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 March 31, 2010





OR




 ̈
            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 check mark 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 þ     No
 ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).




Yes o    No
 ̈




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





Large accelerated
      filer ̈
                  Accelerated filer ̈
                  Non-accelerated
      filer
                  Smaller reporting
      company þ(Do
      not check if a smaller reporting company)




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




Yes  ̈
    No þ




As of
May 10, 2010 there were outstanding 117,775,914 shares of the Registrant’s
common stock, par value $0.01 per share.








Allied
Security Innovations, Inc.





INDEX





Page No.PART
      I.  FINANCIAL INFORMATIONItem
      1
                              Condensed
      Financial Statements:Consolidated Balance
      SheetsMarch
      31, 2010 (unaudited) and December 31, 2009
                              3Consolidated Statements of
      Income(unaudited)
      for the three months ended March 31, 2010 and 2009
                              4Consolidated Statements of Cash
      Flows(unaudited)
      for the three months ended March 31, 2010 and 2009
                              5Notes
      to Condensed Consolidated Financial Statements(Unaudited)
                              7Item
      2
                              Management's Discussion and
      Analysis of Financial Condition and Results of
      Operations
                              17Item
      3
                              Quantitative and Qualitative
      Disclosures about Market Risk
                              19Item
      4
                              Controls and
      Procedures
                              19PART
      II.  OTHER INFORMATIONItem
      1
                              Legal
      Proceedings
                              20Item
      1A
                              Risk
    Factors
                              20Item
      3
                              Defaults Upon Senior
    Securities
                              20Item
      4.
                              Submission of Matters to a Vote of Security
      Holders
                              20Item
      5
                              Other
      Information
                              20Item
      6
                              Exhibits
                              20Signatures and
      Certifications
                              21




2





ALLIED
SECURITY INNOVATIONS, INC. AND SUBSIDIARY


CONDENSED
CONSOLIDATED BALANCE SHEETS





March 31,
                      
                      
                      December 31,2010
                      
                      
                      2009(Unaudited)ASSETSCurrent
      Assets:Cash
      and cash equivalents
                      
                      $
                      69,848
                      
                      
                      $
                      52,667Accounts
      receivable, net
                      
                      
                      418,866
                      
                      
                      
                      292,453Inventory
                      
                      
                      104,381
                      
                      
                      
                      117,621Other
      Current Assets
                      
                      
                      1,500
                      
                      
                      
                      3,375Total
      Current Assets
                      
                      
                      594,595
                      
                      
                      
                      466,116Property
      and equipment, net
                      
                      
                      197,231
                      
                      
                      
                      209,485Other
      Assets:Deposits
                      
                      
                      11,914
                      
                      
                      
                      9,421Intangible
      assets, net
                      
                      
                      31,999
                      
                      
                      
                      33,541Total
      Other Assets
                      
                      
                      43,913
                      
                      
                      
                      42,962TOTAL
      ASSETS
                      
                      $
                      835,739
                      
                      
                      $
                      718,563LIABILITIES
      AND STOCKHOLDERS' DEFICITLIABILITIESCurrent
      Liabilities:Accounts
      payable
                      
                      $
                      415,681
                      
                      
                      $
                      319,651Accrued
      expenses
                      
                      
                      -
                      
                      
                      
                      160,312Accrued
      payroll
                      
                      
                      19,681
                      
                      
                      
                      61,748Accrued
      interest
                      
                      
                      1,730,867
                      
                      
                      
                      1,552,590Deferred
      income
                      
                      
                      63,247
                      
                      
                      
                      52,182Convertible
      debentures current portion
                      
                      
                      6,554,471
                      
                      
                      
                      25,279Notes
      payable
                      
                      
                      4,100,000
                      
                      
                      
                      5,000Derivative
      liabilities
                      
                      
                      17,582,072
                      
                      
                      
                      18,888,603Total
      Current Liabilities
                      
                      
                      30,466,019
                      
                      
                      
                      21,065,365Long
      Term Liabilities:Note
      payable
                      
                      
                      -
                      
                      
                      
