UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-K






(Mark
One)




S
            
            ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
              
              For  the
      fiscal year ended June 30, 2009




£
            
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
              
              For
      the transition period
      from  __  to_______________________________








Commission
File Number: 333-118801


SMARTMETRIC,
      INC(Exact
      name of registrant as specified in its charter)





Nevada
            
            05-0543557(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (I.R.S.
      Employer identification No.)1150 Kane Concourse, Suite 400, Bay Harbor
      Islands, FL
            
            33154(Address
      of principal executive offices)
            
            (Zip
      Code)Registrant’s
      telephone number, including area code
            
            (305)
      495-7190




Securities
registered under Section 12(b) of the Exchange Act:




Title
      of each class
            
            Name
      of each exchange on which registeredN/A
            
            N/A




Securities
registered pursuant to section 12(g) of the Act




Common Stock, par value
$0.001 per share




(Title of
Class)




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.£
YesSNo





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.£
YesSNo





Note – Checking the box above
will not relieve any registrant required to file reports pursuant to Section 13
or 15(d) of the Exchange Act from their obligations under those
Sections.












Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. S
Yes  £No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).    £  Yes£No





Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this
chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.S





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





Large
accelerated filer £                    
Accelerated filer £





Non-accelerated filer£(Do not check if a smaller reporting
company)       Smaller reporting companyS





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


£
Yes                               SNo




State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter.




Note – If a determination as
to whether a particular person or entity is an affiliate cannot be made without
involving unreasonable effort and expense, the aggregate market value of the
common stock held by non-affiliates may be calculated on the basis of
assumptions reasonable under the circumstances, provided that the assumptions
are set forth in this Form.




The
aggregate market value of the voting and non-voting common stock of the issuer
held by non-affiliates as of October 21, 2009 was approximately $2,531,844 based
upon the closing price of the common stock as quoted by Nasdaq OTC Bulletin
Board on such date.




APPLICABLE
ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY


PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:




Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.£Yes£No






(APPLICABLE
ONLY TO CORPORATE REGISTRANTS)






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






As of
October 21, 2009 there were 75,546,222 issued and outstanding shares of the
issuer’s common stock.




DOCUMENTS
INCORPORATED BY REFERENCE




List
hereunder the following documents if incorporated by reference and the Part of
the Form 10-K (e.g. Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933.  The listed documents should be
clearly described for identification purposes (e.g. annual report to security
holders for fiscal years ended December 24, 1980).









2




TABLE OF
CONTENTS





PagePART
      IItem
      1.
            DESCRIPTION
      OF BUSINESS
            
            5Item
      1A
            RISK
      FACTORS
            
            10Item
      1B
            UNRESOLVED
      STAFF COMMENTS
            
            10Item
      2.
            DESCRIPTION
      OF PROPERTY
            
            10Item
      3.
            LEGAL
      PROCEEDINGS
            
            10Item
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
            
            10PART
      IIItem
      5.
            MARKET
      FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS ISSUER PURCHASES OF EQUITY
      SECURITIES
            
            11Item
      6
            SELECT
      FINANCIAL DATA
            
            12Item
      7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
            
            13Item
      7A
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            
            15Item
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
            
            15Item
      9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
            
            16Item
      9A.
            CONTROLS
      AND PROCEDURES
            
            16Item
      9B.
            OTHER
      INFORMATION
            
            17PART
      IIIItem
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
      16(b) OF THE EXCHANGE ACT
            
            18Item
      11.
            EXECUTIVE
      COMPENSATION
            
            20Item
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
            
            21Item
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
            
            21Item
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
            
            22Item
      15.
            EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES
            
            23SIGNATURES
            
            24











3





FORWARD
LOOKING STATEMENTS





In this
annual report, references to “SmartMetric, Inc.,” “Smartmetric,” “SMME,” “the
Company,” “we,” “us,” and “our” refer to SmartMetric, Inc.





This
Annual Report on Form 10-KSB contains forward-looking statements regarding our
business, financial condition, results of operations and prospects. Words such
as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,”
“estimates” and similar expressions or variations of such words are intended to
identify forward-looking statements, but are not deemed to represent an
all-inclusive means of identifying forward-looking statements as denoted in this
Annual Report on Form 10-KSB/A. Additionally, statements concerning future
matters are forward-looking statements.





Although
forward-looking statements in this Annual Report on Form 10-K reflect the good
faith judgment of our management, such statements can only be based on facts and
factors currently known by us. Consequently, forward-looking statements are
inherently subject to risks and uncertainties and actual results and outcomes
may differ materially from the results and outcomes discussed in or anticipated
by the forward-looking statements. Factors that could cause or contribute to
such differences in results and outcomes include, without limitation, those
specifically addressed under the headings “Risks Factors” and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.” You
are urged not to place undue reliance on these forward-looking statements, which
speak only as of the date of this Annual Report on Form 10-K. We file reports
with the SEC. The SEC maintains a website (www.sec.gov) that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC, including us. You can also read and copy any
materials we file with the SEC at the SEC’s Public Reference Room at 100 F
Street, NE, Washington, DC 20549. You can obtain additional information about
the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.





We
undertake no obligation to revise or update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of this
Annual Report on Form 10-K, except as required by law. Readers are urged to
carefully review and consider the various disclosures made throughout the
entirety of this Annual Report, which are designed to advise interested parties
of the risks and factors that may affect our business, financial condition,
results of operations and prospects.















4







PART
I






Item
1.    Business




Corporate
History and Overview





SmartMetric
was incorporated pursuant to the laws of Nevada on December 18,
2002.  SmartMetric is a development stage company engaged in the
technology industry. SmartMetric has a license to utilize proprietary technology
to manufacture and sell a fingerprint sensor activated card with a finger sensor
on the board card and a built-in rechargeable battery for portable biometric
identification. This card may be referred to as a "biometric card" or the
SmartMetric "Biometric Smartcard."





On
September 14, 2004, Mr. Hendrick received a United States patent with regard to
the use of the Biometric card. Mr. Hendrick transferred the patent, which was
then pending, to Applied Cryptography, Inc., a Nevada corporation, owned by Mr.
Hendrick, in June 2004. On August 1, 2004, Applied Cryptography, Inc. entered
into a license agreement with SmartMetric pursuant to which SmartMetric has the
right to use, manufacture and sell products utilizing the patented technology in
perpetuity. This patent was granted on September 14, 2004.





As of
June 30, 2009, SmartMetric had a total stockholders' deficiency of $424,838, and
cash of $42,519.  SmartMetric has no off-balance sheet arrangements
that are reasonably likely to have a material current or future effect on
SmartMetric's financial condition, results of operations or
liquidity.





The
SmartMetric Biometric Card





SmartMetric
has designed a biometric card utilizing patented technology licensed to the
company.  A prototype of this card was completed in February 2005. The
company is in the process of finalizing its biometric card and expects to have a
final product by January 2010.  The product, due to exposure in
specialty trade publications and numerous press releases, is receiving much
interest in the private sector, especially amongst banking
entities.  Also, the product has received interest from the
governmental sector, including, but not limited to the Department of Homeland
Security and the Department of Defense.





SmartMetric
believes that its biometric card will have several functions:





·
            The
      fingerprint sensor will facilitate instant authorization
      verification;





·
            In
      card biometric measurement storage will safeguard personal
      information;





·
            In
      card biometric storage will permit access, identity and transaction
      control verification;





·
            Instant
      identity verification will be secure since such information is contained
      in the card and not in centralized
database





The
SmartMetric Biometric Smartcard is a credit card size plastic
card.  On the cards surface are two components.  The first
is a standard Smartcard chip that is a standard interface that connects to USB
computer smartcard readers, ATM machines and smartcard able Point Of Sale
machines in retail outlets.  The second component is a sensor that
protrudes through the cards surface.  This sensor is connected to a
sophisticated miniature circuit board that allows the sensor to read a person’s
fingerprint and match it with the user’s pre-stored fingerprint encrypted and
resident inside the circuit board.





The
challenge SmartMetric sought to overcome was having a truly portable
Identification credential that incorporated biometrics and yet was the standard
size of an employee ID Card or Drivers License.  As it stood standard
biometric fingerprint scanners were too large to fit inside a credit card sized
card and none were portable needing to be attached to a computer that powered
the scanning process thereby not allowing for true
portability.   In order to achieve the goal of Biometric
portability in the form factor to fit inside a users wallet or purse and work
across both computer and banking platforms SmartMetric had to achieve incredible
reductions in electronics and develop specialized manufacturing
techniques.  The miniaturization to all intents and purposes of a
laptop computer circuit board to the size that fits inside a credit card has
taken years of research and development.





The
SmartMetric Biometric Smartcard contains over 150 active and passive components
mounted onto a paper-thin circuit board.  Reducing a powerful ARM
processor to a thin sliver of silicon along with many other complex computer
components including memory chips and then mounting them on the super thin board
has required innovations in electronic manufacturing and the use of Nano
technology.





Today
SmartMetric has created the World’s first and to its knowledge the only portable
biometric fingerprint scanner that resides inside a credit card sized card and
acts independently of any other computing device.





5


Unlike a
picture-based identification system, the SmartMetric biometric card has been
designed to operate exclusively with the registered user. And unlike biometric
security systems where the biometric information is stored at a central
location, the Company believes that security cannot be compromised during the
verification process since the biometric information is embedded in the card
itself, in a memory chip protected by encryption and no data is travelling over
a network.  The built-in fingerprint scanner is designed to activate
the card. Without a match with the encrypted fingerprint already stored on the
card, the Biometric Smartcard will not operate.





In the
case of an employee Identity Card application when a match occurs on the card a
green light lights up, if no match then a red light is activated on the cards
surface.





SmartMetric
believes its Biometric Smartcard may be used for a variety of security
applications such as airport employee access and identity, building access and
identity, computer network access, drivers licenses, passports, and check
cashing identity verification, etc.  Additionally, the Biometric
Smartcard contains a powerful on-card ARM Processor and up to 1 gigabyte of
encrypted memory, enabling the Biometric Smartcard to not only store the full
image of a fingerprint but also maintain a database capable of storing
information such as medical records, financial or banking records or human
resource data.





As an
online purchasing card, the Biometric Smartcard helps protect against identity
theft and related fraudulent crimes that consumers can be exposed to when making
purchases over the internet.  Unlike conventional credit cards, which
require a consumer to type and deliver sensitive information over the internet
in order to make a purchase, the Biometric Smartcard is designed to be inserted
into the USB port of a computer and any purchasing information can only be
released from the card when the owner’s fingerprint unlocks the
card.  The consumer’s information then travels across the internet
encrypted, minimizing exposure to interception by hackers and Identity
Thieves.





As an
online money transfer card, the company has developed software and systems to
allow money to be transferred from one card to another over the internet with
user confirmation of transaction by both sender and receiver.  Much as
in the same way that digital files are transferred in a process called Peer to
Peer transfer.  Because fingerprint activation is required at both
ends of the transaction the sending and receiving party’s can be confident that
only the appropriate person is receiving the funds.  This allows the
low cost of internet communication to now be used for person to person money
transfer.





SmartMetric
believes that its biometric card, by way of containing information unique to the
individual user, will be useless in the hands of others. Unlike a picture-based
identification system, the SmartMetric biometric card has been designed to
operate exclusively with the registered user. And unlike biometric security
systems where the biometric information is stored at a central location, we
believe that confirmation of identify with the SmartMetric system may not be
interrupted during the verification process or while it is stored at the remote
location since the biometric information is embedded in the card, itself, in a
memory chip protected by encryption. The fingerprint sensor built into the card
has been designed to activate the card. Without a match with the encrypted
fingerprint already stored on the card, the biometric card will not
operate.





The
SmartMetric biometric card is a card that authorized persons will carry with
them and activate to obtain access. Such activation will take place by placing a
finger on a fingerprint sensor. The SmartMetric biometric cards are designed to
be read by both contact and contactless card acceptor devices. For contact card
acceptor devices, the device must touch a chip mounted on the surface of the
Biometric card. This contact allows the card to transmit data to the reading
device. For contactless acceptor devices, a radio frequency signal will be sent
from the card to a radio frequency signal receiver in the acceptor device. In
both types of acceptor devices, the activation signal is sent only when there
has been a positive match of fingerprint by fingerprint sensor. The card
acceptor devices are available from several different third parties and do not
require any licenses.





The
company expects that the memory and computational capacities of the biometric
card will be used to store a template of each user's fingerprint(s). The memory
capacity will store a template of a user's fingerprint(s). The computational
capacity will be used to process a digitized image from the fingerprint sensor
to confirm a match (or no match) with the fingerprint template. Additional
computational processes such as increased Cryptography will depend on the
requirements of specific customers.





SmartMetric
believes its biometric card may be used for a variety of security applications
such as airport employed access and identity, building access and identity,
computer network access, drivers licenses, passports and check cashing identity
verification.





Fingerprint
Sensor





The
fingerprint sensor used in the SmartMetric biometric card is known as the
"Metric 60" fingerprint sensor. The Metric 60 allows for fingerprints which are
either wet or dry to be recognized or authenticated. It is also pressure
sensitive. SmartMetric purchases the fingerprint sensor from an unrelated third
party, but has no signed agreement with such party. The fingerprint sensor is
available from other suppliers. SmartMetric has designed a method of integrating
the fingerprint sensor on the card, which is then connected to a microprocessor,
which is connected to a rechargeable power supply in the card and a memory chip
for storage, retrieval and matching of the fingerprint on the card.





The
SmartMetric biometric card has been designed to utilize a rechargeable, lithium
polymer battery. Because this battery is available in a variety of shapes and
sizes, SmartMetric can design its cards in similar variety of shapes. This
lithium polymer battery is owned and manufactured by a third party unaffiliated
with SmartMetric. This battery will be integrated into the card. SmartMetric has
located a supplier for this battery and has purchased battery’s that meet the
requirements and specifications of the Biometric Card.





