
      connection with the prior financing.





The
      secured convertible notes are convertible into our Common Stock, at the selling
      stockholders' option, at the lower of (i) $0.025 or (ii) 55% of the average
      of
      the three lowest intraday trading prices for the Common Stock on a principal
      market for the 20 trading days before but not including the conversion date.
      Accordingly, there is in fact no limit on the number of shares into which the
      notes may be converted. The applicable conversion price for the secured
      convertible notes is $0.01375 as of September 30, 2008. Based on this conversion
      price, the $750,000 secured convertible notes, excluding interest, were
      convertible into 54,545,455 shares of our Common Stock. AJW Partners, LLC,
      AJW
      Qualified Partners, LLC, AJW Offshore, Ltd. and New Millennium Capital Partners
      II, LLC have contractually agreed to restrict their ability to convert or
      exercise their warrants and receive shares of our Common Stock such that the
      number of shares of Common Stock held by them and their affiliates after such
      conversion or exercise does not exceed 4.99% of the then issued and outstanding
      shares of Common Stock.





There
      are
      various risks of default associated with the secured convertible notes,
      including the fact that the secured convertible notes become immediately due
      and
      payable upon failure to pay the principal and interest of the secured
      convertible notes, the failure to convert the secured convertible notes to
      Common Stock, the failure to obtain the effectiveness of the registration
      statement covering the resale of the shares of the common stock issuable upon
      conversion of the secured convertible notes and exercise of the warrants on
      or
      before June 30, 2008, an assignment for the benefit of the Company’s or its
      subsidiaries’ creditors, an application for or consent to the appointment of a
      receiver for the Company or its subsidiaries, any judgment against the Company
      in excess of $50,000, and/or any bankruptcy, insolvency, reorganization or
      liquidation proceedings instituted by or against the Company or its
      subsidiaries. If an event of default on the secured convertible notes has
      occurred and is continuing, the holders may demand all amounts under the notes
      due and payable. In that case, we would be required to pay the holders of the
      secured convertible notes an amount equal to the greater of (x) 130% times
      the
      sum of the outstanding amount of the secured convertible notes per month plus
      accrued and unpaid interest on the secured convertible notes plus any additional
      amounts owed to the holders of the secured convertible notes or (y) the value
      of
      the highest number of shares of Common Stock issuable upon conversion of or
      otherwise pursuant to the amount calculated under clause (x) determined based
      upon the highest closing price of the Common Stock during the period beginning
      on the date of default and ending on the date the payment described herein.
      Additionally, we made certain representations and warranties and agreed to
      certain covenants that are customary for securities purchase agreements. In
      the
      event that we breach those representations, warranties or covenants, we will
      be
      subject to liquidated damages in the amount of 3% of the outstanding amount
      of
      the secured convertible notes per month plus accrued and unpaid interest on
      the
      secured convertible notes for breaches by us of certain representations,
      warranties and certain covenants. If we are unable to pay these liquidated
      damages we may be forced to abandon or curtail our business
      operations.





We
      are
      currently not in compliance with our obligation to pay interest when due on
      our
      secured convertible notes. As of September 30, 2008, we had failed to pay
      $80,753 in interest on the notes plus $11,330 in default interest. Our failure
      to comply with our obligations relating to these securities exposes us to
      demands for immediate repayment (at a premium to outstanding principal) as
      well
      as default interest and liquidated damages claims by the security holders.





21


In
      the
      December 2006 securities purchase agreement, we agreed that, without the consent
      of the selling stockholders, we would not obtain additional equity financing
      (including debt financing with an equity component) that involves (i) the
      issuance of our Common Stock at a discount to the market price of the Common
      Stock on the date of issuance (taking into account the value of any warrants
      or
      options to acquire our Common Stock issued in connection therewith) or (ii)
      the
      issuance of convertible securities that are convertible into an indeterminate
      number of shares of Common Stock or (iii) the issuance of warrants during a
      “lock-up” period that lasts until 180 days following the date that the
      registration statement is declared effective by the Securities and Exchange
      Commission (plus any days in which sales cannot be made thereunder). In
      addition, for an additional two-year period following expiration of the
“lock-up” period, we granted the selling stockholders a right to purchase any
      securities we propose to issue in an equity financing (including debt with
      an
      equity component). The foregoing limitations do not apply to securities issued
      in connection with certain underwritten public offerings, merger and acquisition
      activities or compensatory arrangements.





