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 June 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  
xNo  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            Accelerated
filer               Non-accelerated
filer 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 July
      12,
                    2009Common
      stock, $.001 par value per share
                  
                  3,311,653,393
      shares









Allied Security Innovations, Inc. and
Subsidiary
 Formerly Digital Descriptor Systems,
Inc.
 Condensed Consolidated Financial
Statements (Unaudited)
 June 30, 2009
 
 PageCondensed Consolidated Unaudited
      Financial Statements (Unaudited):Condensed
      Consolidated Balance Sheets at June 30, 2009 and December 31,
      2008
                                                      
                                                      3Condensed
      Consolidated Statements of Operations for the Three
      Months and Six Months Ended June 30, 2009 and 2008
                                                      
                                                      4Condensed Consolidated Statements
      of Cash Flows for the Six
      Months Ended June 30, 2009 and 2008
                                                      
                                                      5Notes
      to Condensed Consolidated Financial Statements
                                                      
                                                      7
  2
 
 ALLIED
SECURITY INNOVATIONS, INC. AND SUBSIDIARY
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 
 June 30,
                        
                        
                        December 31,2009
                        
                        
                        2008ASSETSCurrent
      Assets:Cash
      and cash equivalents
                        
                        $
                        264,055
                        
                        
                        $
                        213,513Accounts
      receivable, net of allowance
                        
                        
                        428,895
                        
                        
                        
                        537,223Inventory
                        
                        
                        197,164
                        
                        
                        
                        238,123Other
      Current Assets
                        
                        
                        5,678
                        
                        
                        
                        9,346Total
      Current Assets
                        
                        
                        895,792
                        
                        
                        
                        998,205Property
      and equipment, net
                        
                        
                        238,539
                        
                        
                        
                        267,594Other
      Assets:Deposits
                        
                        
                        12,896
                        
                        
                        
                        12,896Goodwill
                        
                        
                        2,054,998
                        
                        
                        
                        2,054,998Intangible
      assets, net
                        
                        
                        130,385
                        
                        
                        
                        137,969Total
      Other Assets
                        
                        
                        2,198,279
                        
                        
                        
                        2,205,863TOTAL
      ASSETS
                        
                        $
                        3,332,610
                        
                        
                        $
                        3,471,662LIABILITIES
      AND STOCKHOLDERS' DEFICITLIABILITIESCurrent
      Liabilities:Accounts
      payable
                        
                        $
                        203,083
                        
                        
                        $
                        142,865Accrued
      expenses
                        
                        
                        346,778
                        
                        
                        
                        339,079Accrued
      payroll
                        
                        
                        50,351
                        
                        
                        
                        114,923Accrued
      interest
                        
                        
                        1,131,220
                        
                        
                        
                        711,684Deferred
      income
                        
                        
                        15,913
                        
                        
                        
                        10,098Convertible
      debentures, net of debt discount
                        
                        
                        32,763
                        
                        
                        
                        39,078Derivative
      liabilities
                        
                        
                        17,376,315
                        
                        
                        
                        17,356,901Total
      Current Liabilities
                        
                        
                        19,156,423
                        
                        
                        
                        18,714,628Long
      Term Liabilities:Note
      payable
                        
                        
                        4,000,000
                        
                        
                        
                        4,000,000Convertible
      debentures, net of debt discount
                        
                        
                        14,020,789
                        
                        
                        
                        14,028,077Total
      Long Term Liabilities
                        
                        
                        18,020,789
                        
                        
                        
                        18,028,077Total
      Liabilities
                        
                        
                        37,177,212
                        
                        
                        
                        36,742,705STOCKHOLDERS'
      DEFICITPreferred
      stock, $.001 par value: authorized shares -1,000,000; issued and
      outstanding shares - none
                        
                        
                        -
                        
                        
                        
                        -Common
      stock, par value $.001; 9,999,000,000 shares authorized:3,311,653,393
      and 2,970,592,594 issued and outstanding at June 30, 2009 and December 31,
      2008, respectively
                        
                        
                        3,311,653
                        
                        
                        
                        2,970,593Additional
      paid in capital
                        
                        
                        16,609,087
                        
                        
                        
                        16,916,041Accumulated
      deficit
                        
                        
                        (53,765,342
                        )
                        