                      4,000,000Convertible
      debentures, net of current portion
                      
                      
                      -
                      
                      
                      
                      13,997,780Total
      Long Term Liabilities
                      
                      
                      -
                      
                      
                      
                      17,997,780Total
      Liabilities
                      
                      
                      30,466,019
                      
                      
                      
                      39,063,145STOCKHOLDERS'
      DEFICITPreferred
      stock, $.001 par value: 1,000,000 sharesauthorized
      ; 20,000 issued and outstanding shares
                      
                      
                      -
                      
                      
                      
                      -Common
      stock, par value $.001; authorized 9,999,000,000 shares;82,910,275
      and 23,176,249 issued and outstanding atMarch
      31, 2010 and December 31, 2010, respectively
                      
                      
                      82,910
                      
                      
                      
                      23,176Additional
      paid in capital
                      
                      
                      19,977,943
                      
                      
                      
                      20,007,629Accumulated
      deficit
                      
                      
                      (49,691,133
                      )
                      
                      
                      (58,375,387
                      )Total
      Stockholders' Deficit
                      
                      
                      (29,630,280
                      )
                      
                      
                      (38,344,582
                      )TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIT
                      
                      $
                      835,739
                      
                      
                      $
                      718,563





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 MONTHS ENDED MARCH 31, 2010 AND 2009


(UNAUDITED)





2010
                    
                    
                    2009REVENUEProduct
      revenue
                    
                    
                    820,130
                    
                    
                    $
                    1,103,944Service
      revenue
                    
                    
                    179,553
                    
                    
                    
                    34,938Total
      revenue
                    
                    
                    999,683
                    
                    
                    
                    1,138,882Cost
      of Revenue
                    
                    
                    232,007
                    
                    
                    
                    411,329Gross
      Profit
                    
                    
                    767,676
                    
                    
                    
                    727,553OPERATING
      EXPENSESGeneral
      and administrative
                    
                    
                    465,759
                    
                    
                    
                    552,539Sales
      and marketing
                    
                    
                    91,515
                    
                    
                    
                    130,028Research
      and development
                    
                    
                    22,941
                    
                    
                    
                    21,471Total
      Operating Expenses
                    
                    
                    580,215
                    
                    
                    
                    704,038INCOME  BEFORE
      OTHER INCOME (EXPENSE)
                    
                    
                    187,461
                    
                    
                    
                    23,515OTHER
      INCOME (EXPENSE)Gain
      on extinuishment of debt
                    
                    
                    9,073,666
                    
                    
                    
                    -Interest
      expense
                    
                    
                    (255,398
                    )
                    
                    
                    (280,183
                    )Beneficial
      interest from conversion
                    
                    
                    -
                    
                    
                    
                    (8,922
                    )Amortization
      of debt discount
                    
                    
                    (4,167
                    )
                    
                    
                    (3,744
                    )Change
      in fair value of derivative liability
                    
                    
                    (317,309
                    )
                    
                    
                    19,378Total
      Other Income (Expense)
                    
                    
                    8,496,792
                    
                    
                    
                    (273,471
                    )NET
      INCOME (LOSS) APPLICABLE TO COMMON SHARES
                    
                    $
                    8,684,253
                    
                    
                    $
                    (249,956
                    )NET
      INCOME (LOSS) PER SHARE - BASIC AND DILUTED
                    
                    $
                    -
                    
                    
                    $
                    -WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-BASIC
                    
                    
                    55,345,966
                    
                    
                    
                    3,106,474WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-DILUTED
                    
                    
                    9,999,000,000
                    
                    
                    
                    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
THREE MONTHS ENDED MARCH 31, 2010 AND 2009


(UNAUDITED)





2010
                  
                  
                  2009Cash
      Flows from Operating Activities:Net
      Income (Loss)
                  
                  $
                  8,684,253
                  
                  
                  $
                  (249,956
                  )Adjustments
      to reconcile net income (loss) to net cash(used
      in) provided by operating activities:Depreciation
      and amortization
                  
