UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q




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




For the
quarterly period ended September 30, 2009




OR




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




For the
transition period from 
to




Commission
file number 0-21384




Allied
Security Innovations Inc.


(Exact
name of registrant as specified in its charter)




Delaware
            
            23-2770048(State
      or other jurisdiction
              of
      organization)
            
            (I.R.S.
      employer
              Identification
      no.)


1709
Route 34


Farmingdale,
New Jersey 07727


Telephone
Number (732) 751-1115




Indicate
by checkmark whether the registrant (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, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” 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




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




Yes 
o
    No  x




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




Class
                
                Outstanding at October 19,
                  2009Common
      stock, $.001 par value per share
                
                9,981,998
      shares





Allied
Security Innovations, Inc. and Subsidiary
 Condensed
Consolidated Financial Statements (Unaudited)
 September
30, 2009
 
 Condensed
      Consolidated Financial Statements (Unaudited):Condensed
      Consolidated Balance Sheets at September 30, 2009 and December 31,
      2008
                          3Condensed
      Consolidated Statements of Operations for theThree Months and Nine
      Months Ended September 30, 2009 and 2008
                          4Condensed
      Consolidated Statements of Cash Flows for theNine Months Ended
      September 30, 2009 and 2008
                          5Notes
      to Condensed Consolidated Financial Statements (Unaudited)
                          6
  2
  ALLIED
SECURITY INNOVATIONS, INC. AND SUBSIDIARY
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 
 September 30,
                                    
                                    
                                    December 31,2009
                                    
                                    
                                    2008ASSETSCurrent
      Assets:Cash
      and cash equivalents
                                    
                                    $
                                    54,619
                                    
                                    
                                    $
                                    213,513Accounts
      receivable, net of allowance
                                    
                                    
                                    380,243
                                    
                                    
                                    
                                    537,223Inventory
                                    
                                    
                                    256,786
                                    
                                    
                                    
                                    238,123Other
      Current Assets
                                    
                                    
                                    5,016
                                    
                                    
                                    
                                    9,346Total
      Current Assets
                                    
                                    
                                    696,664
                                    
                                    
                                    
                                    998,205Property
      and equipment, net
                                    
                                    
                                    224,012
                                    
                                    
                                    
                                    267,594Other
      Assets:Deposits
                                    
                                    
                                    11,914
                                    
                                    
                                    
                                    12,896Goodwill
                                    
                                    
                                    2,054,998
                                    
                                    
                                    
                                    2,054,998Intangible
      assets, net
                                    
                                    
                                    126,593
                                    
                                    
                                    
                                    137,969Total
      Other Assets
                                    
                                    
                                    2,193,505
                                    
                                    
                                    
                                    2,205,863TOTAL
      ASSETS
                                    
                                    $
                                    3,114,181
                                    
                                    
                                    $
                                    3,471,662LIABILITIES
      AND STOCKHOLDERS' DEFICITLIABILITIESCurrent
      Liabilities:Accounts
      payable
                                    
                                    $
                                    279,765
                                    
                                    
                                    $
                                    142,865Accrued
      expenses
                                    
                                    
                                    347,070
                                    
                                    
                                    
                                    339,079Accrued
      payroll
                                    
                                    
                                    29,584
                                    
                                    
                                    
                                    114,923Accrued
      interest
                                    
                                    
                                    1,340,502
                                    
                                    
                                    
                                    711,684Deferred
      income
                                    
                                    
                                    35,054
                                    
                                    
                                    
                                    10,098Convertible
      debentures, net of debt discount
                                    
                                    
                                    27,214
                                    
                                    
                                    
                                    39,078Derivative
      liabilities
                                    
                                    
                                    33,204,916
                                    
                                    
                                    
                                    17,356,901Total
      Current Liabilities
                                    
                                    
                                    35,264,105
                                    
                                    
                                    
                                    18,714,628Long
      Term Liabilities:Note
      payable
                                    
                                    
                                    4,000,000
                                    
                                    
                                    
                                    4,000,000Convertible
      debentures, net of debt discount
                                    
                                    
                                    14,007,678
                                    
                                    
                                    
                                    14,028,077Total
      Long Term Liabilities
                                    
                                    
                                    18,007,678
                                    
                                    
                                    
                                    18,028,077Total
      Liabilities
                                    
                                    
                                    53,271,783
                                    
                                    
                                    
                                    36,742,705STOCKHOLDERS'
      DEFICITPreferred
      stock, $.001 par value:1,000,000 shares authorized:
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -20,000
      and -0- shares issued and outstanding shares at September 30, 2009 and
      December 31, 2008, respectivelyCommon
      stock, par value $.001; 9,999,000,000 shares authorized:7,904,161
      and 2,970,592 issued and outstanding at September 30, 2009 and December
      31, 2008, respectively
                                    
                                    
                                    7,904
                                    
                                    
                                    
                                    2,971Additional
      paid in capital
                                    
                                    
                                    19,989,785
                                    
                                    
                                    
                                    19,883,663Accumulated
      deficit
                                    
                                    
                                    (70,155,292
                                    )
                                    
                                    
                                    (53,157,677
                                    )Total
      Stockholders' Deficit
                                    
                                    
                                    (50,157,602
                                    )
                                    
                                    
                                    (33,271,043
                                    )TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIT
                                    
                                    $
                                    3,114,181
                                    
                                    
                                    $
                                    3,471,662
 
 The
accompanying notes are an integral part of the condensed consolidated financial
statements.
  3
 
 ALLIED
SECURITY INNOVATIONS, INC. AND SUBSIDIARY
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 FOR THE
THREE AND NINE  MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
 (UNAUDITED)
 
 Three Months
                              
                              
                              Three Months
                              
                              
                              Nine Months
                              
                              
                              Nine MonthsEnded
                              
                              
                              Ended
                              
                              
                              Ended
                              
                              
                              Ended9/30/2009
                              
                              
                              9/30/2008
                              
                              
                              9/30/2009
                              
                              
                              9/30/2008INCOMENet
      Sales
                              
                              $
                              770,906
                              
                              
                              $
                              1,528,479
                              
                              
                              $
                              2,888,718
                              
                              
                              $
                              3,657,487327,136
                              
                              
                              
                              521,410
                              
                              
                              
                              1,013,630
                              
                              
                              
                              1,193,267Gross
      Profit
                              
                              
                              443,770
                              
                              
                              
                              1,007,069
                              
                              
                              
                              1,875,088
                              
                              
                              
                              2,464,220OPERATING
      EXPENSESGeneral
      and administrative
                              
                              
                              502,680
                              
                              
                              
                              534,508
                              
                              
                              
                              1,549,003
                              
                              
                              
                              1,700,083Sales
      and marketing
                              
                              
                              126,836
                              
                              
                              
                              156,130
                              
                              
                              
                              483,855
                              
                              
                              
                              447,537Research
      and development
                              
                              
                              19,709
                              
                              
                              
                              23,910
                              
                              
                              
                              69,261
                              
                              
                              
                              68,812Total
      Operating Expenses
                              
                              
                              649,225
                              
                              
                              
                              714,548
                              
                              
                              
                              2,102,119
                              
                              
                              