                        
                        (53,157,677
                        )Total
      Stockholders' Deficit
                        
                        
                        (33,844,602
                        )
                        
                        
                        (33,271,043
                        )TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIT
                        
                        $
                        3,332,610
                        
                        
                        $
                        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 SIX  MONTHS ENDED JUNE 30, 2009 AND 2008
 (UNAUDITED)
 
 Three
      Months
                  
                  
                  Three
      Months
                  
                  
                  Six
      Months
                  
                  
                  Six
      MonthsEnded
                  
                  
                  Ended
                  
                  
                  Ended
                  
                  
                  Ended6/30/2009
                  
                  
                  6/30/2008
                  
                  
                  6/30/2009
                  
                  
                  6/30/2008INCOMENet
      Sales
                  
                  $
                  978,933
                  
                  
                  $
                  1,134,954
                  
                  
                  $
                  2,117,814
                  
                  
                  $
                  2,129,008275,164
                  
                  
                  
                  366,426
                  
                  
                  
                  686,495
                  
                  
                  
                  671,858Gross
      Profit
                  
                  
                  703,769
                  
                  
                  
                  768,528
                  
                  
                  
                  1,431,319
                  
                  
                  
                  1,457,150OPERATING
      EXPENSESGeneral
      and administrative
                  
                  
                  521,363
                  
                  
                  
                  518,264
                  
                  
                  
                  1,055,581
                  
                  
                  
                  1,165,575Sales
      and marketing
                  
                  
                  222,537
                  
                  
                  
                  196,106
                  
                  
                  
                  352,565
                  
                  
                  
                  291,407Research
      and development
                  
                  
                  23,276
                  
                  
                  
                  22,203
                  
                  
                  
                  44,747
                  
                  
                  
                  44,902Total
      Operating Expenses
                  
                  
                  767,176
                  
                  
                  
                  736,573
                  
                  
                  
                  1,452,893
                  
                  
                  
                  1,501,884INCOME
      (LOSS) BEFORE OTHER INCOME (EXPENSE)
                  
                  
                  (63,407
                  )
                  
                  
                  31,955
                  
                  
                  
                  (21,574
                  )
                  
                  
                  (44,734
                  )OTHER
      INCOME (EXPENSE)Loss
      on extinguishment of debt
                  
                  
                  -
                  
                  
                  
                  (7,237,883
                  )
                  
                  
                  -
                  
                  
                  
                  (7,237,883
                  )Interest
      expense
                  
                  
                  (282,522
                  )
                  
                  
                  (289,684
                  )
                  
                  
                  (562,706
                  )
                  
                  
                  (475,875
                  )Beneficial
      interest from conversion
                  
                  
                  (500
                  )
                  
                  
                  (7,497
                  )
                  
                  
                  (9,422
                  )
                  
                  
                  (91,022
                  )Amortization
      of debt discount
                  
                  
                  (4,167
                  )
                  
                  
                  (37,115
                  )
                  
                  
                  (7,911
                  )
                  
                  
                  (81,346
                  )Change
      in fair value of derivative liability
                  
                  
                  11,208
                  
                  
                  
                  (2,763,334
                  )
                  
                  
                  30,586
                  
                  
                  
                  5,202,253Depreciation
      and Amortization
                  
                  
                  (18,320
                  )
                  
                  
                  (21,782
                  )
                  
                  
                  (36,638
                  )
                  
                  
                  (45,847
                  )Total
      Other Income (Expense)
                  
                  
                  (294,301
                  )
                  
                  
                  (10,357,295
                  )
                  
                  
                  (586,091
                  )
                  
                  
                  (2,729,720
                  )Loss
      before provision for income taxes
                  
                  $
                  (357,708
                  )
                  
                  $
                  (10,325,340
                  )
                  
                  $
                  (607,665
                  )
                  
                  $
                  (2,774,454
                  )Provision
      for income taxes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -NET
      LOSS APPLICABLE TO COMMON SHARES
                  
                  $
                  (357,708
                  )
                  
                  $
                  (10,325,340
                  )
                  
                  $
                  (607,665
                  )
                  
                  $
                  (2,774,454
                  )NET
      LOSS PER BASIC SHARES AND DILUTED SHARES
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -NET
      LOSS PER DILUTED SHARES
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-BASIC
                  
