**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-KSB/A**

(Amendment No. 1)

| **x**      | **Annual Report Pursuant to Section 13 or 15(d) of  the Securities Exchange Act of 1934**      |
|------------|------------------------------------------------------------------------------------------------|
| ** ** | **For the Fiscal Year Ended June 30, 2006**                                                    |
| ** ** |
| **OR**     |
| ** ** |
| **o**      | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934.** |

 

**000-33099**

(CommissionFile Number)

**GeMSolutions, Inc.**

(Name of Small BusinessIssuer in Its Charter)

| **Colorado**                              |   | **84-1553046**                        |
|-------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of          |   | (IRS Employer  Identification Number) |
| Incorporation of  organization)           |   |                                  |
|                                      |   |                                  |
| **7935  Airport Pulling Road**            |   | ** **                            |
| **Suite  No. 201**                        |   | ** **                            |
| **Naples,  Florida**                      |   | **34109**                             |
| (Address of  Principal Executive Offices) |   | (Zip Code)                            |

 

**(239) 592-1816**

(Issuer’s Telephone Number,Including Area Code)

**Securities registered pursuant to Section 12(b) of the Act:**

| Title of Each Class | ** ** | **Name of Exchange on which Registered** |
|---------------------|------------|------------------------------------------|
| None                |       | None                                     |

 

**Securities registered pursuant to Section 12(g) of the Act:**

| **Title of Each Class**        |   |   |
|--------------------------------|--------|--------|
| Common Stock,  $.001 par value |   |   |

 

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during thepreceding 12 months (or for such shorter period that the issuer was required tofile such reports), and (2) has been subject to such filing requirements forthe past 90 days.

Yes  x  No  o

Check if there is no disclosure of delinquent filersin response to Item 405 of Regulation S-B contained in this form, and nodisclosure will be contained, to the best of issuer’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III of thisForm 10-KSB or any amendment to this form 10-KSB.  o

Indicate by check mark whether the registrant is ashell company (as defined in rule 12b-2 of the Exchange Act).  Yes o   No x

State issuer’s revenues for the year ended June 30,2006.  $870,964

The aggregate market value of the voting commonequity held by non-affiliates of the issuer based on the closing sale price ofthe issuer’s common stock as reported on the OTC Bulletin Board on October 10,2006 was $4,881,997.  The informationprovided shall in no way be construed as an admission that any person whoseholdings are excluded from the figure is an affiliate or that any person whoseholdings are included in the figure is not an affiliate, and any such admissionis hereby disclaimed.

As of October 10, 2006, 29,190,969 shares of theissuer’s common stock were outstanding.

Transitional Small Business Disclosure Formats(check one):

Yes o  No x

**DOCUMENTSINCORPORATED BY REFERENCE**

None.

 

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**EXPLANATORYNOTE**

GeMSolutions, Inc. (“the Company”, “we”, or “us”) is filing this Amendment No. 1(the “Amendment”) to our Annual Report on Form 10-KSB for the year ended June30, 2006 filed with the Securities and Exchange Commission (“SEC”) on October 13,2006 (the “Original Report”).  We arefiling this Amendment to restate our audited year end financial statements forthe fiscal years ended June 30, 2006 and 2005 and to restate our unauditedfinancial statements for each of the fiscal quarters ended March 31, 2006 and2005, December 31, 2005 and 2004, and September 30, 2005 and 2004.  The forgoing restatements appear in Note 3 toour Consolidated Financial Statements included in the Amendment.

Onor about May 10, 2006, we concluded it was necessary to restate our financialresults for the year ended June 30, 2005 and for the 2006 and 2005 fiscalquarters to reflect additional non-operating gains and losses related to theclassification of and accounting for (i) various warrants issued in 2003, 2004and 2005, and (ii) the conversion features of our $1.6 million convertible notepayable issued in April 2005.  We hadpreviously classified the value of the conversion features and warrants topurchase common stock as equity, where applicable.  After further review, we determined thatthese instruments should have been classified as derivative liabilities and,therefore, the fair value of each instrument should be reflected as derivativeliabilities on our balance sheet. Changes in fair value of these instrumentsare reflected as non-operating gains/losses in our statement ofoperations.  At the date of conversion ofeach respective instrument or portion thereof (or exercise of the warrants orportion thereof, as the case may be), the corresponding derivative liabilitywill be reclassified to equity.

Werestated our financial statements as of and for the year ended June 30, 2005 toreflect the forgoing and included such restatement in our Annual Report on Form10-KSB for the year ended June 30, 2006. We restated our financial statements as of and for the fiscal quarterended September 30, 2005 to reflect the forgoing and included such restatementin our Quarterly Report on Form 10-QSB for the quarter ended September 30,2006.  In addition, we have previouslyrestated the unaudited consolidated financial statements as of and for thethree months ended September 30, 2004 and three and nine months ended March 31,2005 to (i) correct the valuation of certain identifiable intangible assetsassociated with the purchase of CompuSven, Inc. (ii) amortize the deferredcompensation related to non-forfeitable warrants issued to anon-employee under a three-year consulting agreement over thevesting period rather than the term of the consulting agreement, and (iii) toaccount for the modification of terms related to options granted to a formeremployee.

Inconnection with the completion of our financial statements for the three-monthperiod ended September 30, 2006 for inclusion in our Quarterly Report on Form10-QSB for the period ended September 30, 2006, and after analyzing certainissues identified by the SEC during a regulatory review of our financialstatements, during the first quarter of fiscal 2007 we concluded it wasnecessary  to restate our financialstatements for the years ended June 30, 2006 and 2005 and our unauditedquarterly financial statements during those fiscal years.

Thepurpose of the restatement of our financial statements for the fiscal yearended June 30, 2006 is to: (i) reclassify capitalized software costs previouslyrecorded as property and equipment to other assets (intangibles); (ii)reclassify the 2004 beneficial conversion feature on our series A convertiblepreferred stock previously recorded against accumulated deficit to properlyrecord it to

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additionalpaid-in-capital; (iii) recognize the $0.001 par value of our series Bconvertible preferred stock by reclassifying $1,463,735, the amount in excessof the preferred shares’ par value, from capital to additional paid-in capital;and (iv) recognize the beneficial conversion feature related to the issuance ofseries B convertible preferred stock in the fourth quarter of the fiscal yearended June 30, 2006.  The net result ofthe restatement will increase other expenses by approximately $835,000 resultingin a corresponding increase in net loss available to common stockholders.  To the extent the forgoing affected thefinancial statements for the fiscal quarters ended September 30, 2005, December31, 2005 or March 31, 2006, such financial statements have also been  restated. The forgoing restatements are setforth in Notes 3, 6, 7 and 16 to our Consolidated Financial Statements includedin the Amendment.

Thepurpose of the restatement of our financial statements for the for the yearended June 30, 2005 is to reclassify the beneficial conversion features of ourseries A convertible preferred stock issued in the fiscal year ended June 30,2004 from accumulated deficit to additional paid-in capital.  The net result of the restatement will haveno impact on our income statement for the year ended June 30, 2005 and willresult in a decrease in additional paid-in capital of approximately $825,000, acorresponding decrease in accumulated deficit, and will have no impact on totalstockholders’ deficit.  To the extent theforgoing affected the financial statements for the fiscal quarters endedSeptember 30, 2004, December 31, 2004 or March 31, 2005, such financialstatements have also been  restated.  The forgoing restatements are set forth inNotes 3, 6, 7 and 16 to our Consolidated Financial Statements included in theAmendment.

Correspondingrevisions have been made to Management’s Discussion and Analysis  appearing in Item 6 of Part II of thisAmendment.

Withthe exception of the events set forth in Notes 3, 6, 7 and 16 to ourConsolidated Financial Statements included in the Amendment, this Amendmentdoes not reflect events that have occurred after October 13, 2006, the date theOriginal Report was filed with the SEC, nor does it modify or update thedisclosures set forth in the Original Report, except to reflect the effects ofthe restatement of the condensed consolidated financial statements for theyears ended June 30, 2006 and 2005 and corresponding changes to Item 6 of PartII of this Amendment, or as deemed necessary in connection with the completionof such financial statements. Information with respect to any such events has been or will be setforth, as appropriate, in our filings with the SEC subsequent to October 13,2006.  We have supplemented Item 13 ofPart III of this Amendment to include current certifications of our chiefexecutive officer and chief financial officer pursuant to Sections 302 and 906of the Sarbanes-Oxley Act of 2002, filed as Exhibits 31.1, 31.2 and 32 to thisAmendment.  The remaining informationcontained in this Amendment, which consists of all other information originallycontained in the Original Report, is not amended hereby, but is included forthe convenience of the reader.

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**TABLE OFCONTENTS**
|                      |   | **PART I**                                                                                                        |   | Page   |
|----------------------|--------|-------------------------------------------------------------------------------------------------------------------|--------|--------|
| Item 1.              |   | Description of  Business                                                                                          |   | 1      |
| Item 2.              |   | Description of  Property                                                                                          |   | 23     |
| Item  3.             |   | Legal  Proceedings                                                                                                |   | 23     |
| Item 4.              |   | Submission of  Matters to a Vote of Security Holders                                                              |   | 23     |
|                 |   |                                                                                                              |   |   |
| ** **           |   | **PART II**                                                                                                       |   |   |
| Item 5.              |   | Market for  Common Equity, Related Stockholder Matters and Small Business Issuer  Purchasers of Equity Securities |   | 23     |
| Item 6.              |   | Management’s  Discussion and Analysis                                                                        |   | 24     |
| Item 7.              |   | Financial Statements                                                                                              |   | 34     |
| Item 8.              |   | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosures                            |   | 34     |
| Item 8A.             |   | Controls and  Procedures                                                                                          |   | 34     |
| Item 8B.             |   | Other Information                                                                                                 |   | 35     |
|                 |   |                                                                                                              |   |   |
| ** **           |   | **PART  III**                                                                                                     |   |   |
| Item 9.              |   | Directors,  Executive Officers, Promoters and Control Persons; Compliance with Section  16(a) of the Exchange Act |   | 36     |
| Item 10.             |   | Executive  Compensation                                                                                           |   | 40     |
| Item 11.             |   | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                  |   | 44     |
| Item 12.             |   | Certain  Relationships and Related Transactions                                                                   |   | 48     |
| Item  13.            |   | Exhibits                                                                                                          |   | 50     |
| Item 14.             |   | Principal  Accountant Fees and Services                                                                           |   | 56     |
| Financial Statements |   | F-1                                                                                                               |
| Signatures           |   | 58                                                                                                                |

 

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**DISCLOSURE REGARDINGFORWARD-LOOKING STATEMENTS**

This report contains “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended.  All statements other thanstatements of historical facts included or incorporated by reference in thisreport, including, without limitation, statements regarding our futurefinancial position, business strategy, budgets, projected revenues, projectedcosts and plans and objective of management for future operations, areforward-looking statements.  In addition,forward-looking statements generally can be identified by the use offorward-looking terminology such as “may,” “will,” “expects,” “intends,” “plans,”“projects,” “estimates,” “anticipates,” or “believes” or the negative thereofor any variation thereon or similar terminology or expressions.

These forward-lookingstatements are subject to risks and uncertainties that could cause actualresults to differ materially from results proposed in such statements.  Although we believe that the expectationsreflected in such forward-looking statements are reasonable, we can give noassurance that such expectations will prove to have been correct.  Important factors that could cause actualresults to differ materially from our expectations include, but are not limitedto: our ability to fund future growth and implement our business strategy; ourability to attract and retain customers and qualified personnel; customer acceptanceand satisfaction with our Internet management solutions; anticipated productenhancements and releases; defects in our products and services; legal claimsagainst us, including, but not limited to, intellectual property infringementclaims; our ability to protect our intellectual property; forecasts of Internetusage and the growth and acceptance of the employee Internet managementindustry; rapid technological changes in the employee Internet managementindustry; competition in our industry and markets; general economic andbusiness conditions, either nationally or internationally or in thejurisdictions in which we are doing business; the condition of the securitiesand capital markets; legislative or regulatory changes; and statements ofassumption underlying any of the foregoing, as well as those other factors setforth under the caption “Risk Factors” on page 13 of this report and “Management’sDiscussions and Analysis” below.

All subsequent written and oral forward-lookingstatements attributable to us, or persons acting on our behalf, are expresslyqualified in their entirety by the foregoing. Except as required by law, we assume no duty to update or revise ourforward-looking statements based on changes in internal estimates orexpectations or otherwise.

**PART I**

**ITEM 1.****                  DESCRIPTIONOF BUSINESS**

**Development**

We wereincorporated on July 20, 2000 as a Colorado corporation.  We were initially engaged in the business ofproviding photography and digital services to organizations in the travelindustry.  We exited the travel industryin April 2002.

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During the quarterended December 31, 2002, we announced our intention to engage in the businessof acquiring, exploring and developing natural gas and oil properties.  In furtherance of this plan, we purchased aninterest in a limited partnership that owned oil and gas leasehold interests inCameron Parish, Louisiana and certain seismic data related thereto in offshoreoil fields.  In September 2003, wedisposed of all of our oil and gas interests and exited the oil and gasbusiness.

On January 15, 2004, we acquired Stellar Venture Partners, LLC, aGeorgia limited liability company (“Stellar Venture Partners”), by merging awholly-owned subsidiary of ours with and into Stellar Venture Partners, withStellar Venture Partners remaining as the surviving entity and becoming ourwholly-owned subsidiary.  At theeffective time of the merger, we issued 18,000,001 shares of our common stockto the membership interest holders of Stellar Venture Partners, LLC,representing, on a fully diluted basis, approximately seventy-four percent(74%) of the then issued and outstanding shares of our common stock.  As a result of the merger, we entered theInternet access management industry.

On July 14, 2004, we acquired all of the issued and outstanding capitalstock of CompuSven, Inc., a Florida corporation (“CompuSven”). Upon completionof this acquisition CompuSven became a wholly owned subsidiary of theCompany.  CompuSven provides e-mailmigration, e-mail data and directory management software and related services.

**Overview**

We provide Internet access management products that are designed toenable businesses and government agencies to monitor, report and manage howtheir employees access and use the Internet. We offer an integrated suite of solutions for establishing andconsistently enforcing Internet usage policies and managing electroniccommunications with others inside and outside of an organization.  Our solutions archive and filter internal andexternal e-mail communications including attachments, instant messaging, andWeb site browsing across the enterprise and provide graphical, real-timehierarchal reporting and immediate warnings of policy violations tomanagement.  Our products and servicesare designed to give employers the ability to implement Internet accesspolicies for different users and groups within their organizations, monitorelectronic communications, including scanning and blocking attachments, andarchive electronic communications to comply with records retentionpolicies.  Our primary product offeringsconsist of:

·                  our Global EcommunicationsManagementTM or GeM SolutionsTM and Stellar Internet Monitoring (“SIM”) products,which we refer to collectively in this report as our Internet access managementsolutions; and

·                  our E-Mail ShuttleTM e-mail migrationsolution.

The E-Mail Shuttle is an e-mail migration product that provides e-mailand e-mail related data migration and directory synchronization betweendisparate e-mail systems.  E-Mail Shuttlehelps organizations with multiple e-mail platforms consolidate to a singlee-mail platform saving both computer hardware and technical resources.  The e-mail systems supported by the E-Mail

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Shuttle include: Microsoft® Exchange Server/Outlook, Lotus® Domino®/Notes®, Novell®GroupWise and any IMAP-compliant system. The E-Mail Shuttle migrates and/or synchronizes inboxes, public foldersand directories, calendars, loader components which allow migration frommultiple systems at any one time from a single management console calledLaunchpadTM.

**Industry Background**

The Internet continues to evolve as a criticalbusiness tool and an important communications and commerce platform forenterprises worldwide.  Manyorganizations use the Internet to utilize business applications that areaccessed over their corporate networks and use high wide-bandwidth connectionsenabling high-speed Internet access to their employees.  The Internet is also a highly popularconsumer medium for communication, entertainment, information and commerce.  As the rapid evolution of Internet technologyand web content continues, the amount and types of data, as well as the waypeople access it, has increased, creating growing challenges for employers.

Internet access in the workplace is fast, convenientand essentially free to employees.    Asa result, employees have the opportunity to use their employers’ computingresources for recreational “web surfing,” peer-to-peer file sharing, instantmessaging and other personal matters during business hours.  This unmanaged non-business use of companycomputing and network resources, including Internet access, can result inincreased risk and cost to the employer, including lost employee productivity,increased network bandwidth consumption, increased network security risks, andpotential legal liability via the loss of sensitive or confidentialinformation.  Additionally, an employee’suse of websites that offer free software downloads, pirated software andpeer-to-peer applications may introduce spyware and other malicious code to theemployee’s desktop and to the employer’s network.  All of these factors can contribute to highercosts for companies that make computing and network resources available totheir employees.

Based on our experience with actual and potentialcustomers, employers have attempted to regulate employee Internet use throughwritten policies governing acceptable use of computing resources, and protectagainst security risks with a combination of firewalls and anti-virus software.  Because this method of enforcement does notproactively curtail undesirable Internet and software application usage,employers are forced to take potentially costly disciplinary actions after thefact.  Firewalls can provide protectionsagainst external threats such as hacking, but do little to prevent employeesfrom accessing unauthorized data via the Internet or from sending or receivinginappropriate electronic communications. Anti-virus software provides protection from e-mail borne viruses, butdoes not prevent the possible theft or corruption of corporate data by spywareand offers only limited protection against viruses that proliferate viapeer-to-peer networks and instant messaging.

To address these problems, businesses are recognizingthe need to become proactive about how their employees access and use theInternet.  We believe that simplymanaging employee Internet access through filtering of URLs is insufficient toprotect an organization.  These productsare often limited to filtering of website URLs, cannot operate on multiple

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networkplatforms, can be labor-intensive to deploy, and consume valuable informationtechnology resources.

**Target Market**

Based on our experience with actual and potentialcustomers, we believe that workplace management of non-business-related use ofcomputing resources and Internet access is becoming an increasingly importantpriority for organizations because of its impact on employee productivity,network bandwidth consumption, network and data security, and potential legalliability.  In addition, the need toretain and retrieve electronic communications to comply with applicableregulations and produce business records in litigation matters, hassignificantly increased the need for a comprehensive and effective e-mail andinstant messaging archiving and retrieval system.

Based on the foregoing, we believe there is asignificant opportunity for an Internet access management solution that enablesbusinesses to manage how employees access and use the Internet.  Additionally, although the web and e-mail arethe primary drivers of Internet traffic today, the rapid emergence ofInternet-enabled applications creates the need for software that appliesmanagement policies to file types, applications and protocols, as well as webpages, at multiple points on the network. Software tools are needed to implement policy-based bandwidth managementand regulation of applications such as instant messaging, peer-to-peer fileexchange tools, interactive games and desktop software applications.  These solutions must also be adaptable enoughto mange new applications and technologies as they are developed.

**Employee Internet Access Management Solutions**

Certain of our closest competitors have been offeringsoftware applications that enable managers to select the types of Internetcontent and applications they wish to allow or block employee access to, basedon the database categories they have defined. The software applications areloaded onto the customers’ servers and are monitored by the customers’ informationtechnology staff.  Their softwareapplications categorize websites in a URL database, and then classify them intodifferent categories to enable organizations to determine the types of Internetcontent that are appropriate for their workplace culture. Their softwareapplications allow managers to permit or deny Internet access based on theemployee, type of user, time of day, amount of personal surfing time and typeof content being accessed.  Most of thecontent management solutions do not have a comprehensive e-mail archiving andretrieval solution or an integrated e-mail and Instant Messaging solutioncapable of scanning and blocking e-mails and e-mail attachments using “BooleanLexical Analysis” key word analysis.

With the introduction ofGlobal Ecommunications Management or GeM, we offer a fully integrated suite ofsolutions for establishing and consistently enforcing employee Internet usagepolicies and electronic communications with others inside and outside of anorganization.  GeM archives and filtersinternal and external e-mail communications including attachments, instantmessaging activities, and Web site browsing across the enterprise.  GeM also provides graphical, real-timehierarchal reporting and immediate warnings for policy violations.  GeM has been designed as a complete archivingsolution to assist companies in meeting the requirements of

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regulatory compliance, records retention, and contentpolicy management.  The principalbenefits of our products include:

Enhanced Network and DataSecurity*. *Our access management solutionsadd an additional layer of protection to an organization’s network and datasecurity by monitoring employee access to security-risk web sites such as thosecontaining malicious code or spyware. This allows an organization to proactively reduce the risk of maliciouscode attacks, such as web-based worms and viruses, and enable organizations toprevent back-channel communication of important corporate or personal datathrough electronic communications.

Increased EmployeeProductivity.  Oursoftware gives businesses the ability to more effectively manage how employeesaccess and use the Internet.  Our accessmanagement solutions enable organizations to identify the pattern and scope ofemployees’ Internet use, and to manage access to non-business related contentand applications such as instant messaging. Our software allows managers to monitor employee use of the Internetbased on the employee, type of user, time of day, amount of personal surfingtime, and to block access to certain websites (or URLs).

Conservation of ITResources.  Ouremployee access management solutions allow organizations to reduce bandwidthconsumption by managing personal Internet use and access to websites,particularly those that may contain bandwidth-intensive content, such asstreaming audio and video, MP3 music files, multi-player games and other newmedia.  Our employee access managementsolutions further enhance bandwidth management capabilities by monitoringnetwork usage in real-time and by allowing employee access based on bandwidththresholds.  Reducing the bandwidthconsumed by non-business-related Internet traffic allows an organization to useits network more efficiently and effectively, and helps ensure that bandwidthis available for mission-critical business applications.

Reduced Exposure toPotential Legal Liabilities. Our employee access management solutions support organizations’ effortsto reduce exposure to legal liability resulting from the improper use of theInternet in the workplace, prevent e-mail and instant messaging born threats,and archive electronic forms of communication for retrieval at a laterdate.   By implementing our products inconjunction with an overall corporate Internet usage policy, organizations canproactively curtail access to objectionable Internet content and reduce theirexposure to threats.

In addition to the above benefits, our Internet accessmanagement solutions include several analysis and reporting capabilities toprovide managers and IT administrators with multiple options for identifying,analyzing and reporting on Internet activity. These options include afull-featured reporting engine with pre-defined and customizable reporttemplates, a real-time analyzer that provides a current view of networkactivity and browser-based reporting tools that allow non-technical managers toview Internet and application use data.

**Products and Services**

Our GeM Solutions suiteconsists of four distinct modules each designed to perform the followingspecific functions:

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·                                          GeM WebManager - manages Web browsing by providing filtering, blocking, reporting,and data archiving and retrieval of employee Web browsing activity.  The Web Manager prevents access to websitesthat are restricted in accordance with company policy while at the same timeenabling organizations to maintain compliance with industry regulations.

·                                          GeM E-MailManager - manages inbound, outbound and internal e-mail communications,including 300 different attachment types. It is designed to prevent employees from disclosing confidentialinformation and prevent threats from infiltrating the corporate network.Threats typically include viruses, spyware, Phishing and identity theft, andmalicious code.  E-Mail Manager is alsodesigned to handle and report on historical e-mail and attachments.

·                                          GeMInstant Message Manager - manages inbound, outbound and internal instantmessaging communications, including 300 different attachment types.  It is designed to prevent employees fromdisclosing confidential information and preventing threats from inhabiting thecorporate network. Threats typically include viruses, spyware, Phishing andidentity theft, and malicious code.

·                                          GeMArchive Manager - allows companies to store all Internet activity includingfull web page content, e-mails and associated attachments, and instant messagesand associated attachments.  It isdesigned to enable powerful searches across the archives for key wordscontained in the archived activity, to re-create, view or print archived messages.

SIM offers the following functions and features:

·                                          Monitoringand reporting of instant message and HTTP traffic and providing secure,real-time reports that can be viewed online from remote location.

·                                          Data storage,processing and reporting that is performed on our servers, saving organizationsexpenditures on IT resources and equipment costs.

·                                          Instant alertnotifications to provide managers with automated e-mails that contain a briefor detailed list of violations by their employees.

E-MailShuttle offers the following functions and features:

·                                          E-mailExtractor - provides ability to extract e-mail and related data from onee-mail system in preparation for loading into another system includingMicrosoft Exchange, Lotus Notes/Domino, Novell Group Wise, and any IMAP-4compliant system.

·                                          E-mailLoader - provides ability to load e-mail and related data from a previouslyprepared file into another e-mail system including Microsoft Exchange, LotusNotes/Domino, Novell GroupWise, and any IMAP-4 compliant system.

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·                                          DirectorySynchronization - provides ability to synchronize two e-mail systems toenable organizations to seamlessly update changes made within disparate e-mailsystems.

We also provideconsulting services to our customers consisting of installation support andcustomized programming based on individual customer needs.  These services are generally provided inconnection with the initial license of our products and billed at that time.  Our perpetual license agreements require ourcustomers to purchase an annual maintenance agreement providing for productupdates and continued product support.

**Strategy**

Our strategy is to generate significant growth inrevenues and gain a realistic share of the market for Internet accessmanagement products and services.  Thekey components of our strategy are:

Deploy a Direct Sales Force In the United States:  We are building a direct sales force. Overthe past ten months, we retained a Senior Vice President of Sales and haverecruited, selected and trained five direct sales people all with extensiveexperience selling software and networking solutions to enterprises throughoutthe United States.  We have initiallydeployed our sales force in the United States, which we believe represents thelargest market opportunity at this time. We intend to continue to aggressively expand our direct sales force ascandidates and finances permit.

Increase Sales to Existing Customers.  Many of our customers are organizations thatinitially deployed our SIM solutions in one or two internal departments and paylicensing fees based on the number of Internet users in those departments.  We believe there is an opportunity to sellour existing customers renewals of existing licenses and upsell GeM, our newmore comprehensive product suite.

Leverage Indirect Sales Channels.  We currently have relationships withvalue-added resellers that focus on the U.S. and South American markets and weintend to develop relationships with resellers in EMEA (Europe, Middle East andAfrica) and Asia Pacific.  While ourindirect sales channels accounted for less than 10% of our licensing revenueduring the years ended June 30, 2005 and 2006, we intend to increase the numberand quality of these resellers in the future.

Expand Our Customer Base.  Our Internet monitoring and E mail Shuttlehave been deployed in organizations worldwide. Many of our customers are well known and have used our products for twoyears.  We believe this provides us withmarket credibility, and we intend to leverage this credibility to further ourmarket penetration with our new GeM product suite.

Expand Our Internet Access Management Product Offering.  We intend to continuously develop and updateour software solutions in order to keep current with the evolution of Internetaccess management technology.  We plan tooffer our customers enhanced reporting and management applications and provideadditional software features that address web filtering and

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blocking,email and instant message usage, and archival and retrieval of electronic communications.

Develop and Maintain Leading Internet AccessManagement Processes and Technologies.  We intend to continue developing proprietaryprocesses and technologies that give us what we believe is a distinct advantageover our competitors.  We believe ourcompetitive advantage lies in the ability of our employee access managementsolutions to enable organizations to monitor and manage employee access towebsites, e-mails and instant messages from a single application. We intend tocontinue to develop modular software and technology that will facilitate theintegration of our products with the systems of our customers.  We believe that this will enable us to offerour products to a broader customer base.

Work Closely WithInternet Infrastructure Providers.  We intend to continue to work closely withInternet infrastructure providers such as Microsoft and IBM to integrate withtheir products.  We also intend toprovide our solution suit in conjunction with their product offerings deep inthe network infrastructure on proxy servers, firewalls and archivingdatabases.  In addition, we plan tocontinue to sponsor co-marketing programs with these companies to associate ouraccess management solutions with their established brands so as to furtherenhance our market position.

Over the past two years, we have developed a fullyintegrated suite of solutions which we believe is the most advanced andcomprehensive solution currently available.  We have branded this solution as GeMTM, Global Ecommunications ManagementTMand GeM SolutionsTM, and are currently doing business as GeM Solutions.  We intend to build our business around thisproduct and have made filings to register these trademarks with the UnitedStates Patent and Trademark Office.  Inorder to identify our company with our primary offering to the market, andprovide a consistent and comprehensive identity, we are in the process ofchanging the name of the Company to GeM Solutions, Inc.

**Sales, Marketing and Distribution**

We sell our products and services through direct andindirect channels.  We derivesubstantially all of our Internet access management revenue from licensing feesthat we receive upon the sale of our Internet access management solutions whichare distributed via master software licensing and subscription agreements withour customers.  The GeM and E-mailShuttle solutions are licensed on a perpetual basis or sold by subscription andinclude first year annual maintenance. Thereafter, licensees are required to pay annual maintenance fees which providefor product updates and continued product support or renew their subscriptions,as applicable.  The SIM and PURLTM(Premium URL list) offerings are licensed on a subscription basis for one ormore years.  We invoice customers for thefull amount of their license at the time the license is activated.  Payment is due generally within 30 days ofthe invoice for the full term of the license. We record amounts billed to customers in excess of recognizable revenueas deferred revenue on our balance sheet.

Our marketing strategy is to raise awareness of thepotential risks associated with unrestricted employee access to the Internet,generate qualified sales leads for our direct sales

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forceand channel partners, and increase recognition of GeM as a much needed employeeaccess management solution.  Ourmarketing efforts are targeted toward business executives, includinginformation technology professionals, CEO’s, CSO’s and CIO’s, upper-levelmanagement and human resource personnel. Our additional marketing initiatives consist of:

·                                          using ourwebsite to communicate with our indirect sales channels, and provide productand company information to interested parties;

·                                          participatingin trade shows and industry events specifically with web and messaging securitycomponents;

·                                          hostingregional and international seminars, webinars and training sessions for oursales organization and reseller partners, as well as customers and prospects;

·                                          participatingin cooperative marketing efforts with our partners including web linkexchanges, joint trade show activities, channel marketing campaigns, road showsand seminars;

·                                          conductingspeaking engagements on topics of interest to our customers and prospects; and

·                                          providing anddistributing soft- and hard- copy materials on our company, products,solutions, technologies, partnerships and benefits.

We intend to provide our reseller partners withsignificant incentives to present our Internet access management and E-mailmigration solutions to their customer base, including:

·                                          discountedsolutions for cooperating in trials of new functionality

·                                          sales andmarketing support, including sales tools such as white papers, Internet usageaudit reports, Internet abuse fact sheets, brochures and other materialsdesigned to assist them in selling our Internet access management solutions;

·                                          a web-basedreseller tutorial designed to help our resellers in understanding the benefitsof our Internet access management solutions;

·                                          support forlead qualification, sales calls, conference calls, volume pricing and othersupport in presenting our solutions to potential customers; and

·                                          access tomarketing opportunities in advertising, trade shows and similar media where oursolutions can be showcased and provide visibility for our partners.

**Customers**

We have customers ranging in size from organizationswith as few as 100 employees to global 1000 companies, and include governmentagencies and educational institutions. ** **We are not dependent on one or afew principal customers.

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**Customer Service, Training and Support**

We believe that superior customer support is criticalto retaining and expanding our customer base. Our technical support group provides dependable and timely resolution ofcustomer technical inquiries and is available to customers by telephone,e-mail, and our training services group delivers education, training andpre-sales support to our customers.  Wealso offer online training to our customers and resellers to provide them withthe knowledge and skills to successfully deploy, use and maintain ourproducts.  Our customer service team isresponsible for handling general customer inquires, answering questions aboutthe ordering process, updating and maintaining customer account information,investigating the status of orders and payments, as well as processing customerorders.  In addition, our customerservice team proactively updates customers on a variety of topics, includingrelease dates of new products and updates to existing products.

**Competition**

Many of our current and potential competitors havelonger operating histories and significantly greater financial, technical,marketing or other resources than we do. They may have significantly greater name recognition, establishedmarketing relationships and access to a larger installed base of customers.Accordingly, new competitors or alliances among competitors may emerge andacquire market share. Competitors vary in size and in scope and breadth of theproducts and services they offer.  Ourcurrent principal competitors include:

·                                          Companiesoffering HTTP/HTTPS filtering products, such as Websense, SurfControl, SecureComputing, 8e6 Technologies, and St. Bernard;

·                                          Companiesoffering instant message filtering products, such as Facetime, Akonix, IMLogic,and CA;

·                                          Companiesoffering e-mail filtering products, such as CipherTrust, Vericept, Symantec,Orchestria, and Vontu; and

·                                          Companiesoffering data archiving and retrieval products, such as Vericept, Vontu, IronMountain, and Reconnex.

We believe that the principal competitive factors in themarket for our products include:

·                                          A product’sability to integrate seamlessly with complex networks;

·                                          How robustthe solution is;

·                                          The use of ascalable and user friendly database and reporting capability;

·                                          The breadthof the product offering for web, email, instant messaging and archiving;

·                                          The depth ofthe product’s monitoring, reporting, archiving and analysis capabilities;

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·                                          The qualityof customer support; and

·                                          Pricing.

We have found that certain potential customers,particularly larger organizations, view our small size and limited financialresources as a negative even if they prefer our offering to those of our largercompetitors.  Based on our currentrevenues and the size of the market for our products, we believe we have amarket share of less than 1%.  Ourprimary strategic objective is to strengthen our position in the market forInternet access management solutions and generate a substantial increase inrevenue over the next 12 months.

**Intellectual Property Rights**

Our intellectual property rights are important to ourbusiness.  We rely upon confidentiality procedures and contractual provisions toprotect our proprietary technology and our brand.  The outsourcing companies we use fordevelopment purposes are made aware that we own the intellectual property andthey are contractually bound in the event of contract termination to protectour intellectual property including returning or destroying all copies of anycode they are working on or have worked on. Our general policy is toenter into confidentiality agreements with our employees and consultants, andnondisclosure agreements with all other parties to whom we discloseconfidential information.

We have filed trademark registrations with the UnitedStates Patent and Trademark Office including: GeMTM, Global EcommunicationsManagementTM, and GeM SolutionsTM.  We do not have anypatents relating to our proprietary technologies, nor do we have anyapplications for such rights pending.  We intend to apply for legal protection forcertain of our intellectual property in the future.  However, we can provide no assurance that wewill receive such legal protection or that, if received, such legalprotection will be adequate to protect our intellectual property rights.

**Research and Development**

We have invested significant time and resources increating a structured process for undertaking product and database development.Members of our research and development department and outside consultants areinvolved with database production, software development, validation andtesting, documentation and research. They work as part of cross-disciplined teams designed to provide aframework for defining and addressing the activities required to bring productconcepts and development projects to market successfully.  Research and development costs consist ofconsulting fees, labor costs incurred in connection with product development,and general and administrative costs incurred for product development purposes.  We spent $763,426 and $193,853 on researchand development during the fiscal years ended June 30, 2006 and 2005,respectively.

**Employees**

As of the date of this report, we had 23 full-time andno part-time employees.  None of ouremployees are represented by a labor union, and we have never experienced aworkstoppage.

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Webelieve that our relations with our employees are good.  We intend to hire up to 20 salesprofessionals by June 2007.

**Regulatory and Legislative Issues**

As use of the Internet has become more prevalent andvarious negative issue associated with the Internet have received increasingamounts of publicity, there has been a correspondingly greater amount ofgovernmental attention directed to the Internet in the United States Congressand elsewhere.  While various pieces oflegislation regulating different aspects of the Internet and Internet-relatedactivity have been proposed, to date there has been no legislation enacted thatplaces any direct and substantial regulatory burden on us.  Nonetheless, we anticipate further attemptsto regulate Internet-related activity in the future, some of which may imposesubstantial burdens on our ability to do business.

