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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-KSB

|                                               | 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                                            
|                                               |                                                                                          
|                                               | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
|                                              
|000-33099                                     
|(Commission File Number)                      
|                                               |                                                                                          
|STELLAR TECHNOLOGIES, INC.                    
|
|(Name of Small Business Issuer in Its Charter)
|                                               |                                                                                          

|Colorado                                                           |  | 84-1553046                              
|------------------------------------------------------------------ |  | ----------------------------------------
|(State or other jurisdiction of
    Incorporation of organization) |  | (IRS Employer
    Identification Number)
|                                                                   |  |                                         
|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 reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes      No

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of issuers
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this form 10-KSB.


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


Yes      No

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


The
       aggregate market value of the voting common equity held by non-affiliates

    of the issuer based on the closing sale price of the issuers common
     stock as reported on the OTC Bulletin Board on October 10, 2006 was $4,881,997.

    The information provided shall in no way be construed as an admission that
     any person whose holdings are excluded from the figure is an affiliate or

    that any person whose holdings are included in the figure is not an affiliate,
     and any such admission is hereby disclaimed.


As of October
    10, 2006, 29,190,969 shares of the issuers common stock were outstanding.


Transitional Small Business Disclosure Formats (check one):


Yes      No


DOCUMENTS INCORPORATED BY REFERENCE

None.


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|                     | TABLE OF CONTENTS                                                                                               |      | 
|-------------------- | --------------------------------------------------------------------------------------------------------------- | ---- | 
|                     |                                                                                                                 |      | 
|                     |                                                                                                                 | Page | 
|                     |                                                                                                                 |      | 
|                     | PART I                                                                                                          |      | 
|Item 1.              | Description of Business                                                                                         | 1    | 
|Item 2.              | Description of Property                                                                                         | 24   | 
|Item 3.              | Legal Proceedings                                                                                               | 24   | 
|Item 4.              | Submission of Matters to a Vote of Security Holders                                                             | 24   | 
|                     |                                                                                                                 |      | 
|                     | PART II                                                                                                         |      | 
|Item 5.              | Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchasers of Equity Securities | 24   | 
|Item 6.              | Management’s Discussion and Analysis                                                                            | 25   | 
|Item 7.              | Financial Statements                                                                                            | 34   | 
|Item 8.              | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures                           | 34   | 
|Item 8A.             | Controls and Procedures                                                                                         | 35   | 
|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 | 35   | 
|Item 10.             | Executive Compensation                                                                                          | 39   | 
|Item 11.             | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                  | 43   | 
|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 REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended.  All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding our future financial position, business
strategy, budgets, projected revenues, projected costs and plans and objective of management for future operations, are forward-looking statements.  In addition, forward-looking statements generally can be identified by the use of forward-looking
terminology such as may, will, expects, intends, plans, projects, estimates, anticipates, or believes or the negative thereof or any
variation thereon or similar terminology or expressions.


These forward-looking
    statements are subject to risks and uncertainties that could cause actual
    results to differ materially from results proposed in such  statements. Although
    we believe that the expectations reflected in such forward-looking statements
    are reasonable, we can give no assurance that such expectations will prove
    to have been correct. Important factors that could cause actual results
to differ materially from our expectations include, but are not limited to: our
    ability to fund future growth and implement our business strategy; our ability
    to attract and retain customers and qualified personnel; customer acceptance
    and  satisfaction with our Internet management solutions; anticipated product
    enhancements and releases; defects in our products and services; legal claims
    against us, including, but not limited to, intellectual property infringement
    claims; our ability
to protect our intellectual property; forecasts of Internet usage and the growth
    and acceptance of the employee Internet management industry; rapid technological
    changes in the employee Internet management industry; competition in our
    industry and  markets; general economic and business conditions, either nationally
    or internationally or in the jurisdictions in which we are doing business;
    the condition of the securities and capital markets; legislative or regulatory
    changes; and statements of
assumption underlying any of the foregoing, as well as those other factors set
    forth under the caption Risk Factors on page 13 of this report
    and Managements Discussions and Analysis below.


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


PART I

|ITEM 1. | DESCRIPTION OF BUSINESS
|------- | -----------------------

Development

We were incorporated on July 20, 2000 as a Colorado corporation.  We were initially engaged in the business of providing photography and digital services to
organizations in the travel industry. We exited the travel industry in April 2002.


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During the quarter
ended December 31, 2002, we announced our intention to engage in the business
of acquiring, exploring and developing natural gas and oil  properties. In furtherance
of this plan, we purchased an  interest in a limited partnership
that owned oil and gas leasehold interests
in Cameron Parish, Louisiana and certain seismic data related thereto in offshore
oil fields. In September 2003, we disposed of all of our oil and gas interests
and exited the oil and gas business.


On January 15, 2004, we acquired Stellar Venture Partners, LLC, a Georgia limited liability company (Stellar Venture Partners), by merging a wholly-owned subsidiary of ours with
and into Stellar Venture Partners, with Stellar Venture Partners remaining as the surviving entity and becoming our wholly-owned subsidiary.  At the effective time of the merger, we issued 18,000,001 shares of our common stock to 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 the Internet
access management industry.


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


Overview

We provide Internet access management products that are designed to enable businesses and government agencies to monitor, report and manage how their employees access and use the Internet.  We
offer an integrated suite of solutions for establishing and consistently enforcing Internet usage policies and managing electronic communications with others inside and outside of an organization.  Our solutions archive and filter internal and
external e-mail communications including attachments, instant messaging, and Web site browsing across the enterprise and provide graphical, real-time hierarchal reporting and immediate warnings of policy violations to management.  Our products and
services are designed to give employers the ability to implement Internet access policies for different users and groups within their organizations, monitor electronic communications, including scanning and blocking attachments, and archive
electronic communications to comply with records retention policies.  Our primary product offerings consist of:


| | • | our
         Global Ecommunications Management or
         GeM Solutions and Stellar Internet
         Monitoring (SIM) products,
         which we refer tocollectively
         in this report as our Internet access management solutions; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                      
| | • | our E-Mail Shuttlee-mail
    migration solution.                                                                                                                                                                                                    

The E-Mail
  Shuttle is an e-mail migration product that provides e-mail and e-mail related
  data migration and directory synchronization between disparate e-mail systems.
  E-Mail Shuttle helps organizations with multiple e-mail platforms consolidate
  to a single e-mail platform saving both computer hardware and technical resources.
  The e-mail systems supported by the E-Mail 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 folders and directories, calendars, loader components which allow migration from multiple
systems at any one time from a single management console called Launchpad.


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Industry Background

The Internet continues
      to evolve as a critical business tool and an important communications and
      commerce platform for enterprises worldwide. Many organizations use the
      Internet to utilize business applications that are accessed over their
      corporate networks and use high wide-bandwidth connections enabling high-speed
      Internet access to their employees. The Internet is also a highly
      popular consumer medium for communication,
    entertainment, information and commerce.  As the rapid evolution of Internet
      technology and web content continues, the amount and types of data, as
      well as the way people access it, has increased, creating growing challenges
    for employers.


Internet access in the workplace is fast, convenient and essentially free to employees. As a result, employees have the opportunity to use their employers computing resources for
    recreational web surfing, peer-to-peer file sharing, instant messaging and other personal matters during business hours.  This unmanaged non-business use of company computing and network resources, including Internet access, can result
    in increased risk and cost to the employer, including lost employee productivity, increased network bandwidth consumption, increased network security risks, and potential legal liability via the loss of sensitive or confidential information.
    Additionally, an employees use of websites that offer free software downloads, pirated software and peer-to-peer applications may introduce spyware and other malicious code to the employees desktop and to the employers network.
    All of these factors can contribute to higher costs for companies that make computing and network resources available to their employees.


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


To address these problems, businesses are recognizing the need to become proactive about how their employees access and use the Internet.  We believe that simply
    managing employee Internet access through filtering of URLs is insufficient to protect an organization. These products are often limited to filtering of website URLs, cannot operate on multiple network platforms, can be labor-intensive to deploy,
    and consume valuable information technology resources.


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Target Market

Based on our experience with actual and potential customers, we believe that workplace management of non-business-related use of computing resources and Internet
    access is becoming an increasingly important priority for organizations because of its impact on employee productivity, network bandwidth consumption, network and data security, and potential legal liability.  In addition, the need to retain and
    retrieve electronic communications to comply withapplicable regulations and produce business records in litigation matters, has significantly increased the need for a comprehensive and effective e-mail and instant messaging archiving and
  retrieval system.


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


Employee Internet Access Management Solutions

Certain of our closest competitors have been offering software applications that enable managers to select the types of Internet content and applications they wish to allow or block employee
    access to, based on the database categories they have defined. The software applications are loaded onto the customers servers and are monitored by the customers information technology staff.  Their software applications categorize
    websites in a URL database, and then classify them into different categories to enable organizations to determine the types of Internet content that are appropriate for their workplace culture. Their software applications allow managers to permit or
    deny Internet access based on the employee, type of user, time of day, amount of personal surfing time and type of content being accessed.  Most of the content management solutions do not have a comprehensive e-mail archiving and retrieval solution
    or an integrated e-mail and Instant Messaging solution capable of scanning and blocking e-mails and e-mail attachments using Boolean Lexical Analysis key word analysis.


With the introduction
    of Global Ecommunications Management or GeM, we offer a fully integrated suite
    of solutions for establishing and consistently enforcing employee Internet
    usage policies and electronic communications with others inside and outside
    of an organization. GeM archives and filters internal and external e-mail
    communications including attachments, instant messaging activities, and Web
    site browsing across the enterprise. GeM also provides graphical, real-time
    hierarchal reporting and immediate warnings for policy violations. GeM has
    been designed as a complete archiving solution to assist companies in meeting
    the requirements of regulatory compliance, records retention, and content
    policy management. The principal benefits of our products include:


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Enhanced Network and Data Security.Our access management solutions add an additional layer of protection to an organizations network and data security by monitoring employee access to security-risk web sites such
    as those containing malicious code or spyware. This allows an organization to proactively reduce the risk of malicious code attacks, such as web-based worms and viruses, and enable organizations to prevent back-channel communicationof important corporate or personal data through electronic communications.


Increased Employee
        Productivity.  Our software
    gives businesses the ability to more effectively manage how employees access
        and use the Internet. Our access management solutions enable organizations
        to identify the pattern and scope of employees Internet use, and
        to manage access to  non-business related content and applications such
        as instant messaging. Our software allows managers to monitor employee
        use of the Internet based on the employee, type of user, time of day,
        amount of personal surfing time, and to block access to
    certain websites (or URLs).


Conservation of IT Resources. Our employee access management
    solutions allow organizations to reduce bandwidth consumption by managing personal Internet use and access to websites, particularly those that may contain bandwidth-intensive content, such as streaming audio and video, MP3 music files, multi-player
    games and other new media.  Our employee access management solutions further enhance bandwidth management capabilities by monitoring network usage in real-time and by allowing employee access based on bandwidth thresholds. Reducing the bandwidth
    consumed by non-business-related Internet traffic allows an organization to use its network more efficiently and effectively, and helps ensure that bandwidth is available for mission-critical business applications.


Reduced Exposure to Potential Legal Liabilities.  Our employee access management solutions support organizations efforts to reduce exposure to legal liability resulting from the improper use of the Internet in the workplace, prevent e-mail and instant messaging born
    threats, and archive electronic forms of communication for retrieval at a later date.    By implementing our products in conjunction with an overall corporate Internet usage policy, organizations can proactively curtail access to objectionable
    Internet content and reduce their exposure to threats.


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


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Products and Services

Our GeM Solutions suite consists of four distinct modules each designed to perform the following specific functions:


| | • | GeM Web Manager- manages Web browsing by providing filtering, blocking, reporting, and data archiving and retrieval of employee Web browsing activity. The Web Manager prevents access to websites that are restricted in accordance with company policy while at the same time enabling organizations to maintain compliance with industry regulations.                                                                                                      
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | • | GeM E-Mail Manager - manages inbound, outbound and internal e-mail communications, including 300 different attachment types.	It is designed to prevent employees from disclosing confidential information and prevent threats from infiltrating the corporate network. Threats typically include viruses, spyware, Phishing and identity theft, and malicious code. E-Mail Manager is also designed to handle and report on historical e-mail and attachments.

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| | • | GeM Instant Message Manager- manages inbound, outbound and internal instant messaging communications, including 300 different attachment types.	It is designed to prevent employees from disclosing confidential information and preventing threats from inhabiting the corporate network. Threats typically include viruses, spyware, Phishing and identity theft, and malicious code.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                        
| | • | GeM Archive Manager allows companies to store all Internet activity including full web page content, e-mails and associated attachments, and instant messages and associated attachments. It is designed to enable powerful searches across the archives for key words contained in the archived activity, to re-create, view or print archived messages.                             

SIM offers the following
    functions and features:

| | • | Monitoring and 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 organizations expenditures on IT resources and equipment costs.     
| |   |                                                                                                                                                     
| | • | Instant alert notifications to provide managers with automated e-mails that contain a brief or detailed list of violations by their employees.      

E-Mail Shuttle offers the following functions and features:

| | • | E-mail Extractor- provides ability to extract e-mail and related data from one e-mail system in
preparation for loading into another system including Microsoft Exchange, Lotus Notes/Domino, Novell Group Wise, and any IMAP-4 compliant system.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                  
| | • | E-mail Loader- provides ability to load e-mail and related data from a previously prepared file into
another e-mail system including Microsoft Exchange, Lotus Notes/Domino, Novell GroupWise, and any IMAP-4 compliant system.                  
| |   |                                                                                                                                                                                                                                                  
| | • | Directory Synchronization provides ability to synchronize two e-mail systems to enable
organizations to seamlessly update changes made within disparate e-mail systems.                                                                         

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


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Strategy

Our strategy is to generate significant growth in revenues and gain a realistic share of the market for Internet access management products and services.  The key components of our strategy are:


Deploy a Direct Sales Force In the United States:We are building a direct sales force. Over the past ten months, we retained a Senior Vice President of Sales and have recruited, selected and trained five direct sales people all with extensive experience selling software and networking solutions to enterprises throughout the United States.  We have initially deployed our sales force in the United States, which we believe represents the largest market opportunity at this time.  We intend to continue to aggressively expand our  direct sales force as candidates and finances permit.


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


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


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


Expand Our Internet Access Management Product Offering.  We
    intend to continuously develop and update our software solutions in order to keep current with the evolution of  Internet access management technology.  We plan to offer our customers enhanced reporting and management applications and provide
    additional software features that address web filtering and blocking, email and instant message usage, and archival and retrieval of electronic communications.


Develop and Maintain Leading Internet Access Management Processes and Technologies. We intend to continue developing proprietary processes and technologies that give us what we believe is a distinct advantage over our competitors. We believe our competitive advantage lies in the ability of our employee
    access  management solutions to enable organizations to monitor and manage employee access to websites, e-mails and instant messages from a single application. We intend to continue to develop modular software and technology that will facilitate the
    integration of our products with the systems of our customers.  We believe that this will enable us to offer our products to a broader customer base.


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Work
          Closely With Internet Infrastructure Providers.  We intend to continue to work closely with Internet infrastructure
        providers such as Microsoft and IBM to integrate with their products.
          We also intend to provide our solution suit in conjunction with their
          product
        offerings deep in the network infrastructure on proxy servers, firewalls
        and archiving databases. In addition, we plan to continue to sponsor
        co-marketing programs with these companies to associate our access management
        solutions with their
    established brands so as to further enhance our market position.


Over the past two years, we have developed a fully integrated suite of solutions which we believe is the most advanced and comprehensive solution currently
    available.    We have branded this solution as GeM, Global Ecommunications Management and GeM Solutions, and are currently doing business as GeM Solutions.  We intend to build our business around this product and have made filings
    to register these trademarks with the United States Patent and Trademark Office.  In order to identify our company with our primary offering to the market, and provide a consistent and comprehensive identity, we are in the process of changing the
    name of the Company to GeM Solutions, Inc.


Sales, Marketing and Distribution

We sell
      our products and services through direct and indirect channels. We derive
      substantially all of our Internet access management revenue from licensing
      fees that we receive upon the sale of our Internet access management solutions
      which are distributed via master software licensing and subscription agreements
      with our customers. The GeM and E-mail Shuttle solutions are licensed on
      a perpetual basis or sold by subscription and
    include first year annual maintenance.  Thereafter, licensees are required
      to pay annual maintenance fees which provide for product updates and continued
      product support or renew their subscriptions, as applicable. The SIM and
      PURL (Premium URL list) offerings are licensed on a subscription
      basis for one or more years. We invoice customers for the full amountof
      their license at the time the license is activated. Payment is due generally
      within 30 days of the invoice for the full term of the license. We record
      amounts billed to customers in excess  of recognizable revenue as deferred
      revenue on our balance sheet.


Our marketing strategy is to raise awareness of the potential risks associated with unrestricted employee access to the Internet, generate qualified sales leads for our direct sales force and
    channel partners, and increase recognition of GeM as a much needed employee access management solution.  Our marketing efforts are targeted toward business executives, including information technology professionals, CEOs, CSOs and
    CIOs, upper-level management and human resource personnel. Our additional marketing initiatives consist of:


| | • | using our website to communicate with our indirect sales channels, and provide product and company information to interested parties;
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                      

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| | • | participating in trade shows and industry events specifically with web and messaging security components;                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                  
| | • | hosting regional and international seminars, webinars and training sessions for our sales organization and reseller partners, as well as customers and prospects;                
| |   |                                                                                                                                                                                  
| | • | participating in cooperative marketing efforts with our partners including web link exchanges, joint trade show activities, channel marketing campaigns, road shows and seminars;
| |   |                                                                                                                                                                                  
| | • | conducting speaking engagements on topics of interest to our customers and prospects; and                                                                                        
| |   |                                                                                                                                                                                  
| | • | providing and distributing soft- and hard- copy materials on our company, products, solutions, technologies, partnerships and benefits.                                          

We intend to provide our reseller partners with significant incentives to present our Internet access management and E-mail migration solutions to their customer base, including:


| | • | discounted solutions for cooperating in trials of new functionality                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                              
| | • | sales and marketing support, including sales tools such as white papers, Internet usage audit reports, Internet abuse fact sheets, brochures and other materials designed to assist them in selling our Internet access management solutions;
| |   |                                                                                                                                                                                                                                              
| | • | a web-based reseller tutorial designed to help our resellers in understanding the benefits of our Internet access management solutions;                                                                                                      
| |   |                                                                                                                                                                                                                                              
| | • | support for lead qualification, sales calls, conference calls, volume pricing and other support in presenting our solutions to potential customers; and                                                                                      
| |   |                                                                                                                                                                                                                                              
| | • | access to marketing opportunities in advertising, trade shows and similar media where our solutions can be showcased and provide visibility for our partners.                                                                                

Customers

We have customers ranging in size from organizations with as few as 100 employees to global 1000 companies, and include government agencies and educational institutions.We are not dependent on one or a few principal customers.


Customer Service, Training and Support

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


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Competition

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


| | • | Companies offering HTTP/HTTPS filtering products, such as Websense, SurfControl, Secure Computing, 8e6 Technologies, and St. Bernard;
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                      
| | • | Companies offering instant message filtering products, such as Facetime, Akonix, IMLogic, and CA;                                    
| |   |                                                                                                                                      
| | • | Companies offering e-mail filtering products, such as CipherTrust, Vericept, Symantec, Orchestria, and Vontu; and                    
| |   |                                                                                                                                      
| | • | Companies offering data archiving and retrieval products, such as Vericept, Vontu, Iron Mountain, and Reconnex.                      

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

| | • | A product’s ability to integrate seamlessly with complex networks;                    
| | - | --------------------------------------------------------------------------------------
| |   |                                                                                       
| | • | How robust the solution is;                                                           
| |   |                                                                                       
| | • | The use of a scalable and user friendly database and reporting capability;            
| |   |                                                                                       
| | • | The breadth of the product offering for web, email, instant messaging and archiving;  
| |   |                                                                                       
| | • | The depth of the product’s monitoring, reporting, archiving and analysis capabilities;
| |   |                                                                                       
| | • | The quality
    of customer support; and                                              
| |   |                                                                                       
| | • | Pricing.                                                                              

We have found that certain potential customers, particularly larger organizations, view our small size and limited financial resources as a negative even if they prefer our offering to those of
    our larger competitors.  Based on our current revenues and the size of the market for our products, we believe we have a market share of less than 1%.  Our primary strategic objective is to strengthen our position in the market for Internet access
    management solutions and generate a substantial increase in revenue over the next 12 months.

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Intellectual Property Rights

Our intellectual property rights are important to our business.  We rely upon confidentiality procedures and contractual provisions to protect our proprietary
    technology and our brand.  The outsourcing companies we use for development purposes are made aware that we own the intellectual property and they are contractually bound in the event of contract termination to protect our intellectual property
    including returning or destroying all copies of any code they are working on or have worked on. Our general policy is to enter into confidentiality agreements with our employees and consultants, and nondisclosure agreements with all other parties to
    whom we disclose confidential information.