                  
                  3,281,320,060
                  
                  
                  
                  1,372,542,923
                  
                  
                  
                  3,192,663,504
                  
                  
                  
                  1,169,572,891
 
 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
SIX MONTHS ENDED JUNE 30, 2009 AND 2008
 (UNAUDITED)
 
 2009
                      
                      
                      2008Cash
      Flows from Operating Activities:Net
      Loss
                      
                      $
                      (607,665
                      )
                      
                      $
                      (2,774,454
                      )Adjustments
      to reconcile net loss to net cash(used in) provided by operating
      activities:Depreciation
      and amortization
                      
                      
                      36,638
                      
                      
                      
                      45,847Amortization
      of debt discount
                      
                      
                      7,911
                      
                      
                      
                      81,346Beneficial
      interest
                      
                      
                      9,422
                      
                      
                      
                      91,022Loss
      on extinguishment
                      
                      
                      -
                      
                      
                      
                      7,237,883Change
      in fair value of derivative liability
                      
                      
                      (30,586
                      )
                      
                      
                      (5,202,253
                      )Bad
      debt expense
                      
                      
                      (38,996
                      )
                      
                      
                      45,000Changes
      in operating assets and liabilities:Accounts
      receivable
                      
                      
                      147,324
                      
                      
                      
                      (10,072
                      )Inventory
                      
                      
                      40,959
                      
                      
                      
                      62,690Prepaid
      expenses, deposits and other assets
                      
                      
                      3,668
                      
                      
                      
                      (8,173
                      )Accounts
      payable
                      
                      
                      60,218
                      
                      
                      
                      68,554Accrued
      expenses
                      
                      
                      (56,873
                      )
                      
                      
                      (12,122
                      )Accrued
      interest
                      
                      
                      472,707
                      
                      
                      
                      294,064Deferred
      Income
                      
                      
                      5,815
                      
                      
                      
                      (40,552
                      )Net
      Cash Provided by (Used In) Operating Activities
                      
                      
                      50,542
                      
                      
                      
                      (121,220
                      )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
      Increase (Decrease) in Cash
                      
                      
                      50,542
                      
                      
                      
                      (121,746
                      )Cash
      at Beginning of Period
                      
                      
                      213,513
                      
                      
                      
                      386,628Cash
      at End of Period
                      
                      $
                      264,055
                      
                      
                      $
                      264,882
 
 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
SIX MONTHS ENDED JUNE 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 andFinancing
      Activities:Common
      stock issued in conversion of convertibledebentures
                        
                        $
                        295,561
                        
                        
                        $
                        697,808Beneficial
      interest in conjunction with issuance ofconvertible
      debentures
                        
                        $
                        9,422
                        
                        
                        $
                        91,022Common
      stock issued in conversion of accrued interest
                        
                        $
                        3,170
                        
                        
                        $
                        2,616
 
 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)


June 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




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.




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 June 30, 2009 was
$15,913 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 $44,747
and $44,902, respectively, for the six months ended June 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 $428,895 on
June 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 $109,510 on June 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 six months ended June 30, 2009 and 2008 because to do so would be
antidilutive for the period presented.





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.


8


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 $35,024 and $32,608 for the six months ended June
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 June 30, 2009, the
fair value of derivatives was $17,376,315, an increase of $19,414 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 $30,586 as of
June 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 - Impact of Recent Accounting Pronouncements





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.





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.


10


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 June 30, 2009 and December 31,
2008.





June 30, 2009
                    
                    
                    December 31, 2008Licenses
                    
                    $
                    222,076
                    
                    
                    $
                    222,076Accumulated
      amortization
                    
                    
                    91,691
                    
                    
                    
                    84,107Total
                    
                    $
                    130,385
                    
                    
                    $
                    137,969





Licenses
are being amortized over its estimated useful life of 15
years.  Amortization expense for the six months ended June 30, 2009
and 2008 was $7,584 and $7,584, respectively.





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





Year
      ended December 312009
                  
                  
                  17,1962010
                  
                  
                  17,1962011
                  
                  
                  17,1962012
                  
                  
                  17,1962013
                  
                  
                  17,196





Note
6- Property and Equipment





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





June 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
                  
                  
                  (978,970
                  )
                  
                  
                  (949,915
                  )Net
                  
                  $
                  238,539
                  
                  
                  $
                  267,594





Depreciation
expense for the six months ended June 30, 2009 and 2008 was
$28,548  and $40,544, respectively.