6


While
SmartMetric has already purchased these batteries, other raw materials which are
part of the product have been purchased as well.  Examples include,
but are not limited to, microchips, memory chips and processor
chips.  The sources and availability of these materials are numerous
and readily available, and should not affect the ability of SmartMetric to meet
future demand.





The
SmartMetric card has been designed to meet the International Standard
Organization 7816 Flex requirements so that it will not break or crack when bent
or flexed. The prototype card has been designed to meet ISO requirements for
crush test, drop test and nail test. It has been designed to operate in a wide
range of temperatures.





The
Biometric card has been designed to offer the option of a built-in radio
frequency transmitter for contactless entry and identity
verification.





The
Security Technology Industry





Biometrics





Biometric
technologies identify users by electronically capturing a specific biological or
behavioral characteristic of that individual, such as a fingerprint or voice or
facial feature, and creating a unique digital identifier from that
characteristic. Because this process relies on largely unalterable human
characteristics, positive identification can be achieved independent of any
information possessed by the individual seeking authorization.





The
process of identity authentication typically requires that a person present for
comparison one or more of the following factors:





·
            Something
      known such as a password, PIN or mother's maiden
  name;





·
            Something
      carried such as a token, card, or key;
or





·
            Something
      physical such as fingerprint, voice pattern, signature motion, facial
      shape or other biological or behavioral
  characteristic.





Comparison
of biological and behavioral characteristics has historically been the most
reliable and accurate of the three factors, but has also been the most difficult
and costly to implement into a single product that can automatically verify the
identity of a user accessing a computer network or the Internet. However, recent
advances in biometric collection technologies (both biometric hardware products
and their associated processing software) have increased the speed and accuracy
and reduced the cost of implementing biometrics in commercial environments.
Management believes that individuals, Web site operators, government
organizations, and businesses will increasingly use this method of identity
authentication.





Biometrics
refers to the automatic identification of a person based on his/her
physiological or behavioral characteristics. This method of identification is
preferred over traditional methods involving passwords and personal
identification numbers ("PINs") for various reasons: (i) the person to be
identified is required to be physically present at the point of identification
to be identification; (ii) identification based on biometric techniques obviates
the need to remember a password or carry a token. By replacing PINs, biometric
techniques can potentially prevent unauthorized access to or fraudulent use of
cellular phones, Biometric cards, desktop PCs, workstations and computer
networks. It can be used during transactions conducted via telephone and
Internet (e-commerce and e-banking). In automobiles, biometrics could replace
keys-less entry devices.





PINs and
passwords may be forgotten, and token-based methods of identification, e.g.,
passports and driver's licenses, may be forged, stolen or lost. Various types of
biometric systems are being used for real-time identification, with the most
popular based on face recognition and fingerprint matching. Other biometric
systems utilize iris and retinal scanning, speech, facial thermograms and hand
geometry.





A
biometric system is essentially a pattern recognition system, which makes a
personal identification by determining the authenticity of a specific
physiological or behavioral characteristic possessed by the user. An important
issue in designing a practical system is to determine how an individual is
identified.





There are
two different ways to resolve a person's identity: verification and
identification. Verification (Am I whom I claim I am?) involves confirming or
denying a person's claimed identity. In identification, one has to establish a
person's identity (Who am I?).





The
SmartMetric biometric card has been designed as a credit-card sized plastic card
embedded with an integrated circuit chip and biometric fingerprint sensor. While
we have completed a prototype of this card, we are in the process of completing
the final product. The SmartMetric card has been designed to provide not only
memory capacity, but also computational capability along with secure
non-refutable identification of the user. We believe that the self-containment
of SmartMetric's card will make it substantially resistant to attack, as it will
not need to depend upon potentially vulnerable external resources. Because of
this characteristic, we expect that the SmartMetric biometric card may be used
in different applications which require strong security protection and
authentication.





7


The
physical structure of a card is specified by the International Standards
Organization ("ISO") 7810, 7816/1 and 7816/2. Generally, it is made up of three
elements. The plastic card is the most basic one and has the dimensions of
85.60mm x 53.98 x 0.80mm. A printed circuit and an integrated circuit chip are
embedded on the card.





The
SmartMetric card has been designed so that the printed circuit conforms to ISO
standard 7816/3 which provides five connection points for power and data. It
will be hermetically fixed in the recess provided for the card and will be
burned onto the circuit chip, filled with a conductive material and sealed with
contracts protruding. The printed circuit is a part of, and not distinct from,
the Biometric card. The printed circuit is intended to protect the circuit chip
from mechanical stress and static electricity. Communication with the chip will
be accomplished through contacts that overlay the printed circuit. The
integrated circuit chip defines the capability of a smart chip. Typically, an
integrated circuit chip consists of a microprocessor, read only memory (ROM),
non-static random access memory and electrically erasable programmable read only
memory which will retain its state when the power is removed. The current
circuit chip is made from silicon, which is not flexible and particularly easy
to break. In order to avoid breakage when the card is bent, the chip is
restricted to only a few millimeters in size.





Furthermore,
it is our intent that the physical interface which allows data exchange between
the integrated circuit chip and the card acceptor device will be limited to 9600
bits per second. The communication line is intended to be a bi-directional
serial transmission line, which conforms to ISO standard 7816/3. We intend that
all the data exchanges will be under the control of the central processing unit
in the integrated circuit chip. Card commands and input data will be sent to the
chip that responds with status words and output data upon the receipt of these
commands and data. Information will be sent in half duplex mode (transmission of
data is in one direction at a time). This protocol, together with the
restriction of the bit rate, is designed to prevent massive data attack on the
card.





In
general, the size, the thickness and bend requirements for the biometric card
were designed to protect the card from being spoiled physically. However, this
also limits the memory and processing resources that may be placed on the card.
In the past, industry participants have encountered particular difficulty in
attempting to integrate high memory chips and finger sensor technology that will
withstand both the size constraints and physical daily usage such as bending in
a user's wallet sitting in his back pocket. We believe our biometric card has
met and overcome the physical demands of the credit card to produce what is a
powerful on-card computer processor with state-of-the-art biometric technology.
However, we believe that additional engineering is necessary to reduce the size
to the circuitry of the card prototype. We expect that such re-engineering will
be complete by January 2010.





Sales
and Marketing





When
we have completed the prototype of our biometric card and received any required
regulatory approval, we plan to market and sell our product to banking interests
in the private sector and governmental agencies such as the Department of
Homeland Security and the Department of Defense.  As noted previously,
we have received interest in the product from the aforementioned.





We do not
currently have a marketing or sales force or a distribution arrangement in
place.  We will need to expend resources to develop our own marketing and
sales force or enter into third-party distribution arrangements.





Manufacturing





We expect
to outsource manufacturing of our Biometric cards once we have sales orders. We
do not intend to purchase any plants or significant
equipment.   Because SmartMetric does not own or rent a
manufacturing facility, we will enter into a contract with a manufacturing
facility to produce our Biometric cards.  Although we have engaged in
preliminary negotiations with two potential manufacturers, no contract has been
signed.





Intellectual
Property





We rely
on patents, licenses, trade secrets, trademarks, copyright registrations and
non-disclosure agreements to establish and protect our proprietary rights in our
technologies and products.





8


Patents





Applied
Cryptography, Inc., a company owned and controlled by Colin Hendrick, President
and CEO of SmartMetric, owns the patent for a Biometric card process. This
patent has been licensed to SmartMetric. The patent expires September 30,
2014.





The
patent asserts claims to the following processes:





·
            A
      system for managing digital rights of digital content over a
      network.





·
            A
      data card contains user information including digital rights information
      specific to a users, the data card having memory component for enabling
      information to be stored within the data
card.





·
            A
      data card reader is adapted to access the user information contained on
      the data card when the data card is in communication with a card reading
      device.





·
            A
      data processor in communication with the data card reader is adapted to be
      connected to the network.





·
            An
      application program resides on the memory component of the data card, the
      application program being configured to operate in conjunction with a
      universal language for creating and controlling digital rights, to manage
      user rights of the digital content available on the network based on the
      digital rights information specific to the user which is contained on the
      data card.





License
Agreements





On August
1, 2004, SmartMetric entered into a license agreement with Applied Cryptography,
Inc., a Nevada corporation which is owner of certain technology for which a
patent was issued from the United States. Pursuant to the license agreement,
SmartMetric has the right to make use of this technology for the purpose of
developing software and systems to be used by SmartMetric to provide certain
applications including any or all of the following: 1) secure transactions over
the Internet from home and office computers; 2) an automatic method for
connecting to remote computers; 3) a method of developing targeted advertising
to home and/or office computers; 4) identity verification and access control as
provided for in the patent. Colin Hendrick, President, Chief Executive Officer
and Chairman of the Board of Directors of SmartMetric, is the sole officer and
shareholder of Applied Cryptography, Inc.





Pursuant
to this license agreement, Applied Cryptography, Inc. will receive 2% of all
revenues generated by SmartMetric on products which utilize this patented
technology. The license fee will be paid on a quarterly basis based on revenues
received during that quarter. The license fee shall be due within 45 days of the
end of each quarter. In the event no revenues were generated through the use of
any of the licensed patents during a given quarter, no money shall be owed
Applied Cryptography, Inc. for such quarter. Late license fees shall accrue
interest at a rate of 2% per quarter. Applied Cryptography, Inc. may rescind the
license agreement and reclaim all rights and interest in the patents if certain
events, such as SmartMetric's filing for bankruptcy protection or
reorganization, occur.





This
license agreement will remain in effect for the life of the patent. SmartMetric
may utilize their patented technological applications anywhere in the world
without limitation.





Our
technology is also dependent upon unpatented trade secrets.  However, trade
secrets are difficult to protect.  In an effort to protect our trade
secrets, we have a policy of requiring our employees, consultants and advisors
to execute non-disclosure agreements.  These agreements provide that
confidential information developed or made known to an individual during the
course of their relationship with us must be kept confidential, and may not be
used, except in specified circumstances.  In addition, our employees are
parties to agreements that require them to assign to us all inventions and other
technology that they create while employed by us.





Research
and Development





Our
research and development program is focused on completing development of our
Biometric card.  We continue to refine existing technology and develop
further improvements to our product.  We are in the very final stages
of finalizing the product.  We expect research and development costs
to trend lower in fiscal year ending June 30, 2009, due to the product expected
to be ready for market in January 2010.  Almost all research and
development costs now center around an adjustment being made to a second antenna
in the card.




Competition





SmartMetric
is a company involved in identity management. This industry is dominated by
several large international corporations such as BioNetrix, Keyware, Gemplus and
Precise Biometrics, all of which manufacture and/or distribute and market
identity management products. These companies and many others are more
established than SmartMetric, which will put it at a competitive disadvantage.
For example, Precise Biometrics, a company whose stock is listed on the
Stockholm Stock Exchange, sells products which utilize its patented biometric
fingerprint authentication technology which allows it to isolate the
characteristic features of a human fingerprint and to match such features with a
stored template to secure identity. However, Precise Biometrics is publicly
traded and better funded then SmartMetric, and thus better known. SmartMetric's
licensed patent allows for such data to be stored on a credit card sized device;
however, SmartMetric only has a prototype of its biometric card.





9


BioNetrix
offers a solution for systems security - user authentication and sign on. This
company was founded in 1997.





Keyware
was founded in 1996 and went public in 2000 and is headquartered in Brussels,
Belgium.  While Keyware’s primary business model is transaction
processing, they maintain a significant platform in identity tracking technology
and maintain a competitive advantage through high capitalization.





Gemplus
manufactures a powerful, yet user friendly software focusing on bar-code
technology.  Gemplus incorporates identity verification tools
within  their software.  Gemplus maintains a large internet
presence and their software is easily downloadable, making them a market
force.





SmartMetric
is a newcomer to this industry, with no proven track record and an untested
product. We are not as well known as our potential competitors, nor are we
certain our card will work as intended or that it will meet clients' needs. We
are at a competitive disadvantage when compared to those better known, better
funded and experienced identity management companies. SmartMetric will be
competing with these as well as smaller and mid-size identity management
manufactures, distributors, and developers.





Employees





As of the
date of this annual report, SmartMetric has three full time employees including
Colin Hendrick, SmartMetric’s CEO, and no part-time employees. None of these
employees belongs to any union.





Government
Regulation





There are
currently no governmental regulations which have any bearing on the raw
materials or the manufacturing of our product.




Item
1A. Risk Factors.




Not
Applicable.




Item
1B. Unresolved Staff Comments.




Not
Applicable.




Item
2.    Properties.




Our
executive offices are located at 1150 Kane Concourse, Suite 400, Bay Harbor
Islands, Florida 33154.  We lease this office space under a lease
expiring June 30, 2008 and renewable to June 30, 2012.  Rent expense
for the years ended June 30, 2009 and 2008 were $66,325 and $54,872,
respectively.





We believe that our existing
facilities will be adequate for our current needs and that additional space will
be available as needed.  The material terms of our property leases are set
forth in the table below.





Location
            
            Use
            
            Square
      Feet
            
            Rent Payments
            
            Term
            
            Leased From1150
      Kane Concourse, Suite 400, Bay Harbor Islands, Florida
    33154
            
            
            Offices
            
            
            Approximately 1200
      square feet
            
            $
            4,815 per month
            
            
            1
      year
            
            
            June
      2008




Item
3.    Legal Proceedings.





We know
of no material, active, pending or threatened proceeding against us or our
subsidiaries, nor are we, or any subsidiary, involved as a plaintiff or
defendant in any material proceeding or pending litigation.




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




None.




10




PART
II






Item
5.    Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities.






Market
Information




Our
common stock has been traded over-the-counter on the Over-the-Counter (“OTC”)
Bulletin Board and “Pink Sheets” since April 7, 2006 under the symbol SMME and
the market for the stock has been relatively inactive. The range of high and low
bid quotations for the quarters of the last two years ended June 30, 2008 is
listed below. The quotations are taken from the OTC Bulletin Board. They reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not necessarily represent actual transactions.