Certain industries, such as healthcare and financialservices, are facing increased governmental regulation mandating the way inwhich electronic records are stored and managed.  Federal court procedural rules and variousstate court procedural rules require production and delivery of electroniccommunications by parties involved in litigation and impose penalties forfailure to be able to produce such information. Certain federal statutes also impose liability for destruction ofdocuments, including electronic messages, while legal proceedings arecontemplated or pending.  We believe thatthese laws and regulations will increase the need and demand for Internetaccess management solutions, particularly e-mail archiving and retrievalsolutions.

Privacy related laws and rights may also affect theuse of our products.  For example, theFederal Wiretap Act and Electronic Communications Privacy Act of 1986 prohibitthe interception, recording and disclosure of, among other things, electroniccommunications, unless an exception applies. Employers generally rely on exceptions permitting them to monitor andintercept communications after obtaining the consent of its employees in orderto enforce internal policies or monitor employee efficiency.  Claims by employees under state common law orconstitutional law are fact intensive and generally require, among otherthings, that an employee establish that he or she had a reasonable expectationof privacy.  The forgoing laws andregulations may affect the way our customers may use our employee Internetaccess management products and compliance with such laws is generally part ofan employer’s comprehensive Internet use policy.

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**RISK FACTORS**

*An investment in our common stock involves a highdegree of risk.  You should carefullyconsider the following risk factors in addition to other information in thisAnnual Report on Form 10-KSB before purchasing our common stock.  The risks and uncertainties described beloware those that we currently deem to be material and that we believe arespecific to our company and our industry. In addition to these risks, our business may be subject to risks currentlyunknown to us.  If any of these or otherrisks actually occurs, our business may be adversely affected, the tradingprice of our common stock may decline and you may lose all or part of yourinvestment.*

***RisksAssociated With Our Business***

**Based on our recurring losses from operations, ourauditors have included an explanatory paragraph in their opinion as to thesubstantial doubt about our ability to continue as a going concern**.

We have met our working capital requirements throughfinancing transactions involving the private placement of our securities.  We do not expect our current working capitalto support our operations through June 2007. We are in need of approximately $5 million of additional capital to fundoperations and repay indebtedness over the next 12 months.  Since our inception, we have not generatedany significant revenue, and have experienced substantial losses fromoperations, including approximately $5.1 million during the year ended June 30,2006, and have a working capital deficit. As a result of these factors, our independent auditors have included anexplanatory paragraph in their opinion for the year ended June 30, 2006 as tothe substantial doubt about our ability to continue as a going concern.  Our financial statements have been preparedin accordance with accounting principals generally accepted in the UnitedStates, which contemplate that we will continue to operate as a goingconcern.  Our financial statements do notcontain any adjustments that might result if we are unable to continue as agoing concern.

**We are an early-stage companywith an unproven business model, which makes it difficult for us to evaluateour current business and future prospects.**

We have only a limited operating history and have notgenerated a material amount of revenue upon which to base an evaluation of ourcurrent business and future prospects. We have only been offering our employee Internet management applicationsfor a limited time and the substantial majority of our licensing revenue hasoccurred within the past two years.  As aresult, we have very limited historical data and the revenue and incomepotential of our business unproven. Because of our limited operating history and because the market for ourInternet access management products is relatively new, we have limited insightinto trends that may emerge and affect our business.  We may make errors in predicting and reactingto relevant business trends, which could harm our business.

Before purchasing our common stock, you should consider an investmentin our common stock in light of the risks, uncertainties and difficultiesfrequently encountered by early-stage companies in new and rapidly evolvingmarkets such as ours, including those described herein.  We may not be able to successfully addressany or all of these risks.  Failure toadequately

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address such riskscould cause our business to fail which may result in a liquidation of theCompany.

**We have a history of losses and,because we expect our operating expenses to increase in the future, we do notexpect to become profitable in the near term, if ever.**

We haveexperienced net losses in each fiscal quarter since our inception and as ofJune 30, 2006, we had an accumulated deficit of approximately $13 million.  We incurred a net loss of approximately $5.1million during the year ended June 30, 2006 and expect to continue to incur netlosses for the foreseeable future.  Wealso expect our operating expenses to continue to increase as we:

·                  expand ourdomestic and international selling and marketing activities;

·                  develop new productsand technologies;

·                  upgrade ourexisting solutions, and serve our expanding customer base;

·                  upgrade ouroperational and financial systems, procedures and controls;

·                  hire additionalpersonnel, including additional sales personnel, engineers and other technicalstaff; and

·                  fulfill ourresponsibilities associated with being a public company.

**We will need to raise additionalfunds in the future, which funds may not be available or, if available, may notbe available on acceptable terms.**

We expect that ouroperating expenses will continue to increase over the next 12 months.  In addition, our $1.6 million principalamount convertible note is due the earlier of April 30, 2007 or upon theclosing of any equity or convertible debt financing after May 19, 2006 of atleast $5,000,000 and we may experience a material decrease in liquidity due tounforeseen capital requirements or other events and uncertainties.  As a result, we will need to raiseapproximately $5,000,000 of additional funds to fund operations and repayindebtedness over the next 12 months, and such funds may not be available onfavorable terms, if at all.  If we cannotraise funds on acceptable terms, we may not be able to develop or enhance oursoftware applications, execute our business plan, take advantage of futureopportunities, or respond to competitive pressures or unanticipatedrequirements.  This may cause us toeliminate future product development, scale back our sales and marketingefforts, and in the extreme case, liquidate the Company.

**Our future success depends onability to achieve substantial revenue growth from licensing our Internetaccess management and e-mail migration solutions to new customers as well asrenewals of licenses to our existing customers.**

Our productsconsist of: (i) GeM , our premier Internet access management solution; (ii)SIM, our web based Internet access management solution; and (iii) E-MailShuttle, our e-mail migration solution. Licenses for our GeM and E-Mail Shuttle solutions are usually sold underperpetual licenses and subscription agreements while licenses of our SIMsolution typically have

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a fixed duration.  Since our customers have no obligation topurchase or renew such licenses, we may be unable to generate sufficientrevenue to cover our operating expenses. Our future success also depends on our ability to license additionalservices or product offerings to existing customers which will require asubstantial sales and marketing effort. We may or may not have the human and capital resources to achieve thisobjective.

**We mustdevelop and expand our sales channels to increase revenue and improve ouroperating results.**

We intend to sellour products both directly and indirectly. We intend to build a direct sales organization to sell to target customers,and continue to develop our indirect sales channels.  We will need to hire and train professionalsales people capable of meeting or exceeding revenue goals and expand ourexisting indirect sales channels to increase our market share and revenue.  We cannot assure you that we will be able todevelop both of these channels simultaneously, maintain and expand our existingrelationships or enter into new relationships, or that any new relationshipswill be available on commercially reasonable terms.  If we are unable to attract and retainsuccessful sales people or maintain and expand our existing relationships, orenter into new relationships, we may lose customer introductions andco-marketing benefits, lose potential sales, and our operating results maysuffer.

**Becausewe expect our future growth to be driven primarily from the sale of our GeMsolution suite, any failure of this product to satisfy customer demands or toachieve meaningful market acceptance may seriously harm our business.**

If revenues from the licensing of our products decline or do not growas rapidly as we anticipate, our operating results and our business may besignificantly impaired.  If our GeMsolution fails to meet the needs of our target customers, or if they do notcompare favorably in price and performance to competing products, our growthmay be limited.  We cannot assure youthat our GeM solutions will achieve any meaningful market acceptance.  Our future financial performance depends onour ability to diversify our offerings and successfully gain customeracceptance of our GeM solution suite and E-Mail Shuttle solutions.  We cannot assure you that we will besuccessful in achieving market acceptance of any new products that we develop orof enhanced versions of our existing solutions. Any failure or delay in achieving market acceptance or diversifying ourexisting offering could result in us never generating any meaningful revenue orprofits.

**We may not be able to developacceptable new products or enhancements to our existing products at a raterequired by our rapidly changing market.**

Our future successdepends on our ability to develop new products or enhancements to our existingproducts that keep pace with rapid technological developments and that addressthe changing needs of our customers. Although our Internet access management and e-mail migration solutionsare designed to operate with a variety of network hardware and softwareplatforms, we will need to continuously modify and enhance our offerings tokeep pace with changes in Internet-related hardware, software, communication,browser and database technologies. We may not be successful in eitherdeveloping such products or timely introducing

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them to the market.  In addition, uncertainties about the timingand nature of new network platforms or technologies, or modifications toexisting platforms or technology, could increase our research and developmentexpenses.  The failure of our products tooperate effectively with the existing and future network platforms and technologiesmay limit or reduce the market for our products, result in customerdissatisfaction, and prevent us from generating any meaningful revenue orprofits.

**Failure of our products to workproperly could impact sales, increase costs, and create risks of potentialnegative publicity and legal liability.**

Because our products are complex and aredeployed in a wide variety of complex network environments, they may haveerrors or defects that users identify after deployment, which could harm ourreputation and our business.  Inaddition, products as complex as ours frequently contain undetected errors whenfirst introduced or when new versions or enhancements are released.  We have from time to time found errors inversions of our Internet access management and e-mail migrationsolutions and we may find such errorsin the future.  The occurrence of errorscould adversely affect licenses of our products, divert the attention ofengineering personnel from our product development efforts, and cause significantcustomer relations problems.  Inaddition, since Internet access management technology generally, and oursolutions specifically, have yet to gain widespread acceptance in the market,any delays would likely have a more detrimental impact on our business than ifwe operated in a more established industry.

Because customers rely on our Internet access management solutions to manage electronic communication,any significant defects or error in our products may result in negativepublicity or legal claims against our customers or us.  Such negative publicity or legal claims coulddamage our reputation in the marketplace, cause us to incur legal fees andcosts to defend such claims, or result in the payment of sums to settle suchclaims.

**Our failure to adequately protect our proprietarytechnology and brand could have an adverse effect on our business.**

Intellectual property is important to our success.  We generally rely upon confidentialityprocedures and contractual provisions to protect our proprietary technology andour GeM, Stellar Internet Monitoring and E-Mail Shuttle solutions, and we intend to apply for legal protection for certain of ourintellectual property in the future.  Wehave filed trademark registrations with the United States Patent and Trademark Officeincluding:  GeMTM, Global EcommunicationsManagementTM and GeM SolutionsTM.  Any suchlegal protection we obtain may be challenged by others or invalidated throughadministrative process or litigation. Furthermore, legal standards relating to the validity, enforceabilityand scope of protection of intellectual property rights are uncertain, andadequate legal protection of our intellectual property may not be available tous in every country in which we intend to sell our products.  The laws of some foreign countries may not beas protective of intellectual property rights as United States laws, and theirmechanisms for enforcement of intellectual property rights may beinadequate.  As a result, our means ofprotecting our proprietary technology and brands may be inadequate.  Furthermore, despite our efforts, we may beunable to prevent third parties from infringing upon or misappropriating ourintellectual property and may not have the financial resources to enforce

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anyrights that we have.  Any such infringementor misappropriation by third parties of claims against us for infringementcould have a material adverse effect on our business, financial condition andresults of operations by preventing us from building brand recognition, or inthe extreme case, from licensing our solutions to our customers.

**We may be sued by third parties for allegedinfringement of their proprietary rights.**

The software and Internet industries are characterized by the existenceof a large number of patents, trademarks and copyrights, and by frequentlitigation based on allegations of patent infringement or other violations ofintellectual property rights.  As thenumber of entrants into our market increases, the possibility of an intellectualproperty claim against us grows.  Ourtechnologies and products may not be able to withstand any third-party claimsor rights against their use.  Anyintellectual property claims, with or without merit, could be time-consumingand expensive to litigate or settle, could divert management attention from theexecution of our business plan and cause us to expend a large amount of ourlimited financial resource.

**Our systems may be vulnerable to security risks orservice disruptions that could harm our business.**

Although we havetaken measures to secure our systems against security risks and other causes ofdisruption of electronic services, our servers are vulnerable to physical orelectronic break-ins and service disruptions, which could lead tointerruptions, delays, loss of data or the inability to process customerrequests.  Such events could be veryexpensive to remedy, could damage our reputation and could discourage existingand potential customers from using our products.

**Our continued growth could strainour personnel and infrastructure resources, and if we are unable to implementappropriate controls and procedures to manage our growth, we may not be able tosuccessfully implement our business plan****.**

We have experienced growth in our operations, which has placed, andwill continue to place, a significant strain on our management, administrative,operational and financial infrastructure. Our future success will depend in part upon the ability of our seniormanagement to manage growth effectively. This will require us to hire and train additional personnel to manageour expanding operations.  In addition,we will be required to continue to improve our operational, financial andmanagement controls and our reporting systems and procedures.  If we fail to successfully manage our growth,we may be unable to execute upon our business plan.

**We face increasing competitionfrom more established companies that have significantly greater resources thanwe do, which may place pressure on our pricing and which could prevent us fromincreasing revenue or attaining profitability.**

The market for ourproducts is intensely competitive and is likely to become even more so in thefuture.  Our current principalcompetitors may offer their products at a significantly lower price than ourInternet access management and e-mail migration solutions, which could resultin pricing pressures on licenses of our products and in the commoditization ofInternet access  managementsolutions.  If we are unable to maintainthe current pricing on sales of our

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Internet management ande-mail migration solutions or increase our pricing in the future, our resultsof operations could be negatively impacted. In addition, pricing pressures and increased competition generally couldresult in reduced licensing, reduced margins or the failure of our solutions toachieve or maintain more widespread market acceptance, any of which could havea material adverse effect on our ability to generate revenue and offersolutions at prices which will cover our costs. Our current principal competitors include:

·                                         companiesoffering HTTP/HTTPS filtering products, such as Websense, SurfControl, SecureComputing, 8e6 Technologies, and St. Bernard;

·                                          companiesoffering instant message filtering products, such as Facetime, Akonix, IMLogic,and CA;

·                                          companiesoffering e-mail filtering products, such as CipherTrust, Vericept, Symantec,Orchestria, and Vontu; and

·                                          companiesoffering data archiving and retrieval products, such as Vericept, Vontu, IronMountain, and Reconnex.

Many of our potentialcompetitors enjoy substantial competitive advantages, such as:

·                                          greater namerecognition and larger marketing budgets and resources;

·                                          establishedmarketing relationships and access to larger customer bases; and

·                                          substantiallygreater financial, technical and other resources.

As a result, they may beable to respond more quickly and effectively than we can to new or changingopportunities, technologies, standards or customer requirements.  For all of the foregoing reasons, we may notbe able to compete successfully against our current and future competitors.

**If Internet access managementsolutions are integrated into existing Internet hardware, software or operatingsystems, the demand for our products may decrease.**

We also facecurrent and potential competition from vendors of Internet servers, operatingsystems, and networking hardware, many of which have developed and/or bundle,or may in the future develop and/or bundle, Internet access managementsolutions, or other competitive products with their products.  We expect increased competition from,anti-virus software developers, traditional network management softwaredevelopers, and web management service providers.  We may face new competition from companiesoffering quality of service solutions, such as Packeteer, companies with adirect presence on computer desktops, such as Microsoft, and companies offeringdesktop management solutions, such as Altiris. If  Internet access managementfunctions become standard features of Internet-related hardware or software, thedemand for our Internet management solutions may decrease.  Moreover, even if our Internet accessmanagement solutions provide greater functionality and are more effective

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than the products offeredby vendors of Internet-related hardware or software, potential customers mightaccept this limited functionality in lieu of purchasing our solutionsseparately.

**We are dependent on ourmanagement team, and the loss of any key member of this team may prevent usfrom implementing our business plan in a timely manner.**

Our successdepends largely upon the continued services of our executive officers and otherkey management and development personnel including Mark G. Sampson, our ChiefExecutive Officer, and Donald R. Innis, our President.   We are also substantially dependent on thecontinued service of our existing engineering personnel because of thecomplexity of our products and technologies. We have transferred a key man life insurance policy on Mr. Sampson inthe amount of CDN $1,000,000 from his previous employer to us.  We do not maintain key person life insurancepolicies on any other employees.  Theloss of one or more of our key employees could seriously harm our business, financialcondition or results of operations.  Insuch an event, we may be unable to recruit personnel to replace theseindividuals in a timely manner, or at all, on acceptable terms.

***Risks Associated With Our Industry***

**The market for our productscontinues to emerge, and if we are not successful in promoting awareness of theneed for our Internet access management****and e-mailmigration****solutions and our brand,our growth may be limited.**

Based on ourexperience with actual and potential customers, we believe that manycorporations do not recognize or acknowledge the existence or scope of problemscaused by employee misuse of the Internet or of their computers.  We also believe there may be a time-limitedopportunity to achieve and maintain a significant share of the market forInternet access management and our other products due in part to the emergingnature of these markets and the substantial resources available to our existingand potential competitors.  If employersdo not recognize or acknowledge these problems, the market for our Internet managementsolutions may develop more slowly than we expect, which could adversely affectour operating results.  Developing andmaintaining awareness of our brand is critical to achieving widespreadacceptance of our existing and future products. Successful promotion of our brand will depend largely on theeffectiveness of our marketing efforts and on our ability to develop reliableand useful products at competitive prices. If we fail to successfully promote our brand, or if our expenses topromote and maintain our brand are greater than anticipated, we may nevergenerate sales sufficient to cover our costs.

**Evolving regulation of the Internet may affect usadversely****.**

As Internet commercecontinues to evolve, increasing regulation by federal, state or foreignagencies becomes more likely.  Such regulationappears most likely in the areas of user privacy, pricing, content and qualityof products and services.  Taxation ofInternet use or other charges imposed by government agencies or by privateorganizations for accessing the Internet may also be imposed.  Laws and regulations applying to thesolicitation, collection or processing of personal or consumer informationcould affect our activities. Furthermore, any regulation

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imposingfees for Internet use could result in a decline in the use of the Internet andthe validity of Internet commerce, which could have a material adverse effecton our business, financial condition and results of operations.

***RisksAssociated With Our Stock***

**Newinvestors will suffer immediate and substantial dilution in the tangible netbook value of their shares.**

Asof the date of this report, the market price of our common stock significantlyexceeded the net tangible book value of our common stock.  The net tangible book value of one share ofour common stock as of June 30, 2006 was negative $0.06.  As a result, investors purchasing commonstock in the market will incur substantial dilution.

**Futuresales of our common stock may cause our stock price to decline.**

Thesale of a large number of shares of our common stock in the market or thebelief that such sales could occur, could cause a drop in the market price ofour common stock. There are currently 29,190,969 outstanding shares of ourcommon stock, of which 18,741,201 are “restricted securities,” as that term isdefined in Rule 144 of the Securities Act. Of these shares, approximately 15,300,000 can be sold withoutrestriction as to volume pursuant to Rule 144(k) of the Securities Act, unlesssuch shares are purchased by our affiliates, and approximately an additional650,000 shares are currently eligible for sale under Rule 144(e) of theSecurities Act.  None of our directors,executive officers or other stockholders is subject to lock-up agreements ormarket stand-off provisions that limit their ability to sell common stock.

**We have issued a substantialnumber of securities exercisable or convertible into shares of our common stockwhich will result in substantial dilution to the ownership interests of ourexisting shareholders**

As of the date ofthis report, we have 29,190,969 outstanding shares of common stock and havereserved an additional 52,512,167 shares of our common stock for issuance uponexercise or conversion of the following securities:

·                  21,587,300shares upon conversion of our outstanding shares of series B convertiblepreferred stock;

·                  4,000,000shares upon conversion of an outstanding $1.6 million principal amountconvertible note;

·                  7,430,000shares upon exercise of outstanding options;

·                  2,655,000shares upon exercise of options issuable under our 2005 Stock Incentive Plan;and

·                  16,839,867shares upon exercise of outstanding warrants.

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Theexercise or conversion of these securities will result in a significantincrease in the number of outstanding shares and substantially dilute theownership interests of our existing shareholders.

**We intend to raise additionalfunds in the future, and such additional funding may be dilutive tostockholders or impose operational restrictions.**

We intend to raiseadditional capital in the future to help fund our operations through sales ofshares of our common stock or securities convertible into shares of our commonstock, as well as issuances of debt. Such additional financing may be dilutive to our stockholders, and debtfinancing, if available, may involve restrictive covenants which may limit ouroperating flexibility.  If additionalcapital is raised through the issuance of shares of our common stock orsecurities convertible into shares of our common stock, the percentage ownershipof our existing stockholders will be reduced. These stockholders may experience additional dilution in net book valueper share and any additional equity securities may have rights, preferences andprivileges senior to those of the holders of our common stock.  We are seeking to raise up to $2,000,000 ormore of additional financing through the issuance of convertible preferredstock and warrants.  The preferred sharesare immediately convertible into shares of our common stock at a conversionprice of $0.15 per share and the warrants are immediately exercisable at $0.40per share.  If we issue and sell anadditional $2,000,000 of convertible preferred shares and warrants, the fullconversion or exercise, as applicable, of these securities would result in theissuance of an additional 20,000,000 shares of common stock resultingsubstantial dilution to the ownership interests of our existing shareholders.

**Themarket price of our common stock is likely to be highly volatile and subject towide fluctuations.**

The market price of our common stock is likely to be highly volatileand could be subject to wide fluctuations in response to a number of factorsthat are beyond our control, including:

·                                          announcementsof technological innovations or new products or services by our competitors;

·                                          demand forour Internet management solutions, including fluctuations in license renewals;and

·                                          fluctuationsin revenue from our indirect sales channels.

The market priceof our common stock could also be subject to wide fluctuations in response to:

·                                          quarterlyvariations in our revenues and operating expenses;

·                                          announcementsof technological innovations or new products or services by us; and

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·                                          ourtechnological capabilities to accommodate the future growth in our operationsor those of our customers.

In addition, the stockmarket has experienced significant price and volume fluctuations that haveparticularly affected the market price of the stock of many Internet-relatedcompanies, and that often have been unrelated or disproportionate to theoperating performance of these companies. Market fluctuations such as these may seriously harm the market price ofour common stock.  Further, securitiesclass action suits have been filed against companies following periods ofmarket volatility in the price of their securities.  If such an action is instituted against us,we may incur substantial costs and a diversion of management attention andresources, which would seriously harm our business, financial condition andresults of operations.

**Our operating results mayfluctuate significantly, and these fluctuations may cause our stock price tofall.**

Our operatingresults will likely vary in the future primarily as the result of fluctuationsin our billings, revenues and operating expenses.  We expect that our operating expenses willcontinue to increase in the future as we expand our selling and marketingactivities, and hire additional personnel. If our results of operations do not meet the expectations of current orpotential investors, the price of our common stock may decline.

**As we do not intend to paydividends, investors in our shares will not receive any dividend income.**

We have neverdeclared or paid any cash dividends on our common stock.  The terms of our outstanding securedconvertible notes preclude us from paying dividends without the consent of theholders of such notes.   We currentlyintend to retain any future profits from operations to fund growth and do notexpect to pay any dividends in the foreseeable future.  Accordingly, investors who seek dividendincome should not purchase our shares. The return, if any, from purchase of our shares will result fromappreciation in the price of our shares.

**Applicable SEC rules governingthe trading of “penny stocks” limits the trading and liquidity of our commonstock which may affect the trading price of our common stock.**

Our common stock currently trades on the OTC BulletinBoard.  Since our common stock continuesto trade below $5.00 per share, our common stock is considered a “penny stock”and is subject to SEC rules and regulations which impose limitations upon themanner in which our shares can be publicly traded. These regulations requirethe delivery, prior to any transaction involving a penny stock, of a disclosureschedule explaining the penny stock market and the associated risks.  Under these regulations, certain brokers whorecommend such securities to persons other than established customers orcertain accredited investors must make a special written suitabilitydetermination regarding such a purchaser and receive such purchaser’s writtenagreement to a transaction prior to sale. These regulations may have the effect of limiting the trading activityof our common stock and reducing the liquidity of an investment in our commonstock.

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**ITEM 2.DESCRIPTION OF PROPERTY**

Ourcorporate headquarters and principal offices are located at 7935 AirportPulling Road, Naples, Florida 34109, where we lease approximately 5,500 squarefeet of space for a monthly rent payment of approximately $11,500.  This lease expires in December 2008, however,we have two one year options to renew this lease.  We lease additional office space at AirportRoad #3, Naples, Florida 34109, where we lease approximately 1,900 square feetof space for a monthly rent payment of approximately $2,600.  This lease expires in December 2006.  We no longer occupy any of this space and arecurrently subletting this space for a monthly rent payment of approximately$2,600.

OurCanadian subsidiary GeM Solutions (Canada) Inc. leases office space at 555 WestHastings Street in Vancouver, British Columbia under a sublet agreement untilJune 30, 2007 at a monthly rent of approximately $3,000 per month.  We expect to expand our Vancouver office byapproximately 2,000 square feet to continue to develop our products andservices.

**ITEM 3.LEGAL PROCEEDINGS**

Weare not currently a party to any material legal proceedings.

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

None.

**PART II**

**ITEM 5.MARKET FOR COMMON EQUITY,  RELATEDSTOCKHOLDER MATTERS****AND SMALL BUSINESS ISSUERPURCHASES OF EQUITY SECURITIES**

**Market Information**

Our common stockcurrently trades on the OTC Bulletin Board under the symbol “SLLR”.  The following table sets forth the range ofhigh and low bid prices for shares of our common stock on the OTC BulletinBoard for the periods indicated, as reported by Nasdaq.  These quotations represent inter-dealerprices, without retail mark-up, markdown or commission, and may not representactual transactions.
| Fiscal Year Ending June 30, 2006 | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|---------|------------|
| Quarter ended  June 30, 2006                              |       | $        | 0.26       |    | $          | 0.16 |   |
| Quarter ended  March 31, 2006                             |       | 0.28     |       | 0.16    |       |
| Quarter ended  December 31, 2005                          |       | 0.64     |       | 0.19    |       |
| Quarter ended September  30, 2005                         |       | 0.65     |       | 0.47    |       |
|                                                           |            |          |            |         |            |  |  |

 

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| Fiscal Year Ended June 30, 2005 | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------------------------------------------|------------|----------|------------|---------|------------|
| Quarter ended  June 30, 2005                             |       | $        | 1.10       |    | $          | 0.47 |   |
| Quarter ended  March 31, 2005                            |       | 2.25     |       | $       | 0.99       |   |
| Quarter ended  December 31, 2004                         |       | 2.90     |       | 2.19    |       |
| Quarter ended September  30, 2004                        |       | 3.60     |       | 2.45    |       |
|                                                          |            |          |            |         |            |  |  |

 

The last price of the Company’s common stock asreported on the OTC Bulletin Board on September 25, 2006, was $0.20 per share.

**Holders**

As of October 10, 2006, the number of stockholders ofrecord of our common stock was 59.**** Based on broker inquiry conducted inconnection with the distribution of proxy solicitation materials in connectionwith our special meeting of shareholders to be held on October 20, 2006, webelieve that there are approximately 1,600 beneficial owners of our commonstock.

**Dividends**

We have not paid any cashdividends on our common stock to date, nor do we intend to pay any cashdividends on our common stock in the foreseeable future.  We intend to retain future earnings, if any,to finance the operation and development of our business. The terms of our$1,600,000 principal amount convertible promissory note preclude us fromdeclaring or paying any dividends for so long as such debt is outstanding.  The terms of our series B preferredconvertible stock preclude us from paying any cash dividends on our commonstock unless and until all dividends due on our series B preferred convertiblestock have been paid in full.

**ITEM 6.     MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

ThisManagement’s Discussion and Analysis and other parts of this Annual Report onForm 10-KSB contain forward-looking statements that involve risks anduncertainties.  All forward-lookingstatements included in this Annual Report on Form 10-KSB are based oninformation available to us on the date hereof, and except as required by law,we assume no obligation to update any such forward-looking statements.  Our actual results may differ materially fromthose anticipated in these forward-looking statements as a result of a numberof factors, including those set forth under the caption “Risk Factors” on page13 of this report and elsewhere herein. The following should be read in conjunction with our annual financialstatements contained elsewhere in this report.

**Overview**

We provide Internetaccess management products and services that are designed to enable businessesand government agencies to monitor, report and manage how their employees usethe

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Internet.  Weoffer an integrated suite of solutions for establishing and consistentlyenforcing employee Internet usage policies and managing electroniccommunications with others inside and outside of an organization.  Our solutions archive and filter internal andexternal e-mail communications, including attachments, instant messaging, andWeb site browsing across the enterprise and provide graphical, real-timehierarchal reporting and immediate warnings of e-mail policy violations tomanagement.  Our products and servicesare designed to give employers the ability to implement Internet accesspolicies for different users and groups within their organizations, monitor allforms of electronic communications, including blocking attachments, andarchiving electronic communications to comply with records retention policies.

Based on our experiencewith customers and prospects, we believe that a substantial amount of employeeInternet activity in the workplace is non-work related and that a significantportion of non-business related e-commerce is conducted through Internetconnections at work.  Because Internetaccess in the workplace is fast, convenient and essentially free to employees,employees have the opportunity to use their employers’ Internet connections forpersonal or recreational purposes during work hours.  Such personal use during business hours canresult in lost employee productivity, increased network bandwidth consumption,potential legal liability and the introduction of malicious code on theenterprise’s network.

Our initial product,Stellar Internet MonitoringTM enables businesses to rapidly implement andconfigure Internet access policies for specific groups, user types, andindividuals within an organization.  Wemonitor employees’ Internet activity without restricting the employees’ accessto web sites.  We then consolidate andreview Internet traffic information with sophisticated rule-based systems forcompliance with policies implemented by our customers.  We notify management when a violation hasoccurred and, if requested, provide management with detailed graphical reportsdisplaying the aggregate Internet activity of the entire organization,department or the monitored employees. Our solution is easy to deploy and use, has minimal impact on anorganization’s information technology department, requires minimal hardware, isscaleable, and supports a broad range of network platforms, including proxyservers, firewalls, and other network appliances and software.

GeM, our next generationtechnology, is an advanced solution we developed as a result of the market andcustomer information we derived from our experiences with existing Internetaccess management solutions. The GeM solution suite allows organizations to:

·                  monitorInternet usage by employees;

·                  preventInternet abuse, and

·                  monitor, filter,block and archive electronic communications, including e-mail and instantmessaging products from the top providers such as MSN, Yahoo, ICQ and AOL.

GeM also scans and blocks over 300 differentattachment types that may contain key-words objectionable to the organizationwhich may be imbedded in the e-mail or instant message.  GeM provides organizations with detailedreports describing which web sites are being visited, what instant messages ore-mails are being sent and received, and whether any objectionable content hasbeen exchanged or viewed.  Our softwaretools give the enterprise the ability to determine

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which employees were involved, and what time theactions took place.  Because of theincreasing need for filtering, blocking, and retaining and retrievingelectronic communications, we believe that the demand for solutions such as ourGeM solution suite will increase and be adopted by an increasing number oforganizations.

Our E-Mail Shuttlesolutions provide immediate and automatic migration and synchronization of datafrom any e-mail system to any other e-mail system.  We enable businesses to migrate andsynchronize inboxes, public folders and directories, calendars, bulletinboards, conferences, to-do lists, and groups on e-mail systems such asMicrosoft® Exchange, Lotus® Domino, Lotus® cc:Mail, Novell® GroupWise,Netscape® Messaging Server and OpenWave® InterMail.  Through our E-Mail Shuttle solutions, weprovide migration to and from each of these systems and develop processes andproducts that enable easy migration from proprietary e-mail and calendaringsystems.  Our E-Mail Shuttle solutions’modular design includes extractor and loader components that allow migrationfrom multiple systems at any one time from a single management console.

**KeyPerformance Indicators and Deferred Revenue**

Ourkey performance indicators are customer orders received (bookings), recognizedrevenue, and deferred revenue.  Wemeasure bookings as the dollar value of contractual agreements entered intowith customers in the period that result in either revenue recognized in theperiod, deferred revenue at the end of the period, or expected billings infuture periods.  Generally, an increasein our bookings will result in an increase in our revenue and/or deferredrevenue.   The timing of bookings isuncertain as we sell to both companies and government organizations.  The process of contractual negotiation is criticaland may be lengthy.

Deferredrevenue consists of amounts billed to customers in excess of the amount werecognize on our statement of operations and/or for which the product orservice has not yet been delivered.  Inthe event a customer purchases our software, maintenance is included for yearone in the purchase price but billable in year two and for every yearthereafter that the customer uses our software. In the event of a subscription agreement, now common in the industry,maintenance is included in the annual or monthly subscription fee.  Deferred revenue excludes all items relatingto consulting services as these services are provided at or prior to thedelivery of our products.  Deferredrevenue was $270,761 and $398,368 at June 30, 2006 and 2005, respectively.  We believe that $239,898 of the deferredrevenue at June 30, 2006 will be recognized as revenue in the next 12 months.

**Outlook**

Themarket for our solutions is large and continues to grow. Sustained spending ontechnology, continued emphasis on employee efficiency, growing awareness of andcompliance with regulatory and reporting requirements by employers, and theincreasing need to retain and retrieve electronic communications in order to,among other things, comply with federal and certain state court rules wheninvolved in litigation, are all key external conditions which may affect ourability to execute our business plan.

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Wecompete against companies with substantially greater market share and financialresources than ours.  We have found thatcertain potential customers, particularly larger organizations, view our smallsize and limited financial resources as a negative even if they prefer ouroffering to those of our larger competitors. Based on our current revenues and the size of the market for ourproducts, we believe we have a market share of less than 1%.

Our primary strategicobjective is to strengthen our position in the market for Internet accessmanagement solutions and generate a substantial increase in revenue over thenext 12 months.  We plan to achieve thisobjective by continuing to enhance the functionality of our current Internetaccess management solutions, developing new products and services, increasingour direct sales force, and pursuing subscription renewals and enterprise-widedeployment of our applications with existing customers.  We intend to hire up to 20 full time salesprofessionals with substantial experience in enterprise sales to informationtechnology professionals.

Webelieve that our near-term success will depend particularly on our ability toincrease customer adoption of our Internet access management products and tocontinue generating revenue from our E-Mail Shuttle products.  Since we have limited capital resources, wewill need to closely manage our expenses and conserve our cash by continuallymonitoring any increase in expenses and reducing or eliminating unnecessaryexpenditures.  We believe that key risksinclude overall economic conditions and the overall level of informationtechnology spending, economic and business conditions within our targetcustomer sectors, timing of the closure of customer contracts, our ability toexpand our direct sales force, competitive factors in our rapidly changingindustry, and our ability to raise the capital necessary to grow ourbusiness.  Our prospects must beconsidered in light of the risks, expenses and difficulties encountered bycompanies at an early stage of development, particularly given that we operatein new and rapidly evolving markets, that we have limited financial resources,and face an uncertain economic environment.  We may not be successful in addressing suchrisks and difficulties.

**CriticalAccounting Policies**

Our discussion andanalysis of our financial condition and results of operations are based uponour consolidated financial statements and accompanying notes, which have beenprepared in accordance with accounting principals generally accepted in theUnited States.  The preparation of thesefinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities.  When making these estimates and assumptions,we consider our historical experience, our knowledge of economic and market factorsand various other factors that we believe to be reasonable under thecircumstances.  Actual results may differunder different estimates and assumptions.

The accounting estimatesand assumptions discussed in this section are those that we consider to be themost critical to an understanding of our financial statements because theyinherently involve significant judgments and uncertainties.  For a more detailed discussion of ourcritical accounting policies, please see our consolidated financial statementsand accompanying notes included elsewhere herein.