We have filed trademark registrations with the United States Patent and Trademark Office including: GeM, Global Ecommunications Management, and GeM Solutions. We do not have any patents relating to our proprietary technologies, nor do we have any applications for such rights
    pending.  We intend to apply for legal protection for certain of our intellectual property in the future.  However, we can provide no assurance that we will receive such legal protection or that, if received, such legal protection will be adequate
    to protect our intellectual property rights.


Research and Development

We have
      invested significant time and resources in creating a structured process
      for undertaking product and database development. Members of our research
      and development department and outside consultants are involved with database
      production, software development, validation and testing, documentation
      and research. They work as part of cross-disciplined teams designed to
      provide a framework for defining and addressing the
    activities required to bring product concepts and development projects to
      market successfully. Research and development costs consist of consulting
      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 research and 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 and no part-time employees.  None of our employees are represented by a labor union, and we have never experienced a workstoppage.    We believe that our relations with our employees are good.  We intend to hire up to 20 sales professionals by June 2007.


Regulatory and Legislative Issues

As use of the Internet has become more prevalent and various negative issue associated with the Internet have received increasing amounts of publicity, there has been a correspondingly greater
    amount of governmental attention directed to the Internet in the United States Congress and elsewhere.  While various pieces of legislation regulating different aspects of the Internet and Internet-related activity have been proposed, to date there
    has been no legislation enacted that places any direct and substantial regulatory burden on us.  Nonetheless, we anticipate further attempts to regulate Internet-related activity in the future, some of which may impose substantial burdens on our
    ability to do business.


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Certain industries, such as healthcare and financial services, are facing increased governmental regulation mandating the way in which electronic records are stored and managed. Federal court procedural rules and various state court procedural rules require production and delivery of electronic communications by parties involved in litigation and impose penalties for failure to be able to produce such information.  Certain federal statutes also impose liability for destruction of documents, including electronic messages, while legal proceedings are contemplated or pending.  We believe that these laws and regulations will increase the need and demand for Internet access management solutions, particularly e-mail archiving and retrieval solutions.


Privacy related laws and rights may also affect the use of our products.  For example, the Federal Wiretap Act and Electronic Communications Privacy Act of 1986 prohibit the interception, recording and disclosure of, among other things, electronic communications, unless an exception applies.  Employers generally rely on exceptions permitting them to monitor and intercept communications after obtaining the consent of its employees in order to enforce internal policies or monitor employee efficiency.  Claims by employees under state common law or constitutional law are fact intensive and generally require, among other things, that an employee establish that he or she had a reasonable expectation of privacy.  The forgoing laws and regulations may affect the way our customers may use our employee Internet access management products and compliance with such laws is generally part of an employers comprehensive Internet use policy.


RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors in addition to other information in this Annual Report on Form 10-KSB before purchasing our common stock.  The risks and uncertainties described below are those that we currently deem to be material and that we believe are specific to our company and our industry.  In addition to these risks, our business may be subject to risks currently unknown to us.  If any of these or other risks actually occurs, our business may be adversely affected, the trading price of our common stock may decline and you may lose all or part of your investment.


Risks Associated With Our Business

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

We have met our working
      capital requirements through financing transactions involving the private
      placement of our securities. We do not expect our current working  capital
      to support our operations through June 2007. We are in need of approximately
      $5 million of additional capital to fund operations and repay indebtedness
      over the next 12 months. Since our inception, we have not generated any
      significant
    revenue, have experienced substantial losses from operations, 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
      an explanatory paragraph
      in their
      opinion for the year ended  June 30, 2006 as to the substantial doubt about
      our ability to continue as a going concern. Our financial statements have
      been prepared in accordance with accounting principals generally accepted
      in the United States, which contemplate that we will
    continue to operate as a going concern.  Our financial statements do not
      contain any adjustments that might result if we are unable to continue
      as a going concern.


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We are an early-stage company with an unproven business model, which makes it difficult for us to evaluate our current business and future prospects.

We have only a limited operating history and have not generated a material amount of revenue upon which to base an evaluation of our current business and future
    prospects.  We have only been offering our employee Internet management applications for a limited time and the substantial majority of our licensing revenue has occurred within the past two years.  As a result, we have very limited historical data
    and the revenue and income potential of our business unproven.  Because of our limited operating history and because the market for our Internet access management products is relatively new, we have limited insight into trends that may emerge and
    affect our business.  We may make errors in predicting and reacting to relevant business trends, which could harm our business.


Before purchasing our common stock, you should consider an investment in our common stock in light of the risks,
    uncertainties and difficulties frequently encountered by early-stage companies in new and rapidly evolving markets such as ours, including those described herein. We may not be able to successfully address any or all of these risks.  Failure to
    adequately address such risks could cause our business to fail which may result in a liquidation of the Company.


We have a history of losses and, because we expect our operating expenses to increase in the future, we do not expect to become profitable in the near term, if ever.

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


| | • | expand our domestic and international selling and marketing activities;
| | - | -----------------------------------------------------------------------
| |   |                                                                        
| | • | develop new products and technologies;                                 
| |   |                                                                        
| | • | upgrade our existing solutions, and serve our expanding customer base; 
| |   |                                                                        
| | • | upgrade our operational and financial systems, procedures and controls;

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| | • | hire additional personnel,includingadditionalsalespersonnel,engineersandother technical staff; and
| | - | --------------------------------------------------------------------------------------------------
| |   |                                                                                                   
| | • | fulfill our responsibilities associated with being a public company.                              

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

We expect that our operating expenses will continue to increase over the next 12 months.  In addition, our $1.6 million principal amount convertible note is due the earlier of April 30, 2007
    or upon the closing of any equity or convertible debt financing after May 19, 2006 of at least $5,000,000 and we may experience a material decrease in liquidity due to unforeseen capital requirements or other events and uncertainties.  As a result,
    we will need to raise approximately $5,000,000 of additional funds to fund operations and repay indebtedness over the next 12 months, and such funds may not be available on favorable terms, if at all.  If we cannot raise funds on acceptable terms,
    we may not be able to develop or enhance our software applications, execute our business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated requirements.  This may cause us to eliminate future product
    development, scale back our sales and marketing efforts, and in the extreme case, liquidate the Company.


Our future success depends on ability to achieve substantial revenue growth from licensing our Internet access management and e-mail migration solutions to new customers as well as
  renewals of licenses to our existing customers.

Our products consist
      of: (i) GeM, our premier Internet access management solution; (ii) SIM,
      our web based Internet access management solution; and (iii) E-Mail Shuttle,
      our e-mail migration solution. Licenses
      for our GeM and E-Mail Shuttle solutions are usually sold under perpetual
      licenses and
    subscription agreements while licenses of our SIM solution typically have
      a fixed duration. Since our customers have no obligation to purchase or
      renew
    such licenses, we may be unable to generate sufficient revenue to cover our
    operating expenses. Our future success also depends on our ability to license
    additional
    services or product offerings to existing customers which will require a
    substantial sales and marketing effort. We may or may not have the human
    and capital resources to achieve this objective.


We must develop and expand our sales channels to increase revenue and improve our operating results.

We intend to sell our 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 professional sales people capable of meeting or exceeding revenue goals and expand our existing indirect sales channels to increase our market share and revenue.  We cannot assure you that we will be able to develop
    both of these channels simultaneously, maintain and expand our existing relationships or enter into new relationships, or that any new relationships will be available on commercially reasonable terms.  If we are unable to attract and retain
    successful sales people or maintain and expand our existing relationships, or enter into new relationships, we may lose customer introductions and co-marketing benefits, lose potential sales, and our operating results may suffer.


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Because we expect our future growth to be driven primarily from the sale of our GeM solution suite, any failure of this product to satisfy customer demands or to achieve meaningful
market acceptance may seriously harm our business.

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


We may not be able to develop acceptable new products or enhancements to our existing products at a rate required by our rapidly changing market.

Our future success depends on our ability to develop new products or enhancements to our existing products that keep pace with rapid technological developments and that address the changing
    needs of our customers.  Although our Internet access management and e-mail migration solutions are designed to operate with a variety of network hardware and software platforms, we will need to continuously modify and enhance our offerings to keep
    pace with changes in Internet-related hardware, software, communication, browser and database technologies. We may not be successful in either developing such products or timely introducing them to the market.  In addition, uncertainties about the
    timing and nature of new network platforms or technologies, or modifications to existing platforms or technology, could increase our research and development expenses.  The failure of our products to operate effectively with the existing and future
    network platforms and technologies may limit or reduce the market for our products, result in customer dissatisfaction, and prevent us from generating any meaningful revenue or profits.


Failure of our products to work properly could impact sales, increase costs, and create risks of potential negative publicity and legal liability.

Because our products are complex and are deployed in a wide variety of complex network environments, they may have errors or defects that users identify after deployment, which could harm our
    reputation and our business.  In addition, products as complex as ours frequently contain undetected errors when first introduced or when new versions or enhancements are released.  We have from time to time found errors in versions of our Internet
    access management and e-mail migration solutions and we may find such errors in the future. The occurrence of errors could adversely affect licenses of our products, divert the attention of engineering personnel from our product development efforts,
    and cause significant customer relations problems.  In addition, since Internet access management technology generally, and our solutions specifically, have yet to gain widespread acceptance in the market, any delays would likely have a more
    detrimental impact on our business than if we operated in a more established industry.


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


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

Intellectual property is important to our success.  We generally rely upon confidentiality procedures and contractual provisions to protect our proprietary technology and our GeM, Stellar
    Internet Monitoring and E-Mail Shuttle solutions, and we intend to apply for legal protection for certain of our intellectual property in the future.  We have filed trademark registrations with the United States Patent and Trademark Office
    including:  GeM, Global Ecommunications Management and GeM Solutions.  Any such legal protection we obtain may be challenged by others or invalidated through administrative process or litigation.  Furthermore, legal standards
    relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain, and adequate legal protection of our intellectual property may not be available to us in every country in which we intend to sell our
    products.  The laws of some foreign countries may not be as protective of intellectual property rights as United States laws, and their mechanisms for enforcement of intellectual property rights may be inadequate.  As a result, our means of
    protecting our proprietary technology and brands may be inadequate. Furthermore, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property and may not have the financial
    resources to enforce any rights that we have.  Any such infringement or misappropriation by third parties of claims against us for infringement could have a material adverse effect on our business, financial condition and results of operations by
    preventing us from building brand recognition, or in the extreme case, from licensing our solutions to our customers.


We may be sued by third parties for alleged infringement of their proprietary rights.

The software and Internet industries are characterized by the existence of a large number of patents, trademarks and copyrights, and by frequent litigation based on allegations of patent
    infringement or other violations of intellectual property rights.  As the number of entrants into our market increases, the possibility of an intellectual property claim against us grows.  Our technologies and products may not be able to withstand
    any third-party claims or rights against their use.  Any intellectual property claims, with or without merit, could be time-consuming and expensive to litigate or settle, could divert management attention from the execution of our business plan and
    cause us to expend a large amount of our limited financial resource.


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Our systems may be vulnerable to security risks or service disruptions that could harm our business.

Although we have taken measures to secure our systems against security risks and other causes of disruption of electronic services, our servers are vulnerable to physical or electronic
    break-ins and service disruptions, which could lead to interruptions, delays, loss of data or the inability to process customer requests.  Such events could be very expensive to remedy, could damage our reputation and could discourage existing and
    potential customers from using our products.


Our continued growth could strain our personnel and infrastructure resources, and if we are unable to implement appropriate controls and procedures to manage our growth, we may not be
  able to successfully implement our business plan.

We have experienced growth in our operations, which has placed, and will 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 senior management to manage growth effectively.  This will require us to hire and train additional personnel to manage our expanding operations.  In addition,
    we will be required to continue to improve our operational, financial and management 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 competition from more established companies that have significantly greater resources than we do, which may place pressure on our pricing and which could prevent us
  from increasing revenue or attaining profitability.

The market for our products is intensely competitive and is likely to become even more so in the future.  Our current principal competitors may offer their products at a significantly lower
    price than our Internet access management and e-mail migration solutions, which could result in pricing pressures on licenses of our products and in the commoditization of Internet access  management solutions.  If we are unable to maintain the
    current pricing on sales of our Internet management and e-mail migration solutions or increase our pricing in the future, our results of operations could be negatively impacted.  In addition, pricing pressures and increased competition generally
    could result in reduced licensing, reduced margins or the failure of our solutions to achieve or maintain more widespread market acceptance, any of which could have a material adverse effect on our ability to generate revenue and offer solutions at
    prices which will cover our costs. Our current principal competitors include:


| | • | companies offering HTTP/HTTPS filtering products, such as Websense, SurfControl, Secure Computing, 8e6 Technologies, and St. Bernard;
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                      
| | • | companies offering instant message filtering products, such as Facetime, Akonix, IMLogic, and CA;                                    
| |   |                                                                                                                                      
| | • | companies offering e-mail filtering products, such as CipherTrust, Vericept, Symantec, Orchestria, and Vontu; and                    
| |   |                                                                                                                                      
| | • | companies offering data archiving and retrieval products, such as Vericept, Vontu, Iron Mountain, and Reconnex.                      

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Many of our potential competitors enjoy substantial competitive advantages, such as:

| | • | greater name recognition and larger marketing budgets and resources;        
| | - | ----------------------------------------------------------------------------
| |   |                                                                             
| | • | established marketing relationships and access to larger customer bases; and
| |   |                                                                             
| | • | substantially greater financial, technical and other resources.             

As a result, they may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements.  For all of theforegoing reasons, we may not be able to compete successfully against our current and future competitors.

If Internet access management solutions are integrated into existing Internet hardware, software or operating systems, the demand for our products may decrease.

We also face current and potential competition from vendors of Internet servers, operating systems, and networking hardware, many of which have developed and/or bundle, or may in the future
    develop and/or bundle, Internet access management solutions, or other competitive products with their products.  We expect increased competition from, anti-virus software developers, traditional network management software developers, and web
    management service providers.  We may face new competition from companies offering quality of service solutions, such as Packeteer, companies with a direct presence on computer desktops, such as Microsoft, and companies offering desktop management
    solutions, such as Altiris.  If Internet access management functions become standard features of Internet-related hardware or software, the demand for our Internet management solutions may decrease.  Moreover, even if our Internet access management
    solutions provide greater functionality and are more effective than the products offered by vendors of Internet-related hardware or software, potential customers might accept this limited functionality in lieu of purchasing our solutions separately.


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

Our success depends largely upon the continued services of our executive officers and other key management and
    development personnel including Mark G. Sampson, our Chief Executive Officer, and Donald R. Innis, our President.    We are also substantially dependent on the continued service of our existing engineering personnel because of the complexity of our
    products and technologies.  We have transferred a key man life insurance policy on Mr. Sampson in the amount of CDN $1,000,000 from his previous employer to us.  We do not maintain key person life insurance policies on any other employees.  The loss
    of one or more of our key employees could seriously harm our business, financial condition or results of operations.  In such an event, we may be unable to recruit personnel to replace these individuals in a timely manner, or at all, on acceptable
    terms.


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Risks Associated With Our Industry

The market for our products continues to emerge, and if we are not successful in promoting awareness of the need for our Internet access management and e-mail migration solutions
and our brand, our growth may be limited.

Based on our experience with actual and potential customers, we believe that many corporations do not recognize or acknowledge the existence or scope of problems caused by employee misuse of
    the Internet or of their computers.  We also believe there may be a time-limited opportunity to achieve and maintain a significant share of the market for Internet access management and our other products due in part to the emerging nature of these
    markets and the substantial resources available to our existing and potential competitors.  If employers do not recognize or acknowledge these problems, the market for our Internet management solutionsmay develop more slowly than we expect, which could adversely affect our operating results. Developing and maintaining awareness of our brand is critical to achieving widespread acceptance of
      our existing and future products.  Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to develop reliable and useful products at competitive prices.  If we fail to successfully
      promote our brand, or if our expenses to promote and maintain our brand are greater than anticipated, we may never generate sales sufficient to cover our costs.




Evolving regulation of the Internet may affect us adversely.

As Internet commerce continues to evolve, increasing regulation by federal, state or foreign agencies becomes more likely.  Such regulation appears most likely in the areas of user privacy,
    pricing, content and quality of products and services.  Taxation of Internet use or other charges imposed by government agencies or by private organizations for accessing the Internet may also be imposed.  Laws and regulations applying to the
    solicitation, collection or processing of personal or consumer information could affect our activities.  Furthermore, any regulation imposing fees for Internet use could result in a decline in the use of the Internet and the validity of Internet
    commerce, which could have a material adverse effect on our business, financial condition and results of operations.


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Risks Associated With Our Stock

New investors will suffer immediate and substantial dilution in the tangible net book value of their shares.

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


Future sales of our common stock may cause our stock price to decline.

The sale of a large number of shares of our common stock in the market or the belief that such sales could occur, could cause a drop in the market price of our common stock. There are
    currently 29,190,969 outstanding shares of our common stock, of which 18,741,201 are restricted securities, as that term is defined in Rule 144 of the Securities Act.  Of these shares, approximately 15,300,000 can be sold without restriction as to volume pursuant to Rule 144(k) of the Securities Act, unless such shares are purchased by our affiliates, and approximately an
      additional 650,000 shares are currently eligible for sale under Rule 144(e) of the Securities Act. None of our directors, executive officers or other stockholders is subject to lock-up agreements or market stand-off provisions that limit their
      ability to sell common stock.


We have issued a substantial number of securities exercisable or convertible into shares of our common stock which will result in substantial dilution to the ownership interests of our
existing shareholders

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


| | • | 21,587,300 shares
       upon conversion of our outstanding shares of series B convertible preferred
       stock;
| | - | ------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                   
| | • | 4,000,000 shares upon conversion of an outstanding $1.6 million principal amount convertible note;                
| |   |                                                                                                                   
| | • | 7,430,000 shares upon exercise of outstanding options;                                                            
| |   |                                                                                                                   
| | • | 2,655,000 shares upon exercise of options issuable under our 2005 Stock Incentive Plan; and                       
| |   |                                                                                                                   
| | • | 16,839,867
       shares upon exercise of outstanding warrants.                                                   

The exercise or conversion of these securities will result in a significant increase in the number of outstanding shares and substantially dilute the ownership
    interests of our existing shareholders.


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

We intend to raise
      additional capital in the future to help fund our operations through sales
      of shares of our common stock or securities convertible into shares of
      our common stock, as well  as issuances of debt. Such additional financing
      may be dilutive to our stockholders, and debt financing, if available,
      may involve restrictive covenants which may limit our operating flexibility.
      If additional capital is raised through the
    issuance of shares of our common stock or securities convertible into shares
      of our common stock, the percentage ownership of our existing stockholders
      will be reduced. These stockholders may experience additional dilution
      in net book value per  share and any additional equity securities may have
      rights, preferences and privileges senior to those of the holders of our
      common stock. We are seeking to raise up to $2,000,000 or more of additional
      financing through the issuance of convertible
    preferred stock and warrants. The preferred shares are immediately convertible
      into shares of our common stock at a conversion price of $0.15 per share
      and the warrants are immediately exercisable at $0.40 per share. If we
      issue and sell an  additional $2,000,000 of convertible preferred shares
      and warrants, the full conversion or exercise, as applicable, of these
      securities would result in the issuance of an
      additional 20,000,000 shares of common stock resulting substantial dilution
      to the ownership interests of our existing shareholders.


The market price of our common stock is likely to be highly volatile and subject to wide fluctuations.

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


| | • | announcements oftechnologicalinnovations ornewproducts orservicesby our competitors;  
| | - | --------------------------------------------------------------------------------------
| |   |                                                                                       
| | • | demand for ourInternetmanagementsolutions,includingfluctuationsinlicense renewals; and
| |   |                                                                                       
| | • | fluctuations in revenue from our indirect sales channels.                             

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


| | • | quarterly variations in our revenues and operating expenses;                                                
| | - | ------------------------------------------------------------------------------------------------------------
| |   |                                                                                                             
| | • | announcements of technological innovations or new products or services by us; and                           
| |   |                                                                                                             
| | • | our technological capabilities to accommodate the future growth in our operations or those of our customers.

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In addition, the stock market has experienced significant price and volume fluctuations that have particularly affected the market price of the stock of many
Internet-related companies, and that often have been unrelated or disproportionate to the operating performance of these companies.  Market fluctuations such as these may seriously harm the market price of our common stock.  Further, securities
class action suits have been filed against companies following periods of market 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 and
resources, which would seriously harm our business, financial condition and results of operations.


Our operating results may fluctuate significantly, and these fluctuations may cause our stock price to fall.