Stock
      Purchase Warrants





The
      warrants expire seven years from their date of issuance. The warrants include
      anti-dilution rights, whereby the exercise price of the warrants shall be
      adjusted in the event that the Company issues or sells any shares of the
      Company's Common Stock for no consideration or consideration less than the
      average of the last reported sale prices for the shares of the Company's Common
      Stock on the OTC Bulletin Board for the five trading days immediately preceding
      such date of issuance or sale. The exercise price of the warrants are also
      proportionately increased or decreased in the event of a reverse stock split
      or
      forward stock split, respectively. The exercise price is also adjusted pursuant
      to the warrants in the event the Company effects a consolidation, merger or
      sale
      of substantially all of its assets and/or if the Company declares or makes
      any
      distribution of its assets (including cash) to holders of its common stock
      as a
      partial liquidating dividend, as provided in the warrants.





The
      warrants also contain a cashless exercise, whereby if a registration statement
      covering the warrants is not effective, the warrant holders may convert the
      warrants into shares of the Company's restricted Common Stock. In the event
      of a
      cashless exercise under the warrants, in lieu of paying the exercise price
      in
      cash, the selling stockholders can surrender the warrant for the number of
      shares of Common Stock determined by multiplying the number of warrant shares
      to
      which it would otherwise be entitled by a fraction, the numerator of which
      is
      the difference between (i) the average of the last reported sale prices for
      the
      Company's Common Stock on the OTC Bulletin Board for the five trading days
      preceding such date of exercise and (ii) the exercise price, and the denominator
      of which is the average of the last reported sale prices for the Company's
      Common Stock on the OTC Bulletin Board for the five trading days preceding
      such
      date of exercise . For example, if the selling stockholder is exercising 100,000
      warrants with a per warrant exercise price of $0.75 per share through a cashless
      exercise when the average of the last reported sale prices for the Company's
      Common Stock on the OTC Bulletin Board for the five trading days preceding
      such
      date of exercise is $2.00 per share, then upon such cashless exercise the
      warrant holder will receive 62,500 shares of the Company's Common
      Stock.





**Off-Balance
      Sheet Arrangements**


The
      Company does not have any off-balance sheet arrangements.





**Critical
      Accounting Policies and Estimates**





*Use
      of Estimates*





The
      preparation of consolidated financial statements in conformity with accounting
      principles generally accepted in the United States of America requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities, disclosure of contingent assets and liabilities at
      the
      date of the consolidated financial statements and the reported amounts of
      revenues and expenses during the reporting period. Significant estimates include
      the collectibility of receivables, the valuation of common and preferred stock,
      the valuation of derivative and warrant liabilities, and the valuation allowance
      of the deferred tax asset. Actual results could differ from those estimates.





*Accounts
      Receivable*





Accounts
      receivable consist of amounts billed to customers upon performance of services
      or delivery of goods and expenses incurred by the Company but not yet billed
      to
      customers for consulting services. The Company extends credit to its customers
      based upon its assessment of their credit worthiness and generally does not
      require collateral. The Company performs ongoing credit evaluations of customers
      and adjusts credit limits based upon payment history and the customers' current
      creditworthiness, as determined by its review of their current credit
      information. The Company continuously monitors collections and payments from
      its
      customers and maintains a provision for estimated credit losses based upon
      its
      historical experience and any customer-specific collection issues that it has
      identified. The allowance for doubtful accounts totaled $15,942 and $9,864
      as of
      September 30, 2008 and December 31, 2007, respectively.




