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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





Amendment
No. 2

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 June 30, 2009



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

Indicate
by check mark 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   |  |  ̈  (Do not check if a smaller reporting company) |  | 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 August 5, 2009: 4,203,280.









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EXPLANATORY NOTE

This Amendment No. 2 on Form 10-Q/A (this Amended Report) amends the Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 (the Original Report) of
Tri-S Security Corporation (the Company). 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 quarter ended June 30, 2009, 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 accrual for paid time off for the quarter ended June 30, 2009. As a result of this
incorrect accrual, indirect 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 of this error.

The restated consolidated financial statements for the quarter ended June 30,2009, included in this Amendment (the
Restatement) report: (i) indirect labor expense of $11,162,000 as opposed to indirect labor expense of $10,528,000 as reported in the Original Report; (ii) cost of revenues of $32,408,000 as opposed to cost of revenues of
$31,774,000 as reported in the Original Report; and (iii) gross profit of $1,290,000 as opposed to gross profit of $1,924,000 as reported in the Original Report; and (iv) net loss of $2,819,000 as opposed to net loss of $2,185,000 as
reported in the Original Report.

The restated consolidated financial statements for the six months ended June 30, 2008, included in this
Amendment (the Restatement) report: (i) indirect labor expense of $21,633,000 as opposed to indirect labor expense of $20,457,000 as reported in the Original Report; (ii) cost of revenues of $61,375,000 as opposed to cost of
revenues of $60,199,000 as reported in the Original Report; and (iii) gross profit of $1,645,000 as opposed to gross profit of $2,821,000 as reported in the Original Report; and (iv) net loss of $6,580,000 as opposed to net loss of
$5,404,000 as reported in the Original Report.

This Amendment amends and restates Items 1, 2 and 4T 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

JUNE 30, 2009

INDEX





|                              |  |                                                                                         |  |         
|----------------------------- |  | --------------------------------------------------------------------------------------- |  | --------
|                              |  |                                                                                         |  | Page No.
|PART I. FINANCIAL INFORMATION |  |                                                                                        
|                              |  |                                                                                        
|ITEM 1.                       |  | FINANCIAL STATEMENTS:                                                                   |  |         
|                              |  |                                                                                        
|                              |  | Consolidated Balance Sheets June 30, 2009 and December 31, 2008                         |  | 1       
|                              |  |                                                                                        
|                              |  | Consolidated Statements of Operations Three and Six Months Ended June 30, 2009 and
2008 |  | 2       
|                              |  |                                                                                        
|                              |  | Consolidated Statements of Cash Flows Six Months Ended June 30, 2009 and 2008           |  | 3       
|                              |  |                                                                                        
|                              |  | Notes to Consolidated Financial Statements                                              |  | 4       
|                              |  |                                                                                        
|ITEM 2.                       |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS   |  | 14      
|                              |  |                                                                                        
|ITEM 4T.                      |  | CONTROLS AND PROCEDURES                                                                 |  | 17      
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                        
|                              |  |                                                                                        
|ITEM 6.                       |  | EXHIBITS                                                                                |  | 17      
|                              | 
|SIGNATURES                    |  | 18                                                                                     
|                              | 
|EXHIBIT INDEX                 |  | E-1                                                                                    



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Tri-S Security Corporation and Subsidiaries

Consolidated Balance Sheets

(In thousands, except per share data)