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Revenue Recognition

We recognizerevenue in accordance with Statement of Position 97-2, *SoftwareRevenue Recognition* (“SOP 97-2”). Significant management judgments and estimates must be made and used inconnection with the revenue recognized in any accounting period.  Specifically, in connection with eachtransaction involving our products, we must evaluate whether persuasiveevidence of an arrangement exists, the product has been delivered, title andrisk of loss has been transferred to the customer, the fee is fixed ordeterminable, and collection of the resulting receivable is reasonablyassured.  Material differences may resultin the amount and timing of recognized revenue for any period if we makedifferent judgments or utilize different estimates.

Goodwill

Wetest our goodwill for impairment annually, on June 30 of each year, and morefrequently in certain circumstances.  Werecorded goodwill upon the acquisition of CompSven in July 2004 and our entryinto the Email migration business segment. Testing goodwill requires that we estimate the fair value of the Emailmigration segment.  We estimate the fairvalue of the Email migration segment based on a number of subjective factors,including projections about future cash flows, discount rates on our futurecash flows, and assumed terminal values. We consider the estimate of fair value to be a critical accountingestimate for our Email migration segment because (a) a potential goodwillimpairment could have a material impact on our financial position and resultsof operations, and (b) the estimate is based on a number of highly subjectivejudgments and assumptions.  If ourforecasts of future cash flows and other subjective factors change negatively,we could have future impairments of goodwill that would need to be recognized.

Accounting forDerivative Instruments

Statementof Financial Accounting Standard (“SFAS”) No. 133, “Accounting for DerivativeInstruments and Hedging Activities,” as amended, requires all derivatives to berecorded on the balance sheet at fair value. These derivatives, includingembedded derivatives in our structured borrowings, are separately valued andaccounted for on our balance sheet. Fair values for exchange-traded securitiesand derivatives are based on quoted market prices. Where market prices are notreadily available, fair values are determined using market based pricing modelsincorporating readily observable market data and requiring judgment andestimates.

Thepricing model we use for determining fair values of our derivatives is theCox-Ross-Rubenstein Binomial Model (which produces results substantiallysimilar to the Black Scholes Pricing Model). Valuations derived from this model are subject to ongoing internal andexternal verification and review.  Themodel uses market-sourced inputs such as interest rates, exchange rates andoption volatilities.  Selection of theseinputs involves management’s judgment and may impact net income.

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**Comparisonof the Year Ended June 30, 2006 to the Year Ended June 30, 2005**

Introductory NoteRegarding Restatement

Asdescribed in our current report on Form 8-K dated May 10, 2006, we concludedthat certain of the conversion features and registration rights provisionsrelated to the convertible note and warrants we issued in April 2005, theconvertible notes and warrants we issued in June 2004, and the convertiblepreferred stock and warrants we issued in February 2004 were embeddedderivatives that should be accounted for as derivative liabilities inaccordance with the guidance provided in SFAS No. 133 and EITF Issue 00-19 andthat we needed to restate certain of our financial statements, including thosefor our fiscal year ended June 30, 2005.

As aresult, we have restated our financial statements for our fiscal year endedJune 30, 2005 to reflect additional non-operating gains and losses related tothe classification of and accounting for: (1) various warrants we issued in2003, 2004 and 2005; (2) the conversion features of the $1.6 millionconvertible note issued in April 2005; and (3) the conversion features of the$1.5 million convertible notes we issued in June 2004.   We had previously classified the value ofthe conversion features of the notes and the warrants as equity, where applicable.  After further review, we determined thatthese instruments should have been classified as derivative liabilities and,therefore, that: (1) the fair value of each instrument should be reflected asderivative liabilities on our balance sheet; (2) any changes in the fair valueof these instruments should be reflected as non-operating gains or losses, asapplicable, in our statement of operations; and (3) at the date of conversionor exercise, as applicable, of each respective instrument or portion there, thecorresponding derivative liability should be reclassified to equity.

Asdescribed in our current report on Form 8-K dated May 10, 2006, we concluded itwas necessary to restate our financial statements for the years ended June 30,2006 and 2005.  The purpose of therestatement of our financial statements for the fiscal year ended June 30, 2006is to: (i) reclassify capitalized software costs previously recorded asproperty and equipment to other assets (intangibles); (ii) reclassify the 2004beneficial conversion feature on our series A convertible preferred stockpreviously recorded against accumulated deficit to properly record it toadditional paid-in-capital; (iii) recognize the $0.001 par value of our seriesB convertible preferred stock by reclassifying $1,463,735, the amount in excessof the preferred shares’ par value, from capital to additional paid-in capital;and (iv) recognize the beneficial conversion feature related to the issuance ofseries B convertible preferred stock in the fourth quarter of the fiscal yearended June 30, 2006.  The purpose of therestatement of our financial statements for the fiscal year ended June 30, 2005is to reclassify the beneficial conversion features of our series A convertiblepreferred stock issued in the fiscal year ended June 30, 2004 from accumulateddeficit to additional paid-in capital.

Thefinancial statements for our fiscal years ended June 30, 2006 and 2005 includedin this report have been restated to reflect the forgoing and the discussion ofour financial condition and results of operation below is based on the restedfinancial statements.  For a more competedescription of the restatement, please see notes 3, 6, 7 and 16 to ourconsolidated financial statements contained elsewhere in this report.

Revenues

Revenue consists oflicensing fees that we receive upon the sale of our Internet management andE-mail migration solutions. We recorded revenues of $870,964 during the yearended June 30, 2006 as compared to $882,805 during the year ended June 30,2005.  Revenues for our E-mail migrationsolutions increased $7,653 to $646,240 during the year ended June 30, 2006 andlicensing revenues from our employee Internet management solutions decreased$19,494 to $224,724 during the year ended June 30, 2006.  During the year, we focused on developing thefunctionality of our GeM solution and building a direct sales force.  We will continue to focus substantialresources on sales and marketing efforts in order to generate licensingrevenues from existing and new customers and continue the roll out of our GeMsolution.  Having substantially completedsuch development and deployed a direct sales force of five professionals, weexpect revenue growth in future periods to exceed revenue growth in pastperiods.

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Operating Expenses

Operating expensesconsist primarily of salaries and wages, selling and marketing expenses,general and administrative, professional fees, and research and developmentexpenses.

*General and AdministrativeExpenses*.  General andadministrative expenses consist of costs related to production of marketingbrochures, trade shows, direct mailing programs, advertising, promotions,travel, customer support, public relations and investor relations, general andadministrative expenses, and office rents. General and administrative expenses remained essentially constant at$1,307,172 for the year ended June 30, 2006 as compared to $1,300,322 for theyear ended June 30, 2005.   We expectgeneral and administrative expenses to increase in future periods as a resultof increased costs associated with growth in our operations.  Specifically, we expect that marketingexpenses will increase as we continue to expand our marketing efforts andpromote our Internet access management products and services.

*Salaries and Wages. *Salaries and wages consist of salaries, commissions,stock compensation, benefits and related compensation that we paid to ouremployees and management fees paid to third parties.  Salaries and wages increased $270,855 to$1,711,397 for the year ended June 30, 2006 from $1,440,542 for the year endedJune 30, 2005.  The increase resultedprimarily from an increase in overall salaries and compensation to ouremployees due to the overall growth of our business, specifically our sales andmarketing effort, and an increase of $163,974 of non-cash expenses associatedwith our employee option program.  Weexpect Salaries and wages to increase in future periods as a result ofincreased personnel costs to support our expanding sales and marketing effortsand increased sales commission expenses as we generate additional license fees.

*Professional Fees.  *Professional fees consistof accounting, legal and financial consulting fees.  Professional fees decreased $444,574 to$873,735 for the year ended June  30,2006 from $1,318,309 for year ended June 30, 2005.  The decrease consisted of a decrease of$594,405 of capital funding costs consisting primarily of non cash consultingfees which was offset by an increase of $193,169 in general legal expenses.

*Research, Development and ProductSupport*.  Researchdevelopment and product support expenses consist primarily of costs associatedwith the development of new products and services, enhancement of our existingInternet access management solutions and product support.  Research and development expenses increased$569,573 to $763,426 for the year ended June 30, 2006 from $193,853 for theyear ended June 30, 2005.  The increasewas due primarily to an increase in contract developers required to completephase one of our development cycle for our GeM solution suite.  We expect research and development expensesto decrease in future periods as we have substantially completed thedevelopment of our GeM offering but will continue to enhance the product tomeet market needs.  We expect to continueto incur expenses relating to the enhancement of our Internet access managementsolutions and e-mail migration, data and directory management solutions, enterinto arrangements with additional technology partners, and support anincreasing customer base.

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*Depreciation and Amortization*.  Depreciation and amortization expenseconsists of depreciation costs related to computer hardware and software,furniture and office equipment, and the write off of intangible assetsassociated with our acquisition of CompuSvan. Depreciation and amortization costs remained relatively constant at$175,337 for the year ended June 30, 2006 as compared to $164,401 for the yearended June 30, 2005.

Other income (expense)

Other income (expense)consists of interest expense and derivative income.

*Interest Expense. *Interest expense increased$988,895 to $1,305,096 for the year ended June 30, 2006 from $316,201 for theyear ended June 30, 2005.  The increaseconsisted primarily of amortization of debt discount and warrant costsassociated with our outstanding $1.6 million convertible note and warrantsissued together with convertible notes in 2006.

*Derivative Income (Expense). *We realized gains onderivative liabilities of $471,721 during the during the year ended June 30,2006 as compared to $7,424,852 during the year ended June 30, 2005.  The decrease was primarily the result ofchanges in the fair value of derivative liabilities.  Specifically, the fair value of thederivative liabilities decreased significantly during the year ended June 30,2005 (resulting in gains on derivative liabilities) because the price of ourstock decreased significantly during that period.

Net Loss

During the year ended June 30, 2006, our net loss was $5,075,670 ascompared to net income of $3,586,459 during the year ended June 30, 2005.  The increase in net loss was primarily theresult of a $413,640 increase in operating expenses, a $988,895 increase ininterest expense which consisted primarily of non cash items related to debtdiscount, and a $6,953,131 decrease in gain on derivative liabilities in 2006as a result of changes in the fair value of our derivative liabilities.

**Liquidity and Capital Resources**

Netcash used in operating activities was $3,102,685****forthe year ended June 30, 2006 compared to $2,646,418 for the year ended June 30,2005.  The $456,267 increase in cash usedin operating activities was due primarily to cash used in operations to fundlosses incurred in the development of our products and ramp up of our sales andmarketing efforts.

Netcash used in investing activities during the year ended June 30, 2006 was$83,823  compared to $916,204 during theyear ended June 30, 2005.  The $832,381decrease in cash used in investing activities was due primarily to the paymentof $890,324 in connection with our acquisition of CompuSven in the year endedJune 30, 2005 without a comparable transaction in 2006.

Netcash provided by financing activities during the year ended June 30, 2006 was$2,748,977 compared to $1,549,963 during the year ended June 30, 2005.  The $1,199,014

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increase in cashprovided by financing activities was due primarily to an increase in net proceedsfrom sales of our preferred stock and common stock in 2006.

AtJune 30, 2006, we had working capital deficit of $1,977,685 as compared to aworking capital deficit of $756,453 at June 30, 2005.  The $1,221,232 decrease in working capitalwas due primarily to cash used in operations to fund losses incurred in thedevelopment of our products and ramp up of our sales and marketingefforts.  The decrease consisted ofdecreases in cash of $439,414 and accounts receivable of $101,892 and toincreases in notes payable of $940,358, accounts payable of $341,152, anddeposits of $138,000.  These amounts werepartially offset by a decrease in derivative liabilities of $724,738.

Sinceour inception, we have funded our operations primarily through private sales ofequity securities and the use of short-term and long-term debt.  Our primary sources of financing over thepast twelve (12) months are set forth below.

On April 1, 2005,we entered into a Loan Agreement (the “Loan Agreement”) with Trident GrowthFund, LP (“Trident”) pursuant to which we issued a $1,600,000 principal amountsecured convertible promissory note (the “Trident Note”) to Trident.  The full principal amount and all accrued andunpaid interest due under the Trident Note in the aggregate amount of $1,616,000became due and payable on April 30, 2006. Effective May 1, 2006, we entered into an agreement with Trident to: (i)extend the maturity date of the Trident Note until the earlier of April 30,2007 or the receipt of $5,000,000 of gross proceeds from the sale ofconvertible debt or equity securities after May 19, 2006; (ii) eliminate allfinancial covenants; (iii) eliminate certain negative covenants and; (iv)eliminate the anti-dilution adjustment for issuances of shares at prices belowthe conversion price of the Trident Note. The Trident Note continues to accrue interest at the rate of 12% perannum payable monthly in arrears on the last day of each month, remains  secured by substantially all of our assets,and is redeemable, in whole or in part, at our option at 100% of par.  Interest is payable in cash unless Tridentelects to have it paid in shares of common stock valued at the conversion pricein effect on such date.  The Trident Noteis convertible in whole or in part at the option of Trident into shares of ourcommon stock at a conversion price of currently $0.40 per share.

Inconsideration for the forgoing extension, amendments to certain outstandingwarrants, and the cancellation of an outstanding warrant, we issued a warrantto Trident to purchase 1,745,000 shares of our common stock.  The warrant is immediately exercisable at anexercise price of $0.40 per share, contains standard and customary cashlessexercise provisions, and terminates five years from the date of grant.

OnNovember 10, 2005, we raised $1,000,000 through the issuance of 2,500,000 shares of common stock and warrantsto purchase an additional 1,250,000 shares of common stock.  The securities were sold in units consistingof two shares of common stock and one common stock purchase warrant at apurchase price of $.80 per unit.  Eachwarrant is immediately exercisable at an exercise price of $.60 per share andexpires three years from the date of grant.

Asof the date of this report, we have raised $2,530,000 through the issuance of168,669 shares of Series B Convertible Preferred Stock (the “Series B Shares”)convertible into

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16,866,900 sharesof common stock and warrants to purchase an additional 8,433,450 shares ofcommon stock.   The Series B Shares havean original issue price of $15.00 per share and are convertible at anytime atthe option of the holder at a conversion price of $0.15 per share.  The Series B Shares automatically convertinto shares of common stock in the event that (i) the average closing price ofour common stock over 20 consecutive trading days equals or exceeds $0.75 pershare; and (ii) the shares of common stock issuable upon conversion of theSeries B Shares are either subject to an effective registration statementpermitting the public resale of such shares under the Securities Act of 1933,as amended (the “Securities Act”), or transferable pursuant to Rule 144(k)under the Securities Act.  Each warrantis immediately exercisable at an exercise price of $0.40 per share for a termof three years.

During March, 2006, we issued convertiblenotes in the aggregate principal amount of $700,000 convertible into 4,666,667shares of common stock and warrants to purchase an additional 2,333,334 sharesof common stock for aggregate gross cash proceeds of $700,000.  Each warrant is immediately exercisable at anexercise price of $0.40 per share for a term of three years.  In May 2006, the forgoing notes wereexchanged for 47,205  Series B Shares.

Theforegoing constitutes our principal sources of financing during the past twelve(12) months.  We do not currentlymaintain a line of credit or term loan with any commercial bank or otherfinancial institution.  To date, ourcapital needs have been principally met through the receipt of proceeds fromsales of our equity and debt securities. We intend to continue to invest our cash in excess of current operatingrequirements in interest-bearing, investment-grade securities.   Other than the repayment of the Trident Notein the amount of $1,600,000, we do not expect to incur any material capitalexpenditures during the next twelve (12) months.

Asof the date of this report, we have cash resources of approximately$600,000.  We currently use approximately$500,000 per month to conduct operations and expect this amount will increasebased on increased salary expenses related to additional sales and supportpersonnel.  We believe that our currentcash resources, expected recurring monthly revenue, and revenue from newcustomers, will only be sufficient to fund operations for the near term.  In order to sustain our current operationsfor the next twelve months and repay indebtedness, we will need approximately$5,000,000.  We are currently seeking toobtain this financing through sales of convertible preferred stock andwarrants.** **Thesale of additional equity securities will result in additional dilution to ourshareholders.  In the event we have toissue additional debt, we would incur increased interest expenses and could besubject to covenants that may have the effect of restricting ouroperations.  We have no commitment forany of the additional financing necessary to execute our business plan and wecan provide no assurance that such financing will be available in amount or onterms acceptable to us, if at all.  If weare unable to obtain additional funds when they are needed or if such fundscannot be obtained on terms favorable to us, we may be required to delay orscale back our operations, including our plans to build a large direct salesforce and continue to improve our product offerings, and in the extreme case,terminate operations and liquidate the Company.

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**Off-BalanceSheet Arrangements**

As of June 30,2006, we did not have any relationships with unconsolidated entities orfinancial partners, such as entities often referred to as structured finance orspecial purpose entities, which had been established for the purpose offacilitating off-balance sheet arrangements or other contractually narrow orlimited purposes.  As such, we are notmaterially exposed to any financing, liquidity, market or credit risk thatcould arise if we had engaged in such relationships.

**ITEM 7.FINANCIAL STATEMENTS**

See FinancialStatements beginning on page F-1.

**ITEM 8.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.**

None.

#### **ITEM 8A. CONTROLS AND PROCEDURES**

Anevaluation of the effectiveness of our “disclosure controls and procedures” (assuch term is defined in Rules 13a-15(e) or 15d-15(e) of the Securities ExchangeAct of 1934, as amended (the “Exchange Act”)) was carried out by us under thesupervision and with the participation of our Chief Executive Officer (“CEO”)and Chief Financial Officer (“CFO”). Based upon that evaluation, our CEO and CFO concluded that, as of theend of the period covered by this Annual Report, our disclosure controls andprocedures were not effective to ensure that information we are required todisclose in reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission rules and forms.  Specifically, in connection with thecompletion of its audit of, and the issuance of its report on ourfinancial  statements for the  years ended June 30, 2005 and 2006,  our independent auditors identifieddeficiencies in our internal controls related to expense recognition anddisclosure control deficiencies related to transactions involving issuances ofour stock and stock options.  Theadjustment to expense and the footnote disclosure deficiencies were detected inthe audit process and have been appropriately recorded and disclosed in ourForms 10-KSB for the years ended June 30, 2005 and 2006.  In addition, we have failed to timely fileour periodic reports with the SEC on a number of occasions over the pastyear.  We are in the process of improvingour internal controls in an effort to remediate these deficiencies through  implementing certain controls and proceduresand improving supervision and training of our accounting  staff.  We have also retained one additional employeefor our accounting staff.  We arecontinuing our efforts to improve and strengthen our control processes andprocedures to fully remedy these deficiencies. Our management and directors will continue to work with our auditors andother outside advisors to ensure that our controls and procedures are adequateand effective.

There were no changes in internal controls over financial  reporting that occurred during the fiscal  quarter ended June 30, 2006,  that have  materially affected,  or are reasonably likely to materially  affect, our internal control over financial reporting.

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**ITEM 8B. OTHER INFORMATION**

Thefollowing information describes certain events required to be disclosed on Form8-K under Item 1.01, Entry into a Material Definitive Agreement, and Item 3.02,Unregistered Sales of Equity Securities, that occurred on October 9, 2006.

BetweenAugust 23 and October 9, 2006, pursuant to a series of securities purchaseagreements, we sold 44,667 units consisting of 44,667 shares of our Series BConvertible Preferred Stock convertible into 4,446,700 shares of common stockand warrants to purchase an additional 2,233,350 shares of common stock foraggregate gross cash proceeds of $670,000. The securities were sold in units consisting of one (1) share of SeriesB Convertible Preferred Stock (the “Series B Shares”) and a warrant to purchasefifty (50) shares of common stock at a purchase price of $15.00 per unit.  The foregoing securities were issued inconcurrent private offerings (collectively, the “Private Offering”) solely toaccredited investors of up $3,300,000 of units consisting of 220,000 Series BShares convertible into an aggregate of 22,000,000 shares of common stock andwarrants to purchase up to an aggregate of 11,000,000 shares of commonstock.  We have reserved the right tooffer and sell additional units for an aggregate purchase price in excess of$3,300,000 to cover any over-allotments.

TheSeries B Shares have an original issue price of $15.00 per share and areconvertible at anytime at the option of the holder into shares of common stockat a conversion price of $0.15 per share. Accordingly, each Series B Share is initially convertible into 100shares of common stock. The Series B Shares automatically convert into sharesof common stock in the event that (i) the average closing price of the Company’scommon stock over 20 consecutive trading days equals or exceeds $0.75 pershare; and (ii) the shares of common stock issuable upon conversion of theSeries B Shares are either subject to an effective registration statementpermitting the public resale of such shares under the Securities Act of 1933,as amended (the “Securities Act”), or transferable pursuant to Rule 144(k)promulgated under the Act.   Theconversion price will be adjusted for stock splits, combinations,recapitalization and stock dividends.  Inthe event of a consolidation or merger in which we are not the survivingcorporation, lawful provision shall be made so that upon conversion of theSeries B Shares the holder shall be entitled to receive the number of shares ofstock or other securities or property of the successor entity that such holderwould have been entitled to receive if the Series B Shares had been convertedimmediately prior to such transaction.

Eachwarrant is immediately exercisable into fifty (50) shares of common stock at anexercise price of $0.40 per share for a term of three years.  The exercise price of the warrants will beadjusted for stock splits, combinations, recapitalization and stockdividends.  In the event of aconsolidation or merger in which we are not the surviving corporation (otherthan a merger with a wholly owned subsidiary for the purpose of incorporatingthe Company in a different jurisdiction), all holders of the warrants shall begiven at least fifteen (15) days notice of such transaction and shall bepermitted to exercise the warrants during such fifteen (15) day period.  Upon expiration of such fifteen (15) dayperiod, the warrants shall terminate.

8,000of the units were sold in a private placement transaction to a limited numberof accredited investors pursuant to the exemption from registration provided bySection 4(2) of the Securities Act and Rule 506 of Regulation D thereunder. Weaccrued aggregate placement agent

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fees of $9,600 tocertain broker dealers registered under the Securities Exchange Act of 1934, asamended, and members of the National Association of Securities Dealers,Inc.  We also issued warrants to theplacement agents to purchase 64,00 shares of common stock (equal to 8% of theshares issuable upon conversion of the preferred stock included in the units)at an exercise price of $0.40 per share. The other material terms of these warrants are identical to the terms ofthe warrants issued to investors in the Private Offering and described above.

Theremaining 36,667 units were sold on October 9, 2006 in a private placementtransaction to Montex Exploration, Inc., who is not a “U.S. person”, pursuantto the exemption from registration provided by Rules 901 and 903 of RegulationS under the Securities Act.  We accruedconsulting fees consisting of $44,000 and warrants to purchase 146,668 sharesof common stock (equal to 8% of the shares issuable upon conversion of thepreferred stock included in the units) at an exercise price of $0.40 pershare.  The other material terms of thesewarrants are identical to the terms of the warrants issued to investors in theOffering and described above.

MontexExploration, Inc. is the beneficial owner of more than 5% of our outstandingshares of common stock.  The units wereissued and sold to Montex on the same terms and conditions as all otherinvestors in the Private Offering.

Wehave agreed to include the shares of common stock issuable upon conversion ofthe Series B Shares and exercise of the warrants sold in the Private Offeringin any registration statement we file under the Securities Act  (excluding registration statements on SECForms S-4, S-8 or any similar or successor forms) in order to permit the publicresale of such shares.

**PART III**

**ITEM 9.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE****WITH SECTION 16(a) OF THE EXCHANGE ACT**

The following chart setsforth certain information about each director and executive officer of theCompany.
| **Name**        | ** ** | **Age**    | ** ** | **Positions Held**                              |
|-----------------|------------|------------|------------|-------------------------------------------------|
| ** **      | ** ** | ** ** | ** ** | ** **                                      |
| Mark G. Sampson |       | 50         |       | Chairman, Chief Executive Officer and Treasurer |
|            |       |       |       |                                            |
| Donald R. Innis |       | 59         |       | President                                       |
|            |       |       |       |                                            |
| John E. Baker   |       | 66         |       | Chief Financial Officer and Secretary           |
|            |       |       |       |                                            |
| Rusty Wright    |       | 48         |       | Senior Vice President of Sales                  |

 

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The following is a brief summary of the businessexperience of each of the above-named individuals:

*Mark G. Sampson***,**age 50, has served as our Chairman, Chief Executive Officer and sole directorsince December 15, 2005.  Mr. Sampsonbrings over 16 years of executive management experience in thetelecommunications and information technology industries.  Since April 1999, Mr. Sampson has served asthe sole owner and President of C-Ray Consulting, Inc., a services companythrough which he has provided executive management services to a number oftechnology companies.  These includeserving as the President and CEO of IP Applications,  Corp., a Vancouver, British Columbia basedprovider of outsourced Internet Solutions whose shares are traded on the TSXVenture Exchange, from January 2004 until October 2005, and serving as VicePresident of Corporate Development for Devon Ventures (now Pender  Financial), a merchant bank focused oninvesting in developing technology companies, from March 2002 until January2004.  During his tenure at IPApplications, the company’s revenues increased 150% through both organic growthand acquisition. Between 1999 and June 2002, C-Ray Consulting providedexecutive management services to NxGen Networks, an early stage provider ofvoice over IP services.  Prior tofounding C-Ray Consulting, Mr. Sampson was Senior Vice President & GeneralManager of Data Services for MetroNet, Canada’s largest competitive localexchange carrier which was acquired by AT&T Canada, Vice-President &General Manager of BC Tel Advanced Communications (now Telus), Canada’s secondlargest telecommunications company, and Chief Operating Officer for CUE DataWest, a financial services outsourcing company which was acquired by OpenSolutions Inc.

*Donald R. Innis*, age 59, hasserved as our President since February 2, 2004. Mr. Innis has over 25 years of senior management experience with manyInformation Technology solution companies and is recognized as an expert onencryption and data security.  He servedas the President of Control Break International Corporation, a developer ofdata encryption software, from April 2003 to February 2004.  Beginning in 1987, Mr. Innis served asPresident of Inware Corporation, a developer of enterprise software that hefounded.  In 1998, Inware was acquired byAllen Systems Group (“ASG”), a provider of software to global Fortune 1000companies, at which time he joined ASG and served as Senior Vice President ofWorldwide Sales and Support until****April2003.  During his time at ASG, thecompany’s annual revenues grew from $5 million to more than $200 million.  Between 1985****and1987, Mr. Innis served as the Chief Executive Officer of Fisher International,a company he founded that was a pioneer in the electronic mail and PC accesscontrol and encryption industry.  Mr.Innis began his career in technology as a computer system designer for GeneralMotors Corporation after receiving a Bachelor of Science degree in mathematicswith a minor in economics from Otterbein College.

*John E. Baker,* age 66, has servedas our Chief Financial Officer since January 31, 2005.  Mr. Baker joined the Company in May 2004 asour Controller.  Mr. Baker is a certifiedpublic accountant with over thirty years of financial management experience inboth the private and public sectors. During his career, he has held financialmanagement positions with Deloitte & Touche, City Investing Company, RheemManufacturing Company, The Home Insurance Company, John Blaire & Co. andAlleghany Beverage Corp.  From May 1997until January 2004, Mr. Baker served as the President and Chief OperatingOfficer of Highlander Sports, Inc., a Huntsville, Alabama based sporting goodsmanufacturer of which he was also a principal

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stockholder. From January2004 to May 2004, Mr. Baker was employed by Account Temps, Inc. where heprovided financial and accounting services to various organizations**.**

*Rusty Wright*, age 48, has servedas our Senior Vice President of Sales since February 20, 2006.  Mr. Wright has been a significant contributorin the data communications industry for over 25 years having served theindustry in a wide variety of functions including engineering, operations,marketing and sales.  From July 2004until August 2005, Mr. Wright was Senior Vice President of Sales for NetificeCommunications, where he led the development and deployment of the nationalsales force.  From April 2002 until July2004, Mr. Wright served as Vice President of Strategic Alliances for YipesCommunications, where he led the development and ongoing management ofpartnerships with companies such as AT&T, Cable and Wireless, Genuity andSprint.  From November 1999 until March2002, Mr. Wright served as Vice President of Data Sales at AT&T Canadawhich merged with MetroNet where Mr. Wright grew data revenues from start-up to$70 million for Canada’s first national competitive access provider.  Prior to MetroNet, Mr. Wright spent 15 yearsat US West where he held various positions in sales, marketing, andengineering.

**Board of Directors**

Richard A. Schmidt served as our sole director fromJanuary 2004 until his resignation on December 14, 2005.  Mr. Schmidt resigned for personal reasons andto pursue other business interests.  MarkG. Sampson was appointed to fill the vacancy on the Board caused by Mr. Schmidt’sresignation, currently serves as our sole director, and will continue to serveuntil the next annual meeting of shareholders or until his successor is dulyelected and qualified.  Directors holdoffice until the next annual meeting of shareholders and the election andqualification of their successors. Officers are elected annually by our board of directors and serve at thediscretion of the Board.  We do notcurrently have any committees of our board of directors.

**AuditCommittee and Audit Committee Financial Expert**

Our Board ofDirectors is currently comprised of one member who acts as our audit committee.

In order toattract a person who qualifies as an “audit committee financial expert” as thatterm is defined in item 401(e) of Regulation S-B promulgated under theSecurities Act, we would have to incur the expense of identifying, recruitingand compensating such a person.  Sinceour inception, we have conducted limited operations, have had a small number ofemployees, and have not generated substantial revenues.  In addition, our Chief Financial Officer hasover thirty (30) years of financial management experience and is intimatelyfamiliar with our operations.  At thistime, we have limited financial resources and our principal goal over the nexttwelve to twenty-four months is to build revenue and generate market awarenessof our products and services.  Our Boardof Directors has decided  that the bestway to achieve this objective is to use our available financial resources toattract and retain personnel with sales and marketing backgrounds, rather thana person who qualifies “audit committee financial expert.”  In light of the foregoing, our Board ofDirectors concluded that the cost of retaining an individual who qualifies asan “audit committee financial expert” could prohibit us from achieving ourprimary

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short term objective and, therefore, that the benefit of retaining sucha person at this time would be outweighed by the costs of retaining such aperson.  As a result, no member of ourBoard of Directors qualifies an “audit committee financial expert.”

**Directors Compensation**

Members of our board of directors receive nocompensation for serving on our board of directors, except that each directoris entitled to be reimbursed for the reasonable costs and expenses incurred inattending Board meetings.

**Shareholder Communications**

Wehave not implemented any formal procedures for shareholder communication withour Board of Directors, including nominations for director.  Any matter intended for the Board, or for anyindividual member or members of the Board, should be directed to our corporatesecretary at Stellar Technologies, Inc., 7935 Airport Pulling Road, Suite No.201, Naples, Florida 34109.  In general,all shareholder communication, including nominations for director, delivered tothe corporate secretary for forwarding to the Board will be forwarded inaccordance with the shareholder’s instructions. However, the corporate secretary reserves the right to not forward toBoard members any abusive, threatening or otherwise inappropriate materials.

**Section16(a) Beneficial Ownership Reporting Compliance**

Section16(a) of the U.S. Securities and Exchange Act of 1934, as amended (the “ExchangeAct”), requires the Company’s officers and directors and persons who owngreater than ten percent (10%) of the Company’s common stock to file with theSecurities and Exchange Commission (“SEC”) initial reports of ownership andreports of changes in beneficial ownership of the Company’s common stock.  Such officers, directors and greater than tenpercent (10%) stockholders are also required by applicable SEC rules to furnishthe Company with copies of all forms filed with the SEC pursuant to Section16(a) of the Exchange Act.  Based solelyon its review of the copies of such forms received by it, or writtenrepresentations from such persons that no other reports were required for suchpersons, the Company believes that during the fiscal year ended June 30, 2006,all Section 16(a) filing requirements applicable to the Company’s officers,directors and greater than ten percent (10%) stockholders were satisfied in atimely manner, except that Mark G. Sampson did not timely file a Form 4 uponreceiving an option in connection with becoming a director and executiveofficer of the Company and Rusty Wright did not timely file a Form 3 and Form 4upon becoming an executive officer of the Company and receiving an option.

**Code ofEthics**

Wehave adopted a written code of ethics that applies to our directors, officersand employees, including our principal executive officer, principal financialofficer, principal accounting officer or controller, or persons performingsimilar functions.  A copy of  our code of ethics is attached as Exhibit14.1 to this report.

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**ITEM 10.EXECUTIVE COMPENSATION**

The following table provides certain summaryinformation concerning compensation paid to or accrued by the executiveofficers named below during the fiscal years ended June 30, 2006, 2005 and2004:

#### **Summary Compensation Table**

| Name And  Principal Position         | ** ** | **Fiscal Year** | ** ** | **Salary ($)** | ** ** | **Securities Underlying  Options (#)** | ** ** |
|------------------------------------------------|------------|----------------------|------------|---------------------|------------|--------------------------------------------------|------------|
| ** **                                     | ** ** | ** **           | ** ** | ** **          | ** ** | ** **                                       | ** ** |
| Mark G. Sampson(1)                             |       | 2006                 |       | $                   | 195,000    |                                             | 5,000,000  |   |
| *Chairman and Chief  Executive Officer*        |       |                 |       |                |       |                                             |       |
| * *                                       |       |                 |       |                |       |                                             |       |
| Donald R. Innis(2)                             |       | 2006                 |       | $                   | 204,716    |                                             | 500,000    |   |
| *President*                                    |       | 2005                 |       | $                   | 76,923     |                                             | 242,500    |   |
| * *                                       |       |                 |       |                |       |                                             |       |
| Richard A. Schmidt(3)                          |       | 2005                 |       | $                   | 240,000    |                                             |       |   |
| *Former Chairman and Chief  Executive Officer* |       | 2004                 |       | $              | 120,000    |                                             |       |   |

 

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(1)  MarkG. Sampson began serving as our Chairman and Chief Executive Officer onDecember 15, 2005.

(2)  DonaldR. Innis began serving as our President on February 2, 2004.

(3)  RichardA. Schmidt served as our Chairman and Chief Executive Officer from January 15,2004 until December 14, 2005.  We did notpay any compensation to our Chief Executive Officer in 2003.

**Option/Sar Grants In Last Fiscal Year**

The followingtable sets forth all options granted during the fiscal year ended June 30, 2006to each of the named executive officers. 
| **Name**        | ** ** | **Number of  Underlying  Option/SARS  Granted** | ** ** | **Percent of Total  Options/SARS  Granted to  Employee in  Fiscal Year** | ** ** | **Exercise or Base  Price ($/Sh)** | ** ** | **Expiration Date** | ** **         |
|-----------------|------------|------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------|--------------------|
| Mark G. Sampson |       | 5,000,000                                            | (1)        | 71                                                                                                | %          | $                                                 | 0.40       |                     | December  15, 2015 |   |
|            |       |                                                 |       |                                                                                              |       |                                              |       |                     |               |
| Donald R. Innis |       | 500,000                                              | (2)        | 7.1                                                                                               | %          | $                                                 | 0.40       |                     | December 15, 2015  |   |

 

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(1) The option issued toMr. Sampson vests in three equal installments six, twelve and eighteen monthsfrom the date of grant.

(2) The option issued toMr. Innis vests in equal annual installments over a three year period commencingon the date of grant.