                              2,216,432INCOME
      (LOSS) BEFORE OTHER INCOME (EXPENSE)
                              
                              
                              (205,455
                              )
                              
                              
                              292,521
                              
                              
                              
                              (227,031
                              )
                              
                              
                              247,788OTHER
      INCOME (EXPENSE)Loss
      on extinguishment of debt
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (7,237,883
                              )Interest
      expense
                              
                              
                              (284,354
                              )
                              
                              
                              (457,386
                              )
                              
                              
                              (847,061
                              )
                              
                              
                              (923,261
                              )Beneficial
      interest from conversion of debt
                              
                              
                              (49,050
                              )
                              
                              
                              (79,651
                              )
                              
                              
                              (58,472
                              )
                              
                              
                              (170,673
                              )Amortization
      of debt discount
                              
                              
                              (4,167
                              )
                              
                              
                              -
                              
                              
                              
                              (12,078
                              )
                              
                              
                              (91,346
                              )Change
      in fair value of derivative liability
                              
                              
                              (15,828,601
                              )
                              
                              
                              389,969
                              
                              
                              
                              (15,798,016
                              )
                              
                              
                              5,592,222Depreciation
      and Amortization
                              
                              
                              (18,320
                              )
                              
                              
                              (17,286
                              )
                              
                              
                              (54,957
                              )
                              
                              
                              (63,134
                              )Total
      Other Income (Expense)
                              
                              
                              (16,184,492
                              )
                              
                              
                              (164,354
                              )
                              
                              
                              (16,770,584
                              )
                              
                              
                              (2,894,075
                              )Income
      (Loss) before provision for income taxes
                              
                              $
                              (16,389,947
                              )
                              
                              $
                              128,167
                              
                              
                              $
                              (16,997,615
                              )
                              
                              $
                              (2,646,287
                              )Provision
      for income taxes
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -NET
      INCOME ( LOSS) APPLICABLE TO COMMON SHARES
                              
                              $
                              (16,389,947
                              )
                              
                              $
                              128,167
                              
                              
                              $
                              (16,997,615
                              )
                              
                              $
                              (2,646,287
                              )NET
      INCOME (LOSS) PER BASIC SHARES
                              
                              $
                              (0.00
                              )
                              
                              $
                              0.00
                              
                              
                              $
                              (0.00
                              )
                              
                              $
                              (0.00
                              )NET
      INCOME (LOSS) PER DILUTED SHARES
                              
                              $
                              (0.00
                              )
                              
                              $
                              0.00
                              
                              
                              $
                              (0.00
                              )
                              
                              $
                              (0.00
                              )WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-BASIC
                              
                              
                              5,136,920
                              
                              
                              
                              2,040,337
                              
                              
                              
                              3,833,755
                              
                              
                              
                              1,525,344WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-FULLY DILUTED
                              
                              
                              -
                              
                              
                              
                              9,999,000,000
                              
                              
                              
                              -
                              
                              
                              
                              -
 
 The
accompanying notes are an integral part of the condensed consolidated financial
statements.
  4
 
 ALLIED
SECURITY INNOVATIONS, INC AND SUBSIDIARY
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
 (UNAUDITED)
 
 2009
                      
                      
                      2008Cash
      Flows from Operating Activities:Net
      Loss
                      
                      $
                      (16,997,615
                      )
                      
                      $
                      (2,646,287
                      )Adjustments
      to reconcile net loss to net cash(used
      in) operating activities:Depreciation
      and amortization
                      
                      
                      54,957
                      
                      
                      
                      63,134Amortization
      of debt discount
                      
                      
                      12,078
                      
                      
                      
                      91,346Beneficial
      interest
                      
                      
                      58,472
                      
                      
                      
                      170,673Loss
      on extinguishment
                      
                      
                      -
                      
                      
                      
                      7,237,883Change
      in fair value of derivative liability
                      
                      
                      15,798,016
                      
                      
                      
                      (5,592,222
                      )Bad
      debt expense
                      
                      
                      (26,308
                      )
                      
                      
                      52,500Changes
      in operating assets and liabilities:Accounts
      receivable
                      
                      
                      183,288
                      
                      
                      
                      (405,456
                      )Inventory
                      
                      
                      (18,663
                      )
                      
                      
                      22,165Prepaid
      expenses, deposits and other assets
                      
                      
                      4,330
                      
                      
                      
                      (4,632
                      )Accounts
      payable
                      
                      
                      136,900
                      
                      
                      
                      267,891Accrued
      expenses
                      
                      
                      (77,347
                      )
                      
                      
                      4,523Accrued
      interest
                      
                      
                      688,042
                      
                      
                      
                      671,398Deferred
      Income
                      
                      
                      24,956
                      
                      
                      
                      (54,193
                      )Net
      Cash Used In Operating Activities
                      
                      
                      (158,894
                      )
                      
                      
                      (121,277
                      )Cash
      Flows from Investing Activities:Purchase
      of equipment
                      
                      
                      -
                      
                      
                      
                      (10,526
                      )Net
      Cash Used in Investing Activities
                      
                      
                      -
                      
                      
                      
                      (10,526
                      )Cash
      Flows from Financing Activities:Increase
      in Note Payable
                      
                      
                      -
                      
                      
                      
                      510,000Decrease
      in Convertible debentures
                      
                      
                      -
                      
                      
                      
                      (500,000
                      )Net
      Cash Provided by Financing Activities
                      
                      
                      -
                      
                      
                      
                      10,000Net
      (Decrease) in Cash
                      
                      
                      (158,894
                      )
                      
                      
                      (121,803
                      )Cash
      at Beginning of Period
                      
                      
                      213,513
                      
                      
                      
                      386,628Cash
      at End of Period
                      
                      $
                      54,619
                      
                      
                      $
                      264,825
 
 The
accompanying notes are an integral part of the condensed consolidated financial
statements.
  5
 
 ALLIED
SECURITY INNOVATIONS, INC AND SUBSIDIARY
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
 (UNAUDITED)
 
 2009
                  
                  
                  2008Supplemental
      Disclosure of Cash Flow Information:Cash
      Paid For:Interest
      Expense
                  
                  $
                  -
                  
                  
                  $
                  -Income
      Taxes
                  
                  $
                  -
                  
                  
                  $
                  -Supplemental
      Disclosure of Non-Cash Investing and Financing Activities:Common
      stock issued in conversion of convertible debentures
                  
                  $
                  44,341
                  
                  
                  $
                  2,288,993Beneficial
      interest in conjunction with issuance of convertible
      debentures
                  
                  $
                  58,472
                  
                  
                  $
                  170,673Common
      stock issued in conversion of accrued interest
                  
                  $
                  8,244
                  
                  
                  $
                  4,682
 
 The
accompanying notes are an integral part of the condensed consolidated financial
statements.
  6




Allied
Security Innovations, Inc. and Subsidiary


Notes to
the Condensed Consolidated Financial Statements (Unaudited)


September
30, 2009 and 2008





Note
1 - Organization and Basis of Presentation





The
unaudited condensed interim financial information included has been prepared by
Allied Security Innovations, Inc. (the “Company” or “ASII”) without audit,
pursuant to the rules and regulations of the Security and Exchange Commission
(the “SEC”). Certain information and footnote disclosures normally included in
the financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted as allowed by such rules and regulations, and the Company believes that
the disclosures are adequate to make the information presented not misleading.
It is suggested that these condensed consolidated financial statements be read
in conjunction with the December 31, 2008 audited consolidated financial
statements and the accompanying notes thereto. While management believes the
procedures followed in preparing these condensed consolidated financial
statements are reasonable, the accuracy of the amounts are in some respects
dependent upon the facts that will exist, and procedures that will be
accomplished by the Company later in the year.





