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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





AMENDMENT NO. 1

ON

FORM 10-Q/A







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the quarterly period ended March 31, 2008



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
|- | ---------------------------------------------------------------

For the transition period from  to

Commission file number 0-51148





TRI-S SECURITY CORPORATION

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|GEORGIA                                                        |  | 30-0016962                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

11675 Great Oaks Way, Suite 120, Alpharetta, Georgia 30022

(Address of principal executive offices)

(678) 808-1540

(Registrants telephone number, including area code)





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

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



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈ |  | Accelerated filer         |  |  ̈
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller reporting company |  | x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act)    Yes   ̈    No  x

Shares of the registrants common stock, par value $0.001 per share, outstanding as of April 13, 2009: 4,203,280.









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EXPLANATORY NOTE

This Amendment No. 1 on Form 10-Q/A (this Amendment) amends the Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 (the Original Report) of Tri-S Security
Corporation (the Company). As reported in the Current Report on Form 8-K filed by the Company on April 10, 2009, the Audit Committee of the Companys Board of Directors determined that the Companys consolidated
financial statements included in the Original Report and in the Companys Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30, and September 30, 2008, should be restated because they contain errors
as addressed in Financial Accounting Standards Board Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections. The errors in the Companys consolidated financial statements included in the
Original Report relate to an incorrect payroll accrual for the quarter ended March 31, 2008. As a result of this incorrect accrual, direct labor expense, cost of revenues and net loss were understated, and gross profit was overstated, in the
Original Report. The Company does not expect any negative impact to its liquidity position as a result this error.

The restated consolidated financial
statements for the quarter ended March 31, 2008, included in this Amendment (the Restatement) report: (i) direct labor expense of $16,779,000 as opposed to direct labor expense of $16,466,000 as reported in the Original Report;
(ii) cost of revenues of $24,554,000 as opposed to cost of revenues of $24,241,000 as reported in the Original Report; (iii) gross profit of $1,911,000 as opposed to gross profit of $2,224,000 as reported in the Original Report; and
(iv) net loss of $2,129,000 as opposed to net loss of $1,815,000 as reported in the Original Report.

This Amendment amends and restates Items 1, 2
and 4 of Part I and Item 6 of Part II of the Original Report to the extent necessary to reflect the effects of the Restatement. Except for such amendments, this Amendment continues to describe conditions as of the date of the Original
Report, and the Company has not modified or updated other disclosures presented in the Original Report affected by subsequent events. Accordingly, this Amendment should be read in conjunction with the Original Report and the Companys filings
made with the Securities and Exchange Commission subsequent to the filing of the Original Report.



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TRI-S SECURITY CORPORATION

QUARTERLY REPORT ON FORM 10-Q FOR THE

QUARTER ENDED March 31, 2008

INDEX



|                              |  |                                                                                       |  |         
|----------------------------- |  | ------------------------------------------------------------------------------------- |  | --------
|                              |  |                                                                                       |  | Page No.
|PART I. FINANCIAL INFORMATION |  |                                                                                      
|                              |  |                                                                                      
|ITEM 1.                       |  | FINANCIAL STATEMENTS:                                                                 |  |         
|                              |  |                                                                                      
|                              |  | Consolidated Balance Sheets March 31, 2008 and December 31, 2007                      |  | 4       
|                              |  |                                                                                      
|                              |  | Consolidated Statements of Operations Three Months Ended March 31, 2008 and 2007      |  | 5       
|                              |  |                                                                                      
|                              |  | Consolidated Statements of Cash Flows Three Months Ended March 31, 2008 and 2007      |  | 6       
|                              |  |                                                                                      
|                              |  | Notes to Consolidated Financial Statements                                            |  | 7       
|                              |  |                                                                                      
|ITEM 2.                       |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 13      
|                              |  |                                                                                      
|ITEM 4T.                      |  | CONTROLS AND PROCEDURES                                                               |  | 15      
|                              | 
|PART II. OTHER INFORMATION    |  | 16                                                                                   
|                              |  |                                                                                      
|ITEM 6.                       |  | EXHIBITS                                                                              |  | 16      
|                              |  |                                                                                      
|SIGNATURES                    |  |                                                                                       |  | 17      
|                              | 
|EXHIBIT INDEX                 |  | E-1                                                                                  



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Tri-S Security Corporation and Subsidiaries

Consolidated Balance Sheets

Unaudited

(In thousands, except per share data)



|                                                                                                                              |  |                                       |         |   |            |   |      |                                         |  |   |                   |   |  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ---------- | - | ---- | --------------------------------------- |  | - | ----------------- | - |  | - | ------- | -
|                                                                                                                              |  | March 31, 2008, aspreviously reported |         |   | Adjustment |   |      | March 31, 2008, asrestated (See Note 3) |  |   | December 31, 2007 |  
|Assets                                                                                                                        |  |                                       |         |   |            |   |      |                                         |  |   |                   |   |  |   |         |  
|Current assets:                                                                                                               |  |                                       |         |   |            |   |      |                                         |  |   |                   |   |  |   |         |  
|Cash and cash equivalents                                                                                                     |  | $                                     | 571     |   |            | $ |      |                                         |  | $ | 571               |   |  | $ | 465     |  
|Restricted cash                                                                                                               |  |                                       | 412     |   |            |   |      |                                         |  |   | 412               |   |  |   | 348     |  
|Unbilled revenues and trade accounts receivable, net of allowance of $750 and $701, respectively                              |  |                                       | 15,912  |   |            |   |      |                                         |  |   | 15,912            |   |  |   | 13,993  |  
|Prepaid expenses and other assets                                                                                             |  |                                       | 988     |   |            |   |      |                                         |  |   | 988               |   |  |   | 353     |  
|                                                                                                                              |  |                                       |         |   |            |   |      |                                         |  |   |                   |   |  |   |         |  
|Total current assets                                                                                                          |  |                                       | 17,883  |   |            |   |      |                                         |  |   | 17,883            |   |  |   | 15,159  |  
|Property and equipment, less accumulated depreciation                                                                         |  |                                       | 763     |   |            |   |      |                                         |  |   | 763               |   |  |   | 476     |  
|Goodwill                                                                                                                      |  |                                       | 16,078  |   |            |   |      |                                         |  |   | 16,078            |   |  |   | 16,078  |  
|Intangibles, net                                                                                                              |  |                                       |         |   |            |   |      |                                         |  |   |                   |   |  |   |         |  
|Customer contracts                                                                                                            |  |                                       | 2,243   |   |            |   |      |                                         |  |   | 2,243             |   |  |   | 2,647   |  
|Deferred loan costs                                                                                                           |  |                                       | 398     |   |            |   |      |                                         |  |   | 398               |   |  |   | 515     |  
|Other                                                                                                                         |  |                                       | 736     |   |            |   |      |                                         |  |   | 736               |   |  |   | 769     |  
|                                                                                                                              |  |                                       |         |   |            |   |      |                                         |  |   |                   |   |  |   |         |  
|Total assets                                                                                                                  |  | $                                     | 38,101  |   |            | $ |      |                                         |  | $ | 38,101            |   |  | $ | 35,644  |  
|                                                                                                                              |  |                                       |         |   |            |   |      |                                         |  |   |                   |   |  |   |         |  
|Liabilities and Stockholders Equity                                                                                          |  |                                       |         |   |            |   |      |                                         |  |   |                   |   |  |   |         |  
|Current liabilities:                                                                                                          |  |                                       |         |   |            |   |      |                                         |  |   |                   |   |  |   |         |  
|Trade accounts payable                                                                                                        |  | $                                     | 1,884   |   |            | $ |      |                                         |  | $ | 1,884             |   |  | $ | 1,983   |  
|Other accrued expenses                                                                                                        |  |                                       | 1,323   |   |            |   |      |                                         |  |   | 1,323             |   |  |   | 895     |  
|Accrued interest expense  short term                                                                                         |  |                                       | 326     |   |            |   |      |                                         |  |   | 326               |   |  |   |        |  
|Accrued salary and benefits                                                                                                   |  |                                       | 5,661   |   |            |   | 314  |                                         |  |   | 5,975             |   |  |   | 3,940   |  
|Income taxes payable                                                                                                          |  |                                       | 630     |   |            |   |      |                                         |  |   | 630               |   |  |   | 586     |  
|Asset-based lending facility                                                                                                  |  |                                       | 13,085  |   |            |   |      |                                         |  |   | 13,085            |   |  |   | 11,625  |  
|10% convertible notes                                                                                                         |  |                                       | 7,527   |   |            |   |      |                                         |  |   | 7,527             |   |  |   | 7,473   |  
|Term loan                                                                                                                     |  |                                       | 2,500   |   |            |   |      |                                         |  |   | 2,500             |   |  |   |        |  
|Long-term debt - current portion                                                                                              |  |                                       |        |   |            |   |      |                                         |  |   |                  |   |  |   | 8       |  
|                                                                                                                              |  |                                       |         |   |            |   |      |                                         |  |   |                   |   |  |   |         |  
|Total current liabilities                                                                                                     |  |                                       | 32,936  |   |            |   | 314  |                                         |  |   | 33,250            |   |  |   | 26,510  |  
|Other liabilities:                                                                                                            |  |                                       |         |   |            |   |      |                                         |  |   |                   |   |  |   |         |  
|Term loan                                                                                                                     |  |                                       |         |   |            |   |      |                                         |  |   |                   |   |  |   | 2,500   |  
|Accrued interest expense - long term                                                                                          |  |                                       | 334     |   |            |   |      |                                         |  |   | 334               |   |  |   | 353     |  
|Series D preferred stock subject to mandatory redemption                                                                      |  |                                       | 1,500   |   |            |   |      |                                         |  |   | 1,500             |   |  |   | 1,500   |  
|                                                                                                                              |  |                                       |         |   |            |   |      |                                         |  |   |                   |   |  |   |         |  
|Total liabilities                                                                                                             |  |                                       | 34,770  |   |            |   |      |                                         |  |   | 35,084            |   |  |   | 30,863  |  
|                                                                                                                              |  |                                       |         |   |            |   |      |                                         |  |   |                   |   |  |   |         |  
|Stockholders equity:                                                                                                         |  |                                       |         |   |            |   |      |                                         |  |   |                   |   |  |   |         |  
|Common stock, $0.001 par value, 25,000,000 shares authorized; 4,248,704 shares issued at March 31, 2008 and December 31,
2007 |  |                                       | 4       |   |            |   |      |                                         |  |   | 4                 |   |  |   | 4       |  
|Treasury stock - 45,424 shares at cost                                                                                        |  |                                       | (105    | ) |            |   |      |                                         |  |   | (105              | ) |  |   | (105    | )
|Additional paid-in capital                                                                                                    |  |                                       | 16,733  |   |            |   |      |                                         |  |   | 16,733            |   |  |   | 16,368  |  
|Deficit                                                                                                                       |  |                                       | (13,301 | ) |            |   | (314 | )                                       |  |   | (13,615           | ) |  |   | (11,486 | )
|                                                                                                                              |  |                                       |         |   |            |   |      |                                         |  |   |                   |   |  |   |         |  
|Total stockholders equity                                                                                                    |  |                                       | 3,331   |   |            |   | (314 | )                                       |  |   | 3,017             |   |  |   | 4,781   |  
|                                                                                                                              |  |                                       |         |   |            |   |      |                                         |  |   |                   |   |  |   |         |  
|Total liabilities and stockholders equity                                                                                    |  | $                                     | 38,101  |   |            | $ |      |                                         |  | $ | 38,101            |   |  | $ | 35,644  |  
|                                                                                                                              |  |                                       |         |   |            |   |      |                                         |  |   |                   |   |  |   |         |  