Calendar
      Quarter
            
            Low
      Bid
            
            High
      Bid2008
      First Quarter
            
            
            0.25
            
            
            0.512008
      Second Quarter
            
            
            0.12
            
            
            0.452008
      Third Quarter
            
            
            0.15
            
            
            0.382008
      Fourth Quarter
            
            
            0.08
            
            
            0.402009
      First Quarter
            
            
            0.07
            
            
            0.252009
      Second Quarter
            
            
            0.08
            
            
            0.182009
      Third Quarter
            
            
            0.06
            
            
            0.182009
      Fourth Quarter
            
            
            0.08
            
            
            0.19





As of
October 21, 2009, we had approximately 858 shareholders of record of our common
stock, including the shares held in street name by brokerage firms. The holders
of common stock are entitled to one vote for each share held of record on all
matters submitted to a vote of stockholders.  Holders of the common
stock have no preemptive rights and no right to convert their common stock into
any other securities. There are no redemption or sinking fund provisions
applicable to the common stock.





Dividends





Any
payment of dividends will be within the discretion of the Company's Board of
Directors and will depend, among other factors, on earnings, capital
requirements and the operating and financial condition of the Company. At the
present time, the Company's anticipated financial capital requirements are such
that it intends to follow a policy of retaining earnings in order to finance the
development of its business.





Securities
authorized for issuance under equity compensation plans





As of the
date of this report, we do not have any securities authorized for issuance under
any equity compensation plans and we do not have any equity compensation
plans.





Penny
Stock Regulations





Our
shares of common stock are subject to the "penny stock" rules of the Securities
Exchange Act of 1934 and various rules under this Act. In general terms, "penny
stock" is defined as any equity security that has a market price less than $5.00
per share, subject to certain exceptions. The rules provide that any equity
security is considered to be a penny stock unless that security is registered
and traded on a national securities exchange meeting specified criteria set by
the SEC, issued by a registered investment company, and excluded from the
definition on the basis of price (at least $5.00 per share), or based on the
issuer's net tangible assets or revenues. In the last case, the issuer's net
tangible assets must exceed $3,000,000 if in continuous operation for at least
three years or $5,000,000 if in operation for less than three years, or the
issuer's average revenues for each of the past three years must exceed
$6,000,000.





Trading
in shares of penny stock is subject to additional sales practice requirements
for broker-dealers who sell penny stocks to persons other than established
customers and accredited investors. Accredited investors, in general, include
individuals with assets in excess of $1,000,000 or annual income exceeding
$200,000 (or $300,000 together with their spouse), and certain institutional
investors. For transactions covered by these rules, broker-dealers must make a
special suitability determination for the purchase of the security and must have
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, the rules
require the delivery, prior to the first transaction, of a risk disclosure
document relating to the penny stock. A broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative,
and current quotations for the security. Finally, monthly statements must be
sent disclosing recent price information for the penny stocks. These rules may
restrict the ability of broker-dealers to trade or maintain a market in our
common stock, to the extent it is penny stock, and may affect the ability of
shareholders to sell their shares.




Recent Sales of Unregistered Securities




The
following summarizes the securities that we sold during the fiscal year
ended June 30, 2009 without registering the securities under the Securities
Act:





On July
4, 2008, the Company sold 13,000 shares of its common stock at prices of $0.23
per share in private placement offerings resulting in net proceeds of
$2,990.





11


In July
2008, the Company sold a total of 206,666 Units at prices ranging from $0.15 and
$0.25 per Unit in private placement offerings resulting in net proceeds of
$23,960.  Each Unit consists of one share of common stock and one
warrant exercisable for 12 months from the date of issue into one share of
common stock at $1.00 per share.





In the
three months ended September 30, 2008, the Company sold a total of 83,000 Units
at prices ranging from $0.25 to $0.33 per Unit in private placements resulting
in net proceeds of $26,950.





In the
three months ended December 31, 2008, the Company sold a total of 1,720,000
Units at a price of $0.10 per Unit in private placements resulting in
net proceeds of $170,200.  Each Unit consists of one share of common
stock and one warrant exercisable for 12 months from the date of issue into one
share of common stock at $1.00 per share.





In the
month of November 2008, the Company sold a total of 668,141 shares of common
stock at a share price of $0.084 per share in private placements resulting in
net proceeds of $51,083.





In the
three months ended March 31, 2009, the Company sold a total of 1,570,569 Units
at a price of $0.10 per Unit in private placements resulting in net proceeds of
$157,057.  Each Unit consists of one share of common stock and one
warrant exercisable for 12 months from the date of issue into one share of
common stock at $1.00 per share.





In the
three months ended June 30, 2009, the Company sold a total of 1,865,000 Units at
a price of $0.10 per Unit in private placements resulting in net proceeds of
$185,894.  Each Unit consists of one share of common stock and one
warrant exercisable for 12 months from the date of issue into one share of
common stock at $1.00 per share.





Unless
otherwise noted in this section, with respect to the sale of unregistered
securities referenced above, all transactions were exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "1933
Act"), and Regulation D or Regulation S promulgated under the 1933 Act. In each
instance, the purchaser had access to sufficient information regarding
SmartMetric so as to make an informed investment decision. More specifically, we
had a reasonable basis to believe that each purchaser was an "accredited
investor" as defined in Regulation D or Regulation S of the 1933 Act and
otherwise had the requisite sophistication to make an investment in
SmartMetric's securities.




Item
6.    Selected Financial Data.




The
following selected statement of operations data contains statement of operations
data and balance sheet data for the fiscal years ended June 30, 2009 and 2008.
The statement of operations data and balance sheet data were derived from the
audited financial statements. Such financial data should be read in conjunction
with the financial statements and the notes to the financial statements starting
on page F-1 and with the section entitled “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” below.





Statements of Operation Data:





Year ended June
      30,
              (unaudited)2009
            
            
            2008Net
      revenues
            
            $
            0
            
            
            $
            0Cost
      of sales
            
            
            0
            
            
            
            0Gross
      profit
            
            
            0
            
            
            
            0Operating
      expenses:Selling
            
            
            250,436
            
            
            
            85,167General
      and administrative
            
            
            847,189
            
            
            
            1,293,946Operating
      income
            
            
            0
            
            
            
            0Other
      income
            
            
            0
            
            
            
            0Interest
      income
            
            
            0
            
            
            
            0Interest
      expenses
            
            
            5,464
            
            
            
            17,943Income
      (Loss) before income taxes
            
            
            (1,103,089
            )
            
            
            (1,397,056
            )Income
      tax
            
            
            0
            
            
            
            0Net
      income (Loss)
            
            
            (1,103,089
            )
            
            
            (1,397,056
            )






12





Balance Sheet Data:





As at June
      30
            
            
            As at June
      302009
            
            
            2008Cash
      and cash equivalents
            
            $
            42,519
            
            
            $
            266,417Working
      capital
            
            
            (435,098
            )
            
            
            112,924Total
      assets
            
            
            91,537
            
            
            
            334,362Total
      debts
            
            
            516,375
            
            
            
            205,394Total
      shareholders’ equity (deficit)
            
            
            (424,838
            )
            
            
            (112,288
            )




Item
7.    Management’s Discussion and Analysis of Financial
Condition and Results of Operations




The
following discussion of the financial condition and results of operation of the
Company for the fiscal years ended June 30, 2009 and 2008 should be read in
conjunction with the selected financial data, the financial statements and the
notes to those statements that are included elsewhere in this registration
statement. Our discussion includes forward-looking statements based upon current
expectations that involve risks and uncertainties, such as our plans,
objectives, expectations and intentions. Actual results and the timing of events
could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors, including those set forth under
the Risk Factors, Cautionary Notice Regarding Forward-Looking Statements and
Business sections in this registration statement. We use terms such as
“anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,”
“believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions
to identify forward-looking statements.




General




Incorporated
in 2002, SmartMetric and its founder and CEO, Colin Hendrick, have been engaged
in research and development of a biometric security solution which would
authenticate the identity of a person in a self-contained credit card-sized
device. SmartMetric’s biometric card has been designed to use an on-board finger
print sensor which is imbedded in the card along with an integrated circuit chip
which will provide one gigabyte of memory capacity. SmartMetric has recently
completed a prototype of its card but has not yet begun to manufacture the
biometric cards utilizing its licensed technology. To date, SmartMetric has had
no sales revenues.





A
prototype of our biometric card was completed in February 2005 and we have been
adjusting and developing software for the card since that date.  The
finished product will be the prototype or model for our biometric cards, which
will be manufactured upon receipt of customer orders.   We are in
the process of revising some of the engineering of the prototype so as to
decrease the size of the circuitry contained in the card. We expect that the
revised prototype will be completed by January 2010.





We expect
to outsource manufacturing of our biometric cards once we have sales orders. We
do not intend to purchase any plants or significant
equipment.   Because SmartMetric does not own or rent a
manufacturing facility, we will enter into a contract with a manufacturing
facility to produce our biometric cards.  Although we have engaged in
preliminary negotiations with two potential manufacturers, no contract has been
signed.





We
currently have three full time employees, including Colin Hendrick, our
President and Chief Executive Officer. Once we have begun to generate sales, we
intend to hire additional employees.





SmartMetric
does not believe its business is seasonal in any way.




Results
of Operations




Comparison of the
Year Ended June 30, 2009 and 2008





Revenue and Net Income
(Loss)





For the
fiscal year ended June 30, 2009, there were $0 sales revenues and a net loss of
$1,103,089. For the year ended June 30, 2008, there were $0 sales revenues and a
net loss of $1,397,056. This decreased loss of $293,967 or 21% is the result
largely of  reduced administrative expenses.





13


General and Administrative
Expenses





General
and administrative expenses for the year ended June 30, 2009 were $677,189, a
decrease of $446,757or 40% compared to $1,123,946 for the comparable period in
2008. The decrease was primarily attributable to lower consultation
expenses.





Research and Development
Expenses





Research
and development expenses for the year ended June 30, 2009 were $250,436, a
increase of $165,269 or 194% compared to $85,167 for the comparable period in
2008. The increase was primarily attributable to a re-working of the prototype
to decrease its size.





Interest
Expenses





There was
$5,464 interest expense for the year ended June 30, 2009 compared to $17,943 for
the comparable period in 2008, a decrease of $12,479 or 70%.  The
decrease was primarily attributable to less debt service.





Income Tax
Expenses





Income
tax for the year ended June 30, 2009 was $0, unchanged from June 30,
2008.





Liquidity
and Capital Resources





Cash
and Cash Equivalent





Our cash
and cash equivalents were $266,417 at the beginning of the year ended June 30,
2009 and decreased to $42,519 by the end of such period, an decrease of $223,898
or 84%.  The decrease was attributable to the $667,242 net cash
used in operating activities offset by the $443,344 net cash provided by
financing activities.





Net
cash used in operating activities





Net cash
used by operating activities was $667,242 for the year ended June 30,
2009,  compared to $1,039,341 for the same period in
2008.  The difference was primarily due to a lower net loss and
increases in operating liabilities in 2009.




Net
cash used in investing activities





Net cash
used in investing activities was $0 for the year ended June 30, 2009, unchanged
from June 30, 2008.





Net
cash provided by financing activities





Net cash
provided in financing activities was $443,344 for the year ended June 30, 2009,
compared to $1,300,224 for the same period in 2008. The difference was primarily
attributable to lower sales of common stock in 2009.





Contractual
Obligations and Off-Balance Sheet Arrangements.





We have
certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments
differing from the estimates. We cannot provide certainty regarding the timing
and amounts of payments. We have presented below a summary of the most
significant assumptions used in our determination of amounts presented in the
tables, in order to assist in the review of this information within the context
of our financial position, results of operations, and cash flows.





The
following table (in thousands) summarizes our contractual obligations as of June
30, 2009, and the effect these obligations are expected to have on our liquidity
and cash flows in future periods.





Totals
            
            
            Less Than
              1 Year
            
            
            1
      to 3
              Years
            
            
            ThereafterCapital
      expenditures
            
            $
            0
            
            
            $
            0
            
            
            $
            0
            
            
            
            0
            
            
            
            —





14


Critical
accounting policies and estimates





The
financial statements are prepared in accordance with accounting principles
generally accepted in the United States, which require us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Management makes these estimates using the best information
available at the time the estimates are made; however actual results could
differ materially from those estimates (See Note 2 in the Notes to Financial
Statements).





Intangible
assets





SmartMetric
did not purchase any intangible assets for the year ended June 30,
2009.




New
Financial Accounting Pronouncements




There
have been no new financial accounting pronouncements that have or are expected
to have a material effect on our financial statements.




Item
7A.  Quantitative and Qualitative Disclosures About Market
Risk.





Not
Applicable.





Interest Rates.





Our
exposure to market risk for changes in interest rates relates primarily to our
short-term investments; thus, fluctuations in interest rates would not have a
material impact on the fair value of these investments. At October 21, 2009, we
had approximately $15,500 in cash and cash equivalents. A hypothetical 5%
increase or decrease in either short term or long term interest rates would not
have a material impact on our earnings or loss, or the fair market value or cash
flows of these instruments.





Item
8.     Financial Statements and Supplementary
Data.





Our
audited consolidated financial statements for the fiscal years ended June 30,
2009 and 2008, together with the reports of the independent certified public
accounting firms thereon and the notes thereto, are presented beginning at page
F-2.