The
management of the Company believes that the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to present
fairly the operations for the periods presented.





Note
2 - Description of Business and Recent Developments




CGM-AST
is a manufacturer and distributor of indicative and barrier security seals,
security tapes and related packaging security systems, protective security
products for palletized cargo, physical security systems for tractors, trailers
and containers as well as a number of highly specialized authentication
products. Focused primarily on “deterrent technologies,” CGM-AST designs and
develops customized tamper evident devices which when integrated into a security
protocol; provide chain of custody and/or proof of tampering for targeted
assets.




The
primary factors behind the need for CGM-AST’s products are: (i) the escalation
of cargo theft and tampering, (ii) the need for enhanced cargo security because
of the fear of terrorism, (iii) damage control of freight and cargo, (iv) the
need for security products, (v) brand protection and authentication requirements
and (vi) governmental and regulatory requirements.




CGM-AST
products are certified by the Customs-Trade Partnership Against Terrorism
("C-TPAT"), a joint initiative between government and business designed to
protect the security of cargo entering the United States while improving the
flow of trade. C-TPAT requires importers to take steps to assess, evolve and
communicate new practices that ensure tighter security of cargo and enhanced
security throughout the entire supply chain. In return, their goods and
conveyances will receive expedited processing into the United States. Many of
our products are also ISO 17712 compliant, which is a standard for international
shipping and container security.




It is
estimated that losses from cargo theft each year reach 30-50 billion dollars
globally and 12 billion dollars in the US, and that these numbers will continue
to rise. Figures taken from L.H. Gray entitled Facing the Growing Problem of
Loss and Theft in 2004.





Note
3 - Summary of Significant Accounting Policies





Significant
accounting policies followed by the Company in the preparation of the
accompanying condensed consolidated financial statements are summarized
below:





Use
of Estimates


The
preparation of the condensed consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the condensed consolidated financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results could differ
from those estimates.


7





Revenue
Recognition


The
Company derives revenue from the sale of hardware, software, post customer
support, and other related services. Post customer support includes telephone
support, bug fixes, and rights to upgrades. Other related services include basic
training. The CGM-AST subsidiary derives its’ revenue from the sale of its tape,
labels and other security devices.




The
Company recognizes revenue upon delivery of the product to the end-user, when
the fee is determinable and collectability is probable. Revenue allocable to
post customer support is recognized on a straight-line basis over the period
which the service is to be provided.




Deferred
Income


Revenue
allocable to post customer support is recognized on a straight-line basis over
the period which the service is to be provided. Revenue collected for future
services is recorded as deferred income. Deferred revenue at September 30, 2009
was $35,054 and at December 31, 2008 was $10,098. Revenue allocable to other
services is recognized as the services are provided. The CGM-AST subsidiary
recognizes it revenue upon shipment of the product to the customer.




Software
Development Costs


All costs
incurred in the research and development of new software products and costs
incurred prior to the establishment of a technologically feasible product are
expensed as incurred. Research and development of software costs were $69,261
and $68,812, respectively, for the nine months ended September 30, 2009 and
2008, respectively.





Cash
and Cash Equivalents


For the
purpose of the statement of cash flows, cash and cash equivalents include time
deposits, certificates of deposits, restricted cash, and all highly liquid debt
instruments with original maturities or three months or less.





Accounts
Receivable


Accounts
receivable are uncollateralized customer obligations due under normal trade
terms requiring payment within 30 days from the invoice date. No interest is
charged on any past due accounts. Accounts receivable are stated at the amount
billed to the customer. Accounts receivable, net of allowance was $380,243 on
September 30, 2009 and $537,223 at December 31, 2008.





The
carrying amount of accounts receivable is reduced by a valuation allowance that
reflects management's best estimate of the amount that will not be collected.
Management reviews all accounts receivable balances that exceed 90 days from
invoice date and based on assessment of current creditworthiness, estimates the
portion, if any that will not be collected. The allowance for doubtful accounts
is $122,198 on September 30, 2009 and $148,506 at December 31,
2008.




Fixed
Assets


Fixed
assets are stated at cost. Depreciation is computed primarily using the
straight-line method over the estimated useful life of the assets.





Machinery
      and equipment
                  7
      yearsFurniture
      and fixtures
                  7
      yearsComputers
                  3
      yearsLeasehold
      improvements
                  39
      years





Income
Taxes


The
Company provides for income taxes under the liability method. Deferred income
taxes reflect the net tax effects of temporary differences between carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Such differences result from differences
in the timing of recognition by the Company of net operating loss carry
forwards, certain expenses, and differences in the depreciable lives and
depreciation methods for certain assets.





Accounting
for Stock Options


The
Company determines stock-based compensation expense under Financial Accounting
Standards Board issued Statement No. 123R (SFAS 123R), "Accounting for
Stock-Based Compensation."





Net
Loss Per Common Share


Basic
loss per share is calculated by dividing the net loss by the weighted average
common shares outstanding for the period. Diluted loss per share is calculated
by dividing the net loss by the weighted average common shares outstanding of
the period plus the dilutive effect of common stock equivalents. Common stock
equivalents were not included in the computation of diluted earnings per share
for the nine months ended September 30, 2009 and 2008 because to do so would be
antidilutive for the period presented.


8






Concentration
of Credit Risk
 Financial
instruments which potentially subject the Company to a concentration of credit
risk principally consist of cash and accounts receivable. Concentration of
credit risk, with respect to accounts receivable, is limited due to the
Company's credit evaluation process. The Company does not require collateral
from its customers. The Company sells its principal products to end users and
distributors principally in the United States.
 
 The
Company maintains cash and cash equivalents in various financial institutions
that, in the aggregate, exceed the limit insured by the Federal Deposit
Insurance Corporation (FDIC). The FDIC insures cash deposits up to $250,000 per
bank. Any amounts over $250,000 represent an uninsured risk to the
Company.
 
 Principles
of Consolidation and Basis of Presentation
 The
condensed consolidated financial statements include the accounts of the Company
and CGM-AST.  All inter-company accounts
have been eliminated.
  Inventory
 Inventories
consist principally of inks, adhesives, film and finished goods held in the
Company’s warehouse. Inventory is stated at the lower of cost or market,
utilizing the first-in, first-out method. The cost of finished goods includes
the cost of raw materials, packaging supplies, direct and indirect labor and
other indirect manufacturing costs. On a quarterly basis, management reviews
inventory for unsalable or obsolete inventory. Obsolete or unsalable inventory
write-offs have been immaterial to the financial statements.
  Advertising
 The
Company’s policy is to expense the costs of advertising as incurred. The Company
had advertising expenses of $100,921 and $93,285 for the nine months ended
September 30, 2009 and 2008, respectively.
 