See accompanying notes to financial statements.



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Tri-S Security Corporation and Subsidiaries

Consolidated Statements of Operations

Unaudited

(In thousands, except per share data)



|                                                           |  |                             |        |   |            |   |       |                               |  |   |        |   |  |   |        |  
|---------------------------------------------------------- |  | --------------------------- | ------ | - | ---------- | - | ----- | ----------------------------- |  | - | ------ | - |  | - | ------ | -
|                                                           |  | Three Months EndedMarch 31, |       
|                                                           |  | 2008, as previouslyreported |        |   | Adjustment |   |       | 2008, as restated(See Note 3) |  |   | 2007   |  
|Revenues                                                   |  | $                           | 26,465 |   |            | $ |       |                               |  | $ | 26,465 |   |  | $ | 20,205 |  
|Cost of revenues                                           |  |                             |        |   |            |   |       |                               |  |   |        |   |  |   |        |  
|Direct labor                                               |  |                             | 16,466 |   |            |   | 313   |                               |  |   | 16,779 |   |  |   | 12,695 |  
|Indirect labor and other support costs                     |  |                             | 7,370  |   |            |   |       |                               |  |   | 7,370  |   |  |   | 5,251  |  
|Amortization of customer contracts                         |  |                             | 405    |   |            |   |       |                               |  |   | 405    |   |  |   | 406    |  
|                                                           |  |                             |        |   |            |   |       |                               |  |   |        |   |  |   |        |  
|                                                           |  |                             | 24,241 |   |            |   | 313   |                               |  |   | 24,554 |   |  |   | 18,352 |  
|                                                           |  |                             |        |   |            |   |       |                               |  |   |        |   |  |   |        |  
|Gross profit                                               |  |                             | 2,224  |   |            |   | (313  | )                             |  |   | 1,911  |   |  |   | 1,853  |  
|                                                           |  |                             |        |   |            |   |       |                               |  |   |        |   |  |   |        |  
|Selling, general and administrative                        |  |                             | 2,953  |   |            |   | 1     |                               |  |   | 2,954  |   |  |   | 2,616  |  
|Amortization of intangible assets                          |  |                             | 176    |   |            |   |       |                               |  |   | 176    |   |  |   | 235    |  
|                                                           |  |                             |        |   |            |   |       |                               |  |   |        |   |  |   |        |  
|                                                           |  |                             | 3,129  |   |            |   | 1     |                               |  |   | 3,130  |   |  |   | 2,851  |  
|                                                           |  |                             |        |   |            |   |       |                               |  |   |        |   |  |   |        |  
|Operating loss                                             |  |                             | (905   | ) |            |   | (314  | )                             |  |   | (1,219 | ) |  |   | (998   | )
|                                                           |  |                             |        |   |            |   |       |                               |  |   |        |   |  |   |        |  
|Other Income (expense):                                    |  |                             |        |   |            |   |       |                               |  |   |        |   |  |   |        |  
|Interest expense                                           |  |                             | (868   | ) |            |   |       |                               |  |   | (868   | ) |  |   | (458   | )
|Interest on Series C redeemable preferred stock            |  |                             |       |   |            |   |       |                               |  |   |       |   |  |   | (75    | )
|Other income                                               |  |                             | 5      |   |            |   |       |                               |  |   | 5      |   |  |   | 550    |  
|                                                           |  |                             |        |   |            |   |       |                               |  |   |        |   |  |   |        |  
|                                                           |  |                             | (863   | ) |            |   |       |                               |  |   | (863   | ) |  |   | 17     |  
|                                                           |  |                             |        |   |            |   |       |                               |  |   |        |   |  |   |        |  
|Loss before income taxes                                   |  |                             | (1,768 | ) |            |   | (314  | )                             |  |   | (2,082 | ) |  |   | (981   | )
|Income tax expense (benefit)                               |  |                             | 47     |   |            |   |       |                               |  |   | 47     |   |  |   | (305   | )
|                                                           |  |                             |        |   |            |   |       |                               |  |   |        |   |  |   |        |  
|Net loss                                                   |  | $                           | (1,815 | ) |            | $ | (314  | )                             |  | $ | (2,129 | ) |  | $ | (676   | )
|Basic and diluted net loss per common share                |  | $                           | (0.43  | ) |            | $ | (0.08 | )                             |  | $ | (0.51  | ) |  | $ | (0.19  | )
|                                                           |  |                             |        |   |            |   |       |                               |  |   |        |   |  |   |        |  
|Basic and diluted weighted average number of common shares |  |                             | 4,203  |   |            |   | 4,203 |                               |  |   | 4,203  |   |  |   | 3,503  |  

See accompanying notes to financial statements.