22


*Valuation
      of Derivative Financial Instruments*





The
      Company’s derivative financial instruments consist of embedded derivatives
      related to the Callable Secured Convertible Term Notes (the “Notes”) entered
      into on December 15, 2006. These embedded derivatives include certain conversion
      features, variable interest features, call options and default provisions.
      The
      accounting treatment of derivative financial instruments requires that the
      Company record the derivatives and related warrants at their fair values as
      of
      the inception date of the agreement and at fair value as of each subsequent
      balance sheet date. In addition, under the provisions of EITF Issue No. 00-19, *Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company's Own Stock* ,
      as a
      result of entering into the Notes, the Company is required to classify all
      other
      non-employee stock options and warrants as derivative liabilities and mark
      them
      to market at each reporting date. As of September 30, 2008, there were no
      non-employee options and warrants other than those issued in connection with
      the
      Notes. Any
      change in fair value will be recorded as non-operating, non-cash income or
      expense at each reporting date. If the fair value of the derivatives is higher
      at the subsequent balance sheet date, the Company will record a non-operating,
      non-cash charge. If the fair value of the derivatives is lower at the subsequent
      balance sheet date, the Company will record non-operating, non-cash income.
      The
      embedded derivatives were valued using the Black-Scholes Option Pricing Model
      with the following assumptions for 2008 and 2007, respectively: dividend yield
      of 0% and 0%; annual volatility of 205% and 205%; and risk free interest rates
      ranging from 1.78% to 2.98% and 5.0% as well as probability analysis related
      to
      trading volume restrictions and other factors.





*Revenue
      Recognition*





The
      Company’s revenues consist primarily of network software/hardware products and
      professional consulting and training services. For these sales, the Company
      utilizes written contracts or purchase orders as the means to establish the
      terms and conditions upon which its products and services are sold to its end
      customers.





For
      sales
      of network hardware and software products, revenue is recognized in accordance
      with Staff Accounting Bulletin ("SAB") 101, *Revenue
      Recognition in Financial Statements,* as
      revised by SAB 104. Accordingly, revenue is recognized at the date of shipment
      to customers when a formal arrangement exists, the price is fixed or
      determinable, the delivery is completed, no other significant obligations by
      the
      Company exist and collectibility of the receivable is reasonably assured.
      Payments received before all of the relevant criteria for revenue recognition
      are satisfied are recorded as deferred revenue. Revenues and costs of revenues
      from consulting or training contracts are recognized during the period in which
      the service is performed.





In
      accordance with EITF Issue No. 06-3, *How
      Taxes Collected from Customers and Remitted to Governmental Authorities Should
      Be Presented in the Income Statement (That Is, Gross Versus Net
      Presentation)* ,
      revenues are reported net of sales taxes collected.





*Issuance
      of Shares for Non-Cash Consideration*





The
      Company accounts for the issuance of equity instruments to acquire goods and/or
      services based on the fair value of the goods and services or the fair value
      of
      the equity instrument at the time of issuance, whichever is more reliably
      determinable.





The
      Company's accounting policy for equity instruments issued to consultants and
      vendors in exchange for goods and services follows the provisions of EITF Issue
      No. 96-18, *Accounting
      for Equity Instruments That are Issued to Other Than Employees for Acquiring,
      or
      in Conjunction with Selling, Goods or Services* and EITF
      Issue No. 00-18, *Accounting
      Recognition for Certain Transactions Involving Equity Instruments Granted to
      Other Than Employees.* The
      measurement date for the fair value of the equity instruments issued is
      determined at the earlier of (i) the date at which a commitment for performance
      by the consultant or vendor is reached or (ii) the date at which the consultant
      or vendor's performance is complete. In the case of equity instruments issued
      to
      consultants, the fair value of the equity instrument is recognized over the
      term
      of the consulting agreement.