 Fair
Value of Financial Instruments
 The
carrying amount reported in the condensed consolidated balance sheet for cash
and cash equivalents, accounts payable and accrued expenses approximates fair
value because of the immediate or short-term maturity of these financial
instruments. The carrying amount reported for the convertible debentures
and notes payable approximates fair value because, in general, the interest on
the underlying instruments fluctuates with market rates.
  Goodwill
and Other Intangible Assets
 In June
2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 142
“Goodwill and Other Intangible Assets.” This statement addresses financial
accounting and reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, “Intangible Assets.” It addresses how intangible
assets that are acquired individually or with a group of other assets (but not
those acquired in a business combination) should be accounted for in financial
statements upon their acquisition. This Statement also addresses how goodwill
and other intangible assets should be accounted for after they have been
initially recognized in the financial statements.   Goodwill was
acquired upon the purchase of its wholly-owned subsidiary of CGM Security
Solutions, Inc. totaling $4,054,998 (see footnote 11).
  In
addition, the Company has acquired licenses, which are included as other
intangible assets. The licenses are being amortized over a period of 15 years
based on the expected benefits to be consumed or otherwise used up. Goodwill and
other intangible assets are tested annually for impairment in the fourth
quarter, and are tested for impairment more frequently if events and
circumstances indicate that the asset might be impaired. An impairment loss is
recognized to the extent that the carrying amount exceeds the asset’s fair
value. The Company assesses the recoverability of its goodwill and other
intangible assets by comparing the projected undiscounted net cash flows
associated with the related asset, over their remaining lives, in comparison to
their respective carrying amounts. Impairment, if any, is based on the excess of
the carrying amount over the fair value of those assets.
 
 In
December of 2008 the Company decreased the value of goodwill from $4,054,998 to
$2,054,998.
  Derivative
Instruments
 The
Company has an outstanding convertible debt instrument that contains
free-standing and embedded derivative features. The Company accounts for these
derivatives in accordance with SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,”and EITF Issue No. 00-19, “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock.”In accordance with the provisions of SFAS No. 133 and EITF Issue No.
00-19, the embedded derivatives are required to be bifurcated from the debt
instrument and recorded as a liability at fair value on the condensed
consolidated balance sheet. Changes in the fair value of the derivatives are
recorded at each reporting period and recorded in net gain (loss) on derivative,
a separate component of the other income (expense). As of September 30, 2009,
the fair value of derivatives was $33,204,916,
an increase of $15,848,015 from December 31, 2008.  This increase consists
of the addition of $50,000 to the derivatives from the debentures issued January
8, 2009 (see note 7) and a decrease in fair market value of the derivatives in
the amount of $15,798,015 as of September 30, 2009.
  9
  Limitations
 Fair
value estimates are made at a specific point in time, based on relevant market
information and information about the financial statement. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
 
 Note
4 - Recent Accounting Pronouncements
  In
May 2009, the FASB issued ASC 855, Subsequent Events. This standard
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date, but before financial statements are issued
or available to be issued. Specifically, this standard codifies in authoritative
GAAP standards the subsequent event guidance that was previously located in
auditing standards. ASC 855 is effective for fiscal years and interim periods
ended after June 15, 2009 and is applied prospectively. We adopted ASC 855 in
our fiscal quarter ended June 30, 2009. The adoption of SFAS 165 did not
have a material impact on our financial position, results of operation or cash
flows.
  In
June 2009, the FASB issued ASC 105, Generally Accepted Accounting
Principles. This section designates the FASB Accounting Standards Codification
(FASC) as the source of authoritative U.S. GAAP. ASC 105 is effective for
interim or fiscal periods ending after September 15, 2009. We have used the
new guidelines and numbering system prescribed by the FASC when referring to
GAAP in our fiscal quarter ending September 30, 2009. The adoption of ASC
105 did not have a material impact on our financial position, results of
operation or cash flows.
 
 In
June 2009, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 168, The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles (“SFAS 168”). SFAS 168 will become the single source of authoritative
nongovernmental U.S. generally accepted accounting principles (“GAAP”),
superseding existing FASB, American Institute of Certified Public Accountants
(“AICPA”), Emerging Issues Task Force (“EITF”), and related accounting
literature. SFAS 168 reorganizes the thousands of GAAP pronouncements into
roughly 90 accounting topics and displays them using a consistent structure.
Also included is relevant Securities and Exchange Commission guidance organized
using the same topical structure in separate sections. SFAS 168 will be
effective for financial statements issued for reporting periods that end after
September 15, 2009. All future references to authoritative accounting
literature in our financial statements issued for reporting periods that end
after September 15, 2009 will be referenced in accordance with SFAS
168.
  In
May 2009, the FASB issued Statement of Financial Accounting Standards
No. 165, Subsequent Events (“SFAS 165”). SFAS 165 establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. SFAS 165 applies prospectively to both interim and annual
financial periods ending after June 15, 2009. The adoption of SFAS 165 did
not result in any material change to our policies.
  In
April 2009, the FASB issued FSP No. 107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments (“FSP 107-1”). FSP 107-1
amends FASB Statement No. 107, Disclosures about Fair Value of Financial
Instruments, and Accounting Principles Board Opinion No. 28, Interim
Financial Reporting, to require disclosures about fair value of financial
instruments for interim periods of publicly traded companies as well as in
annual financial statements. FSP 107-1 is effective for interim reporting
periods ending after June 15, 2009. The adoption of FSP 107-1 had no
material effect on our disclosures in our financial statements.
  From time
to time, new accounting pronouncements are issued by the FASB or other standards
setting bodies that we adopt as of the specified effective date. Unless
otherwise discussed in these financial statements and notes or in our financial
statements and notes included in our Annual Report on Form 10-K for the year
ended December 31, 2008, we believe the impact of any other recently issued
standards that are not yet effective are either not applicable to us at this
time or will not have a material impact on our consolidated financial statements
upon adoption.
 
 In
June 2008, the FASB issued FASB Staff Position (“FSP”) Emerging Issues
Task Force (“EITF”) No. 03-6-1 “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities.” Under
the FSP, unvested share-based payment awards that contain rights to receive non
forfeitable dividends (whether paid or unpaid) are participating securities, and
should be included in the two-class method of computing EPS. The FSP is
effective for fiscal years beginning after December 15, 2008 and for
interim periods within those years.  The implementation of this
standard did not have a material impact on the Company's condensed consolidated
financial statements.
 
 In May
2008, the FASB issued SFAS No. 162 “The Hierarchy of Generally Accepted
Accounting Principles” (SFAS No. 162). SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting principles used in the
preparation of financial statements.  SFAS No. 162 is effective 60
days following the SEC’s approval of the Public Company Accounting Oversight
Board amendments to AU Section 411 “The Meaning of Present Fairly in Conformity
with Generally Accepted Accounting Principles.” The implementation of this
standard will not have a material impact on Consolidated Financial
Statements.
  10
  In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities: an amendment of FASB Statement No. 133"
("SFAS No. 161"). SFAS No. 161 changes the disclosure requirements for
derivative instruments and hedging activities. The provisions of SFAS
No. 161, is effective the first quarter of fiscal 2009. The implementation
of this standard did not have a material impact on the Condensed Consolidated
Financial Statements.
 