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Tri-S Security Corporation and Subsidiaries

Consolidated Statements of Cash Flows

Unaudited

(In thousands)



|                                                                            |  |                             |        |   |            |   |      |                               |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---------- | - | ---- | ----------------------------- |  | - | ------ | - |  | - | ------ | -
|                                                                            |  | Three Months EndedMarch 31, |       
|                                                                            |  | 2008, as previouslyreported |        |   | Adjustment |   |      | 2008, as restated(See Note 3) |  |   | 2007   |  
|Cash flow from operating activities:                                        |  |                             |        |   |            |   |      |                               |  |   |        |   |  |   |        |  
|Net loss                                                                    |  | $                           | (1,815 | ) |            | $ | (314 | )                             |  | $ | (2,129 | ) |  | $ | (676   | )
|Adjustments to reconcile net loss to net cash used by operating activities: |  |                             |        |   |            |   |      |                               |  |   |        |   |  |   |        |  
|Gain on Cornwall settlement                                                 |  |                             |       |   |            |   |      |                               |  |   |       |   |  |   | (250   | )
|Bad debt expense                                                            |  |                             | 50     |   |            |   |      |                               |  |   | 50     |   |  |   | 65     |  
|Depreciation and amortization                                               |  |                             | 677    |   |            |   |      |                               |  |   | 677    |   |  |   | 719    |  
|Deferred income tax benefits                                                |  |                             |       |   |            |   |      |                               |  |   |       |   |  |   | (179   | )
|Non-cash employee stock option expense                                      |  |                             | 365    |   |            |   |      |                               |  |   | 365    |   |  |   | 76     |  
|Non-cash interest expense                                                   |  |                             | 54     |   |            |   |      |                               |  |   | 54     |   |  |   | 48     |  
|Changes in operating assets and liabilities:                                |  |                             |        |   |            |   |      |                               |  |   |        |   |  |   |        |  
|Unbilled revenues and trade accounts receivable, net                        |  |                             | (1,969 | ) |            |   |      |                               |  |   | (1,969 | ) |  |   | 2,324  |  
|Prepaid expenses and other assets                                           |  |                             | (635   | ) |            |   |      |                               |  |   | (635   | ) |  |   | (174   | )
|Trade accounts payable                                                      |  |                             | (99    | ) |            |   |      |                               |  |   | (99    | ) |  |   | (126   | )
|Accrued liabilities                                                         |  |                             | 2,448  |   |            |   | 314  |                               |  |   | 2,762  |   |  |   | (83    | )
|Income taxes payable                                                        |  |                             | 44     |   |            |   |      |                               |  |   | 44     |   |  |   | (140   | )
|                                                                            |  |                             |        |   |            |   |      |                               |  |   |        |   |  |   |        |  
|Net cash (used) provided by operating activities                            |  |                             | (880   | ) |            |   |      |                               |  |   | (880   | ) |  |   | 1,604  |  
|                                                                            |  |                             |        |   |            |   |      |                               |  |   |        |   |  |   |        |  
|Cash flow from investing activities:                                        |  |                             |        |   |            |   |      |                               |  |   |        |   |  |   |        |  
|Increase in restricted cash                                                 |  |                             | (64    | ) |            |   |      |                               |  |   | (64    | ) |  |   |       |  
|Purchase of property and equipment                                          |  |                             | (384   | ) |            |   |      |                               |  |   | (384   | ) |  |   | (12    | )
|                                                                            |  |                             |        |   |            |   |      |                               |  |   |        |   |  |   |        |  
|Net cash used by investing activities                                       |  |                             | (448   | ) |            |   |      |                               |  |   | (448   | ) |  |   | (12    | )
|                                                                            |  |                             |        |   |            |   |      |                               |  |   |        |   |  |   |        |  
|Cash flow from financing activities:                                        |  |                             |        |   |            |   |      |                               |  |   |        |   |  |   |        |  
|Net proceeds from (payments on) borrowing facility                          |  |                             | 1,460  |   |            |   |      |                               |  |   | 1,460  |   |  |   | (1,577 | )
|Proceeds of term loans                                                      |  |                             |       |   |            |   |      |                               |  |   |       |   |  |   | 100    |  
|Deferred financing costs                                                    |  |                             | (26    | ) |            |   |      |                               |  |   | (26    | ) |  |   | (40    | )
|                                                                            |  |                             |        |   |            |   |      |                               |  |   |        |   |  |   |        |  
|Net cash (used) provided by financing activities                            |  |                             | 1,434  |   |            |   |      |                               |  |   | 1,434  |   |  |   | (1,517 | )
|                                                                            |  |                             |        |   |            |   |      |                               |  |   |        |   |  |   |        |  
|Net increase in cash and cash equivalents                                   |  |                             | 106    |   |            |   |      |                               |  |   | 106    |   |  |   | 75     |  
|Cash and cash equivalents at beginning of period                            |  |                             | 465    |   |            |   |      |                               |  |   | 465    |   |  |   | 66     |  
|                                                                            |  |                             |        |   |            |   |      |                               |  |   |        |   |  |   |        |  
|Cash and cash equivalents at end of period                                  |  | $                           | 571    |   |            |   |      |                               |  | $ | 571    |   |  | $ | 141    |  
|                                                                            |  |                             |        |   |            |   |      |                               |  |   |        |   |  |   |        |  
|Supplemental disclosures of cash flow information:                          |  |                             |        |   |            |   |      |                               |  |   |        |   |  |   |        |  
|Interest paid                                                               |  | $                           | 571    |   |            |   |      |                               |  | $ | 571    |   |  | $ | 410    |  
|Income taxes paid                                                           |  | $                           | 4      |   |            |   |      |                               |  | $ | 4      |   |  | $ | 14     |  

See accompanying notes to financial statements.



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TRI-S SECURITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2008

1. Organization

Tri-S Security Corporation, a Georgia corporation (Tri-S, the Company or we), was incorporated in October 2001 under the name Diversified Security Corporation. We
changed our name to Tri-S Security Corporation on August 16, 2004. We provide contract guard services to (i) various Federal government agencies through our subsidiary, Paragon Systems, Inc., an Alabama corporation with
its principal office located in Washington, DC (Paragon Systems); and (ii) commercial and state and local government customers through our subsidiary, The Cornwall Group, Inc., a Florida corporation with its principal office
located in Miami, Florida (Cornwall).

We provide cost-effective solutions to ensure the safety and security of the assets and
personnel of our customers and to continually improve the protection we provide for their personnel, programs, resources and facilities. Our goal is to provide demonstrably superior contract guard services with the highest degree of integrity and
responsiveness.

In January 2006, Paragon Systems entered into a Joint Venture Agreement with Southeastern Protective Services, Inc.
(Southeastern Protective Services) to form Southeastern Paragon (also referred to herein as SEP). Paragon Systems owns 49% and Southeastern Protective Services owns 51% of SEP. Southeastern Paragon was formed to bid on
certain contracts, and Paragon Systems manages the contracts awarded to SEP. We account for the results of SEP in accordance with Accounting Principal Board Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock,and Financial Accounting Standards Board (FASB) Interpretation No. 46(R) (revised December 2003), Consolidation of Variable Interest Entities  an Interpretation of ARB No. 51.

In September, 2007, Paragon Systems formed On Duty Patrol Services LLC (ODPS), a joint venture between Paragon Systems and On Duty Patrol
Services, Inc. ODPS has been certified by the U.S. Small Business Administration as a small and disadvantaged business (an 8(a) firm) and is therefore qualified to bid on security contracts specially designated for 8(a) firms. Paragon
Systems owns 49% of ODPS. Since formation, ODPS has not entered into any contracts.

All significant intercompany transactions have been
eliminated.

2. Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP). The financial statements presented are unaudited and have been
prepared by our management in accordance with the rules and regulations of the Securities and Exchange Commission (the SEC). In the opinion of our management, all adjustments, consisting of normal recurring accruals, necessary for
the fair presentation of the financial position, results of operations and cash flows have been included. For further information, see our audited financial statements and footnotes thereto included in our Annual Report on Form 10-K for the
year ended December 31, 2007 (the Annual Report) filed with the SEC. Disclosure that substantially duplicates the disclosure contained in the footnotes to the audited financial statements included in the Annual Report has been
omitted from these notes.

3. Restatement

Subsequent to December 31, 2008, the Company determined the previously issued consolidated financial statements for the quarter ended March 31, 2008 should be restated as these financials contained certain errors as addressed in
Financial Accounting Standards Board Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections. The error in the Companys consolidated financial statements relate to an incorrect payroll accrual
for the quarter ended March 31, 2008. As a result of this incorrect accrual, direct labor expense, cost of revenues and net loss were understated, and gross profit was overstated.

The restated amounts in these amended consolidated financial statements for the quarter ended March 31, 2008, are as follows: (i) direct labor
expense of $16,779,000 as opposed to direct labor expense of $16,466,000 as previously reported; (ii) cost of revenues of $24,554,000 as opposed to cost of revenues of $24,241,000 as previously reported; (iii) gross profit of $1,911,000 as
opposed to gross profit of $2,224,000 as previously reported; and (iv) net loss of $2,129,000 as opposed to net loss of $1,815,000 as previously reported.