15
  SMARTMETRIC
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 CONSOLIDATED
FINANCIAL STATEMENTS
 YEARS
ENDED JUNE 30, 2009 AND 2008
 INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
  REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM – JUNE 30,
      2009
                F-2REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM – JUNE 30,
      2008
                F-3CONSOLIDATED
      BALANCE SHEETS AS OF JUNE 30, 2009 AND 2008
                F-4CONSOLIDATED
      STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2009 AND 2008 WITH
      CUMULATIVE TOTALS SINCE DECEMBER 18, 2002 (INCEPTION)
                F-5CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE PERIOD
      DECEMBER 18, 2002 (INCEPTION) TO JUNE 30, 2009
                F-6CONSOLIDATED
      STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2009 AND 2008 WITH
      CUMULATIVE TOTALS SINCE DECEMBER 18, 2002 (INCEPTION)
                F-7NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 AND
2008
                F-8-F-23
 
 
   F-1
 
 
 Report
of Independent Registered Public Accounting Firm
 
   
    
  
  
  
      F-2
 
 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
 
 To the
Board of Directors and Stockholders of
 SmartMetric,
Inc.
 
 I have
audited the accompanying consolidated balance sheets of SmartMetric, Inc. and
subsidiary (the “Company”), a development stage company, as of June 30, 2008,
and the related consolidated statements of operations, changes in stockholders’
equity, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company’s management.  My
responsibility is to express an opinion on these consolidated financial
statements based on my audits.
 
 I
conducted my audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that I 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.  I believe
that my audit provides a reasonable basis for my opinion.
  In my
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of SmartMetric, Inc. and
subsidiary, a development stage company, as of June 30, 2008, and the results of
their operations and cash flows for the year then in conformity with accounting
principles generally accepted in the United States.
  The
accompanying financial statements referred to above have been prepared assuming
that the Company will continue as a going concern.  As discussed in
Note 1 to the consolidated financial statements, the Company’s present financial
situation raises substantial doubt about its ability to continue as a going
concern.  Management’s plans in regard to this matter are also
described in Note 1.  The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
 
 /s/Michael
T. Studer CPA P.C.
 Michael
T. Studer CPA P.C.
 
 Freeport,
New York
 October
10, 2008
 
 
 
 F-3
   SMARTMETRIC,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 CONSOLIDATED
BALANCE SHEETS
 JUNE
30, 2009 AND 2008
  ASSETS2009
                
                
                2008Current
      Assets:Cash
      and cash equivalents
                
                $
                42,519
                
                
                $
                266,417Prepaid
      expenses and other current assets
                
                
                38,758
                
                
                
                51,901Total
      Current Assets
                
                
                81,277
                
                
                
                318,318Equipment,
      net of depreciation of $13,599 and $9,315, respectively
                
                
                2,385
                
                
                
                6,669Other
      Assets:Patent
      costs, net of amortization of $7,125 and $5,625,
    respectively
                
                
                7,875
                
                
                
                9,375Total
      Other Assets
                
                
                7,875
                
                
                
                9,375TOTAL
      ASSETS
                
                $
                91,537
                
                
                $
                334,362LIABILITIES AND STOCKHOLDERS' EQUITY
      (DEFICIT)LIABILITIESCurrent
      Liabilities:Accounts
      payable and accrued expenses
                
                $
                129,244
                
                
                $
                67,886Payroll
      tax liabilities, accrued interest and penalties
                
                
                240,677
                
                
                
                137,508Liability
      for stock to be issued
                
                
                146,454
                
                
                
                -Total
      Current Liabilities
                
                
                516,375
                
                
                
                205,394Total
      Liabilities
                
                
                516,375
                
                
                
                205,394Common
      stock subject to possible recission (160,837 shares)
                
                
                -
                
                
                
                241,256STOCKHOLDERS’
      EQUITY (DEFICIT)Preferred
      stock, $.01 Par Value; 5,000,000 shares authorizedand
      0 shares issued and outstanding
                
                
                -
                
                
                
                -Class
      A common stock, $.001 Par Value; 50,000,000 shares
    authorizedand
      0 shares issued and outstanding
                
                
                -
                
                
                
                -Common
      stock, $.001 Par Value; 100,000,000 shares authorizedand
      75,546,222 and 69,913,395 shares issued and outstanding
                
                
                75,546
                
                
                
                69,913Additional
      paid-in capital
                
                
                4,569,388
                
                
                
                3,784,482Deficits
      accumulated during the development stage
                
                
                (5,069,772
                )
                
                
                (3,966,683
                )Total Stockholders’ Equity
      (Deficit)
                
                
                (424,838
                )
                
                
                (112,288
                )TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
                
                $
                91,537
                
                
                $
                334,362
 F-4
  SMARTMETRIC,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008
 WITH CUMULATIVE TOTALS SINCE DECEMBER 18, 2002
(INCEPTION)
  CUMULATIVETOTALS
      SINCEYEARS
      ENDED
                  
                  INCEPTIONJUNE
      30,
                  
                  DECEMBER
      18,2009
                  
                  
                  
                  2008
                  
                  
                  2002OPERATING
      REVENUESRevenues
                  
                  $
                  -
                  
                  
                  
                  $
                  -
                  
                  
                  $
                  -OPERATING
      EXPENSESResearch
      and development
                  
                  
                  250,436
                  
                  
                  
                  
                  85,167
                  
                  
                  
                  813,599Officer's
      salary
                  
                  
                  170,000
                  
                  
                  
                  
                  170,000
                  
                  
                  
                  765,000Other
      general and administrative expenses
                  
                  
                  677,189
                  
                  
                  
                  
                  1,123,946
                  
                  
                  
                  3,453,285Total
      Operating Expenses
                  
                  
                  1,097,625
                  
                  
                  
                  
                  1,379,113
                  
                  
                  
                  5,031,884LOSS
      BEFORE OTHER INCOME (EXPENSE)
                  
                  
                  (1,097,625
                  )
                  
                  
                  
                  (1,379,113
                  )
                  
                  
                  (5,031,884
                  )OTHER
      INCOME (EXPENSE)Interest
      expense
                  
                  
                  (5,464
                  )
                  
                  
                  
                  (17,943
                  )
                  
                  
                  (38,545
                  )Interest
      income
                  
                  
                  -
                  
                  
                  
                  
                  -
                  
                  
                  
                  657Total
      Other Income (expense)
                  
                  
                  (5,464
                  )
                  
                  
                  
                  (17,943
                  )
                  
                  
                  (37,888
                  )NET
      LOSS BEFORE PROVISION FOR INCOME TAXES
                  
                  
                  (1,103,089
                  )
                  
                  
                  
                  (1,397,056
                  )
                  
                  
                  (5,069,772
                  )Provision
      for Income Taxes
                  
                  
                  -
                  
                  
                  
                  
                  -
                  
                  
                  
                  -NET
      LOSS APPLICABLE TO COMMON SHARES
                  
                  $
                  (1,103,089
                  )
                  
                  
                  $
                  (1,397,056
                  )
                  
                  $
                  (5,069,772
                  )NET
      LOSS PER BASIC AND DILUTED SHARES
                  
                  
                  (0.02
                  )
                  
                  
                  
                  (0.02
                  )WEIGHTED
      AVERAGE NUMBER OF COMMONSHARES
      OUTSTANDING
                  
                  
                  71,908,264
                  
                  
                  
                  
                  64,207,052
   F-5
   SMARTMETRIC,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
 FOR
THE PERIOD DECEMBER 18, 2002 (INCEPTION) THROUGH JUNE 30, 2009
   Preferred
      Stock
                    
                    
                    Class
      A
                      Common
      Stock
                    
                    
                    Common
      Stock
                    
                    
                    
                    
                    
                    AdditionalPaid-in
                    
                    
                    DeficitsAccumulatedDuring
      theDevelopmentShares
                    
                    
                    Amount
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Stage
                    
                    
                    TotalBalance
      - December 18, 2002
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Net
      loss for the period December 18, 2002
      (incpetion)  through June 30, 2003
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (60
                    )
                    
                    
                    (60
                    )Balance
      June 30, 2003
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (60
                    )
                    
                    
                    (60
                    )Shares
      issued of Class A Common stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    50,000,000
                    
                    
                    
                    50,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    50,000Shares
      issued of common stock for cash
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    8,560,257
                    
                    
                    
                    8,560
                    
                    
                    
                    77,042
                    
                    
                    
                    -
                    
                    
                    
                    85,602Net
      loss for the year
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (35,978
                    )
                    
                    
                    (35,978
                    )Balance
      June 30, 2004
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    50,000,000
                    
                    
                    
                    50,000
                    
                    
                    
                    8,560,257
                    
                    
                    
                    8,560
                    
                    
                    
                    77,042
                    
                    
                    
                    (36,038
                    )
                    
                    
                    99,564Costs
      associated with sale of common stock subject to possible
      rescission
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (95,877
                    )
                    
                    
                    -
                    
                    
                    
                    (95,877
                    )Net
      loss for the year
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (258,355
                    )
                    
                    
                    (258,355
                    )Balance
      June 30, 2005
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    50,000,000
                    
                    
                    
                    50,000
                    
                    
                    
                    8,560,257
                    
                    
                    
                    8,560
                    
                    
                    
                    (18,835
                    )
                    
                    
                    (294,393
                    )
                    
                    
                    (254,668
                    )Shares
      issued of common stock for cash, net of offeringcosts of
      $138,509
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    936,112
                    
                    
                    
                    936
                    
                    
                    
                    1,197,361
                    
                    
                    
                    -
                    
                    
                    
                    1,198,297Shares
      issued of common stock for services rendered
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    20,000
                    
                    
                    
                    20
                    
                    
                    
                    19,980
                    
                    
                    
                    -
                    
                    
                    
                    20,000Conversion
      of loans payable and accrued interest to common shares
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    40,000
                    
                    
                    
                    40
                    
                    
                    
                    62,360
                    
                    
                    
                    -
                    
                    
                    
                    62,400Conversion
      of Class A common shares to common shares
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (50,000,000
                    )
                    
                    
                    (50,000
                    )
                    
                    
                    50,000,000
                    
                    
                    
                    50,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Net
      loss for the year
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,225,045
                    )
                    
                    
                    (1,225,045
                    )Balance
      June 30, 2006
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    59,556,369
                    
                    
                    
                    59,556
                    
                    
                    
                    1,260,866
                    
                    
                    
                    (1,519,438
                    )
                    
                    
                    (199,016
                    )Shares
      issued of common stock for cash
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,208,887
                    
                    
                    
                    1,209
                    
                    
                    
                    759,140
                    
                    
                    
                    -
                    
                    
                    
                    760,349Shares
      issued of common stock for services rendered
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    191,505
                    
                    
                    
                    192
                    
                    
                    
                    (192
                    )
                    
                    
                    -
                    
                    
                    
                    -Net
      loss for the year
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,050,189
                    )
                    
                    
                    (1,050,189
                    )Balance
      June 30, 2007
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    60,956,761
                    
                    
                    
                    60,957
                    
                    
                    
                    2,019,814
                    
                    
                    
                    (2,569,627
                    )
                    
                    
                    (488,856
                    )Shares
      issued of common stock for cash
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    6,629,634
                    
                    
                    
                    6,629
                    
                    
                    
                    1,293,595
                    
                    
                    
                    -
                    
                    
                    
                    1,300,224Shares
      issued of common stock for services rendered
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,327,000
                    
                    
                    
                    2,327
                    
                    
                    
                    471,073
                    
                    
                    
                    -
                    
                    
                    
                    473,400Net
      loss for the year
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,397,056
                    )
                    
                    
                    (1,397,056
                    )Balance
      June 30, 2008
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    69,913,395
                    
                    
                    
                    69,913
                    
                    
                    
                    3,784,482
                    
                    
                    
                    (3,966,683
                    )
                    
                    
                    (112,288
                    )Transfer
      of shares from temporary equity to common stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    160,837
                    
                    
                    
                    161
                    
                    
                    
                    241,095
                    
                    
                    
                    -
                    
                    
                    
                    241,256Shares
      issued of common stock for cash
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,412,596
                    
                    
                    
                    4,413
                    
                    
                    
                    438,931
                    
                    
                    
                    -
                    
                    
                    
                    443,344Shares
      issued of common stock for services rendered
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,059,394
                    
                    
                    
                    1,059
                    
                    
                    
                    104,880
                    
                    
                    
                    -
                    
                    
                    
                    105,939Net
      loss for the year
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,103,089
                    )
                    
                    
                    (1,103,089
                    )Balance
      June 30, 2009
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    75,546,222
                    
                    
                    $
                    75,546
                    
                    
                    $
                    4,569,388
                    
                    
                    $
                    (5,069,772
                    )
                    
                    $
                    (424,838
                    )
   F-6
   SMARTMETRIC,
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008
 WITH
CUMULATIVE TOTALS SINCE DECEMBER 18, 2002 (INCEPTION)
  YEARS
      ENDED
                      
                      
                      CUMULATIVE

                          TOTALS
      SINCEJUNE
      30,
                      
                      
                      DECEMBER
      18,2009
                      
                      
                      2008
                      
                      
                      2002CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                      
                      $
                      (1,103,089
                      )
                      
                      $
                      (1,397,056
                      )
                      
                      $
                      (5,069,772
                      )Adjustments
      to reconcile net loss to net cashused
      in operating activities:Depreciation
                      
                      
                      4,284
                      
                      
                      
                      4,284
                      
                      
                      
                      13,599Amortization
                      
                      
                      1,500
                      
                      
                      
                      1,500
                      
                      
                      
                      7,125Common
      stock issued for consulting services
                      
                      
                      105,939
                      
                      
                      
                      473,400
                      
                      
                      
                      599,339Interest
      accrued on convertible notes payable
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,400Changes
      in assets and liabilities(Increase)
      decrease in prepaid expenses
                      
                      
                      13,143
                      
                      
                      
                      7,051
                      
                      
                      
                      (38,758
                      )Organization
      costs
                      
                      
                      -
                      
                      
                      
                      60
                      
                      
                      
                      -Increase
      (decrease) in accounts payable and accrued expenses
                      
                      
                      61,358
                      
                      
                      
                      (74,019
                      )
                      