 In
February 2008, FASB Staff Position ("FSP") FAS No. 157-2, "Effective
Date of FASB Statement No. 157" ("FSP No. 157-2") was issued. FSP
No. 157-2 defers the effective date of SFAS No. 157 to fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years, for all nonfinancial assets and liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). Examples of items within the scope of FSP
No. 157-2 are nonfinancial assets and nonfinancial liabilities initially
measured at fair value in a business combination (but not measured at fair value
in subsequent periods), and long-lived assets, such as property, plant and
equipment and intangible assets measured at fair value for an impairment
assessment under SFAS No. 144.
  The
partial adoption of SFAS No. 157 on January 1, 2008 with respect to
financial assets and financial liabilities recognized or disclosed at fair value
in the financial statements on a recurring basis did not have a material impact
on the Company's condensed financial statements. See Note 10 for the fair
value measurement disclosures for these assets and liabilities. The Company
adopted SFAS No. 157 on January 1, 2009.
  On
January 1, 2008 (the first day of fiscal 2008), the Company adopted SFAS
No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities, Including an amendment of FASB Statement No. 115" ("SFAS
No. 159"). SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value, which are not
otherwise currently required to be measured at fair value. Under SFAS
No. 159, the decision to measure items at fair value is made at specified
election dates on an instrument-by-instrument basis and is irrevocable. Entities
electing the fair value option are required to recognize changes in fair value
in earnings and to expense upfront costs and fees associated with the item for
which the fair value option is elected. The new standard did not impact the
Company's Condensed Consolidated Financial Statements as the Company did not
elect the fair value option for any instruments existing as of the adoption
date. However, the Company will evaluate the fair value measurement election
with respect to financial instruments the Company enters into in the
future.





Note
5 – Intangible Assets





Intangible
assets consist of the following at September 30, 2009 and December 31,
2008.





September 30, 2009
                  
                  
                  December 31, 2008Licenses
                  
                  $
                  222,076
                  
                  
                  $
                  222,076Accumulated
      amortization
                  
                  
                  95,483
                  
                  
                  
                  84,107Total
                  
                  $
                  126,593
                  
                  
                  $
                  137,969





Licenses
are being amortized over their estimated useful lives of 15 years. Amortization
expense for the nine months ended September 30, 2009 and 2008 was $11,376 and
$11,376, respectively.





The
following is a listing of the estimated amortization expense for the next five
years:





Year
ended December 31,





2009
                    
                    $
                    15,1682010
                    
                    $
                    15,1682011
                    
                    $
                    15,1682012
                    
                    $
                    15,1682013
                    
                    $
                    15,168


11





Note
6- Property and Equipment





Fixed
assets consist of the following at September 30, 2009 and December 31,
2008:





September 30, 2009
                      
                      
                      December 31, 2008Furniture
      and Fixtures
                      
                      $
                      75,615
                      
                      
                      $
                      75,615Leasehold
      Improvements
                      
                      
                      159,607
                      
                      
                      
                      159,607Computers
                      
                      
                      219,300
                      
                      
                      
                      219,300Machinery
      and Equipment
                      
                      
                      762,987
                      
                      
                      
                      762,9871,217,509
                      
                      
                      
                      1,217,509Less:
      Accumulated depreciation
                      
                      
                      (993,497
                      )
                      
                      
                      (949,915
                      )Net
                      
                      $
                      224,012
                      
                      
                      $
                      267,594





Depreciation
expense for the nine months ended September 30, 2009 and 2008 was $43,582 and
$51,758, respectively.





Note
7 - Convertible Debentures





Based on
the guidance in SFAS133 and EITF00-19, the Company concluded that the conversion
features of its convertible debentures were required to be accounted for as
derivatives. The imbedded derivative feature was bi-furcated and the fair market
value was determined using a convertible bond valuation model. The derivative
instruments are recorded at fair market value with changes in value recognized
during the period of change.




On May
16, 2008 convertible debentures in the net amount of $5,832,483 were
satisfied.





On May
16, 2008, the Company issued sixteen convertible notes for an aggregate amount
of $14,165,899. The debentures are collateralized by substantially all of the
Company's assets. The debentures accrue interest at the rate of 6% per
annum.





The
holders have the right to convert the principal amount plus accrued interest
into shares of the Company's common stock. The conversion price in effect on any
Conversion Date shall be an amount equal to 26% of the mean average price of the
common stock for the ten trading days prior to notice of
conversion.





We
recorded a derivative liability related to this convertible debenture. The
initial fair market value of the conversion option in the amount of $10,000 was
recorded as a debt discount and was expensed in 2008. The fair market value of
the conversion feature is also shown as a derivative liability on the Company’s
balance sheet and is being adjusted to fair market value each reporting period
with the change being reported as “other income and expenses” in the statement
of income.





On
January 8, 2009, the Company issued five convertible notes for an aggregate
amount of $50,000. The debentures are collateralized by substantially all of the
Company's assets. The debentures accrue interest at the rate of 12% per
annum.





The
holders have the right to convert the principal amount plus accrued interest
into shares of the Company's common stock. The conversion price in effect on any
Conversion Date shall be an amount equal to 26% of the mean average price of the
common stock for the ten trading days prior to notice of
conversion.





We
recorded a derivative liability related to this convertible debenture. The fair
market value of the conversion feature in the amount of $55,538 is shown as a
derivative liability on the Company’s balance sheet and is being adjusted to
fair market value each reporting period with the change being reported as “other
income and expenses” in the statement of income. The initial fair market value
of the conversion option in the amount of $50,000 was recorded as a debt
discount and a loss is recognized in the amount of $5,538..




Note
8 - Commitments and Contingencies





CGM-AST
leases one facility in Staten Island, New York under non-cancelable lease
agreements that ended in December 2008. The Company still occupies the space on
a month to month basis.





On June
1, 2007 the offices of Allied Security Innovations, Inc. and the Somerset office
of CGM-AST Applied Security Technologies, Inc. were combined into a new office
located in Farmingdale, NJ in a 6,000 square foot combination warehouse /office
space. The reason for this was cost savings and improved operational
efficiencies. The lease is a 5 year lease ending May 12, 2012 with a 5 year
renewal option. The company is required to pay utilities, insurance and other
costs relating to the lease facility. The following is a schedule by years of
future minimum rental payments required under operating leases that have initial
or remaining non-cancelable lease terms in excess of one year as of December 31,
2008:


12





Per Year2009
                    
                    $
                    56,8242010
                    
                    
                    58,5292011
                    
                    
                    60,2852012
                    
                    
                    30,588





Employment
Agreements





Anthony
R. Shupin, Chairman, President and Chief Executive Officer. Mr. Shupin was
re-appointed as Chairman, President and Chief Executive Officer effective
February, 2005. On February 25, 2005, ASII entered into a five-year employment
agreement with Mr. Shupin, which entitled him to a base salary of $227,900 per
year, which may at the Board of Directors discretion adjust his base salary (but
not below $215,000 per year). Mr. Shupin is also entitled to participate in the
Annual Management Bonus Plan. As a participant in the Annual Management Bonus
Plan, Mr. Shupin will be eligible to receive bonuses, based on performance, in
any amount from 10% to 200% of the Base Salary. In addition, Mr. Shupin shall
participate in the Management Equity Incentive Plan. As a participant in the
Management Equity Plan, Mr. Shupin will be eligible to receive options, which
vest over a period of time from the date of the option's issue, to purchase
common shares of ASII. The Company may grant Mr. Shupin, following the first
anniversary of the date hereof and at the sole discretion of the Board of
Directors, options to purchase common shares of the Company (subject to the
vesting and the satisfaction of the other terms and conditions of such options).
Mr. Shupin will be entitled to 25 vacations days per year at such times as may
be mutually agreed with the Board of Directors. ASII will provide Mr. Shupin a
monthly car allowance of One Thousand Dollars ($1,000) along with related car
expenses.