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4. Liquidity

The Company has historically incurred losses and has not yet generated sufficient levels of cash flows from operating activities to meet its scheduled debt service payments and other obligations. Additionally, the Companys 10%
convertible promissory notes (the 10% Notes) with an outstanding principal balance of approximately $7.5 million mature in September and October of 2008. The Company anticipates that the recently awarded contracts along with the
initiatives instituted to maximize cash flows and raise additional equity will alleviate any short-term liquidity issues facing the Company. Management is also evaluating various alternatives to restructure the 10% Notes which mature later this
year. Management believes these initiatives will contribute toward achieving profitability and alleviating the liquidity issues facing the Company.

5.
Stock-based Compensation

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standard No. 123
(revised 2004), Share Based Payment (SFAS No. 123(R)), using the modified prospective method and, therefore, reflects compensation expense in accordance with the SFAS No. 123(R) transition provisions. Under the modified
prospective method, prior periods are not restated to reflect the impact of adopting the new standard at earlier dates. In accordance with SFAS No. 123(R), the Company recorded $365,000 and $75,000 of stock-based compensation expense for the
three months ended March 31, 2008 and 2007, respectively, related to employee stock options. After recording the expense through March 31, 2008, there remained approximately $482,000 of unrecognized compensation cost related to
unvested employee stock options to be recognized over the next two years.

6. Common and Preferred Stock

Immediately prior to the initial public offering of the common stock on February 9, 2005, we entered into an exchange and recapitalization agreement
with all of the holders of the outstanding common stock and convertible preferred stock and holders of outstanding rights to acquire the common stock. Pursuant to the agreement, we implemented a reverse stock split of all the outstanding shares of
the common stock and stock options and exchanged common stock for all outstanding Series A and B convertible preferred stock. The recapitalization was given retroactive treatment in the financial statements and related disclosures.

On September 13, 2007, we entered into a Settlement Agreement and General Release (the Paragon Settlement Agreement), among the
Company, Paragon Systems, and Ronald G. Farrell, our Chief Executive Officer, on the one hand, and Charles Keathley, Robert Luther, John Wilson and Harold Bright, on the other hand (collectively, the Selling Shareholders), with respect
to all of the litigation pending among the Company, Paragon Systems, Mr. Farrell and the Selling Shareholders (collectively, the Litigation). Pursuant to the Paragon Settlement Agreement:

(i) we paid the Selling Shareholders an aggregate of $1,250,000;

(ii) the Selling Shareholders and the Company cancelled the shares of the Companys Series C redeemable preferred stock held by the Selling Shareholders, which shares had an aggregate redemption value of
$6,000,000;

(iii) the Selling Shareholders terminated and released their security interest in the outstanding shares of capital stock of
Paragon Systems;

(iv) we issued to the Selling Shareholders an aggregate of 700,000 shares of common stock and an aggregate of 100 shares
of our newly-designated Series D redeemable preferred stock (the Preferred Shares), which Preferred Shares (a) have an aggregate redemption value of $1,500,000, payable upon the earlier of September 13, 2012 or the date on
which the Company sells 70% or more of its assets in one or more transactions (unless the proceeds from such sale are reinvested in the Companys business, used to restructure debt or used for acquisitions or working capital purposes), and
(b) accrue dividends of $750 per share per annum which are payable quarterly;

(v) we agreed not to amend Mr. Farrells
employment agreement with the Company to increase or enhance the compensation or benefits payable to him thereunder until September 13, 2008;

(vi) we agreed to issue to the Selling Shareholders an aggregate of 10% of any equity securities of the Company which are issued to Mr. Farrell during the period commencing on May 18, 2007 and ending on May 18, 2008;

(vii) the Selling Shareholders granted to Mr. Farrell a proxy to vote, in his sole and absolute discretion, an aggregate of 700,000
shares of common stock held by them until such time as such shares are sold by them to an unaffiliated party in accordance with the terms of the Securities Act of 1933, as amended (the Securities Act);

(viii) the Company agreed to indemnify the Selling Shareholders for costs and expenses incurred by them relating to the litigation which had been pending
against the Company in the United States District Court for the Northern District of Georgia regarding the Companys initial public offering; and

(ix) the Company, Paragon Systems and the Selling Shareholders released each other from all claims and obligations among them existing as of September 13, 2007 (except for obligations arising pursuant to the
terms of the Paragon Settlement Agreement) and have caused the Litigation to be dismissed with prejudice.



During the first quarter of 2008, the Company granted to Mr. Farrell an option to purchase 400,000 shares of common stock at an exercise price of
$2.50 per share, which vests with respect to one-half of the underlying shares on the date of grant and the



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remaining one-half of the underlying shares on the first anniversary of the date of grant. Pursuant to the Paragon Settlement Agreement and concurrently with
the grant to Mr. Farrell, the Company granted to the Selling Shareholders options to purchase an aggregate of 40,000 shares of common stock at an exercise price of $2.50 per share, which options vest on the same schedule as the option granted
to Mr. Farrell.

One September 13, 2007, and pursuant to the Paragon Settlement Agreement, we cancelled the shares of the
Companys Series C redeemable preferred stock held by the Selling Shareholders. Holders of the Series C redeemable preferred stock had no voting rights, except that a consent of a majority of the holders of the Series C redeemable
preferred stock, voting separately as a class, was required to increase or decrease the number of authorized shares of Series C redeemable preferred stock and except as otherwise required by applicable law. The Series C redeemable
preferred stock did not have any preemptive, conversion or sinking fund rights nor did it have any rights or preferences in the event of a liquidation, dissolution or winding-up of the Company.

We are authorized to issue 25 million shares of common stock with a par value of $0.001 per share. The holders of common stock are entitled to one
vote per share on all matters. The common stock does not have cumulative voting rights and no conversion rights. Each share of common stock has an equal and ratable right to receive dividends to be paid from assets legally available when and if
declared by our Board of Directors. We have never paid any cash dividends on common stock.

7. Debt and Other Obligations

Amended and Restated Credit Agreement

On October 18, 2005, we entered into a Credit Agreement (the Original Credit Agreement) with LSQ Funding Group, L.C. (LSQ) and BRE LLC (BRE and, together with LSQ, our Lenders), pursuant
to which we borrowed $1,650,000 pursuant to a term loan with a maturity date of October 1, 2007 and $3,500,000 pursuant to a term loan with a maturity date of October 1, 2009. During the second quarter of 2006, these term loans were paid
in full.

On June 27, 2006, Paragon Systems executed a Guaranty of Joint Venture (the JV Guaranty) pursuant to which
Paragon Systems unconditionally guarantees to LSQ the prompt payment and performance of all obligations, indebtedness and liabilities, whether currently existing or subsequently arising, of SEP (the JV Obligations). The JV Obligations
include the obligations, indebtedness and liabilities of SEP to LSQ under that certain Factoring and Security Agreement between SEP and LSQ dated as of June 27, 2006 (the JV Factoring Agreement), pursuant to which LSQ will purchase
from SEP from time to time certain accounts receivable at a discount of 0.7% and provide SEP a professional accounts receivable management service for a funds usage fee equal to the prime rate plus 1.0% on the funds advanced on the outstanding
accounts receivable purchased. The JV Factoring Agreement has a $1,000,000 initial purchase limit and a one-year term which will automatically renew unless SEP provides notice of its intent to terminate.

During March 2007, we entered into an Amendment and Forbearance Agreement with our Lenders pursuant to which we amended the Original Credit Agreement and
secured an additional $2.5 million term loan with our Lenders to provide additional financing. The term loan matures on March 28, 2009.

On December 31, 2007, we entered into an Amended and Restated Credit Agreement (the Amended and Restated Credit Agreement) with our Lenders, which amends and restates the Original Credit Agreement to provide us with a
revolving, asset-based lending facility with up to $25.0 million of borrowing availability, replacing our pre-existing factoring facility with up to $12.0 million of borrowing availability under the Original Credit Agreement. In connection with
entering into the Amended and Restated Credit Agreement, we also entered into (i) a Loan and Security Agreement with LSQ (the Loan and Security Agreement) and (ii) a Supplemental Agreement to Amended and Restated Credit
Agreement with our Lenders (the Credit Agreement Supplement).

The Amended and Restated Credit Agreement continues to provide
for the $2,500,000 term loan to us contemplated by the Original Credit Agreement. Under the Amended and Restated Credit Agreement, interest on the term loan accrues at a rate equal to the prime rate, as published by the Wall Street Journal from time
to time (the Prime Rate), plus 4.50% (the Non-Default Rate), but at no time shall the interest rate be less than 11.25% per annum. If an event of default under the Amended and Restated Credit Agreement occurs, then
interest accrues on the term loan at a rate equal to the Non-Default Rate plus 5% and certain other default fees specified in the Amended and Restated Credit Agreement would become due and payable. The term loan requires us to pay a Minimum
Balance Fee as described in the Amended and Restated Credit Agreement if the term loan is repaid prior to maturity.