                      
                      129,244Increase
      (decrease) in payroll taxes, accrued interest and
penalties
                      
                      
                      103,169
                      
                      
                      
                      (54,561
                      )
                      
                      
                      240,677Increase
      (decrease) in liability for stock to be issued
                      
                      
                      146,454
                      
                      
                      
                      -
                      
                      
                      
                      146,454Total
      adjustments
                      
                      
                      435,847
                      
                      
                      
                      357,715
                      
                      
                      
                      1,100,080Net
      cash (used in) operating activities
                      
                      
                      (667,242
                      )
                      
                      
                      (1,039,341
                      )
                      
                      
                      (3,969,692
                      )CASH
      FLOWS FROM INVESTING ACTIVITIESAcquisition
      of equipment
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (15,984
                      )Patent
      costs
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (15,000
                      )Net
      cash (used in) investing activities
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (30,984
                      )CASH
      FLOWS FROM FINANCING ACTIVITESProceeds
      from notes payable
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      60,000Loans
      from related parties
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      54,427Repayments
      of loans from related parties
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (54,427
                      )Stock
      subscriptions received from private placements
                      
                      
                      443,344
                      
                      
                      
                      1,300,224
                      
                      
                      
                      3,006,194Sale
      of common stock in public offering
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,115,472Public
      offering costs incurred
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (138,471
                      )Net
      cash provided by financing activities
                      
                      
                      443,344
                      
                      
                      
                      1,300,224
                      
                      
                      
                      4,043,195NET
      INCREASE (DECREASE) INCASH
      AND CASH EQUIVALENTS
                      
                      
                      (223,898
                      )
                      
                      
                      260,883
                      
                      
                      
                      42,519CASH
      AND CASH EQUIVALENTS -BEGINNING
      OF PERIOD
                      
                      
                      266,417
                      
                      
                      
                      5,534
                      
                      
                      
                      -CASH
      AND CASH EQUIVALENTS - END OF PERIOD
                      
                      $
                      42,519
                      
                      
                      $
                      266,417
                      
                      
                      $
                      42,519CASH
      PAID DURING THE YEAR FOR:Income
      taxes
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Interest
      expense
                      
                      $
                      -
                      
                      
                      $
                      15,436
                      
                      
                      $
                      28,174
  F-7
   SMARTMETRIC
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009 AND 2008
 
 
 
 NOTE
1
-                      ORGANIZATION AND BASIS OF
PRESENTATION
 
 SmartMetric,
Inc. (the “Company” or “SmartMetric”) was incorporated in the State of Nevada on
December 18, 2002. The Company is developing a credit card size plastic card
embedded with an integrated circuit chip and biometric fingerprint sensor which
provides identification of the user (the “SmartMetric Smart Card”) to market to
government agencies, corporations, and organizations interested in
identification cards.
 
 Going
Concern
 
 As shown
in the accompanying consolidated financial statements the Company has incurred
recurring losses of $1,103,089 and $1,397,056 for the years ended June 30, 2009
and 2008 respectively, and has incurred a cumulative loss of $5,069,772 since
inception (December 18, 2002).  In addition, the Company has a working
capital deficit in the amount of $435,098 as of June 30, 2009. The Company is
currently in the development stage and has been spending a majority of their
time in the development of their technology.
 
 There is
no guarantee that the Company will be able to raise enough capital or generate
revenues to sustain its operations.  These conditions raise
substantial doubt about the Company’s ability to continue as a going concern for
a reasonable period.
 
 Management
believes that the Company’s capital requirements will depend on many
factors.  These factors include the final phase of development being
successful as well as product implementation and distribution.
 
 The
consolidated financial statements do not include any adjustments relating to the
carrying amounts of recorded assets or the carrying amounts and classification
of recorded liabilities that may be required should the Company be unable to
continue as a going concern.
 
 NOTE
2
-                      SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
 
 Development Stage
Company
 
 The
Company is considered to be in the development stage as defined in Statement of
Financial Accounting Standards (SFAS) No.7, "Accounting and Reporting by
Development Stage Enterprises".The Company has devoted substantially all
of its efforts to the development of their technology.  Additionally,
the Company has allocated a substantial portion of their time and investment in
bringing their services to the market, and the raising of capital.
 
 Principles of
Consolidation
 
 The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiary, SmartMetric Australia Pty. Ltd.  All
significant intercompany accounts and transactions have been eliminated in
consolidation.
   F-8
 
 
  SMARTMETRIC
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009 AND 2008
 
 NOTE
2
-                      SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
 
 Use of
Estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.  On an ongoing basis, the Company
evaluates its estimates, including, but not limited to, those related to
derivative liabilities, bad debts, income taxes and
contingencies.  The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources.  Actual results could differ from
those estimates.
 
 Cash and Cash
Equivalents
 
 The
Company considers all highly liquid debt instruments and other short-term
investments with an initial maturity of three months or less to be cash
equivalents.  Any amounts of cash in financial institutions over FDIC
insured limits, exposes the Company to cash concentration risk.
 
 Fair Value of Financial
Instruments
 
 The
carrying amounts reported in the consolidated balance sheet for cash and cash
equivalents, accounts payable, and accrued expenses including payroll
withholdings, interest and penalties approximate fair value because of the
immediate or short-term maturity of these financial instruments.
 
 Research and
Development
 
 The
Company annually incurs costs on activities that relate to research and
development of new technology and products.  Research and development
costs are expensed as incurred.
 
 Revenue
Recognition
 
 The
Company has not recognized revenues to date.  The Company anticipates
recognizing revenue in accordance with the contracts it enters into for the sale
and distribution of the SmartCard.
 
 Accounts
Receivable
 
 The
Company when it will conduct business it will extend credit based on an
evaluation of the customers’ financial condition, generally without requiring
collateral.  Exposure to losses on receivables is expected to vary by
customer due to the financial condition of each customer.  The Company
monitors exposure to credit losses and maintains allowances for anticipated
losses considered necessary under the circumstances.  The Company has
not recorded any receivables, and therefore no allowance for doubtful accounts
at June 30, 2009 and 2008, respectively.  Accounts receivable will
generally be due within 30 days and collateral is not required.
   F-9
  SMARTMETRIC
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009 AND 2008
 
 NOTE
2
-                      SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
 
 Income
Taxes
 
 Under
Financial Accounting Standards Board Statement No. 109, “Accounting for Income
Taxes,” the liability method is used in accounting for income
taxes.  Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities, and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to
reverse.
 
 Uncertainty in Income
Taxes
 
 In July
2006, the FASB issued interpretation No. 48 (FIN No. 48), “Accounting for
Uncertainty in Income Taxes.”  This interpretation requires
recognition and measurement of uncertain income tax positions using a
“more-likely-than-not” approach.  FIN No. 48 is effective for fiscal
years beginning after December 15, 2006.  Management has adopted FIN
48 for 2007, and they evaluate their tax positions on an annual basis and have
determined that as of June 30, 2009 no additional accrual for income taxes is
necessary.
 
 Advertising
Costs
 
 The
Company expenses the costs associated with advertising as
incurred.  Advertising expenses for the years ended June 30, 2009 and
2008 are included in other general and administrative expenses in the
consolidated statements of operations.
 
 Equipment
 
 Equipment
is stated at cost.  Depreciation is computed using the straight-line
method over the estimated useful lives of the assets – 3 - 5 years.
 
 When
assets are retired or otherwise disposed of, the costs and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is
recognized in income for the period.  The cost of maintenance and
repairs is charged to income as incurred; significant renewals and betterments
are capitalized.  Deduction is made for retirements resulting from
renewals or betterments.
 
 Impairment of Long-Lived
Assets
 
 Long-lived
assets, primarily fixed assets, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets might
not be recoverable.  The Company does not perform a periodic
assessment of assets for impairment in the absence of such information or
indicators.  Conditions that would necessitate an impairment
assessment include a significant decline in the observable market value of an
asset, a significant change in the extent or manner in which an asset is used,
or a significant adverse change that would indicate that the carrying amount of
an asset or group of assets is not recoverable.  For long-lived assets
to be held and used, the Company recognizes an impairment loss only if its
carrying amount is not recoverable through its undiscounted cash flows and
measures the impairment loss based on the difference between the carrying amount
and estimated fair value.
   F-10
 
 
 SMARTMETRIC
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009 AND 2008
 
 NOTE
2
-                      SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
 
 (Loss) Per Share of Common
Stock
 
 Basic net
(loss) per common share is computed using the weighted average number of common
shares outstanding.  Diluted earnings per share ("EPS") include
additional dilution from common stock equivalents, such as stock issuable
pursuant to the exercise of stock options and warrants.  Common stock
equivalents were not included in the computation of diluted earnings per share
on the consolidated statement of operations due to the fact that the Company
reported a net loss and to do so would be anti-dilutive for the periods
presented.
 
 The
following is a reconciliation of the computation for basic and diluted
EPS:
 
 June 30,
                  2009
                
                
                
                June 30,
                  2008Net
      loss
                
                $
                (1,103,089
                )
                
                $
                (1,397,056
                )Weighted-average
      common shares Outstanding (Basic)
                
                
                71,908,264
                
                
                
                64,207,052Weighted-average
      common stock EquivalentsStock
      options
                
                
                -
                
                
                
                -Warrants
                
                
                3,750,569
                
                
                
                5,239,816Weighted-average
      commons sharesOutstanding (Diluted)
                
                
                75,658,833
                
                
                
                69,446,868
 Stock-Based
Compensation
 
 On
December 16, 2004, the Financial Accounting Standards Board (“FASB”) published
Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment”(“SFAS
123R”).  SFAS 123R requires that compensation cost related to
share-based payment transactions be recognized in the financial
statements.  Share-based payment transactions within the scope of SFAS
123R include stock options, restricted stock plans, performance-based awards,
stock appreciation rights, and employee share purchase plans.  The
provisions of SFAS 123R, as amended, are effective for small business issuers
beginning as of the next interim period after December 15, 2005.
 
 On July
1, 2006, the Company adopted the provisions of FAS No. 123R “Share-Based
Payment” (“FAS 123R”) which requires recognition of stock-based compensation
expense for all share-based payments based on fair value.  Prior to
July 1, 2006, the Company measured compensation expense for all of its
share-based compensation using the intrinsic value method prescribed by
Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued
to Employees” (“APB 25”) and related interpretations.
 
 
 
 F-11
 
 
 SMARTMETRIC
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009 AND 2008
 
 NOTE
2
-                      SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
 
 Stock-Based
Compensation (Continued)
 
 The
Company has provided pro forma disclosure amounts in accordance with FAS No.
148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123” (“FAS 148”), as if the fair value method
defined by FAS No. 123, “Accounting for Stock Based Compensation” (“FAS 123”)
had been applied to its stock-based compensation.
 
 The
Company has elected to use the modified-prospective approach
method.  Under that transition method, the calculated expense in 2006
is equivalent to compensation expense for all awards granted prior to, but not
yet vested as of July 1, 2006, based on the grant-date fair values estimated in
accordance with the original provisions of FAS 123.  Stock-based
compensation expense for all awards granted after July 1, 2006 is based on the
grant-date fair values estimated in accordance with the provisions of FAS
123R.  The Company recognizes these compensation costs, net of an
estimated forfeiture rate, on a pro rata basis over the requisite service period
of each vesting tranche of each award.  The Company considers
voluntary termination behavior as well as trends of actual option forfeitures
when estimating the forfeiture rate.
 
 The
Company measures compensation expense for its non-employee stock-based
compensation under the Financial Accounting Standards Board (FASB) Emerging
Issues Task Force (EITF) 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".The fair value of the option
issued is used to measure the transaction, as this is more reliable than the
fair value of the services received.  The fair value is measured at
the value of the Company’s common stock on the date that the commitment for
performance by the counterparty has been reached or the counterparty’s
performance is complete.  The fair value of the equity instrument is
charged directly to compensation expense and additional paid-in
capital.
 
 Segment
Information
 
 The
Company follows the provisions of SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information”.This standard requires
that companies disclose operating segments based on the manner in which
management disaggregates the Company in making internal operating
decisions.  The Company only operates in one reporting segment as of
June 30, 2009 and for the years ended June 30, 2009 and 2008.
 
 Reclassifications
 
 Certain
balances for the year ended June 30, 2008 have been reclassified to conform with
the presentation for the year ended June 30, 2009. The reclassifications have
had no effect on the net loss for the year ended June 30, 2008.
 
 
 
 F-12
 
  SMARTMETRIC
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009 AND 2008
 
 NOTE
2
-                      SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
 
 Recent Accounting
Pronouncements
 
 In
September 2006, the FASB issued SFAS 157, “Fair Value
Measurements.”  This standard defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosure about fair value measurements.  This statement
is effective for financial statements issued for fiscal years beginning after
November 15, 2007.  Early adoption is encouraged.  The
adoption of SFAS 157 did not have a material impact on the consolidated
financial statements.
 
 In
February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities - Including an amendment of FASB Statement No.
115” (“FAS 159”) which permits entities to choose to measure many financial
instruments and certain other items at fair value at specified election
dates.  A business entity is required to report unrealized gains and
losses on items for which the fair value option has been elected in earnings at
each subsequent reporting date.  This statement is expected to expand
the use of fair value measurement.  FAS 159 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years.
 
 In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No 51” (SFAS 160).  SFAS 160 establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, changes in a parent’s ownership of a non-controlling interest,
calculation and disclosure of the consolidated net income attributable to the
parent and the non-controlling interest, changes in a parent’s ownership
interest while the parent retains its controlling financial interest and fair
value measurement of any retained non-controlling equity
investment.
 
 SFAS 160
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal
years.  Early adoption is prohibited.  The adoption of SFAS
160 did not have a material impact on the Company’s consolidated financial
position, results of operations or cash flows.
 