|                                                                                                                                                  |  |                                    |         |   |            |   |        |                                       |  |   |                          |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------- | ------- | - | ---------- | - | ------ | ------------------------------------- |  | - | ------------------------ | - |  | - | ------- | -
|                                                                                                                                                  |  | June 30, 2009as
previouslyreported |         |   | Adjustment |   |        | June 30, 2009,as restated(See Note 3) |  |   | AuditedDecember 31, 2008 |  
|Assets                                                                                                                                            |  |                                    |         |   |            |   |        |                                       |  |   |                          |   |  |   |         |  
|                                                                                                                                                  |  |                                    |         |  
|Current assets:                                                                                                                                   |  |                                    |         |   |            |   |        |                                       |  |   |                          |   |  |   |         |  
|Cash and cash equivalents                                                                                                                         |  | $                                  |        |   |            |   |        |                                       |  | $ |                         |   |  | $ | 1,246   |  
|Restricted cash                                                                                                                                   |  |                                    | 75      |   |            |   |        |                                       |  |   | 75                       |   |  |   | 75      |  
|Trade accounts receivable, net                                                                                                                    |  |                                    | 18,969  |   |            |   |        |                                       |  |   | 18,969                   |   |  |   | 16,610  |  
|Escrow funds  sale of Cornwall                                                                                                                   |  |                                    | 629     |   |            |   |        |                                       |  |   | 629                      |   |  |   |         |  
|Prepaid expenses and other assets                                                                                                                 |  |                                    | 1,114   |   |            |   |        |                                       |  |   | 1,114                    |   |  |   | 903     |  
|                                                                                                                                                  |  |                                    |         |   |            |   |        |                                       |  |   |                          |   |  |   |         |  
|Total current assets                                                                                                                              |  |                                    | 20,787  |   |            |   |       |                                       |  |   | 20,787                   |   |  |   | 18,834  |  
|                                                                                                                                                  |  |                                    |         |   |            |   |        |                                       |  |   |                          |   |  |   |         |  
|Property and equipment, less accumulated depreciation                                                                                             |  |                                    | 572     |   |            |   |        |                                       |  |   | 572                      |   |  |   | 611     |  
|Goodwill                                                                                                                                          |  |                                    | 7,747   |   |            |   |        |                                       |  |   | 7,747                    |   |  |   | 9,825   |  
|Intangibles                                                                                                                                       |  |                                    |         |   |            |   |        |                                       |  |   |                          |   |  |   |         |  
|Customer contracts                                                                                                                                |  |                                    |         |   |            |   |        |                                       |  |   |                         |   |  |   | 1,028   |  
|Deferred loan costs                                                                                                                               |  |                                    | 583     |   |            |   |        |                                       |  |   | 583                      |   |  |   | 797     |  
|Other                                                                                                                                             |  |                                    |         |   |            |   |        |                                       |  |   |                         |   |  |   | 665     |  
|                                                                                                                                                  |  |                                    |         |   |            |   |        |                                       |  |   |                          |   |  |   |         |  
|Total assets                                                                                                                                      |  | $                                  | 29,689  |   |            | $ |       |                                       |  | $ | 29,689                   |   |  | $ | 31,760  |  
|                                                                                                                                                  |  |                                    |         |   |            |   |        |                                       |  |   |                          |   |  |   |         |  
|Liabilities and Stockholders Equity                                                                                                              |  |                                    |         |   |            |   |        |                                       |  |   |                          |   |  |   |         |  
|                                                                                                                                                  |  |                                    |         |  
|Current liabilities:                                                                                                                              |  |                                    |         |   |            |   |        |                                       |  |   |                          |   |  |   |         |  
|Bank overdraft                                                                                                                                    |  | $                                  | 56      |   |            | $ |       |                                       |  | $ | 56                       |   |  | $ |        |  
|Trade accounts payable                                                                                                                            |  |                                    | 2,658   |   |            |   |        |                                       |  |   | 2,658                    |   |  |   | 1,885   |  
|Other accrued expenses                                                                                                                            |  |                                    | 1,250   |   |            |   |        |                                       |  |   | 1,250                    |   |  |   | 2,058   |  
|Accrued interest                                                                                                                                  |  |                                    | 1,379   |   |            |   |        |                                       |  |   | 1,379                    |   |  |   | 534     |  