Pursuant to the Loan and Security Agreement, at our request, LSQ shall make advances (Advances) to us not to exceed $25,000,000 and subject
to a borrowing base, which base includes 90% of accounts receivable, including unbilled accounts receivable through March 31, 2008 and at any time thereafter that the term loan has been repaid in full. Prior to repayment of the term loan,
interest accrues on Advances made on the basis of (i) billed accounts receivable at a rate equal to the Prime Rate plus 1% and (ii) unbilled accounts receivable at a rate equal to the Prime Rate plus 4.5%. In addition, until the term loan
is paid in full, we must pay LSQ a fee of .7% of the face amount of billed accounts receivable. Following repayment of the term loan, interest accrues on all Advances at a rate equal to the Prime Rate plus 4.5%. Upon the occurrence of an event of
default under the Loan and Security Agreement, interest is payable on all Advances at a rate equal to the Prime Rate plus 9.5%. The Loan and Security Agreement expires on October 31, 2010.



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Under the Credit Agreement Supplement, anytime the term loan is outstanding and so long as unbilled
accounts receivable are included in the borrowing base for purposes of making Advances, we must pay a monthly fee to our Lenders equal to 2.25% of the highest daily overadvance amount, which is the highest daily amount in any given month calculated
as follows: the outstanding term loan, plus all outstanding Advances less the borrowing base. All of our obligations under the Amended and Restated Credit Agreement and the Loan and Security Agreement are secured by a first priority security
interest in all of our assets and a pledge of all of the equity interests in our subsidiaries.

The outstanding balance under the Amended
and Restated Credit Agreement as of March 31, 2008 is approximately $15.6 million. Additionally, from time to time during 2008 and 2007, we borrowed more than the maximum amount allowable under the availability formula in both the Amended and
Restated Credit Agreement and the Original Credit Agreement. Accordingly, on those occasions when the outstanding balance exceeded the availability, we were charged the default interest and fees by our Lenders.

As of December 31, 2007, the Company was not in compliance with the Amended and Restated Credit Agreement and the outstanding borrowings exceeded
the borrowing base as defined. On March 26, 2008, the Company and its subsidiaries entered into an Amendment and Forbearance Agreement with our Lenders pursuant to which the Lenders waived certain specified defaults under the Amended and
Restated Credit Agreement and agreed to forebear from exercising all remedies available to them in connection with such existing defaults until the earlier of the completion of an equity or subordinated debt offering or January 1, 2009.

If an event of default under the Amended and Restated Credit Agreement or any agreement we have with our Lenders occurs, then the entire
balance outstanding under all such agreements shall become immediately due and payable. We will not be able to repay this balance unless we raise significant capital by selling assets or issuing debt or equity securities, which we may not be able to
do on terms acceptable to us, if at all. If the balance outstanding under our agreements with our Lenders becomes immediately due and payable and we are unable to raise significant capital or obtain from our Lenders an additional waiver and an
agreement to forbear, then we will not be able to satisfy our obligations to our Lenders, our Lenders may proceed to foreclose on the collateral and our business and financial condition will be materially and adversely affected.

Convertible Notes

During
September and October 2005, we issued in a private placement transaction the 10% Notes, which had an original aggregate principal amount of $8,015,000, and warrants to purchase 834,896 shares of common stock for a total purchase price of
$8,015,000. The 10% Notes and warrants were issued in four closings between September 2, 2005 and October 14, 2005. The face value of the 10% Notes is $8,015,000. Interest is payable monthly on the face value of the 10% Notes at a rate of
10% per annum. The gross proceeds from the offering of 10% Notes and warrants was allocated to the 10% Notes and warrants in accordance with Emerging Issue Tax Force 98-5, Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios (EITF 98-5). In accordance with EITF 98-5, $6,107,000 of the gross proceeds received was allocated to the 10% Notes and $1,908,000 of the gross proceeds received was
allocated to additional paid in capital related to the warrants and the beneficial conversion feature. The conversion of the 10% Notes was restricted at the issue date because of the need for a shareholder vote to approve the contingently issuable
shares as well as certain other restrictions. In February 2006, the shareholders approved the shares issuable upon conversion of the 10% Notes. Accordingly, approximately $1.1 million of the in-the-money beneficial conversion feature was recorded to
increase the book value of the 10% Notes. Of the $1.1 million of in-the-money beneficial conversion feature, approximately $700,000 was recorded as interest expense during the second quarter of 2006 and approximately $426,000 was recorded as a
reduction to additional paid in capital because of additional conversion restrictions associated with a certain portion of the 10% Notes. During the third quarter of 2007, the 10% Notes subject to conversion restrictions became convertible.
Accordingly, approximately $426,000 was recorded as interest expense and as an increase to paid in capital. The remaining discount on the 10% Notes relative to face value will be amortized to interest expense over the remaining life of the 10%
Notes. The 10% Notes mature three years after issuance and may be prepaid at the option of the Company after one year after the issuance thereof subject to the satisfaction of certain conditions.

The 10% Notes are convertible by the holders at an initial conversion price of $4.80 per share subject to certain restrictions. The warrants issued have
an exercise price of $4.80 and expire three years from the date of issuance.



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8. Income Taxes

We adopted the provisions of FASB Interpretation 48, Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109 (FIN 48), on January 1, 2007. FIN 48
prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on the de-recognition, measurement, classification, interest and penalties, accounting in interim
periods, disclosure and transition issues. The adoption of FIN 48 resulted in the recognition of $32,104 of penalties which was recorded as an adjustment to the January 1, 2007 retained earnings. No adjustments were made in the quarter ended
March 31, 2008 to the balance of unrecognized tax benefits and no material change is expected in the next twelve months. In addition, the following information required by FIN 48 is provided:



| |  |  | As noted above, as of January 1, 2007, we have accrued penalties in the amount of $32,104 related to uncertain tax positions. As of March 31, 2008, the
total amount of interest and penalties accrued was $216,745. Accrued interest on tax deficiencies and tax penalties are recorded as a component of income tax expense.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The recognition of unrecognized tax benefits will not impact the Companys effective tax rate.
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | The Company and its subsidiaries file federal income tax returns, as well as multiple state and local tax returns. The tax years of 2004 to 2006 for all
jurisdictions remain open to examination.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a result of the gain on the sale of the Companys investment in Army
Fleet Support, LLC (Army Fleet Support), a tax payment of approximately $1,300,000 was due in September 2007. This payment was not paid, but accrued. The Company anticipates a refund in 2008 of similar magnitude due to recognized losses
in 2007.

At March 31, 2008, the Company had cumulative gross federal income tax net operating loss (NOL) carryforwards of
approximately $3,461,000 available to reduce future amounts of taxable income. If not utilized to offset future taxable income the current NOL will expire in 2027. Additionally, the Company acquired through its acquisition of Cornwall in October
2005 unused federal NOLs. Under Internal Revenue Code Section 382, there is an annual limitation on the use of the NOLs acquired from Cornwall. If not utilized to offset future taxable income, the cumulative NOL amount will expire from 2020
through 2025. The Company also had approximately $524,000 of tax effected state NOLs. If not utilized to offset future state taxable income, then the state NOLs will expire between 2020 and 2027.

An assessment is made at the end of each reporting period of the likelihood that the recorded net deferred tax asset will be realized. The net deferred
tax asset must be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or all of the new deferred tax asset will not be realized within a
relatively short period, generally no more than three years. As of March 31, 2008, management recorded a total valuation allowance of approximately $1,135,000 against its deferred tax assets including the NOLs.

The Companys effective tax rate for the three months ended March 31, 2008 and 2007 was 2.1% and 35.7%, respectively. For the three months
ended March 31, 2008, the principal cause of the difference between the effective rate and the U.S. statutory rate of 34% was the recording of an additional allowance of $654,000 against the deferred tax asset.

9. Net Loss per Share

Basic net loss per share is
computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per share gives effect to all potentially dilutive securities. For the three months ended
March 31, 2008 and 2007, the effect of our warrants and stock options were not included in the computation of diluted earnings per share as their effect was anti-dilutive.