 
  F-13
 
 
 SMARTMETRIC
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009 AND 2008
 
 NOTE
2
-                      SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
 
 Recent Accounting
Pronouncements (Continued)
 
 In
December 2007, the FASB issued SFAS 141R, Business Combinations(“SFAS
141R”), which replaces FASB SFAS 141, Business
Combinations.This Statement retains the fundamental
requirements in SFAS 141 that the acquisition method of accounting be used for
all business combinations and for an acquirer to be identified for each business
combination.  SFAS 141R defines the acquirer as the entity that
obtains control of one or more businesses in the business combination and
establishes the acquisition date as the date that the acquirer achieves
control.  SFAS 141R will require an entity to record separately from
the business combination the direct costs, where previously these costs were
included in the total allocated cost of the acquisition.  SFAS 141R
will require an entity to recognize the assets acquired, liabilities assumed,
and any non-controlling interest in the acquired at the acquisition date, at
their fair values as of that date.  This compares to the cost
allocation method previously required by SFAS No. 141.  SFAS 141R will
require an entity to recognize as an asset or liability at fair value for
certain contingencies, either contractual or non-contractual, if certain
criteria are met.  Finally, SFAS 141R will require an entity to
recognize contingent consideration at the date of acquisition, based on the fair
value at that date.  This Statement will be effective for business
combinations completed on or after the first annual reporting period beginning
on or after December 15, 2008.  Early adoption of this standard is not
permitted and the standards are to be applied prospectively only.  The
adoption of SFAS No. 141R did not have a material effect on the Company’s
consolidated financial position, results of operations or cash
flows.
 
 In
December 2007, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 110, “Use of a
Simplified Method in Developing Expected Term of Share Options”(“SAB
110”).  SAB 110 expresses the current view of the staff that it will
accept a company’s election to use the simplified method discussed in Staff
Accounting Bulletin No. 107, “Share Based Payment”(“SAB
107”), for estimating the expected term of “plain vanilla” share options
regardless of whether the company has sufficient information to make more
refined estimates. SAB 110 became effective for the Company on January 1,
2008.  The adoption of SAB 110 did not have a material impact on the
Company’s financial position.
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133 (“SFAS 161”).
SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging
activities. These enhanced disclosures will discuss: how and why an entity uses
derivative instruments; how derivative instruments and related hedged items are
accounted for under SFAS 133 and its related interpretations; and how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. The Company does not believe that SFAS 161 will have an impact on
their results of operations or financial position.
 
 
 
 
 
 F-14
 
 
 SMARTMETRIC
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009 AND 2008
 
 NOTE
2
-                      SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
 
 Recent Accounting
Pronouncements (Continued)
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (SFAS 162). SFAS 162 makes the hierarchy of generally
accepted accounting principles explicitly and directly applicable to preparers
of financial statements, a step that recognizes preparers’ responsibilities for
selecting the accounting principles for their financial statements. The
effective date for SFAS 162 is 60 days following the U.S. Securities and
Exchange Commission’s approval of the Public Company Accounting Oversight
Board’s related amendments to remove the GAAP hierarchy from auditing standards,
where it has resided for some time. The adoption of SFAS 162 will not have an
impact on the Company’s results of operations or financial
position.
 
 In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts – an interpretation of SFAS No. 60” (SFAS 163). SFAS 163
prescribes accounting for insures of financial obligations, bringing consistency
to recognizing and recording premiums and to loss recognition. SFAS 163 also
requires expanded disclosures about financial guarantee insurance contracts.
Except for some disclosures, SFAS 163 is effective for financial statements
issued for fiscal years beginning after December 15, 2008. The adoption of SFAS
163 will not have an impact on the Company’s results of operations or financial
position.
 
 In April
2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of
Intangible Assets”. This FSP amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets”. The Company was required to adopt FSP 142-3 on October 1, 2008. The
guidance in FSP 142-3 for determining the useful life of a recognized intangible
asset shall be applied prospectively to intangible assets acquired after
adoption, and the disclosure requirements shall be applied prospectively to all
intangible assets recognized as of, and subsequent to, adoption. The Company
does not believe FSP 142-3 will materially impact their financial position,
results of operations or cash flows.
 
 In May
2008, the FASB issued FSP Accounting Principles Board 14-1, “Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 requires the
issuer of certain convertible debt instruments that may be settled in cash (or
other assets) on conversion to separately account for the liability (debt) and
equity (conversion option) components of the instrument in a manner that
reflects the issuer’s non-convertible debt borrowing rate. FSP APB 14-1 is
effective for fiscal years beginning after December 15, 2008 on a retroactive
basis. The Company does not believe that the adoption of FSP APB 14-1 will have
a material effect on its financial position, results of operations or cash
flows.
 
 
 F-15
 SMARTMETRIC
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009 AND 2008
 
 NOTE
2
-                      SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
 
 Recent Accounting
Pronouncements (Continued)
  In June
2008, the Emerging Issues Task Force issued EITF No. 07-05, “Determining Whether
an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF
07-05”), which supersedes the definition in EITF 06-01 for periods beginning
after December 15, 2008. The objective of EITF 07-05 is to provide guidance for
determining whether an equity-linked financial instrument (or embedded feature)
is indexed to an entity’s own stock and it applies to any freestanding financial
instrument or embedded feature that has all the characteristics of a derivative
in FSAB 133, for purposes of determining whether that instrument or embedded
feature qualifies for the first part of the scope exception in paragraph 11(a)
of SFAS 133 (“the Paragraph 11(a) Exception”). EITF 07-05 also applies to any
freestanding financial instrument that is potentially settled in an entity’s own
stock, regardless of whether the instrument is within the scope of EITF 00-19.
The Company does not believe that EITF 07-05 will have on its financial
position, results of operations and cash flows.
 
 In May
2009, the FASB published SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS
165 requires the Company to disclose the date through which subsequent events
have been evaluated and whether that date is the date the financial statements
were issued or the date the financial statements were available to be issued.
SFAS 165 is effective for financial periods ending after June 15, 2009.
Management has adopted SFAS 165 for their annual report for June 30, 2009 and
has evaluated subsequent events through October 15, 2009, the date the financial
statements were issued.
 
 Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the consolidated financial statements
upon adoption.
 
 
 
 F-16
 
 
 SMARTMETRIC
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009 AND 2008
 
 NOTE
3
-                      EQUIPMENT
 
 Equipment
as of June 30, 2009 and 2008 were as follows:
 
 Estimated
                Useful Live(Years)
              
              
              June 30,
                2009
              
              
              June 30,
                2008Computer
      equipment
              
              
              3-5
              
              
              $
              15,984
              
              
              $
              15,984Less: accumulated
      depreciation
              
              
              
              
              
              
              (13,599
              )
              
              
              (9,315
              )Equipment,
    net
              
              
              
              
              
              $
              2,385
              
              
              $
              6,669
  There was
$4,284 charged to operations for depreciation expense for the years ended June
30, 2009 and 2008, respectively.
 
 
 NOTE
4
-                      PATENT
COSTS
 
 Patent
costs as of June 30, 2009 and 2008 were as follows:
  Estimated
                Useful Live(Years)
              
              
              June 30,
                2009
              
              
              June 30,
                2008Legal
      fees paid in connection with
      patent
                applications
              
              
              10
              
              
              $
              15,000
              
              
              $
              15,000Less:
      accumulated amortization
              
              
              
              
              
              
              (7,125
              )
              
              
              (5,625
              )Patent Costs,
      net
              
              
              
              
              
              $
              7,875
              
              
              $
              9,375
 
 There was
$1,500 charged to operations for amortization expense for the years ended June
30, 2009 and 2008, respectively.
 
 NOTE
5
-                      COMMON STOCK SUBJECT TO
POSSIBLE RESCISSION
 
 On
November 3, 2004, the Company deposited $102,311 from the sale of a total of
68,207 shares of common stock to investors at a price of $1.50 per share. The
net proceeds to the Company, after deducting $44,052 in costs relating to this
private placement for fees paid to an unrelated third party, was
$58,259.
 
 On
January 30, 2005, the Company closed a second private placement which resulted
in the sale of a total of 92,630 shares of common stock to investors at a price
of $1.50 per share, or $138,945 gross proceeds. The net proceeds to the Company,
after deducting $51,825 in costs relating to this private placement for fees
paid to an unrelated third party, was $87,120.
 
 
 
 
 
 F-17
 
 
 SMARTMETRIC
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009 AND 2008
 
 NOTE
5
-                      COMMON STOCK SUBJECT TO
POSSIBLE RESCISSION (CONTINUED)
 
 Since the
private placements referred to in the preceding paragraphs occurred after the
filing of the Company’s registration statement on Form SB-2 on September 3, 2004
and before its effectiveness on August 12, 2005, the related investors may have
had rescission rights under the federal securities laws. Accordingly, the
Company classified the $241,256 as temporary equity and the related costs of
$95,877 as a deduction from stockholders’ equity (deficit).
 
 The
Company believes that the statute of limitations for claiming rescission ran on
August 12, 2008 (three years from the date the shares were offered to the
public). To date, none of the investors has made a claim for rescission. The
Company has reclassified the temporary equity to permanent equity in the year
ended June 30, 2009.
 
 NOTE
6
-                      COMMITMENTS
 
 PATENT LICENSE
AGREEMENT
 
 Effective
August 1, 2004, the Company executed a license agreement with Applied
Cryptology, Inc. (“ACI”), a corporation controlled by the Company’s president
and the owner of certain technology. Pursuant to the license agreement, the
Company has the right to make use of this technology for the purpose of
developing software and systems to be used by the Company to provide any or all
of the following: 1) secure transactions over the Internet from home and office
computers; 2) an automatic method for connecting to remote computers; 3) a
method of developing targeted advertising to home and/or office computers; and
4) identity verification and access control as provided for in the patent.
Pursuant to this license agreement, ACI will receive 2% of all revenues
generated by the Company on products which utilize this patented technology. The
license fee will be paid within 45 days of the end of each quarter. In the event
no revenues are generated through the use of any of the licensed patents during
a given quarter, no money shall be owed ACI for such quarter. ACI may rescind
the license agreement and reclaim all rights and interest in the patents if
certain events, such as the Company’s filing for bankruptcy protection or
reorganization, occur. This license agreement will remain in effect for the
lives of the patents. The Company may utilize the technological applications
anywhere in the world without limitation.
 
 Employment
Agreement
 
 Effective
July 1, 2004, the Company executed a one-year employment agreement with its
president, which in June 2005 was renewed for one-year to June 30, 2006.
Pursuant to the employment agreement, the president received an annual salary of
$170,000. The employment agreement has not been renewed in writing however, the
president continues to serve the Company and is being paid the same annual
salary of $170,000.
 
 Lease
Agreement
 
 The
Company leases office space in Bay Harbor Islands, Florida under a month to
month agreement at a monthly rental of $4,815 per month. Rent expense for the
years ended June 30, 2009 and 2008 was $57,780 and $54,872,
respectively.
   F-18
  
 SMARTMETRIC
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009 AND 2008
 
 
 NOTE
7
-                      STOCKHOLDERS’ EQUITY
(DEFICIT)
 
 Preferred
Stock
 
 As of
June 30, 2009, the Company has 5,000,000 shares of preferred stock, par value
$0.01, authorized and no shares issued and outstanding. There have been no
issuances of preferred stock since the Company’s inception.
 
 Class A Common
Stock
 
 As of
June 30, 2009, the Company has 50,000,000 shares of Class A common stock, par
value $0.001, authorized and no shares issued and outstanding. The Company in
October 2003 issued 50,000,000 shares of Class A common stock at par value
($50,000). These shares were converted into 50,000,000 shares of common stock in
February and May 2006.
 
 Common
Stock
 
 The
Company was incorporated on December 18, 2002, with 45,000,000 shares, par value
$0.001. In 2006, the Company amended their articles of incorporation to increase
the 45,000,000 shares to 100,000,000 shares.
 
 As of
June 30, 2009, the Company has 75,546,222 shares of common stock issued and
outstanding.
 
 From
October 2003 to June 2004, the Company issued 8,560,257 shares to investors at
$0.01 for $85,602.
 
 From
August 2005 to February 2006, the Company sold a total of 743,648 shares of
common stock at $1.50 per share in its public offering resulting in gross
proceeds of $1,115,472. The net proceeds to the Company after deducting $138,471
in offering costs, was $977,001.
 
 From May
2006 to June 2006, the Company sold a total of 192,464 Units at $1.15 per Unit
in private placements resulting in gross proceeds of $221,334 and net proceeds
of $221,296. Each Unit consisted of one share of common stock and one warrant
exercisable for 12 months from the date of issue into one share of common stock
at $1.50 per share.
 
 In July
2006, the Company sold a total of 56,522 Units at $1.15 per Unit in private
placements resulting in net proceeds of $65,000.  In August and
September 2006, the Company sold a total of 128,377 Units at prices ranging
between $0.60 to $0.79 per Unit in private placements resulting in net proceeds
of $83,558. In the three months ended December 31, 2006, the Company sold a
total of 344,115 Units at prices ranging from $0.48 to $1.00 per Unit in private
placements resulting in net proceeds of $229,284. In the three months ended
March 31, 2007, the Company sold a total of 297,228 Units at prices ranging from
$0.55 to $1.00 per Unit in private placements resulting in net proceeds of
$200,641. In the three months ended June 30, 2007, the Company sold a total of
382,645 Units at prices ranging from $0.36 to $0.56 per Unit in private
placements resulting in net proceeds of $181,866. Each Unit consisted of one
share of common stock and one warrant exercisable for 12 months from the date of
issue into one share of common stock at $1.50 per share.
   F-19
  
 SMARTMETRIC
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009 AND 2008
 
 NOTE
8
-                      STOCKHOLDERS’ EQUITY
(DEFICIT) (CONTINUED)
 
 Common Stock
(Continued)
 
 In the
year ended June 30, 2007, the Company also authorized the issuance of a total of
82,893 Units to various parties for services rendered relating to the public
offering and the private placements and a total of 108,612 shares of common
stock to various parties relating to the financings.
 