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


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

We have never declared or paid any cash dividends on our common stock.  The terms of our outstanding secured
  convertible notes preclude us from paying dividends without the consent of the holders of such notes.    We currently intend to retain any future profits from operations to fund growth and do not expect to pay any dividends in the foreseeable
future.  Accordingly, investors who seek dividend income should not purchase our shares.  The return, if any, from purchase of our shares will result from appreciation in the price of our shares.


Applicable SEC rules governing the trading of penny stocks limits the trading and liquidity of our common stock which may affect the trading price of our common stock.

Our common stock currently trades on the OTC Bulletin Board.  Since our common stock continues to 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 the manner in which our shares can be publicly traded. These regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny
  stock market and the associated risks.  Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination
  regarding such a purchaser and receive such purchaser's written agreement to a transaction prior to sale.  These regulations may have the effect of limiting the trading activity of our common stock and reducing the liquidity of an investment in our
  common stock.


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ITEM 2. DESCRIPTION OF PROPERTY

Our corporate headquarters and principal offices are located at 7935 Airport Pulling Road, Naples, Florida 34109, where we lease approximately 5,500 square feet 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 Airport Road #3, Naples, Florida 34109, where we lease approximately 1,900 square
  feet of 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 are currently subletting this space for a monthly rent payment of approximately $2,600.


Our Canadian subsidiary GeM Solutions (Canada) Inc. leases office space at 555 West Hastings Street in Vancouver, British Columbia under a sublet agreement until
  June 30, 2007 at a monthly rent of approximately $3,000 per month.  We expect to expand our Vancouver office by approximately 2,000 square feet to continue to develop our products and services.


ITEM 3. LEGAL PROCEEDINGS

We are not currently a party to any material legal proceedings.




None.


PART II



Market Information

Our common stock currently trades on the OTC Bulletin Board under the symbol "SLLR".  The following table sets forth the range of high and low bid prices for shares of our common stock on the
OTC Bulletin Board for the periods indicated, as reported by Nasdaq. These quotations represent inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual 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
|                                 |  |   |      |  |     |     
|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

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


Holders

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


Dividends

We have not paid any cash dividends on our common stock to date, nor do we intend to pay any cash dividends 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 from declaring or paying any dividends for so long as such debt is outstanding.  The terms of our
series B preferred convertible stock preclude us from paying any cash dividends on our common stock unless and until all dividends due on our series B preferred convertible stock have been paid in full.


ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Managements
      Discussion and Analysis and other parts of this Annual Report on Form 10-KSB
      contain  forward-looking statements that involve risks and uncertainties.
      All forward-looking statements included in this Annual Report on Form 10-KSB
      are based on information 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
      from those anticipated in these forward-looking statements as a result
      of a number of factors, including those set forth under the caption "Risk
      Factors" on
    page 13 of this report and elsewhere  herein. The following
      should be read in conjunction with our annual financial statements contained
    elsewhere in this report.


Overview

We provide Internet access management products and services that are designed to enable businesses and government agencies to monitor, report and manage how their
    employees use the Internet.  We offer an integrated suite of solutions for establishing and consistently enforcing employee Internet usage policies and managing electronic communications with others inside and outside of an organization.  Our
    solutions archive and filter internal and external e-mail communications, including attachments, instant messaging, and Web site browsing across the enterprise and provide graphical, real-time hierarchal reporting and immediate warnings of e-mail
    policy violations to management.  Our products and services are designed to give employers the ability to implement Internet access policies for different users and groups within their organizations, monitor all forms of electronic communications,
    including blocking attachments, and archiving electronic communications to comply with records retention policies.


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Based on our experience with customers and prospects, we believe that a substantial amount of employee Internet activity in the workplace is non-work related and
that a significant portion of non-business related e-commerce is conducted through Internet connections at work. Because Internet access in the workplace is fast, convenient and essentially free to employees, employees have the opportunity to use
their employers Internet connections for personal or recreational purposes during work hours.  Such personal use during business hours can result in lost employee productivity, increased network bandwidth consumption, potential legal liability
and the introduction of malicious code on the enterprises network.


Our initial product, Stellar Internet Monitoring enables businesses to rapidly implement and configure Internet access policies for specific groups, user types, and individuals within an
organization.  We monitor employees Internet activity without restricting the employees access to web sites.  We then consolidate and review Internet traffic information with sophisticated rule-based systems for compliance with policies
implemented by our customers.  We notify management when a violation has occurred and, if requested, provide management with detailed graphical reports displaying 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 an organizations information technology department, requires minimal hardware, is scaleable, and supports a broad range of network platforms, including proxy
servers, firewalls, and other network appliances and software.


GeM,
  our next generation technology, is an advanced solution we developed as a result
  of the market and customer information we derived from our experiences with
  existing Internet access management solutions. The GeM solution suite allows
  organizations to:


| | • | monitor Internet usage by employees;                                                                                                                            
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | • | prevent Internet abuse, and                                                                                                                                     
| | • | monitor, filter, block and archive electronic communications, including e-mail and instant messagingproducts fromthe topproviders such asMSN,Yahoo, ICQ and AOL.

GeM also scans and blocks over 300 different attachment types that may contain key-words objectionable to the organization which may be imbedded in the e-mail or instant message.  GeM provides
organizations with detailed reports describing which web sites are being visited, what instant messages or e-mails are being sent and received, and whether any objectionable content has been exchanged or viewed.  Our software tools give the
enterprise the ability to determine which employees were involved, and what time the actions took place.  Because of the increasing need for filtering, blocking, and retaining and retrieving electronic communications, we believe that the demand for
solutions such as our GeM solution suite will increase and be adopted by an increasing number of organizations.


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Our E-Mail Shuttle solutions provide immediate and automatic migration and synchronization of data from any e-mail system to any other e-mail system.  We enable businesses to migrate and
synchronize inboxes, public folders and directories, calendars, bulletin boards, conferences, to-do lists, and groups on e-mail systems such as Microsoft® Exchange, Lotus® Domino, Lotus® cc:Mail, Novell® GroupWise, Netscape®
Messaging Server and OpenWave® InterMail.  Through our E-Mail Shuttle solutions, we provide migration to and from each of these systems and develop processes and products that enable easy migration from proprietary e-mail and calendaring
systems.  Our E-Mail Shuttle solutions modular design includes extractor and loader components that allow migration from multiple systems at any one time from a single management console.




Our key performance indicators are customer orders received (bookings), recognized revenue, and deferred revenue.  We measure bookings as the dollar value of
contractual agreements entered into with customers in the period that result in either revenue recognized in the period, deferred revenue at the end of the period, or expected billings in future periods. Generally, an increase in our bookings will
result in an increase in our revenue and/or deferred revenue.    The timing of bookings is uncertain as we sell to both companies and government organizations. The process of contractual negotiation is critical and may be lengthy.


Deferred revenue consists of amounts billed to customers in excess of the amount we recognize on our statement of operations and/or for which the product or service has not yet been delivered.
 In the event a customer purchases our software, maintenance is included for year one in the purchase price but billable in year two and for every year thereafter 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 relating to consulting services as these services are provided at or prior to the delivery of our products.  Deferred
revenue was $270,761 and $398,368 at June 30, 2006 and 2005, respectively.  We believe that $239,898 of the deferred revenue at June 30, 2006 will be recognized as revenue in the next 12 months.




The market for our solutions is large and continues to grow. Sustained spending on technology, continued emphasis on employee efficiency, growing awareness of and compliance with regulatory
and reporting requirements by employers, and the increasing need to retain and retrieve electronic communications in order to, among other things, comply with federal and certain state court rules when involved in litigation, are all key external
conditions which may affect our ability to execute our business plan.


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


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Our primary strategic objective is to strengthen our position in the market for Internet access management solutions and generate a substantial increase in revenue
over the next 12 months.  We plan to achieve this objective by continuing to enhance the functionality of our current Internet access management solutions, developing new products and services, increasing our direct sales force, and pursuing
subscription renewals and enterprise-wide deployment of our applications with existing customers.  We intend to hire up to 20 full time sales professionals with substantial experience in enterprise sales to information technology
professionals.


We believe that our near-term success will depend particularly on our ability to increase customer adoption of our Internet access management products and to continue generating revenue from
our E-Mail Shuttle products.  Since we have limited capital resources, we will need to closely manage our expenses and conserve our cash by continually monitoring any increase in expenses and reducing or eliminating unnecessary expenditures.  We
believe that key risks include overall economic conditions and the overall level of information technology spending, economic and business conditions within our target customer sectors, timing of the closure of customer contracts, our ability to
expand our direct sales force, competitive factors in our rapidly changing industry, and our ability to raise the capital necessary to grow our business.  Our prospects must be considered in light of the risks, expenses and difficulties encountered
by companies at an early stage of development, particularly given that we operate in new and rapidly evolving markets, that we have limited financial resources, and face an uncertain economic environment. We may not be successful in addressing such
risks and difficulties.


Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements and accompanying notes, which have been prepared in
accordance with accounting principals generally accepted in the United States.  The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities.  When making these estimates and assumptions, we consider our historical experience, our knowledge of economic and market factors and various other factors that we believe to be
reasonable under the circumstances. Actual results may differ under different estimates and assumptions.


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


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Revenue Recognition

We recognize revenue in accordance with Statement of Position 97-2, Software Revenue
Recognition (SOP 97-2).  Significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period.
Specifically, in connection with each transaction involving our products, we must evaluate whether persuasive evidence of an arrangement exists, the product has been delivered, title and risk of loss has been transferred to the customer, the fee is
fixed or determinable, and collection of the resulting receivable is reasonably assured.  Material differences may result in the amount and timing of recognized revenue for any period if we make different judgments or utilize different estimates.


Goodwill

We test our goodwill for impairment annually, on June 30 of each year, and more frequently in certain circumstances.  We recorded goodwill upon the acquisition of
CompSven in July 2004 and our entry into the Email migration business segment.  Testing goodwill requires that we estimate the fair value of the Email migration segment.  We estimate the fair value of the Email migration segment based on a number of
subjective factors, including projections about future cash flows, discount rates on our future cash flows, and assumed terminal values.  We consider the estimate of fair value to be a critical accounting estimate for our Email migration segment
because (a) a potential goodwill impairment could have a material impact on our financial position and results of operations, and (b) the estimate is based on a number of highly subjective judgments and assumptions.  If our forecasts of future cash
flows and other subjective factors change negatively, we could have future impairments of goodwill that would need to be recognized.


Accounting for Derivative Instruments

Statement of Financial Accounting Standard (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended,
requires all derivatives to be recorded on the balance sheet at fair value. These derivatives, including embedded derivatives in our structured borrowings, are separately valued and accounted for on our balance sheet. Fair values for exchange-traded
securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and
estimates.


The pricing model we use for determining fair values of our derivatives is the Cox-Ross-Rubenstein Binomial Model (which produces results substantially similar to
the Black Scholes Pricing Model).  Valuations derived from this model are subject to ongoing internal and external verification and review.  The model uses market-sourced inputs such as interest rates, exchange rates and option volatilities.
Selection of these inputs involves managements judgment and may impact net income.


Comparison of the Year Ended June 30, 2006 to the Year Ended June 30, 2005

Introductory Note Regarding Restatement

As described in our current report on Form 8-K dated May 10, 2006, we concluded that certain of the conversion features and registration rights provisions related
    to the convertible note and warrants we issued in April 2005, the convertible notes and warrants we issued in June 2004, and the convertible preferred stock and warrants we issued in February 2004 were embedded derivatives that should be accounted
    for as derivative liabilities in accordance with the guidance provided in SFAS No. 133 and EITF Issue 00-19 and that we needed to restate certain of our financial statements, including those for our fiscal year ended June 30, 2005.


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As a result, we have
      restated our financial statements for our fiscal year ended June 30, 2005
      to reflect additional non-operating gains and losses related to the  classification
      of and accounting for: (1) various warrants we issued in 2003, 2004 and
      2005; (2) the conversion features of the $1.6 million convertible 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 of the
      conversion features of the notes and the warrants as equity, where applicable.
      After further review, we determined that these instruments should have
      been classified as derivative liabilities and,
      therefore, that: (1) the fair value of each instrument should be reflected
      as derivative liabilities on our balance sheet; (2) any changes in the
      fair value of these instruments should be reflected as
    non-operating gains or losses, as applicable, in our statement of operations;
      and (3) at the date of conversion or exercise, as applicable, of each respective
      instrument or portion there, the corresponding derivative liability should
      be reclassified  to equity.


The financial statements
      for our fiscal year ended June 30, 2005 included in this report have been
      restated to reflect the forgoing and the discussion of our financial condition
      and results of operation below is based on the rested financial statements.
      For a more compete description of the restatement, please see Note 3 to
    our consolidated financial statements contained elsewhere in this report.


Revenues

Revenue consists of
      licensing fees that we receive upon the sale of our Internet management
      and E-mail migration solutions. We recorded revenues of $870,964 during
      the year ended June 30, 2006 as compared to $882,805 during the year ended
      June
      30, 2005. Revenues for our E-mail migration solutions increased $7,653
      to $646,240 during the year ended June 30, 2006 and licensing 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 the functionality of our GeM solution
      and building a direct sales force. We will continue to focus substantial
      resources on sales and marketing efforts in order to generate licensing
      revenues from existing and new customers and continue the roll out of our
      GeM solution. Having substantially completed such development and deployed
      a direct sales force of five professionals, we
    expect revenue growth in future periods to exceed revenue growth in past
    periods.


Operating Expenses

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


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General and Administrative
         Expenses. General and administrative expenses consist of costs related
          to production of marketing brochures, trade shows, direct mailing programs,

    advertising, promotions, travel, customer support, public relations and investor
          relations, general and administrative 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 the year
         ended
         June
         30,
    2005. We expect general and
    administrative expenses to increase in future periods as
         a  result of increased costs associated with growth in our operations.
         Specifically,
    we expect that marketing expenses will increase as we continue to expand
         our  marketing efforts and promote 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 our employees 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 ended June
      30, 2005. The increase resulted primarily from an increase in overall salaries
      and compensation to our employees due to the overall growth of our business,
      specifically our sales and marketing effort, and an increase of $163,974
      of non-cash expenses associated with our employee option program. We expect
      Salaries and wages to increase in future periods as a result of increased
      personnel costs to support our expanding sales and marketing efforts and
      increased sales commission  expenses as we generate additional license
      fees.


Professional Fees.   Professional
      fees consist of 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 consulting fees which was offset by
    an increase of $193,169 in general legal expenses.


Research, Development
        and Product Support.     Research
    development and product support expenses consist primarily of costs associated
        with the development of new products and services, enhancement of our
        existing
        Internet 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 the year ended June 30, 2005. The increase
        was due primarily to an increase in contract developers required to complete
        phase one of our development cycle for
    our GeM solution suite.  We expect research and development expenses to decrease
        in future periods as we have substantially completed the development
        of our GeM offering but will continue to enhance the product to meet
        market needs. We expect to  continue to incur expenses relating to the
        enhancement of our Internet access management solutions and e-mail migration,
        data and directory management solutions, enter into arrangements with
        additional technology partners, and support an increasing
    customer base.


Depreciation and
         Amortization.   Depreciation and amortization expense
         consists  of depreciation costs related to computer hardware and software,
         furniture and office equipment, and the write off of intangible assets
         associated 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 year ended 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 the year ended June 30, 2005. The increase consisted
      primarily
      of amortization of debt discount and warrant costs associated with our
      outstanding $1.6 million convertible note and warrants issued together
      with convertible notes in 2006.


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Derivative Income (Expense).We realized gains on
    derivative liabilities of $471,721 during the during the year ended June 30, 2006 as compared to $7,424,822 during the year ended June 30, 2005.  The decrease was primarily the result of changes in the fair value of derivative liabilities.
    Specifically, the fair value of the derivative liabilities decreased significantly duringthe year ended June 30, 2005 (resulting in gains on derivative liabilities) because the price of our stock decreased significantly during that period.


Net Loss

During the year ended
      June 30, 2006, our net loss was $5,075,670 as compared to net income of
      $3,586,429 during the year ended June 30, 2005. The increase in net loss
      was primarily
      the result of a $413,640 increase in operating expenses, a $988,895 increase
      in interest expense which consisted primarily of non cash items related
      to debt discount, and a $6,953,131 decrease in gain on derivative liabilities
      in
    2006 as a result of changes in the fair value of our derivative liabilities.


Liquidity and Capital Resources

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


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


Net cash 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
      increase
      in cash provided by financing activities was due primarily to an increase
    in net proceeds from sales of our preferred stock and common stock in 2006.


At June 30, 2006, we
      had working capital deficit of $1,977,685 as compared to a working capital
      deficit of $756,453 at June 30, 2005. The $1,221,232 decrease in  working
      capital was due primarily to cash used in operations to fund losses incurred
      in the development of our products and  ramp up of our sales and marketing
      efforts. The decrease consisted of decreases in cash of $439,414 and accounts
      receivable of $101,892 and to increases in notes payable of $940,358, accounts
      payable of $341,152, and deposits of $138,000.  These amounts were
      partially offset by a decrease in derivative liabilities of $724,738.


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


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On April 1, 2005, we entered into a Loan Agreement (the "Loan Agreement") with Trident Growth Fund, LP ("Trident") pursuant to which we issued a $1,600,000 principal amount secured convertible
    promissory note (the "Trident Note") to Trident.  The full principal amount and all accrued and unpaid interest due under the Trident Note in the aggregate amount of $1,616,000 became 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 of convertible debt or equity securities after May 19, 2006;
    (ii) eliminate all financial covenants; (iii) eliminate certain  negative covenants and; (iv) eliminate the anti-dilution adjustment for issuances of shares at prices below the conversion price of the Trident 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, 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 Trident elects to have it paid in shares of common stock valued at the conversion price in effect on such date.  The Trident Note is convertible in whole or in part at the option of Trident into shares of our common stock at a conversion
    price of currently $0.40 per share.


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


On November 10, 2005, we raised $1,000,000 through the issuance of 2,500,000 shares of common stock and warrants to purchase an additional 1,250,000 shares of
    common stock. The securities were sold in units consisting of two shares of common stock and one common stock purchase warrant at a purchase price of $.80 per unit.  Each warrant is immediately exercisable at an exercise price of $.60 per share and
    expires three years from the date of grant.


As of the date of this
      report, we have raised $2,530,000 through the issuance of 168,669 shares
      of Series B Convertible Preferred Stock (the Series B
    Shares) convertible into 16,866,900 shares of common stock and warrants
    to purchase an additional 8,433,450 shares of common stock. The Series B
    Shares have an original issue price of $15.00 per share and are convertible
    at anytime at the  option of the holder at a conversion price of $0.15 per
    share. The Series B Shares automatically convert into shares of common stock
    in the event that (i) the average closing price of our common stock over
    20 consecutive trading days equals or
    exceeds $0.75 per share; and (ii) the shares of common stock issuable upon
    conversion of the Series B Shares are either subject to an effective registration
    statement permitting 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 warrant is immediately
    exercisable at an exercise price of $0.40 per share for a term of three years.


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


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The foregoing constitutes our principal sources of financing during the past twelve (12) months.  We do not currently maintain a line of credit or term loan with any commercial bank or other
    financial institution.  To date, our capital needs have been principally met through the receipt of proceeds from sales of our equity and debt securities.  We intend to continue to invest our cash in excess of current operating requirements in
    interest-bearing, investment-grade securities.    Other than the repayment of the Trident Note in the amount of $1,600,000, we do not expect to incur any material capital expenditures during the next twelve (12) months.


As of 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
      increase based on increased salary expenses related to additional sales
      and support personnel. We believe that our current cash resources, expected
      recurring monthly revenue, and revenue  from new customers, will only be
      sufficient to fund operations for the near term. In order to sustain our
      current operations for the next twelve months and repay indebtedness, we
      will need approximately $5,000,000. We are currently seeking to
      obtain this financing through sales of convertible preferred stock and
      warrants.The
      sale of additional  equity securities will result in additional dilution
      to our shareholders. In the event we have to issue additional debt, we
      would incur increased interest expenses and could be subject to covenants
      that may have the effect of restricting our
    operations.  We have no commitment for any of the additional financing necessary
      to execute our business plan and we can provide no assurance that such
      financing will be available in amount or on terms acceptable to us, if
      at all. If we are unable  to obtain additional funds when they are needed
      or if such funds cannot be obtained on terms favorable to us, we may be
      required to delay or scale back our operations, including our plans to
      build a large direct sales force and continue to improve
    our product offerings, and in the extreme case, terminate operations and
      liquidate the Company.


Off-Balance Sheet Arrangements

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


ITEM 7. FINANCIAL STATEMENTS

See Financial Statements beginning on page F-1.


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

None.