                  
                  13,796
                  
                  
                  
                  18,319Amortization
      of debt discount
                  
                  
                  4,167
                  
                  
                  
                  3,744Beneficial
      interest
                  
                  
                  -
                  
                  
                  
                  8,922Gain
      on extinuishment of debt
                  
                  
                  (9,073,666
                  )
                  
                  
                  -Change
      in fair value of derivative liability
                  
                  
                  317,309
                  
                  
                  
                  (19,378
                  )Bad
      debt expense
                  
                  
                  (4,037
                  )
                  
                  
                  (32,468
                  )Changes
      in operating assets and liabilities:Accounts
      receivable
                  
                  
                  (122,376
                  )
                  
                  
                  98,582Inventory
                  
                  
                  13,240
                  
                  
                  
                  38,055Prepaid
      expenses, deposits and other assets
                  
                  
                  (617
                  )
                  
                  
                  1,236Accounts
      payable and accrued expenses
                  
                  
                  79,047
                  
                  
                  
                  183,656Deferred
      Income
                  
                  
                  11,065
                  
                  
                  
                  1,186Net
      Cash Provided by (Used In) Operating Activities
                  
                  
                  (77,819
                  )
                  
                  
                  51,898Cash
      Flows from Financing Activities:Proceeds
      from notes payable
                  
                  
                  95,000
                  
                  
                  
                  50,000Net
      Cash provided by Financing Activities
                  
                  
                  95,000
                  
                  
                  
                  50,000Net
      Increase in Cash
                  
                  
                  17,181
                  
                  
                  
                  101,898Cash
      at Beginning of Period
                  
                  
                  52,667
                  
                  
                  
                  213,513Cash
      at End of Period
                  
                  $
                  69,848
                  
                  
                  $
                  315,411





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


FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009


(UNAUDITED)





2010
                            
                            
                            2009Supplemental
      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
                            
                            $
                            22,927
                            
                            
                            $
                            291,061Beneficial
      interest in conjunction with issuance of convertible
      debentures
                            
                            $
                            -
                            
                            
                            $
                            8,922Common
      stock issued in conversion of accrued interest
                            
                            $
                            7,121
                            
                            
                            $
                            3,170





The
accompanying notes are an integral part of the condensed consolidated financial
statements.


6





Allied
Security Innovations, Inc. and Subsidiary


Notes
to Condensed Consolidated Financial Statements




Note
1 - 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
2 - Summary of Significant Accounting Policies





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





Use
of Estimates


The
preparation of the 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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reported period. Actual results could differ from those
estimates.





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, virus fixes, and rights to upgrades. Other related services include
basic training. CGM derives its revenue from the sale of its tapes, labels and
other security devices. Revenue is recognized when products are shipped or
services are rendered, evidence of a contract exists, the price is fixed or
reasonably determinable, and collectability is reasonably assured.


7


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 March 31, 2010 was
$63,247 and at December 31, 2009 was $52,182.. 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 $22,941
and $21,471, for the three months ended March 31, 2010 and 2009.





Cash
and Cash Equivalents


The
Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. The Company had no
cash equivalents at March 31, 2010. The Company maintains cash balances at
financial institutions that are insured by the Federal Deposit Insurance
Corporation (“FDIC”) up to federally insured limits. At times balances may
exceed FDIC insured limits. The Company has not experienced any losses in such
accounts.





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.




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 $134,590 at March31, 2010 and $138,027 at December 31, 2009.




Property
and Equipment


Property
and equipment 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




8


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 has adopted Accounting Standards Codification ASC 718-10, “Accounting
for Stock-Based Compensation”, which establishes financial accounting and
reporting standards for stock-based employee compensation plans.  This
pronouncement also applies to transactions in which an entity issues its equity
instruments to acquire goods or services from non-employees. Those transactions
must be accounted for based on the fair value of the consideration received or
the fair value of the equity instruments issued, whichever is more reliably
measurable.  For stock options, fair value is determined using an
option-pricing model that takes into account the stock price at the grant date,
the exercise price, the expected life of the option, the volatility of the
underlying stock and the expected dividends on it, and the risk-free interest
rate over the expected life of the option.