 In the
three months ended September 30, 2007, the Company sold a total of 903,813 Units
at prices ranging from $0.30 to $0.34 per Unit in private placements resulting
in net proceeds of $297,633. In the three months ended December 31, 2007, the
Company sold a total of 332,500 Units at prices ranging from $0.20 to $0.25 per
Unit in private placements resulting in net proceeds of $64,284. In the three
months ended March 31, 2008, the Company sold a total of 1,042,300 Units at a
price of $0.20 per Unit in private placements resulting in net proceeds of
$207,967.  In the three months ended June 30, 2008, the Company sold a
total of 2,961,203 Units at prices ranging from $0.20 to $0.25 per Unit in
private placements resulting in net proceeds of $597,542. Each Unit consisted of
one share of common stock and one warrant exercisable for 12 months from the
date of issue into one share of common stock at $1.00 per share.
 
 On March
25, 2008, the Company sold 200,000 shares of its common stock at a price of
$0.10 per share resulting in net proceeds of $20,000. In the three months ended
June 30,2 008, the Company sold 1,189,818 shares of its common stock at prices
ranging from $0.07 to $0.13 per share resulting in net proceeds of
$112,798.
 
 In the
three months ended September 30, 2007, the Company authorized the issuance of a
total of 80,000 shares, valued at $24,000 to non-officer directors of the
Company for services rendered.
 
 On
January 14, 2008, the Company issued a total of 2,107,000 shares of its common
stock, valued at $421,400 to its attorney and two consultants for services
rendered. On February 26, 2008, the Company issued 140,000 shares of common
stock, valued at $28,000 to its attorney for services rendered.
 
 In the
year ended June 30, 2009, the Company issued 1,059,394 shares of stock for
services rendered valued at $105,939; 662,027 shares of common stock in private
placements at prices ranging from $0.08 to $0.10 resulting in net proceeds of
$49,587; and 3,750,569 Units at a price of $0.10 resulting in net proceeds of
$393,757. Each Unit consisted of one share of common stock and one warrant
exercisable for 12 months from the date of issue into one share of common stock
at $1.00 per share.
 
 
 
 F-20
 
 SMARTMETRIC
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009 AND 2008
 
 
 NOTE
8
-                      STOCKHOLDERS’ EQUITY
(DEFICIT) (CONTINUED)
 
 Warrants
 
 The
Company granted from time to time warrants in connection with private placements
at various prices as noted herein. Each warrant is exercisable for 12 months
from the date of issue into one share of common stock at various prices. As of
June 30, 2009 and 2008, the following is a breakdown of the
activity:
 
 June 30,
2009:
  Outstanding –
      beginning of period
              
              
              5,239,816Issued
              
              
              3,750,569Exercised
              
              
              -Expired
              
              
              (5,239,816
              )Outstanding – end of
      period
              
              
              3,750,569
  June 30,
2008:
  Outstanding –
      beginning of period
              
              
              1,291,780Issued
              
              
              5,239,816Exercised
              
              
              -Expired
              
              
              (1,291,780
              )Outstanding – end of
      period
              
              
              5,239,816
  The
3,750,569 warrants outstanding at June 30, 2009, expire at various times through
June 30, 2010.
 
 The
warrant agreements contain no clauses regarding adjustments to exercise price,
net settlement provisions, registration rights or liquidated damages
clauses.
 
 NOTE
9
-                      PROVISION FOR INCOME
TAXES
 
 Deferred
income taxes are determined using the liability method for the temporary
differences between the financial reporting basis and income tax basis of the
Company’s assets and liabilities.  Deferred income taxes are measured
based on the tax rates expected to be in effect when the temporary differences
are included in the Company’s tax return.  Deferred tax assets and
liabilities are recognized based on anticipated future tax consequences
attributable to differences between financial statement carrying amounts of
assets and liabilities and their respective tax bases.
 
 
 
 F-21
 
 
 SMARTMETRIC
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009 AND 2008
 
 
 NOTE
9
-                      PROVISION FOR INCOME
TAXES (CONTINUED)
 
 At June
30, 2009, deferred tax assets consist of the following:
  Net operating
      losses
              
              $
              1,723,722Valuation
      allowance
              
              
              (1,723,722
              )$
              -
  At June
30, 2009, the Company had a net operating loss carryforward in the amount of
$5,069,772 available to offset future taxable income through
2029.  The Company established valuation allowances equal to the full
amount of the deferred tax assets due to the uncertainty of the utilization of
the operating losses in future periods.  A reconciliation of the
Company’s effective tax rate as a percentage of income before taxes and federal
statutory rate for the periods ended June 30, 2009 and 2008 is summarized as
follows:
  2009
              
              
              2008Federal statutory
      rate
              
              
              (34.0
              %)
              
              
              (34.0
              %)State income taxes,
      net of federal benefits
              
              
              3.3
              
              
              
              3.3Valuation
      allowance
              
              
              30.7
              
              
              
              30.70
              %
              
              
              0
              %
  NOTE
10
-                      FAIR VALUE
MEASUREMENTS
 
 On
January 1, 2008, the Company adopted SFAS 157. SFAS 157 defines fair value,
provides a consistent framework for measuring fair value under generally
accepted accounting principles and expands fair value financial statement
disclosure requirements. SFAS 157’s valuation techniques are based on observable
and unobservable inputs. Observable inputs reflect readily obtainable data from
independent sources, while unobservable inputs reflect our market assumptions.
SFAS 157 classifies these inputs into the following hierarchy:
 
 Level 1
inputs: Quoted prices for identical instruments in active markets.
 
 Level 2
inputs: Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and
model-derived valuations whose inputs are observable or whose significant value
drivers are observable.
 
 Level 3
inputs: Instruments with primarily unobservable value drivers.
 
 
 
 
 F-22
 
 SMARTMETRIC
INC. AND SUBSIDIARY
 (A
DEVELOPMENT STAGE COMPANY)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009 AND 2008
 
 
 NOTE
10
-                      FAIR VALUE
MEASUREMENTS (CONTINUED)
 
 The
following table represents the fair value hierarchy for those financial assets
and liabilities measured at fair value on a recurring basis as of June 30,
2009:
 
 Level
      1
                
                
                Level
      2
                
                
                Level
      3
                
                
                TotalCash
                
                $
                42,519
                
                
                $
                -
                
                
                $
                -
                
                
                $
                42,519Total
      assets
                
                $
                42,519
                
                
                $
                -
                
                
                $
                -
                
                
                $
                42,519Total
      liabilities
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
 
 
  F-23





Item
9.     Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.









ITEM 9A (T) – CONTROLS AND
PROCEDURES





Evaluation
of Disclosure Controls and Procedures





As
required by rule 13a-15, under the Exchange Act, our management, including our
Chief Executive Offer and our Chief Financial Officer evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of June 30, 2009.





Disclosure
controls and procedures refers to controls and other procedures designed to
ensure that information required to be disclosed in the reports we file or
submit under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC and
that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure.  In designing and evaluating our disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is required to apply
its judgment in evaluating and implementing possible controls and
procedures.





Management
conducted its evaluation of disclosure controls and procedures under the
supervision of our Chief Executive Officer and Chief Financial
Officer.  Based on that evaluation, we have concluded that because of
significant deficiencies in internal control over financial reporting described
below, our disclosure controls and procedures were not effective as of June 30,
2009.





Management’s
Report on Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act.    Our management is also
required to assess and report on the effectiveness of our internal control over
financial reporting in accordance with section 404 of the Sarbanes-Oxley of 2002
(“section 404”).  Management assessed the effectiveness of our
internal control over financial reporting as of June 30, 2009.  In
making this assessment we used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. During our assessment of the effectiveness of
internal control over financial reporting as of June 30, 2009, management
identified significant deficiencies related to (i) the U.S. GAAP expertise of
our internal accounting staff, (ii) our internal audit functions and (iii) a
lack of segregation of duties within accounting functions.  These
deficiencies have, on occasion, prevented us from timely filing of our 8-K and
10-K.  However, management believes that these deficiencies do not
amount to a material weakness.  Therefore our internal controls over
financial reporting were effective as of June 30, 2009.





16


We became
a reporting company in December 2002.  We began preparing to be in
compliance with the internal control obligations, including section 404, for our
fiscal year ending June 30, 2003, with an accounting staff that was relatively
inexperienced in working for a U.S. public company.  During most of
our first fiscal year, our internal accounting staff was primarily engaged in
insuring compliance with accounting and reporting requirements to meet U.S. GAAP
requirements.  As a result, with the exception of certain additional
persons hired towards the end of fiscal year ending June 30, 2003 to address
these deficiencies, including the hiring of our Chief Financial Officer, our
current internal accounting department responsible for financial reporting of
the Company, on a consolidated basis, is relatively new to U.S. GAAP and the
related internal control procedures required of U.S. public
companies.  Although our accounting staff is professionally trained in
accounting requirements and procedures required by U.S. GAAP, management has
determined that they require additional training and assistance in U.S. GAAP
matters.  Management has determined that our internal audit function
is also deficient due to insufficient qualified resources to perform internal
audit functions.





Changes
in Internal Control over Financial Reporting





In order
to correct the foregoing deficiencies, we have taken the following remediation
measures:





1)
            We
      have committed to the establishment of effective internal audit functions,
      however, due to the scarcity of qualified candidates with extensive
      experience in U.S. GAAP reporting and accounting in the region, we were
      not able to hire sufficient internal audit resources as of October 20,
      2009.  However, we will increase our search for qualified
      candidates with assistance from recruiters and through
      referrals.





2)
            During
      August of 2009, we elected independent directors to serve on our audit
      committee and we have set up a compensation committee to be headed by one
      of our independent directors.





3)
            Due
      to our size and nature, segregation of all conflicting duties may not
      always be possible and may not be economically
      feasible.  However, to the extent possible, we will implement
      procedures to ensure that the initiation of transactions, the custody of
      assets and the recording of transactions will be performed by separate
      individuals, and will ensure the timely filing of our 8-K and 10-K in the
      future.





We
believe that the foregoing steps will remediate the deficiency identified above,
and we will continue to monitor the effectiveness of these steps and make any
changes that our management deems appropriate.





A
material weakness (within the meaning of PCAOB auditing standard No. 5) is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis.  A significant deficiency is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting that is less severe than a material weakness, yet important enough to
merit attention by those responsible for oversight of the company’s financial
reporting.





Our
management is not aware of any material weaknesses in our internal control over
financial reporting, and nothing has come to the attention of management that
causes them to believe that any material inaccuracies or errors exist in our
financial statements as of June 30, 2009.  The reportable conditions
and other areas of internal control over financial reporting identified by us as
needing improvement have not resulted in a material misstatement of our
financial statements.  Nor are we aware of any instance where such
reportable conditions or other identified areas of weakness have resulted in a
material misstatement or omission in any report we have filed with or submitted
to the Commission.  Accordingly, we believe that our financial
controls were effective.  These deficiencies, as stated above, have on
occasion cause late filing of our 8-K and 10-K.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements or prevent late required quarterly filing with
the SEC.  Projections of any evaluations of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or the degree of compliance with the policies and
procedures may deteriorate.




Limitations
on Controls





Management
does not expect that our disclosure controls and procedures or our internal
control over financial reporting will prevent or detect all error and fraud. Any
control system, no matter how well designed and operated, is based upon certain
assumptions and can provide only reasonable, not absolute, assurance that its
objectives will be met. Further, no evaluation of controls can provide absolute
assurance that misstatements due to error or fraud will not occur or that all
control issues and instances of fraud, if any, within the Company have been
detected.





Item
9B. Other Information.





There
have been no material events that have occurred during the fiscal year ending
June 30, 2009 that were not previously disclosed.








17





PART
III





Item
10.                      
Directors, Executive Officers and Corporate Governance





The
following table sets forth certain information concerning our directors and
executive officers:








Name
            Age
            Position
      with the CompanyColin
      Hendrick
              9195
      Collins Ave #302
              Surfside,
      Fl. 33154
            53
            President,
      Chief Executive Officer and Chairman of the BoardJay
      M. Needelman, CPA
              c/o
      Smartmetric, Inc.
              520
      West 47th
      Street
              Miami
      Beach Fl 33140
            41
            Chief
      Financial Officer, DirectorElizabeth
      Ryba
              73
      Brown Road
              Scarsdale,
      New York 10583
            58
            DirectorPeter
      Sleep*
              3
      Bernadette Court
              East
      Doncaster, Victoria Australia
            52
            Vice
      President of Asia-Pacific Sales and former
  Director


*Peter
Sleep resigned as a director of Smartmetric as of April 2008.





Biography





COLIN HENDRICK has been
President, Chief Executive Officer and Chairman of the Board of SmartMetric
since the Company’s inception in 2002. He has served as President and CEO of
Smart Micro Chip, Inc., an Australian corporation from 2000 to 2002. From 1999
to 2001, Mr. Hendrick was President and Chief Executive Officer of Smarticom
Inc. and Fast Econ, Inc., Australian corporations. From 1994 to 1998, Mr.
Hendrick served as executive officer of Applied Computing Science (Australia),
an Australian company involved in e-commerce systems, research and development.
Mr. Hendrick attended Dandenong College in Australia.





JAY M.  NEEDELMAN, CPA,has been the Chief Financial Officer for SmartMetric since July
2004.  Mr. Needelman has over 16 years of experience in public
accounting.  A 1991 graduate of Florida State University in
Tallahassee, Fl, Mr. Needelman began his career in public accounting in Miami,
Fl, in 1991.  After working for two different firms, Mr. Needelman
founded his own firm in late 1992.