13





Michael
J. Pellegrino, Senior Vice President and Chief Financial Officer. Mr. Pellegrino
was appointed as Senior Vice President and Chief Financial Officer effective
February 25, 2005. On February 25, 2005, ASII entered into a five-year
employment agreement with Mr. Pellegrino, which entitled him to a base salary of
$185,500 per year which may at the Board of Directors discretion adjust his base
salary (but not below $175,000 per year). Mr. Pellegrino is also entitled to
participate in the Annual Management Bonus Plan. As a participant in the Annual
Management Bonus Plan, Mr. Pellegrino will be eligible to receive bonuses, based
on performance, in any amount from 10% to 200% of the Base Salary. In addition,
Mr. Pellegrino shall participate in the Management Equity Incentive Plan. As a
participant in the Management Equity Incentive Plan, Mr. Pellegrino will be
eligible to receive options, which vest over a period of time from the date of
the option's issue, to purchase common shares of ASII. ASII may also grant to
the Employee, following the first anniversary of the date of the Agreement and
at the sole discretion of the Board of Directors, options to purchase common
shares of the Company (subject to the vesting and the satisfaction of the other
terms and conditions of such options). Mr. Pellegrino will be entitled to 25
vacation days per year at such times as may be mutually agreed with the Board of
Directors. ASII shall also furnish Mr. Pellegrino with monthly car allowance of
One Thousand Dollars ($1,000) and related car expenses.





Note
9 - Stock Option and Other Plans





Effective
November 13, 2006, Allied Security Innovations, Inc. ("ASII") granted to each of
Anthony Shupin, its President and Chief Executive Officer and Michael
Pellegrino, its Chief Financial Officer, 10,000 shares of newly created Series A
Preferred Stock ("A Preferred") as recognition for services.





Effective
May 11, 2009 the above Series A Preferred Stock were cancelled in partial
consideration for the issuance of 10,000 shares each of Series B Preferred Stock
(“B Preferred”) and as recognition for services.





The
shares of B Preferred will vest in five equal monthly installments and will be
issued at the discretion of Mr. Shupin and Mr. Pellegrino. Each share of B
Preferred is convertible into 200,000 shares of common stock of the Company
starting three years from the date of issuance, provided that the closing bid
price of the Company's common stock is then $2.00 per share. The shares of B
Preferred may be voted with the Company's common stock on an as converted basis
on any matters that the common stock is entitled to vote on as a
class.





Unconverted
shares of B Preferred will automatically cease to exist, and all rights
associated therewith will be terminated upon the earlier of (i) that person's
termination of employment with the Company for any reason, or (ii) five years
from the date of issuance.




On May
11, 2009, the Company filed with the Secretary of State of Delaware a
Certificate of Designation of Preferences, Rights and Limitations of Series B
Preferred Stock.





The
Company maintains the 1994 Restated Stock Option Plan (the 1994 Plan) pursuant
to which the Company reserved 5,000,000 shares of common stock. The options
granted have a term of ten years and are issued at or above the fair market
value of the underlying shares on the grant date.


14





Note
10 - Fair Value Measurements





On
January 1, 2008, the Company adopted SFAS No. 157 “Fair Value
Measurements” (“SFAS 157”). SFAS 157 defines fair value, provides a consistent
framework for measuring fair value under Generally Accepted Accounting
Principles and expands fair value financial statement disclosure requirements.
SFAS 157’s valuation techniques are based on observable and unobservable inputs.
Observable inputs reflect readily obtainable data from independent sources,
while unobservable inputs reflect our market assumptions. SFAS 157 classifies
these inputs into the following hierarchy:





Level 1
Inputs– Quoted prices for identical instruments in active markets.





Level 2
Inputs– Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and
model-derived valuations whose inputs are observable or whose significant value
drivers are observable.





Level 3
Inputs– Instruments with primarily unobservable value drivers.





The
following table represents the fair value hierarchy for those financial assets
and liabilities measured at fair value on a recurring basis as of September 30,
2009.





Fair
Value Measurements on a Recurring Basis as of September 30, 2009




Assets
                          
                          Level I
                          
                          
                          Level II
                          
                          
                          Level III
                          
                          
                          TotalAssets
                          
                          $
                          -
                          
                          
                          
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -Total
      Assets
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -Liabilities
                          
                          
                          -
                          
                          
                          $
                          47,239,808
                          
                          
                          
                          -
                          
                          
                          $
                          47,239,808Total
      Liabilities
                          
                          $
                          -
                          
                          
                          $
                          47,239,808
                          
                          
                          $
                          -
                          
                          
                          $
                          47,239,808





Note
11 – Acquisitions and Note Payable





On March
1, 2005, the Company acquired substantially all of the assets of CGM Security
Solutions, Inc., a Florida corporation ("CGM"), for (i) $1,500,000 in cash and
(ii) a 2.86% promissory note (the "Note") in the principal amount of $3,500,000,
subject to adjustment (the "Acquisition"). The assets of CGM Security Solutions,
Inc. were acquired pursuant to an Asset Purchase Agreement among the Company and
CGM Security Solutions, Inc. dated as of February 25, 2005. In connection with
the acquisition, the Company and CGM-AST each entered into an employment
agreement with Erik Hoffer (the "Employment Agreement"). CGM Security Solutions,
Inc is a manufacturer and distributor of barrier security seals, security tapes
and related packaging security systems, protective security products for
palletized cargo, physical security systems for tractors, trailers and
containers.





The
principal amount of the three year Note is subject to adjustment based upon the
average of (i) the gross revenues of CGM-AST for the fiscal year ending December
31, 2008 and (ii) an independent valuation of CGM-AST Sub based upon the audited
consolidated financial statements of the Company and CGM-AST Sub for the fiscal
years ending December 31, 2006 and 2007. In addition, the Company has granted
CGM-AST a secondary security interest in substantially all of its assets and
intellectual property. If the Company is unable to fulfill its obligations
pursuant to the Asset Purchase Agreement and the Note, there is a likelihood
that CGM Security Solutions, Inc. can declare default and attempt to take back
the asset. As of March 31, 2008 the Company did not secure sufficient funding
but was in negotiations with private investors in an attempt to obtain
same.