**AggregatedOption Exercises in****Last Fiscal Year and Fiscal Year-End Option Values**

The following table sets forth the number of stockoptions held by the executive officers named in the Summary Compensation Tableas of June 30, 2006 and the value of unexercised “in-the-money” options heldwhich represents the positive difference between the exercise price and themarket price at fiscal year end.  No suchexecutive exercised any options during the fiscal year ended June 30, 2006.****
| **Name**        | ** ** | **Shares  Acquired on  Exercise (#)** | ** ** | **Value  Realized ($)** | ** ** | **Number of Securities  Underlying Unexercised  Options at Fiscal  Year End  Exercisable/Unexercisable** | ** ** | **Value of  Unexercised  “In-The-Money”  Options/SARs at  Fiscal Year End (1)** | ** ** |
|-----------------|------------|-------------------------------------------------|------------|------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|
| Mark G. Sampson |       | -0-                                             |       | -0-                          |       | 1,666,667/3,333,333                                                                                                                    |       | -0-                                                                                                                |       |
|            |       |                                            |       |                         |       |                                                                                                                                   |       |                                                                                                               |       |
| Donald R. Innis |       | -0-                                             |       | -0-                          |       | 242,500/500,000                                                                                                                        |       | -0-                                                                                                                |       |

 

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(1)The last sales price of our common stock as reported on the OTC Bulletin Boardon June 30, 2006 was $0.18.

**2005 Stock Incentive Plan**

OnDecember 16, 2005, our Board of Directors adopted the Stellar Technologies,Inc. 2005 Stock Incentive Plan (the “Plan”). The Plan reserves 4,500,000 shares of common stock for issuance pursuantto stock options, stock appreciation rights, restricted stock awards,restricted stock units, unrestricted stock awards, and other equity based orequity related awards to employees, officers, directors, or advisors to theCompany or any of our subsidiaries as well as individuals who have entered intoan agreement with us under which they will be employed by the Company or any ofour subsidiaries in the future. As of the date of this report, we have issuedoptions under the Plan to purchase 2,005,000 shares of common stock.  The Plan is administered by the Board ofDirectors (the “Board”) of the Company which has full and final authority tointerpret the Plan, select the persons to whom awards may be granted, anddetermine the amount and terms of any award. In order to comply with certainrules and regulations of the Securities and Exchange Commission or the InternalRevenue Code, the Board can delegate authority to appropriate committees of theBoard.  Although the Plan provides forthe issuance of options that qualify as incentive stock options (“ISOs”) underthe Internal Revenue Code of 1986, as amended, since the Plan was not approvedby our stockholders, we cannot issue ISOs unless and until we obtain therequisite shareholder approval.

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Stockoptions issued under the Plan have a term of no more than 10 years, an exerciseprice equal to at least 85% of the fair market value of our common stock on thedate of grant (100% in the case of ISOs), are subject to vesting as determinedby the Board, and unless otherwise determined by the Board, may not betransferred except by will, the laws of descent and distribution, or pursuantto a domestic relations order. Unless otherwise determined by the Board, awardsterminate three (3) months after termination of employment or other associationwith the Company or one (1) year after termination due to disability, death orretirement.  In the event thattermination of employment or association is for a cause, as that term isdefined in the Plan, awards terminate immediately upon such termination.

ThePlan provides for immediate vesting of all options and stock appreciationrights upon the occurrence of a “Change In Control Event,” unless specificallyprovided to the contrary in any specific option or stock appreciation right. Inthe event of a “Reorganization Event” (regardless of whether such event also constitutesa “Change In Control Event”), except as otherwise specifically provided to thecontrary in any option or stock appreciation right, the Plan provides for alloutstanding options and stock appreciation rights to either (i) be assumed by,or equivalent options or rights substituted by, the acquiring or succeedingcorporation; or (ii) if the acquiring or succeeding corporation does not agreeto assume or substitute for such options or rights, all then unexercisedoptions and stock appreciation rights will become immediately exercisable infull as of a date prior to the completion of such Reorganization Event and willterminate immediately prior to the consummation of such ReorganizationEvent.  In the event that aReorganization Event provides for the payment of cash to our stockholders, theBoard may instead provide that all outstanding options and stock appreciationrights will terminate upon the consummation of such Reorganization Event andfor the holders of such options and stock appreciation rights to receive a cashpayment equal to the amount (if any) by which the price paid to ourstockholders exceeds the aggregate exercise price of such options or rights.

Inthe case of outstanding restricted stock or restricted unit awards, the Planprovides that upon a “Change In Control Event,” all restrictions applicable tosuch awards to automatically be deemed terminated or satisfied, except asspecifically set forth to the contrary in any award. In the event of a “ReorganizationEvent” that is not a “Change in Control Event”, the repurchase and other rightsof the Company under such restricted stock or restricted unit awards shallinure to the benefit of the Company’s successor and shall apply to the cash,securities or other property that the common stock was converted into orexchanged for pursuant to such Reorganization Event.

ThePlan defines “Reorganization Event” to mean: (i) any merger or consolidation ofthe Company with or into another entity as a result of which all of theoutstanding shares of common stock are converted into or exchanged for theright to receive cash, securities or other property; or (ii) any exchange ofall outstanding shares of common stock for cash, securities or other propertypursuant to a share exchange transaction.

ThePlan defines a “Change in Control Event” to mean: (i) the acquisition by anindividual, entity or group of 30% or more of the issued and outstanding sharesof common stock of the Company or of the combined voting power of alloutstanding securities of the Company

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unless suchacquisition was directly from the Company, was acquired by an employee benefitplan of the Company, or resulted from an acquisition of the Company in whichthe stockholders of the Company immediately prior to the acquisition continueto own more than 50% of the Company’s outstanding voting securities and noperson (except for the acquiring corporation or an employee benefit plan ofsuch entity) beneficially owns in excess of 30% of the Company’s outstandingvoting shares; (ii) an event as a result of which persons who were members ofthe Board of Directors of the Company on the date the Plan was adopted or werenominated or elected by at least a majority of such directors fail toconstitute a majority of the board of directors of the Company; or (iii) amerger, consolidation, reorganization, recapitalization, share exchange or saleor other disposition of all or substantially all assets of the Company unlessimmediately following such transaction, the stockholders of the Companyimmediately prior to such transaction continue to own more than 50% of theCompany’s outstanding voting securities and no person (except for the acquiringcorporation or an employee benefit plan of such entity) beneficially owns inexcess of 30% of the Company’s outstanding voting shares.

**Employment Agreements and Change of ControlArrangements**

We entered into a letteragreement with Donald R. Innis pursuant to which Mr. Innis was appointed ourPresident effective February 1, 2004. The letter agreement provides for an annual base salary of $200,000 and,if employment is terminated involuntarily, severance in an amount equal to theamount of salary received by him during the three (3) most recently completedmonths of employment with us.  Mr. Innis’annual salary was increased on April 10, 2005 to $220,000.  The letter agreement also provided that wewould grant Mr. Innis a stock option exercisable into that number of shares ofour common stock equal to one percent (1%) of the number of shares of ourcommon stock issued and outstanding on the date of grant.  The letter agreement contains no specificterm of employment and may be terminated by either us or Mr. Innis at any timewith or without cause.

Our subsidiary, GeMSolutions (Canada) Inc., a corporation organized under the laws of BritishColumbia, Canada, employs Mark G. Sampson. Mr. Sampson provides executivemanagement services to us pursuant to an offer letter that provides for a termof three years, an annual base salary of $360,000, and an annual performancebonus equal to 50% of the annual base salary based on the Company achievingrevenue targets of $10,000,000 for the fiscal year ending June 30, 2007 and$20,000,000 for the fiscal year ending June 30, 2008.  The letter contains standard and customaryconfidentiality, non competition, non solicitation, and work made for hireprovisions and provides for payment equal to one year base salary in the eventthat the agreement is terminated, unless such termination is for cause.

Alloptions issued to Donald Innis, John Baker and Rusty Wright under the Planprovide for immediate vesting upon a Change in Control Event.   See **“2005 Stock Incentive Plan”**above.  In addition, alloptions issued to Mark Sampson, John Baker and Donald Innis outside of the Planprovide for immediate vesting upon a Change in Control Event on terms identicalto the Plan.

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**ITEM11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS**

Thefollowing table sets forth, as of October 10, 2006, information with respect tothe securities holdings of all persons that we, pursuant to filings with theSecurities and Exchange Commission (the “SEC”) and our stock transfer records,have reason to believe may be deemed the beneficial owner of more than fivepercent (5%) of our common stock or series B convertible preferred stock.  Holders of our series B convertible preferredstock vote on an as converted to common stock basis together with the holdersof our common stock on all matters presented to the holders of our commonstock.  The following table also setsforth, as of such date, the beneficial ownership of our common stock by all ofour current officers and directors, both individually and as a group.

Thebeneficial owners and amount of securities beneficially owned have beendetermined in accordance with Rule 13d-3 under the Securities Exchange Act of1934, as amended (the “Exchange Act”), and, in accordance therewith, includesall shares of our common stock that may be acquired by such beneficial ownerswithin 60 days of October 10, 2006 upon the exercise or conversion of anyoptions, warrants or other convertible securities, including shares of ourSeries B preferred stock.  This table hasbeen prepared based on 29,190,969 shares of common stock outstanding on October10, 2006 and 215,874 shares of series B convertible preferred stock outstandingon October 10, 2006.  Unless otherwiseindicated, each person or entity named below has sole voting and investmentpower with respect to all shares beneficially owned by that person or entity,subject to the matters set forth in the footnotes to the table below, and hasan address at Stellar Technologies, Inc., 7935 Airport Pulling Road, Suite 201,Naples, FL  34109.
| **Name and Address of Beneficial   Owner**        | ** ** | **Amount and  Nature  of Beneficial  Ownership of  Common  Stock** | ** ** | **Percentage  of Class** | ** ** | **Amount and  Nature  of Beneficial  Ownership of  Series B  Convertible  Preferred  Stock** | ** ** | **Percentage  of Class** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|-------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| Mark G. Sampson                                                            |       | 1,666,667                                                                         | (1)        | 5.4                           | %          | 0                                                                                                                |       | —                        |       |
|                                                                       |       |                                                                              |       |                          |       |                                                                                                             |       |                          |       |
| Donald R. Innis                                                            |       | 242,500                                                                           | (2)        | *                             |       | 0                                                                                                                |       | —                        |       |
|                                                                       |       |                                                                              |       |                          |       |                                                                                                             |       |                          |       |
| John E. Baker                                                              |       | 100,000                                                                           | (3)        | *                             |       | 0                                                                                                                |       | —                        |       |
|                                                                       |       |                                                                              |       |                          |       |                                                                                                             |       |                          |       |
| Rusty Wright                                                               |       | —                                                                            | (4)        | —                        |       |                                                                                                             |       |                          |       |
|                                                                       |       |                                                                              |       |                          |       |                                                                                                             |       |                          |       |
| Montex Exploration,  Inc.

43 Addison Road

London, United Kingdom

W148JH |       | 10,265,150                                                                        | (5)        | 26.6                          | %          | 56,816                                                                                                           |       | 26.3                          | %          |

 

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| Trident Growth Fund,  L.P.

700 Gemini

Houston, Texas 77058                                                                    |   | 7,471,833 | (6)    | 20.5   | %      | — |   | — |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|-----------|--------|--------|--------|--------|--------|--------|--------|
|                                                                                                                            |   |      |   |   |   |   |   |   |   |
| Dromen Securities Ltd.

Cours de Rive 13

Geneva, 1204  Switzerland                                                             |   | 3,750,000 | (7)    | 12.3   | %      | — |   | — |   |
|                                                                                                                            |   |      |   |   |   |   |   |   |   |
| Alta Fin B.V.

Pareravweg 45

Netherland Antilles                                                                               |   | 2,016,667 | (8)    | 6.5    | %      | 13,500 |   | 6.2    | %      |
|                                                                                                                            |   |      |   |   |   |   |   |   |   |
| Moonlight Investments,  Ltd.

5th Floor – One  Cathedral Square

Jules Koenig Street

Port Louis, Mauritius |   | 4,022,300 | (9)    | 12.5   | %      | 20,223 |   | 9.4    | %      |
|                                                                                                                            |   |      |   |   |   |   |   |   |   |
| S G Private Banking  (Suisse) SA

Avenue de Rumine 20 –  CP 220

1001  Lausanne-Switzerland                                |   | 2,500,050 | (10)   | 7.9    | %      | 16,667 |   | 7.8    | %      |
|                                                                                                                            |   |      |   |   |   |   |   |   |   |
| Millennium  International Pension Plan

P.O. Box 100 Sydney  Vane

House

Admiral Park

St. Peter Port,  Guernsey GYI

3EL      |   | 4,000,050 | (11)   | 12.1   | %      | 26,667 |   | 12.4   | %      |
|                                                                                                                            |   |      |   |   |   |   |   |   |   |
| Strand Properties  Corporation

P.O. Box 11516

Vancouver BC V6B 4N7                                                            |   | 2,100,000 | (12)   | 6.7    | %      | 14,000 |   | 6.5    | %      |
|                                                                                                                            |   |      |   |   |   |   |   |   |   |
| SPH Profit Sharing Plan

111 Presidential Blvd.

Bala Cynwyd, PA 19004                                                          |   | 2,158,000 | (13)   | 6.9    | %      | 13,333 |   | 6.2    | %      |
|                                                                                                                            |   |      |   |   |   |   |   |   |   |
| Paul Modie

1900 Washington Avenue

Parkersburg, WV 26101                                                                       |   | 2,100,000 | (12)   | 6.7    | %      | 14,000 |   | 6.5    | %      |
|                                                                                                                            |   |      |   |   |   |   |   |   |   |
| All Officers and Directors as a group (4 persons) (14)                                                                          |   | 2,009,167 |   | 6.4    | %      | — |   | — |   |

 

45

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----

*   Representsless than one percent of class.

(1)  Consists of shares issuable upon exercise of options. Does not include 3,333,333 shares of common stock issuable upon exercise of options which are subject to vesting.

(2)  Consists of shares issuable upon exercise of options.  Does not include 500,000 shares issuable upon exercise of options which are subject to vesting.

(3)  Consists of shares issuable upon exercise of options. Does not include 250,000 shares issuable upon exercise of options which are subject to vesting.

(4)  Does not include 400,000 shares issuable upon exercise of options which are subject to vesting.

(5)  Includes 3,734,700 shares issuable upon exercise of warrants and 5,681,600 shares issuable upon conversion of series B preferred stock.

(6)  Includes 3,220,000 shares issuable upon exercise of warrants and 4,000,000 shares issuable upon conversion of a convertible promissory note.

(7)  Includes 1,250,000 shares issuable upon exercise of warrants.

(8)  Consists of 1,350,000 shares issuable upon conversion of series B preferred stock and 666,667 shares issuable upon exercise of warrants.

(9)  Includes 2,022,300 shares issuable upon conversion of series B preferred stock and 1,000,000 shares issuable upon exercise of warrants.

 (10)  Includes 1,666,700 shares issuable upon conversion of series B preferred stock and 833,350 shares issuable upon exercise of warrants.

(11)  Consists of 2,666,700 shares issuable upon conversion of series B preferred stock and 1,333,350 shares issuable upon exercise of warrants.

(12)  Consists of 1,400,000 shares issuable upon conversion of series B preferred stock and 700,000 shares issuable upon exercise of warrants.

(13)  Includes 1,333,300 shares issuable upon conversion of series B preferred stock and 666,650 shares issuable upon exercise of warrants.

(14)  Consists of 2,009,167shares issuable upon exercise of stock options.

46

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**EQUITYCOMPENSATION PLAN INFORMATION**

The followingtable sets forth certain equity compensation information as of June 30, 2006.
| ** **                                                  | ** ** | **Number of securities  to be issued upon  exercise of  outstanding warrants  and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available  for future issuance  under equity  compensation plans  (excluding securities  reflected in column(a))** |  

  |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------|
| **Plan Category**                                      | ** ** | **(a)**                                                                                                                            | ** ** | **(b)**                                                                                                     | ** ** | **(c)**                                                                                                                                                                                                |           |
| Equity  Compensation Plans approved by security holders     |       | 0                                                                                                                                  |       | Not applicable                                                                                              |       | 0                                                                                                                                                                                                      |           |
| Equity  compensation plans not approved by security holders |       | 8,090,000                                                                                                                          |       | $                                                                                                           | 0.45       |                                                                                                                                                                                                   | 2,495,000      | (1) |
| Total                                                       |       | 8,090,000                                                                                                                          |       | $                                                                                                           | 0.45       |                                                                                                                                                                                                   | 0              |   |

 

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(1)  Represents shares available for issuanceunder the Plan.

On February 4, 2004,pursuant to the terms of a letter agreement, we issued Mr. Innis an option topurchase 242,500 shares of our common stock. The option was issued at an exercise price of $1.76, the last salesprice of our common stock as reported on the OTC Bulletin Board on the date ofgrant.  The option has a term of ten (10)years and vests one year from the date of grant.

In addition, on February4, 2004, we issued an aggregate of 242,500 options to various employees of theCompany pursuant to individual stock option agreements between us and eachemployee.  Each option has an exerciseprice of $1.76, has a term of ten (10) years and vests one year from the dateof grant.  On May 13, 2005, we issued Mr.Baker an option to purchase 100,000 shares of our common stock at an exerciseprice of $0.59, the last sales price of our common stock as reported on the OTCBulletin Board on the date of grant.  Theoption has a term of ten (10) years and vests one year from the date of grant.

On May 27, 2004, weissued warrants to purchase 300,000 shares of our common stock pursuant to athree year financial advisory services agreement. The warrants are currentlyexercisable at $1.00 per share, have a term of three (3) years, and becamefully vested on January 1, 2005.   Theexercise price is subject to downward adjustment in the event we issue additionalshares of our common stock or securities convertible or exercisable into sharesof our common stock at a price or conversion or exercise price less than theexercise price in effect immediately prior to such issuance.

47

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In connection with theissuance of the Trident Note, we issued warrants to consultants to purchase200,000 shares of our common stock.  Thewarrants are immediately exercisable at an exercise price of $1.00 per share,subject to adjustment, contain standard and customary cashless exercise provisions,and terminate five years from the date of grant. The exercise price is subjectto downward adjustment in the event we issue additional shares of our commonstock or securities convertible or exercisable into shares of our common stockat a price or conversion or exercise price less than the exercise price ineffect immediately prior to such issuance.

During the year endedJune 30, 2006, we issued options to purchase 2,005,000 shares under the Plan tovarious employees of the Company pursuant to individual stock option agreementsbetween us and each employee.  Eachoption has an exercise price between $0.18 and $0.40 per share, has a term often (10) years, and vests over a three year period from the date of grant.

**ITEM 12. CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

On May 13, 2005, we issued John E. Baker, our ChiefFinancial Officer, an option to purchase 100,000 shares of our commonstock.  The option was issued at anexercise price of $0.59, the last sales price of our common stock as reportedon the OTC Bulletin Board on the date of grant. The option has a term of ten (10) years and vests one year from the dateof grant.

Pursuant toSecurities Purchase Agreement dated March 28, 2005 by and between MAS Services,Inc. (“MAS Services”) and  MontexExploration, Inc. (“Montex”), MAS Services sold 1,000,000 shares of commonstock to Montex in a private transaction for a total purchase price of$1,000,000.  In connection with the sale,we agreed to register the public sale of the shares of common stock purchasedby Montex by including such shares in any registration statement we file withthe Securities and Exchange Commission. Our former Chairman and Chief Executive Officer, Richard A. Schmidt, isthe President and Chairman of the Board of MAS Services.

Pursuant toSecurities Purchase Agreement dated May 27, 2005 by and between MAS Servicesand  Moonlight Investments Limited (“Moonlight”),MAS Services sold 1,000,000 shares of common stock to Moonlight in a privatetransaction for a total purchase price of $1,000,000.  In connection with the sale, we agreed toregister the public sale of the shares of common stock purchased by Moonlightby including such shares in any registration statement we file with theSecurities and Exchange Commission.

On April 5, 2005,we entered into a Consultant Agreement with Trident Advisors, Inc. (“TridentAdvisors”), an affiliate of Trident Growth Fund, LP (“Trident”), the beneficialowner of in excess of 5% of our outstanding shares of common stock.  The initial term of the Consultant Agreementwas six months after which either party may terminate upon written notice.  Under the Consultant Agreement, TridentAdvisors provided services consisting of identifying possible businesscombinations or investors.  TheConsultant Agreement provided for a nonrefundable retainer fee of $60,000 andthe payment of additional transaction based fees, of which none were earned orpaid.

48

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As of October 28,2005, we had not been in compliance with any of the financial covenantsincluded in our $1,600,000 principal amount secured convertible promissory note(the “Trident Note”) for a period of thirty (30) days.  This constituted an event of default. OnNovember 4, 2005, Trident waived the event of default and waived compliancewith all financial covenants contained in the Trident Note for a period of 180days.  In consideration for the wavier,we issued 211,833 shares of common stock and warrants to purchase 250,000 shares of common stock to Tridentat an exercise price of $0.40 per share.

On May 19, 2006, weentered into a Master Amendment with Trident to amend the $1.6 principal amountconvertible note to extend the maturity date of the note, delete all financialand certain negative covenants, and delete the demand registration rights andassociated penalty provisions.  We also amendedthe terms of all outstanding warrants previously issued to Trident to revisethe anti-dilution adjustment provisions and set the exercise price at $0.40 pershare. In consideration of the foregoing, we issued a warrant to Trident topurchase 1,745,000 shares of common stock at an exercise price of $0.40 pershare.  The warrant is immediatelyexercisable for a term of five years.

On December 13, 2005, weissued an option to Mark G. Sampson, our Chief Executive Officer, to purchase5,000,000 shares of common at an exercise price of $0.40 per share for a termof ten years.  The options vest in threeequal installments six, twelve and eighteen months from the date of grant.  In the event that Mr. Sampson ceases toprovide services to us, the options shall terminate 90 days after cessationof  service, unless such cessation is forcause, in which case the options shall terminate immediately upon cessation ofservice. On June 21, 2006, we amended the option to accelerate vesting in theevent of termination of employment or service to the Company without cause,extend the time during which the option can be exercised after termination ofemployment or service to the Company without cause, include additional methodsof cashless exercise, and revise the change of control provisions to make themconsistent with the Company’s 2005 Stock Incentive Plan.

OnDecember 16, 2005, we issued nonstatutory stock options under the Plan toDonald R. Innis, our President, to purchase 500,000 shares of commonstock, and to John E. Baker, our Chief Financial Officer, to purchase 250,000****shares of common stock. The options have an exercise price of $0.40 per share, vest in threeequal annual installments over a three year period commencing on the date ofgrant and are otherwise subject to the terms of the Plan.  On June 21, 2006, we amended these options toextend the time during which the options can be exercised in the event oftermination of employment or service to the Company without cause, includeadditional methods of cashless exercise, and make inapplicable the provision inthe Plan providing for a right of repurchase by the Company or a successorunder certain circumstances in the event the options are exercised after achange of control.

OnFebruary 22, 2006, we entered into an agreement with Montex to provideconsulting services to us including introducing us to persons outside of theUnited States qualified and interested in purchasing our securities.  The agreement provides for the payment offees to Montex equal to 8% of the gross purchase price of our securities issuedto any person introduced to us by Montex and warrants to purchase shares ofcommon stock equal to 8% of the shares issued to such persons at an exerciseprice of $1.50 per shares.  During March2006, we paid or

49

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accrued consultingfees to Montex of $56,000 and issued warrants to purchase 373,333 shares ofcommon stock.  Montex beneficially ownsin excess of 5% of our outstanding shares.

OnMarch 21, 2006, we sold a $200,000 principal amount convertible note andwarrants to purchase an additional 666,666 shares of common stock to Montex fora purchase price of $200,000.  Theforgoing securities were sold to Montex on the same terms and conditions as allother purchasers of securities in the offering. On May 7, 2006, Montexexchanged the notes for 13,482 shares of series B convertible preferred stock.

BetweenMay 3 and October 9, 2006, we sold an aggregate of 43,334 units consisting of43,334 shares of series B convertible preferred stock and warrants to purchase2,166,667 shares of common stock to Montex for an aggregate purchase price of$650,000.  The foregoing securities weresold to Montex on the same terms and conditions as all other purchasers ofsecurities in the offering.

OnJune 19, 2006, we issued letters to Messrs. Sampson, Innis and Wrightconfirming pre-existing arrangements regarding severance payment and provisionof benefits in the event we terminate their employment or service to theCompany without cause and providing for the immediate vesting of all optionsissued under the Plan in the event of such termination or cessation of service.We also issued a letter to Mr. Baker providing for three (3) months basesalary, immediate vesting of all options issued under the Plan, and healthinsurance coverage for three (3) months in the event we terminate hisemployment without cause. Receipt of the foregoing is conditioned upon theofficer’s execution of a general release in favor of the Company.

**ITEM 13.EXHIBITS**
| Exhibit No. | ** ** | **Exhibit**                                                                                                                                                                                                                                                                                                           |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1         |       | Agreement and Plan of Merger dated August 31, 2006  and between the Company and GeM Solutions, Inc., a Delaware corporation and a  wholly owned subsidiary of the Company (incorporated by reference to Appendix  A to the Company’s Definitive Proxy Statement filed with the Commission on September 15, 2006) |
|        |       |                                                                                                                                                                                                                                                                                                                  |
| 3.1         |       | Articles of Incorporation (incorporated by reference  to Exhibit 3.1 to the Company’s Registration Statement on Form SB-2,  Registration No. 333-54292, filed with the Commission on January 25, 2001)                                                                                                           |
|        |       |                                                                                                                                                                                                                                                                                                                  |
| 3.2         |       | Bylaws (incorporated by reference to Exhibit 3.2 to  the Company’s Registration Statement on Form SB-2, Registration No.  333-54292, filed with the Commission on  January 25, 2001)                                                                                                                             |

 

50

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| 3.3    |   | Articles of Amendment to Articles of Incorporation  (incorporated by reference to Exhibit 3.3 to the Company’s Quarterly Report  on Form 10-QSB for the quarter ended December 31, 2002)                                                                               |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                        |
| 3.4    |   | Articles of Amendment to  Articles of Incorporation (incorporated by reference to Exhibit 3.3 to  the Company’s Quarterly Report on Form 10-QSB for the quarter ended December  31, 2003)                                                                              |
|   |   |                                                                                                                                                                                                                                                                        |
| 3.5    |   | Certificate of Designation for Series A Convertible  Preferred Stock (incorporated by reference to Exhibit 3.5 to the Company’s  Quarterly Report on Form 10-QSB for the quarter ended March 31, 2004)                                                                 |
|   |   |                                                                                                                                                                                                                                                                        |
| 3.6    |   | Amended and Restated Articles of Incorporation  (incorporated by reference to Exhibit 3.6 to the Company’s Quarterly Report  on Form 10-QSB for the quarter ended March 31, 2004)                                                                                      |
|   |   |                                                                                                                                                                                                                                                                        |
| 3.7    |   | Certificate of Designation of Series B Convertible  Preferred Stock (incorporated by reference to Exhibit 10.3 to the Company’s  Current Report on Form 8-K filed with the Commission on May 4, 2006)                                                                  |
|   |   |                                                                                                                                                                                                                                                                        |
| 4.1    |   | Specimen Stock Certificate (incorporated by  reference to Exhibit 4.1 to the Company’s Registration Statement on Form  SB-2, Registration No. 333-54292, filed with the Commission on January 25, 2001)                                                                |
|   |   |                                                                                                                                                                                                                                                                        |
| 10.1   |   | Warrant to purchase 100,000 shares of common stock,  dated January 16, 2003, issued to Trident Growth Fund, LP (incorporated by  reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-QSB  for the quarter ended March 31, 2003)                     |
|   |   |                                                                                                                                                                                                                                                                        |
| 10.2   |   | Warrant to purchase 25,000 shares of common stock,  dated January 16, 2003, issued to Trident Growth Fund, LP (incorporated by  reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-QSB  for the quarter ended March 31, 2003)                      |
|   |   |                                                                                                                                                                                                                                                                        |
| 10.3   |   | First Amendment and Waiver to Warrant to purchase  100,000 shares of common stock, dated September 9, 2003, issued to Trident  (incorporated by reference to Exhibit 10.10 to the Company’s Quarterly Report  on Form 10-QSB for the quarter ended September 30, 2003) |
|   |   |                                                                                                                                                                                                                                                                        |
| 10.4   |   | First Amendment and Waiver to Warrant to purchase  25,000 shares of common stock, dated September 9, 2003, issued to Trident  (incorporated by reference to Exhibit 10.11 to the Company’s Quarterly Report  on Form 10-QSB for the quarter ended September 30, 2003)  |

 

51

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| 10.5   |   | Warrant to purchase 200,000 shares of common stock,  dated September 9, 2003, issued to Trident (incorporated by reference to  Exhibit 10.12 to the Company’s Quarterly Report on Form 10-QSB for the  quarter ended September 30, 2003)                                                          |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                   |
| 10.6   |   | Form of Series B Warrant to purchase 1,200,000  shares of common stock (incorporated by reference to Exhibit 10.24 to the  Company’s Registration Statement Report on Form SB-2 filed with the  Commission on June 9, 2004)                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                   |
| 10.7   |   | Option to Purchase 242,500 shares of Common Stock  issued to Donald R. Innis (incorporated by reference to Exhibit 10.18 to the  Company’s Quarterly Report on Form 10-QSB for the quarter ended March 31,  2004)                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                   |
| 10.8   |   | Restated Option to Purchase 242,500 shares of Common  Stock issued to Donald R. Innis (incorporated by reference to Exhibit 10.19  to the Company’s Quarterly Report on Form 10-QSB for the quarter ended March  31, 2004)                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                   |
| 10.9   |   | Form of Warrant issued in connection with Offering  of Series A Convertible Preferred Stock and Warrants to Acquire Shares of  Common Stock (incorporated by  reference to Exhibit 10.20 to the Company’s Quarterly Report on Form 10-QSB  for the quarter ended March 31, 2004)        |
|   |   |                                                                                                                                                                                                                                                                                                   |
| 10.10  |   | Letter Agreement, dated January 8, 2004, by and  between the Company and Donald R. Innis (incorporated by reference to Exhibit  10.21 to the Company’s Amendment No. 1 to the Company’s Registration  Statement Report on Form SB-2 filed with the Commission on July 6, 2004)               |
|   |   |                                                                                                                                                                                                                                                                                                   |
| 10.11  |   | Securities Purchase Agreement dated March 28, 2005,  by and among the Company, MAS Services, Inc. and Montex Exploration, Inc. (incorporated by reference to Exhibit 4.2 to  Amendment No. 2 to the Company’s Registration Statement on Form SB-2 filed  with the Commission on January 13, 2006) |
|   |   |                                                                                                                                                                                                                                                                                                   |
| 10.12  |   | Securities Purchase Agreement dated May 27, 2005, by  and the Company, MAS Services, Inc. and Moonlight Investments Limited.  (incorporated by reference to Exhibit 4.3 to Amendment No. 2 to the Company’s  Registration Statement on Form SB-2 filed with the Commission on January 13,  2006)  |
|   |   |                                                                                                                                                                                                                                                                                                   |
| 10.13  |   | Loan Agreement dated April 1, 2005 by and between  the Company and Trident Growth Fund, LP (incorporated by reference to Exhibit  10.1 to the Company’s Current Report on Form 8-K filed with the Commission on  April 7, 2005)                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                   |
| 10.14  |   | Warrant dated April 1, 2005 to Purchase Shares of  Common Stockissued to Trident Growth Fund, LP (incorporated by reference to  Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the  Commission on April 7, 2005)                                                             |

 

52

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| 10.15  |   | Form of Security Agreement dated April 1, 2005 by  and between Trident Growth Fund, LP and each of the Company and its operating  subsidiaries (incorporated by  reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed  with the Commission on April 7, 2005)                                                 |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.16  |   | Form of Guaranty dated April 1, 2005 by and between  Trident Growth Fund, LP and each of the Company’s operating subsidiaries. (incorporated by reference to Exhibit 10.4 to  the Company’s Current Report on Form 8-K filed with the Commission on April  7, 2005)                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.17  |   | 12% Secured Convertible Note dated April 1, 2005 in  the Principal Amount of $1,600,000 (incorporated by reference to Exhibit 10.5  to the Company’s Current Report on Form 8-K filed with the Commission on  April 7, 2005)                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.18  |   | Form of First Amendment to Warrant issued in connection  with offering of Series A Convertible Preferred Stock and Warrants to acquire  shares of Common Stock issued in February 2004 (incorporated by reference to Exhibit 10.31 to the Company’s Registration  Statement on Form SB-2 filed with the Commission on July 7, 2005) |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.19  |   | Form of First Amendment to Warrant dated June 8,  2004 to purchase shares of Common Stock issued to FEQ Investments, Inc.  (incorporated by reference to Exhibit 10.32 to the Company’s Registration  Statement on Form SB-2 filed with the Commission on July 7, 2005)                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.20  |   | Waiver Letter dated November 4, 2005 by and between  the Company and Trident Growth Fund Ltd. (incorporated by reference to  Exhibit 10.1 to the Company’s Quarterly Report on Form 10-QSB for the quarter  ended September 30, 2005)                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.21  |   | Consulting Agreement dated February 22, 2006 by and  between the Company and Montex Exploration, Inc. (incorporated by reference  to Exhibit 10.1 to the Company’s Current  Report on Form 8-K filed with the Commission on March 24, 2006)                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.22  |   | Form of Securities Purchase Agreement by and between  the Company and Purchasers of Units consisting of Convertible Notes and  Warrants (incorporated by reference  to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission  on March 24, 2006)                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.23  |   | Form of Convertible Note Issued to Purchasers of  Units consisting of Convertible Notes and Warrants (incorporated by reference  to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the  Commission on March 24, 2006)                                                                                          |

 

53

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| 10.24  |   | Form of Warrant issued to Advisors and Purchasers of  Units consisting of Convertible Notes and Warrants (incorporated by reference  to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the  Commission on March 24, 2006)                                                        |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                       |
| 10.25  |   | Form of Securities Purchase Agreement by and between  the Company and Non U.S. Purchasers of Units consisting of Series B  Convertible Preferred Stock and Warrants (incorporated by reference to Exhibit 10.1 to the Company’s Current  Report on Form 8-K filed with the Commission on May 4, 2006) |
|   |   |                                                                                                                                                                                                                                                                                                       |
| 10.26  |   | Form of Reg S Warrant issued to Non U.S. Purchasers  of Units and advisors in Unit Offering consisting of Series B Convertible  Preferred Stock and Warrants. (incorporated by reference to Exhibit 10.4 to  the Registrants Current Report on Form 8-K filed March 24, 2006)                              |
|   |   |                                                                                                                                                                                                                                                                                                       |
| 10.27  |   | Exchange Agreement dated May 1, 2006 by and between  the Company and Montex Exploration, Inc. (incorporated by reference to  Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the  Commission on May 4, 2006)                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                       |
| 10.28  |   | Exchange Agreement dated May 1, 2006 by and between  the Companyand Alta Fin, BV. (incorporated by reference to Exhibit 10.3 to  the Company’s Current Report on Form 8-K filed with the Commission on May 12,  2006)                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                       |
| 10.29  |   | Master Amendment to those certain April, 2005 Loan  Documents by and between the Company and Trident Growth Fund, L.P. effective  as of May 1, 2006 (incorporated by reference to Exhibit 10.1 to the Company’s  Current Report on Form 8-K filed with the Commission on May 25, 2006)                |
|   |   |                                                                                                                                                                                                                                                                                                       |
| 10.30  |   | Warrant to purchase 1,745,000 shares of common stock  dated as of May 1, 2006 issued to Trident Growth Fund, L.P. (incorporated by  reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed  with the Commission on May 25, 2006)                                                 |
|   |   |                                                                                                                                                                                                                                                                                                       |
| 10.31  |   | Amended and Restated Option Agreement dated June 21,  2006 by and between Mark G. Sampson and the Company (incorporated by  reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed  with the Commission on June 23, 2006)                                                        |
|   |   |                                                                                                                                                                                                                                                                                                       |
| 10.32  |   | Amended and Restated Option Agreement dated June 21,  2006 by and between Donald R. Innis and the Company (incorporated by  reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed  with the Commission on June 23, 2006)                                                        |

 

54

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| 10.33  |   | Amended and Restated Option Agreement dated June 21,  2006 by and between John E. Baker and the Company (incorporated by reference  to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the  Commission on June 23, 2006)                                                           |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                        |
| 10.34  |   | Form of Amended and Restated Option Agreement Under  The Stellar Technologies, Inc. 2005 Stock Incentive Plan (incorporated by  reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed  with the Commission on June 23, 2006)                                                     |
|   |   |                                                                                                                                                                                                                                                                                                        |
| 10.35  |   | Form of Letter to Officers Regarding Rights In The  Event of Termination Without Cause (incorporated by reference to Exhibit 10.5  to the Company’s Current Report on Form 8-K filed with the Commission on June  23, 2006)                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                        |
| 10.36  |   | Form of Securities Purchase Agreement by and between  the Company and U.S. Purchasers of Units consisting of Series B Convertible  Preferred Stock and Warrants (incorporated by reference to Exhibit 10.1 to  the Company’s Current Report on Form 8-K filed with the Commission on August  18, 2006) |
|   |   |                                                                                                                                                                                                                                                                                                        |
| 10.37  |   | Form of Warrant issued to U.S. Purchasers of Units  and placement agents in Unit Offering consisting of Series B Convertible  Preferred Stock and Warrants (incorporated by reference to Exhibit 10.2 to  the Company’s Current Report on Form 8-K filed with the Commission on August  18, 2006)      |
|   |   |                                                                                                                                                                                                                                                                                                        |
| 14.1   |   | Code of Ethics (incorporated by reference to Exhibit  14.1 to the Company’s Annual Report on Form 10-KSB for the year ended June  30, 2004)                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                        |
| 21.1** |   | Subsidiaries of the Company                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                        |
| 31.1** |   | Certification of Chief Executive Officer of the  Company required by Rule 13a-14(a) under the Securities Exchange Act of 1934,  as amended                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                        |
| 31.2** |   | Certification of Chief Financial Officer of the  Company required by Rule 13a-14(a) under the Securities Exchange Act of 1934,  as amended                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                        |
| 32.1** |   | Certification of President of the Company Pursuant  to 18 USC Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                        |
| 32.2** |   | Certification of Chief Financial Officer of the  Company Pursuant to 18 USC Section 1350, as Adopted Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002                                                                                                                                             |

 

----

**                                  Filedherewith

55

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**ITEM14.  PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

The following table presentsfees for professional audit services performed by Malone & Bailey, PC forthe audit of our annual financial statements for the fiscal years ended June30, 2006 and 2005 and fees billed for other services rendered by Malone &Bailey, PC during such years.    
|                     | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** |
|---------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                |       |                        |       |                        |       |
| Audit Fee           |       | $                           | 121,831    |                        | $          | 60,480 |   |
|                |       |                        |       |                        |       |
| Audit-Related Fees: |       | $                           | 14,397     |                        | $          | 8,400 |   |
|                |       |                        |       |                        |       |
| Tax Fees:           |       | $                           | 5,475      |                        | $          | — |   |
|                |       |                        |       |                        |       |
| All Other Fees:     |       | $                           | 37,769     |                        | $          | — |   |
|                |       |                        |       |                        |       |
| Total:              |       | $                           | 179,472    |                        | $          | 68,880 |   |

 

*Audit Fees* consist of feesbilled for professional services rendered for the audit of our financialstatements and review of the interim financial statements included in quarterlyreports and services that are normally provided by our independent accountants in connection with statutory and regulatoryfilings or engagements.