11


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





Operating
Lease





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:





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.


12





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.




The
shares will vest in five equal monthly installments and will be issued at the
discretion of Mr. Shupin and Mr. Pellegrino.  These share have not
been issued as of December 31, 2008.   Each share of A Preferred
is convertible into 480 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 A 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 A 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 8,
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.





Effective
May 8, 2009, 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 B
Preferred Stock ("B Preferred") as recognition for services.




The
shares will vest in five equal monthly installments and will be issued at the
discretion of Mr. Shupin and Mr. Pellegrino.  These share have not
been issued as of June 30, 2009.   Each share of B Preferred is
convertible into 480 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 8,
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. The Company also maintains the
1996 Director Option Plan (the Director Plan) pursuant to which the Company
reserved 200,000 shares of common stock. Options granted under the Director Plan
are issued at or above the fair market value of the underlying shares on the
grant date. A portion of the first option vests at the six-month anniversary of
the date of the grant and continues over a four-year period. Subsequent options
vest on the first anniversary of the grant date. The options expire ten years
from the date of the grant or 90 days after termination of employment, whichever
comes first.


13





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.




Effective
this quarter, we implemented Statement of Financial Accounting Standards No.
157, Fair Value Measurements, or SFAS 157, for our nonfinancial assets and
liabilities that are remeasured at fair value on a non-recurring basis. The
adoption of SFAS 157 for our nonfinancial assets and liabilities that are
remeasured at fair value on a non-recurring basis did not impact our financial
position or results of operations; however, could have an impact in future
periods. In addition, we may have additional disclosure requirements in the
event we complete an acquisition or incur impairment of our assets in future
periods.




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




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




Assets
                  
                  Level I
                  
                  
                  Level II
                  
                  
                  Level III
                  
                  
                  TotalAssets
                  
                  $
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Total
      Assets
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Liabilities
                  
                  
                  -
                  
                  
                  $
                  31,429,867
                  
                  
                  
                  -
                  
                  
                  $
                  31,429,867Total
      Liabilities
                  
                  $
                  -
                  
                  
                  $
                  31,429,867
                  
                  
                  $
                  -
                  
                  
                  $
                  31,429,867





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 and 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, 2007 and 2008. 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 June 30, 2009 the Company did not secure
sufficient funding but was in negotiations with private investors in an attempt
to obtain same.


14





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 payable on March 1, 2011 carrying an annual interest rate
of 7% of which the interest is due quarterly.





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 June 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 – Subsequent 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.


15


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




Revenues
for the three months ended June 30, 2009 were $978,933 compared to $1,134,954
for the three months ended June 30, 2008, a decrease of $156,021 or
13.7%.  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.  Sales industry wide was down 35% for the
three months ended June 30, 2009.




Cost of
revenue for the three months ended June 30, 2009 was $275,164 compared to
$366,426 for the three months ended June 30, 2008 a decrease of $91,262 or
24.9%. Cost of revenue sold as a percentage of revenue for the three months
ended June 30, 2009 was 28.1% of total revenues.




Operating
expenses for the three months ended June 30, 2009 were $767,176 compared to
$736,573 for the three months ended June 30, 2008, an increase of $30,603 or
4.2%. This increase was mainly attributable to two new salespersons were hired
in August 2008.




General
and Administrative expenses for the three months ended June 30, 2009 were
$521,363 compared to $518,264 for the three months ended June 30, 2008 for an
increase of $3,099 or 0.6%. A look at quarter to quarter, general and
administrative cost stayed the same.




Sales and
Marketing expenses for the three months ended June 30, 2009 were $222,537
compared $196,106 for the three months ended June 30, 2008 for an increase of
$26,431 or 13.5%.  This increase is mainly attributable to two new
salespersons were hired in August 2008.




Research
and development expenses for the three months ended June 30, 2009 were $23,276
compared to $22,203 for the three months ended June 30, 2008 for an increase of
$1,073 or 4.8%.




ASII had
a net loss for the three months ended June 30, 2009 of $357,708 and a net loss
for the three months ended June 30, 2008 of $10,325,340. This is a decrease in
net loss of $9,967,632.  This was primarily due to the change in the
fair value of derivative liability.