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
when the Company reported a loss because to do so would be antidilutive for the
years 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. 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. ASII has no
major customer as of March 31, 2010.





Principles of Consolidation and Basis
of Presentation


The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiary CGM.  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 $90 and $12,625 for the three months ended March 31,
2010 and 2009, respectively.





Fair Value of Financial
Instruments


The
carrying amount reported in the 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 fair value of long-term debt is discussed in Note 13.





Goodwill and Other Intangible
Assets


In June 2001, the Financial Accounting
Standards Board (“FASB”) issued ASC 350 “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 totaling $4,054,998.




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.


9


In
December of 2008 the Company determined its’ goodwill was impaired and recorded
a loss of $2,000,000 and in December 2009 the Company wrote off the balance of
the goodwill to $0.





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 ASC 815, “Accounting for Derivative
Instruments and Hedging Activities,”including “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock.”In
accordance with the provisions of ASC 815, the embedded derivatives are required
to be bifurcated from the debt instrument and recorded as a liability at fair
value on the consolidated balance sheet. Changes in the fair value of the
derivatives are recorded at each reporting period and recorded in change in fair
market value of derivative liability, a separate component of the other income
(expense).





Earnings (Loss) Per Share of Common
Stock


Historical
net income (loss) per common share is computed using the weighted average number
of common shares outstanding. Diluted earnings per share (EPS) include
additional dilution from common stock equivalents, such as stock issuable
pursuant to the exercise of stock options and warrants. Common stock equivalents
were not included in the computation of diluted earnings per share at March 31,
2010 and 2009 when the Company reported a loss because to do so would be
anti-dilutive for years presented.




The following is a reconciliation of
the computation for basic and diluted EPS:




March 31, 2010
                      
                      
                      March 31, 2009Net
      Income (Loss)
                      
                      $
                      8,684,253
                      
                      
                      $
                      (249,956
                      )Weighted-average
      common shares outstanding (Basic)
                      
                      
                      55,345,966
                      
                      
                      
                      3,106,474Weighted-average
      common stock Equivalents:Stock
      options
                      
                      
                      -
                      
                      
                      
                      -Warrants
                      
                      
                      -
                      
                      
                      
                      -Weighted-average
      common shares outstanding (Diluted)
                      
                      
                      55,345,966
                      
                      
                      
                      3,106,474





Options
and warrants outstanding to purchase stock were not included in the computation
of diluted EPS on March 31, 2010 and December 31, 2009 because inclusion would
have been anti-dilutive. There were no options and warrants available at
March 31, 2010 and 2009.





Going Concern


The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. The Company
has sustained operating losses and has accumulated large deficits for the period
ended March 31, 2010. 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 distributors 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 consolidated financial statements do not include any
adjustments that might result from the eventual outcome of the risks and
uncertainties described above.


10


Note
3 - Impact of Recent Accounting Pronouncements




ASU 2010-06, Fair Value
Measurements and Disclosures (Topic 820): Improving
Disclosures about Fair Value Measurements This ASU amends FASB ASC Topic
820, Fair Value Measurements
and Disclosures, to require reporting entities to make new disclosures
about recurring or nonrecurring fair-value measurements including significant
transfers into and out of Level 1 and Level 2 fair-value measurements and
information about purchases, sales, issuances, and settlements on a gross basis
in the reconciliation of Level 3 fair-value measurements. The ASU also clarifies
existing fair-value measurement disclosure guidance about the level of
disaggregation, inputs, and valuation techniques.




Except
for the detailed Level 3 roll forward disclosures, the guidance in the ASU was
adopted by the Company on January 1, 2010 with no material impact on its
financial statements. The new disclosures about purchases, sales, issuances, and
settlements in the roll forward activity for Level 3 fair-value measurements are
effective January 1, 2011.