*Audit-Related Fees* consist offees billed for assurance and related services that are reasonably related tothe performance of the audit or review of our consolidated financialstatements, including services relating to audits of acquired entities andservices in connection with registration statements which are not reportedunder “Audit Fees.”

*Tax Fees* consists of feesbilled for professional services for tax compliance, tax advice and taxplanning.  These services includeassistance regarding federal and state tax compliance, tax audit defense,customs and duties, and mergers and acquisitions.

*All Other Fees* consist of feesbilled for products and services provided by the principal accountant, otherthan those services described above.

**Audit Committee Pre-Approval Procedures**

OurBoard of Directors serves as our audit committee.  Our Board of Directors approves theengagement of our independent auditors, and meets either telephonically, or inperson, with our independent auditors to approve the annual scope of accountingservices to be performed and the related fee estimates.  It also meets with our independent auditors,on a quarterly basis, following completion of their quarterly reviews andannual audit and prior to our earnings announcements, if any, to review theresults of their work.  During the courseof the year, our chairman has the authority to pre-approve requests forservices that were not approved in the annual pre-approval process.  The chairman reports any interimpre-approvals at the following

56

----

quarterly meeting.  At each of the meetings, management and ourindependent auditors update the Board of Directors with material changes to anyservice engagement and related fee estimates as compared to amounts previouslyapproved.  During the fiscal year endedJune 30, 2006, all audit and non-audit services performed by our independentaccountants were pre-approved by the Board of Directors in accordance with theforegoing procedures.

57

----

**SIGNATURES**

In accordance withSection 13 or 15(d) of the Exchange Act, the registrant caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.
|                          | GEM SOLUTIONS, INC.                                    |
|--------------------------|--------------------------------------------------------|
|                     |                                                   |
|                     |                                                   |
| Date: February 16,  2007 | /s/ John E. Baker                                 |   |
|                     | John E. Baker                                          |
|                     | Chief Executive  Officer and Chief

Financial  Officer |

In accordance with the Exchange Act, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.
| Signature               | ** ** | **Title**                                                                                       | ** ** | **Date**          |
|-------------------------|------------|-------------------------------------------------------------------------------------------------|------------|-------------------|
| ** **              | ** ** | ** **                                                                                      | ** ** | ** **        |
|                    |       |                                                                                            |       |              |
| /s/ John E.  Baker |       | Chief Executive Officer,                                                                        |       | February 16, 2007 |
| John E. Baker           |       | Chief Financial Officer, and Director (Principal  Executive Officer and Principal Financial and |       |              |
|                    |       | Accounting Officer)                                                                             |       |              |

 

58

----

EXHIBIT INDEX
| Exhibit Number | ** ** | **Description**                                                                                                                                                                    |
|----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |       |                                                                                                                                                                               |
| 21             |       | Subsidiaries of the Company                                                                                                                                                        |
|           |       |                                                                                                                                                                               |
| 31.1           |       | Certification of Chief Executive Officer of the  Company required by Rule 13a-14(a) under the Securities Exchange Act of 1934,  as amended                                         |
|           |       |                                                                                                                                                                               |
| 31.2           |       | Certification of Chief Financial Officer of the  Company required by Rule 13a-14(a) under the Securities Exchange Act of 1934,  as amended                                         |
|           |       |                                                                                                                                                                               |
| 32.1           |       | Certification of Chief Executive Officer and Chief  Financial Officer of the Company to 18 USC Section 1350, as Adopted Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

----

**STELLAR TECHNOLOGIES, INC.**

TABLE OF CONTENTS
| Item 1. Financial Statements  as of and for the Year Ended June 30, 2005 and 2006. |                                                                      |
|------------------------------------------------------------------------------------|---------------------------------------------------------------------------|
|                                                                               |                                                                      |   |
|                                                                               | Report of Independent Registered Public Accounting  Firm                  | F-2 |
|                                                                               |                                                                      |   |
|                                                                               | Consolidated Balance Sheet                                                | F-3 |
|                                                                               |                                                                      |   |
|                                                                               | Consolidated Statements of Operations                                     | F-4 |
|                                                                               |                                                                      |   |
|                                                                               | Consolidated Statement of Changes in Stockholders’  Equity (Deficit) | F-5 |
|                                                                               |                                                                      |   |
|                                                                               | Consolidated Statements of Cash Flows                                     | F-6 |
|                                                                               |                                                                      |   |
|                                                                               | Notes to Consolidated Financial Statements                                | F-7 |

 

F-1

----

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM

To the Board of Directorsof

GeM Solutions, Inc. (formerly known as Stellar Technologies, Inc.)

Naples, Florida

 

We have audited theaccompanying consolidated balance sheets of GeM Solutions, Inc. andsubsidiaries (“GeM”) as of June 30, 2006 and 2005, and the related consolidatedstatements of operations, stockholders’ equity, and cash flows for the yearsthen ended. These financial statements are the responsibility of GeM’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of GeM as of June 30, 2006 and2005, and the results of its operations and its cash flows for the years thenended in conformity with accounting principles generally accepted in the UnitedStates of America.

The accompanyingconsolidated financial statements have been prepared assuming that GeM willcontinue as a going concern. As shown in the financial statements, GeM hassuffered recurring losses from operations and has negative working capital atJune 30, 2006. These factors and others raise substantial doubt about GeM’sability to continue as a going concern. Management’s plans in regard to thosematters are described in Note 4 to the financial statements. The consolidatedfinancial statements do not include any adjustments relating to therecoverability and classification of recorded assets, or to the amounts andclassification of liabilities that might be necessary in the event GeM cannotcontinue in existence.

As described in Note 3,the audited financial statements as of and for the years ended June 30, 2006and 2005, have been restated.
| /s/ MALONE & BAILEY, PC                                       |
|-------------------------------------------------------------------|
| www.malone-bailey.com                                             |
| Houston, Texas                                                    |
|                                                              |
| October 6, 2006                                                   |
|                                                              |
| (Except for Note 3 for which the date is February 15,  2007) |

F-2

----

**GeM SOLUTIONS, INC.**

***(Formerly Stellar Technologies, Inc.)***

ConsolidatedBalance Sheets
| ** **                                                                                                                                       | ** ** | **June 30,   2006  (Restated)** | ** ** | **June 30,   2005  (Restated)** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ASSETS                                                                                                                                           |       |                                      |       |                                      |       |
| Current assets                                                                                                                                   |       |                                      |       |                                      |       |
| Cash and cash  equivalents                                                                                                                       |       | $                                         | 584,609    |                                      | $          | 1,024,023 |   |
| Accounts receivable,  net of allowance for doubtful accounts of $43,750 and $18,750 in 2006 and  2005, respectively                              |       | 173,495                                   |       | 275,387                                   |       |
| Debt issuance costs                                                                                                                              |       | —                                    |       | 39,500                                    |       |
| Prepaid expenses and  other assets                                                                                                               |       | 35,842                                    |       | 68,146                                    |       |
|                                                                                                                                             |       |                                      |       |                                      |       |
| Total current assets                                                                                                                             |       | 793,946                                   |       | 1,407,056                                 |       |
|                                                                                                                                             |       |                                      |       |                                      |       |
| Property and equipment,  net                                                                                                                     |       | 136,034                                   |       | 98,155                                    |       |
| Investment using the  cost method                                                                                                                |       | 100,000                                   |       | 400,000                                   |       |
| Goodwill                                                                                                                                         |       | 863,907                                   |       | 863,907                                   |       |
| Intangible assets                                                                                                                                |       | 275,848                                   |       | 405,241                                   |       |
| Other assets                                                                                                                                     |       | 15,133                                    |       | 12,320                                    |       |
|                                                                                                                                             |       |                                      |       |                                      |       |
| Total assets                                                                                                                                     |       | $                                         | 2,184,868  |                                      | $          | 3,186,679 |   |
|                                                                                                                                             |       |                                      |       |                                      |       |
|                                                                                                                                             |       |                                      |       |                                      |       |
| LIABILITIES AND  STOCKHOLDERS’ DEFICIT                                                                                                      |       |                                      |       |                                      |       |
| Current liabilities                                                                                                                              |       |                                      |       |                                      |       |
| Accounts payable and  accrued expenses                                                                                                           |       | $                                         | 792,153    |                                      | $          | 451,001 |   |
| Current portion of  capital lease obligations                                                                                                    |       | 1,580                                     |       | 4,652                                     |       |
| Convertible note  payable                                                                                                                        |       | 1,600,000                                 |       | 659,642                                   |       |
| Deposits                                                                                                                                         |       | 138,000                                   |       | —                                    |       |
| Derivative liabilities                                                                                                                           |       | —                                    |       | 724,738                                   |       |
| Deferred revenues                                                                                                                                |       | 239,898                                   |       | 323,476                                   |       |
|                                                                                                                                             |       |                                      |       |                                      |       |
| Total current  liabilities                                                                                                                       |       | 2,771,631                                 |       | 2,163,509                                 |       |
| Deferred revenues                                                                                                                                |       | 30,863                                    |       | 74,902                                    |       |
| Capital lease  obligations, net of current portion                                                                                               |       | —                                    |       | 1,951                                     |       |
| Total liabilities                                                                                                                                |       | 2,802,494                                 |       | 2,240,362                                 |       |
|                                                                                                                                             |       |                                      |       |                                      |       |
| Stockholders’ Equity  (Deficit)                                                                                                             |       |                                      |       |                                      |       |
| Preferred stock, Series  B, $0.001 per share par value; 10,000,000 shares authorized; 127,206 and 0  shares issued and outstanding, respectively |       | 127                                       |       | —                                    |       |
| Common stock, $0.001  per share par value; 100,000,000 shares authorized; 29,190,969 and 26,479,136  shares issued and outstanding, respectively |       | 29,191                                    |       | 26,479                                    |       |
| Additional paid-in  capital                                                                                                                      |       | 11,529,521                                |       | 8,018,750                                 |       |
| Accumulated other comprehensive  loss                                                                                                            |       | (1,883                                    | )          | —                                    |       |
| Accumulated deficit                                                                                                                              |       | (12,174,582                               | )          | (7,098,912                                | )          |
|                                                                                                                                             |       |                                      |       |                                      |       |
| Total stockholders’  equity (deficit)                                                                                                       |       | (617,626                                  | )          | 946,317                                   |       |
|                                                                                                                                             |       |                                      |       |                                      |       |
| Total  liabilities and stockholders’ equity (deficit)                                                                                       |       | $                                         | 2,184,868  |                                      | $          | 3,186,679 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements

F-3

----

**GeM SOLUTIONS, INC.**

***(Formerly Stellar Technologies, Inc.)***

ConsolidatedStatements of Operations

 
| ** **                                                         | ** ** | **Year Ended  June 30, 2006  (Restated)** | ** ** | **Year Ended  June 30, 2005  (Restated)** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
|                                                               |       |                                                     |       |                                                     |       |
| Revenues                                                           |       | $                                                        | 870,964    |                                                     | $          | 882,805 |   |
|                                                               |       |                                                     |       |                                                     |       |
| Expenses                                                           |       |                                                     |       |                                                     |       |
| Salaries and wages                                                 |       | 1,711,397                                                |       | 1,440,542                                                |       |
| Professional fees                                                  |       | 873,735                                                  |       | 1,318,309                                                |       |
| Other general and  administrative                                  |       | 1,307,172                                                |       | 1,300,322                                                |       |
| Research, development  and product support                         |       | 763,426                                                  |       | 193,853                                                  |       |
| Depreciation and  amortization expense                             |       | 175,337                                                  |       | 164,401                                                  |       |
|                                                               |       |                                                     |       |                                                     |       |
| Total expenses                                                     |       | 4,831,067                                                |       | 4,417,427                                                |       |
|                                                               |       |                                                     |       |                                                     |       |
| Loss from operations                                               |       | (3,960,103                                               | )          | (3,534,622                                               | )          |
|                                                               |       |                                                     |       |                                                     |       |
| Other income (expense)                                             |       |                                                     |       |                                                     |       |
| Loss on  impairment of investment                                  |       | (300,000                                                 | )          | —                                                   |       |
| Gain on  derivative liability                                      |       | 471,721                                                  |       | 7,424,852                                                |       |
| Interest income                                                    |       | 17,808                                                   |       | 12,430                                                   |       |
| Interest expense                                                   |       | (1,305,096                                               | )          | (316,201                                                 | )          |
|                                                               |       |                                                     |       |                                                     |       |
| Total other income  (expense)                                      |       | (1,115,567                                               | )          | 7,121,081                                                |       |
|                                                               |       |                                                     |       |                                                     |       |
| Net income (loss)                                                  |       | (5,075,670                                               | )          | 3,586,459                                                |       |
|                                                               |       |                                                     |       |                                                     |       |
| Deemed dividend —  beneficial conversion feature              |       | (836,670                                                 | )          | —                                                   |       |
| Cumulative convertible  preferred stock dividend requirements |       | (22,359                                                  | )          | —                                                   |       |
|                                                               |       |                                                     |       |                                                     |       |
| Net income (loss)  available to common stockholders                |       | $                                                        | (5,934,699 | )                                                        | $          | 3,586,459 |   |
|                                                               |       |                                                     |       |                                                     |       |
| Basic and diluted  income (loss) per common share                  |       | $                                                        | (0.22      | )                                                        | $          | 0.14 |   |
|                                                               |       |                                                     |       |                                                     |       |
| Basic and diluted  weighted average common shares outstanding      |       | 26,766,795                                               |       | 26,392,136                                               |       |

 

The accompanying notes are an integral part of theseconsolidated financial statements

F-4

----

**GeM SOLUTIONS, INC.**

***(Formerly Stellar Technologies, Inc.)***

 Consolidated Statement of Changes inStockholders’ Equity (Deficit)

For the Years Ended June30, 2005 and June 30, 2006

 
| ** **                                                                                              | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | ** **     | ** **     | ** ** | ** ** | **Accumulated  Other**     | ** ** | ** **               | ** **     | ** **                      | ** **   |
|---------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|----------------|----------------|------------|------------|----------------------------|------------|--------------------------|----------------|---------------------------------|--------------|
| ** **                                                                                              | ** ** | **Shares**               | ** ** | **Amount**            | ** ** | **Shares**     | ** **     | **Amount** | ** ** | **Paid-in   Capital** | ** ** | **Deferred   Comp** | ** **     | **Comprehensive   Income** | ** **   | **Accumulated   Deficit** | ** ** | **Total** | ** ** |
| **Balance at June 30, 2004**                                                                            | ** ** | ** **               | ** ** | ** **            | ** ** | **25,759,558** | ** **     | **$**      | **25,760** | ** **                 | **$**      | **7,530,246**            | ** **     | **$**                           | **(725,346** | **)** | **$** | **—** | ** ** | **$** | **(11,510,321** | **)** | **$** | **(4,679,661** | **)** |
| Prior period adjustment  reclassify BCF to paid-in-capital                                              |       |                     |       |                  |       |           |           |       |       | (824,950                   | )          |                     |           | —                          |         | 824,950 |   | — |   |
|                                                                                                    |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           |                            |         |   |   |   |   |
| Shares issued for  CompuSven acquisition                                                                |       |                     |       |                  |       | 43,353         |           | 43         |       | 149,957                    |       |                     |           |                            |         | — |   | 150,000 |   |
|                                                                                                    |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           |                            |         |   |   |   |   |
| Conversion of  convertible notes                                                                        |       |                     |       |                  |       | 601,155        |           | 601        |       | 1,502,287                  |       |                     |           |                            |         |   |   | 1,502,888 |   |
|                                                                                                    |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           |                            |         |   |   |   |   |
| Reclassification of  unamortized debt discount to equity on note converted to common stock              |       |                     |       |                  |       |           |           |       |       | (1,500,000                 | )          |                     |           |                            |         |   |   | (1,500,000 | ) |
|                                                                                                    |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           |                            |         |   |   |   |   |
| Exercised warrants                                                                                      |       |                     |       |                  |       | 22,500         |           | 23         |       | (23                        | )          |                     |           | —                          |         | — |   |   |   |
|                                                                                                    |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           |                            |         |   |   |   |   |
| Exercise Coleman Option                                                                                 |       |                     |       |                  |       | 12,570         |           | 12         |       | 29,988                     |       |                     |           |                            |         |   |   | 30,000 |   |
|                                                                                                    |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           |                            |         |   |   |   |   |
| Fair value adjustment  from elimination of derivatives—embedded conversion option                  |       |                     |       |                  |       | —         |           | —     |       | 924,846                    |       |                     |           |                            |         |   |   | 924,846 |   |
|                                                                                                    |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           |                            |         |   |   |   |   |
| Fair value adjustment  from elimination of derivatives—warrants                                    |       |                     |       |                  |       |           |           |       |       | 109,846                    |       |                     |           |                            |         |   |   | 109,846 |   |
|                                                                                                    |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           |                            |         |   |   |   |   |
| Modification of options                                                                                 |       |                     |       |                  |       |           |           | —     |       | 72,513                     |       |                     |           | —                          |         | — |   | 72,513 |   |
|                                                                                                    |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           |                            |         |   |   |   |   |
| Amortization of warrants  issued for advisory services                                                  |       |                     |       |                  |       | —         |           | —     |       |                       |       | 725,346                  |           | —                          |         | — |   | 725,346 |   |
|                                                                                                    |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           |                            |         |   |   |   |   |
| Shares issued for  convertible note                                                                     |       |                     |       |                  |       | 40,000         |           | 40         |       | 24,040                     |       |                     |           |                            |         |   |   | 24,080 |   |
|                                                                                                    |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           |                            |         |   |   |   |   |
| Net income                                                                                              |       |                     |       |                  |       | —         |           | —     |       | —                     |       |                     |           |                            |         | 3,586,459 |   | 3,586,459 |   |
|                                                                                                    |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           |                            |         |   |   |   |   |
| **Balance at June 30, 2005  (Restated)**                                                                | ** ** | **—**               | ** ** | **—**            | ** ** | **26,479,136** | ** **     | **$**      | **26,479** | ** **                 | **$**      | **8,018,750**            | ** **     | **$**                           | **—**   | ** ** | **$** | **—** | ** ** | **$** | **(7,098,912** | **)** | **$** | **946,317** | ** ** |
| Shares issued for waiver  of debt covenants                                                             |       | —                   |       |                  |       | 211,833        |           | 212        |       | 92,995                     |       | —                   |           | —                          |         | — |   | 93,207 |   |
|                                                                                                    |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           |                            |         |   |   |   |   |
| Sale of Investment Units                                                                                |       | —                   |       |                  |       | 2,500,000      |           | 2,500      |       | 736,935                    |       |                     |           | —                          |         | — |   | 739,435 |   |
|                                                                                                    |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           |                            |         |   |   |   |   |
| Conversion of note and  accrued interest to Series B Preferred Shares                                   |       | 47,205                   |       | 47                    |       | —         |           | —     |       | 708,008                    |       | —                   |           | —                          |         | — |   | 708,055 |   |
|                                                                                                    |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           |                            |         |   |   |   |   |
| Series B Preferred  Shares issued for cash                                                              |       | 80,001                   |       | 80                    |       | —         |           | —     |       | 1,009,670                  |       | —                   |           |                            |         | — |   | 1,009,750 |   |
|                                                                                                    |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           |                            |         |   |   |   |   |
| Warrants issued in  connection with sale of Series B Preferred Shares                                   |       |                     |       |                  |       |           |           |       |       | 190,250                    |       |                     |           |                            |         |   |   | 190,250 |   |
|                                                                                                    |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           |                            |         |   |   |   |   |
| Discount for BCF on  Preferred Shares                                                                   |       |                     |       |                  |       |           |           |       |       | 836,670                    |       |                     |           |                            |         |   |   | 836,670 |   |
|                                                                                                    |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           |                            |         |   |   |   |   |
| Deemed Dividend on  Preferred Shares                                                                    |       |                     |       |                  |       |           |           |       |       | (836,670                   | )          |                     |           |                            |         |   |   | (836,670 | ) |
|                                                                                                    |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           |                            |         |   |   |   |   |
| Placement fees for  Series B Preferred Stock and related warrants                                       |       |                     |       |                  |       |           |           |       |       | (96,000                    | )          |                     |           |                            |         |   |   | (96,000 | ) |
|                                                                                                    |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           |                            |         |   |   |   |   |
| Warrant expense                                                                                         |       |                     |       | —                |       | —         |           | —     |       | 241,059                    |       | —                   |           |                            |         | — |   | 241,059 |   |
|                                                                                                    |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           |                            |         |   |   |   |   |
| Reclassification of  unamortized debt discount to equity on note converted to Series B Preferred  Stock |       | —                   |       | —                |       | —         |           | —     |       | (724,080                   | )          |                     |           | —                          |         | — |   | (724,080 | ) |
|                                                                                                    |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           |                            |         |   |   |   |   |
| Fair value adjustment from  elimination of derivatives—embedded conversion option                  |       | —                   |       |                  |       | —         |           | —     |       | 535,038                    |       | —                   |           | —                          |         | — |   | 535,038 |   |
|                                                                                                    |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           |                            |         |   |   |   |   |
| Fair value adjustment  from elimination of derivatives—warrants                                    |       | —                   |       | —                |       | —         |           | —     |       | 620,489                    |       | —                   |           | —                          |         | — |   | 620,489 |   |
|                                                                                                    |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           |                            |         |   |   |   |   |
| Warrants issued for note  modification                                                                  |       |                     |       | —                |       | —         |           | —     |       | 196,407                    |       | —                   |           | —                          |         | — |   | 196,407 |   |
|                                                                                                    |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           |                            |         |   |   |   |   |
| Foreign currency  translation                                                                           |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           | (1,883                          | )            |   |   | (1,883 | ) |
|                                                                                                    |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           |                            |         |   |   |   |   |
| Net loss                                                                                                |       |                     |       | —                |       | —         |           | —     |       |                       |       | —                   |           | —                          |         | (5,075,670 | ) | (5,075,670 | ) |
|                                                                                                    |       |                     |       |                  |       |           |           |       |       |                       |       |                     |           |                            |         |   |   |   |   |
| **Balance at June 30, 2006 (Restated)**                                                                 | ** ** | **127,206**              | ** ** | **$**                 | **127**    | ** **     | **29,190,969** | ** ** | **$**      | **29,191**                 | ** ** | **$**                    | **11,529,521** | ** **                      | **$**        | **—** | ** ** | **$** | **(1,883** | **)** | **$** | **(12,174,582** | **)** | **$** | **(617,626** | **)** |
|                                                                                                         |            |                          |            |                       |            |                |                |            |            |                            |            |                          |                |                                 |              |  |  |  |  |  |  |  |  |  |  |  |

 

Theaccompanying notes are an integral part of these consolidated financialstatements

F-5

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**GeM SOLUTIONS, INC.**

***(Formerly Stellar Technologies, Inc.)***

ConsolidatedStatements of Cash Flows

 
| ** **                                                                        | ** ** | **Year Ended   June 30, 2006** | ** ** | **Year Ended   June 30, 2005   (Restated)** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| Cash flows from  operating activities                                             |       |                                               |       |                                                                 |       |
| Net loss                                                                          |       | $                                                  | (5,075,670 | )                                                                    | $          | 3,586,459 |   |
| Adjustments to  reconcile net income (loss) to net cash                           |       |                                               |       |                                                                 |       |
| Provided by  (used in) operating activities                                       |       |                                               |       |                                                                 |       |
| Depreciation and  amortization                                                    |       | 175,337                                            |       | 164,401                                                              |       |
| Amortization of  deferred advisory services                                       |       | —                                             |       | 725,346                                                              |       |
| Amortization of  debt discount                                                    |       | 916,278                                            |       | 153,868                                                              |       |
| Amortization of  debt issuance costs                                              |       | 39,500                                             |       | 141,502                                                              |       |
| Share based  compensation                                                         |       | 530,673                                            |       | 72,513                                                               |       |
| Bad debts                                                                         |       | 13,931                                             |       | 27,000                                                               |       |
| Impairment of  investment                                                         |       | 300,000                                            |       | —                                                               |       |
| Gain on sale of  property and equipment                                           |       | —                                             |       | (2,966                                                               | )          |
| Derivative gain                                                                   |       | (471,721                                           | )          | (7,424,852                                                           | )          |
| Changes in  assets and liabilities                                                |       |                                               |       |                                                                 |       |
| Decrease  (increase) in accounts receivable                                       |       | 87,961                                             |       | (81,388                                                              | )          |
| Decrease  (increase) in other current assets                                      |       | 32,303                                             |       | (94,830                                                              | )          |
| Increase in  other assets                                                         |       | (2,813                                             | )          | (12,320                                                              | )          |
| Increase in  accounts payable                                                     |       | 341,153                                            |       | 36,374                                                               |       |
| Increase  (decrease) in deferred revenues                                         |       | (127,617                                           | )          | 62,475                                                               |       |
| Increase in  deposits                                                             |       | 138,000                                            |       | —                                                               |       |
| Net cash used in  operating activities                                            |       | (3,102,685                                         | )          | (2,646,418                                                           | )          |
|                                                                              |       |                                               |       |                                                                 |       |
| Cash flows provided by  (used in) investing activities                            |       |                                               |       |                                                                 |       |
| Purchase of  property and equipment                                               |       | (83,823                                            | )          | (64,164                                                              | )          |
| Proceeds from  sale of property and equipment                                     |       | —                                             |       | 12,500                                                               |       |
| Acquisition of  CompuSven, net of cash acquired                                   |       | —                                             |       | (864,540                                                             | )          |
| Net cash used in  investing activities                                            |       | (83,823                                            | )          | (916,204                                                             | )          |
|                                                                              |       |                                               |       |                                                                 |       |
| Cash flows from  financing activities                                             |       |                                               |       |                                                                 |       |
| Principal  payments on capital                                                    |       |                                               |       |                                                                 |       |
| leases and  short-term obligations                                                |       | (5,023                                             | )          | (64,037                                                              | )          |
| Proceeds from  sales of preferred stock and warrants, net of offering costs       |       | 1,104,000                                          |       | —                                                               |       |
| Proceeds from  sales of common stock                                              |       | 950,000                                            |       | 30,000                                                               |       |
| Proceeds from  issuance of convertible notes                                      |       | 700,000                                            |       | 1,584,000                                                            |       |
| Net cash provided by  financing activities                                        |       | 2,748,977                                          |       | 1,549,963                                                            |       |
| Effect of exchange rate  changes on cash                                          |       | (1,883                                             | )          | —                                                               |       |
|                                                                              |       |                                               |       |                                                                 |       |
| Net increase (decrease)  in cash                                                  |       | (439,414                                           | )          | (2,012,659                                                           | )          |
| Cash and cash  equivalents, beginning of period                                   |       | 1,024,023                                          |       | 3,036,682                                                            |       |
| Cash and cash  equivalents, end of period                                         |       | $                                                  | 584,609    |                                                                 | $          | 1,024,023 |   |
|                                                                              |       |                                               |       |                                                                 |       |
| Supplemental disclosure  of cash flow information:                                |       |                                               |       |                                                                 |       |
| Interest paid                                                                     |       | $                                                  | 187,871    |                                                                 | $          | 31,562 |   |
| Income taxes                                                                      |       | $                                                  | —     |                                                                 | $          | — |   |
| Non-cash Investing and  Financing Activities:                                     |       |                                               |       |                                                                 |       |
| Exchange of  convertible note payable to Series B Preferred Stock                 |       | $                                                  | 708,055    |                                                                 | $          | — |   |
| Conversion of  convertible notes into common stock                                |       | $                                                  | —     |                                                                 | $          | 1,502,287 |   |
| Fair value of  derivatives transferred to equity—embedded conversion feature |       | $                                                  | 535,038    |                                                                 | $          | 924,846 |   |
| Fair value of  derivatives transferred to equity—warrants                    |       | $                                                  | 596,409    |                                                                 | $          | 109,846 |   |
| Reclassification of  unamortized debt discount to equity                          |       | $                                                  | 724,080    |                                                                 | $          | 1,500,000 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements

F-6

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**GeM SOLUTIONS, INC.**

***(Formerly Stellar Technologies, Inc.)***

Notes to Consolidated Financial Statements

NOTE 1 — DESCRIPTIONOF BUSINESS

Nature ofOperations

GeM Solutions, Inc. andsubsidiaries (collectively, “GeM”) provide Employee Internet Management (“EIM”)products and services that enable businesses to monitor, report, and manage howtheir employees use the Internet. GeM’s products and services give managers theability to implement Internet access policies for different users and groupswithin their businesses, and support their efforts to improve employeeproductivity, conserve network bandwidth, and mitigate potential legalliability. GeM’s products also provide customers the ability to filter, block,archive and retrieve electronic communications.

GeM is also engaged inthe development and selling of “E-Mail Shuttle,” migration softwarespecifically designed to migrate, upgrade and provide coexistence andsynchronization of data for its customers’ e-mail data. GeM also providesproduct support and maintenance for its software and consulting services forthe installation of its products.

History

The Company, formerlyInternational Travel CD’s, Inc. (“ILCD”), was formed on July 20, 2000, as aColorado corporation. In January 2004, the Company consummated an agreement andplan of merger with Stellar Venture Partners, LLC (“Stellar LLC”). Inconnection with the merger, the Company changed its name to StellarTechnologies, Inc. (“Stellar”).

Stellar LLC was formed asa limited liability company under the laws of the state of Georgia on March 13,2000. On July 14, 2004, Stellar purchased 100% of the common stock of CompuSven,Inc. (“CompuSven”) to obtain the E-Mail migration line of business and thesystems design and development knowledge to assist Stellar in the design anddevelopment of its internet management monitoring and reporting systems. OnNovember 21, 2005, Stellar formed a Canadian subsidiary, GeM Solutions(Canada), Inc. (“GeM Canada”), formerly STI Management Services LTD., for thepurpose of conducting the operations of Stellar in Canada including, but notlimited to sales, marketing, and development, as well as employee functionsrelated to Canadian employees.

In October 2006, Stellarobtained shareholder approval to reincorporate from Colorado to Delaware,change its name from Stellar Technologies, Inc. to GeM Solutions, Inc., andincrease its authorized shares of common stock to 175,000,000.

NOTE 2 —SIGNIFICANT ACCOUNTING POLICIES

Basis ofPresentation

The accompanyingfinancial statements have been prepared on the accrual basis of accounting inaccordance with accounting principles generally accepted in the United Statesof America.

Principles ofConsolidation

The accompanyingfinancial statements have been presented on a consolidated basis and includeall the accounts of GeM, CompuSven (see Note 5) and GeM Canada. GeM Canada is awholly-owned Canadian subsidiary.

Consolidation

Affiliate entities inwhich GeM directly or indirectly owns more than 50% of the outstanding, votinginterest are accounted for under the consolidation method of accounting. Underthis method, an investee company’s results of operations are reflected withinGeM’s consolidated statement of operations. All significant intercompanyaccounts and transactions have been eliminated in consolidation.

Reclassifications

Certain amountshave been reclassified from the previous year to conform to the 2006presentation with no effect on reported earnings (loss).

F-7

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InvestmentAccounted for under the Cost Method

Entities in which GeMdirectly or indirectly owns less than 20% of the outstanding voting interestare accounted for under the cost method of accounting. Under this method,income received from investees is reflected within GeM’s consolidated statementof operations as investment income or loss unless the amount of the dividendsexceeds GeM’s proportionate share of the affiliates’ income. In that case, theexcess amount would be considered a return of capital and be recorded as areduction of the investment. GeM periodically reviews, at least annually, itsinvestments for impairment.