*Stock-Based
      Compensation*




At
      September 30, 2008, the Company has one stock-based compensation
      plan.




Upon
      inception, the Company adopted SFAS No. 123 (revised 2004), *Share-Based
      Payment* ,
      ("SFAS
      123(R)") which establishes standards for the accounting of transactions in
      which
      an entity exchanges its equity instruments for goods or services, primarily
      focusing on accounting for transactions where an entity obtains employee
      services in share-based payment transactions. SFAS 123(R) requires a public
      entity to measure the cost of employee services received in exchange for an
      award of equity instruments, including stock options, based on the grant-date
      fair value of the award and to recognize it as compensation expense over the
      period the employee is required to provide service in exchange for the award,
      usually the vesting period.  In March 2005, the SEC issued Staff Accounting
      Bulletin No. 107 ("SAB 107") relating to SFAS 123(R). The Company has
      applied the provisions of SAB 107 in its adoption of SFAS 123(R).




23


Stock-based
      compensation expense recognized during the period is based on the value of
      the
      portion of share-based payment awards that is ultimately expected to vest during
      the period. Stock-based compensation expense recognized in the Company's
      consolidated statement of operations for the nine months ended September 30,
      2008 included compensation expense for the share-based payment awards granted
      based on the grant date fair value estimated in accordance with the provisions
      of SFAS 123(R). As stock-based compensation expense recognized in the
      consolidated statement of operations for the nine months ended September 30,
      2008 is based on awards ultimately expected to vest, it has been reduced for
      estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at
      the
      time of grant and revised, if necessary, in subsequent periods if actual
      forfeitures differ from those estimates. The estimated average forfeiture rate
      for the nine months ended September 30, 2008 of 0% was based on estimated future
      employee forfeitures. Stock-based compensation expense for the nine months
      ended
      September 30, 2008 and 2007 totaled $14,576 and $36,439,
      respectively.




SFAS
      123(R) requires the cash flows resulting from the tax benefits resulting from
      tax deductions in excess of the compensation cost recognized for those options
      to be classified as financing cash flows. Due to the Company's loss position,
      there were no such tax benefits during the nine months ended September 30,
      2008.





**RESULTS
      OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE
      THREE MONTHS ENDED SEPTEMBER 30, 2007**





**Net
      Revenues**





Net
      revenues totaled $26,587 for the three months ended September 30, 2008 compared
      to $743,454 for the comparable period in the prior year. The $716,867 or 96%
      decrease can be attributed to the resignation of the senior management and
      several employees of STI in June and July 2008. STI has not been able to replace
      the management and staff losses and has experienced the loss of substantially
      all of its revenue in since July. As a result of STI’s reduced level of
      operations, we expect that our revenue in the fourth quarter of 2008 will be
      dependent on our ability to stabilize the operations of STI, to supplement
      STI’s
      management and staff and to maintain its customer relationships. However, to
      date, our efforts have not been successful and there can be no assurance that
      our efforts ultimately will be successful.





**Cost
      of Revenues and Gross Profit**





Cost
      of
      revenues totaled $21,438 for the three months ended September 30, 2008 compared
      to $530,369 in the same period in the prior year. The decrease in cost of
      revenues can be primarily attributed to the resignation of the senior management
      and several employees of STI in June and July 2008. Cost of revenues were 81%
      of
      net revenues in the current period versus 71% in the same period in the prior
      year. Gross profit margins were 19% of net revenues in the current period
      compared to 29% in the same period in the prior year. The deterioration of
      margin compared to the margins realized during the 2007 period can be attributed
      to the competitive market place which has put additional pressure on the pricing
      of the Company’s products and services.