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ITEM 8A. CONTROLS AND PROCEDURES

An evaluation of the
       effectiveness of our disclosure controls and procedures (as
       such  term is defined in Rules 13a-15(e) or 15d-15(e) of the Securities
       Exchange
    Act of 1934, as amended (the Exchange Act)) was carried out by
     us under the supervision 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 the end of the period covered by this

    Annual Report, our disclosure controls and procedures were not effective
    to  ensure that information we are required to disclose in reports that we
    file
    or submit under the Exchange Act is recorded, processed, summarized and reported
     within the time periods specified in the Securities and Exchange Commission

    rules and forms. Specifically, in connection with the completion of its audit
     of, and the issuance of its report on our financial statements for the years
    ended June 30, 2005 and 2006, our independent auditors identified deficiencies
    in our internal controls related to expense recognition and disclosure control
    deficiencies
    related to transactions involving issuances of our stock and stock options.
     The adjustment to expense and the footnotedisclosure
      deficiencies were detected in the audit process and have been appropriately

    recorded and disclosed in our Forms 10-KSB for the years ended June 30, 2005
     and 2006. In addition, we have failed to timely file our periodic reports
     with the SEC
    on a number of occasions over the past year. We are in the process of improving
      our internal controls in an effort to remediate these deficiencies through

    implementing certain controls and procedures and improving supervision and
      training of our accounting staff. We have also retained one additional
     employee
    for our accounting staff. We are continuing our efforts to improve and strengthen
      our control processes and procedures to fully remedy these deficiencies.
     Our
    management and directors will continue to work with our auditors and other
      outside advisors to ensure that our controls and procedures are adequate
     and
    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.


ITEM 8B. OTHER INFORMATION

The following information describes certain events required to be disclosed on Form 8-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. Between August 23 and October 9,
    2006, pursuant to a series of securities purchase agreements, we sold 44,667
    units consisting of 44,667 shares of our Series B Convertible Preferred Stock
    convertible into 4,446,700 shares of common stock and warrants to purchase
    an additional 2,233,350 shares of common stock for aggregate gross cash proceeds
    of $670,000. The securities were sold in units consisting of one (1) share
    of Series B Convertible Preferred Stock (the “Series B Shares”)
    and a warrant to purchase fifty (50) shares of common stock at a purchase
    price of $15.00 per unit. The foregoing securities were issued in concurrent
    private offerings (collectively, the “Private Offering”)
solely to accredited investors of up $3,300,000 of units consisting of 220,000
    Series B Shares convertible into an aggregate of 22,000,000 shares of common
    stock and warrants to purchase up to an aggregate of 11,000,000 shares of
    common stock. We have reserved the right to offer and sell additional units
    for an aggregate purchase price in excess of $3,300,000 to cover any over-allotments. The Series B Shares have an original issue price of $15.00 per share and are convertible at anytime at the option of the holder into shares of common stock at a conversion price of $0.15 per share.  Accordingly, each Series B Share is initially convertible into 100 shares of common stock. The Series B Shares automatically convert into shares of common stock in the event that (i) the average closing price of the Company’s common stock over 20 consecutive trading days equals or exceeds $0.75 per share; and (ii) the shares of common stock issuable upon conversion of the Series B Shares are either subject to an effective registration statement permitting 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.   The conversion price will be adjusted for stock splits, combinations, recapitalization and stock dividends.  In the event of a consolidation or merger in which we are not the surviving corporation, lawful provision shall be made so that upon conversion of the Series B Shares the holder shall be entitled to receive the number of shares of stock or other securities or property of the successor entity that such holder would have been entitled to receive if the Series B Shares had been converted immediately prior to such transaction. Each warrant is immediately exercisable into fifty (50) shares of common stock at an exercise price of $0.40 per share for a term of three years.  The exercise price of the warrants will be adjusted for stock splits, combinations, recapitalization and stock dividends.  In the event of a consolidation or merger in which we are not the surviving corporation (other than a merger with a wholly owned subsidiary for the purpose of incorporating the Company in a different jurisdiction), all holders of the warrants shall be given at least fifteen (15) days notice of such transaction and shall be permitted to exercise the warrants during such fifteen (15) day period.  Upon expiration of such fifteen (15) day period, the
warrants shall terminate. 8,000 of the units were sold in a private placement transaction to a limited number of accredited investors pursuant to the exemption from registration provided by Section 4(2) of the Securities Act and Rule 506 of Regulation D thereunder. We accrued aggregate placement agent fees of $9,600 to certain broker dealers registered under the Securities Exchange Act of 1934, as amended, and members of the National Association of Securities Dealers, Inc.  We also issued warrants to the placement agents to purchase 64,00 shares of common stock (equal to 8% of the shares 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 of the warrants issued to investors in the Private Offering and described above. The remaining 36,667 units were sold
    on October 9, 2006 in a private placement transaction to Montex Exploration,
    Inc., who is not a "U.S. person",
    pursuant to the exemption from registration provided by Rules 901 and 903
    of Regulation S under the Securities Act. We accrued consulting fees consisting
    of $44,000 and warrants to purchase 146,668 shares of common stock (equal
    to 8% of the shares 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 of the warrants issued
  to investors in the Offering and described above. Montex Exploration, Inc. is the beneficial
    owner of more than 5% of our outstanding shares of common stock. The units
    were issued and sold to Montex on the same terms and conditions as all other
    investors in the Private Offering. We have agreed to include the shares of common stock issuable upon conversion of the Series B Shares and exercise of the warrants sold in the Private Offering in any registration statement we file under the Securities Act  (excluding registration statements on SEC Forms S-4, S-8 or any similar or successor forms) in order to permit the public resale 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 sets forth certain information about each director and executive officer of the Company.


|**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 business experience of each of the above-named individuals:


Mark
        G. Sampson,age 50, has served as our Chairman,
        Chief Executive Officer and sole director since December 15, 2005. Mr.
        Sampson brings over 16 years of executive management experience in the
        telecommunications and
        information
        technology industries. Since April 1999, Mr. Sampson has served as the
        sole owner and  President of C-Ray Consulting, Inc., a services company
        through which he has provided executive management services to a number
        of technology companies. These include serving as the President and CEO
        of IP Applications, Corp., a Vancouver, British
    Columbia based provider of outsourced Internet Solutions whose shares are
        traded on the TSX Venture Exchange, from January 2004 until October 2005,
        and serving as Vice President of Corporate Development for Devon Ventures
        (now Pender Financial), a merchant
        bank focused on investing in developing technology companies, from March
        2002 until January 2004. During his tenure at IP Applications, the companys
        revenues increased 150%  through both organic growth and acquisition.
        Between 1999 and June 2002, C-Ray Consulting provided executive management
        services to NxGen Networks, an early stage provider of voice over IP
        services. Prior to founding C-Ray Consulting, Mr. Sampson
      was Senior Vice President & General Manager of Data Services for MetroNet,
      Canada's largest competitive local exchange carrier which was acquired
      by AT&T Canada, Vice-President & General Manager of BC Tel Advanced
      Communications (now  Telus), Canada's second largest telecommunications
      company, and Chief Operating Officer for CUE Data West, a financial services
      outsourcing company which was acquired by Open Solutions Inc.


Donald R. Innis,
        age 59, has served as our President since February 2, 2004. Mr. Innis
        has over 25 years of senior management experience with many Information
        Technology solution companies and is recognized as an expert on encryption
        and data security. He served as the President of Control Break International
        Corporation, a developer of data encryption software, from April 2003
        to February 2004. Beginning in 1987, Mr. Innis served as President of
        Inware Corporation, a developer of enterprise software that he founded.
        In 1998, Inware was
    acquired by Allen Systems Group (ASG), a provider of software to global Fortune 1000 companies, at which time he joined ASG and served as Senior Vice President of Worldwide Sales and Support until April 2003.  During his time at ASG, the companys annual revenues grew from $5 million to more than $200 million.  Between
      1985 and 1987, 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 access control and encryption industry.  Mr. Innis began his career in technology as a computer system designer for General Motors Corporation after receiving a Bachelor of Science degree in mathematics
        with a minor in economics from Otterbein College.


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John
          E. Baker,age
        66, has served as our Chief Financial Officer since January 31, 2005.
        Mr. Baker joined the Company in May 2004 as our Controller. Mr. Baker
          is a certified public accountant with over thirty years of financial
          management
        experience in both the private and public sectors. During his career,
        he has held
    financial management positions with Deloitte & Touche, City Investing
    Company, Rheem Manufacturing Company, The Home Insurance Company, John Blaire & Co.
    and Alleghany Beverage Corp. From May 1997 until January 2004, Mr. Baker
    served as the President and Chief Operating Officer of Highlander Sports,
    Inc., a Huntsville, Alabama based sporting goods manufacturer of which he
    was also a principal stockholder. From January 2004 to May 2004, Mr. Baker
    was employed by Account Temps, Inc. where he provided financial and accounting
    services to various organizations.


Rusty Wright, age 48, has served as our
    Senior Vice President of Sales since February 20, 2006.  Mr. Wright has been a significant contributor in the data communications industry for over 25 years having served the industry in a wide variety of functions including engineering, operations,
    marketing and sales.  From July 2004 until August 2005, Mr. Wright was Senior Vice President of Sales for Netifice Communications, where he led the development and deployment of the national sales force.  From April 2002 until July 2004, Mr. Wright
    served as Vice President of Strategic Alliances for Yipes Communications, where he led the development and ongoing management of partnerships with companies such as AT&T, Cable and Wireless, Genuity and Sprint.  From November 1999 until March
    2002, Mr. Wright served as Vice President of Data Sales at AT&T Canada which merged with MetroNet where Mr. Wright grew data revenues from start-up to $70 million for Canadas first national competitive accessprovider.  Prior to MetroNet, Mr. Wright spent 15 years at US West where he held various positions in sales, marketing, and engineering.


Board of Directors

Richard A. Schmidt served as our sole director from January 2004 until his resignation on December 14, 2005.  Mr. Schmidt resigned for personal reasons and to
    pursue other business interests.  Mark G. Sampson was appointed to fill the vacancy on the Board caused by Mr. Schmidts resignation, currently serves as our sole director, and will continue to serve until the next annual meeting of
    shareholders or until his successor is duly elected and qualified. Directors hold office until the next annual meeting of shareholders and the election and qualification of their successors.  Officers are elected annually by our board of directors
    and serve at the discretion of the Board.  We do not currently have any committees of our board of directors.


Audit Committee and Audit Committee Financial Expert

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


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In order to attract a person who qualifies as an audit committee financial expert as thatterm is defined in item 401(e) of Regulation S-B promulgated under the Securities Act, we would have to incur the expense of identifying, recruiting and
    compensating such a person. Since our inception, we have conducted limited operations, have had a small number of employees, and have not generated substantial revenues.  In addition, our Chief Financial Officer has over thirty (30) years of
    financial management experience and is intimately familiar with our operations.  At this time, we have limited financial resources and our principal goal over the next twelve to twenty-four months is to build revenue and generate market awareness of
    our products and services.  Our Board of Directors has decided  that the best way to achieve this objective is to use our available financial resources to attract and retain personnel with sales and marketing backgrounds, rather than a person who
    qualifies audit committee financial expert.  In light of the foregoing, our Board of Directors concluded that the cost of retaining an individual who qualifies as an audit committee financial expert could prohibit us from
    achieving our primary short term objective and, therefore, that the benefit of retaining such a person at this time would be outweighed by the costs of retaining such a person.  As a result, no member of our Board of Directors qualifies an
    audit committee financial expert.


Directors Compensation

Members of our board of directors receive no compensation for serving on our board of directors, except that each director is entitled to be reimbursed for the reasonable costs and expenses
    incurred in attending Board meetings.


Shareholder Communications

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


Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the U.S. Securities and Exchange Act of 1934, as amended (the Exchange Act), requires the Company's officers and directors and persons who own greater than ten percent (10%)
  of the Company's common stock to file with the Securities and Exchange Commission (SEC) initial reports of ownership and reports of changes in beneficial ownership of the Company's common stock.  Such officers, directors and greater than ten
  percent (10%) stockholders are also required by applicable SEC rules to furnish the Company with copies of all forms filed with the SEC pursuant to Section 16(a) of the Exchange Act.  Based solely on its review of the copies of such forms received
  by it, or written representations from such persons that no other reports were required for such persons, 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 a timely manner, except that Mark G. Sampson did not timely file a Form 4 upon receiving an option in connection with becoming a director and executive officer of
  the Company and Rusty Wright did not timely file a Form 3 and Form 4 upon becoming an executive officer of the Company and receiving an option.


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Code of Ethics

We have adopted a written code of ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting
    officer or controller, or persons performing similar functions.  A copy of  our code of ethics is attached as Exhibit 14.1 to this report.


ITEM 10. EXECUTIVE COMPENSATION

The following table provides certain summary information concerning compensation paid to or accrued by the executive officers named below during the fiscal years
  ended June 30, 2006, 2005 and 2004:


Summary Compensation Table

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

|   
|---
|(1)
|(2)
|(3)

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Option/Sar Grants In Last Fiscal Year

The following table sets forth all options granted during the fiscal year ended June 30, 2006 to each of the named executive officers.


|Name            |             | Number of    |     | Percent of Total |  | Exercise or Base |  | Expiration Date  
|--------------- | ----------- | ------------ | --- | ---------------- |  | ---------------- |  | -----------------
|Options/SARS   
|Underlying      | Granted to 
|Option/SARS     | Employee in
|Granted         | Fiscal Year | Price ($/Sh)
|                |             |              |     |                  |  |                  |  |                  
|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

|    |                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------
|   
|(1) | The option issued to Mr. Sampson vests in three equal installments six, twelve and eighteen months from the date of grant. 
|(2) | The option issued to Mr. Innis vests in equal annual installments over a three year period commencing on the date of grant.

Aggregated Option Exercises in
Last Fiscal Year and Fiscal Year-End Option Values

The
      following table sets forth the number of stock options held by the executive
      officers named in the Summary Compensation Table as of June 30, 2006 and
the value of unexercised in-the-money options held which represents
the positive difference between the exercise price and the market price at fiscal
year end. No such executive 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-                                                                                      | 

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

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2005 Stock Incentive Plan

On December 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 pursuant to stock options, stock appreciation rights, restricted stock awards, restricted stock units, unrestricted stock awards, and other equity based or equity related awards to employees, officers, directors, or
    advisors to the Company or any of our subsidiaries as well as individuals who have entered into an agreement with us under which they will be employed by the Company or any of our subsidiaries in the future. As of the date of this report, we have
    issued options under the Plan to purchase 2,005,000 shares of common stock.  The Plan is administered by the Board of Directors (the Board) of the Company which has full and final authority to interpret the Plan, select the persons to whom awards
    may be granted, and determine the amount and terms of any award. In order to comply with certain rules and regulations of the Securities and Exchange Commission or the Internal Revenue Code, the Board can delegate authority to appropriate committees
    of the Board.  Although the Plan provides for the issuance of options that qualify as incentive stock options (ISOs) under the Internal Revenue Code of 1986, as amended, since the Plan was not approved by our stockholders, we cannot issue ISOs
    unless and until we obtain the requisite shareholder approval.


Stock
        options issued under the Plan have a term of no more than 10 years, an
        exercise price equal to at least 85% of the fair market value of our
        common stock on the date of grant (100% in the case of ISOs), are subject
        to vesting as determined by the Board, and unless otherwise determined
        by the Board, may not be transferred except by will, the laws of descent
        and distribution, or pursuant to a domestic
    relations order. Unless otherwise determined by the Board, awards terminate
        three (3) months after termination of employment or other association
        with the Company or one (1) year after termination due to disability,
        death or retirement. In the event that termination of employment or association
        is for a cause, as that term is defined in the Plan, awards terminate
    immediately upon such termination.


The Plan provides for immediate vesting of all options and stock appreciation rights upon the occurrence of a Change In Control Event,” unless specifically
    provided to the contrary in any specific option or stock appreciation right. In the event of a Reorganization Event” (regardless of whether such event also constitutes a Change In Control Event), except as otherwise specifically provided to the
    contrary in any option or stock appreciation right, the Plan provides for all outstanding options and stock appreciation rights to either (i) be assumed by, or equivalent options or rights substituted by, the acquiring or succeeding corporation; or
    (ii) if the acquiring or succeeding corporation does not agree to assume or substitute for such options or rights, all then unexercised options and stock appreciation rights will become immediately
      exercisable in full as of a date prior to the completion of such Reorganization Event and will terminate immediately prior to the consummation of such Reorganization Event.  In the event that a Reorganization Event provides for the payment of cash
      to our stockholders, the Board may instead provide that all outstanding options and stock appreciation rights will terminate upon the consummation of such Reorganization Event and for the holders of such options and stock appreciation rights to
      receive a cash payment equal to the amount (if any) by which the price paid to our stockholders exceeds the aggregate exercise price of such options or rights.


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In the case of outstanding restricted stock or restricted unit awards, the Plan provides that upon a Change In Control Event, all restrictions applicable to such
    awards to automatically be deemed terminated or satisfied, except as specifically set forth to the contrary in any award. In the event of a Reorganization Event that is not a Change in Control Event”, the repurchase and other rights of the
    Company under such restricted stock or restricted unit awards shall inure 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 or exchanged for pursuant to such
    Reorganization Event.


The Plan defines Reorganization Event” to mean: (i) any merger or consolidation of the Company with or into another entity as a result of which all of the
    outstanding shares of common stock are converted into or exchanged for the right to receive cash, securities or other property; or (ii) any exchange of all outstanding shares of common stock for cash, securities or other property pursuant to a share
    exchange transaction.


The Plan defines a Change in Control Event” to mean: (i) the acquisition by an individual, entity or group of 30% or more of the issued and outstanding shares of
    common stock of the Company or of the combined voting power of all outstanding securities of the Company unless such acquisition was directly from the Company, was acquired by an employee benefit plan of the Company, or resulted from an acquisition
    of the Company in which the stockholders of the Company immediately prior to the acquisition continue to own more than 50% of the Company's outstanding voting securities and no person (except for the acquiring corporation or an employee benefit plan
    of such entity) beneficially owns in excess of 30% of the Company's outstanding voting shares; (ii) an event as a result of which persons who were members of the Board of Directors of the Company on the date the Plan was adopted or were nominated or
    elected by at least a majority of such directors fail to constitute a majority of the board of directors of the Company; or (iii) a merger, consolidation, reorganization, recapitalization, share exchange or sale or other disposition of all or
    substantially all assets of the Company unless immediately following such transaction, the stockholders of the Company immediately prior to such transaction continue to own more than 50% of the Company's outstanding voting securities and no person
    (except for the acquiring corporation or an employee benefit plan of such entity) beneficially owns in excess of 30% of the Company's outstanding voting shares.


Employment Agreements and Change of Control Arrangements

We entered into a letter agreement with Donald R. Innis pursuant to which Mr. Innis was appointed our President 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 the amount of salary received by him during the three (3) most recently completed months of employment with us.  Mr. Innis annual salary was
    increased on April 10, 2005 to $220,000.  The letter agreement also provided that we would grant Mr. Innis a stock option exercisable into that number of shares of our common stock equal to one percent (1%) of the number of
      shares of our common stock issued and outstanding on the date of grant.  The letter agreement contains no specific term of employment and may be terminated by either us or Mr. Innis at any time with or without cause.


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Our subsidiary,
      GeM Solutions (Canada) Inc., a corporation organized under the laws of
      British Columbia, Canada, employs Mark G. Sampson. Mr. Sampson provides
      executive management services to us pursuant to an offer letter that provides
      for a term of three years, an annual base salary of $360,000, and an annual
      performance bonus equal to 50% of the annual base salary based on the Company
      achieving revenue 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 customary confidentiality, non competition,
      non solicitation, and work made for hire provisions and provides for payment
      equal to one year base salary in the event that the agreement is terminated,
      unless such termination is for cause.


All options issued to Donald Innis, John Baker and Rusty Wright under the Plan provide for immediate vesting upon a Change in Control Event.    See 2005 Stock Incentive Planabove.  In addition, all options issued to Mark Sampson, John Baker and Donald Innis outside of the Plan provide for immediate vesting upon a Change in Control Event on terms identical to the Plan.


|ITEM
      11. | SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS
|-------------- | ----------------------------------------------------------------------------------------------------------

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


The
        beneficial owners and amount of securities beneficially owned have been
        determined in accordance with Rule 13d-3 under the Securities Exchange
        Act of 1934, as amended (the Exchange Act),
        and, in accordance therewith, includes all shares of our common stock
        that may be acquired by such beneficial owners within 60 days of October
        10, 2006 upon the exercise or conversion of any options, warrants or
        other convertible
        securities, including shares of our Series B preferred stock. This table
        has been prepared based on 29,190,969 shares of common stock outstanding
        on October 10, 2006 and 215,874 shares of series B convertible preferred
        stock outstanding on October 10, 2006. Unless otherwise indicated,
        each person or entity named below has sole voting and investment power
        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 has


 an address at Stellar Technologies, Inc., 7935 Airport Pulling Road, Suite 201,
  Naples, FL 34109.