Use of Estimates

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amount of assets and liabilities and disclosures of contingentassets and liabilities at the date of financial statements and the reportedamounts of increases and decreases in net assets from operations during thereporting period. Actual results could differ from these estimates.

Cash and CashEquivalents

Cash and cash equivalentsinclude cash on hand and investments in money market funds. GeM considers allhighly-liquid instruments with an original maturity of 90 days or less at thetime of purchase to be cash equivalents.

Goodwill andAcquired Intangibles

GeM accounts for goodwilland acquired intangible assets in accordance with SFAS No. 142, “Goodwill andOther Intangible Assets” (“SFAS 142”). Accordingly, goodwill arising from theacquisition of investments is not amortized, but is reviewed annually forimpairment. GeM has elected to perform its annual goodwill impairment test asof June 30, 2006. Other intangibles are amortized over their useful life on astraight-line basis.

Impairment ofLong-Lived Assets

In accordance withStatement of Financial Accounting Standards No. 144 “Accounting for theImpairment or Disposal of Long-Lived Assets”, GeM reviews the carrying value ofits long-lived assets annually or whenever events or changes in circumstancesindicate that the historical cost-carrying value of an asset may no longer beappropriate. GeM assesses recoverability of the carrying value of theasset by estimating the future net cash flows expected to result from theasset, including eventual disposition.  If the future net cash flows areless than the carrying value of the asset, an impairment lossis recorded equal to the difference between the asset’s carrying value and fairvalue.

Federal IncomeTaxes

Income taxes are recordedin the period in which the related transactions are recognized in the financialstatements, net of any valuation allowances recorded against deferred taxassets, if GeM estimates that it is more likely than not that it will be unableto utilize those deferred tax benefits in future periods. Deferred tax assetsand liabilities are recorded for the expected future tax consequences oftemporary differences between the tax basis and the financial reporting basisof assets and liabilities.

Credit Risk

Financial instrumentsthat potentially subject GeM to concentrations of credit risk consistprincipally of cash deposits at financial institutions and trade receivables.To mitigate these risks, GeM provides credit in the normal course of businessand performs ongoing credit reviews of its customers while maintaining aprovision for credit losses. Also, GeM places its cash deposits only with highcredit quality institutions. At various times during the year, GeM may exceedthe federally insured limits. Management believes the risk of loss of cashplaced in these institutions is remote.

Fair Value ofFinancial Instruments

The carrying amountsreflected in the consolidated balance sheet for cash and equivalents,short-term receivables and short-term payables approximate their fair value dueto the short maturity of the instruments.

Issuance of Sharesfor Services

Stock compensationexpense for stock and warrants granted to non-employees is determined inaccordance with Emerging Issues Task Force consensus in Issue No. 96-18,Accounting for Equity Instruments that are Issued to Other than Employees forAcquiring, or in Conjunction with Selling Goods or Services (EITF 96-18).

F-8

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Foreign CurrencyTransactions

In accordance withStatement of Financial Accounting Standard (“SFAS”) No. 52 (as amended), “ForeignCurrency Translation, the recorded balances that are required to be paid inforeign currencies at June 30, 2006 are adjusted to reflect the exchange rateat the balance sheet date.

DerivativeFinancial Instruments

GeM does not usederivative instruments to hedge exposures to cash flow, market or foreigncurrency risks. GeM has periodically entered into financing and equityinstruments with certain provisions containing imbedded conversion featuresrequired to be accounted for under SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities,” and EITF 00-19.

Derivative financialinstruments are initially measured at their fair value. For derivativefinancial instruments that are accounted for as liabilities, the derivativeinstrument is initially recorded at it fair value and is then re-valued at eachreporting date, with changes in the fair value reported as charges or creditsto income. For option-based derivative financial instruments, GeM uses theCox-Ross-Rubenstein binomial option-pricing model (which produces resultssubstantially the same as the Black-Scholes model) to value the derivative instruments.

The classification ofderivative instruments, including whether such instruments should be recordedas liabilities or as equity, is reassessed at the end of each reporting period.Derivative instrument liabilities are classified in the balance sheet ascurrent or non-current based on whether or not net-cash settlement of thederivative instrument could be required within 12 months of the balance sheetdate.

SFAS No. 133, as amended,requires all derivatives to be recorded at each balance sheet at fair marketvalue. These derivatives, including embedded derivatives in GeM’s structuredborrowings, are separately valued and accounted for on GeM’s balance sheet.Fair values for exchange-traded securities and derivatives are based on quotedmarket prices. Where market prices are not readily available, fair values aredetermined using market based pricing models incorporating readily observablemarket data and requiring judgment and estimates.

With the assistance of avaluation consultant, GeM determines fair values of its derivatives using theCox-Ross-Rubinstein binomial pricing model (which produces resultssubstantially the same as the Black-Scholes model). This model is a series ofExcel spreadsheets that calculate and summarize the accounting for the freestandingand embedded derivative instruments associated with various debt instrumentsand related warrants issued by Stellar. The model uses market-sourced inputssuch as interest rates and option volatilities. Selection of these inputsinvolves management’s judgment and such estimates may impact net income.

The historic volatilityof GeM’s common stock is considered a good estimate of the volatility to beexpected over the (future) life of the conversion options and warrants. GeMuses, as a risk free interest rate, the U.S. Treasury bill “constant maturities”rates published by the Federal Reserve for a security with a maturity thatapproximates the estimated life of the derivative or security. GeM uses theclosing market price of GeM’s common stock on the date of issuance of aderivative or at the end of a quarter when a derivative is valued at fairvalue. The volatility factor in Cox-Ross- Rubinstein has a significant effecton the resulting valuation of the derivative liabilities on GeM’s balancesheet. The volatility used was 80%. GeM’s volatility rate will likely change inthe future. To the extent that GeM’s stock price increases or decreases, GeM’sderivative liability will also increase or decrease, absent any change involatility rates.

In September 2000, theEmerging Issues Task Force (“EITF”) issued EITF 00-19, “Accounting forDerivative Financial Instruments Indexed to and Potentially Settled in, aCompany’s Own Stock,” (“EITF 00-19”) which requires freestanding contracts thatare settled in a company’s own stock, including common stock warrants, to bedesignated as an equity instrument, asset or liability. Under the provisions ofEITF 00-19, a contract designated as an asset or liability must be carried atfair value on the balance sheet, with any changes in fair value recorded toresults of operations. A contract designated as an equity instrument must beincluded within equity, and no fair value adjustments are required from periodto period. In accordance with EITF 00-19, certain of GeM’s warrants to purchasecommon stock and the embedded conversion feature of several of its financialinstruments are accounted for as liabilities. The fair value of these warrantsand conversion features are shown on GeM’s balance sheet and the unrealizedchanges in the values of these derivatives are shown in GeM’s consolidatedstatement of operations as “gain (loss) on derivative liabilities.” During thefourth quarter of 2006, GeM obtained modifications from the holders of certainfinancial instruments that eliminated the derivative 

F-9

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liability classificationand, accordingly, eliminated GeM’s derivative liabilities.

The EITF recently issuedan exposure draft, EITF 06-07*Issuer’sAccounting for a Previously Bifurcated Conversion Option in a Convertible DebtInstrument When the Conversion Option No Longer Meets the Bifurcation Criteriain FASB Statement No. 133, Accounting for Derivative Instruments and HedgingActivities.*  The EITF has notreached a consensus on this issue and has deferred deliberation until the FASBaddresses certain questions which could impact a conclusion on this issue.Specifically, EITF 06-07 presents alternative views on how an entity shouldrecognize the change in the derivative liability when a previously bifurcatedconversion option is no longer required to be bifurcated pursuant to FAS 133.GeM had embedded conversion options that initially required separate accountingas a derivative under FAS 133 that no longer met the conditions for separateaccounting as a derivative at June 30, 2006 due to the amendment of the relatedinstrument (see Note 10). It has chosen to adopt View A of EITF 06-07, whichrequires that the carrying value of the liability for the conversion option bereclassified to shareholder’s equity. The debt discount recorded at issuancewill continue to be amortized over the remaining term of the instrument. If theEITF were to adopt a different view, GeM may have to change its policy andfollow the EITF view.

RevenueRecognition

Revenue from the sale ofmigration software is recognized at the time the software is released to thecustomer. Revenue for consulting services is recognized as the service isperformed. Revenue for product support or maintenance is recognized ratablyover the life of the support or maintenance agreement. Accounts receivablerepresent the balances due from customers for products released and consultingservices performed, as well as the full value of any support or maintenanceagreements. As a result of billing support or maintenance agreement paymentsreceived in advance of services being performed, GeM has established a deferredincome account representing amounts billed but not earned. Management estimatesthat such deferred revenues are fully collectible. Bad debts are charged tooperations in the year in which the account is determined to be uncollectible.

Revenue from the sale ofmonitoring services is recognized ratably over the life of the monitoringservice agreement. Accounts receivable represent balances due from customersfor all billed but not collected Internet monitoring service agreements signedby the customer. As a result of billing monitoring service agreements inadvance of services performed, GeM has established a deferred income accountrepresenting amounts billed but not earned. Bad debts are charged to operationsin the year in which the account is determined to be uncollectible.

AccountsReceivable

GeM uses the allowancemethod of accounting for doubtful accounts. The year-end balance is based onhistorical collections and management’s review of the current status ofexisting receivables and estimate as to their collectibility. GeM does notrequire collateral on its receivables.

Advertising Costs

GeM charges costsof advertising to expense as incurred. Advertising costs were $223,439 and$171,287 for the years ended June 30, 2006 and 2005, respectively.

Property andEquipment

Property and equipment isrecorded at cost, less accumulated depreciation and is depreciated using thestraight-line method over the estimated useful life of the asset, which rangesfrom three to seven years.

Earnings (Loss)Per Share

Earnings (loss) percommon share is calculated in accordance with SFAS No. 128, “Earnings PerShare.” Basic loss per common share is computed based upon the weighted averagenumber of shares of common stock outstanding for the period and excludes anypotential dilution. Shares associated with stock options, warrants andconvertible debt are not included because their inclusion would be antidilutive(i.e., reduce the net loss per share). The per share calculations take intoeffect all stock dividends, stock splits, recapitalizations and reverse stocksplits.

The total numbersof such shares excluded from diluted net loss per common share were 20,846,467and 4,804,250 at June 30, 2006 and 2005, respectively.

Recent AccountingPronouncements

In December 2004, theFASB issued SFAS No.123R, “Accounting for Stock-Based Compensation”. SFASNo.123R establishes standards for transactions in which an entity exchanges itsequity instruments for goods or services. This Statement focuses primarily onaccounting for transactions in which an entity obtains employee services inshare-based payment transactions. SFAS No.123R requires that the fair value ofsuch equity instruments be recognized as expense in the historical financialstatements as services are performed. Prior to SFAS No.123R, only certain proforma disclosures of fair value were required. SFAS No.123R became effectivefor small business issuers as of the beginning of the first interim or annualreporting period that began after December 15, 2005. Since January 1, 2006, GeMhas recorded the fair value of transactions in which it obtains employeeservices in share-based payment transactions as expenses in the periods inwhich they occurred.

F-10

----

GeM does not expect theadoption of any other recently issued accounting pronouncements to have asignificant impact on GeM’s results of operations, financial position or cashflow.

Stock-BasedCompensation

In December 2005, GeMgranted options to its officers and nine of its existing employees. In May,2005, GeM granted stock options to an employee. In February, 2004, GeM grantedoptions to its new President as part of his employment agreement and to five ofits existing employees. Prior to January 1, 2006, GeM accounted for employeestock options under the recognition and measurement principles of AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued toEmployees,” and related interpretations. Consequently, no stock-based employeecompensation cost was included in net loss, as all the options granted had anexercise price equal to the market value of the stock on the date of grant.

Effective January 1,2006, GeM adopted the fair value recognition provisions of FASB Statement No. 123R,*Share-Based Payment*, and relatedinterpretations (“SFAS No. 123R”), using the modified-prospectivetransition method. Under that method, compensation cost recognized in the firstquarter of 2006 includes (a) compensation cost for all share-based paymentsgranted prior to, but not yet vested as of December 31, 2005, based on thegrant date fair value estimated in accordance with the original provisions ofSFAS No. 123 and (b) compensation cost for all share-based paymentsgranted on or subsequent to January 1, 2006, based on the grant-date fair valueestimated in accordance with the provisions of SFAS No. 123R. Compensationcost is being recognized on a straight-line basis over the requisite serviceperiod for the entire award in accordance with the provisions of SFASNo. 123R. Results for the prior periods have not been restated.

The following tableillustrates the effect on net loss and earnings per share if GeM had appliedthe fair value recognition provisions of SFAS No. 123R to stock-based compensationduring the years ended June 30, 2006 and 2005:

|                                                                                                                                                 | ** ** | **Year Ended   June 30, 2006  (Restated)** | ** ** | **Year Ended   June 30, 2005   (Restated)** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
|                                                                                                                                            |       |                                                           |       |                                                                 |       |
| Net loss to  common stockholders, as reported                                                                                                   |       | $                                                              | (5,934,699 | )                                                                    | $          | 3,586,459 |   |
|                                                                                                                                            |       |                                                           |       |                                                                 |       |
| Add: Stock-based  employee/director compensation included in reported net loss determined under  APB No. 25, net of related tax effects         |       | —                                                         |       | —                                                               |       |
| Deduct: Total  stock-based employee/director compensation expense under the fair value based  method for all awards, net of related tax effects |       | (25,450                                                        | )          | (622,768                                                             | )          |
|                                                                                                                                            |       |                                                           |       |                                                                 |       |
| Pro forma net  loss                                                                                                                             |       | $                                                              | (5,960,149 | )                                                                    | $          | 2,963,691 |   |
|                                                                                                                                            |       |                                                           |       |                                                                 |       |
| Loss per share basic and diluted—as reported                                                                                               |       | $                                                              | (0.22      | )                                                                    | $          | 0.14 |   |
| Loss per share basic and diluted—pro forma                                                                                                 |       | $                                                              | (0.22      | )                                                                    | $          | 0.11 |   |
|                                                                                                                                            |       |                                                           |       |                                                                 |       |
| Shares used in  basic and diluted loss per share                                                                                                |       |                                                           |       |                                                                 |       |
| Amounts                                                                                                                                         |       | 26,766,795                                                     |       | 26,392,136                                                           |       |

 

F-11

----

These pro forma amountsmay not be representative of future disclosures since the estimated fair valueof stock options is amortized to expense over the vesting period and additionaloptions may be issued in future years. The estimated fair value of each optiongranted was calculated using the Black-Scholes option pricing model. Thefollowing summarizes the weighted average of the assumptions used in the model.

|                                | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Risk free rate                 |       | 4.46     | %          | 4.1      | %          |
| Expected years until  exercise |       | 1.8      |       | 1.0      |       |
| Expected stock  volatility     |       | 85       | %          | 88       | %          |
| Dividend yield                 |       | —   |       | —   |       |

 

The weightedaverage grant-date fair value of options granted during 2006 and 2005 was $0.38and $0.59 per share, respectively.

The terms of awardsissued to employees state that awards are forfeited upon termination ofemployment with Stellar. In January 2005, GeM modified the terms of an awardissued to a former employee such that the award continues after termination ofemployment. The award fully vested in 2005. As a result of this modification,GeM recorded expense totaling $72,513 in 2005 representing the fair value ofthe options on the date of modification.

NOTE 3 —RESTATEMENT

GeM has restated its 2006and 2005 unaudited quarterly financial statements and the audited financialstatements for the years ended June 30, 2006 and 2005.

On or about May 10, 2006,GeM concluded it was necessary to restate its financial results for the yearended June 30, 2005 and the 2006 and 2005 quarters to reflect additionalnon-operating gains and losses related to the classification of and accountingfor (1) various warrants issued in 2003, 2004 and 2005, (2) the conversionfeatures of GeM’s $1.6 million convertible note payable issued in April 2005 (“2005Note”), and (3) to reclassify capitalized software costs previously included inproperty and equipment.  GeM hadpreviously classified the value of the conversion features and warrants topurchase common stock as equity, where applicable. After further review, GeMhas determined that these instruments should have been classified as derivativeliabilities and, therefore, the fair value of each instrument should bereflected as derivative liabilities on GeM’s balance sheet. Changes in fairvalue of these instruments are reflected as non-operating gains/losses in GeM’sstatement of operations. At the date of conversion of each respectiveinstrument or portion thereof (or exercise of the warrants or portion thereof,as the case may be), the corresponding derivative liability will bereclassified to equity.

GeM has previouslyrestated the unaudited consolidated financial statements as of and for thethree and nine months ended March 31, 2005 and the three and six months endedDecember 31, 2004 to a) correct the valuation of certain identifiableintangible assets associated with the purchase of CompuSven, b) amortize thedeferred compensation related to non-forfeitable warrants issued to anon-employee under a three-year consulting agreement over thevesting period rather than the term of the consulting agreement, and c) accountfor the modification of terms related to options granted to a former employee.

During the first quarterof fiscal 2007, GeM concluded it was necessary to restate its financial statements for the years ended June 30, 2006and 2005 and its unaudited quarterly financial statements during those fiscalyears to (1) reclassify capitalized software costs previously recorded asproperty and equipment to other assets (intangibles) in accordance with SFAS86, (2) reclassify its 2004 beneficial conversion feature on the Series APreferred Stock previously recorded against accumulated deficit to properlyrecord it to additional paid-in-capital, (3) recognize the $0.001 par value ofits Series B Preferred Shares by reclassifying $1,463,735, the amount in excessof the preferred shares’ par value, to additional paid-in capital, and (4)recognize the beneficial conversion feature related to the issuance of Series BPreferred Stock in the fourth quarter of fiscal 2006.

The following schedulesreflect all adjustments described above to the amounts originally reported byGeM.

F-12

----

The following tablessummarize the restatement adjustments for each of the periods:

 
| ** **                                                    | ** ** | **For the year ended June 30, 2006** | ** ** | **For the year ended June 30, 2005** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **As  Originally  Reported**                                       | ** ** | **Adjustments**                                                    | ** ** | **Restated** | ** ** | **As  Originally  Reported** | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| **Consolidated Statement of  Operations**                     | ** ** | ** **                                                         | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                          |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Revenues                                                      |       | $                                                                  | 870,964    |                                                               | $          | — |   | $ | 870,964 |   | $ | 882,805 |   | $ | — |   | $ | 882,805 |   |
|                                                          |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Expenses                                                      |       | —                                                             |       |                                                               |       |   |   |   |   |   |   |   |   |
| Salaries  and Wages                                           |       | 1,711,397                                                          |       | —                                                             |       | 1,711,397 |   | — |   | 1,440,542 | (c) | 1,440,542 |   |
| Professional  fees                                            |       | 873,735                                                            |       | —                                                             |       | 873,735 |   | 1,985,595 |   | (667,286 | )(a) | 1,318,309 |   |
|                                                          |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Other  general and administrative                             |       | 1,307,172                                                          |       | —                                                             |       | 1,307,172 |   | 2,740,864 |   | (1,440,542 | )(c) | 1,300,322 |   |
|                                                          |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Research,  development and product support                    |       | 763,426                                                            |       | —                                                             |       | 763,426 |   | 193,853 |   | — |   | 193,853 |   |
|                                                          |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Depreciation  and amortization expense                        |       | 175,337                                                            |       | —                                                             |       | 175,337 |   | 164,401 |   | — |   | 164,401 |   |
|                                                          |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Total expenses                                                |       | 4,831,067                                                          |       | —                                                             |       | 4,831,067 |   | 5,084,713 |   | (667,286 | ) | 4,417,427 |   |
|                                                          |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Loss from operations                                          |       | (3,960,103                                                         | )          | —                                                             |       | (3,960,103 | ) | (4,201,908 | ) | 667,286 |   | (3,534,622 | ) |
|                                                          |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Other income (expense)                                        |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Gain  on derivative liability                                 |       | 471,721                                                            |       | —                                                             |       | 471,721 |   | — |   | 7,424,852 | (d) | 7,424,852 |   |
| Impairment  loss on investment                                |       | (300,000                                                           | )          | —                                                             |       | (300,000 | ) | — |   | — |   | — |   |
| Interest  income                                              |       | 17,808                                                             |       | —                                                             |       | 17,808 |   | 12,430 |   | — |   | 12,430 |   |
| Interest  expense                                             |       | (1,305,096                                                         | )          | —                                                             |       | (1,305,096 | ) | (1,837,171 | ) | 1,520,970 | (d) | (316,201 | ) |
|                                                          |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Total other income  (expense)                                 |       | (1,115,567                                                         | )          | —                                                             |       | (1,115,567 | ) | (1,824,741 | ) | 8,945,822 |   | 7,121,081 |   |
|                                                          |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                             |       | $                                                                  | (5,075,670 | )                                                                  | $          | — |   | $ | (5,075,670 | ) | $ | (6,026,649 | ) | $ | 9,613,108 |   | $ | 3,586,459 |   |
|                                                          |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Deemed  dividend—beneficial conversion feature           |       | —                                                             |       | (836,670                                                           | )(b)       | (836,670 | ) | — |   | — |   | — |   |
|                                                          |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Cumulative convertible  preferred stock dividend requirements |       | (22,359                                                            | )          | —                                                             |       | (22,359 | ) | — |   | — |   |   |   |
|                                                          |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net income (loss)  available to common stockholders           |       | $                                                                  | (5,098,029 | )                                                                  | $          | (836,670 | ) | $ | (5,934,699 | ) | $ | (6,026,649 | ) | $ | 9,613,108 |   | 3,586,459 |   |
|                                                          |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic net income (loss)  per common share                     |       | $                                                                  | (0.19      | )                                                                  |       |   | $ | (0.22 | ) | $ | (0.23 | ) |   |   | $ | 0.14 |   |
|                                                          |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Weighted average common shares outstanding—basic         |       | 26,766,795                                                         |       |                                                               |       | 26,766,795 |   | 26,392,136 |   |   |   | 26,392,136 |   |

----

(a)             To reclassifysalaries and wages previously included in other general and administrative

(b)            To recognize thebeneficial conversion feature related to issuance of Series B Preferred shares

(c)             To adjust theamortization of deferred compensation related to non-forfeitable warrantsissued to a non-employee under a three-year consulting agreement

(d)            To record the changein fair value of warrants determined to be derivative liabilities and to adjustthe amortization of interest expense on the $1.6 million convertible notes

F-13

----

The impact of theadjustments to the June 30, 2006 and 2005 balance sheets are summarized below:
| ** **                                                           | ** ** | **For the Year Ended June 30, 2006** | ** ** | **For the Year Ended June 30, 2005** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **As Originally  Reported**                                   | ** ** | **Adjustment**                                                     | ** ** | **Restated** | ** ** | **As Originally  Reported** | ** ** | **Adjustment** | ** ** | **Restated** | ** ** |
|                                                                 |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Current assets                                                       |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Cash                                                                 |       | $                                                                  | 584,609    |                                                               | $          | — |   | $ | 584,609 |   | $ | 1,024,023 |   | $ | — |   | $ | 1,024,023 |   |
| Accounts  receivable, net                                            |       | 173,495                                                            |       | —                                                             |       | 173,495 |   | 275,387 |   | — |   | 275,387 |   |
| Deposits                                                             |       | —                                                             |       | —                                                             |       | — |   | — |   | — |   | — |   |
| Debt issuance  cost, net                                             |       | —                                                             |       | —                                                             |       | — |   | 93,555 |   | (54,055 | )(d) | 39,500 |   |
| Prepaid expenses  and other assets                                   |       | 35,842                                                             |       | —                                                             |       | 35,842 |   | 68,146 |   | — |   | 68,146 |   |
| Total current assets                                                 |       | 793,946                                                            |       | —                                                             |       | 793,946 |   | 1,461,111 |   | — |   | 1,407,056 |   |
|                                                                 |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Property and equipment,  net                                         |       | 312,047                                                            |       | (176,013                                                           | )(a)       | 136,034 |   | 326,881 |   | (228,726 | )(a) | 98,155 |   |
| Investment—cost method                                          |       | 100,000                                                            |       | —                                                             |       | 100,000 |   | 400,000 |   | — |   | 400,000 |   |
| Goodwill                                                             |       | 863,907                                                            |       | —                                                             |       | 863,907 |   | 863,907 |   | — |   | 863,907 |   |
| Intangible assets, net                                               |       | 99,835                                                             |       | 176,013                                                            | (a)        | 275,848 |   | 176,515 |   | 228,726 | (a) | 405,241 |   |
| Other assets                                                         |       | 15,133                                                             |       | —                                                             |       | 15,133 |   | 12,320 |   | — |   | 12,320 |   |
|                                                                 |       | $                                                                  | 2,184,868  |                                                               | $          | — |   | $ | 2,184,868 |   | $ | 3,240,734 |   | $ | (54,055 | ) | $ | 3,186,679 |   |
|                                                                 |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Current liabilities                                                  |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Accounts payable  and accrued expenses                               |       | $                                                                  | 792,153    |                                                               | $          | — |   | $ | 792,153 |   | $ | 451,001 |   | $ | — |   | $ | 451,001 |   |
| Current portion  of obligations under capital leases                 |       | 1,580                                                              |       | —                                                             |       | 1,580 |   | 4,652 |   | — |   | 4,652 |   |
| $1.6 million  convertible notes payable, net of unamortized discount |       | 1,600,000                                                          |       | —                                                             |       | 1,600,000 |   | 1,060,288 |   | (400,646 | )(e) | 659,642 |   |
| Deposits                                                             |       | 138,000                                                            |       | —                                                             |       | 138,000 |   | — |   | — |   | — |   |
| Derivative liabilities                                               |       | —                                                             |       | —                                                             |       | — |   | — |   | 724,738 | (f) | 724,738 |   |
| Deferred revenues                                                    |       | 239,898                                                            |       | —                                                             |       | 239,898 |   | 323,476 |   | — |   | 323,476 |   |
| Total current  liabilities                                           |       | 2,771,631                                                          |       | —                                                             |       | 2,771,631 |   | 1,839,417 |   | 324,092 |   | 2,163,509 |   |
|                                                                 |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Deferred revenues                                                    |       | 30,863                                                             |       | —                                                             |       | 30,863 |   | 74,902 |   | — |   | 74,902 |   |
| Obligations under  capital leases, net of current portion            |       | —                                                             |       | —                                                             |       | — |   | 1,951 |   | — |   | 1,951 |   |
| Total liabilities                                                    |       | 2,802,494                                                          |       | —                                                             |       | 2,802,494 |   | 1,916,270 |   | 324,092 |   | 2,240,362 |   |
|                                                                 |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Stockholders’ equity  (deficit)                                 |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Preferred stock,  $0.001 par value 10,000,000 authorized shares      |       | 1,463,862                                                          |       | (1,463,735                                                         | )(b)       | 127 |   | — |   | — |   | — |   |
| Common stock                                                         |       | 29,191                                                             |       | —                                                             |       | 29,191 |   | 26,480 |   | (1 | ) | 26,479 |   |
| Additional  paid-in capital                                          |       | 10,890,736                                                         |       | 638,785                                                            | (b,c)      | 11,529,521 |   | 13,872,157 |   | (5,853,407 | )(g) | 8,018,750 |   |
| Accumulated other  comprehensive loss                                |       | (1,883                                                             | )          | —                                                             |       | (1,883 | ) | — |   | — |   | — |   |
| Accumulated  deficit                                                 |       | (12,999,532                                                        | )          | 824,950                                                            | (c)        | (12,174,582 | ) | (12,574,173 | ) | 5,475,261 | (h) | (7,098,912 | ) |
| Total  stockholders’ equity (deficit)                           |       | (617,626                                                           | )          | —                                                             |       | (617,626 | ) | 1,324,464 |   | (378,147 | ) | (946,317 | ) |
|                                                                 |       | $                                                                  | 2,184,868  |                                                               | $          | — |   | $ | 2,184,868 |   | $ | 3,240,734 |   | $ | (54,055 | ) | $ | 3,168,679 |   |

----

(a)  Toreclassify software assets, net of accumulated amortization, from property andequipment to intangible assets.

(b)  Toreclassify Series B Stock issued, $.001 par value, previously recorded at nopar value.

(c)  Toreclassify 2004 Beneficial Conversion Feature (BCF) on Series A Preferred Stockto APIC previously recorded to accumulated deficit.

(d)  Toreclassify debt issuance cost as a debt discount on the $1.6 millionconvertible notes

(e)  To adjustthe unamortized discount on the $1.6 million convertible notes.

(f)  To recordthe fair value of the warrants and embedded conversion features.

(g)  To adjustadditional paid-in capital for the impact of the derivative liabilities and beneficialconversion features.

(h)  To reflectthe change in net income associated with the change in fair value of thederivative liability.

F-14

----

 
| ** **                                             | ** ** | **For the Three Months Ended March 31, 2006  (Unaudited)** | ** ** | **For the Three Months Ended March 31, 2005  (Unaudited)** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **As Originally  Reported**                                                              | ** ** | **Adjustments**                                                                               | ** ** | **Restated** | ** ** | **As Originally  Reported** | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| **Consolidated  Statement of Operations**              |       |                                                                                          |       |                                                                                          |       |   |   |   |   |   |   |   |   |
| Revenues                                               |       | $                                                                                             | 181,687    |                                                                                          | $          | — |   | $ | 181,687 |   | $ | 197,879 |   | $ | — |   | $ | 197,879 |   |
|                                                   |       |                                                                                          |       |                                                                                          |       |   |   |   |   |   |   |   |   |
| Expenses                                               |       |                                                                                          |       |                                                                                          |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense                  |       | 44,152                                                                                        |       | —                                                                                        |       | 44,152 |   | 15,718 |   | 25,389 | (a) | 41,107 |   |
| General and administrative                             |       | 774,757                                                                                       |       | —                                                                                        |       | 774,757 |   | 700,990 |   | 72,514 | (b) | 773,504 |   |
| Professional fees                                      |       | 207,472                                                                                       |       | —                                                                                        |       | 207,472 |   | 142,087 |   | (62,172 | )(c) | 79,915 |   |
| Research, development and product support              |       | 247,540                                                                                       |       | —                                                                                        |       | 247,540 |   | 13,478 |   | — |   | 13,478 |   |
| Total expenses                                         |       | 1,273,921                                                                                     |       | —                                                                                        |       | 1,273,921 |   | 872,273 |   | 35,731 |   | 908,004 |   |
|                                                   |       |                                                                                          |       |                                                                                          |       |   |   |   |   |   |   |   |   |
| Loss from  operations                                  |       | (1,092,234                                                                                    | )          | —                                                                                        |       | (1,092,234 | ) | (674,394 | ) | (35,731 | ) | (710,125 | ) |
|                                                   |       |                                                                                          |       |                                                                                          |       |   |   |   |   |   |   |   |   |
| Other income (expense)                                 |       |                                                                                          |       |                                                                                          |       |   |   |   |   |   |   |   |   |
| Gain (loss) on derivative liabilities                  |       | (254,841                                                                                      | )          | —                                                                                        |       | (254,841 | ) | — |   | 2,398,411 | (d) | 2,398,411 |   |
| Interest income                                        |       | —                                                                                        |       | —                                                                                        |       | — |   | 1,430 |   | — |   | 1,430 |   |
| Interest expense                                       |       | (391,694                                                                                      | )          | —                                                                                        |       | (391,694 | ) | — |   | — |   | — |   |
|                                                   |       |                                                                                          |       |                                                                                          |       |   |   |   |   |   |   |   |   |
| Total other  income (expense)                          |       | (646,535                                                                                      | )          | —                                                                                        |       | (646,535 | ) | 1,430 |   | 2,398,411 |   | 2,399,841 |   |
|                                                   |       |                                                                                          |       |                                                                                          |       |   |   |   |   |   |   |   |   |
| Net income  (loss)                                     |       | $                                                                                             | (1,738,769 | )                                                                                             | $          | — |   | $ | (1,738,769 | ) | $ | (672,964 | ) | $ | 2,362,680 |   | $ | 1,689,716 |   |
|                                                   |       |                                                                                          |       |                                                                                          |       |   |   |   |   |   |   |   |   |
| Basic net income  (loss) per common share              |       | $                                                                                             | (0.06      | )                                                                                             |       |   | $ | (0.06 | ) | $ | (0.03 | ) |   |   | $ | 0.06 |   |
|                                                   |       |                                                                                          |       |                                                                                          |       |   |   |   |   |   |   |   |   |
| Weighted average  common shares outstanding—basic |       | 29,190,969                                                                                    |       |                                                                                          |       | 29,190,969 |   | 26,439,136 |   |   |   | 26,439,136 |   |

----

(a)    To adjust the amortization of certainidentifiable intangible assets associated with the purchase of CompuSven, Inc.

(b)    To adjust the amortization of deferredcompensation related to non-forfeitable warrants issued to a non-employee undera three-year consulting agreement.

(c)    To account for the modification of termsrelated to options granted to a former employee.

(d)    To record the change in fair value ofwarrants determined to be derivative liabilities.

F-15

----

 
| ** **                                             | ** ** | **For the Nine Months Ended March 31, 2006  (Unaudited)** | ** ** | **For the Nine Months Ended March 31, 2005  (Unaudited)** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **As Originally  Reported**                                                             | ** ** | **Adjustments**                                                                              | ** ** | **Restated** | ** ** | **As Originally  Reported** | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| **Consolidated  Statement of Operations**              |       |                                                                                         |       |                                                                                         |       |   |   |   |   |   |   |   |   |
| Revenues                                               |       | $                                                                                            | 702,155    |                                                                                         | $          | — |   | $ | 702,155 |   | $ | 650,226 |   | $ | — |   | $ | 650,226 |   |
|                                                   |       |                                                                                         |       |                                                                                         |       |   |   |   |   |   |   |   |   |
| Expenses                                               |       |                                                                                         |       |                                                                                         |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense                  |       | 129,653                                                                                      |       | —                                                                                       |       | 129,653 |   | 46,205 |   | 72,022 | (c) | 118,227 |   |
| General and administrative                             |       | 1,958,111                                                                                    |       |                                                                                         |       | 1,958,111 |   | 1,923,776 |   | 72,513 | (e) | 1,996,289 |   |
| Professional fees                                      |       | 742,423                                                                                      |       | (50,000                                                                                      | )(a)       | 692,423 |   | 558,821 |   | 538,830 | (d) | 1,097,651 |   |
| Research, development and product support              |       | 458,003                                                                                      |       | —                                                                                       |       | 458,003 |   | 165,994 |   | — |   | 165,994 |   |
|                                                   |       |                                                                                         |       |                                                                                         |       |   |   |   |   |   |   |   |   |
| Total expenses                                         |       | 3,288,190                                                                                    |       | (50,000                                                                                      | )          | 3,238,190 |   | 2,694,796 |   | 683,365 |   | 3,378,161 |   |
|                                                   |       |                                                                                         |       |                                                                                         |       |   |   |   |   |   |   |   |   |
| Loss from  operations                                  |       | (2,586,035                                                                                   | )          | 50,000                                                                                       |       | (2,536,035 | ) | (2,044,570 | ) | (683,365 | ) | (2,727,935 | ) |
|                                                   |       |                                                                                         |       |                                                                                         |       |   |   |   |   |   |   |   |   |
| Other income  (expense)                                |       |                                                                                         |       |                                                                                         |       |   |   |   |   |   |   |   |   |
| Gain / (loss) on derivative liabilities                |       | 370,814                                                                                      |       | —                                                                                       |       | 370,814 |   | — |   | 6,257,502 | (f) | 6,257,502 |   |
|                                                   |       |                                                                                         |       |                                                                                         |       |   |   |   |   |   |   |   |   |
| Interest expense                                       |       | (1,009,865                                                                                   | )          | (92,216                                                                                      | )(b)       | (1,102,081 | ) | (1,553,066 | ) | 1,449,415 | (f) | (103,651 | ) |
|                                                   |       |                                                                                         |       |                                                                                         |       |   |   |   |   |   |   |   |   |
| Total other income  (expense)                          |       | (639,051                                                                                     | )          | (92,216                                                                                      | )          | (731,267 | ) | (1,553,066 | ) | 7,706,917 |   | 6,153,851 |   |
|                                                   |       |                                                                                         |       |                                                                                         |       |   |   |   |   |   |   |   |   |
| Net income  (loss)                                     |       | $                                                                                            | (3,225,086 | )                                                                                            | $          | (42,216 | ) | $ | (3,267,302 | ) | $ | (3,597,636 | ) | $ | 7,023,552 |   | $ | 3,425,916 |   |
|                                                   |       |                                                                                         |       |                                                                                         |       |   |   |   |   |   |   |   |   |
| Basic net income  (loss) per common share              |       | $                                                                                            | (0.12      | )                                                                                            |       |   | $ | (0.12 | ) | $ | (0.14 | ) |   |   | $ | 0.13 |   |
|                                                   |       |                                                                                         |       |                                                                                         |       |   |   |   |   |   |   |   |   |
| Weighted average common  shares outstanding—basic |       | 27,884,409                                                                                   |       |                                                                                         |       | 27,884,409 |   | 26,439,136 |   |   |   | 26,439,136 |   |

----

a)     To reclass placement fees related to $1 million offering inNovember 2005; netted against proceeds.

b)     To reclass issuance of common stock previously charged tointerest expense.

c)     To adjust the amortization of certain identifiable intangibleassets associated with the purchase of CompuSven, Inc.

d)     To adjust the amortization of deferred compensation related tonon-forfeitable warrants issued to a non-employee under a three-year consultingagreement.

e)     To account for the modification of terms related to optionsgranted to a former employee.

f)      To record the change in fair value of warrants determined to bederivative liabilities and to adjust the amortization of interest expense onthe $1.5 million notes.