**Selling,
      General and Administrative Expenses**





Selling,
      general and administrative expenses (“SG&A”) totaled $187,812 for the three
      months ended September 30, 2008 compared to $294,724 for the same period in
      the
      prior year. Included within SG&A is management fees to a related party,
      consulting fees, legal fees, audit fees, and other expenses incurred in the
      normal course of operations. The decrease from the comparable period in the
      prior year can be attributed to the resignation of the senior management team
      and several employees of STI in June and July 2008. We expect our selling,
      general and administrative expenses to continue to decrease in the fourth
      quarter of 2008, as the Company reduces its cost structure in response to its
      reduced level of operations.





**Change
      in fair value of derivative and warrant liabilities**





The
      decrease in the fair value of the derivative and warrant liabilities for the
      three months ended September 30, 2008 totaled $32,454 due to the valuation
      performed at the end of the period. During the same period in the prior year,
      the fair value of the derivative and warrant liabilities decreased by
      $3,551.





24


**Interest
      Expense, net**





Interest
      expense, net totaled $78,670 for the three months ended September 30, 2008,
      which consisted of the amortization of the debt discount of $62,499,
      amortization of debt issuance costs of $1,251 and interest accrued at the face
      rate of $11,342 plus $2,888 of default interest as the Company failed to make
      the quarterly interest payments (see below). These amounts were partially offset
      by $849 of interest income from a note receivable from a related party. Interest
      expense, net totaled $75,214 for the three months ended September 30, 2007,
      which consisted of the amortization of the debt discount of $62,499,
      amortization of debt issuance costs of $1,251 and interest accrued at the face
      rate of $11,342. These amounts were partially offset by $2,823 of interest
      income from a note receivable from a related party.





**Net
      Loss**





As
      a
      result of the above, net loss was $228,879 and $153,302 for the three months
      ended September 30, 2008 and 2007, respectively. The net losses are mainly
      a
      result of selling, general and administrative expenses exceeding gross profit
      as
      well as the interest expense incurred on the convertible notes.





**RESULTS
      OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE
      NINE
      MONTHS ENDED SEPTEMBER 30, 2007**





**Net
      Revenues**





Net
      revenues totaled $1,961,311 for the nine months ended September 30, 2008
      compared to $1,774,733 for the comparable period in the prior year. The $186,578
      or 11% increase can be attributed to a $75,358 increase in hardware and software
      sales as well as a $266,649 increase in maintenance and support services,
      partially offset by a $172,773 decrease in project management. Hardware and
      software sales accounted for 48% of total revenues in the current period versus
      49% in the same period in the prior year. Project management accounted for
      17%
      of revenues during the nine months ended September 30, 2008 compared to 28%
      in
      the same period in the prior year. Maintenance and support services accounted
      for 35% of revenues in the current period versus only 23% in the same period
      in
      the prior year. Although the Company experienced growth in first nine months
      of
      2008 versus 2007, the Company experienced the loss of substantially all of
      its
      revenue in the third quarter of 2008 and expects this loss of revenue to
      continue at least through the fourth quarter of 2008. In June and July 2008,
      the
      senior management and several employees of STI resigned. STI has not been able
      to replace the management and staff losses. As a result of STI’s reduced level
      of operations, we expect that our revenue in the fourth quarter of 2008 will
      be
      dependent on our ability to stabilize the operations of STI, to supplement
      STI’s
      management and staff and to maintain its customer relationships. However, to
      date, our efforts have not been successful and there can be no assurance that
      our efforts ultimately will be successful.





**Cost
      of Revenues and Gross Profit**





Cost
      of
      revenues totaled $1,631,363 for the nine months ended September 30, 2008
      compared to $1,297,971 in the same period in the prior year. Cost of revenues
      were 83% of net revenues in the current period versus 73% in the same period
      in
      the prior year. Gross profit margins were 17% of net revenues in the current
      period compared to 27% in the same period in the prior year. The deterioration
      of margin compared to the margins realized during the 2007 period can be
      attributed to the competitive market place which has put additional pressure
      on
      the pricing of the Company’s products and services. Additionally, utilization
      rates of our professional staff were lower than previous periods which had
      an
      adverse impact on our professional services margins.