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|                                 |            |               |           |            | Amount and |  |      |  
|-------------------------------- | ---------- | ------------- | --------- | ---------- | ---------- |  | ---- | -
|                                 |            | Nature        |          
|Amount and                       |            | of Beneficial |          
|Nature                           |            | Ownership of  |          
|of Beneficial                    |            | Series B      |          
|Ownership of                     |            | Convertible   |          
|Name and Address of Beneficial   | Common     | Percentage    | Preferred | Percentage
|Owner                            | Stock      | of Class      | Stock     | 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.         | 10,265,150 | (5)           | 26.6      | %          | 56,816     |  | 26.3 | %
|43 Addison Road                  |            |               |           |            |            |  |      |  
|London, United Kingdom           |            |               |           |            |            |  |      |  
|W148JH                           |            |               |           |            |            |  |      |  
|                                 |            |               |           |            |            |  |      |  
|Trident Growth Fund, L.P.        | 7,471,833  | (6)           | 20.5      | %          | —          |  | —    |  
|700 Gemini                       |            |               |           |            |            |  |      |  
|Houston, Texas 77058             |            |               |           |            |            |  |      |  
|                                 |            |               |           |            |            |  |      |  
|Dromen Securities Ltd.           | 3,750,000  | (7)           | 12.3      | %          | —          |  | —    |  
|Cours de Rive 13                 |            |               |           |            |            |  |      |  
|Geneva, 1204 Switzerland         |            |               |           |            |            |  |      |  
|                                 |            |               |           |            |            |  |      |  
|Alta Fin B.V.                    | 2,016,667  | (8)           | 6.5       | %          | 13,500     |  | 6.2  | %
|Pareravweg 45                    |            |               |           |            |            |  |      |  
|Netherland Antilles              |            |               |           |            |            |  |      |  
|                                 |            |               |           |            |            |  |      |  
|Moonlight Investments, Ltd.      | 4,022,300  | (9)           | 12.5      | %          | 20,223     |  | 9.4  | %
|5 thFloor  One Cathedral Square |            |               |           |            |            |  |      |  
|Jules Koenig Street              |            |               |           |            |            |  |      |  
|Port Louis, Mauritius            |            |               |           |            |            |  |      |  

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|S G Private Banking (Suisse) SA  | 2,500,050 | (10) | 7.9  | % | 16,667 |  | 7.8  | %
|-------------------------------- | --------- | ---- | ---- | - | ------ |  | ---- | -
|Avenue de Rumine 20  CP 220     |           |      |      |   |        |  |      |  
|1001 Lausanne-Switzerland        |           |      |      |   |        |  |      |  
|                                 |           |      |      |   |        |  |      |  
|Millennium International Pension | 4,000,050 | (11) | 12.1 | % | 26,667 |  | 12.4 | %
|Plan                             |           |      |      |   |        |  |      |  
|P.O. Box 100 Sydney Vane         |           |      |      |   |        |  |      |  
|House                            |           |      |      |   |        |  |      |  
|Admiral Park                     |           |      |      |   |        |  |      |  
|St. Peter Port, Guernsey GYI     |           |      |      |   |        |  |      |  
|3EL                              |           |      |      |   |        |  |      |  
|                                 |           |      |      |   |        |  |      |  
|Strand Properties Corporation    | 2,100,000 | (12) | 6.7  | % | 14,000 |  | 6.5  | %
|P.O. Box 11516                   |           |      |      |   |        |  |      |  
|Vancouver BC V6B 4N7             |           |      |      |   |        |  |      |  
|                                 |           |      |      |   |        |  |      |  
|SPH Profit Sharing Plan          | 2,158,000 | (13) | 6.9  | % | 13,333 |  | 6.2  | %
|111 Presidential Blvd.           |           |      |      |   |        |  |      |  
|Bala Cynwyd, PA 19004            |           |      |      |   |        |  |      |  
|                                 |           |      |      |   |        |  |      |  
|Paul Modie                       | 2,100,000 | (12) | 6.7  | % | 14,000 |  | 6.5  | %
|1900 Washington Avenue           |           |      |      |   |        |  |      |  
|Parkersburg, WV 26101            |           |      |      |   |        |  |      |  
|                                 |           |      |      |   |        |  |      |  
|                                 |           |      |      |   |        |  |      |  
|All Officers and Directors as a  | 2,009,167 |      | 6.4  | % | —      |  | —    |  
|group
         (4 persons) (14)  |           |      |      |   |        |  |      |  
|                                 |           |      |      |   |        |  |      |  

|   
|---
|*  
|   
|(1)
|   
|(2)
|   
|(3)
|   
|(4)
|   

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|(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 2,009,167 shares issuable upon exercise of stock options.                                                                     

EQUITY COMPENSATION PLAN INFORMATION

The following table 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                                                                                                                                          
|                                                           |  |                                                                                    |  |                                                                             |  |                                                                                                                                            

|(1) | Represents shares available for issuance under the Plan.
|--- | --------------------------------------------------------

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


In addition, on February 4, 2004, we issued an aggregate of 242,500 options to various employees of the Company pursuant to individual stock option agreements between us and each employee.  Each option has an exercise price of $1.76, has a term of ten (10) years and vests one year from the date of grant.  On May 13, 2005, we issued Mr. Baker an option to purchase 100,000 shares of our common stock at an exercise price of $0.59, the last sales price of our common stock as reported on the OTC Bulletin Board on the date of grant.  The option has a term of ten (10) years and vests one year from the date of grant.


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


In connection with the issuance of the Trident Note, we issued warrants to consultants to purchase 200,000 shares of our common stock.  The warrants 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 subject to downward adjustment in the event we issue additional shares of our common stock or securities convertible or exercisable into shares of our common stock at a price or conversion or exercise price less than the exercise price in effect immediately prior to such issuance.


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


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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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


Pursuant to Securities Purchase Agreement dated March 28, 2005 by and between MAS Services, Inc. (MAS Services) and  Montex Exploration, Inc. (Montex), MAS Services sold 1,000,000 shares of common stock 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 purchased by Montex by including such shares in any registration statement we file with the Securities and Exchange Commission.  Our former Chairman and Chief Executive Officer, Richard A. Schmidt, is the President and Chairman of the Board of MAS Services.


Pursuant
      to Securities Purchase Agreement dated May 27, 2005 by and between MAS
      Services and Moonlight Investments Limited (Moonlight),
      MAS Services sold 1,000,000 shares of common stock to Moonlight 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 purchased by Moonlight by including such shares in any registration
      statement we file with the Securities and Exchange Commission.


On
    April 5, 2005, we entered into a Consultant Agreement with Trident Advisors,
    Inc. (Trident Advisors), an affiliate of Trident Growth Fund,
    LP (Trident), the beneficial owner of in excess of 5% of our outstanding
    shares of common stock. The initial term of the Consultant Agreement was six
    months after which either party may terminate upon written notice. Under the
    Consultant Agreement, Trident Advisors provided services consisting of identifying
    possible business combinations or investors. The Consultant Agreement provided
    for a nonrefundable retainer fee of $60,000 and the payment of additional
    transaction based fees, of which none were earned or paid.


As of October
    28, 2005, we had not been in compliance with any of the financial covenants
    included 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. On November 4, 2005, Trident waived the
    event of default and waived compliance with all financial covenants contained
    in
    the Trident Note for a period of 180 days. In consideration for the wavier,
    we issued 211,833 shares of common stock and warrants to purchase 250,000
    shares of common stock to Trident at an exercise price of $0.40 per share.


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On May 19, 2006, we entered into a Master Amendment with Trident to amend the $1.6 principal amount convertible note to extend the maturity date of the note, delete all financial and certain negative covenants, and delete the demand registration rights and associated penalty provisions.  We also amended the terms of all outstanding warrants previously issued to Trident to revise the anti-dilution adjustment provisions and set the exercise price at $0.40 per share. In consideration of the foregoing, we issued a warrant to Trident to purchase 1,745,000 shares of common stock at an exercise price of $0.40 per share.  The warrant is immediately exercisable for a term of five years.


On December 13, 2005, we issued an option to Mark G. Sampson, our Chief Executive Officer, to purchase 5,000,000 shares of common at an exercise price of $0.40 per share for a term of ten years.  The options vest in three equal installments six, twelve and eighteen months from the date of grant.  In the event that Mr. Sampson ceases to provide services to us, the options shall terminate 90 days after cessation of  service, unless such cessation is for cause, in which case the options shall terminate immediately upon cessation of service. On June 21, 2006, we amended the option to accelerate vesting in the event of termination of employment or  service to the Company without cause, extend the time during which the option can be exercised after termination of employment or service to the Company without cause, include additional methods of cashless exercise, and revise the change of control provisions to make them consistent with the Company&




#8217;s 2005 Stock Incentive Plan.


On December 16, 2005, we issued nonstatutory stock options under the Plan to Donald R. Innis, our President, to purchase 500,000 shares of common stock, 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 three equal annual installments over a three year period commencing on the date of grant and are otherwise subject to the terms of the Plan.  On June 21, 2006, we amended these options to extend the time during which the options can be exercised in the event of termination of employment or service to the Company without cause, include additional methods of cashless exercise, and make inapplicable the provision in the Plan providing for a right of repurchase by the Company or a successor under certain circums




tances in the event the options are exercised after a change of control.


On February 22, 2006, we entered into an agreement with Montex to provide consulting services to us including introducing us to persons outside of the United States qualified and interested in purchasing our securities.  The agreement provides for the payment of fees to Montex equal to 8% of the gross purchase price of our securities issued to any person introduced to us by Montex and warrants to purchase shares of common stock equal to 8% of the shares issued to such persons at an exercise price of $1.50 per shares.  During March 2006, we paid or accrued consulting fees to Montex of $56,000 and issued warrants to purchase 373,333 shares of common stock. Montex beneficially owns in excess of 5% of our outstanding shares.


On
      March 21, 2006, we sold a $200,000 principal amount convertible note and
      warrants to purchase an additional 666,666 shares of common stock to Montex
      for a purchase price of $200,000. The forgoing securities were sold to
      Montex on the same terms and conditions as all other purchasers of securities
      in the offering. On May 7, 2006, Montex exchanged the notes for 13,482
      shares of series B convertible preferred stock.


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Between
      May 3 and October 9, 2006, we sold an aggregate of 43,334 units consisting
      of 43,334 shares of series B convertible preferred stock and warrants to
      purchase
      2,166,667
      shares
      of
      common stock
      to Montex for an aggregate purchase price of $650,000. The foregoing securities
      were sold to Montex on the same terms and conditions as all other purchasers
      of securities in the offering.


On June 19, 2006, we issued letters to Messrs. Sampson, Innis and Wright confirming pre-existing arrangements regarding severance payment and provision of benefits in the event we terminate their employment or service to the Company without cause and providing for the immediate vesting of all options issued 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 base salary, immediate vesting of all options issued under the Plan, and health insurance coverage for three (3) months in the event we terminate his employment without cause. Receipt of the foregoing is conditioned upon the officer’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)                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                              
|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)                                                                                                         

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|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)  
|     |  |                                                                                                                                                                                                                                                                      
|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)                                                       

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|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 Stock  	issued 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)                                                         
|      |  |                                                                                                                                                                                                                                                                                               
|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)                                                                     

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|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)                                                                                     
|      |                                                                                                                                                                                                                                                                                                                                 
|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)                                                      

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|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 Company and 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)                                        
|      |                                                                                                                                                                                                                                                                                    
|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)                                                           

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|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                                                                                                                                    

**     Filed herewith

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ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table presents fees for professional audit services performed by Malone & Bailey, PC for the audit of our annual financial statements for the
    fiscal years ended June 30, 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 fees billed for professional services rendered for the audit of our financial statements and
review of the interim financial statements included in quarterly reports and services that are normally provided by our independent accountants in connection with statutory and regulatory filings or engagements.

Audit-Related Fees consist of fees billed for assurance and related services that are reasonably related to the
performance of the audit or review of our consolidated financial statements, including services relating to audits of acquired entities and services in connection with registration statements which are not reported under Audit Fees.

Tax Fees consists of fees billed for professional services for tax compliance, tax advice and tax planning.  These
services include assistance regarding federal and state tax compliance, tax audit defense, customs and duties, and mergers and acquisitions.

All Other Fees consist of fees billed for products and services provided by the principal accountant, other than those
services described above.

Audit Committee Pre-Approval Procedures

Our Board of Directors serves as our audit committee.  Our Board of Directors approves the engagement of our independent auditors, and meets either telephonically, or in person, with our
    independent auditors to approve the annual scope of accounting services 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 and annual
    audit and prior to our earnings announcements, if any, to review the results of their work.  During the course of the year, our chairman has the authority to pre-approve requests for services that were not approved in the annual pre-approval
    process.  The chairman reports any interim pre-approvals at the following quarterly meeting.  At each of the meetings, management and our independent auditors update the Board of Directors with material changes to any service engagement and related
    fee estimates as compared to amounts previously approved.  During the fiscal year ended June 30, 2006, allaudit and non-audit services performed by our independent accountants were pre-approved by the Board of Directors in accordance with the foregoing procedures.


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STELLAR TECHNOLOGIES, INC.

TABLE OF CONTENTS

|Item 1. Financial
        Statements as of and for the Year Ended June 30, 2005 and 2006.
|-----------------------------------------------------------------------------------------
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors ofStellar Technologies, Inc.Naples, Florida

We have audited the accompanying
    consolidated balance sheet of Stellar Technologies, Inc. and subsidiaries
    (“Stellar”) as of June 30, 2006 and 2005, and the related consolidated
    statements of operations, stockholders’ equity, and cash flows for
    the years then ended. These financial statements are the responsibility of
    Stellar’s management. Our responsibility is to express an opinion on
    these financial statements based on our audits.

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

In our opinion, the financial statements
    referred to above present fairly, in all material respects, the consolidated
    financial position of Stellar as of June 30, 2006 and 2005, and the results
    of its operations and its cash flows for the years then ended in conformity
    with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial
    statements have been prepared assuming that Stellar will continue as a going
    concern. As shown in the financial statements, Stellar has suffered recurring
    losses from operations and has negative working capital at June 30, 2006.
    These factors and others raise substantial doubt about Stellar’s ability
    to continue as a going concern. Management’s plans in regard to those
    matters are described in Note 4 to the financial statements. The consolidated
    financial statements do not include any adjustments relating to the recoverability
    and classification of recorded assets, or to the amounts and classification
    of liabilities that might be necessary in the event Stellar cannot continue
    in existence.

As described in Note 3, the financial
    statements for 2005 have been restated.

MALONE & BAILEY, PCwww.malone-bailey.comHouston, Texas

October 6, 2006



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STELLAR TECHNOLOGIES, INC.Consolidated Balance Sheets

|                                 |                                                                                                                          |  |         | June 30,2006 |  |           | 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 $18,750in 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      |                                                                                                                          |  | 312,047 |              |  | 326,881   |             
|Investment using the cost method |                                                                                                                          |  | 100,000 |              |  | 400,000   |             
|Goodwill                         |                                                                                                                          |  | 863,907 |              |  | 863,907   |             
|Intangible assets                |                                                                                                                          |  | 99,835  |              |  | 176,515   |             
|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, no
        par value; 10,000,000 shares authorized;   |  |             |           |  |            |           | 
|                                         | 127,206 and 0 shares issued
        and outstanding, respectively                |  |             | 1,463,862 |  |            |          | 
|                                         | 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               |                                                                                  |  | 10,890,736  |           |  | 8,843,700  |          
|Accumulated other comprehensive
    loss |                                                                                  |  | (1,883      | )         |  |           |          
|Accumulated deficit                      |                                                                                  |  | (12,999,532 | )         |  | (7,923,862 | )        
|                                         |                                                                                  |  |             |           |  |            |           | 
|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
    partof these consolidated financial
    statements



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STELLAR TECHNOLOGIES, INC.Consolidated
Statements of Operations

|                                                                    |                                                   |   |            | Year Ended 
    June 30, 2006 |   |            | Year EndedJune 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  |                        
|                                                                    |                                                   |   |            |                               |   |            |                         |  
|Cumulative convertible preferred
        stock dividendrequirements |                                                   |   | (22,359    | )                             |   |           |                        
|                                                                    |                                                   |   |            |                               |   |            |                         |  
|Net income (loss) available
    to stockholders                     |                                                   |   | (5,098,029 | )                             | $ | 3,586,459  |                        
|                                                                    |                                                   |   |            |                               |   |            |                         |  
|Basic and diluted income (loss)
    per common share                |                                                   | $ | (0.19      | )                             | $ | 0.14       |                        
|                                                                    |                                                   |   |            |                               |   |            |                        
|Basic and diluted
    weighted average common shares outstanding    |                                                   |   | 26,766,795 |                               |   | 26,392,136 |                        
|                                                                    |                                                   |   |            |                               |   |            |                         |  

The accompanying notes are an integral
    partof
    these consolidated financial statements



F-4

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STELLAR TECHNOLOGIES, INC.Consolidated Statement of Changes in Stockholders’ Equity
    (Deficit)For the Years Ended June 30, 2005 and June
  30, 2006