F-16

----

The impact of theadjustments to the March 31, 2006 and 2005 balance sheets are summarized below:
| ** **                                                                                          | ** ** | **March 31, 2006  (Unaudited)** | ** ** | **March 31, 2005  (Unaudited)** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                          | ** ** | **As Originally  Reported**          | ** ** | **Adjustment**                            | ** ** | **Restated** | ** ** | **As Originally  Reported** | ** ** | **Adjustment** | ** ** | **Restated** | ** ** |
| Current assets                                                                                      |       |                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Cash                                                                                                |       | $                                         | 566,178    |                                      | $          | — |   | $ | 566,178 |   | $ | 258,740 |   | $ | — |   | $ | 258,740 |   |
| Accounts  receivable, net                                                                           |       | 108,416                                   |       | —                                    |       | 108,416 |   | 167,241 |   | — |   | 167,241 |   |
| Deposits                                                                                            |       | —                                    |       | —                                    |       | — |   | 64,107 |   | — |   | 64,107 |   |
| Debt issuance  cost, net                                                                            |       | —                                    |       | —                                    |       | — |   | — |   | — |   | — |   |
| Prepaid expenses  and other Assets                                                                  |       | 13,621                                    |       | —                                    |       | 13,621 |   | 3,660 |   | — |   | 3,660 |   |
| Total current assets                                                                                |       | 688,215                                   |       | —                                    |       | 688,215 |   | 493,748 |   | — |   | 493,748 |   |
|                                                                                                |       |                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Property and equipment,  net                                                                        |       | 319,765                                   |       | (187,007                                  | )(a)       | 132,758 |   | 108,884 |   | (14,290) | (a,e) | 94,594 |   |
| Cost based investment                                                                               |       | 400,000                                   |       | —                                    |       | 400,000 |   | 400,000 |   | — |   | 400,000 |   |
| Goodwill                                                                                            |       | 863,907                                   |       | —                                    |       | 863,907 |   | 1,238,907 |   | (375,000 | )(e) | 863,907 |   |
| Intangible assets, net                                                                              |       | 119,005                                   |       | 187,007                                   |       | 306,012 |   | 124,457 |   | 317,268 | (a,e) | 441,725 |   |
| Other assets                                                                                        |       | 16,648                                    |       | —                                    |       | 16,648 |   | — |   | — |   | — |   |
|                                                                                                |       |                                      |       |                                      |       |   |   |   |   |   |   |   |   |
|                                                                                                |       | $                                         | 2,407,540  |                                      | $          | — |   | $ | 2,407,540 |   | $ | 2,365,996 |   | $ | (72,022 | ) | $ | 2,293,974 |   |
|                                                                                                |       |                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Current liabilities                                                                                 |       |                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Accounts payable  and accrued expenses                                                              |       | $                                         | 730,402    |                                      | $          | — |   | $ | 730,402 |   | $ | 334,344 |   | $ | — |   | $ | 334,344 |   |
| Current portion  of obligations under capital leases                                                |       | 2,751                                     |       | —                                    |       | 2,751 |   | 4,420 |   | — |   | 4,420 |   |
| $1.6 million  convertible notes payable, net of unamortized discount                                |       | 1,474,236                                 |       | —                                    |       | 1,474,236 |   | — |   | — |   | — |   |
| Other convertible  notes payable                                                                    |       | 1,060                                     |       | —                                    |       | 1,060 |   | — |   | — |   | — |   |
| Derivative  liabilities                                                                             |       | 1,340,083                                 |       | —                                    |       | 1,340,083 |   | — |   | 821,941 | (d) | 821,941 |   |
| Deferred revenues                                                                                   |       | 230,331                                   |       | —                                    |       | 230,331 |   | 323,687 |   | — |   | 323,687 |   |
|                                                                                                |       |                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Total current  liabilities                                                                          |       | 3,778,863                                 |       | —                                    |       | 3,778,863 |   | 662,451 |   | 821,941 |   | 1,484,392 |   |
|                                                                                                |       |                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Deferred revenues                                                                                   |       | 19,489                                    |       |                                      |       | 19,489 |   | 44,634 |   | — |   | 44,634 |   |
| Obligations under  capital leases, net of current portion                                           |       | —                                    |       | —                                    |       | — |   | 3,254 |   | — |   | 3,254 |   |
|                                                                                                |       |                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Total liabilities                                                                                   |       | 3,798,352                                 |       | —                                    |       | 3,798,352 |   | 710,339 |   | 821,941 |   | 1,532,280 |   |
|                                                                                                |       |                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Commitments and  contingencies                                                                      |       |                                      |       |                                      |       |   |   |   |   |   |   |   |   |
|                                                                                                |       |                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Stockholders’ equity  (deficit) Preferred stock, $0.001 par value 10,000,000 authorized shares |       | —                                    |       | —                                    |       | — |   | — |   | — |   | — |   |
| Common  stock                                                                                       |       | 29,191                                    |       | —                                    |       | 29,191 |   | 26,440 |   | — |   | 26,440 |   |
| Additional paid-in  capital                                                                         |       | 9,728,944                                 |       | (782,733                                  | )(b)       | 8,946,211 |   | 12,313,207 |   | (4,318,498 | )(b) | 7,994,709 |   |
| Deferred compensation                                                                               |       | —                                    |       | —                                    |       | — |   | (538,830 | ) | 538,830 | (f) | — |   |
| Accumulated deficit                                                                                 |       | (11,148,947                               | )          | 782,733                                   | (c)        | (10,366,214 | ) | (10,145,160 | ) | 2,885,705 | (c,f) | (7,259,455 | ) |
| Total stockholders’  equity (deficit)                                                          |       | (1,390,812                                | )          | —                                    |       | (1,390,812 | ) | 1,655,657 |   | (893,963 | ) | 761,694 |   |
|                                                                                                |       | $                                         | 2,407,540  |                                      | $          | — |   | $ | 2,407,540 |   | $ | 2,365,996 |   | $ | (72,022 | ) | $ | 2,293,974 |   |

----

(a)    To reclassify software assets from property and equipment tointangible assets.

(b)    To adjust additional paid-in capital for the impact of the derivativeliabilities and beneficial conversion features.

(c)    To reflect the change in net income associated with the change infair value of the derivative liabilities.

(d)    To record the fair value of the warrant and embedded conversionfeatures

(e)    To correct the valuation of certain identifiable intangibleassets associated with the purchase of CompuSven.

(f)     To adjust the amortization of deferred compensation related tonon-forfeitable warrants issued to a non-employee under a three-year consultingagreement.

F-17

----

** **
| ** **                                             | ** ** | **For the Three Months Ended December 31, 2005  (Unaudited)** | ** ** | **For the Three Months Ended December 31, 2004  (Unaudited)** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **As  Originally  Reported**                                                                     | ** ** | **Adjustments**                                                                                  | ** ** | **Restated** | ** ** | **As  Originally  Reported** | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| **Consolidated  Statement of Operations**              |       |                                                                                             |       |                                                                                             |       |   |   |   |   |   |   |   |   |
| Revenues                                               |       | $                                                                                                | 319,956    |                                                                                             | $          | — |   | $ | 319,956 |   | $ | 254,366 |   | $ | — |   | $ | 254,366 |   |
|                                                   |       |                                                                                             |       |                                                                                             |       |   |   |   |   |   |   |   |   |
| Expenses                                               |       |                                                                                             |       |                                                                                             |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense                  |       | 42,984                                                                                           |       | —                                                                                           |       | 42,984 |   | 14,594 |   | 25,420 | (e) | 40,014 |   |
| General and administrative                             |       | 587,751                                                                                          |       | —                                                                                           |       | 587,751 |   | 633,267 |   | 8,953 |   | 642,220 |   |
| Professional fees                                      |       | 608,876                                                                                          |       | (287,051                                                                                         | )(a)       | 321,825 |   | 195,538 |   | 300,580 | (a) | 496,118 |   |
| Research, development and product support              |       | 183,263                                                                                          |       | —                                                                                           |       | 183,263 |   | 117,937 |   | (9,032 | ) | 108,905 |   |
|                                                   |       |                                                                                             |       |                                                                                             |       |   |   |   |   |   |   |   |   |
| Total expenses                                         |       | 1,422,874                                                                                        |       | (287,051                                                                                         | )          | 1,135,823 |   | 961,336 |   | 325,921 |   | 1,287,257 |   |
|                                                   |       |                                                                                             |       |                                                                                             |       |   |   |   |   |   |   |   |   |
| Loss from  operations                                  |       | (1,102,918                                                                                       | )          | 287,051                                                                                          |       | (815,867 | ) | (706,970 | ) | (325,921 | ) | (1,032,891 | ) |
|                                                   |       |                                                                                             |       |                                                                                             |       |   |   |   |   |   |   |   |   |
| Other income  (expense)                                |       |                                                                                             |       |                                                                                             |       |   |   |   |   |   |   |   |   |
| Interest income                                        |       | 6,298                                                                                            |       | —                                                                                           |       | 6,298 |   | 3,541 |   | — |   | 3,541 |   |
| Derivative gain                                        |       | —                                                                                           |       | 709,526                                                                                          | (b)        | 709,526 |   | — |   | 1,661,465 | (b) | 1,661,465 |   |
| Interest expense                                       |       | (388,029                                                                                         | )          | (20,929                                                                                          | )(c)(d)    | (408,958 | ) | — |   | — |   | — |   |
|                                                   |       |                                                                                             |       |                                                                                             |       |   |   |   |   |   |   |   |   |
| Total other  income (expense)                          |       | (381,731                                                                                         | )          | 688,597                                                                                          |       | 306,866 |   | 3,541 |   | 1,661,465 |   | 1,665,006 |   |
|                                                   |       |                                                                                             |       |                                                                                             |       |   |   |   |   |   |   |   |   |
| Net loss                                               |       | $                                                                                                | (1,484,649 | )                                                                                                | $          | 975,648 |   | $ | (509,001 | ) | $ | (703,429 | ) | $ | 1,335,544 |   | $ | 632,115 |   |
|                                                   |       |                                                                                             |       |                                                                                             |       |   |   |   |   |   |   |   |   |
| Basic net income  (loss) per common share              |       | $                                                                                                | (0.05      | )                                                                                                |       |   | $ | (0.02 | ) | $ | (0.03 | ) |   |   | $ | 0.02 |   |
|                                                   |       |                                                                                             |       |                                                                                             |       |   |   |   |   |   |   |   |   |
| Weighted average  common shares outstanding—basic |       | 28,012,922                                                                                       |       |                                                                                             |       | 28,012,922 |   | 26,406,935 |   |   |   | 26,406,935 |   |

----

(a)    To adjust the amortization of deferred compensation related tonon-forfeitable warrants issued to a non-employee under a three-year consultingagreement.

(b)    To record the change in fair value of warrants and embeddedconversion feature determined to be derivative liabilities.

(c)    To record amortization of debt discount to interest expense.

(d)    To record issuance of common stock previously charged to interestexpense

(e)    To correct the valuation of certain identifiable intangibleassets associated with the purchase of CompuSven.

F-18

----

 
| ** **                                             | ** ** | **For the Six Months Ended December 31, 2005  (Unaudited)** | ** ** | **For the Six Months Ended December 31, 2004  (Unaudited)** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **As  Originally  Reported**                                                                   | ** ** | **Adjustments**                                                                                | ** ** | **Restated** | ** ** | **As  Originally  Reported** | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| **Consolidated  Statement of Operations**              |       |                                                                                           |       |                                                                                           |       |   |   |   |   |   |   |   |   |
| Revenues                                               |       | $                                                                                              | 520,468    |                                                                                           | $          | — |   | $ | 520,468 |   | $ | 452,347 |   | $ | — |   | $ | 452,347 |   |
|                                                   |       |                                                                                           |       |                                                                                           |       |   |   |   |   |   |   |   |   |
| Expenses                                               |       |                                                                                           |       |                                                                                           |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense                  |       | 85,501                                                                                         |       | —                                                                                         |       | 85,501 |   | 30,487 |   | 46,603 | (d) | 77,090 |   |
| General and administrative                             |       | 1,183,454                                                                                      |       |                                                                                           |       | 1,183,454 |   | 1,222,786 |   |   |   | 1,222,786 |   |
| Professional fees                                      |       | 790,020                                                                                        |       | (332,569)                                                                                      | (a)        | 457,451 |   | 416,734 |   | 601,002 | (a) | 1,017,736 |   |
| Research, development and product support              |       | 210,463                                                                                        |       | —                                                                                         |       | 210,463 |   | 152,516 |   | — |   | 152,516 |   |
|                                                   |       |                                                                                           |       |                                                                                           |       |   |   |   |   |   |   |   |   |
| Total expenses                                         |       | 2,269,438                                                                                      |       | (332,569                                                                                       | )          | 1,936,869 |   | 1,822,523 |   | 647,605 |   | 2,470,128 |   |
|                                                   |       |                                                                                           |       |                                                                                           |       |   |   |   |   |   |   |   |   |
| Loss from  operations                                  |       | (1,748,970                                                                                     | )          | 332,569                                                                                        |       | (1,416,401 | ) | (1,370,176 | ) | (647,605 | ) | (2,017,781 | ) |
|                                                   |       |                                                                                           |       |                                                                                           |       |   |   |   |   |   |   |   |   |
| Other income  (expense)                                |       |                                                                                           |       |                                                                                           |       |   |   |   |   |   |   |   |   |
| Interest income                                        |       | 10,292                                                                                         |       | —                                                                                         |       | 10,292 |   | 5,910 |   | — |   | 5,910 |   |
| Derivative  expense                                    |       | —                                                                                         |       | 550,059                                                                                        | (b)        | 550,059 |   | — |   | 3,859,061 | (b) | 3,859,061 |   |
| Interest expense                                       |       | (616,328                                                                                       | )          | (56,155                                                                                        | )(b,c)     | (672,483 | ) | (1,560,405 | ) | 1,449,415 | (b) | (110,990 | ) |
|                                                   |       |                                                                                           |       |                                                                                           |       |   |   |   |   |   |   |   |   |
| Total other  income (expense)                          |       | (606,036                                                                                       | )          | 493,904                                                                                        |       | (112,132 | ) | (1,554,495 | ) | 5,308,476 |   | 3,753,981 |   |
|                                                   |       |                                                                                           |       |                                                                                           |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                      |       | $                                                                                              | (2,355,006 | )                                                                                              | $          | 826,473 |   | $ | (1,528,533 | ) | $ | (2,924,671 | ) | $ | 4,660,871 |   | $ | 1,736,200 |   |
|                                                   |       |                                                                                           |       |                                                                                           |       |   |   |   |   |   |   |   |   |
| Basic net income  (loss) per common share              |       | $                                                                                              | (0.09      | )                                                                                              |       |   | $ | (0.06 | ) | $ | (0.11 | ) |   |   | $ | 0.07 |   |
|                                                   |       |                                                                                           |       |                                                                                           |       |   |   |   |   |   |   |   |   |
| Weighted average common  shares outstanding—basic |       | 27,241,838                                                                                     |       |                                                                                           |       | 27,241,838 |   | 26,359,081 |   |   |   | 26,359,081 |   |

----

a)      To adjust the amortization of deferred compensation related tonon-forfeitable warrants issued to a non-employee under a three-year consultingagreement.

b)     To record the change in fair value of warrants determined to bederivative liabilities and to adjust the amortization of interest expense onthe $1.5 million notes.

c)      To reclass issuance of common stock previously charged tointerest expense.

d)     To correct the valuation of certain identifiable intangibleassets associated with the purchase of CompuSven.

F-19

----

Theimpact of the adjustments on the December 31, 2004 and 2005 balance sheets aresummarized below:
| ** **                                                           | ** ** | **December 31, 2005  (Unaudited)** | ** ** | **December 31, 2004  (Unaudited)** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                           | ** ** | **As  Originally  Reported**                 | ** ** | **Adjustment**                               | ** ** | **Restated** | ** ** | **As  Originally  Reported** | ** ** | **Adjustment** | ** ** | **Restated** | ** ** |
| Current assets                                                       |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Cash                                                                 |       | $                                            | 698,427    |                                         | $          | — |   | $ | 698,427 |   | $ | 937,869 |   | $ | — |   | $ | 937,869 |   |
| Accounts  receivable, net                                            |       | 195,306                                      |       | —                                       |       | 195,306 |   | 190,745 |   | — |   | 190,745 |   |
| Deposits                                                             |       | —                                       |       | —                                       |       | — |   | 73,308 |   | — |   | 73,308 |   |
| Debt  issuance cost, net                                             |       | 25,769                                       |       | —                                       |       | 25,769 |   | — |   | — |   | — |   |
| Prepaid  expenses and other  assets                                  |       | 2,862                                        |       | —                                       |       | 2,862 |   | 12,893 |   | — |   | 12,893 |   |
| Total current assets                                                 |       | 922,364                                      |       | —                                       |       | 922,364 |   | 1,214,815 |   | — |   | 1,214,815 |   |
|                                                                 |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Property and equipment,  net                                         |       | 307,808                                      |       | (199,924)                                    | (e)        | 107,884 |   | 78,468 |   | (7,225) | (e,f) | 71,243 |   |
| Investment—cost based                                           |       | 400,000                                      |       | —                                       |       | 400,000 |   | 400,000 |   | — |   | 400,000 |   |
| Goodwill                                                             |       | 863,907                                      |       | —                                       |       | 863,907 |   | 1,238,907 |   | (375,000) | (f) | 863,907 |   |
| Intangible assets, net                                               |       | 138,175                                      |       | 199,924                                      |       | 338,099 |   | 131,708 |   | 335,622 | (e,f) | 467,330 |   |
|                                                                 |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Other assets                                                         |       | 16,648                                       |       | —                                       |       | 16,648 |   | — |   | — |   | — |   |
|                                                                 |       | $                                            | 2,648,902  |                                         | $          | — |   | $ | 2,648,902 |   | $ | 3,063,898 |   | $ | (46,603 | ) | $ | 3,017,295 |   |
|                                                                 |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Current liabilities                                                  |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Accounts  payable and accrued  expenses                              |       | $                                            | 587,735    |                                         | $          | — |   | $ | 587,735 |   | $ | 386,541 |   | $ | — |   | $ | 386,541 |   |
| Current  portion of obligations under capital leases                 |       | 4,353                                        |       |                                         |       | 4,353 |   | 4,088 |   | — |   | 4,088 |   |
| $1.6  million convertible notes payable, net of unamortized discount |       | 1,325,405                                    |       | (222,775)                                    | (a)        | 1,102,630 |   | — |   | — |   | — |   |
| Derivative  liabilities                                              |       | —                                       |       | 385,242                                      | (b)        | 385,242 |   | — |   | 3,220,382 | (b) | 3,220,382 |   |
| Deferred  revenues                                                   |       | 289,612                                      |       |                                         |       | 289,612 |   | 359,185 |   | — |   | 359,185 |   |
|                                                                 |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Total current  liabilities                                           |       | 2,207,105                                    |       | 162,467                                      |       | 2,369,572 |   | 749,814 |   | 3,220,382 |   | 3,970,196 |   |
|                                                                 |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Deferred  revenues                                                   |       | 28,904                                       |       |                                         |       | 28,904 |   | 43,011 |   | — |   | 43,011 |   |
| Obligations  under capital leases, net of current portion            |       | —                                       |       | —                                       |       | — |   | 4,623 |   | — |   | 4,623 |   |
|                                                                 |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Total liabilities                                                    |       | 2,236,009                                    |       | 162,467                                      |       | 2,398,476 |   | 797,448 |   | 3,220,382 |   | 4,017,830 |   |
|                                                                 |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Stockholders’ equity  (deficit)                                 |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Preferred  stock, $0.001 par value; 10,000,000 authorized shares     |       | —                                       |       | —                                       |       | — |   | — |   | — |   | — |   |
| Common  stock                                                        |       | 29,191                                       |       |                                         |       | 29,191 |   | 26,440 |   | — |   | 26,440 |   |
| Additional paid-in  capital                                          |       | 15,312,881                                   |       | (6,464,201)                                  | (c)        | 8,848,680 |   | 12,313,207 |   | (4,391,011) | (c) | 7,922,196 |   |
| Deferred Compensation                                                |       | —                                       |       | —                                       |       | — |   | (601,002 | ) | 601,002 | (g) | — |   |
| Accumulated deficit                                                  |       | (14,929,179                                  | )          | 6,301,734                                    | (d)        | (8,627,445 | ) | (9,472,195 | ) | 523,024 | (d,g) | (8,949,171 | ) |
| Total stockholders’  equity (deficit)                           |       | 412,893                                      |       | (162,467                                     | )          | 250,426 |   | 2,266,450 |   | (3,266,985 | ) | (1,000,535 | ) |
|                                                                 |       |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
|                                                                 |       | $                                            | 2,648,902  |                                         | $          | — |   | $ | 2,648,902 |   | $ | 3,063,898 |   | $ | (46,603 | ) | $ | 3,017,295 |   |

----

a)               Toadjust the unamortized discount on the $1.6 million notes.

b)              Torecord the fair value of the warrant and embedded conversion features

c)               Toadjust additional paid-in-capital for the impact of the derivative liabilitiesand beneficial conversion features

d)              Toreflect the change in net income associated with the change in fair value ofthe derivative liabilities.

e)               Toreclassify software assets from property and equipment to intangible assets.

f)                Tocorrect the valuation of certain identifiable intangible assets associated withthe purchase of CompuSven.

g)               Toadjust the amortization of deferred compensation related to non-forfeitablewarrants issued to a non-employee under a three-year consulting agreement.

F-20

----

 
| ** **                                             | ** ** | **For the Three Months Ended September 30, 2005  (Unaudited)** | ** ** | **For the Three Months Ended September 30, 2004  (Unaudited)** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **As  Originally  Reported**                                                                      | ** ** | **Adjustments**                                                                                   | ** ** | **Restated** | ** ** | **As  Originally  Reported** | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| **Consolidated  Statement of Operations**              |       |                                                                                              |       |                                                                                              |       |   |   |   |   |   |   |   |   |
| Revenues                                               |       | $                                                                                                 | 200,512    |                                                                                              | $          | — |   | $ | 200,512 |   | $ | 197,981 |   | $ | — |   | $ | 197,981 |   |
|                                                   |       |                                                                                              |       |                                                                                              |       |   |   |   |   |   |   |   |   |
| Expenses                                               |       |                                                                                              |       |                                                                                              |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense                  |       | 42,517                                                                                            |       | —                                                                                            |       | 42,517 |   | 15,893 |   | 21,183 | (e) | 37,076 |   |
| General and administrative                             |       | 595,703                                                                                           |       | —                                                                                            |       | 595,703 |   | 589,519 |   | (8,953 | )(e) | 580,566 |   |
| Professional fees                                      |       | 181,144                                                                                           |       | (45,518)                                                                                          | (a)        | 135,626 |   | 221,196 |   | 300,422 | (e,a) | 521,618 |   |
| Research, development, and production                  |       | 27,200                                                                                            |       | —                                                                                            |       | 27,200 |   | 34,579 |   | 9,032 | (e) | 43,611 |   |
| Total expenses                                         |       | 846,564                                                                                           |       | (45,518                                                                                           | )          | 801,046 |   | 861,187 |   | 321,684 |   | 1,182,871 |   |
|                                                   |       |                                                                                              |       |                                                                                              |       |   |   |   |   |   |   |   |   |
| Loss from  operations                                  |       | (646,052                                                                                          | )          | 45,518                                                                                            |       | (600,534 | ) | (663,206 | ) | (321,684 | ) | (984,890 | ) |
|                                                   |       |                                                                                              |       |                                                                                              |       |   |   |   |   |   |   |   |   |
| Other income  (expense)                                |       |                                                                                              |       |                                                                                              |       |   |   |   |   |   |   |   |   |
| Interest income                                        |       | 3,994                                                                                             |       | —                                                                                            |       | 3,994 |   | 2,369 |   | — |   | 2,369 |   |
| Derivative gain (loss)                                 |       | —                                                                                            |       | (159,467                                                                                          | )(b)       | (159,467 | ) | — |   | 2,197,596 | (c) | 2,197,596 |   |
| Interest expense                                       |       | (228,299                                                                                          | )          | (35,226                                                                                           | )(b)       | (263,525 | ) | (1,560,405 | ) | 1,449,415 | (d) | (110,990 | ) |
|                                                   |       |                                                                                              |       |                                                                                              |       |   |   |   |   |   |   |   |   |
| Total other expense                                    |       | (224,305                                                                                          | )          | (194,693                                                                                          | )          | (418,998 | ) | (1,558,036 | ) | 3,647,011 |   | 2,088,975 |   |
|                                                   |       |                                                                                              |       |                                                                                              |       |   |   |   |   |   |   |   |   |
| Net loss                                               |       | $                                                                                                 | (870,357   | )                                                                                                 | $          | (149,175 | ) | $ | (1,019,532 | ) | $ | (2,221,242 | ) | $ | 3,325,327 |   | $ | 1,104,085 |   |
|                                                   |       |                                                                                              |       |                                                                                              |       |   |   |   |   |   |   |   |   |
| Basic net loss  per common share                       |       | $                                                                                                 | (0.03      | )                                                                                                 |       |   | $ | (0.04 | ) | $ | (0.08 | ) |   |   | $ | 0.04 |   |
|                                                   |       |                                                                                              |       |                                                                                              |       |   |   |   |   |   |   |   |   |
| Weighted average common  shares outstanding—basic |       | 26,479,136                                                                                        |       |                                                                                              |       | 26,479,136 |   | 26,311,230 |   |   |   | 26,311,230 |   |

----

(a)    To adjust the amortization of deferred compensation related tonon-forfeitable warrants issued to a non-employee under a three-year consultingagreement

(b)    To record the change in fair value of warrants determined to bederivative liabilities and to adjust the amortization of interest expense onthe $1.5 million notes

(c)    To record the change in fair value of warrants determined to bederivative liabilities.

(d)    To record amortization of debt discount to interest expense.

(e)    To adjust the amortization of certain identifiable intangibleassets associated with the purchase of CompuSven, Inc.

F-21

----

Theimpact of the adjustments on the September 30, 2006 and 2005 balance sheets aresummarized below:
| ** **                                                           | ** ** | **September 30, 2005  (Unaudited)** | ** ** | **September 30, 2004  (Unaudited)** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                           | ** ** | **As  Originally  Reported**                  | ** ** | **Adjustment**                                | ** ** | **Restated** | ** ** | **As  Originally  Reported** | ** ** | **Adjustment** | ** ** | **Restated** | ** ** |
| Current assets                                                       |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |
| Cash                                                                 |       | $                                             | 307,569    |                                          | $          | — |   | $ | 307,569 |   | $ | 1,646,542 |   | $ | — |   | $ | 1,646,542 |   |
| Accounts  receivable, net                                            |       | 267,822                                       |       | —                                        |       | 267,822 |   | 214,232 |   | — |   | 214,232 |   |
| Deposits                                                             |       | 49,500                                        |       | —                                        |       | 49,500 |   | 13,386 |   | — |   | 13,386 |   |
| Debt  issuance cost, net                                             |       | 51,537                                        |       | (36,037                                       | )(a)       | 15,500 |   | — |   | — |   | — |   |
| Prepaid  expenses and other assets                                   |       | 4,579                                         |       | —                                        |       | 4,579 |   | 15,725 |   | — |   | 15,725 |   |
|                                                                 |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |
| Total current assets                                                 |       | 681,007                                       |       | (36,037                                       | )          | 644,970 |   | 1,889,885 |   | — |   | 1,889,885 |   |
|                                                                 |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |
| Property and equipment,  net                                         |       | 310,332                                       |       | (213,985                                      | )          | 96,347 |   | 80,694 |   | (21,183 | ) | 59,511 |   |
| Investment—cost method                                          |       | 400,000                                       |       | —                                        |       | 400,000 |   | 400,000 |   | — |   | 400,000 |   |
| Goodwill                                                             |       | 863,907                                       |       | —                                        |       | 863,907 |   | 1,238,907 |   | — |   | 1,238,907 |   |
| Intangible assets, net                                               |       | 157,345                                       |       | 213,985                                       |       | 371,330 |   | 138,958 |   | — |   | 138,958 |   |
| Other assets                                                         |       | 16,648                                        |       | —                                        |       | 16,648 |   | — |   | — |   |   |   |
|                                                                 |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |
|                                                                 |       | $                                             | 2,429,239  |                                          | $          | (36,037 | ) | $ | 2,393,202 |   | $ | 3,748,444 |   | $ | (21,183 | ) | $ | 3,727,261 |   |
|                                                                 |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |
| Current liabilities                                                  |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |
| Accounts  payable and accrued expenses                               |       | $                                             | 342,280    |                                          | $          | — |   | $ | 342,280 |   | $ | 459,458 |   | $ | — |   | $ | 459,458 |   |
| Current  portion of obligations under capital leases                 |       | 4,652                                         |       | —                                        |       | 4,652 |   | 4,088 |   | — |   | 4,088 |   |
| $1.6  million convertible notes payable, net of unamortized discount |       | 1,240,192                                     |       | (392,919                                      | )(b)       | 847,273 |   | — |   | — |   | — |   |
| Derivative  liabilities                                              |       | —                                        |       | 884,204                                       | (c)        | 884,204 |   | — |   | 4,900,280 |   | 4,900,280 |   |
| Deferred  revenues                                                   |       | 332,783                                       |       | —                                        |       | 332,783 |   | 357,335 |   | — |   | 357,335 |   |
|                                                                 |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |
| Total current  liabilities                                           |       | 1,919,907                                     |       | 491,285                                       |       | 2,411,192 |   | 820,881 |   | 4,900,280 |   | 5,721,161 |   |
|                                                                 |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |
| Deferred  revenues                                                   |       | 53,274                                        |       | —                                        |       | 53,274 |   | 44,229 |   | — |   | 44,229 |   |
| Obligations  under capital leases, net of current portion            |       | 1,951                                         |       | —                                        |       | 1,951 |   | 5,628 |   | — |   | 5,628 |   |
|                                                                 |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |
| Total liabilities                                                    |       | 1,975,132                                     |       | 491,285                                       |       | 2,466,417 |   | 870,738 |   | 4,900,280 |   | 5,771,018 |   |
|                                                                 |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |
| Commitments and  contingencies                                       |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |
|                                                                 |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |
| Stockholders’ equity  (deficit)                                 |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |
| Preferred  stock, $0.001 par value; 10,000,000 authorized shares     |       | —                                        |       | —                                        |       | — |   | — |   | — |   | — |   |
| Common  stock                                                        |       | 26,480                                        |       | (1)                                           |       | 26,479 |   | 26,427 |   | — |   | 26,427 |   |
| Additional paid-in  capital                                          |       | 13,872,157                                    |       | (5,853,407)                                   | (d)        | 8,018,750 |   | 12,283,219 |   | (4,409,444 | ) | 7,873,775 |   |
| Deferred Compensation                                                |       | —                                        |       | —                                        |       | — |   | (663,174 | ) | 300,501 |   | (362,673 | ) |
| Accumulated deficit                                                  |       | (13,444,530                                   | )          | 5,326,086                                     | (e)        | (8,118,444 | ) | (8,768,766 | ) | (812,520 | ) | (9,581,286 | ) |
| Total stockholders’  equity (deficit)                           |       | 454,107                                       |       | (527,322                                      | )          | (73,215 | ) | 2,877,706 |   | (4,921,463 | ) | (2,043,757 | ) |
|                                                                 |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |
|                                                                 |       | $                                             | 2,429,239  |                                          | $          | (36,037 | ) | $ | 2,393,202 |   | $ | 3,748,444 |   | $ | (21,183 | ) | $ | 3,727,261 |   |

----

(a)    To reclassify debt issuance cost as a debt discount on the $1.6million convertible notes

(b)    To adjust the unamortized discount on the $1.6 million notes.

(c)    To record the fair value of the warrants and embedded conversionfeatures

(d)    To adjust additional paid-in capital for the impact of thederivative liabilities and beneficial conversion features.

F-22

----

NOTE 4 — GOINGCONCERN

The accompanyingfinancial statements have been prepared assuming that GeM will continue as agoing concern. As shown in the accompanying financial statements, GeM hassuffered recurring losses from operations and has a working capital deficit of$1,990,000. These conditions raise substantial doubt as to GeM’s ability tocontinue as a going concern. The financial statements do not include anyadjustments that might be necessary if GeM is unable to continue as a goingconcern. Management’s plans in regard to these matters are described below.

GeM has experiencedrecurring losses from operations and has relied on proceeds from the sale ofequity securities and the issuance of convertible notes to fund its operations.GeM intends to seek additional working capital through borrowings and theissuance of equity securities. Although in the past GeM has been able to obtainworking capital through borrowings and the issuance of equity securities, therecan be no assurances that it will succeed in its efforts, which creates a doubtabout GeM’s ability to continue as a going concern. Subsequent to June 30,2006, GeM has raised an additional $1.13 million through the issuance of SeriesB Convertible Preferred Stock. See Note 19.

NOTE 5 — PURCHASEOF COMPUSVEN, INC.