|Accrued salary and benefits                                                                                                                       |  |                                    | 5,126   |   |            |   | 1,176  |                                       |  |   | 6,302                    |   |  |   | 5,676   |  
|Income taxes payable                                                                                                                              |  |                                    | 53      |   |            |   |        |                                       |  |   | 53                       |   |  |   | 67      |  
|Asset based lending facility                                                                                                                      |  |                                    | 22,453  |   |            |   |        |                                       |  |   | 22,453                   |   |  |   | 19,641  |  
|10% convertible notes                                                                                                                             |  |                                    | 900     |   |            |   |        |                                       |  |   | 900                      |   |  |   | 1,025   |  
|Term loan                                                                                                                                         |  |                                    | 2,500   |   |            |   |        |                                       |  |   | 2,500                    |   |  |   |         |  
|                                                                                                                                                  |  |                                    |         |   |            |   |        |                                       |  |   |                          |   |  |   |         |  
|Total current liabilities                                                                                                                         |  |                                    | 36,375  |   |            |   | 1,176  |                                       |  |   | 37,551                   |   |  |   | 30,886  |  
|                                                                                                                                                  |  |                                    |         |   |            |   |        |                                       |  |   |                          |   |  |   |         |  
|Other liabilities:                                                                                                                                |  |                                    |         |   |            |   |        |                                       |  |   |                          |   |  |   |         |  
|14% convertible notes                                                                                                                             |  |                                    | 6,629   |   |            |   |        |                                       |  |   | 6,629                    |   |  |   | 6,470   |  
|Term loan                                                                                                                                         |  |                                    |         |   |            |   |        |                                       |  |   |                         |   |  |   | 2,500   |  
|Accrued interest expense  long term                                                                                                              |  |                                    | 240     |   |            |   |        |                                       |  |   | 240                      |   |  |   | 277     |  
|Series D preferred stock subject to mandatory redemption                                                                                          |  |                                    | 1,500   |   |            |   |        |                                       |  |   | 1,500                    |   |  |   | 1,500   |  
|                                                                                                                                                  |  |                                    |         |   |            |   |        |                                       |  |   |                          |   |  |   |         |  
|                                                                                                                                                  |  |                                    | 8,369   |   |            |   |       |                                       |  |   | 8,369                    |   |  |   | 10,747  |  
|                                                                                                                                                  |  |                                    |         |   |            |   |        |                                       |  |   |                          |   |  |   |         |  
|Total liabilities                                                                                                                                 |  |                                    | 44,744  |   |            |   | 1,176  |                                       |  |   | 45,920                   |   |  |   | 41,633  |  
|                                                                                                                                                  |  |                                    |         |   |            |   |        |                                       |  |   |                          |   |  |   |         |  
|Stockholders equity:                                                                                                                             |  |                                    |         |   |            |   |        |                                       |  |   |                          |   |  |   |         |  
|Common stock, $0.001 par value, 25,000,000 shares authorized; 4,203,280 shares issued and outstanding at September 30, 2008
and December 31, 2007 |  |                                    | 4       |   |            |   |        |                                       |  |   | 4                        |   |  |   | 4       |  
|Treasury stock                                                                                                                                    |  |                                    | (105    | ) |            |   |        |                                       |  |   | (105                     | ) |  |   | (105    | )
|Additional paid-in capital                                                                                                                        |  |                                    | 17,784  |   |            |   |        |                                       |  |   | 17,784                   |   |  |   | 17,562  |  
|Retained deficit                                                                                                                                  |  |                                    | (32,738 | ) |            |   | (1,176 | )                                     |  |   | (33,914                  | ) |  |   | (27,334 | )
|                                                                                                                                                  |  |                                    |         |   |            |   |        |                                       |  |   |                          |   |  |   |         |  
|Total stockholders equity                                                                                                                        |  |                                    | (15,055 | ) |            |   | (1,176 | )                                     |  |   | (16,231                  | ) |  |   | (9,873  | )
|                                                                                                                                                  |  |                                    |         |   |            |   |        |                                       |  |   |                          |   |  |   |         |  
|Total liabilities and stockholders equity                                                                                                        |  | $                                  | 29,689  |   |            | $ |       |                                       |  | $ | 29,689                   |   |  | $ | 31,760  |  
|                                                                                                                                                  |  |                                    |         |   |            |   |        |                                       |  |   |                          |   |  |   |         |  