In
connection with the Acquisition, the Company entered into a letter agreement
with certain of its investors (the "Investors") which extended the maturity date
of debt instruments issued on November 30, 2004 until September 1, 2008, and
amended the conversion price of the debt that is held by the Investors to the
lower of (i) $0.0005 or (ii) 40% of the average of the three lowest intraday
trading prices for the Company's common stock during the 20 trading days before,
but not including, the conversion date. In addition, the exercise price of the
warrants held by the Investors was amended to $.001 per share.





Whereas
the Company did not have sufficient funds to satisfy this obligation and was not
able to raise the required payment when due the Company came to an agreement to
pay CGM Security Solutions, Inc. and it’s owner Mr. Erik Hoffer Five Hundred
Thousand Dollars ($500,000) and signed a new note with him raising the purchase
price by One Million Dollars (1,000,000).The new note for Four Million Dollars
is a three year note carrying an annual interest rate of 7% of which the
interest is due quarterly.


15





Note
12 - Going Concern





The
accompanying condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America, which contemplates continuation of the Company as a going concern. The
Company has sustained recurring losses and has accumulated a significant deficit
as of September 30, 2009. These factors raise substantial doubt about its
ability to continue as a going concern.





Management
has formulated and is in the process of implementing its business plan intended
to develop steady revenues and income, as well as reducing expenses in the areas
of operations. This plan includes the following management
objectives:





·   
Soliciting new customers in the U.S.


·   
Expanding sales in the international market


·   
Expanding sales through E-commerce


·    Adding
new distributor both in the U.S and internationally


·    The
introduction of new products into the market


·     
Seeking out possible merger candidates





Presently,
the Company cannot ascertain the eventual success of management’s plan with any
degree of certainty. Each objective is contingent upon a number of factors and
the Company does not represent that any or all of these objectives will occur.
The accompanying condensed consolidated financial statements do not include any
adjustments that might result from the eventual outcome of the risks and
uncertainties described above.





Note
13 – Recent Events





On July
10, 2009, the Company was notified by FINRA, the body governing the OTC Bulletin
Board that its request for a 1 for 1,000 reverse split of its issued and
outstanding stock (the “Reverse Split”) had been processed and that it had
assigned ADSV to be the new trading symbol for the Company’s common stock. The
assignment was effective as of the open of business on July 13, 2009.  The
Reverse Split had been implemented through a filing with the Delaware Secretary
of State.


16





Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations





Forward-Looking
Statements





The
information in this report contains forward-looking statements. All statements
other than statements of historical fact made in report are forward looking. In
particular, the statements herein regarding industry prospects and future
results of operations or financial position are forward-looking statements.
These forward-looking statements can be identified by the use of words such as
“believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,”
“projects,” “expects,” “may,” “will,” or “should” or other variations or similar
words. No assurances can be given that the future results anticipated by the
forward-looking statements will be achieved. Forward-looking statements reflect
management’s current expectations and are inherently uncertain. Our actual
results may differ significantly from management’s expectations.





The
following discussion and analysis should be read in conjunction with our
financial statements, included herewith. This discussion should not be construed
to imply that the results discussed herein will necessarily continue into the
future, or that any conclusion reached herein will necessarily be indicative of
actual operating results in the future. Such discussion represents only the best
present assessment of our management.





RESULTS
OF OPERATIONS





THREE
MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30,
2008





Revenues
for the three months ended September 30, 2009 were $770,906 compared to
$1,528,479 for the three months ended September 30, 2008, a decrease of
$757,573. ASII generates its revenues through software licenses, hardware, post
customer support arrangements and other services. CGM-AST generates its revenue
through the manufacture and distribution of indicative and barrier security
seals, security tapes and related packaging security systems, protective
security products for palletized cargo, physical security systems for tractors,
trailers and containers as well as a number of highly specialized authentication
products. CGM is experiencing a slow down in sales due to the current economic
conditions. CGM is tied to the transportation security sector. Sales industry
wide across the country are down in almost every sector,; with sales down there
is less transporting of product and therefore, less need for security
products.





Cost of
revenue for the three months ended September 30, 2009 was $327,136 compared to
$521,410 for the three months ended September 30, 2008 a decrease of $194,274 or
37%. Cost of revenue sold as a percentage of revenue for the three months ended
September 30, 2009 was 42% of total revenues. The decrease in cost of revenue is
directly related to the decrease in sales.





Operating
expenses for the three months ended September 30, 2009 were $649,225 compared to
$714,548 for the three months ended September 30, 2008, a decrease of $65,323 or
9%. The decrease in expenses is due to implementation of tighter cost
controls.





General
and Administrative expenses for the three months ended September 30, 2009 were
$502,680 compared to $534,508 for the three months ended September 30, 2008 for
a decrease of $31,828 or 6%.




Sales and
Marketing expenses for the three months ended September 30, 2009 were $126,836
compared $156,130 for the three months ended September 30, 2008 for a decrease
of $29,294 or 19%.




Research
and development expenses for the three months ended September 30, 2009 were
$19,709 compared to $23,910 for the three months ended September 30, 2008 for a
decrease of $4,201 or 18%.





NINE
MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2008





Revenues
for the nine months ended September 30, 2009 were $2,888,718 compared to
$3,657,487 for the nine months ended September 30, 2008, a decrease of $768,769.
ASII generates its revenues through software licenses, hardware, post customer
support arrangements and other services. CGM-AST generates its revenue through
the manufacture and distribution of indicative and barrier security seals,
security tapes and related packaging security systems, protective security
products for palletized cargo, physical security systems for tractors, trailers
and containers as well as a number of highly specialized authentication
products.





Cost of
revenue for the nine months ended September 30, 2009 was $1,013,630 compared to
$1,193,267 for the nine months ended September 30, 2008 a decrease of $179,637
or 15%. Cost of revenue sold as a percentage of revenue for the nine months
ended September 30, 2009 was 35% of total revenues.


17





Operating
expenses for the nine months ended September 30, 2009 were $2,102,119 compared
to $2,216,432 for the nine months ended September 30, 2008, a decrease of
$114,313 or 5%.




General
and Administrative expenses for the nine months ended September 30, 2009 were
$1,549,003 compared to $1,700,083 for the nine months ended September 30, 2008
for a decrease of $151,080 or 9%.




Sales and
Marketing expenses for the nine months ended September 30, 2009 were $483,855
compared to $447,537 for the nine months ended September 30, 2008 for an
increase of $36,318 or 8%.





Research
and development expenses for the nine months ended September 30, 2009 were
$69,261 compared to $68,812 for the nine months ended September 30, 2008 for an
increase of $449 or less than 1%.




ASII had
a net loss for the nine months ended September 30, 2009 of $16,997,615 and a net
loss for the nine months ended September 30, 2008 of $2,646,287. This is a
increase in net loss of $14,351,328.




Net cash
used in operating activities for the nine months ended September 30, 2009 was
$158,894 and the nine months ended September 30, 2008 was $121,277. The increase
in cash used in operating activities for the nine months ended September 30,
2009 compared to September 30, 2008 was $37,617.




Net cash
used in investing activities was $0 and $10,526 for the nine months ended
September 30, 2009 and the nine months ended September 30, 2008
respectively..