|                                                                                                                          |  | Preferred
          Stock |  | Common
          Stock |  |            |  |   |        |  |   |                        |   |   |                       |   |   |                                                          |   |  
|------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ---------------------- |  | ---------- |  | - | ------ |  | - | ---------------------- | - | - | --------------------- | - | - | -------------------------------------------------------- | - | -
|                                                                                                                          |  |                           |  |                        |  |            |  |   |        |  |   |                        |   |   |                       |   |   |                                                          |   |  
|                                                                                                                          |  | Shares                    |  | Amount                 |  | Shares     |  |   | Amount |  |   | Paid-in 
      Capital |   |   | Deferred 
      Comp. |   |   | Accumulated
      Other
      Comprehensive
      Income |   |  
|                                                                                                                          |  |                           |  |                        |  |            |  |   |        |  |   |                        |   |   |                       |   |   |                                                          |   |  
|Balance
          at June 30, 2004                                                                                        |  |                           |  |                        |  | 25,759,558 |  | $ | 25,760 |  | $ | 7,530,246              |   | $ | (725,346              | ) | $ |                                                         |   | $
|                                                                                                                          |  |                           |  |                        |  |            |  |   |        |  |   |                        |   |   |                       |   |   |                                                          |   |  
|Shares
            issued for CompuSven acquisition                                                                       |  |                           |  |                        |  | 43,353     |  |   | 43     |  |   | 149,957                |   |   |                       |   |   |                                                         |   |  
|                                                                                                                          |  |                           |  |                        |  |            |  |   |        |  |   |                        |   |   |                       |   |   |                                                          |   |  
|Conversion
          of convertible notes                                                                                 |  |                           |  |                        |  | 601,155    |  |   | 601    |  |   | 1,502,287              |   |   |                       |   |   |                                                          |   |  
|                                                                                                                          |  |                           |  |                        |  |            |  |   |        |  |   |                        |   |   |                       |   |   |                                                          |   |  
|Reclassification
          of unamortized debt discount to equity on note converted to common
          stock             |  |                           |  |                        |  |            |  |   |        |  |   | (1,500,000             | ) |   |                       |   |   |                                                          |   |  
|Exercised
          warrants                                                                                              |  |                           |  |                        |  | 22,500     |  |   | 23     |  |   | (23                    | ) |   |                       |   |   |                                                         |   |  
|                                                                                                                          |  |                           |  |                        |  |            |  |   |        |  |   |                        |   |   |                       |   |   |                                                          |   |  
|Exercise
          Coleman Option                                                                                         |  |                           |  |                        |  | 12,570     |  |   | 12     |  |   | 29,988                 |   |   |                       |   |   |                                                          |   |  
|                                                                                                                          |  |                           |  |                        |  |            |  |   |        |  |   |                        |   |   |                       |   |   |                                                          |   |  
|Fair
          value adjustment from elimination of derivatives  embedded conversion
          option                    |  |                           |  |                        |  |           |  |   |       |  |   | 924,846                |   |   |                       |   |   |                                                          |   |  
|                                                                                                                          |  |                           |  |                        |  |            |  |   |        |  |   |                        |   |   |                       |   |   |                                                          |   |  
|Fair
          value adjustment from elimination of derivatives  warrants                                                |  |                           |  |                        |  |            |  |   |        |  |   | 109,846                |   |   |                       |   |   |                                                          |   |  
|                                                                                                                          |  |                           |  |                        |  |            |  |   |        |  |   |                        |   |   |                       |   |   |                                                          |   |  
|Modification
          of options                                                                                         |  |                           |  |                        |  |           |  |   |       |  |   | 72,513                 |   |   |                       |   |   |                                                         |   |  
|                                                                                                                          |  |                           |  |                        |  |            |  |   |        |  |   |                        |   |   |                       |   |   |                                                          |   |  
|Amortization
            of warrants issuedfor advisory services                                                          |  |                           |  |                        |  |           |  |   |       |  |   |                       |   |   | 725,346               |   |   |                                                         |   |  
|                                                                                                                          |  |                           |  |                        |  |            |  |   |        |  |   |                        |   |   |                       |   |   |                                                          |   |  
|Shares
          issued for convertible note                                                                              |  |                           |  |                        |  | 40,000     |  |   | 40     |  |   | 24,040                 |   |   |                       |   |   |                                                          |   |  
|                                                                                                                          |  |                           |  |                        |  |            |  |   |        |  |   |                        |   |   |                       |   |   |                                                          |   |  
|Net
          income                                                                                                      |  |                           |  |                        |  |           |  |   |       |  |   |                       |   |   |                       |   |   |                                                         |   |  
|                                                                                                                          |  |                           |  |                        |  |            |  |   |        |  |   |                        |   |   |                       |   |   |                                                          |   |  
|Balance
          at June 30, 2005 (Restated)                                                                             |  |                          |  |                       |  | 26,479,136 |  | $ | 26,479 |  | $ | 8,843,700              |   | $ |                      |   | $ |                                                         |   | $
|                                                                                                                          |  |                           |  |                        |  |            |  |   |        |  |   |                        |   |   |                       |   |   |                                                          |   |  
|Shares
          issued for waiver of debt covenants                                                                      |  |                          |  |                       |  | 211,833    |  |   | 212    |  |   | 92,995                 |   |   |                      |   |   |                                                         |   |  
|                                                                                                                          |  |                           |  |                        |  |            |  |   |        |  |   |                        |   |   |                       |   |   |                                                          |   |  
|Sale
          of Investment Units                                                                                        |  |                          |  |                       |  | 2,500,000  |  |   | 2,500  |  |   | 736,935                |   |   |                      |   |   |                                                         |   |  
|                                                                                                                          |  |                           |  |                        |  |            |  |   |        |  |   |                        |   |   |                       |   |   |                                                          |   |  
|Conversion
          of note and accrued interest to Series B Preferred Shares                                            |  | 47,205                    |  | 708,055                |  |           |  |   |       |  |   |                       |   |   |                      |   |   |                                                         |   |  
|                                                                                                                          |  |                           |  |                        |  |            |  |   |        |  |   |                        |   |   |                       |   |   |                                                          |   |  
|Series
          B Preferred Shares issued for cash                                                                       |  | 80,001                    |  | 755,807                |  |           |  |   |       |  |   | 348,193                |   |   |                      |   |   |                                                         |   |  
|                                                                                                                          |  |                           |  |                        |  |            |  |   |        |  |   |                        |   |   |                       |   |   |                                                          |   |  
|Warrant
          expense                                                                                                 |  |                          |  |                       |  |           |  |   |       |  |   | 241,059                |   |   |                      |   |   |                                                         |   |  
|                                                                                                                          |  |                           |  |                        |  |            |  |   |        |  |   |                        |   |   |                       |   |   |                                                          |   |  
|Reclassification
          of unamortized debt discount to equity on note converted to Series
          B Preferred Stock |  |                          |  |                       |  |           |  |   |       |  |   | (724,080               | ) |   |                      |   |   |                                                         |   |  
|                                                                                                                          |  |                           |  |                        |  |            |  |   |        |  |   |                        |   |   |                       |   |   |                                                          |   |  
|Fair
          value adjustment from elimination of derivatives  embedded conversion
          option                    |  |                          |  |                       |  |           |  |   |       |  |   | 535,038                |   |   |                      |   |   |                                                         |   |  
|                                                                                                                          |  |                           |  |                        |  |            |  |   |        |  |   |                        |   |   |                       |   |   |                                                          |   |  
|Fair
          value adjustment from elimination of derivatives  warrants                                                |  |                          |  |                       |  |           |  |   |       |  |   | 620,489                |   |   |                      |   |   |                                                         |   |  
|                                                                                                                          |  |                           |  |                        |  |            |  |   |        |  |   |                        |   |   |                       |   |   |                                                          |   |  
|Warrants
          issued for note modification                                                                           |  |                          |  |                       |  |           |  |   |       |  |   | 196,407                |   |   |                      |   |   |                                                         |   |  
|                                                                                                                          |  |                           |  |                        |  |            |  |   |        |  |   |                        |   |   |                       |   |   |                                                          |   |  
|Foreign
          currency translation                                                                                    |  |                           |  |                        |  |            |  |   |        |  |   |                        |   |   |                       |   |   | (1,883                                                   | ) |  
|                                                                                                                          |  |                           |  |                        |  |            |  |   |        |  |   |                        |   |   |                       |   |   |                                                          |   |  
|Net
          loss                                                                                                        |  |                          |  |                       |  |           |  |   |       |  |   |                       |   |   |                      |   |   |                                                         |   |  
|                                                                                                                          |  |                           |  |                        |  |            |  |   |        |  |   |                        |   |   |                       |   |   |                                                          |   |  
|Balance
          at June 30, 2006                                                                                        |  | 127,206                   |  | 1,463,862              |  | 29,190,969 |  | $ | 29,191 |  | $ | 10,890,736             |   | $ |                      |   | $ | (1,883                                                   | ) | $
|                                                                                                                          |  |                           |  |                        |  |            |  |   |        |  |   |                        |   |   |                       |   |   |                                                          |   |  

The accompanying notes are an integral
    partof these consolidated financial statements

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STELLAR TECHNOLOGIES, INC.Consolidated Statements of Cash Flows

|                                                                                                  |  | Year
          Ended
      June 30, 2006 |            | Year
          Ended
      June 30, 2005
      (Restated) |  
|------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ---------- | --------------------------------------------------------- | -
|Cash flows from operating activities                                                              |  |                                          |            |                                                           |  
|Net
          loss                                                                                |  | $                                        | (5,075,670 | )                                                         | $
|Adjustments
          to reconcile net income (loss) to net cash                                  |  |                                          |            |                                                           |  
|Provided
          by (used in) operating activities                                              |  |                                          |            |                                                           |  
|Depreciation
          and amortization                                                           |  |                                          | 175,337    |                                                           |  
|Amortization
          of deferred advisory services                                              |  |                                          |           |                                                           |  
|Amortization
          of debt discount                                                           |  |                                          | 916,278    |                                                           |  
|Amortization
          of debt issuance costs                                                     |  |                                          | 39,500     |                                                           |  
|Share
          based compensation                                                                |  |                                          | 530,673    |                                                           |  
|Bad
          debts                                                                               |  |                                          | 13,931     |                                                           |  
|Impairment
          of investment                                                                |  |                                          | 300,000    |                                                           |  
|Gain
          on sale of property and equipment                                                  |  |                                          |           |                                                           |  
|Derivative
          gain                                                                         |  |                                          | (471,721   | )                                                         |  
|Changes
          in assets and liabilities                                                       |  |                                          |            |                                                           |  
|Decrease
          (increase) in accounts receivable                                              |  |                                          | 87,961     |                                                           |  
|Decrease
          (increase) in other current assets                                             |  |                                          | 32,303     |                                                           |  
|Increase
          in other assets                                                                |  |                                          | (2,813     | )                                                         |  
|Increase
          in accounts payable                                                            |  |                                          | 341,153    |                                                           |  
|Increase
          (decrease) in deferred revenues                                                |  |                                          | (127,617   | )                                                         |  
|Increase
          in deposits                                                                    |  |                                          | 138,000    |                                                           |  
|                                                                                                  |  |                                          |            |                                                           |  
|Net cash used in operating activities                                                             |  |                                          | (3,102,685 | )                                                         |  
|                                                                                                  |  |                                          |            |                                                           |  
|Cash flows provided by (used
        in) investing activities                                     |  |                                          |            |                                                           |  
|Purchase
          of property and equipment                                                      |  |                                          | (83,823    | )                                                         |  
|Proceeds
          from sale of property and equipment                                            |  |                                          |           |                                                           |  
|Acquisition
          of CompuSven, net of cash acquired                                          |  |                                          |           |                                                           |  
|                                                                                                  |  |                                          |            |                                                           |  
|Net cash used in investing activities                                                             |  |                                          | (83,823    | )                                                         |  
|                                                                                                  |  |                                          |            |                                                           |  
|Cash flows from financing activities                                                              |  |                                          |            |                                                           |  
|Principal
          payments on capital                                                           |  |                                          |            |                                                           |  
|leases
          and short-term obligations                                                       |  |                                          | (5,023     | )                                                         |  
|Proceeds
          from sales of preferred stock and warrants, net of offering costs              |  |                                          | 1,104,000  |                                                           |  
|Proceeds
          from sales of common stock                                                     |  |                                          | 950,000    |                                                           |  
|Proceeds
          from issuance of convertible notes                                             |  |                                          | 700,000    |                                                           |  
|                                                                                                  |  |                                          |            |                                                           |  
|Net cash provided by financing
        activities                                                 |  |                                          | 2,748,977  |                                                           |  
|                                                                                                  |  |                                          |            |                                                           |  
|Effect of exchange rate changes
        on cash                                                   |  |                                          | (1,883     | )                                                         |  
|                                                                                                  |  |                                          |            |                                                           |  
|                                                                                                  |  |                                          |            |                                                           |  
|Net increase (decrease) in cash                                                                   |  |                                          | (439,414   | )                                                         |  
|Cash and cash equivalents, beginning
        of period                                            |  |                                          | 1,024,023  |                                                           |  
|                                                                                                  |  |                                          |            |                                                           |  
|                                                                                                  |  |                                          |            |                                                           |  
|Cash and cash equivalents, end
        of period                                                  |  | $                                        | 584,609    |                                                           | $
|Supplemental disclosure of cash
        flow information:                                         |  |                                          |            |                                                           |  
|Interest
          paid                                                                           |  | $                                        | 187,871    |                                                           | $
|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                                       |  | $                                        |           |                                                           | $
|Fair
          value of derivatives transferred to equity  embedded conversion
          feature |  | $                                        | 535,038    |                                                           | $
|Fair
          value of derivatives transferred to equity  warrants                              |  | $                                        | 596,409    |                                                           | $
|Reclassification
          of unamortized debt discount to equity                                 |  | $                                        | 724,080    |                                                           | $

The accompanying notes are an integral
    partof these consolidated financial statements

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STELLAR TECHNOLOGIES, INC.Notes to Consolidated Financial Statements

NOTE 1  DESCRIPTION OF BUSINESS

Nature of Operations

Stellar Technologies, Inc. and subsidiaries
    (collectively, “Stellar”) provide Employee Internet Management
    ("EIM") products and services that enable businesses to monitor,
    report, and manage how their employees use the Internet. Stellar's products
    and services give managers the ability to implement Internet access policies
    for different users and groups within their businesses, and support their
    efforts to improve employee productivity, conserve network bandwidth, and
    mitigate potential legal liability. Stellar’s products also provide
    customers the ability to filter, block, archive and retrieve electronic communications.

Stellar is also engaged in the development
    and selling of “E-Mail Shuttle,” migration software specifically
    designed to migrate, upgrade and provide coexistence and synchronization
    of data for its customers’ e-mail data. Stellar also provides product
    support and maintenance for its software and consulting services for the
    installation of its products.

History

The Company, formerly International
    Travel CD's, Inc. ("ILCD"), was formed on July 20, 2000, as a Colorado
    corporation. In January 2004, the Company consummated an agreement and plan
    of merger with Stellar Venture Partners, LLC ("Stellar LLC"). In
    connection with the merger, the Company changed its name to Stellar Technologies,
    Inc. (“Stellar”)

Stellar LLC was formed as a 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 the systems design and development knowledge to assist Stellar in the
    design and development of its internet management monitoring and reporting
    systems. On November 21, 2005, Stellar formed a Canadian subsidiary, GeM
    Solutions (Canada), Inc. (“GeM”), formerly STI Management Services
    LTD., for the purpose of conducting the operations of Stellar in Canada including,
    but not limited to sales, marketing, and development, as well as employee
    functions related to Canadian employees.

NOTE 2  SIGNIFICANT ACCOUNTING
    POLICIES

Basis of Presentation

The accompanying financial statements
    have been prepared on the accrual basis of accounting in accordance with
    accounting principles generally accepted in the United States of America.

Principles of Consolidation

The accompanying financial statements
    have been presented on a consolidated basis and include all the accounts
    of Stellar, CompuSven (see Note 5) and GeM. GeM is a wholly-owned Canadian
    subsidiary.

Consolidation

Affiliate entities in which Stellar
    directly or indirectly owns more than 50% of the outstanding, voting interest
    are accounted for under the consolidation method of accounting. Under this
    method, an investee company’s results of operations are reflected within
    Stellar’s consolidated statement of operations. All significant intercompany
    accounts and transactions have been eliminated in consolidation.

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Reclassifications

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

Investment Accounted for under
      the Cost Method

Entities in which Stellar directly
    or indirectly owns less than 20% of the outstanding voting interest are accounted
    for under the cost method of accounting. Under this method, income received
    from investees is reflected within Stellar’s consolidated statement
    of operations as investment income or loss unless the amount of the dividends
    exceeds Stellar’s proportionate share of the affiliates’ income.
    In that case, the excess amount would be considered a return of capital and
    be recorded as a reduction of the investment. Stellar periodically reviews,
    at least annually, its investments for impairment.

Use of Estimates

The preparation of financial statements
    in conformity with generally accepted accounting principles requires management
    to make estimates and assumptions that affect the reported amount of assets
    and liabilities and disclosures of contingent assets and liabilities at the
    date of financial statements and the reported amounts of increases and decreases
    in net assets from operations during the reporting period. Actual results
    could differ from these estimates.

Cash and Cash Equivalents

Cash and cash equivalents include
    cash on hand and investments in money market funds. Stellar considers all
    highly-liquid instruments with an original maturity of 90 days or less at
    the time of purchase to be cash equivalents.

Goodwill and Acquired Intangibles

Stellar accounts for goodwill and
    acquired intangible assets in accordance with SFAS No. 142, “Goodwill
    and Other Intangible Assets” (“SFAS 142”). Accordingly,
    goodwill arising from the acquisition of investments is not amortized, but
    is reviewed annually for impairment. Stellar has elected to perform its annual
    goodwill impairment test as of June 30, 2006. Other intangibles are amortized
    over their useful life on a straight-line basis.

Impairment of Long-Lived Assets

In accordance with Statement of Financial
    Accounting Standards No. 144 “Accounting for the Impairment or Disposal
    of Long-Lived Assets”, Stellar reviews the carrying value of its long-lived
    assets annually or whenever events or changes in circumstances indicate that
    the historical cost-carrying value of an asset may no longer be appropriate.
    Stellar assesses recoverability of the carrying value of the asset by
    estimating the future net cash flows expected to result from the asset, including
    eventual disposition.  If the future net cash flows are less than the carrying value
    of the asset, an impairment loss is recorded equal to the difference
    between the asset’s carrying value and fair value.

Federal Income Taxes

Income taxes are recorded in the
    period in which the related transactions are recognized in the financial
    statements, net of any valuation allowances recorded against deferred tax
    assets, if Stellar estimates that it is more likely than not that it will
    be unable to utilize those deferred tax benefits in future periods. Deferred
    tax assets and liabilities are recorded for the expected future tax consequences
    of temporary differences between the tax basis and the financial reporting
    basis of assets and liabilities.

Credit Risk

Financial instruments that potentially
    subject Stellar to concentrations of credit risk consist principally of cash
    deposits at financial institutions and trade receivables. To mitigate these
    risks, Stellar provides credit in the normal course of business and performs
    ongoing credit reviews of its customers while maintaining a provision for
    credit losses. Also, Stellar places its cash deposits only with high credit
    quality institutions. At various times during the year, Stellar may exceed
    the federally insured limits. Management believes the risk of loss of cash
    placed in these institutions is remote.

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Fair Value of Financial Instruments

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

Issuance of Shares for Services

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

Foreign Currency Transactions

In accordance with Statement of Financial
    Accounting Standard (“SFAS”) No. 52 (as amended), “Foreign
    Currency Translation, the recorded balances that are required to be paid
    in foreign currencies at June 30, 2006 are adjusted to reflect the exchange
    rate at the balance sheet date.

Derivative Financial Instruments

Stellar does not use derivative instruments
    to hedge exposures to cash flow, market or foreign currency risks. Stellar
    has periodically entered into financing and equity instruments with certain
    provisions containing imbedded conversion features required to be accounted
    for under SFAS No. 133, “Accounting for Derivative Instruments and
    Hedging Activities,” and EITF 00-19.

Derivative financial instruments
    are initially measured at their fair value. For derivative financial instruments
    that are accounted for as liabilities, the derivative instrument is initially
    recorded at it fair value and is then re-valued at each reporting date, with
    changes in the fair value reported as charges or credits to income. For option-based
    derivative financial instruments, Stellar uses the Cox-Ross-Rubenstein binomial
    option-pricing model (which produces results substantially the same as the
    Black-Scholes model) to value the derivative instruments.

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

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

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

The historic volatility of Stellar’s
    common stock is considered a good estimate of the volatility to be expected
    over the (future) life of the conversion options and warrants. Stellar uses,
    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 that approximates
    the estimated life of the derivative or security. Stellar uses the closing
    market price of Stellar’s common stock on the date of issuance of a
    derivative or at the end of a quarter when a derivative is valued at fair
    value. The volatility factor in Cox-Ross- Rubinstein has a significant effect
    on the resulting valuation of the derivative liabilities on Stellar’s
    balance sheet. The volatility used was 80%. Stellar’s volatility rate
    will likely change in the future. To the extent that Stellar’s stock
    price increases or decreases, Stellar’s derivative liability will also
    increase or decrease, absent any change in volatility rates.

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In September 2000, the Emerging Issues
    Task Force (“EITF”) issued EITF 00-19, “Accounting for
    Derivative Financial Instruments Indexed to and Potentially Settled in, a
    Company’s Own Stock,” (“EITF 00-19”) which requires
    freestanding contracts that are settled in a company’s own stock, including
    common stock warrants, to be designated as an equity instrument, asset or
    liability. Under the provisions of EITF 00-19, a contract designated as an
    asset or liability must be carried at fair value on the balance sheet, with
    any changes in fair value recorded to results of operations. A contract designated
    as an equity instrument must be included within equity, and no fair value
    adjustments are required from period to period. In accordance with EITF 00-19,
    certain of Stellar’s warrants to purchase common stock and the embedded
    conversion feature of several of its financial instruments are accounted
    for as liabilities. The fair value of these warrants and conversion features
    are shown on Stellar’s balance sheet and the unrealized changes in
    the values of these derivatives are shown in Stellar’s consolidated
    statement of operations as “gain (loss) on derivative liabilities.” During
    the fourth quarter of 2006, Stellar obtained modifications from the holders
    of certain financial instruments that eliminated the derivative liability
    classification and, accordingly, eliminated Stellar’s derivative liabilities.

The EITF recently issued an exposure
    draft, EITF 06-07Issuer’s Accounting for a Previously Bifurcated
    Conversion Option in a Convertible Debt Instrument When the Conversion Option
    No Longer Meets the Bifurcation Criteria in FASB Statement No. 133, Accounting
    for Derivative Instruments and Hedging Activities. The EITF has not reached
    a consensus on this issue and has deferred deliberation until the FASB addresses
    certain questions which could impact a conclusion on this issue. Specifically,
    EITF 06-07 presents alternative views on how an entity should recognize the
    change in the derivative liability when a previously bifurcated conversion
    option is no longer required to be bifurcated pursuant to FAS 133. Stellar
    had embedded conversion options that initially required separate accounting
    as a derivative under FAS 133 that no longer met the conditions for separate
    accounting as a derivative at June 30, 2006 due to the amendment of the related
    instrument (see Note 10). It has chosen to adopt View A of EITF 06-07, which
    requires that the carrying value of the liability for the conversion option
    be reclassified to shareholder’s equity. The debt discount recorded
    at issuance will continue to be amortized over the remaining term of the
    instrument. If the EITF were to adopt a different view, Stellar may have
    to change its policy and follow the EITF view.

Revenue Recognition

Revenue from the sale of migration
    software is recognized at the time the software is released to the customer.
    Revenue for consulting services is recognized as the service is performed.
    Revenue for product support or maintenance is recognized ratably
    over the life of the support or maintenance agreement. Accounts receivable
    represent the balances due from customers for products released and consulting
    services performed, as well as the full value of any support or maintenance
    agreements. As a result of billing support or maintenance agreement payments
    received in advance of services being performed, Stellar has established
    a deferred income account representing amounts billed but not earned. Management
    estimates that such deferred revenues are fully collectible. Bad debts are
    charged to operations in the year in which the account is determined to be
    uncollectible.