See accompanying notes to financial statements



1



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Tri-S Security Corporation and Subsidiaries

Consolidated Statements of Operations

Unaudited

(In thousands, except per share data)



|                                                            |  |                            |        |   |                          |   |       |                              |  |   |        |   |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |        |   |  |   |        |  
|----------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ----- | ---------------------------- |  | - | ------ | - |  | -------------------------- | ------ | - | ---------- | - | ------ | ---------------------------- |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                            |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                            |  | 2009, aspreviouslyreported |        |   | Adjustment               |   |       | 2009, asrestated(See Note 3) |  |   | 2008   |   |  | 2009, aspreviouslyreported |        |   | Adjustment |   |        | 2009, asrestated(See Note 3) |  |   | 2008   |  
|Revenues                                                    |  | $                          | 33,698 |   |                          |   |       |                              |  | $ | 33,698 |   |  | $                          | 28,168 |   |            | $ | 63,020 |                              |  |   |        |   |  | $ | 63,020 |   |  | $ | 44,459 |  
|Cost of revenues:                                           |  |                            |        |   |                          |   |       |                              |  |   |        |   |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |        |   |  |   |        |  
|Direct labor                                                |  |                            | 21,246 |   |                          |   |       |                              |  |   | 21,246 |   |  |                            | 17,630 |   |            |   | 39,719 |                              |  |   |        |   |  |   | 39,719 |   |  |   | 27,526 |  
|Indirect labor and other contract support costs             |  |                            | 10,528 |   |                          |   | 634   |                              |  |   | 11,162 |   |  |                            | 8,893  |   |            |   | 20,457 |                              |  |   | 1,176  |   |  |   | 21,633 |   |  |   | 14,519 |  
|Amortization of customer contracts                          |  |                            |       |   |                          |   |       |                              |  |   |       |   |  |                            | 66     |   |            |   | 23     |                              |  |   |        |   |  |   | 23     |   |  |   | 133    |  
|                                                            |  |                            |        |   |                          |   |       |                              |  |   |        |   |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |        |   |  |   |        |  
|                                                            |  |                            | 31,774 |   |                          |   | 634   |                              |  |   | 32,408 |   |  |                            | 26,589 |   |            |   | 60,199 |                              |  |   | 1,176  |   |  |   | 61,375 |   |  |   | 42,178 |  
|                                                            |  |                            |        |   |                          |   |       |                              |  |   |        |   |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |        |   |  |   |        |  
|Gross profit                                                |  |                            | 1,924  |   |                          |   | (634  | )                            |  |   | 1,290  |   |  |                            | 1,579  |   |            |   | 2,821  |                              |  |   | (1,176 | ) |  |   | 1,645  |   |  |   | 2,281  |  
|                                                            |  |                            | 5.7    | % |                          |   |       |                              |  |   | 3.8    | % |  |                            | 5.6    | % |            |   | 4.5    | %                            |  |   |        |   |  |   | 2.6    | % |  |   | 5.1    | %
|Selling, general and administrative                         |  |                            | 2,013  |   |                          |   |       |                              |  |   | 2,013  |   |  |                            | 1,596  |   |            |   | 4,056  |                              |  |   |        |   |  |   | 4,056  |   |  |   | 3,286  |  
|Amortization of intangible assets                           |  |                            | 112    |   |                          |   |       |                              |  |   | 112    |   |  |                            | 157    |   |            |   | 230    |                              |  |   |        |   |  |   | 230    |   |  |   | 320    |  
|                                                            |  |                            |        |   |                          |   |       |                              |  |   |        |   |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |        |   |  |   |        |  
|                                                            |  |                            | 2,125  |   |                          |   |      |                              |  |   | 2,125  |   |  |                            | 1,753  |   |            |   | 4,286  |                              |  |   |       |   |  |   | 4,286  |   |  |   | 3,606  |  
|                                                            |  |                            |        |   |                          |   |       |                              |  |   |        |   |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |        |   |  |   |        |  
|Operating income (loss)                                     |  |                            | (201   | ) |                          |   | (634  | )                            |  |   | (835   | ) |  |                            | (174   | ) |            |   | (1,465 | )                            |  |   | (1,176 | ) |  |   | (2,641 | ) |  |   | (1,325 | )