**Selling,
      General and Administrative Expenses**





Selling,
      general and administrative expenses (“SG&A”) totaled $726,696 for the nine
      months ended September 30, 2008 compared to $917,740 for the same period in
      the
      prior year. Included within SG&A is management fees to a related party,
      consulting fees, legal fees, audit fees, and other expenses incurred in the
      normal course of operations. The decrease from the comparable period in the
      prior year can be attributed to the resignation of the senior management team
      and several employees of STI in June and July 2008. We expect our selling,
      general and administrative expenses to continue to decrease in the fourth
      quarter of 2008, as the Company reduces its cost structure in response to its
      reduced level of operations.





25


**Change
      in fair value of derivative and warrant liabilities**





The
      decrease in the fair value of the derivative and warrant liabilities for the
      nine months ended September 30, 2008 totaled $66,240 due to the valuation
      performed at the end of the period. During the same period in the prior year,
      the fair value of the derivative and warrant liabilities increased by
      $11,235.





**Interest
      Expense, net**





Interest
      expense, net totaled $233,202 for the nine months ended September 30, 2008,
      which consisted of the amortization of the debt discount of $187,497,
      amortization of debt issuance costs of $3,753 and interest accrued at the face
      rate of $33,781 plus $7,392 of default interest as the Company failed to make
      the quarterly interest payments (see below). These amounts were partially offset
      by $5,283 of interest income from a note receivable from a related party.
      Interest expense, net totaled $220,575 for the nine months ended September
      30,
      2007, which consisted of the amortization of the debt discount of $187,497,
      amortization of debt issuance costs of $3,753 and interest accrued at the face
      rate of $33,658. These amounts were partially offset by $7,911 of interest
      income from a note receivable from a related party.





**Net
      Loss**





As
      a
      result of the above, net loss was $564,510 and $673,588 for the nine months
      ended September 30, 2008 and 2007, respectively. The net losses are mainly
      a
      result of selling, general and administrative expenses exceeding gross profit
      as
      well as the interest expense incurred on the convertible notes.





**LIQUIDITY
      AND CAPITAL RESOURCES**





We
      have
      incurred operating losses since our inception and have limited financial
      resources until such time that we are able to generate positive cash flow from
      operations. We had cash of $76,830 as of September 30, 2008.





Net
      cash
      provided by operations totaled $65,182 for the nine months ended September
      30,
      2008. This was primarily due to a net loss of $564,510, offset by the non-cash
      expenses of amortization of debt discount of $187,497, amortization of deferred
      financing costs of $3,753, management fee applied against note receivable -
      related party of $111,301, and stock compensation charges. An additional
      contributing factor was a decrease in accounts receivable.





Net
      cash
      provided by operations totaled $47,268 for the nine months ended September
      30,
      2007. This was primarily due to a net loss of $673,588, offset by the non-cash
      expenses of amortization of debt discount of $187,498, amortization of deferred
      financing costs $3,752 and a $880,694 decrease in accounts
      receivable.





Net
      cash
      used in investing activities totaled $9,996 for the nine months ended September
      30, 2008 and related to purchase of fixed assets. Net cash used in investing
      activities totaled $92,000 for the nine months ended September 30, 2007 and
      related to the issuance of a note receivable to a related party. The Company
      identified the opportunity to invest in the note which bears interest at the
      greater of 8% or $150 per annum and matures on December 31, 2008. In the event
      of default, the interest rate may increase by 3% at the option of the Company.
      We believe that the terms of the note receivable are as or more favorable to
      us
      than equivalent investments.





We
      have
      historically lost money. As of September 30, 2008, we had an accumulated deficit
      of $2,322,211 and have incurred losses since inception. Our operating cash
      losses (net loss adjusted for non-cash expenses) for the nine months ended
      September 30, 2008 were approximately $374,000 or an average of $41,500 per
      month.