10. Related Party Transactions

Employment Agreements

Pursuant to the
employment agreement, as amended, between us and Mr. Farrell, Mr. Farrell has agreed to serve as our Chief Executive Officer and President until June 30, 2010. The agreement provides for (i) payment of a specified base salary
which increases by 10% per year; (ii) payment of an annual incentive bonus equal to 5% of our earnings before interest, income taxes, depreciation and amortization, as adjusted (EBITDA), for such year, provided that such bonus
may not exceed 100% of Mr. Farrells base salary for such year; (iii) prohibitions against Mr. Farrells disclosure of confidential information, solicitation of our employees and participation in a business competitive
with our business during his employment and for a period of one year following the termination of his employment; and (iv) continuation of Mr. Farrells compensation and benefits for the remainder of the term of his employment
agreement if his employment is terminated by us without cause or by Mr. Farrell for good reason or upon a change of control of the Company, provided that if a change of control occurs after June 30, 2008
and before July 1, 2010, Mr. Farrell is entitled to receive all monies which he would have been paid under the employment agreement had the term the agreement terminated on the second anniversary of such change of control rather than on
June 30, 2010. Pursuant to Mr. Farrells employment agreement, we also provide certain other benefits and expense reimbursements to Mr. Farrell which are consistent with his position as our Chief Executive Officer.
Mr. Farrell is also entitled to participate in any employee benefit plan, stock option plan and other fringe benefit plan at the discretion of our Board of Directors.

Pursuant to the employment agreement, between us and Nicolas V. Chater, Mr. Chater has agreed to serve as our Chief Financial Officer until
June 30, 2010. The agreement provides for (i) a base salary at a rate of $250,000 per year, (ii) an annual



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retention bonus equal to $25,000 per year and (iii) an annual performance bonus equal to 3% of our EBITDA, as adjusted, for such year; provided, that
(a) the annual performance bonus may not exceed 100% of the base salary for such year and (b) Mr. Chaters 2008 performance bonus shall not be less than $90,000. The agreement also provides that, if Mr. Chaters
employment is terminated by the Company without cause or by him for good reason, then Mr. Chater shall be entitled to receive a single lump sum in an amount equal to his then-current salary and performance bonus and
shall be entitled to participate in the Companys employee benefit, retirement and compensation plans during the twelve-month period following the date of such termination. Notwithstanding the foregoing, if Mr. Chaters employment is
terminated by the Company without cause during the 24-month period following a change of control of the Company, then Mr. Chater will be entitled to receive a lump sum payment of his then-current performance bonus and twice his then-current
base salary and shall be entitled to participate in the Companys employee benefit, retirement and compensation plans during the 24-month period following the date of such termination.

On December 13, 2007, we granted to grant to Mr. Chater, pursuant to the Companys Amended and Restated 2004 Stock Incentive Plan (the
Incentive Plan), an option to purchase 100,000 shares of common stock, with one-half of the underlying shares vesting on each of the first anniversary and the second anniversary of the date of grant. The option has an exercise price of
$2.00 per share which is equal to the fair market value of the common stock on the date of grant.

Subject to availability under the
Incentive Plan, the Company has also agreed to grant Mr. Chater an option to purchase up to 50,000 shares of common stock on each anniversary of the execution of his employment agreement with the Company, with such options vesting equally over
a two-year period (the Subsequent Options). The Subsequent Options will have an exercise price equal to the fair market value of the Companys common stock on the date of grant.

11. Sales to Major Customers

During the three month
periods ended March 31, 2008 and 2007, respectively, 61.5%, and 49.8% of the Companys revenue was earned under contracts with various Federal government agencies through its Paragon Systems/SEP subsidiary. In addition, in the quarter
ended March 31, 2008, two customers individually accounted for at least 10% of total revenue: the Social Security Administration ($3,523,000 or 13.3% of revenue) and the Miami-Dade General Services Administration ($3,917,000 or 14.8% of
revenue). At March 31, 2008 and 2007, approximately 63.8% and 53.5% of accounts receivable were due from various Federal government agencies, respectively.

12. Cornwall Settlement

At the closing of our acquisition of Cornwall, we paid a total purchase price of $13,500,000
payable as follows: (i) payment of $12,825,000 in cash; (ii) delivery of a promissory note in principal amount of $250,000 payable to the former Cornwall shareholders (the Cornwall Promissory Note); and (iii) deposit of
$425,000 with an escrow agent to secure the indemnification obligations of the former Cornwall shareholders under the Stock Purchase Agreement between us and the former Cornwall shareholders dated as of August 11, 2005 (the Cornwall
Purchase Agreement). After adjusting for certain working capital items, the net purchase price was $12,753,000. On January 26, 2007, we entered into a Settlement Agreement and General Release (the Cornwall Settlement Agreement) with
David Shopay, on behalf of himself and the other former shareholders of Cornwall, in his capacity as the representative of such shareholders. Pursuant to the Cornwall Settlement Agreement (i) the parties waived and released each other from all
claims and liabilities, with the exception of certain claims and liabilities specified in the Cornwall Settlement Agreement, arising from the Cornwall Purchase Agreement; (ii) the shareholder representative forgave and discharged all amounts
owed by us to the former shareholders of Cornwall under the Cornwall Promissory Note; and (iii) the shareholder representative and the Company instructed the escrow agent administering the escrow fund to release $200,000 from such fund to us
and the remaining balance of such fund to the former shareholders of Cornwall. We recognized a gain of $450,000 as other income on the accompanying statements of operations for the year ended December 31, 2007.

13. Segment Reporting

The Companys two
reportable segments are Cornwall and Paragon Systems/SEP. The accounting policies applicable to these reportable segments are the same as those described in the summary of significant accounting policies. The Cornwall segment focuses on contract
guard services to commercial and state and local government customers. The Paragon Systems/SEP segment focuses on contract guard services to various Federal government agencies.



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We considered our organization and reporting structure and the information used by our chief operating
decision makers to make decisions about resource allocation and performance assessment and determined management evaluates the performance of the segments based primarily on revenues and operating income (loss). Revenues, operating income, and
assets for each segment are as follows (in thousands):



|                                                                  |  |       |        |   |          |   |        |                     |  |       |        |  |   |        |  
|----------------------------------------------------------------- |  | ----- | ------ | - | -------- | - | ------ | ------------------- |  | ----- | ------ |  | - | ------ | -
|                                                                  |  | Total |        |   | Cornwall |   |        | Paragon Systems/SEP |  | Other |       
|For the three months ended March 31, 2008, as previously reported |  |       |        |   |          |   |        |                     |  |       |        |  |   |        |  
|Revenues                                                          |  | $     | 26,465 |   |          | $ | 10,174 |                     |  | $     | 16,291 |  | $ |       |  
|Amortization and depreciation                                     |  |       | 677    |   |          |   | 407    |                     |  |       | 129    |  |   | 141    |  
|Operating (loss)                                                  |  |       | (905   | ) |          |   | (68    | )                   |  |       | 401    |  |   | (1,238 | )
|Current assets                                                    |  |       | 17,883 |   |          |   | 6,190  |                     |  |       | 11,669 |  |   | 24     |  
|Goodwill                                                          |  |       | 16,078 |   |          |   | 8,331  |                     |  |       | 7,747  |  |   |       |  
|Other Intangibles                                                 |  |       | 3,377  |   |          |   | 2,710  |                     |  |       | 287    |  |   | 380    |  
|Total assets                                                      |  |       | 38,101 |   |          |   | 17,373 |                     |  |       | 20,276 |  |   | 452    |  



|                                                       |  |       |        |   |          |   |        |                     |  |       |        |  |   |        |  
|------------------------------------------------------ |  | ----- | ------ | - | -------- | - | ------ | ------------------- |  | ----- | ------ |  | - | ------ | -
|                                                       |  | Total |        |   | Cornwall |   |        | Paragon Systems/SEP |  | Other |       
|For the three months ended March 31, 2008, as restated |  |       |        |   |          |   |        |                     |  |       |        |  |   |        |  
|Revenues                                               |  | $     | 26,465 |   |          | $ | 10,174 |                     |  | $     | 16,291 |  | $ |       |  
|Amortization and depreciation                          |  |       | 677    |   |          |   | 407    |                     |  |       | 129    |  |   | 141    |  
|Operating (loss)                                       |  |       | (1,219 | ) |          |   | (68    | )                   |  |       | 87     |  |   | (1,238 | )
|Current assets                                         |  |       | 17,883 |   |          |   | 6,190  |                     |  |       | 11,669 |  |   | 24     |  
|Goodwill                                               |  |       | 16,078 |   |          |   | 8,331  |                     |  |       | 7,747  |  |   |       |  
|Other Intangibles                                      |  |       | 3,377  |   |          |   | 2,710  |                     |  |       | 287    |  |   | 380    |  
|Total assets                                           |  |       | 38,101 |   |          |   | 17,373 |                     |  |       | 20,276 |  |   | 452    |  