16




SIX
MONTHS ENDED JUNE 30, 2009 COMPARED TO SIX MONTHS ENDED JUNE 30,
2008




Revenues
for the six months ended June 30, 2009 were $2,117,814 compared to $2,129,008
for the six months ended June 30, 2008, a decrease of $11,194 or
0.5%.  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 six months ended June 30, 2009 was $686,495 compared to $671,858
for the six months ended June 30, 2008 an increase of $14,637 or 2.1%. Cost of
revenue sold as a percentage of revenue for the six months ended June 30, 2009
was 32.4% of total revenues.




Operating
expenses for the six months ended June 30, 2009 were $1,452,893 compared to
$1,501,884 for the six months ended June 30, 2008, a decrease of $53,151 or
3.5%. This decrease was mainly attributable to a decrease in payroll because of
an officer’s resignation in April 2008.  The officer was not
replaced.




General
and Administrative expenses for the six months ended June 30, 2009 were
$1,055,581 compared to $1,165,575 for the six months ended June 30, 2008 for a
decrease of $114,154 or 9.8%. This decrease was mainly attributable to an
adjustment to bad debt and a decrease in officer’s payroll.




Sales and
Marketing expenses for the six months ended June 30, 2009 were $352,565 compared
$291,407 for the six months ended June 30, 2008 for an increase of $61,158 or
20.9%. Two new salespersons were hired in August 2008.




Research
and development expenses for the six months ended June 30, 2009 were $44,747
compared to $44,902 for the six months ended June 30, 2008 for a decrease of
$155.




ASII had
a net loss for the six months ended June 30, 2009 of $607,665 and a net loss for
the six months ended June 30, 2008 of $2,774,454. This is a decrease in net loss
of $2,166,789.  This was primarily due to the change in the fair value
of derivative liability.





Net cash
provided by (used in) operating activities for the six months ended June 30,
2009 and the six months ended June 30, 2008 was $50,542 and $(121,220),
respectively. The increase in cash provided by operating activities for the six
months ended June 30, 2009 was $171,762.




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





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





LIQUIDITY
AND CAPITAL RESOURCES




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. In addition, there 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.





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. However, there can be no assurance that the
Company will be able to generate sufficient working capital.  If the
Company is unable to obtain additional funding in the future, it may be forced
to curtail or terminate operations.  At June 30, 2009, ASII had assets
of $3,332,610 compared to $3,471,662 on December 31, 2008 a decrease of $139,052
and shareholder (deficit) of $ (33,844,602) on June 30, 2009 compared to
shareholder (deficit) of $(33,271,043) on December 31, 2008, an increase of
$573,559. This increase in shareholder (deficit) for the three months ended June
30, 2009 resulted from the net loss for the six months ended June 30,
2009.


17





The
Company had net (loss) of $607,665 and $2,774,454 during the six months ended
June 30, 2009 and 2008, respectively. As of June 30, 2009, we had a cash balance
in the amount of $264,055 and current liabilities of $19,156,423. The total
amount of notes payable and debentures is $18,053,552.  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.




The
Company has contractual obligations of $19,784,984 as of June 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
                
                
                600,212
                
                
                
                600,212
                
                
                
                0Accrued
      interest on loans
                
                
                1,131,220
                
                
                
                1,131,220
                
                
                
                0Note
      payable
                
                
                4,000,000
                
                
                
                0
                
                
                
                4,000,000Convertible
      Debentures
                
                
                14,053,552
                
                
                
                32,763
                
                
                
                14,020,789Total
      Contractual Obligations
                
                $
                19,784,984
                
                
                $
                1,764,195
                
                
                $
                18,020,789




The
Company is currently in default on several of the convertible debentures that
are included in current liabilities.




Off
Balance Sheet Arrangements




We do not
have any off balance sheet arrangements as of June 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.




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.


18





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


19




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:
      August 13, 2009
                    By:
                    /s/
      ANTHONY SHUPINAnthony
      Shupin(President,
      Chief Executive Officer)
                      (Chairman)




Date:
      August 13, 2009
                  By:
                  /s/
      MICHAEL J. PELLEGRINOMichael
      J. PellegrinoSenior
      Vice President & CFO
                    (Principal
      Financial and Accounting
Officer)




20