To
      achieve cash-flow breakeven or profitability we will need to generate
      significant additional revenues to offset our cost of revenues and our selling,
      general and administrative expenses. Our ability to achieve cash-flow breakeven
      or profitability has been adversely affected by the recent staff losses at
      STI.
      In June and July 2008, the senior management and several employees of STI
      resigned. STI has not been able to replace the management and staff losses
      and
      has experienced the loss of a substantially all of its revenue since July 2008.
      As a result of STI’s reduced level of operations, we expect that our revenue in
      the fourth quarter of 2008 will be dependent on our ability to stabilize the
      operations of STI, to supplement STI’s management and staff and to maintain its
      customer relationships. However, to date, our efforts have not been successful
      and there can be no assurance that our efforts ultimately will be successful.
      As
      a result of the recent loss of senior management and key employees at STI,
      we
      are in the process of reevaluating our growth strategy in respect of both our
      existing operations and the potential for new lines of business.





26


We
      depend
      on relationships with entities controlled by David Walters for outsourced
      financial management, administrative, investment banking and other services.
      Accordingly, the success of the Company heavily depends upon our relationships
      with, and the performance of, these entities. Any failure of the Company to
      pay
      for such outsourced services could have a material adverse effect on our
      business and operations and cause us to expend significant resources in finding
      replacement providers. The Company does not have sufficient liquidity to pay
      for
      such services beyond the end of 2008..





As
      of
      September 30, 2008, we had incurred approximately $750,000 in debt obligations.
      We are not in compliance with our obligation to pay interest when due on our
      secured convertible notes. As of September 30, 2008, we had failed to pay
      $80,753 in interest on the notes plus $11,330 in default interest. Our failure
      to comply with our obligations relating to these securities exposes us to
      demands for immediate repayment (at a premium to outstanding principal) as
      well
      as default interest by the security holders.





We
      do not
      currently have enough capital to pay current interest on or to repay any of
      our
      debt obligations. In addition, we require additional capital to continue our
      business operations beyond the end of 2008. We plan to explore alternatives
      to
      restructure or otherwise satisfy our obligations to our note holders and to
      obtain additional financing from existing investors as well as new third
      parties. However, there can be no assurance that capital from any sources will
      be available, or if such financing is available, that it will be on terms that
      management deems sufficiently favorable.





If
      we are
      unsuccessful in obtaining additional capital upon terms that management deems
      sufficiently favorable, or at all, we may be forced to default on our debt
      obligations and to curtail or abandon our business plan, file for bankruptcy,
      sell assets or cease operations. A default could result in the liquidation
      of
      all or a portion of our assets, most likely at less than their market value.
      If
      we are forced to take any of these steps, any investment in our Common Stock
      may
      be worthless.




**ITEM** **4T:** **CONTROLS
      AND PROCEDURES**




We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our reports made
      pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange
      Act”). is
      recorded, processed, summarized and reported within the timelines specified
      in
      the Securities and Exchange Commission’s rules and forms, and that such
      information is accumulated and communicated to our management, including our
      Chief Executive Officer and Principal Financial Officer, as appropriate, to
      allow timely decisions regarding required disclosure. In designing and
      evaluating the disclosure controls and procedures, management recognized that
      any controls and procedures, no matter how well designed and operated, can
      only
      provide reasonable assurance of achieving the desired control objectives, and
      in
      reaching a reasonable level of assurance, management necessarily was required
      to
      apply its judgment in evaluating the cost-benefit relationship of possible
      controls and procedures.




As
      required by Rule 13a-15(b) under the Exchange Act, we carried out an
      evaluation, under the supervision and with the participation of our management,
      including our Chief Executive Officer and Principal Financial Officer, of the
      effectiveness of the design and operation of our disclosure controls and
      procedures as of the end of the period covered by this report. Based on the
      foregoing, our Chief Executive Officer and Principal Financial Officer concluded
      that our disclosure controls and procedures were effective
      as of the end of period covered by this report in timely alerting them to
      material information relating to STI Group, Inc. required to be disclosed in
      our
      periodic reports with the Securities and Exchange Commission.