Revenue from the sale of monitoring
    services is recognized ratably over the life of the monitoring service agreement.
    Accounts receivable represent balances due from customers for all billed
    but not collected Internet monitoring service agreements signed by the customer.
    As a result of billing monitoring service agreements in advance of services
    performed, Stellar has established a deferred income account representing
    amounts billed but not earned. Bad debts are charged to operations in the
    year in which the account is determined to be uncollectible.

Accounts Receivable

Stellar uses the allowance method
    of accounting for doubtful accounts. The year-end balance is based on historical
    collections and management’s review of the current status of existing
    receivables and estimate as to their collectibility. Stellar does not require
    collateral on its receivables.

Advertising Costs

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

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Property and Equipment

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

Earnings (Loss) Per Share

Earnings (loss) per common share
    is calculated in accordance with SFAS No. 128, “Earnings Per Share.” Basic
    loss per common share is computed based upon the weighted average number
    of shares of common stock outstanding for the period and excludes any potential
    dilution. Shares associated with stock options, warrants and convertible
    debt are not included because their inclusion would be antidilutive (i.e.,
    reduce the net loss per share). The per share calculations take into effect
    all stock dividends, stock splits, recapitalizations and reverse stock splits.

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

Recent Accounting Pronouncements

In December 2004, the FASB issued
    SFAS No.123R, “Accounting for Stock-Based Compensation”. SFAS
    No.123R establishes standards for transactions in which an entity exchanges
    its equity instruments for goods or services. This Statement focuses primarily
    on accounting for transactions in which an entity obtains employee services
    in share-based payment transactions. SFAS No.123R requires that the fair
    value of such equity instruments be recognized as expense in the historical
    financial statements as services are performed. Prior to SFAS No.123R, only
    certain pro forma disclosures of fair value were required. SFAS No.123R became
    effective for small business issuers as of the beginning of the first interim
    or annual reporting period that began after December 15, 2005. Since January
    1, 2006, Stellar has recorded the fair value of transactions in which it
    obtains employee services in share-based payment transactions as expenses
    in the periods in which they occurred.

Stellar does not expect the adoption
    of any other recently issued accounting pronouncements to have a significant
    impact on Stellar’s results of operations, financial position or cash
    flow.

Stock-Based Compensation

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

Effective January 1, 2006, Stellar
    adopted the fair value recognition provisions of FASB Statement No. 123R, Share-Based
    Payment, and related interpretations (“SFAS No. 123R”),
    using the modified-prospective transition method. Under that method, compensation
    cost recognized in the first quarter of 2006 includes (a) compensation
    cost for all share-based payments granted prior to, but not yet vested as
    of December 31, 2005, based on the grant date fair value estimated in accordance
    with the original provisions of SFAS No. 123 and (b) compensation
    cost for all share-based payments granted on or subsequent to January 1,
    2006, based on the grant-date fair value estimated in accordance with the
    provisions of SFAS No. 123R. Compensation cost is being recognized on
    a straight-line basis over the requisite service period for the entire award
    in accordance with the provisions of SFAS No. 123R. Results for the
    prior periods have not been restated.

The following table illustrates the
    effect on net loss and earnings per share if Stellar had applied the fair
    value recognition provisions of SFAS No. 123R to stock-based compensation
    during the years ended June 30, 2006 and 2005:

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|                                                          |  |   | Year Ended
      June 30, 2006 |   |   | Year Ended
      June 30, 2005
      (Restated) |  
|--------------------------------------------------------- |  | - | ------------------------------ | - | - | ----------------------------------------------- | -
|                                                          |  |   |                                |   |   |                                                 |  
|Net loss to common stockholders,
        as reported      |  | $ | (5,075,670                     | ) | $ | 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                                        |  | $ | (5,101,120                     | ) | $ | 2,963,631                                       |  
|                                                          |  |   |                                |   |   |                                                 |  
|Loss per share
        basic and diluted  as reported    |  | $ | (0.19                          | ) | $ | 0.14                                            |  
|Loss per share
        basic and diluted  pro forma      |  | $ | (0.19                          | ) | $ | 0.11                                            |  
|                                                          |  |   |                                |   |   |                                                 |  
|Shares used in basic and diluted
        loss per share   |  |   |                                |   |   |                                                 |  
|Amounts                                                   |  |   | 26,766,795                     |   |   | 26,392,136                                      |  
|                                                          |  |   |                                |   |   |                                                 |  

These pro forma amounts may not be
    representative of future disclosures since the estimated fair value of stock
    options is amortized to expense over the vesting period and additional options
    may be issued in future years. The estimated fair value of each option granted
    was calculated using the Black-Scholes option pricing model. The following
    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 weighted average grant-date fair
    value of options granted during 2006 and 2005 was $0.38 and $0.59 per share,
    respectively.

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

NOTE 3  RESTATEMENT

On or about May 10, 2006, Stellar
    concluded it was necessary to restate its financial results for the year
    ended June 30, 2005 to reflect additional non-operating gains and losses
    related to the classification of and accounting for (1) various warrants
    issued in 2003, 2004 and 2005, and (2) the conversion features of Stellar’s
    $1.6 million convertible note payable issued in April 2005 (“2005 Note”).
    Stellar had previously classified the value of the conversion features and
    warrants to purchase common stock as equity, where applicable. After further
    review, Stellar has determined that these instruments should have been classified
    as derivative liabilities and, therefore, the fair value of each instrument
    should be reflected as derivative liabilities on Stellar’s balance
    sheet. Changes in fair value of these instruments are reflected as non-operating
    gains/losses in Stellar’s statement of operations. At the date of conversion
    of each respective instrument or portion thereof (or exercise of the warrants
    or portion thereof, as the case may be), the corresponding derivative liability
    will be reclassified to equity.

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Stellar has previously restated the
    unaudited consolidated financial statements as of and for the three and nine
    months ended March 31, 2005 to a) correct the valuation of certain identifiable
    intangible assets associated with the purchase of CompuSven, b) amortize
    the deferred compensation related to non-forfeitable warrants issued to a
    non-employee under a three-year consulting agreement over the vesting period
    rather than the term of the consulting agreement, and c) account for the
    modification of terms related to options granted to a former employee.

The accompanying financial statements
    for the year ended June 30, 2005 have been restated to effect the changes
    described above. The impact of those adjustments for the year ended June
    30, 2005 are summarized below:

Year Ended June 30, 2005:

|                                                           |                                                   |   |            | As Previously
      Reported |   |           | Adjustments |       |            | Restated  |  
|---------------------------------------------------------- | ------------------------------------------------- | - | ---------- | ---------------------------- | - | --------- | ----------- | ----- | ---------- | --------- | -
|                                                           |                                                   |   |            |                              |   |           |             |       |            |           |  
|Revenues                                                   |                                                   | $ | 882,805    |                              | $ |          |             | $     | 882,805    |          
|                                                           |                                                   |   |            |                              |   |           |             |       |            |           |  
|Expenses                                                   |                                                   |   |            |                              |   |           |             |       |            |          
|                                                           | Other general and administrative                  |   |            | 2,740,864                    |   |           |             |       |            | 2,740,864 |  
|                                                           | Professional fees                                 |   |            | 1,985,595                    |   |           | (667,286    | ) (a) |            | 1,318,309 |  
|                                                           | Research, development and product
        support |   |            | 193,853                      |   |           |            |       |            | 193,853   |  
|                                                           | Depreciation and amortization
        expense     |   |            | 164,401                      |   |           |            |       |            | 164,401   |  
|                                                           |                                                   |   |            |                              |   |           |             |       |            |           |  
|Total expenses                                             |                                                   |   | 5,084,713  |                              |   | (667,286  | )           |       | 4,417,427  |          
|                                                           |                                                   |   |            |                              |   |           |             |       |            |           |  
|Loss from operations                                       |                                                   |   | (4,201,908 | )                            |   | 667,286   |             |       | (3,534,622 | )        
|                                                           |                                                   |   |            |                              |   |           |             |       |            |           |  
|Other income (expense)                                     |                                                   |   |            |                              |   |           |             |       |            |          
|                                                           | Gain on derivative liability                      |   |            |                             |   |           | 7,424,852   | (b)   |            | 7,424,852 |  
|                                                           | Interest income                                   |   |            | 12,430                       |   |           |            |       |            | 12,430    |  
|                                                           |                                                   |   |            |                              |   |           |             |       |            |           |  
|                                                           | Interest expense                                  |   |            | (1,837,171                   | ) |           | 1,520,970   | (b)   |            | (316,201  | )
|                                                           |                                                   |   |            |                              |   |           |             |       |            |           |  
|Total other income
        (expense)                       |                                                   |   | (1,824,741 | )                            |   | 8,945,822 |             |       | 7,121,081  |          
|                                                           |                                                   |   |            |                              |   |           |             |       |            |           |  
|Net income (loss)                                          |                                                   | $ | (6,026,649 | )                            | $ | 9,613,108 |             | $     | 3,586,459  |          
|                                                           |                                                   |   |            |                              |   |           |             |       |            |           |  
|Basic net income
        (loss) per common share           |                                                   | $ | (0.23      | )                            |   |           |             | $     | 0.14       |          
|                                                           |                                                   |   |            |                              |   |           |             |       |            |           |  
|Weighted average
        common shares outstanding  basic |                                                   |   | 26,392,136 |                              |   |           |             |       | 26,392,136 |          
|                                                           |                                                   |   |            |                              |   |           |             |       |            |           |  

|
|
|

| |  |  | b) | to record the change in fair value of warrants
        determined to be derivative liabilities and to adjust the amortization
        of interest expense on the $1.6 million convertible notes
| |  |  | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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The impact of the adjustments related
    to the classification and accounting for the conversion features and warrants
    to the June 30, 2005 balance sheet are summarized below:

June 30, 2005

|                                         |                                                                       |  |             | As Previously
      Reported |  |            | Adjustment |       |            | Restated  | 
|---------------------------------------- | --------------------------------------------------------------------- |  | ----------- | ---------------------------- |  | ---------- | ---------- | ----- | ---------- | --------- | 
|                                         |                                                                       |  |             |                              |  |            |            |       |            |           | 
|Current assets                           |                                                                       |  |             |                              |  |            |            |       |            |          
|                                         | Cash                                                                  |  | $           | 1,024,023                    |  | $          |           |       | $          | 1,024,023 | 
|                                         | Accounts receivable, net                                              |  |             | 275,387                      |  |            |           |       |            | 275,387   | 
|                                         | Debt issuance cost, net                                               |  |             | 93,555                       |  |            | (54,055    | ) (a) |            | 39,500    | 
|                                         | Prepaid expenses and other
        assets                             |  |             | 68,146                       |  |            |           |       |            | 68,146    | 
|                                         |                                                                       |  |             |                              |  |            |            |       |            |           | 
|Total current assets                     |                                                                       |  | 1,461,111   |                              |  | (54,055    | )          |       | 1,407,056  |          
|                                         |                                                                       |  |             |                              |  |            |            |       |            |           | 
|Property and equipment,
        net      |                                                                       |  | 326,881     |                              |  |           |            |       | 326,881    |          
|Investment using
        the cost method |                                                                       |  | 400,000     |                              |  |           |            |       | 400,000    |          
|Goodwill                                 |                                                                       |  | 863,907     |                              |  |           |            |       | 863,907    |          
|Intangible assets,
        net           |                                                                       |  | 176,515     |                              |  |           |            |       | 176,515    |          
|Other assets                             |                                                                       |  | 12,320      |                              |  |           |            |       | 12,320     |          
|                                         |                                                                       |  |             |                              |  |            |            |       |            |           | 
|                                         |                                                                       |  | $           | 3,240,734                    |  | $          | (54,055    | )     | $          | 3,186,679 | 
|                                         |                                                                       |  |             |                              |  |            |            |       |            |           | 
|Current liabilities                      |                                                                       |  |             |                              |  |            |            |       |            |          
|                                         | Accounts payable and accrued
        expenses                         |  | $           | 451,001                      |  | $          |           |       | $          | 451,001   | 
|                                         | Current portion of obligations
        under capital leases           |  |             | 4,652                        |  |            |            |       |            | 4,652     | 
|                                         | Convertible notes payable, net
        of unamortized discount        |  |             | 1,060,288                    |  |            | (352,486   | )(b)  |            | 659,642   | 
|                                         | Derivative liabilities                                                |  |             |                             |  |            | 724,738    | (c)   |            | 724,738   | 
|                                         | Deferred revenues                                                     |  |             | 323,476                      |  |            |            |       |            | 323,476   | 
|                                         |                                                                       |  |             |                              |  |            |            |       |            |           | 
|Total current liabilities                |                                                                       |  | 1,839,417   |                              |  | 324,092    |            |       | 2,163,509  |          
|                                         |                                                                       |  |             |                              |  |            |            |       |            |           | 
|                                         | Deferred revenues                                                     |  |             | 74,902                       |  |            |           |       |            | 74,902    | 
|                                         | Obligations under capital leases,
        net of current portion      |  |             | 1,951                        |  |            |           |       |            | 1,951     | 
|                                         |                                                                       |  |             |                              |  |            |            |       |            |           | 
|Total liabilities                        |                                                                       |  | 1,916,270   |                              |  |           |            |       | 2,240,362  |          
|                                         |                                                                       |  |             |                              |  |            |            |       |            |           | 
|Commitments and
        contingencies    |                                                                       |  |             |                              |  |            |            |       |            |          
|                                         |                                                                       |  |             |                              |  |            |            |       |            |           | 
|Stockholders’ equity                     |                                                                       |  |             |                              |  |            |            |       |            |          
|                                         | Preferred stock, no par value
        ; authorized 10,000,000 shares; |  |             |                             |  |            |           |       |            |          | 
|                                         | Common stock                                                          |  |             | 26,480                       |  |            | (1         | )     |            | 26,479    | 
|Additional paid-in
        capital       |                                                                       |  | 13,872,157  |                              |  | (5,028,457 | )(d)       |       | 8,843,700  |          
|Accumulated deficit                      |                                                                       |  | (12,574,173 | )                            |  | 4,650,311  | (e)        |       | (7,923,862 | )        
|                                         |                                                                       |  |             |                              |  |            |            |       |            |           | 
|Total stockholders’ equity               |                                                                       |  | 1,324,464   |                              |  | (378,146   | )          |       | 946,317    |          
|                                         |                                                                       |  |             |                              |  |            |            |       |            |           | 
|                                         |                                                                       |  | $           | 3,240,734                    |  | $          | (54,055    | )     | $          | 3,186,679 | 
|                                         |                                                                       |  |             |                              |  |            |            |       |            |           | 

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

| | (b) | to adjust the unamortized discount on the
        $1.6 million convertible notes.
| | --- | ---------------------------------------------------------------------------------

| | (c) | To record the fair value of the warrants
        and embedded conversion features.
| | --- | ----------------------------------------------------------------------------------

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

| | (e) | To reflect the change in net income associated
        with the change in fair value of the derivative liability.
| | --- | -----------------------------------------------------------------------------------------------------------------

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NOTE 4  GOING CONCERN

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

Stellar has experienced recurring
    losses from operations and has relied on proceeds from the sale of equity
    securities and the issuance of convertible notes to fund its operations.
    Stellar intends to seek additional working capital through borrowings and
    the issuance of equity securities. Although in the past Stellar has been
    able to obtain working capital through borrowings and the issuance of equity
    securities, there can be no assurances that it will succeed in its efforts,
    which creates a doubt about Stellar’s ability to continue as a going
    concern. Subsequent to June 30, 2006, Stellar has raised an additional $1.18
    million through the issuance of Series B Convertible Preferred Stock. See
    Note 16.

NOTE 5  PURCHASE OF COMPUSVEN,
    INC.

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

The following table summarizes the
    fair values assigned of the assets acquired and the liabilities assumed 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 the purchase price
    over the fair value of assets acquired and liabilities assumed was allocated
    to goodwill. The amount assigned to intangible assets represents customer
    relationships and employment contracts, and was based on an independent appraisal.
    The intangible assets will be amortized on a straight-line basis over periods
    ranging 3 to 5 years. See Note 7.

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

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NOTE 6  PROPERTY AND EQUIPMENT

Property and equipment consisted
    of the following:

|                                  |  | Useful Life(Years) |  |  | June 30,2005 |          
|--------------------------------- |  | ------------------ |  |  | ------------ | ---------
|                                  |  |                    |  |  |              |          
|Computer equipment                |  | 5                  |  |  | $            | 117,845  
|Software                          |  | 3  5              |  |  |              | 363,360  
|Furniture, fixtures and equipment |  | 5  7              |  |  |              | 84,442696
|Leasehold improvements            |  | 5                  |  |  |              | 14,150   
|Capital leases  equipment        |  | 5                  |  |  |              | 13,090   
|                                  |  |                    |  |  |              |          
|                                  |  |                    |  |  |              | 592,887  
|Less: accumulated depreciation    |  |                    |  |  |              | (280,840 
|                                  |  |                    |  |  |              |          
|                                  |  |                    |  |  | $            | 312,047  
|                                  |  |                    |  |  |              |          

Depreciation expense, which includes
    property under capital leases, was $98,657 and $87,235 for the years ended
    June 30, 2006 and 2005, respectively.

NOTE 7  GOODWILL AND INTANGIBLE
    ASSETS

The following intangibles arose from
    the acquisition of CompuSven in July 2004.

|                       |  | June
          30, 2006 |          
|---------------------- |  | ----------------------- | ---------
|                       |  |                         |          
|                       |  |                         | Cost     
|                       |  |                         |          
|Goodwill               |  | $                       | 893,906  
|Employment contract    |  |                         | 200,000  
|Customer relationships |  |                         | 50,000   
|                       |  |                         |          
|Total                  |  | $                       | 1,143,906
|                       |  |                         |          

The weighted average amortization
    period for amortizable intangible assets is 4 years.

Stellar periodically reviews the
    carrying value of intangible assets not subject to amortization, including
    goodwill, to determine whether impairment may exist. SFAS No. 142, Goodwill
    and Other Intangible Assets,requires that goodwill and certain intangible
    assets be assessed annually for impairment using fair value measurement techniques.
    Specifically, goodwill impairment is determined using a two-step process.
    The first step of the goodwill impairment test is used to identify potential
    impairment by comparing the fair value of a reporting unit with its carrying
    amount, including goodwill. The assumptions about future cash flows and growth
    rates are based on the Company’s budget and long-term plans. If the
    fair value of a reporting unit exceeds its carrying amount, goodwill of the
    reporting unit is considered not impaired and the second step of the impairment
    test is unnecessary. In Stellar’s case, the first step of the analysis
    indicated the fair value of CompuSven exceeded its carrying amount and therefore,
    goodwill of CompSven is not considered impaired at June 30, 2006.

NOTE 8  INVESTMENT IN SYNERGY

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

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NOTE 9  INCOME TAXES

Stellar uses the liability method,
    where deferred tax assets and liabilities are determined based on the expected
    future tax consequences of temporary differences between the carrying amounts
    of assets and liabilities for financial and income tax reporting purposes.
    Since inception, Stellar has incurred net losses and, therefore, had no tax
    liability. Realization of the benefits of the deferred tax assets generated
    by the loss carry-forward will require that Stellar generate future taxable
    income. There can be no assurance that Stellar will generate any taxable
    income in future years. Therefore, Stellar has established a valuation allowance
    for the full amount of the deferred tax assets at June 30, 2006. The cumulative
    net operating loss carry-forward is approximately $10,300,000 at June 30,
    2006, and will expire in the years 2022 through 2026. The components of deferred
    tax assets and liabilities at June 30, 2006 are as follows:

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

NOTE 10  CAPITAL LEASE OBLIGATIONS

Stellar periodically enters into
    capital leases, primarily for office equipment. The following is a schedule
    by year of future minimum lease payments required to be paid by Stellar under
    capital lease obligations together with the present value of the net minimum
    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

$1.5 million Convertible Notes-
    In June 2004, the Company raised gross proceeds of $1,500,000 through the
    issuance of Convertible Promissory Notes (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 million Notes accrued interest at a rate
    of 1.98% per annum, payable monthly, and had an original maturity date of
    June 7, 2005. The $1.5 million Notes were convertible, at an initial conversion
    price of $2.50, into 600,000 shares of common stock. The $1.5 million Notes
    included a provision requiring Stellar to file a registration statement with
    the Securities and Exchange Commission (“SEC”) covering the public
    resale of the shares underlying the $1.5 million Notes and warrants. The
    $1.5 million Notes automatically converted into common stock upon the effective
    date of such registration statement. Each A and B Warrant is exercisable
    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 to downward
    adjustment in the event that the Company issues shares of common stock or
    securities that are convertible into shares of common stock at a purchase
    or conversion price less than the exercise price of the warrants. The Series
    A Warrants expired October 12, 2005. The Series B Warrants have an expiration
    date of June 7, 2009. In July 2004, upon the SEC declaring Stellar’s
    registration statement effective, the $1.5 million Notes and accrued interest
    automatically converted into 601,155 shares of common stock.