ELIZABETH RYBA, has been a
director of SmartMetric since April 5, 2006. Ms. Ryba has over 15 years of
experience in the credit card industry. She was a promotion director at Hearst
Publishing from 2002 through 2005. Between 2001 and 2004, Ms. Ryba was a
consultant at Stratus Rewards Credit Cards where she launched a Visa Luxury
credit card where points were redeemable on private jets. Between 2000 and 2001,
Ms. Ryba worked as a Marketing Consultant for SpaFinder. In 1991 through 1999
Ms. Ryba worked at Master Card where she launched a SmartCard in Australia Ms.
Ryba received her M.S. in Marketing from the University of Illinois, and her
B.A. in English from the State University of New York at Stony Brook.





PETER SLEEP was Secretary and
a director of SmartMetric in January 2003. In April 2006, he was appointed Vice
President of Sales - Asia Pacific. In April 2008, Mr. Sleep resigned from his
position as director of Smartmetric. From November 1996 to January 2003, Mr.
Sleep was Vice President of Smart MicroChip, Inc., an Australian corporation.
Mr. Sleep attended Brunswick Technology School and Footscray College, both
located in Australia.





Family
Relationships





There are
no family relationships among officers or directors of SmartMetric.





18


Involvement
in Certain Legal Proceedings





Our
directors, executive officers and control person have not been involved in any
of the following events during the part five years:





1.
            any
      bankruptcy petition filed by or against any business of which such person
      was a general partner or executive officer either at the time of the
      bankruptcy or within two years prior to that
  time;





2.
            any
      conviction in a criminal proceeding or being subject to a pending criminal
      proceeding (excluding traffic violations and other minor
      offenses);





3.
            being
      subject to any order, judgment, or decree, not subsequently reversed,
      suspended or vacated, of any court of competent jurisdiction, permanently
      or temporarily enjoining, barring, suspending or otherwise limiting his
      involvement in any type of business, securities or banking activities;
      or





4.
            being
      found by a court of competent jurisdiction (in a civil action), the
      Commission or the Commodity Futures Trading Commission to have violated a
      federal or state securities or commodities law, and the judgment has not
      been reversed, suspended, or
vacated.





Audit
Committee Financial Expert





SmartMetric’s
board of directors has determined that the company does not have an audit
committee financial expert serving on its audit committee.  At the
present time, we believe that the members of Board of Directors are collectively
capable of analyzing and evaluating our financial statements and understanding
internal controls and procedures for financial reporting.  We do, however,
recognize the importance of good corporate governance and intend to appoint an
audit committee comprised entirely of independent directors, including at least
one financial expert, in the near future.








Identification
of the Audit Committee





SmartMetric
does not currently have a separately - designated standing committee established
in accordance with Section 3(a) (58)(A) of the Exchange Act. The entire board of
directors is acting as SmartMetric’s audit committee.





Compensation
Committee





SmartMetric
does not presently have a compensation committee. Our board of directors
currently acts as our compensation committee.





Nominating
Committee





SmartMetric
does not presently have a nominating committee. Our board of directors
currently acts as our nominating
committee.








Code
of Ethics





The
Company has adopted a Code of Ethics that applies to its Chief Executive Officer
and Chief Financial Officer.





Compliance
with Section 16(a) of the Securities Act of 1934





Not
Applicable.





19


Item
11.                      
Executive Compensation.





The
following is a summary of the compensation we paid to our Chief Executive
Officer, Chief Financial Officer, and Vice President of Sales – Asia Pacific for
the two years ended June 30, 2009 and 2008.





Name and
              Principal
              Position
            
            Fiscal
              Year
            
            Salary
              ($)
            
            Bonus
              ($)
            
            Stock
              Awards
              ($)
            
            Option
              Awards
              ($)
            
            Non-equity
              Incentive Plan
              Compensation
              ($)
            
            Change in
              Pension
              Value 
      and
              Nonqualified
              Deferred
              Compensation
              Earnings
              ($)
            
            All Other
              Compensation
              ($)
            
            Total
              ($)Colin
      Hendrick  (President, Chief Executive Officer, Chairman of the
      Board) (1)
            
            
            2009
            
            170,000
            
            
            -0-
            
            -0-
            
            
            -0-
            
            -0-
            
            
            -0-
            
            -0-
            
            
            170,0002008
            
            170,000
            
            
            -0-
            
            -0-
            
            
            -0-
            
            -0-
            
            
            -0-
            
            -0-
            
            
            170,000Jay
      Needelman (Chief Financial Officer) (2)
            
            
            2009
            
            -0-
            
            
            -0-
            
            -0-
            
            
            -0-
            
            -0-
            
            
            -0-
            
            8,975
            
            
            8,9752008
            
            -0-
            
            
            -0-
            
            -0-
            
            
            -0-
            
            -0-
            
            
            -0-
            
            7,380
            
            
            7,380Peter
      Sleep (Vice President, Asia Pacific Sales and former Director)
      (3)
            
            
            2009
            
            -0-
            
            
            -0-
            
            -0-
            
            
            -0-
            
            -0-
            
            
            -0-
            
            70,400
            
            
            70,4002008
            
            -0-
            
            
            -0-
            
            -0-
            
            
            -0-
            
            -0-
            
            
            -0-
            
            131,000
            
            
            131,000








(1)
            Colin
      Hendrick has been President, CEO and director of the Company since
      inception.  Mr. Hendrick receives an annual salary of
      $170,000.(2)
            Jay
      Needelman has been serving as CFO and director of the Company since July
      2004.(3)
            Peter
      Sleep was appointed Secretary and director of the Company in January
      2003.  In April 2008, Mr. Sleep resigned as
      director.  He remains Vice President of Sales – Asia Pacific, a
      position that he has held since April
2006.





Employment
Agreements





We have
no employment agreements with any of our executive officers, except for an
employment agreement entered into between the Company and Mr. Hendrick effective
July 1, 2004, which expired June 30, 2006. However, Mr. Hendrick continues to
serve as President and is paid on the basis of $170,000 annual
salary.





Compensation
Discussion and Analysis





We strive
to provide our named executive officers (as defined in Item 402 of Regulation
S-K) with a competitive base salary that is in line with their roles and
responsibilities when compared to peer companies of comparable size in similar locations.





We plan
to implement a more comprehensive compensation program, which takes into account
other elements of compensation, including, without limitation, short and long
term compensation, cash and non-cash, and other equity-based compensation such
as stock options. We expect that this compensation program will be comparable to
the programs of our peer companies and aimed to retain and attract talented
individuals.





We will
also consider forming a compensation committee to oversee the compensation of
our named executive officers. The majority of the members of the compensation
committee would be independent directors.





Compensation
of Directors





As of the
date of this annual report, our directors have received no compensation for
their service on the board of directors.   A compensation program
for our independent directors, as and when they are appointed, which we
anticipate will include such elements as an annual retainer, meeting attendance
fees and stock options. The details of that compensation program will be
negotiated with each independent director.  Please note that Mr.
Sleep’s compensation was paid to him as a Director.










20


Item
12.  Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
 
 The
following table sets forth certain information with respect to the beneficial
ownership of our voting securities by (i) any person or group owning more than
5% of any class of voting securities, (ii) each director, (iii) our chief
executive officer and president and (iv) all executive officers and directors as
a group as of October 21, 2009.





Amount
and Nature of Beneficial Ownership





Name and Address of
              Beneficial Owner
            Director/Officer
            
            Number
      of Shares of Common Stock (1)
            
            
            
            Percentage
              of Class (1)Owner of More than 5% of
      ClassApplied
      Cryptography, Inc.
              9195
      Collins Avenue
              Surfside,
      Fl, 33154
            
            
            
            49,127,778
            
            (2)
            
            65.0%Directors
      and Executive OfficersColin
      Hendrick
              1150
      Kane Concourse, Suite 400,
              Bay
      Harbor Islands, FL
            Chief
      Executive Officer,
              Chairman
      of the Board of Directors
            
            
            49,127,778
            
            (2)
            
            65.0%Jay
      Needelman, CPA
              1150
      Kane Concourse, Suite 400,
              Bay
      Harbor Islands, FL
            Chief
      Financial Officer, Director
            
            
            0
            
            
            
            *%Elizabeth
      Ryba
              73
      Brown Road
              Scarsdale,
      New York 10583
            Director
            
            
            40,000
            
            
            
            *%Peter Sleep
              3
      Bernadette Court
              East
      Doncaster, Victoria
              Australia
            Vice
      President, Asia Pacific Sales
              and
      Former Director
            
            
            1,060,000
            
            (3)
            
            1.4%All
      directors and officers as a group (5 persons)
            
            
            
            50,227,778
            
            
            
            66.5%











(1)           In
determining beneficial ownership of our common stock as of a given date, the
number of shares shown includes shares of common stock which may be acquired on
exercise of warrants or options or conversion of convertible securities within
60 days of that date. In determining the percent of common stock owned by a
person or entity on October 14, 2009, (a) the numerator is the number of shares
of the class beneficially owned by such person or entity, including shares which
may be acquired within 60 days on exercise of warrants or options and conversion
of convertible securities, and (b) the denominator is the sum of (i) the total
shares of common stock outstanding on October 21, 2009 (75,546,222), and (ii)
the total number of shares that the beneficial owner may acquire upon conversion
of any preferred stock and on exercise of the warrants and options. Unless
otherwise stated, each beneficial owner has sole power to vote and dispose of
its shares.





(2)           
Applied Cryptography, Inc., a Nevada corporation, is owned and controlled by Mr.
Hendrick, our Chairman and Chief Executive Officer.





(3)           Includes
300,000 shares owned by Carolyn Dianne Sleep (Mr. Sleep’s wife) and 500,000
shares owned by TrinityTrust. Mr. Sleep is trustee of the Trinity
Trust.  Mr. Sleep serves as Vice President for Asia-Pacific Sales and
served as director of SmartMetric from January 2003 to April 2008.





* Under 1
percent of the issued and outstanding shares as of October 21,
2009.





Item
13.  Certain Relationships and Related Transactions, and Director
Independence.





There
have been no significant related party transactions meeting the requirements for
disclosure for the fiscal year ended June 30, 2008.





21


Procedures
for Approval of Related Party Transactions





Our board
of directors is charged with reviewing and approving all potential related party
transactions.  All such related party transactions must then be
reported under applicable SEC rules. We have not adopted other procedures for
review, or standards for approval, of such transactions, but instead review them
on a case-by-case basis.





Director
Independence





The
Company currently does not have a director that qualifies as an “independent”
director as that term is defined under the National Association of Securities
Dealers Automated Quotation system.  Our company, however, recognizes
the importance of good corporate governance and intends to appoint an audit
committee comprised entirely of independent directors, including at least one
financial expert, in the near future.





Item
14.   Principal Accounting Fees and Services





The
approximate annual accounting fees of SmartMetric, paid to Mr. Jay Needelman,
CPA, are $9,000.  SmartMetric does not anticipate any material change
in this amount going forward.





Audit
Fee





The
aggregate fees incurred by the Company’s independent registered public
accounting firms, for professional services rendered for the audit of our annual
financial statements for the year ended June 30, 2009, and for the reviews of
the financial statements included in our Quarterly Reports on Form 10-Q during
this fiscal year were approximately $30,000.





Audit-Related
Fees





The
Company incurred approximately $21,000 in fees from its independent registered
public accounting firms for audit-related services during the year ended June
30, 2009.





Tax
Fees





The
Company incurred approximately $9,000 in fees from its independent registered
public accounting firms for tax compliance and tax consulting services for the
year ended June 30, 2009.





All
Other Fees





The
Company incurred approximately $0 in fees from its independent registered public
accounting firms for services rendered to the Company other than services
covered in “Audit Related Fees” for the fiscal year ended June 30,
2009.





22


Item
15.  Exhibits, Financial Statements Schedules





3.1
            Certificate
      of Incorporation of SmartMetric, Inc. (1)3.2
            By-laws
      of SmartMetric, Inc. (1)4.1
            Specimen
      Certificate of Common Stock. (1)10.1
            License
      Agreement between SmartMetric and Applied Cryptography, Inc. (3)10.2
            Employment
      Agreement - Colin Hendrick (2)10.3
            Agreement
      between SmartMetric and ISI (1)10.4
            Employment
      Agreement Extension (4)10.5
            Subscription
      Agreement (4)10.6
            Lease
      Agreement for Florida Office. (3)14.1
            Code
      of Ethics (1)21.1
            Subsidiaries
      of SmartMetric (2)31.1
            Certification
      of SmartMetric’s Chief Executive Office pursuant to Rule13a- 14(a) of the
      Securities Exchange Act of 193431.2
            Certification
      of SmartMetric’s Chief Financial Officer pursuant to Rule13a- 14(a) of the
      Securities Exchange Act of 193432.1
            Certification
      of SmartMetric’s Chief Executive Officer and Chief Financial Officer
      required by Rule 13a-14(b) under the Securities Exchange Act of 1934 and
      Section 1350 of Chapter 63 of Title 18 the United States Code (18
      U.S.C.1350)





(1)
            Filed
      with original registration statement on September 3,
  2004.(2)
            Filed
      with Amendment No. 1 on February 3,
2005.





(3)
            Filed
      with Amendment No. 3 May 23, 2005.(4)
            Filed
      with Amendment No. 5 June 27, 2005.











23





SIGNATURES





Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Bay Harbor Islands, FL, on
the 26th day
of October, 2009.





SMARTMETRIC,
      INC.By:
            /s/
      Colin HendrickColin
      HendrickPresident,
      Chief Executive Officer and
Chairman





In
accordance with the requirements of the Securities and Exchange Act of 1934,
this registration statement has been signed below by the following persons on
behalf of the Company in the capacities and on the dates indicated.





/s/
      Colin Hendrick
            
            October
      26, 2009Colin
      HendrickPresident,
      Chief Executive Officer and Chairman/s/
      Jay Needelman
            
            October
      26, 2009Jay
      Needelman, CPAChief
      Financial Officer and Director





/s/
      Elizabeth Ryba
            
            October
      26, 2009Elizabeth
      RybaDirector