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, 2009, 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.





Note
4 – Intangible Assets





Intangible
assets consist of the following at March 31, 2010 and December 31,
2009:





2010
                  
                  
                  2009Licenses
                  
                  $
                  87,076
                  
                  
                  $
                  87,076Accumulated
      amortization
                  
                  
                  55,077
                  
                  
                  
                  53,535Total
                  
                  $
                  31,999
                  
                  
                  $
                  33,541





Licenses
are being amortized over its estimated useful life of 15 years. The Licenses are
amortized using the straight-line method over the useful life of 15
years.




Based on
the results of its most recent annual impairment tests, the Company determined
that there would be no future value on the Brake Lock License. Therefore,
management recorded an impairment of $89, 260 in 2009. There was no impairment
determined for the other licenses that exist. However, future impairment tests
could result in a charge to earnings.





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





Year
ended December 31,


2011
                    
                    $
                    6,1682012
                    
                    
                    6,1682013
                    
                    
                    6,1682014
                    
                    
                    6,1682015
                    
                    
                    6,168





Note
5- Property and Equipment





Property
and Equipment consist of the following at March 31, 2010 and December 31,
2009.





2010
                      
                      
                      2009Furniture
      and Fixtures $ 75,613
                      
                      $
                      75,613Leasehold
      Improvements
                      
                      
                      159,607
                      
                      
                      
                      159,607Computers
                      
                      
                      219,301
                      
                      
                      
                      219,301Machinery
      and Equipment 762,987
                      
                      
                      762,9871,217,508
                      
                      
                      
                      1,217,508Less:
      Accumulated depreciation
                      
                      
                      (1,020,277
                      )
                      
                      
                      (1,008,023
                      )Net
                      
                      $
                      197,231
                      
                      
                      $
                      209,485




11


Note
6 - Convertible Debentures





Based on
the guidance ASC 815, the Company concluded that its convertible debentures were
required to be accounted for as derivatives. The imbedded conversion features
were 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 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.





During
January 2009, the Company issued 5 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 6% per annum with terms of
three years.





The
Company recorded a derivative liability related to these convertible debentures
at their fair market value and adjusts the balance to fair market value each
reporting period with the change being reported as “other income and expenses”
in the statement of income.





On March
2, 2010, the Company entered into a rescission agreement (the “Rescission
Agreement”) with each of AJW Partners, LLC, AJW Master Fund, Ltd., New
Millennium Capital Partners II, LLC and AJW Offshore, Ltd. as holders (the
“Holders”) of the Company’s Callable Secured Convertible Notes (the “New
Notes”). Under the terms of the Rescission Agreement, the parties agreed to
rescind a recapitalization agreement dated May 16, 2008 among the Company and
the Holders (the “Recapitalization Agreement”). Under the Recapitalization
Agreement, certain convertible debt securities previously held by the Holders
(the “Old Notes”) were exchanged for the New Notes.




Under the
Rescission Agreement, the New Notes are deemed void as if they were never issued
by the Company to the Holders and the Old Notes were returned to the Holders as
if they had never been exchanged for the New Notes pursuant to the
Recapitalization Agreement. On March 2, 2010 $13,458,796 convertible debt
principal was extinguished and $6,008,968 of principal was reinstated for a net
decrease of $7,449,828. See Note 10.





The fair
market value of the conversion feature 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 operations.





Note
7 – Derivative Liability





In
accordance with ASC 815, the conversion feature associated with the Secured
Convertible Debentures represents embedded derivatives. As such, the Company had
recognized embedded derivatives as a liability in the accompanying consolidated
balance sheet, and it was measured at its estimated fair value of $17,582,072
and $18,888,603 as of March 31, 2010 and December 31, 2009. The estimated fair
value of the embedded derivative has been calculated based on a Black-Scholes
pricing model using the following assumptions:


2010
                    
                    
                    2009$
                    0.0012
                    
                    
                    $
                    0.0001Exercise
      price
                    
                    $
                    0.0003 to 0
..0009
                    
                    
                    $
                    0.0003 to 0 0009Dividend
      yield
                    
                    
                    0.00
                    %
                    
                    
                    0.00
                    %Risk
      free interest rate
                    
                    0.81%
      to 2.03
                    %
                    
                    0.81%
      to 2.03
                    %Expected
      volatility
                    
                    254%
      to 356
                    %
                    
                    254%
      to 356
                    %Expected
      life
                    
                    1
      to 30 Years
                    
                    
                    1
      to 2 Years





Note
8 - Commitments




Operating
Leases





CGM-AST
leases one facility in Staten Island, New York on a month to month basis. In
addition, the Company’s Farmingdale, NJ location is a 6,000 square foot
combination warehouse /office. 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 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
March 31, 2010:


12





Per Year2010
                      
                      $
                      43,8972011
                      
                      
                      60,2852012
                      
                      
                      30,588Thereafter
                      
                      
                      -0-Total
      Minimum Payment required
                      
                      $
                      134,770





Employment
Agreements





On July
18 2008, 2005, ASII entered into a five-year employment agreement with Anthony
R. Shupin, Chairman, President and Chief Executive Officer, which entitled him
to a base salary of $227,900 per year.  The Board of Directors may
adjust his base salary at their discretion but it may not be adjusted below
$225,000 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 the Management
Equity Incentive 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.





On July
18, 2008, ASII entered into a five-year employment agreement with Michael J.
Pellegrino, Senior Vice President and Chief Financial Officer, which entitled
him to a base salary of $185,500 per year. The Board of Directors may adjust his
base salary at their discretion but it may not be adjusted 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 30
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 the Company granted to each of the executives discussed in
Note 8, 10,000 shares of newly created Series A Preferred Stock ("A Preferred")
as recognition for services. On May 11, 2009 the Series A Preferred Stock was
cancelled and replaced with 10,000 shares each of newly created Series B
Preferred Stock.




Each
share of B Preferred stock 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 $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 common stock is entitled to vote on. The shares are
not exercisable unless common stock is $2.00 per share and only after these
preferred shares have been outstanding for 2 years.  After 1 more year
they would become exercisable. Currently, a zero-value contingency is reported
and a value will be assigned only if the $2.00 target is achieved within the
allotted time frame and the shares become exercisable.




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., 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


The
following is a summary of option activity under all plans:





1994
      Plan
                            
                            
                            1996
      Director
                              Plan
                            
                            
                            Nonqualified
                            
                            
                            Total
                              Number
      of
                              Options
                            
                            
                            Weighted
                              Average
                              Exercise
                              PriceOutstanding
      at December 31, 2008
                            
                            
                            0
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            00
                            
                            
                            
                            0Outstanding
      at March 31, 2010
                            
                            
                            0
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            0
                            
                            
                            
                            0


14


Note
10 – Extinguishment of debt





The
accompanying condensed consolidated Statement of Operations for the three months
ended March 31, 2010,  reports a gain on extinguishment of debt in the
amount of $9,073,666.  As
required by the Troubled Debt Restructurings by Debtors Topic discussed in Note
6, the transaction was accounted for as a troubled debt restructurings under ASC
470-60 as follows:





Convertible
      debentures rescinded March 2, 2010
                  
                  $
                  13,458,796Convertible
      debentures reinstated March 2, 2010
                  
                  
                  6,008,969Gain
      on extinguishment- notes
                  
                  
                  7,449,827Derivative
      liability rescinded March 2, 2010
                  
                  
                  16,696,175Derivative
      liability reinstated March 2, 2010
                  
                  
                  15,072,336Gain
      on extinguishment- derivatives
                  
                  
                  1,623,839Total
      Gain on Extinguishment of Debt
                  
                  $
                  9,073,666





The
Company has determined it received a concession from the creditor through a
reduction in principal balance; the Rescission Agreement meets the definition of
a troubled debt restructuring.  Paragraph 35-6 of ASC 47-60 notes that
if total future cash payments specified by new terms, including face amount and
interest, is less than the current carrying amount, then the debtor shall reduce
the carrying amount equal to the total future cash payments specified by the new
terms and shall recognize a gain on restructuring.  The Company has
determined that the future cash payments are less than the current carrying
amount due to the conversion feature.