On July 14, 2004, GeMpurchased 100% of the common stock of CompuSven, Inc. (“CompuSven). The primaryreasons for this acquisition was to obtain the E-Mail migration line ofbusiness and the systems design and development knowledge to assist GeM in thedesign and development of its internet management monitoring and reportingsystems. The purchase price of the CompuSven common stock was $869,379 paid incash plus a total of 43,353 shares of GeM common stock valued at $150,000.Transaction costs associated with the acquisition totaled $17,219.

The following tablesummarizes the fair values assigned of the assets acquired and the liabilitiesassumed at the date of acquisition:

| Current assets              |   | $         | 101,663   |   |
|-----------------------------|--------|-----------|-----------|--------|
| Property and  equipment     |   | 284,293   |      |
| Goodwill                    |   | 863,906   |      |
| Intangible  assets          |   | 250,000   |      |
| Other assets                |   | 3,500     |      |
|                        |   |      |      |
| Total Assets                |   | 1,503,362 |      |
|                        |   |      |      |
| Current  liabilities        |   | 460,245   |      |
| Long-term  deferred revenue |   | 6,519     |      |
|                        |   |      |      |
| Total Liabilities           |   | 466,764   |      |
|                        |   |      |      |
| Total purchase price        |   | $         | 1,036,598 |   |

 

The excess of thepurchase price over the fair value of assets acquired and liabilities assumedwas allocated to goodwill. The amount assigned to intangible assets representscustomer relationships and employment contracts, and was based on anindependent appraisal. The intangible assets will be amortized on astraight-line basis over periods ranging 3 to 5 years. See Note 7.

The $863,906 ofgoodwill was assigned to the E-Mail migration segment. No amount of thisgoodwill is expected to be deductible for tax purposes.

F-23

----

NOTE 6 — PROPERTYAND EQUIPMENT

Property and equipmentconsisted of the following:

|                                    | ** ** | **Useful Life  (Years)** | ** ** | **June 30,  2006** | ** ** | **June 30,  2005** | ** ** |
|------------------------------------|------------|-------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                         | ** ** | ** **                    | ** ** | **(Restated)**          | ** ** | **(Restated)**          | ** ** |
| Computer  equipment                |       | 5                             |       | $                       | 117,845    |                    | $          | 49,138 |   |
| Furniture,  fixtures and equipment |       | 5 – 7                    |       | 84,442                  |       | 76,391                  |       |
| Leasehold  improvements            |       | 5                             |       | 14,150                  |       | 13,325                  |       |
| Capital leases—equipment      |       | 5                             |       | 13,090                  |       | 13,088                  |       |
|                               |       |                          |       |                    |       |                    |       |
|                               |       |                          |       | 229,527                 |       | 151,942                 |       |
| Less:  accumulated depreciation    |       |                          |       | (93,493                 | )          | (53,787                 | )          |
|                               |       |                          |       |                    |       |                    |       |
|                               |       |                          |       | $                       | 136,034    |                    | $          | 98,155 |   |

 

Depreciationexpense, which includes property under capital leases, was $38,712 and $35,438for the years ended June 30, 2006 and 2005, respectively.

NOTE 7 — GOODWILLAND INTANGIBLE ASSETS

GeM has thefollowing intangibles at June 30, 2006 and 2005.

|  2006              | ** ** | **Cost** | ** ** | **Accumulated  amortization** | ** ** |
|-------------------------|------------|----------|------------|-------------------------------|------------|
|                    |       |     |       |                          |       |
| Goodwill                |       | $        | 863,906    |                          | $          | — |   |
| Employment  contract    |       | 200,000  |       | $                             | (130,566   | ) |
| Customer  relationships |       | 50,000   |       | (19,599                       | )          |
| Software                |       | 363,360  |       | (187,347                      | )          |
|                    |       |     |       |                          |       |
| Total                   |       | $        | 1,477,266  |                          | $          | (337,512 | ) |

 

| 2005                    | ** ** | **Cost** | ** ** | **Accumulated  amortization** | ** ** |
|-------------------------|------------|----------|------------|-------------------------------|------------|
|                    |       |     |       |                          |       |
| Goodwill                |       | $        | 863,906    |                          | $          | — |   |
| Employment  contract    |       | 200,000  |       | $                             | (63,894    | ) |
| Customer  relationships |       | 50,000   |       | (9,591                        | )          |
| Software                |       | 357,661  |       | (128,935                      | )          |
|                    |       |     |       |                          |       |
| Total                   |       | $        | 1,471,567  |                          | $          | (202,420 | ) |

 

The weightedaverage amortization period for amortizable intangible assets is 4 years.  Amortization expense for the years ended June30, 2006 and 2005 was $136,625 and $128,963, respectively.

GeM periodically reviewsthe carrying value of intangible assets not subject to amortization, includinggoodwill, to determine whether impairment may exist. SFAS No. 142,*  Goodwill andOther Intangible Assets,* requires that goodwill and certain intangible assets be assessedannually for impairment using fair value measurement techniques. Specifically,goodwill impairment is determined using a two-step process. The first step ofthe goodwill impairment test is used to identify potential impairment bycomparing the fair value of a reporting unit with its carrying amount,including goodwill. The assumptions about future cash flows and growth ratesare based on the Company’s budget and long-term plans. If the fair value of areporting unit exceeds its carrying amount, 

F-24

----

goodwill of the reportingunit is considered not impaired and the second step of the impairment test isunnecessary. In GeM’s case, the first step of the analysis indicated the fairvalue of CompuSven exceeded its carrying amount and therefore, goodwill ofCompuSven is not considered impaired at June 30, 2006.

NOTE 8 —INVESTMENT IN SYNERGY

In July 2001, GeMpurchased a 10% interest in Synergy Networks, Inc. (“SNI”) for $400,000 whichis accounted for under the cost method. In 2006, GeM performed an internalanalysis of the estimated value of its investment in SNI and determined that animpairment should be recorded to reflect GeM’s assessment of realizability ofthe investment. GeM does not expect to receive income from this investment inthe near future, if ever, and determined that a limited market currently existsfor the minority interest held in SNI. Based on these factors, GeM determinedthat the investment was impaired. A loss on impairment of $300,000 has beenrecorded as expense in the fourth quarter of 2006.

NOTE 9 — INCOMETAXES

GeM uses the liabilitymethod, where deferred tax assets and liabilities are determined based on theexpected future tax consequences of temporary differences between the carryingamounts of assets and liabilities for financial and income tax reportingpurposes. Since inception, GeM has incurred net losses and, therefore, had notax liability. Realization of the benefits of the deferred tax assets generatedby the loss carry-forward will require that GeM generate future taxable income.There can be no assurance that GeM will generate any taxable income in futureyears. Therefore, GeM has established a valuation allowance for the full amountof the deferred tax assets at June 30, 2006. The cumulative net operating losscarry-forward is approximately $10,300,000 at June 30, 2006, and will expire inthe years 2022 through 2026. The components of deferred tax assets andliabilities at June 30, 2006 and 2005 are as follows:

|                                                                                      | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Deferred tax asset:                                                        |       |       |       |       |       |
|                                                                                 |       |       |       |       |       |
| Federal and  state deferred tax benefit arising from net operating loss carryforward |       | $          | 3,605,000  |       | $          | 1,314,000 |   |
|                                                                                 |       |       |       |       |       |
| Less: valuation  allowance                                                           |       | (3,605,000 | )          | (1,314,000 | )          |
|                                                                                 |       |       |       |       |       |
| Net deferred tax asset                                                               |       | $          | —     |       | $          | — |   |

 

NOTE 10 — CAPITALLEASE OBLIGATIONS

GeM periodicallyenters into capital leases, primarily for office equipment. The following is aschedule by year of future minimum lease payments required to be paid by GeMunder capital lease obligations together with the present value of the netminimum lease payments as of June 30, 2006:

| Total minimum lease payments—2006       |   | $      | 1,629  |   |
|----------------------------------------------|--------|--------|--------|--------|
|                                         |   |   |   |
| Less amount  representing interest           |   | (49    | )      |
|                                         |   |   |   |
| Present value of  net minimum lease payments |   | 1,580  |   |
|                                         |   |   |   |
| Less current  portion                        |   | (1,580 | )      |
|                                         |   |   |   |
| Non-current portion                          |   | $      | 0      |   |

 

NOTE 11 —CONVERTIBLE NOTES PAYABLE

*$1.5million Convertible Notes*—In June 2004, the Company raisedgross proceeds of $1,500,000 through the issuance of Convertible PromissoryNotes (the “ $1.5 million Notes”) plus two series of detachable warrants,Series A and B, to acquire 2,400,000 shares of common stock. The $1.5 millionNotes accrued interest at a rate of 1.98% per annum, payable monthly, and hadan original maturity date of June 7, 2005. The $1.5 million Notes wereconvertible, at an initial conversion price of $2.50, into 600,000 shares ofcommon stock. The $1.5 million Notes included a provision requiring GeM to filea registration statement with the Securities and Exchange 

F-25

----

Commission (“SEC”)covering the public resale of the shares underlying the $1.5 million Notes andwarrants. The $1.5 million Notes automatically converted into common stock uponthe effective date of such registration statement. Each A and B Warrant isexercisable into one share of common stock at a modified exercise price each of$1.00 per share. The exercise prices of the A and B Warrants are subject todownward adjustment in the event that the Company issues shares of common stockor securities that are convertible into shares of common stock at a purchase orconversion price less than the exercise price of the warrants. The Series AWarrants expired October 12, 2005. The Series B Warrants have an expirationdate of June 7, 2009. In July 2004, upon the SEC declaring GeM’s registrationstatement effective, the $1.5 million Notes and accrued interest automaticallyconverted into 601,155 shares of common stock.

In connection with the$1.5 million Notes, GeM paid commissions of $120,000 to Founders EquitySecurities, Inc. which was recorded to debt issuance costs. Upon theregistration statement being declared effective by the SEC, the unamortizedbalance of $110,000 was immediately expensed to interest expense.

*$1.6million Convertible Note*—In April 2005 GeM issued a $1.6million convertible note (the “Trident Note”) and detachable warrants topurchase 450,000 shares of common stock to Trident Growth Fund, L.P. (“Trident”).. The warrants had an exercise price of $1.00 per share and an expiration dateof five years after the issue date. The Trident Note accrued interest at therate of 12% per annum paid monthly in arrears and was due the earlier of (i)April 30, 2006 (ii) the next public offering of securities of GeM for its ownaccount or (iii) a change in management control of Stellar. The Trident Notewas secured by substantially all of GeM’s assets.

GeM paid a 1.0%origination fee of $16,000; $60,000 for a six month non-exclusive investmentservices agreement with an affiliate of Trident; and issued 100,000 warrants toan advisor in connection with the debt valued at $72,074. These costs wererecorded as debt issuance costs and are being amortized over the life of theTrident Note, or six months in the case of the investment services agreement.GeM also issued 40,000 shares of common stock and warrants to purchase 100,000shares of common stock to Trident. The proceeds were allocated among thewarrants, the embedded conversion option, and the common stock, with theremainder to the host instrument.

At the option of Trident,it may elect to receive shares of common stock instead of cash payments forinterest due under the Trident Note and may convert the principal due intoshares of common stock at a conversion price of $1.00 per share subject tocertain anti-dilution adjustments. In addition, the Trident Note includes a provisionrequiring GeM to file a registration statement with the SEC to cover the publicsale of shares that have been or may be issued under the Trident Note orwarrants.

The Trident Notecontained certain financial covenants with which GeM was required to comply.These covenants included a requirement to maintain adequate cash flow and acurrent ratio of not less than 1.5 to 1. Beginning in October 2005, GeM was notin compliance with any of the financial covenants included in the Trident Note,which constituted an event of default.

On November 4, 2005,Trident waived compliance with all financial covenants contained in the TridentNote for a period of 180 days. In consideration for the waiver, GeM issued211,833 shares of common stock and a warrant to purchase an additional 250,000shares of common stock at an exercise price of $0.40 per share. Interestexpense of $93,207, which equals the fair market value of the common stock atthe time of issuance, was recognized and the related warrants were accounted foras derivative instruments under SFAS No. 133 and were valued at $210,565 at thetime of grant.

The full principal amountand all accrued and unpaid interest due under the Trident Note in the aggregateamount of $1,616,000 became due and payable on April 30, 2006. Effective May 1,2006, GeM entered into an agreement with Trident to: (i) extend the maturitydate of the Trident Note until the earlier of April 30, 2007 or the receipt of$5,000,000 of gross proceeds from the sale of convertible debt or equitysecurities after May 19, 2006; (ii) eliminate all financial covenants; (iii)eliminate certain negative covenants; and (iv) eliminate the anti-dilutionadjustment for issuances of shares at prices below the conversion price of theTrident Note. The Trident Note continues to accrue interest at the rate of 12%per annum payable monthly in arrears on the last day of each month, remainssecured by substantially all of GeM’s assets, and is redeemable, in whole or inpart, at GeM’s option at 100% of the principal amount. Interest is payable incash unless Trident elects to have it paid in shares of common stock valued atthe conversion price in effect on such date. The Trident Note is convertible inwhole or in part at the option of Trident into shares of common stock at aconversion price of $0.40 per share.

In consideration for theforegoing extension, amendments to certain outstanding warrants, and thecancellation of an outstanding warrant, GeM issued warrants to Trident topurchase 1,745,000 shares of common stock. The warrants are immediatelyexercisable at an exercise price of $0.40 per share, contain standard andcustomary cashless exercise provisions, and expire May 1, 2011. Total amountexpensed related to the warrants was $188,305, which is the net of the fairvalue of the warrants of $196,407 reduced by the value of the cancelledwarrants of $8,102.

The amendments eliminatedthe provisions that caused the conversion feature of the note and the relatedwarrants to be treated as 

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derivatives. In addition,all other warrants that were accounted for as derivates due to the Trident Note’soriginal provisions ceased being derivatives as a result of the modificationsof the terms of the debt. (See Note 12)

*$700,000Convertible Notes—*During March 2006, pursuant to a series ofsecurities purchase agreements, GeM sold convertible notes in the aggregateprincipal amount of $700,000 convertible into 4,666,667 shares of common stockand warrants to purchase an additional 2,333,334 shares of common stock foraggregate gross cash proceeds of $700,000 ($644,000 net of placement fees). Thesecurities were sold in units consisting of a $45,000 convertible note and awarrant to purchase 150,000 shares of common stock at a purchase price of$45,000 per unit.

The convertible notesaccrued interest at the rate of 10% per annum payable at maturity, were dueeighteen months after issuance, and were convertible at anytime at the optionof the holder at a conversion price of $0.15 per share. The conversion pricewill not be adjusted other than for stock splits, combinations,recapitalization and stock dividends. GeM may prepay the convertible notes, inwhole or in part, at any time upon ten days written notice. The amounts dueunder the convertible notes were subordinated to the prior payment of allsenior indebtedness which included GeM’s obligations to Trident under theTrident Note, all present or future bank or other financial institutionalindebtedness, and any indebtedness secured by a lien on any of GeM’s assets.

Each warrant isimmediately exercisable into one (1) share of common stock at an exercise priceof $0.40 per share for a term of three years. The exercise price of thewarrants will not be adjusted other than for stock splits, combinations,recapitalization and stock dividends.

In connection with theseconvertible notes, GeM incurred placement fees consisting of $56,000 and issuedwarrants to purchase 373,333 shares of common stock (equal to 8% of the sharesissuable upon conversion of the notes included in the units) at an exerciseprice of $0.40 per share. The placement fees were fully expensed in 2006 due tothe conversion of the notes to preferred stock.

GeM agreed to include theshares of common stock issuable upon conversion of the convertible notes orexercise of the warrants sold in the debt offering in any registrationstatement filed under the Securities Act (excluding registration statements onSEC Forms S-4, S-8 or any similar or successor forms) in order to permit thepublic resale of such shares. There were no demand registration rightsassociated with these instruments.

GeM evaluated theembedded conversion option and the freestanding warrants under SFAS No. 133 andEITF 00-19 and determined that they qualified for derivative accounting (seeNote 12). The fair value of the embedded conversion feature and the warrantswere first allocated between the warrants and the hybrid instrument, with$259,367 allocated to the warrants. GeM then recorded the fair value of theconversion option as a derivative liability in the amount of $666,781. Theexcess of the combined value of the warrants and the embedded conversion optionover the proceeds totaling $226,148 was charged to Loss on DerivativeLiabilities at the date of note issuance.

On May 1, 2006, all ofthe convertible notes in the aggregate principal amount of $700,000, plusaccrued interest of $8,055 were exchanged for 47,205 shares of Series BConvertible Preferred Stock, $.001 par value per share, at a purchase price of$15.00 per share (see Note 12). This exchange resulted in the cancellation ofall amounts due and owing the purchasers under the original convertible notes.Moreover, the related warrants that were initially classified as derivativesceased being a derivative as a result of the modification of the Trident Note.

NOTE 12 —DERIVATIVES

GeM evaluated theapplication of SFAS 133 and EITF 00-19 for the following financialinstruments:

·      Warrants issued to Trident during 2003;

·      Series B convertible preferred stockconversion feature;

·      Warrants associated with the Series Apreferred stock;

·      2004 convertible notes conversion feature;

·      Warrants associated with the 2004convertible notes;

·      Warrants to purchase common stock issuedfor services;

·      The Trident Note conversion feature;

·      Warrants associated with the Trident Note;

·      Warrants issued to Trident in November2005 to waive covenant for non-compliance;

·      Warrants issued in connection with thesale of units in November 2005

·      Warrants issued in connection with thesale of convertible notes in March 2006

·      Warrants issued in connection with themodification of the Trident Note in May 2006

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Based on the guidance inSFAS 133 and EITF 00-19, GeM concluded all of these instruments, other than theconversion feature of the Series B Preferred Stock and the warrants issued inconnection with the modification of the Trident Note, qualified for derivativeaccounting through May 1, 2006 (the date of the Trident Note was amended).Specifically, the warrants issued to Trident in 2003 had registration rightsthat contained liquidated damage provisions that required GeM to cause andmaintain effectiveness of a registration statement covering those securities.Should GeM be unsuccessful, the penalty provision called for GeM to issue 0.1%of its common shares then outstanding computed on a fully-diluted basis per dayuntil the shares are registered. Because the registration rights agreement didnot have an explicit limit on the number of shares to be delivered in a sharesettlement, the warrants issued to Trident, the 2004 Notes, the Trident Note,and all of the other warrants qualified for derivative accounting.

In addition, all of theinstruments contain reset provisions that required the exercise price to adjustdownward and in some cases, the number of shares issuable upon exercise orconversion to be adjusted upward, should GeM sell or otherwise issue commonstock at prices below the applicable exercise price. In certain cases, GeM hassold common stock at a price below the exercise price of the instruments,thereby, triggering the reset provisions. Following the guidance in EITF 00-19,GeM concluded that these reset provisions, and particularly the fact that GeMhas triggered the reset provisions on several instruments, caused theassociated instruments to be accounted for as derivatives. GeM concluded thatthe conversion feature of the Series B Preferred Stock is clearly and closelyrelated to the economic characteristics of the host contract and, as a result,the conversion feature of the Series B Preferred Stock does not qualify forderivative accounting.

GeM is required to recordthe fair value of the conversion features and the warrants and options on itsbalance sheet at fair value with unrealized changes in the values of thesederivatives reflected in the consolidated statement of operations as “gain(loss) on derivative liabilities.”

With the help of avaluation specialist, GeM used the Cox-Ross-Rubenstein binomial model (whichproduces results substantially the same as Black-Scholes) to calculate thevalue of derivative liabilities. GeM used volatility rates based on GeM’strading history. GeM used as a risk free rate the U. S. Treasury rate with amaturity that approximates the estimated expected life of a derivative orsecurity. GeM used the closing market price of the common stock at the close ofbusiness on the date of issuance of a derivative or at the end of a quarterwhen a derivative is valued at fair value. The volatility factor used inCox-Ross-Rubenstein binomial model has a significant effect on the resultingvaluation of the derivative liabilities on the balance sheet. The volatilityused was 80%.

In May 2006, the TridentNote was amended. The note was extended to the earlier of April 30, 2007 or thesale of $5 million of convertible debt or equity. The modification alsoeliminated the anti-dilution adjustments for issuances of shares below theconversion price, the registration rights requirements and related penalties.Trident cancelled previously issued warrants with the exception of warrants topurchase an aggregate of 1,475,000 shares of common stock. The exercise priceof the remaining warrants held by Trident and the conversion price of the notewere reduced to $0.40 per share. The Trident Note and remaining warrants wereamended to eliminate the (non-standard) anti-dilution adjustment for issuancesof securities below the exercise price. As part of the amendment, GeM issuedadditional warrants to Trident to purchase 1,745,000 shares of common stock atan exercise price of $.40 per share, expiring on May 1, 2011. The amendmentseliminated the provisions that caused the conversion feature of the note andthe related warrants to be treated as derivatives. As a result, there is noderivative liability associated with this debt instrument or warrants at June30, 2006.

The EITF recently issuedan exposure draft, EITF 06-07*Issuer’sAccounting for a Previously Bifurcated Conversion Option in a Convertible DebtInstrument When the Conversion Option No Longer Meets the Bifurcation Criteriain FASB Statement No. 133, Accounting for Derivative Instruments and HedgingActivities.*  The EITF has notreached a consensus on this issue and has deferred deliberation until the FASBaddresses certain questions which could impact a conclusion on this issue.Specifically, EITF 06-07 presents alternative views on how an entity shouldrecognize the change in the derivative liability when a previously bifurcatedconversion option is no longer required to be bifurcated pursuant to FAS 133.GeM had embedded conversion options that initially required separate accountingas a derivative under FAS 133 that no longer meet the conditions for separateaccounting as a derivative at June 30, 2006 due to the amendment of the relatedinstrument (see Note 11). GeM has chosen to adopt View A of EITF 06-07 whichrequires reclassification of the carrying value of the liability for theconversion option to shareholder’s equity. The debt discount recorded atissuance will continue to be amortized over the remaining term of theinstrument. If the EITF were to adopt a different view GeM may have to changeits policy to follow the final EITF guidelines.

A detail of the fairvalue of the derivative liabilities at June 30, 2006 and June 30, 2005 is asfollows:

|                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
|                        |       |     |       |     |       |
| Embedded  conversion option |       | $        | —     |     | $          | 93,619 |   |
| Warrants                    |       | —   |       | 631,117  |       |
|                        |       |     |       |     |       |
| Total                       |       | $        | —     |     | $          | 724,736 |   |

 

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NOTE 13 —STOCKHOLDERS’ DEFICIT

In June 2004, GeM enteredinto an agreement whereby FEQ Investments, Inc. (FEQ) will provide GeM withfinancial advisory services for a period of three years for a fee of $5,000 permonth and warrants to acquire 300,000 shares of common stock at an exerciseprice of $3.25 per share, expiring on June 7, 2009. The warrants vested onJanuary 1, 2005. In accordance with EITF 96-18, GeM accounts for stock optionsand warrants issued to non-employees at fair value. The value of such warrantsis amortized to expense over the vesting period. GeM recorded compensationexpense of $725,346 in 2005 associated with the warrants.

In April 2005, GeMreduced the exercise price of certain of its outstanding and vested warrantsgranted to non-employees to $1.00. This modification resulted in additionalexpense totaling $828,498, which was recorded in full on the date ofmodification as all of the outstanding warrants were fully vested on the dateof modification. This amount is included in the gain on derivative liability atJune 30, 2005.

The estimated fairvalue of warrants granted was calculated using the Black-Scholes option pricingmodel. The following summarizes the weighted average of the assumptions used inthe model.

|                                | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |
| Risk free rate                 |       | 4.7      | %          | 4.1      | %          |
| Expected years  until exercise |       | 2.9      |       | 3.8      |       |
| Expected stock  volatility     |       | 80       | %          | 88       | %          |
| Dividend yield                 |       | —   |       | —   |       |

 

On May 13, 2005, GeMgranted one employee, who is a leased employee, options to purchase 100,000shares of GeM’s common stock at the exercise price of $0.59 which was theclosing price on that date. The options vest over 1 year and expire 10 yearsfrom the date of grant. Compensation expense equal to $21,208 was recognizedduring the year ended June 30, 2006.

On November 10, 2005, GeMraised $1,000,000 of additional funding by selling investment units at $0.80per unit. Each investment unit consisted of two shares of common stock and onewarrant to purchase one additional share of common stock. The warrants expirethree years from the date of purchase and each warrant is exercisable for oneshare of common stock at an exercise price of $0.60 per share. The sale ofunits resulted in the issuance of 2,500,000 shares of common stock and warrantsto purchase an additional 1,250,000 shares of common stock.

Between December 16, 2005and April 15, 2006, GeM granted certain officers and employees, who are leasedemployees, options to purchase 7,005,000 shares of GeM’s common stock atexercise prices ranging from $0.18 to $0.40 per share which is equal to orhigher than the closing price of the stock on the issuance dates. The optionsvest over 18 months or three years and expire 10 years from the date of grant.Compensation expense equal to $219,851 was recognized during the year endedJune 30, 2006.

The following tablessummarize GeM’s stock option and warrant activity and related information:

|                           | ** ** | **STOCK OPTIONS**     | ** ** | **STOCK WARRANTS**                     | ** ** |
|---------------------------|------------|----------------------------|------------|---------------------------------------------|------------|
| ** **                | ** ** | **Number of  Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Number of  Shares** | ** ** | **Weighted-  Average  Exercise Price (a)** | ** ** |
|                      |       |                       |       |                                        |       |   |   |   |   |
| Balance at June  30, 2004 |       | 727,500                    |       | 1.76                                        |       | 3,370,500 |   | 1.00 |   |
| Granted                   |       | 100,000                    |       | 0.59                                        |       | 650,000 |   | 1.00 |   |
| Exercised                 |       | —                     |       | —                                      |       | (43,750 | ) | (1.40 | ) |
| Expired                   |       | —                     |       | —                                      |       | — |   | — |   |
|                      |       |                       |       |                                        |       |   |   |   |   |
| Balance at June  30, 2005 |       | 827,500                    |       | $                                           | 1.62       |   | 3,976,750 |   | $ | 1.00 |   |
| Granted                   |       | 7,005,000                  |       | 0.35                                        |       | 10,629,717 |   | 0.40 |   |
| Exercised                 |       | —                     |       | —                                      |       | — |   | — |   |
| Cancelled                 |       | —                     |       | —                                      |       | (150,000 | ) | (0.40 | ) |
| Expired                   |       | (242,500                   | )          | (1.76                                       | )          | (1,200,000 | ) | (0.40 | ) |
|                      |       |                       |       |                                        |       |   |   |   |   |
| Balance at June 30,  2006 |       | 7,590,000                  |       | $                                           | 0.47       |   | 13,256,467 |   | $ | 0.40 |   |

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(a)    The weighted-average exercise price reflectsa modification to the award approved in April 2005 which resulted in a decreasein the exercise price of outstanding warrants.

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|                                     | ** ** | **OPTIONS OUTSTANDING**                                             | ** ** | **OPTIONS EXERCISABLE**                         | ** ** |
|-------------------------------------|------------|--------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **Range of  Exercise  Prices** | ** ** | **Number of  Outstanding Shares  at  June 30, 2006** | ** ** | **Weighted  Average  Remaining  Contract Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable  at  June 30, 2006** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|                                |       |                                                                     |       |                                                 |       |   |   |   |   |   |   |
| $0.18-0.40                          |       | 7,005,000                                                                |       | 9.50                                                 |       | $ | 0.35 |   | — |   | $ | 0.35 |   |
| $0.59                               |       | 100,000                                                                  |       | 9.00                                                 |       | $ | 0.59 |   | 100,000 |   | $ | 0.59 |   |
| $1.76                               |       | 485,000                                                                  |       | 7.75                                                 |       | $ | 1.76 |   | 727,500 |   | $ | 1.76 |   |

 

 

|                                     | ** ** | **WARRANTS OUTSTANDING**                                            | ** ** | **WARRANTS EXERCISABLE**                        | ** ** |
|-------------------------------------|------------|--------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **Range of  Exercise  Prices** | ** ** | **Number of  Outstanding  Shares  At June 30, 2006** | ** ** | **Weighted  Average  Remaining  Contract Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable  at  June 30, 2006** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|                                |       |                                                                     |       |                                                 |       |   |   |   |   |   |   |
| $0.40                               |       | 13,256,467                                                               |       | 3.14                                                 |       | $ | 0.40 |   | 13,256,647 |   | $ | 0.40 |   |
|                                     |            |                                                                          |            |                                                      |            |  |  |  |  |  |  |  |  |

 

NOTE 14 — SERIES BPREFERRED STOCK

During the period March1, 2006 through June 30, 2006, GeM issued a total of 127,206 shares of Series BConvertible Preferred Stock (“Series B Preferred), $0.001 par value per share,and warrants to acquire up to 636,030 shares of common stock at $0.001 parvalue per share. The first 47,205 Series B Preferred shares issued resultedfrom an exchange of the $700,000 convertible note issued in March 2006 andrelated accrued interest of $8,055 (see Note 10). The remaining 80,001preferred shares were sold raising gross proceeds of $1,200,000 ($1,104,000 netof $96,000 in placement fees). The Series B Preferred and Warrants were sold inunits comprised of one share of Series B Preferred and one Warrant (“Units”).The Units were sold at a purchase price of $15.00 per unit. Each Series BPreferred is convertible into 100 shares of common stock at any time at theoption of the holder at a conversion price of $0.15 per share.  Each warrant is immediately exercisable into50 shares of common stock at an exercise price of $0.40 per share for a periodof three years after the date of issue. The exercise price of the warrants willnot be adjusted other than for stock splits, combinations, recapitalization andstock dividends.

GeM evaluated theapplication of SFAS 133 *Accounting forDerivative Instruments and Hedging Activities*and EITF 00-19, *Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock,*forthe Series B Shares. It concluded that the conversion feature of the Series BPreferred Shares does not qualify for derivative accounting and need not bebifurcated because the preferred stock is convertible into a fixed number ofshares (subject to stock splits, combinations, recapitalization and stockdividends) and is, therefore, considered to be “conventional convertiblepreferred stock” under EITF 00-19 and 05-02 *TheMeaning of “Conventional Convertible Debt Instrument” in Issue 00-19.*However,in accordance with EITF No. 00-27,*Application of Issue No. 98—5 to Certain Convertible Instruments*,which provides guidance on the calculation of a beneficial conversion featureon a convertible instrument, GeM Solutions has determined that the Series BPreferred Shares issued during the quarter had an aggregate beneficialconversion feature of $836,670 as of the date of issuance. GeM recorded thisbeneficial conversion feature as a deemed dividend upon issuance.  These financial statements reflectcorrections to reflect the beneficial conversion feature pertaining to theissued shares.

The holder of each shareof Preferred Stock will be entitled to receive, when, as, and if declared bythe Board of Directors cumulative dividends equal to eight percent (8%) perannum of the original issue price payable in shares of common stock. There wereno dividends declared or paid during the year ended June 30, 2006.

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NOTE 15 —OPERATING LEASES

GeM has a leasecommitment for its office space until January, 2008 at which time GeM has theoption to extend the term of this lease for three (3) periods of one (1) yearon the same terms and conditions as the base lease. If the lease is renewed foronly one year, GeM will have to pay a penalty of $10,000, and if the lease isrenewed for only two years, GeM will have to pay a penalty of $5,000. Themonthly lease commitment is $11,238 per month which includes common areamaintenance and taxes.

Total rentalexpense for all operating leases was $160,605 and $157,053 for the years endedJune 30, 2006 and 2005, respectively.

The following is aschedule by year of future minimum rental payments required under operatingleases that have initial or remaining non-cancelable lease terms of one year orgreater as of June 30, 2006:

| 2007   |   | $      | 106,292 |   |
|--------|--------|--------|---------|--------|
| 2008   |   | 57,167 |    |
|   |   |   |    |
|   |   | $      | 163,459 |   |

 

NOTE 16 — SEGMENTREPORTING

With the acquisition ofCompuSven, Inc. in July 2004 (see Note 5); GeM determined it has two reportablesegments, Internet Monitoring and Email Migration. Information about operationsby reportable segment for 2006 as restated is as follows:

|                                | ** ** | **Internet  Monitoring** | ** ** | **Email  Migration** | ** ** | **Corporate and  Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------|------------|--------------------------|------------|----------------------|------------|--------------------------------------|------------|------------------|------------|
|                           |       |                     |       |                 |       |                                 |       |             |       |
| Revenues                       |       | $                        | 224,724    |                 | $          | 646,240                              |       | $                | —     |   | $ | 870,964 |   |
| Depreciation and  amortization |       | 39,927                   |       | 135,410              |       | —                               |       | 175,337          |       |
| Operating profit  (loss)       |       | (3,717,320               | )          | 76,775               |       | (319,558                             | )          | (3,960,103       | )          |
| Capital  expenditures          |       | 83,823                   |       | —               |       | —                               |       | 83,823           |       |
| Total assets                   |       | 450,474                  |       | 1,241,509            |       | 492,885                              |       | 2,184,868        |       |
|                                |            |                          |            |                      |            |                                      |            |                  |            |  |  |  |  |

 

Information aboutoperations by reportable segment for 2005 as restated is as follows:

|                                | ** ** | **Internet  Monitoring** | ** ** | **Email  Migration** | ** ** | **Corporate and  Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------|------------|--------------------------|------------|----------------------|------------|--------------------------------------|------------|------------------|------------|
|                           |       |                     |       |                 |       |                                 |       |             |       |
| Revenues                       |       | $                        | 244,218    |                 | $          | 638,587                              |       | $                | —     |   | $ | 882,805 |   |
| Depreciation and  amortization |       | 31,814                   |       | 132,097              |       | —                               |       | 164,401          |       |
| Operating profit  (loss)       |       | (2,706,402               | )          | 95,721               |       | (923,941                             | )          | (3,534,622       | )          |
| Capital  expenditures          |       | 62,559                   |       | 1,605                |       | —                               |       | 64,164           |       |
| Total assets                   |       | 1,689,356                |       | 1,127,161            |       | 370,162                              |       | 3,186,679        |       |
|                                |            |                          |            |                      |            |                                      |            |                  |            |  |  |  |  |

 

NOTE 17 — FOREIGNCURRENCY ADJUSTMENTS

The financial positionand results of operations of GeM Canada, GeM’s Canadian subsidiary, aremeasured using GeM Canada’s local currency (Canadian Dollar) as the functionalcurrency. Revenues and expenses of GeM have been translated into U.S. dollarsat average exchange rates prevailing during the period. Assets and liabilitieshave been translated at the rates of exchange on the balance-sheet date. Theresulting translation gain and loss adjustments are recorded directly as aseparate component of shareholders’ equity. Foreign currency translationadjustments resulted in an other comprehensive net loss of $1,883 and $0 in2006 and 2005, respectively.

NOTE 18 — CUSTOMERCONCENTRATION

The Company had sales toone (1) customer representing 11% of total revenues for the year ended June 30,2006. There were no significant concentrations for the year ended June 30,2005.

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NOTE 19 —SUBSEQUENT EVENTS

Since June 30, 2006, GeMraised an additional $1,330,000 through the issuance of 88,668 shares of theSeries B Convertible Preferred Stock (the “Series B Shares”) convertible into8,866,800 shares of common stock and warrants to purchase an additional4,433,400 shares of common stock. The Series B Shares have an original issue priceof $15.00 per share and are convertible at anytime at the option of the holderat a conversion price of $0.15 per share. Each warrant is immediatelyexercisable at an exercise price of $0.40 per share for a term of three years.

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