|                                          |  |       |        |   |          |   |        |                     |  |   |        |   |  |   |       |  
|----------------------------------------- |  | ----- | ------ | - | -------- | - | ------ | ------------------- |  | - | ------ | - |  | - | ----- | -
|                                          |  | Total |        |   | Cornwall |   |        | Paragon Systems/SEP |  |   | Other  |  
|For the three months ended March 31, 2007 |  |       |        |   |          |   |        |                     |  |   |        |   |  |   |       |  
|Revenues                                  |  | $     | 20,205 |   |          | $ | 10,146 |                     |  | $ | 10,059 |   |  | $ |      |  
|Amortization and depreciation             |  |       | 719    |   |          |   | 439    |                     |  |   | 112    |   |  |   | 168   |  
|Operating (loss)                          |  |       | (998   | ) |          |   | (24    | )                   |  |   | (5     | ) |  |   | (969  | )
|Current assets                            |  |       | 11,888 |   |          |   | 5,257  |                     |  |   | 6,593  |   |  |   | 38    |  
|Goodwill                                  |  |       | 16,078 |   |          |   | 8,331  |                     |  |   | 7,747  |   |  |   |      |  
|Other Intangibles                         |  |       | 5,797  |   |          |   | 4,183  |                     |  |   | 636    |   |  |   | 978   |  
|Total assets                              |  |       | 34,294 |   |          |   | 18,104 |                     |  |   | 15,108 |   |  |   | 1,082 |  



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations.
|------- | --------------------------------------------------------------------------------------

This Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Managements
Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report.

You should carefully review the
information contained in this Quarterly Report and should particularly consider any risks and other factors that we set forth in this Quarterly Report and in other reports or documents that we file from time to time with the SEC. Except for
historical information contained herein, this Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
Exchange Act), including statements of our expectations as to future events and our future financial performance. In some cases, you can identify those so-called forward-looking statements by words such as may,
will, should, expects, plans, anticipates, believes, estimates, predicts, potential, or continue or the negative of those words
and other comparable words. You should be aware that those statements are only our predictions, which are being made as of the date hereof. Actual events or results may differ materially. In evaluating those statements, you should specifically
consider various factors, including those outlined below. Those factors may cause our actual results to differ materially from any of our forward-looking statements. We undertake no obligation to update any forward-looking statements, whether
as a result of new information, future events or otherwise.

Overview

We provide contract guard services to government and commercial customers. These guard services include providing uniformed and armed guards for access control, personnel protection, plant security, theft prevention,
surveillance, vehicular and foot patrol, crowd control and prevention of sabotage, terrorist and criminal activities. In connection with providing these services, we assume responsibility for a variety of functions, including recruiting, hiring,
training and supervising security guards deployed to the customers we serve as well as paying all guards and providing them with uniforms, employee benefits and workers compensation insurance. We are responsible for preventing the interruption
of guard services as a consequence of illness, vacations or resignations.



Critical Accounting Policies

The following discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make judgments regarding estimates that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures. We base our judgments on historical experience and on various assumptions that we believe are reasonable under the



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circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe our judgments and related estimates
regarding the following accounting policies are critical in the preparation of our consolidated financial statements.

Revenue
Recognition.Revenue is recorded monthly as guard services are provided to our customers under contracts. We bill guard services in arrears at hourly or monthly rates based on the number of hours worked under some contracts and as fixed monthly
amounts under other contracts. Hourly and monthly rates are based on contractual terms.

The terms of our contracts are complex and
may be subject to differing interpretations. We make estimates and judgments about terms of the contracts in providing services and in billing and recording revenue. At times, our Federal contracts require interpretations. Typically,
differences in interpretation are resolved on a mutual basis in discussions with the government agency involved. The resolution of differences may result in a determination that amounts previously billed are not in accordance with contract
terms and adjustments of amounts initially recorded as revenue may be material.

Contracts with Federal government agencies
may be subject to cessation of funding. Cessation of funding may result in amounts billed and recorded as revenue as being uncollectible. We work with the appropriate government agency to resolve funding issues. When funding issues become
known, we make estimates and judgments about the extent of potential losses and adjust revenues accordingly. Amounts estimated could differ from amounts ultimately collected and these amounts could be material. During 2008 and 2007, none of our
contracts have been subject to cessation of funding.

Contract losses, if any, are recorded as they become known.

Cost of Revenues.Cost of revenues is primarily comprised of labor, related payroll taxes, employee benefits, workers compensation,
liability insurance, and the pro rata portion of the costs of customer contracts acquired.

We make estimates and judgments of amounts
recorded for accruals of labor related costs. Expenses most subject to estimation and judgment are accrued vacation and workers compensation costs. The terms of vacation policies may be complex and subject to interpretation. Workers
compensation insurance is subject to retroactive audit. Actual amounts could differ from the amounts initially recorded.

Impairment of
Long-lived Assets, Goodwill and Intangible Assets. We evaluate impairment of long-lived assets, including property and equipment and intangible assets with finite lives, whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, then an impairment loss is recognized. Measurement of an impairment loss for
long-lived assets is based on discounted cash flows and the fair value of an asset.

SFAS No. 123(R).On January 1, 2006,
we adopted SFAS No. 123R using the modified-prospective-transition approach method. Under this transition method, compensation costs for 2006 include costs for options granted prior to, but not vested at, December 31, 2005, and options
vested thereafter. Therefore, results for prior periods have not been restated.

Results of Operations - Three Months Ended March 31, 2008 Compared
to Three Months Ended March 31, 2007

Revenue.Revenue increased $6.3 million to $26.5 million, or 31.2%, for the three
months ended March 31, 2008, as compared to revenue of $20.2 million for the three months ended March 31, 2007. The increase in revenue is primarily due to the increase in revenue at Paragon Systems related to six new Federal government
contracts obtained in 2007 and two new federal government contracts in 2008.

Costs of Revenues.We categorize our cost of revenues
into three areas: (i) direct labor; (ii) indirect labor and other contract support costs; and (iii) amortization of government contracts.

Direct Labor. Direct labor is the most significant expense in providing guard services on any contract. Direct labor was approximately 63.4% of revenue in 2008 and 62.8% of revenue in 2007. When bidding on
contracts, we must anticipate labor rates during the contract term.

Indirect Labor and Other Contract Support Costs. This category
of expenses consists primarily of indirect labor (guard supervisors), our portion of payroll taxes, employee benefit costs and other expenses. Other expenses comprise a relatively small portion of costs in this category. As with direct labor, when
bidding on contracts, we must anticipate the cost of providing supervisory oversight of the guards performing the actual guard services and the related payroll taxes and employee benefits that are provided to both guards and supervisors. Indirect
labor and other contract support costs were approximately 27.8% of revenue in 2008 and 25.9% of revenue in 2007. The increase in 2008 over 2007 is due primarily to start-up costs on the new Federal government contracts obtained by Paragon.



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Amortization of Government Contracts. Upon our acquisition of each of Paragon Systems and
Cornwall, the existing contracts were valued in accordance with purchase accounting rules and the resulting asset values are being amortized over the remaining term of each contract proportionate to estimated future discounted cash flows based
on an independent appraisal.

Total Cost of Revenue. Our total cost of revenue was 92.8% of revenue in 2008 and 90.8% of revenue in
2007. The increase in 2008 over 2007 is due to the additional contracts obtained by Paragon Systems where the cost of revenue is traditionally higher than in the commercial sector and start up costs of approximately $519,000 on the new Federal
government contracts.

Selling, General and Administrative Expense.Selling, general and administrative expenses as a percentage of
revenue was 11.1% in 2008 and 12.9% in 2007. Selling, general and administrative expenses, which include payroll and related expenses for administrative personnel, occupancy costs at the office locations, consulting and professional fees, and other
miscellaneous office and corporation expenses, increased $338,000 to $2.9 million, or 12.9%, for the three months ended March 31, 2008, as compared to $2.6 million for the three months ended March 31, 2007. This increase is primarily due
to higher non-cash charges on stock-based compensation taken in the first quarter of 2008 in accordance with FAS No. 123(R) upon the issuance of stock options to Company employees.