|                                                            |  |                            |        |   |                          |   |       |                              |  |   |        |   |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |        |   |  |   |        |  
|Other income (expense):                                     |  |                            |        |   |                          |   |       |                              |  |   |        |   |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |        |   |  |   |        |  
|Interest expense, net                                       |  |                            | (1,476 | ) |                          |   |       |                              |  |   | (1,476 | ) |  |                            | (1,299 | ) |            |   | (2,860 | )                            |  |   |        |   |  |   | (2,860 | ) |  |   | (2,064 | )
|Other income                                                |  |                            | 7      |   |                          |   |       |                              |  |   | 7      |   |  |                            |       |   |            |   | 12     |                              |  |   |        |   |  |   | 12     |   |  |   | 5      |  
|                                                            |  |                            |        |   |                          |   |       |                              |  |   |        |   |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |        |   |  |   |        |  
|                                                            |  |                            | (1,469 | ) |                          |   |      |                              |  |   | (1,469 | ) |  |                            | (1,299 | ) |            |   | (2,848 | )                            |  |   |       |   |  |   | (2,848 | ) |  |   | (2,059 | )
|                                                            |  |                            |        |   |                          |   |       |                              |  |   |        |   |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |        |   |  |   |        |  
|Loss before income taxes                                    |  |                            | (1,670 | ) |                          |   | (634  | )                            |  |   | (2,304 | ) |  |                            | (1,473 | ) |            |   | (4,313 | )                            |  |   | (1,176 | ) |  |   | (5,489 | ) |  |   | (3,384 | )
|Income tax expense (benefit)                                |  |                            |       |   |                          |   |       |                              |  |   |       |   |  |                            | (55    | ) |            |   | 2      |                              |  |   |        |   |  |   | 2      |   |  |   | (8     | )
|                                                            |  |                            |        |   |                          |   |       |                              |  |   |        |   |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |        |   |  |   |        |  
|Net loss, prior to discontinued operations                  |  | $                          | (1,670 | ) |                          | $ | (634  | )                            |  | $ | (2,304 | ) |  | $                          | (1,418 | ) |            | $ | (4,315 | )                            |  | $ | (1,176 | ) |  | $ | (5,491 | ) |  | $ | (3,376 | )
|                                                            |  |                            |        |   |                          |   |       |                              |  |   |        |   |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |        |   |  |   |        |  
|Discontinued Operations, net of tax                         |  |                            | (515   | ) |                          |   |       |                              |  |   | (515   | ) |  |                            | (397   | ) |            |   | (1,089 | )                            |  |   |        |   |  |   | (1,089 | ) |  |   | (568   | )
|                                                            |  |                            |        |   |                          |   |       |                              |  |   |        |   |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |        |   |  |   |        |  
|Net loss                                                    |  | $                          | (2,185 | ) |                          | $ | (634  | )                            |  | $ | (2,819 | ) |  | $                          | (1,815 | ) |            | $ | (5,404 | )                            |  | $ | (1,176 | ) |  | $ | (6,580 | ) |  | $ | (3,944 | )
|                                                            |  |                            |        |   |                          |   |       |                              |  |   |        |   |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |        |   |  |   |        |  
|Basic and diluted loss per common share  continuing ops.   |  | $                          | (0.40  | ) |                          | $ | (0.15 | )                            |  | $ | (0.55  | ) |  | $                          | (0.34  | ) |            | $ | (1.03  | )                            |  | $ | (0.28  | ) |  | $ | (1.31  | ) |  | $ | (0.80  | )
|Basic and diluted loss per common share  discontinued ops. |  | $                          | (0.12  | ) |                          |   |       |                              |  | $ | (0.12  | ) |  | $                          | (0.09  | ) |            | $ | (0.26  | )                            |  |   |        |   |  | $ | (0.26  | ) |  | $ | (0.14  | )
|Basic and diluted weighted average number of common shares  |  |                            | 4,203  |   |                          |   | 4,203 |                              |  |   | 4,203  |   |  |                            | 4,203  |   |            |   | 4,203  |                              |  |   | 4,203  |   |  |   | 4,203  |   |  |   | 4,203  |  