In connection with the $1.5 million
    Notes, Stellar paid commissions of $120,000 to Founders Equity Securities,
    Inc. which was recorded to debt issuance costs. Upon the registration statement
    being declared effective by the SEC, the unamortized balance of $110,000
    was immediately expensed to interest expense.

$1.6 million Convertible Note-
    In April 2005 Stellar issued a $1.6 million convertible note (the ”Trident
    Note”) and detachable warrants to purchase 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 date of five years
    after the issue date. The Trident Note accrued interest at the rate 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 Stellar for its own account
    or (iii) a change in management control of Stellar. The Trident Note was
    secured by substantially all of Stellar's assets.

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

At the option of Trident, it may
    elect to receive shares of common stock instead of cash payments for interest
    due under the Trident Note and may convert the principal due into shares
    of common stock at a conversion price of $1.00 per share subject to certain
    anti-dilution adjustments. In addition, the Trident Note includes a provision
    requiring Stellar to file a registration statement with the SEC to cover
    the public sale of shares that have been or may be issued under the Trident
    Note or warrants.

The Trident Note contained certain
    financial covenants with which Stellar was required to comply. These covenants
    included a requirement to maintain adequate cash flow and a current ratio
    of not less than 1.5 to 1. Beginning in October 2005, Stellar was not in
    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 Trident Note for
    a period of 180 days. In consideration for the waiver, Stellar issued 211,833
    shares of common stock and a warrant to purchase an additional 250,000 shares
    of common stock at an exercise price of $0.40 per share. Interest expense
    of $93,207, which equals the fair market value of the common stock at the
    time of issuance, was recognized and the related warrants were accounted
    for as derivative instruments under SFAS No. 133 and were valued at $210,565
    at the time of grant.

The full principal amount and all
    accrued and unpaid interest due under the Trident Note in the aggregate amount
    of $1,616,000 became due and payable on April 30, 2006. Effective May 1,
    2006, Stellar 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 of convertible debt or equity
    securities after May 19, 2006; (ii) eliminate all financial covenants; (iii)
    eliminate certain negative covenants; and (iv) eliminate the anti-dilution
    adjustment for issuances of shares at prices below the conversion price of
    the Trident 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,
    remains secured by substantially all of Stellar’s assets, and is redeemable,
    in whole or in part, at Stellar’s option at 100% of the principal amount.
    Interest is payable in cash unless Trident elects to have it paid in shares
    of common stock valued at the conversion price in effect on such date. The
    Trident Note is convertible in whole or in part at the option of Trident
    into shares of common stock at a conversion price of $0.40 per share.

In consideration for the foregoing
    extension, amendments to certain outstanding warrants, and the cancellation
    of an outstanding warrant, Stellar issued warrants to Trident to purchase
    1,745,000 shares of common stock. The warrants are immediately exercisable
    at an exercise price of $0.40 per share, contain standard and customary cashless
    exercise provisions, and expire May 1, 2011. Total amount expensed related
    to the warrants was $188,305, which is the net of the fair value of the warrants
    of $196,407 reduced by the value of the cancelled warrants of $8,102.

The amendments eliminated the provisions
    that caused the conversion feature of the note and the related warrants to
    be treated as derivatives. In addition, all other warrants that were accounted
    for as derivates due to the Trident Note’s original provisions ceased
    being derivatives as a result of the modifications of the terms of the debt.
    (See Note 12)

$700,000 Convertible Notes - During
    March 2006, pursuant to a series of securities purchase agreements, Stellar
    sold convertible notes in the aggregate principal amount of $700,000 convertible
    into 4,666,667 shares of common stock and warrants to purchase an additional
    2,333,334 shares of common stock for aggregate gross cash proceeds of $700,000
    ($644,000 net of placement fees). The securities were sold in units consisting
    of a $45,000 convertible note and a warrant to purchase 150,000 shares of
    common stock at a purchase price of $45,000 per unit.

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

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

In connection with these convertible
    notes, Stellar incurred placement fees consisting of $56,000 and issued warrants
    to purchase 373,333 shares of common stock (equal to 8% of the shares issuable
    upon conversion of the notes included in the units) at an exercise price
    of $0.40 per share. The placement fees were fully expensed in 2006 due to
    the conversion of the notes to preferred stock.

Stellar agreed to include the shares
    of common stock issuable upon conversion of the convertible notes or exercise
    of the warrants sold in the debt offering in any registration statement filed
    under the Securities Act (excluding registration statements
    on SEC Forms S-4, S-8 or any similar or successor forms) in order to permit
    the public resale of such shares. There were no demand registration rights
    associated with these instruments.

Stellar evaluated the embedded conversion
    option and the freestanding warrants under SFAS No. 133 and EITF 00-19 and
    determined that they qualified for derivative accounting (see Note 12). The
    fair value of the embedded conversion feature and the warrants were first
    allocated between the warrants and the hybrid instrument, with $259,367 allocated
    to the warrants. Stellar then recorded the fair value of the conversion option
    as a derivative liability in the amount of $666,781. The excess of the combined
    value of the warrants and the embedded conversion option over the proceeds
    totaling $226,148 was charged to Loss on Derivative Liabilities at the date
    of note issuance.

On May 1, 2006, all of the convertible
    notes in the aggregate principal amount of $700,000, plus accrued interest
    of $8,055 were exchanged for 47,205 shares of Series B Convertible 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 of all amounts
    due and owing the purchasers under the original convertible notes. Moreover,
    the related warrants that were initially classified as derivatives ceased
    being a derivative as a result of the modification of the Trident Note.

NOTE 12  DERIVATIVES

Stellar evaluated the application
    of SFAS 133 and EITF 00-19 for the following financial instruments:

| |  | Warrants issued to Trident during 2003;                                                    
| | - | -------------------------------------------------------------------------------------------
| |  | Series B convertible preferred stock conversion
        feature;                           
| |  | Warrants associated with the Series A preferred
        stock;                             
| |  | 2004 convertible notes conversion feature;                                                 
| |  | Warrants associated with the 2004 convertible
        notes;                               
| |  | Warrants to purchase common stock issued
        for services;                             
| |  | The Trident Note conversion feature;                                                       
| |  | Warrants associated with the Trident Note;                                                 
| |  | Warrants issued to Trident in November 2005
        to waive covenant for non-compliance;  
| |  | Warrants issued in connection with the sale
        of units in November 2005              
| |  | Warrants issued in connection with the sale
        of convertible notes in March 2006     
| |  | Warrants issued in connection with the modification
        of the Trident Note in May 2006

Based on the guidance in SFAS 133
    and EITF 00-19, Stellar concluded all of these instruments, other than the
    conversion feature of the Series B Preferred Stock and the warrants issued
    in connection with the modification of the Trident Note, qualified for derivative
    accounting through May 1, 2006 (the date of the Trident Note was amended).
    Specifically, the warrants issued to Trident in 2003 had registration rights
    that contained liquidated damage provisions that required Stellar to cause
    and maintain effectiveness of a registration statement covering those securities.
    Should Stellar be unsuccessful, the penalty provision called for Stellar
    to issue 0.1% of its common shares then outstanding computed on a fully-diluted
    basis per day until the shares are registered. Because the registration rights
    agreement did not have an explicit limit on the number of shares to be delivered
    in a share settlement, the warrants issued to Trident, the 2004 Notes, the
    Trident Note, and all of the other warrants qualified for derivative accounting.

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In addition, all of the instruments
    contain reset provisions that required the exercise price to adjust downward
    and in some cases, the number of shares issuable upon exercise or conversion
    to be adjusted upward, should Stellar sell or otherwise issue common stock
    at prices below the applicable exercise price. In certain cases, Stellar
    has sold common stock at a price below the exercise price of the instruments,
    thereby, triggering the reset provisions. Following the guidance in EITF
    00-19, Stellar concluded that these reset provisions, and particularly the
    fact that Stellar has triggered the reset provisions on several instruments,
    caused the associated instruments to be accounted for as derivatives. Stellar
    concluded that the conversion feature of the Series B Preferred Stock is
    clearly and closely related to the economic characteristics of the host contract
    and, as a result, the conversion feature of the Series B Preferred Stock
    does not qualify for derivative accounting.

Stellar is required to record the
    fair value of the conversion features and the warrants and options on its
    balance sheet at fair value with unrealized changes in the values of these
    derivatives reflected in the consolidated statement of operations as “gain
    (loss) on derivative liabilities.”

With the help of a valuation specialist,
    Stellar used the Cox-Ross-Rubenstein binomial model (which produces results
    substantially the same as Black-Scholes) to calculate the value of derivative
    liabilities. Stellar used volatility rates based on Stellar’s trading
    history. Stellar used as a risk free rate the U. S. Treasury rate with a
    maturity that approximates the estimated expected life of a derivative or
    security. Stellar used the closing market price of the common stock at the
    close of business on the date of issuance of a derivative or at the end of
    a quarter when a derivative is valued at fair value. The volatility factor
    used in Cox-Ross-Rubenstein binomial model has a significant effect on the
    resulting valuation of the derivative liabilities on the balance sheet. The
    volatility used was 80%.

In May 2006, the Trident Note was
    amended. The note was extended to the earlier of April 30, 2007 or the sale
    of $5 million of convertible debt or equity. The modification also eliminated
    the anti-dilution adjustments for issuances of shares below the conversion
    price, the registration rights requirements and related penalties. Trident
    cancelled previously issued warrants with the exception of warrants to purchase
    an aggregate of 1,475,000 shares of common stock. The exercise price of the
    remaining warrants held by Trident and the conversion price of the note were
    reduced to $0.40 per share. The Trident Note and remaining warrants were
    amended to eliminate the (non-standard) anti-dilution adjustment for issuances
    of securities below the exercise price. As part of the amendment, Stellar
    issued additional warrants to Trident to purchase 1,745,000 shares of common
    stock at an exercise price of $.40 per share, expiring on May 1, 2011. The
    amendments eliminated the provisions that caused the conversion feature of
    the note and the related warrants to be treated as derivatives. As a result,
    there is no derivative liability associated with this debt instrument or
    warrants at June 30, 2006.

The EITF recently issued an exposure
    draft, EITF 06-07Issuer’s Accounting for a Previously Bifurcated
    Conversion Option in a Convertible Debt Instrument When the Conversion Option
    No Longer Meets the Bifurcation Criteria in FASB Statement No. 133, Accounting
    for Derivative Instruments and Hedging Activities. The EITF has not reached
    a consensus on this issue and has deferred deliberation until the FASB addresses
    certain questions which could impact a conclusion on this issue. Specifically,
    EITF 06-07 presents alternative views on how an entity should recognize the
    change in the derivative liability when a previously bifurcated conversion
    option is no longer required to be bifurcated pursuant to FAS 133. Stellar
    had embedded conversion options that initially required separate accounting
    as a derivative under FAS 133 that no longer meet the conditions for separate
    accounting as a derivative at June 30, 2006 due to the amendment of the related
    instrument (see Note 11). Stellar has chosen to adopt View A of EITF 06-07
    which requires reclassification of the carrying value of the liability for
    the conversion option to shareholder’s equity. The debt discount recorded
    at issuance will continue to be amortized over the remaining term of the
    instrument. If the EITF were to adopt a different view Stellar may have to
    change its policy to follow the final EITF guidelines.

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A detail of the fair value of the
    derivative liabilities at June 30, 2006 and June 30, 2005 is as follows:

|                           |  | June
          30,
      2006 |   | June
          30,
      2005 |  
|-------------------------- |  | ----------------------------- | - | ----------------------------- | -
|                           |  |                               |   |                               |  
|Embedded conversion option |  | $                             |  |                               | $
|Warrants                   |  |                               |  |                               |  
|                           |  |                               |   |                               |  
|Total                      |  | $                             |  |                               | $
|                           |  |                               |   |                               |  

NOTE 13 STOCKHOLDERS’ DEFICIT

In June 2004, Stellar entered into
    an agreement whereby FEQ Investments, Inc. (FEQ) will provide Stellar with
    financial advisory services for a period of three years for a fee of $5,000
    per month and warrants to acquire 300,000 shares of common stock at an exercise
    price of $3.25 per share, expiring on June 7, 2009. The warrants vested on
    January 1, 2005. In accordance with EITF 96-18, Stellar accounts for stock
    options and warrants issued to non-employees at fair value. The value of
    such warrants is amortized to expense over the vesting period. Stellar recorded
    compensation expense of $725,346 in 2005 associated with the warrants.

In April 2005, Stellar reduced the
    exercise price of certain of its outstanding and vested warrants granted
    to non-employees to $1.00. This modification resulted in additional expense
    totaling $828,498, which was recorded in full on the date of modification
    as all of the outstanding warrants were fully vested on the date of modification.
    This amount is included in the gain on derivative liability at June 30, 2005.

The estimated fair value of warrants
    granted was calculated using the Black-Scholes option pricing model. The
    following summarizes the weighted average of the assumptions used in the
    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, Stellar granted
    one employee, who is a leased employee, options to purchase 100,000 shares
    of Stellar’s common stock at the exercise price of $0.59 which was
    the closing price on that date. The options vest over 1 year and expire 10
    years from the date of grant. Compensation expense equal to $21,208 was recognized
    during the year ended June 30, 2006.

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

Between December 16, 2005 and April
    15, 2006, Stellar granted certain officers and employees, who are leased
    employees, options to purchase 7,005,000 shares of Stellar’s common
    stock at exercise prices ranging from $0.18 to $0.40 per share which is equal
    to or higher than the closing price of the stock on the issuance dates. The
    options vest 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 ended June 30, 2006.

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The following tables summarize Stellar’s
    stock option and warrant activity and related information:

|                         |  |                                  | STOCK OPTIONS |                                              |   | STOCK WARRANTS                   |  
|------------------------ |  | -------------------------------- | ------------- | -------------------------------------------- | - | -------------------------------- | -
|                         |  |                                  |               |                                              |   |                                  |  
|                         |  | Number
          of
      Shares |               | Weighted-
      Average
      Exercise Price |   | Number
          of
      Shares |  
|                         |  |                                  |               |                                              |   |                                  |  
|Balance at June 30, 2004 |  |                                  | 727,500       |                                              |   | 1.76                             |  
|Granted                  |  |                                  | 100,000       |                                              |   | 0.59                             |  
|Exercised                |  |                                  |              |                                              |   |                                 |  
|Expired                  |  |                                  |              |                                              |   |                                 |  
|                         |  |                                  |               |                                              |   |                                  |  
|Balance at June 30, 2005 |  |                                  | 827,500       |                                              | $ | 1.62                             |  
|Granted                  |  |                                  | 7,005,000     |                                              |   | 0.35                             |  
|Exercised                |  |                                  |              |                                              |   |                                 |  
|Cancelled                |  |                                  |              |                                              |   |                                 |  
|Expired                  |  |                                  | (242,500      | )                                            |   | (1.76                            | )
|                         |  |                                  |               |                                              |   |                                  |  
|Balance at June 30, 2006 |  |                                  | 7,590,000     |                                              | $ | 0.47                             |  

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

|                                               |  | OPTIONS
          OUTSTANDING                                           |           | OPTIONS
          EXERCISABLE                              | 
|---------------------------------------------- |  | ----------------------------------------------------------------------- | --------- | ---------------------------------------------------------- | 
|                                               |  |                                                                         |           |                                                            | 
|Range
          of
      Exercise
      Prices |  | Number
          of
      Outstanding Shares
      at June 30,
    2006 |           | Weighted
      Average
      Remaining
      Contract Life | 
|                                               |  |                                                                         |           |                                                            | 
|$0.18-$0.40                                    |  |                                                                         | 7,005,000 |                                                            | 
|$ 0.59                                         |  |                                                                         | 100,000   |                                                            | 
|$ 1.76                                         |  |                                                                         | 485,000   |                                                            | 

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

During the period March 1, 2006 through
    June 30, 2006, Stellar issued a total of 127,206 shares of Series B Convertible
    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 par
    value per share. The first 47,205 Series B Preferred shares issued resulted
    from an exchange of the $700,000 convertible note issued in March 2006 and
    related accrued interest of $8,055 (see Note 10). The remaining 80,001 preferred
    shares were sold raising gross proceeds of $1,200,000 ($1,104,000 net of
    $96,000 in placement fees). The Series B Preferred and Warrants were sold
    in units 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 B
    Preferred is convertible into 100 shares of common stock and each warrant
    is immediately exercisable into 50 shares of common stock at an exercise
    price of $0.40 per share for a period of three years after the date of issue.
    The exercise price of the warrants will not be adjusted other than for stock
    splits, combinations, recapitalization and stock dividends. Since the preferred
    stock is convertible into a fixed number of shares, it is considered to be “conventional
    convertible preferred stock” as that term is used by EITF Issues 00-19
    and 05-02. Accordingly, the embedded conversion option has not been bifurcated.
    There is no beneficial conversion feature associated with the preferred stock,
    pursuant to the requirements of Emerging Issues Task Force (“EITF”)
    98-5 “Accounting for Convertible Securities with Beneficial Conversion
    Features or Contingently Adjustable Conversion Ratios” and EITF 00-27 “Application
    of Issue No. 98-5 to Certain Convertible Instruments,” because the
    exercise conversion price of $0.40 exceeded the stock price on the date of
    offering.

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The holder of each share of Preferred
    Stock will be entitled to receive, when, as, and if declared by the Board
    of Directors cumulative dividends equal to eight percent (8%) per annum of
    the original issue price payable in shares of common stock. There were no
    dividends declared or paid during the year ended June 30, 2006.

NOTE 14  OPERATING LEASES

Stellar has a lease commitment for
    its office space until January, 2008 at which time Stellar has the option
    to extend the term of this lease for three (3) periods of one (1) year on
    the same terms and conditions as the base lease. If the lease is renewed
    for only one year, Stellar will have to pay a penalty of $10,000, and if
    the lease is renewed for only two years, Stellar will have to pay a penalty
    of $5,000. The monthly lease commitment is $11,238 per month which includes
    common area maintenance and taxes.

Total rental expense for all operating
    leases was $160,605 and $157,053 for the years ended June 30, 2006 and 2005,
    respectively.

The following is a schedule by year
    of future minimum rental payments required under operating leases that have
    initial or remaining noncancelable lease terms of one year or greater as
    of June 30, 2006:

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

NOTE 15  SEGMENT REPORTING

With the acquisition of CompuSven,
    Inc. in July 2004 (see Note 5); Stellar determined it has two reportable
    segments, Internet Monitoring and Email Migration. Information about operations
    by reportable segment for 2006 is as follows:

|                              |  |   | InternetMonitoring |   |   | EmailMigration |  |   | Corporate andEliminations |   |   | 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    |  

NOTE 16  FOREIGN CURRENCY ADJUSTMENTS
      The financial position and results of operations of GeM, Stellar’s
      Canadian subsidiary, are measured using GeM’s local currency (Canadian
      Dollar) as the functional currency. Revenues and expenses of GeM have been
      translated into U.S. dollars at average exchange rates prevailing during
      the period. Assets and liabilities have been translated at the rates of
      exchange on the balance-sheet date. The resulting translation gain and
      loss adjustments are recorded directly as a separate component of shareholders’ equity.
      Foreign currency translation adjustments resulted in an other comprehensive
      net loss of $1,883 and $0 in 2006 and 2005, respectively.
      NOTE 17  CUSTOMER CONCENTRATION

The Company had sales to one (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 18  SUBSEQUENT EVENTS

Since June 30, 2006, Stellar raised
    an additional $1,330,000 through the issuance of 88,668 shares of the Series
    B Convertible Preferred Stock (the “Series B Shares”) convertible
    into 8,866,800 shares of common stock and warrants to purchase an additional
    4,433,400 shares of common stock. The Series B Shares have an original issue
    price of $15.00 per share and are convertible at anytime at the option of
    the holder at a conversion price of $0.15 per share. Each warrant is immediately
    exercisable at an exercise price of $0.40 per share for a term of three years.

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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


|                               | STELLAR TECHNOLOGIES, INC.
|------------------------------ | --------------------------
|                               |                           
|                               |                           
|Date:
        October 13, 2006 | /s/ Mark G. Sampson       
|                               |                           
|                               | Mark G. Sampson           
|                               | Chief Executive Officer   

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


|Signature           | Title                                                              | Date            
|------------------- | ------------------------------------------------------------------ | ----------------
|                    |                                                                    |                 
|                    |                                                                    |                 
|/s/ Mark G. Sampson | Chief Executive Officer andDirector (Principal ExecutiveOfficer)   | October 13, 2006
|                    |                                                                   
|Mark G. Sampson     |                                                                   
|                    |                                                                   
|                    |                                                                    |                 
|/s/ John E. Baker   | Chief Financial Officer(Principal Financial andAccounting Officer) | October 13, 2006
|                    |                                                                   
|John E. Baker       |                                                                   
|                    |                                                                   



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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 of Registrant 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 Registrant to 18 USC Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                    



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