Note
11 - Contingency





There
were two holders of convertible notes dated December 31, 2001 who could
potentially seek damages from the Company. Should they seek these damages, the
Company could incur an additional expense of $71,668. Management feels however,
that the likelihood that the other holders will seek the damages is remote, and
therefore, no provision for this expense has been made in the accompanying
consolidated financial statements.





Note 12 – 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, 2009 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.





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 its 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 due on May 15, 2011 carrying an annual
interest rate of 7% of which the interest is due quarterly.


15


On March
2, 2010 the Company signed a six month promissory note in the
amount  of Seventy Thousand Dollars ($70,000) which carries and
interest rate of 12% and is due in 5 monthly installments of  $7,000
with a balloon payment in the sixth month of $38,242.





As of
March 31, 2010 there are two note payables totaling $30,000 owed to corporate
officers with no terms.





Note
13 -Fair Value Measurements





On
January 1, 2008, the Company adopted ASC 820 “Fair Value Measurements”. ASC
820 defines fair value, provides a consistent framework for measuring fair value
and expands fair value financial statement disclosure requirements. ASC 820’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. ASC 820 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 March 31,
2010.





Fair
Value Measurements on a Recurring Basis as of March 31, 2010





Level
      I
                                                    
                                                    
                                                    Level II
                                                    
                                                    
                                                    Level III
                                                    
                                                    
                                                    TotalAssets
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    -Total
      Assets
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    -Convertible
      debentures
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    6,554,471
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    6,554,471Derivative
      liability
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    17,582,072
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    17,582,072Notes
      payable
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    4,100,000
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    4,100,000Total
      Liabilities
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    28,236,543
                                                    
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    28,236,543


16


Note
14 - Subsequent Events





Within
the last twelve months, many of the Company’s customers have changed their terms
from 30 days to 45 to 90 days.  To insure a level cash flow the
Company entered into a factoring agreement with Universal Funding Corporation in
April 2010 for one year with advances not to exceed 80% of accounts receivable
up to a $450,000 limit.   Interest is calculated and charged at
..4375% per month.





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 MARCH 31, 2010 COMPARED TO THREE MONTHS ENDED MARCH 31,
2009





Revenues
for the three months ended March 31, 2010 were $999,683 compared to $1,138,882
for the three months ended March 31, 2009, a decrease of $139,199 or
12,2%.  ASII generates its revenues through software licenses,
hardware, post customer support arrangements and other services. The revenue
from ASII service was $179,553 and $34,938 for the three months ended March 31,
2010 and 2009.  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. The revenue from
these products was $820,130 and $1,103,944 for the three months ended March 31,
2010 and 2009.





Cost of
revenue for the three months ended March 31, 2010 was $232,007 compared to
$411,329 for the three months ended March 31, 2009 a decrease of $179,322 or
43.6%. Cost of revenue sold as a percentage of revenue for the three months
ended March 31, 2010 was 23.2% of total revenues.





Operating
expenses for the three months ended March 31, 2010 were $580,215 compared to
$704,038 for the three months ended March 31, 2009, a decrease of $123,823 or
17.6%. This decrease was mainly attributable to a decrease in
payroll.  Management also put tight cost controls in place in
2010.





General
and Administrative expenses for the three months ended March 31, 2010 were
$465,759 compared to $552,539 for the three months ended March 31, 2009 for a
decrease of $86,780 or 15.7%. This decrease was mainly attributable to tighter
controls on spending.





Sales and
Marketing expenses for the three months ended March 31, 2010 were $91,515
compared $130,028 for the three months ended March 31, 2009 for a decrease of
$38,513 or 29.6%. This decrease was mainly attributable to a decrease in
payroll.