There
      were no changes in our internal controls over financial reporting (as such
      term
      is defined in Rule 13a-15(f) under the Exchange Act) that occurred during
      the nine months ended September 30, 2008, that have materially affected, or
      are reasonably likely to materially affect, our internal controls over financial
      reporting,




O ur
      Chief
      Executive Officer and Principal Financial Officer concluded that our disclosure
      controls and procedures were effective
      as of the end of period covered by this report in timely alerting them to
      material information relating to STI Group, Inc. required to be disclosed in
      our
      periodic reports with the Securities and Exchange Commission.




27




**PART
      II - OTHER INFORMATION**





**ITEM
      1: LEGAL PROCEEDINGS**




In
      September 2008, STI filed suit against its former senior management and their
      new employer in the case Solana Technologies, Inc. v. Ipkeys Technologies,
      LLC,
      et al. (Superior Court of California, County of San Diego). In the case, STI
      alleged misappropriation of trade secrets, unfair competition, breach of loyalty
      and other claims. In November 2008, the defendants filed a counter-complaint
      against STI, the Company, our Chairman and Chief Executive Officer and another
      individual alleging intentional and negligent misrepresentation and breach
      of
      contract. No amounts have been accrued as of September 30, 2008.





In
      November 2008, a vendor of STI filed a request for entry of default judgment
      in
      the case TriGeo Network Security, Inc. v. Solana Technologies, Inc. (Superior
      Court of California, County of San Diego). The plaintiff in the case alleged
      breach of contract and sought payment of $35,613, plus interest and attorneys’
fees. STI does not have adequate funding to engage counsel and assert a defense
      in the matter or to pay the amount of any judgment obtained in the case. The
      Company has accrued $35,613 in accounts payable as of September 30,
      2008.




**ITEM
      2: RECENT SALES OF UNREGISTERED SECURITIES**





None.





**ITEM
      3: DEFAULTS UPON SENIOR SECURITIES**




We
      are
      not in compliance with the obligation to pay interest when due on our secured
      convertible notes. As of September 30, 2008, we had failed to pay $80,753 in
      interest on the notes plus $11,330 in default interest. Our failure to comply
      with our obligations relating to these securities exposes us to demands for
      immediate repayment (at a premium to outstanding principal) as well as default
      interest by the security holders. We do not currently have the cash on hand
      to
      repay this amount if the holders elect to exercise their repayment or other
      remedies, or to pay interest on our secured convertible notes. If we are unable
      to raise enough money to cover this amount payable under the notes we may be
      forced to restructure, file for bankruptcy, sell assets or cease
      operations.




**ITEM
      4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**




None.




**ITEM
      5: OTHER INFORMATION**




None.




**ITEM
      6: EXHIBITS**




See
      the
      attached Index to Exhibits.


28


SIGNATURE





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





STI
                GROUP, INC.Date:
                November 19, 2008
            By:/s/
                David
                Walters
              David
                Walters
              Chief
                Executive Officer
              (Principal
                Executive Officer)


Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the Registrant and in the
      capacities and on the dates indicated.




**Signature**
            
            **Title**
            
            **Date**/s/
                David Walters
            
            Chief
                Executive Officer (*Principal
                Financial and Accouting Officer)*
            
            November
                19, 2008David
                Walters





29


**INDEX
      TO EXHIBITS**




**Exhibit
                  No.**
              **Identification
                  of Exhibit**31.1
              Certification
                  of Principal Executive Officer and Principal Financial Officer
                  pursuant to
                  Rules 13a-14 and 15d-14 promulgated under the Securities Exchange
                  Act of
                  193432.1
              Certification
                  of Chief Executive Officer and Chief Financial Officer pursuant
                  to 18
                  U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002







30