Net cash
provided by financing activities was $0 and $10,000 for the nine months ended
September 30, 2009 and the nine months ended September 30, 2008,
respectively.


18





LIQUIDITY
AND CAPITAL RESOURCES





The
Company had net (loss) of ($16,997,615) and ($2,646,287) during the nine months
ended September 30, 2009 and 2008, respectively. As of September 30, 2009, we
had a cash balance in the amount of $54,619 and current liabilities of
$35,264,105. The total amount of notes payable and debentures is
$18,034,892.  We may not have sufficient cash or other assets to meet
our current liabilities. In order to meet these obligations, we may need to
raise cash from the sale of securities or from borrowings.





Over the
next twelve months, management is hopeful that sufficient working capital may be
obtained from operations and external financing to meet ASII's liabilities and
commitments as they become payable. ASII has in the past relied on private
placements of common stock securities, and loans from private investors to
sustain operations.  However, if ASII is unable to obtain additional
funding in the future, it may be forced to curtail or terminate
operations.  At September 30, 2009, ASII had assets of
$3,114,181compared to $3,471,662 on December 31, 2008 a decrease of $357,481 and
accumulated (deficit) of $ (70,155,292) on September 30, 2009 compared to
accumulated (deficit) of $(53,157,677) on December 31, 2008, an increase of
$16,997,615. This increase in accumulated (deficit) for the nine months ended
September 30, 2009 resulted from the net loss for the nine months ended
September 30, 2009.





The
Company's revenues have been insufficient to cover the cost of revenues and
operating expenses. Therefore, the Company has been dependent on private
placements of its Common Stock and issuance of convertible notes in order to
sustain operations. Tthere can be no assurances that the proceeds from private
placements or other capital will continue to be available, or that revenues will
increase to meet the Company's cash needs, or that a sufficient amount of the
Company's Common Stock or other securities can or will be sold or that any
Common Stock purchase options/warrants will be exercised to fund the operating
needs of the Company.




Our
ability to survive current financial difficulties resulting from our cash flow
deficit is dependent on our capacity to generate revenues from the sale of our
products. Alternatively, we may have to raise additional financing through
the issuance of our equity or debt securities Even if we are able to raise the
funds required, it is possible that we could incur unexpected costs and
expenses, fail to collect significant amounts owed to us, or experience
unexpected cash requirements that would force us to seek alternative financing.
Further, if we issue additional equity or debt securities, our stockholders may
experience additional dilution or the new equity securities may have rights,
preferences or privileges senior to those of existing holders of our common
stock. If
additional financing is not available or is not available on acceptable terms,
we may have to curtail our operations.





The
Company has contractual obligations of $19,655,159 as of September 30, 2009.
These contractual obligations, along with the dates on which such payments are
due are described below:





Contractual Obligations
                
                Total
                
                
                One Year or
                  Less
                
                
                More Than One
                  YearDue
      to Related Parties
                
                $
                0
                
                
                $
                0
                
                
                $
                0Accounts
      Payable and Accrued Expenses
                
                
                279,765
                
                
                
                279,765
                
                
                
                0Accrued
      interest on loans
                
                
                1,340,502
                
                
                
                1,340,502
                
                
                
                0Note
      payable
                
                
                4,000,000
                
                
                
                0
                
                
                
                4,000,000Convertible
      Debentures
                
                
                14,034,892
                
                
                
                0
                
                
                
                14,034,892Total
      Contractual Obligations
                
                $
                19,655,159
                
                
                $
                1,620,267
                
                
                $
                18,034,892





Off
Balance Sheet Arrangements





We do not
have any off balance sheet arrangements as of September 30, 2009 or as of the
date of this report.




Plan
of Operations




The
short-term objective of ASII is the following:




o The
short-term objective of ASII is to increase the market penetration of the
product line of its CGM-AST subsidiary as the Company believes this is the area
where the greatest revenue growth exists.


19




o
Additionally, ASII plans to execute an acquisition strategy based upon fund
availability.




ASII's
long-term objective is as follows:




o To seek
additional products to sell into its basic business market - Criminal Justice -
so that ASII can generate sales adequate enough to allow for
profits.




ASII
believes that it will not reach profitability in the foreseeable future. Over
the next twelve months, management is of the opinion that sufficient working
capital will be obtained from operations and external financing to meet ASII's
liabilities and commitments as they become payable. ASII has in the past
successfully relied on private placements of common stock securities, bank debt,
loans from private investors and the exercise of common stock warrants in order
to sustain operations. If ASII is unable to obtain additional funding in the
future, it may be forced to curtail or terminate operations.




ASII is
doing the following in its effort to reach profitability:




o
Cut costs in areas that add the least value to ASII.




o
Concentrate on increasing the sales of the CGM-AST product line.




o Derive
funds through investigating business alliances with other
companies.


o Acquire
and effectively add management support to profitable companies complementary to
its broadened target markets




Item
4T. Control and Procedures




(a)
Evaluation of Disclosure Controls and Procedures




The
Securities and Exchange Commission defines the term “disclosure controls and
procedures” to mean a company’s controls and other procedures that are designed
to ensure that information required to be disclosed in the reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms. Based on the evaluation of the
effectiveness of our disclosure controls and procedures by our management, with
the participation of our Chief Executive Officer and our Chief Financial
Officer, as of the end of the period covered by this report, our Chief Executive
Officer and our Chief Financial Officer have concluded that our disclosure
controls and procedures at the end of the period covered by this report were
effective to ensure that information required to be disclosed in the reports
that we file or submit under the Securities Exchange Act of 1934 is
(i) recorded, processed, summarized and reported, within the time periods
specified in the Commission’s rules and forms, and (ii) accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding
disclosure.





Changes
in internal controls.





Management
of the Company has also evaluated, with the participation of the Chief Executive
Officer and Chief Financial Officer of the Company, any change in the Company's
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) that occurred during the fiscal quarter
covered by this Quarterly Report on Form 10-Q.  There was no change in
the Company's internal control over financial reporting identified in that
evaluation that occurred during the fiscal quarter covered by this Quarterly
Report on Form 10-Q that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial
reporting.


20





PART II. OTHER INFORMATION





Item
1. Legal Proceedings




None




Item
2. Changes in Securities and Use of Proceeds




None.





Item
3. Defaults Upon Senior Securities:




None




Item
4. Submission of Matters to a Vote of Security Holders




None.





Item
5. Other Information




On
October 9, 2007 the companies stock trading moved from the Pink Sheets to NASDAQ
Bulletin Board.





Item 6. Exhibits





No.31.1
            
            Certification
      of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K,
      as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.31.2
            
            Certification
      of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K,
      as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.32.1
            
            Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes- Oxley Act of 2002


21




SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.




ALLIED SECURITY INNOVATIONS,
      INC.
                    (Registrant)Date:
      November 12, 2009
                  By:
                  /s/
      ANTHONY SHUPINAnthony
      Shupin(President,
      Chief Executive Officer)
                    (Chairman)




Date:
      November 12, 2009
              By:
              /s/
      MICHAEL J. PELLEGRINOMichael
      J. PellegrinoSenior
      Vice President & CFO
                (Principal
      Financial and Accounting
Officer)


22