Research
and development expenses for the three months ended March 31, 2010 were $22,941
compared to $21,471 for the three months ended March 31, 2009 for an increase of
$1,470.





ASII had
a net income for the three months ended March 31, 2010 of $8,684,253 and a net
(loss) for the three months ended March 31, 2009 of $(249,956). This is an
increase in net income of $8,934,209.  This was primarily due to the
rescission agreement of March 2, 2010.





Net cash
provided by (used in) operating activities for the three months ended March 31,
2010 and the three months ended March 31, 2009 was $(77,819) and $51,898. The
decrease in cash provided by operating activities for the three months ended
March 31, 2010 was $129,717.





Net cash
provided by financing activities was $95,000 and $50,000 for the three months
ended March 31, 2010 and the three months ended March 31, 2009.


17


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. 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 March 31, 2010, ASII had assets
of $835,739 compared to $718,563 on December 31, 2009 an increase of $117,176
and shareholder (deficit) of $ (29,630,280) on March 31, 2010 compared to
shareholder (deficit) of $(38,344,582) on December 31, 2009, a decrease of
$8,714,302. This decrease in shareholder (deficit) for the three months ended
March 31, 2010 resulted from the net income for the three months ended March 31,
2010.





The
Company had net income of $8,684,253 and net (loss) of ($249,956) during the
three months ended March 31, 2010 and 2009. As of March 31, 2010, we had a cash
balance in the amount of $69,848 and current liabilities of $30,466,019. The
total amount of notes payable and debentures is $10,654,471.  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'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.





The
Company has contractual obligations of $12,820,800 as of March 31, 2010. 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
                    
                    
                    435,362
                    
                    
                    
                    435,362
                    
                    
                    
                    0Accrued
      interest on loans
                    
                    
                    1,730,867
                    
                    
                    
                    1,730,867
                    
                    
                    
                    0Note
      payable
                    
                    
                    4,100,000
                    
                    
                    
                    4,100,000
                    
                    
                    
                    0Convertible
      Debentures
                    
                    
                    6,554,571
                    
                    
                    
                    6,554,571
                    
                    
                    
                    0Total
      Contractual Obligations
                    
                    $
                    12,820,800
                    
                    
                    $
                    12,820,800
                    
                    
                    $
                    0





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 March 31, 2010 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.


18




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
3. Quantitative and Qualitative Disclosures about Market Risk


None





Item 4. Control and Procedures





Management
of the Company has evaluated, with the participation of the Chief Executive
Officer and Chief Financial Officer of the Company, the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or
15d-15(e) promulgated by the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end
of the period covered by this interim Report on Form 10-Q. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer of the
Company had concluded that the Company's disclosure controls and procedures as
of the period covered by this Interim Report on Form 10-Q were not effective for
the following reasons:





a)           The
deficiency was identified as the Company's limited segregation of duties among
the Company's employees with respect to the Company's control activities. This
deficiency is the result of the Company's limited number of employees. This
deficiency may affect management's ability to determine if errors or
inappropriate actions have taken place. Management is required to apply its
judgment in evaluating the cost-benefit relationship of possible changes in our
disclosure controls and procedures.





b)           The
deficiency was identified in respect to the Company's Board of Directors. This
deficiency is the result of the Company's limited number of external board
members. This deficiency may give the impression to the investors that the board
is not independent from management. Management and the Board of Directors are
required to apply their judgment in evaluating the cost-benefit relationship of
possible changes in the organization of the Board of Directors.





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.


19


PART II. OTHER INFORMATION





Item
1. Legal Proceedings





None





Item
1A. Risk Factors





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





None.





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


20




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:
      May 21, 2010
                    By:
                    /s/
      ANTHONY SHUPINAnthony
      Shupin(President,
      Chief Executive Officer)(Chairman)Date:
      May 21, 2010
                    By:
                    /s/
      MICHAEL J. PELLEGRINOMichael
      J. PellegrinoSenior
      Vice President & CFO(Principal
      Financial and Accounting
Officer)


21