Interest Expense, Net. Interest expense relates to the interest incurred under our credit agreements with our Lenders, the outstanding term loan,
our mandatory redeemable preferred stock, and the interest expense incurred on our 10% Notes. Interest expense increased $410,000, or 89.5%, to $868,000 for the three months ended March 31, 2008, as compared to interest expense of $458,000 for
the three months ended March 31, 2007. This increase is due to the higher level of borrowings, resulting from new Federal government contracts obtained at Paragon Systems, as well as a higher rate paid on our Loan and Security Agreement in 2008
as compared to 2007 and interest on the outstanding term loan, which was issued in March of 2007.

Other Income.For the three
months ended March 31, 2007, we recognized other income of $550,000 primarily due to the $450,000 gain recognized on the settlement with the former shareholders of Cornwall pursuant to the Cornwall Settlement Agreement dated January 17,
2007.

Income Tax Expense(Benefit).The loss before income taxes for the three months ended March 31, 2008, resulted in tax
expense of $47,000, while the loss before income taxes for the three months ended March 31, 2007, resulted in a tax benefit of $305,000. The variance between 2008 and 2007 resulted primarily from the recording of the deferred tax valuation
allowance at March 31, 2008, which was not necessary at March 31, 2007.

Liquidity and Capital Resources

As of March 31, 2008, we had $571,000 of cash on hand. Cash used by operating activities was $880,000 for the three months ended March 31, 2008,
which was primarily due to the net loss of $2.1 million, the increase in unbilled and trade accounts receivable of $2.0 million at March 31, 2008, offset by the increase in accrued liabilities of $2.8 million. Cash provided by financing
activities was $1.4 million primarily due to the proceeds from our asset-based lending facility.

The outstanding balance under the Amended
and Restated Credit Agreement as of March 31, 2008 was approximately $15.6 million. Additionally, from time to time during 2008 and 2007, we have borrowed more than the maximum amount allowable under the availability formula in both the Amended
and Restated Credit Agreement and the Original Credit Agreement. Accordingly, on those occasions when the outstanding balance exceeded the availability, we were charged the default interest and fees by our Lenders.

As of December 31, 2007, we were not in compliance with the Amended and Restated Credit Agreement and our outstanding borrowings exceeded the
borrowing base as defined. On March 26, 2008, we entered into an Amendment and Forbearance Agreement with our Lenders. Pursuant to this agreement, our Lenders waived certain specified defaults under Amended and Restated Credit Agreement and
agreed to forebear from exercising all remedies available to them in connection with such existing defaults until the earlier of the completion of an equity or subordinated debt offering by the Company or January 1, 2009.

We have has historically incurred losses and have not yet generated sufficient levels of cash flows from operating activities to meet our scheduled debt
service payments and other obligations. Additionally, our 10% Notes with an outstanding principal balance of approximately $7.5 million mature in September and October of 2008. We anticipate that the recently awarded contracts along with the
initiatives instituted to maximize cash flows and raise additional equity will alleviate any short-term liquidity issues facing the Company. Management is also evaluating various alternatives to restructure the 10% Notes which mature later this
year. Management believes these initiatives will contribute toward achieving profitability and alleviating the liquidity issues facing the Company.





|Item 4T. | Controls and Procedures
|-------- | -----------------------

In the Original Report,
our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by the Quarterly Report, our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) or 15d-15(e) of
the Exchange Act) were effective. This conclusion was reached after our Chief Executive Officer and Chief Financial Officer evaluated our disclosure controls and procedures as of the end of the period covered by the Quarterly Report, as required by
paragraph (b) of Rules 13a-15 or 15d-15 of the Exchange Act.



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In connection with preparing this Amendment, our Chief Executive Officer and Chief Financial Officer
again evaluated our disclosure controls and procedures as of the end of the period covered by the Quarterly Report and concluded that such disclosure controls and procedures were ineffective due to the material weakness that we identified in our
internal control over financial reporting in that we did not maintain effective controls over the completeness and accuracy of certain accrued liabilities and related expense accounts with respect to payroll. Specifically, effective controls which
were designed and in place to ensure the complete and accurate recording of accrued liabilities and related expenses at each period end with respect to payroll were not followed. A further discussion of this material weakness is set forth under
Item 9(a), Controls and Procedures, of our Annual Report on Form 10-K for the year ended December 31, 2008.

During
the quarter ended March 31, 2008, there was not any change in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 of the Exchange Act that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II
- OTHER INFORMATION



|Item 6. | Exhibits
|------- | --------

The exhibits required to be filed with
this Quarterly Report are set forth on the Exhibit Index included herein.



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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



|                     |  |                                                            
|-------------------- |  | -----------------------------------------------------------
|                     |  | TRI-S SECURITY CORPORATION                                 
|                     | 
|Date: April 14, 2009 |  | /s/ Ronald G. Farrell                                      
|                     |  | Ronald G. Farrell                                          
|                     |  | Chairman of the Board and Chief Executive Officer          
|                     |  | (duly authorized signatory and Principal Executive Officer)



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|            |  |                                                                                                                                                                           |  |                                                                                                                      
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                               |  | Method of Filing                                                                                                     
|3.1         |  | Amended and Restated Articles of Incorporation.                                                                                                                           |  | Incorporated by reference toExhibit 3.1 to theCompanys RegistrationStatement on Form S-1 (No.333-119737).           
|            |  |                                                                                                                                                                          
|3.2         |  | Amended and Restated Bylaws.                                                                                                                                              |  | Incorporated by reference toExhibit 3.2 to theCompanys RegistrationStatement on Form S-1 (No.333-119737).           
|            |  |                                                                                                                                                                          
|3.3         |  | Articles of Amendment to Amended and Restated Articles of Incorporation of the Company, dated September 14, 2007.                                                         |  | Incorporated by reference toExhibit 3.1 to theCompanys Current Reporton Form 8-K filed onSeptember 19, 2007.        
|            |  |                                                                                                                                                                          
|3.4         |  | Amendment to the Amended and Restated Bylaws of the Company, adopted September 13, 2007.                                                                                  |  | Incorporated by reference toExhibit 3.2 to theCompanys Current Reporton Form 8-K filed onSeptember 19, 2007.        
|            |  |                                                                                                                                                                          
|3.5         |  | Amendment to the Amended and Restated Bylaws of the Company, adopted December 13, 2007.                                                                                   |  | Incorporated by reference toExhibit 3.1 to theCompanys Current Reporton Form 8-K filed onDecember 19, 2007.         
|            |  |                                                                                                                                                                          
|10.1        |  | Amended and Restated Credit Agreement, dated as of December 31, 2007, among the Company, its subsidiaries, LSQ Funding Group, L.C. and BRE LLC.                           |  | Incorporated by reference toExhibit 99.1 to theCompanys Current Reporton Form 8-K filed onJanuary 7, 2008.          
|            |  |                                                                                                                                                                          
|10.2        |  | Loan and Security Agreement, dated as of December 31, 2007, among the Company, its subsidiaries and LSQ Funding Group, L.C.                                               |  | Incorporated by reference toExhibit 99.2 to theCompanys Current Reporton Form 8-K filed onJanuary 7, 2008.          
|            |  |                                                                                                                                                                          
|10.3        |  | Supplemental Agreement to Amended and Restated Credit Agreement, dated as of December 31, 2007, among the Company, its subsidiaries, LSQ Funding Group, L.C. and BRE LLC. |  | Incorporated by reference toExhibit 99.3 to theCompanys Current Reporton Form 8-K filed onJanuary 7, 2008.          
|            |  |                                                                                                                                                                          
|10.4        |  | Amendment and Forbearance, dated as of March 26, 2008, among the Company, its subsidiaries, LSQ Funding Group, L.C. and BRE LLC.                                          |  | Incorporated by reference toExhibit 10.83 theCompanys Annual Reporton Form 10-K for the yearended December 31, 2007.
|            |  |                                                                                                                                                                          
|10.5        |  | Summary of Board Compensation.                                                                                                                                            |  | Previously filed.                                                                                                    
|            |  |                                                                                                                                                                          
|31.1        |  | Rule 13a-14(a)/15d-14(a) Certification of the Companys Chief Executive Officer.                                                                                          |  | Filed herewith.                                                                                                      
|            |  |                                                                                                                                                                          
|31.2        |  | Rule 13a-14(a)/15d-14(a) Certification of the Companys Chief Financial Officer.                                                                                          |  | Filed herewith.                                                                                                      
|            |  |                                                                                                                                                                          
|32.1        |  | Section 1350 Certification of the Companys Chief Executive Officer.                                                                                                      |  | Filed herewith.                                                                                                      
|            |  |                                                                                                                                                                          
|32.2        |  | Section 1350 Certification of the Companys Chief Financial Officer.                                                                                                      |  | Filed herewith.                                                                                                      



E-1