See accompanying notes to financial statements



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##### Table of Contents

Tri-S Security Corporation and Subsidiaries

Consolidated Statements of Cash Flows

Unaudited

(In thousands)



|                                                                                                |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |         |  
|----------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ---------- | - | ------ | ---------------------------- |  | - | ------ | - |  | - | ------- | -
|                                                                                                |  | Six Months Ended June 30,  |       
|                                                                                                |  | 2009, aspreviouslyreported |        |   | Adjustment |   |        | 2009, asrestated(See Note 3) |  |   | 2008   |  
|Cash flow from operating activities:                                                            |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |         |  
|Net income (loss)                                                                               |  | $                          | (5,404 | ) |            | $ | (1,176 | )                            |  | $ | (6,580 | ) |  | $ | (3,944  | )
|Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |         |  
|Loss on sale of discontinued operations                                                         |  |                            | 54     |   |            |   |        |                              |  |   | 54     |   |  |   |         |  
|Bad debt expense                                                                                |  |                            | (7     | ) |            |   |        |                              |  |   | (7     | ) |  |   | 293     |  
|Depreciation and amortization                                                                   |  |                            | 838    |   |            |   |        |                              |  |   | 838    |   |  |   | 1,362   |  
|Non-cash employee stock option expense                                                          |  |                            | 213    |   |            |   |        |                              |  |   | 213    |   |  |   | 463     |  
|Non-cash interest expense                                                                       |  |                            | 43     |   |            |   |        |                              |  |   | 43     |   |  |   | 111     |  
|Changes in operating assets and liabilities:                                                    |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |         |  
|Unbilled revenues and trade accounts receivable                                                 |  |                            | (2,352 | ) |            |   |        |                              |  |   | (2,352 | ) |  |   | (14,174 | )
|Prepaid expenses and other assets                                                               |  |                            | (225   | ) |            |   |        |                              |  |   | (225   | ) |  |   | (984    | )
|Trade accounts payable                                                                          |  |                            | 773    |   |            |   |        |                              |  |   | 773    |   |  |   | (789    | )
|Accrued liabilities                                                                             |  |                            | (550   | ) |            |   | 1,176  |                              |  |   | 626    |   |  |   | 3,312   |  
|Income taxes payable                                                                            |  |                            | (14    | ) |            |   |        |                              |  |   | (14    | ) |  |   | (402    | )
|                                                                                                |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |         |  
|Net cash provided (used) by operating activities                                                |  |                            | (6,631 | ) |            |   |       |                              |  |   | (6,631 | ) |  |   | (14,752 | )
|                                                                                                |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |         |  
|Cash flow from investing activities:                                                            |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |         |  
|Restricted cash                                                                                 |  |                            |       |   |            |   |        |                              |  |   |       |   |  |   | 273     |  
|Purchase of property and equipment                                                              |  |                            | (218   | ) |            |   |        |                              |  |   | (218   | ) |  |   | (552    | )
|                                                                                                |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |         |  
|Net cash provided (used) by investing activities                                                |  |                            | (218   | ) |            |   |       |                              |  |   | (218   | ) |  |   | (279    | )
|                                                                                                |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |         |  
|Cash flow from financing activities:                                                            |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |         |  
|Bank overdraft                                                                                  |  |                            | 56     |   |            |   |        |                              |  |   | 56     |   |  |   |         |  
|Proceeds from (payments on) asset based lending facility, net                                   |  |                            | 5,557  |   |            |   |        |                              |  |   | 5,557  |   |  |   | 15,128  |  
|Deferred financing costs                                                                        |  |                            | (1     | ) |            |   |        |                              |  |   | (1     | ) |  |   | (26     | )
|Issuance of convertible notes                                                                   |  |                            | (9     | ) |            |   |        |                              |  |   | (9     | ) |  |   |         |  
|                                                                                                |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |         |  
|Net cash provided (used) by financing activities                                                |  |                            | 5,603  |   |            |   |       |                              |  |   | 5,603  |   |  |   | 15,102  |  
|                                                                                                |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                                            |  |                            | (1,246 | ) |            |   |        |                              |  |   | (1,246 | ) |  |   | 71      |  
|Cash and cash equivalents at beginning of period                                                |  |                            | 1,246  |   |            |   |        |                              |  |   | 1,246  |   |  |   | 465     |  
|                                                                                                |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |         |  
|Cash and cash equivalents at end of period                                                      |  | $                          |       |   |            | $ |       |                              |  | $ |       |   |  | $ | 536     |  
|                                                                                                |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |         |  
|Supplemental disclosures of cash flow information:                                              |  |                            |        |   |            |   |        |                              |  |   |        |   |  |   |         |  
|Interest paid  continuing operations                                                           |  | $                          | 2,107  |   |            |   |        |                              |  |   | 2,107  |   |  | $ | 1,990   |  
|Income taxes paid                                                                               |  |                            | 16     |   |            |   |        |                              |  |   | 16     |   |  |   | 394     |  
|Tender of 10% convertible notes for 14% convertible notes                                       |  |                            | 116    |   |            |   |        |                              |  |   | 116    |   |  | $ |        |  
|Payment of deferred financing costs through issuance of warrants                                |  |                            | 9      |   |            |   |        |                              |  |   | 9      |   |  | $ |        |  

See accompanying notes to financial statements



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TRI-S SECURITY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

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 a joint venture in which we are a 49% partner, Southeastern Paragon (SEP)
and (ii) commercial and state and local government customers through our subsidiary, Florida Business I, Inc., formerly known as The Cornwall Group, a Florida corporation (Cornwall). The Company sold substantially all of the
operating assets (except accounts receivable) of Cornwall and its subsidiaries on May 13, 2009.

Tri-S was formed for the
purpose of acquiring and consolidating electronic and physical security companies in order to take advantage of the operating efficiencies created by a large company. Tri-S has acquired and continues to pursue acquisition opportunities in the
contract guard services and system integration services segments of the security industry.

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 SEP. Paragon Systems owns 49% and Southeastern Protective Services owns 51% of SEP. SEP was formed to bid on certain contracts, and Paragon Systems will manage the contracts awarded to SEP. We are accounting for the joint venture in
accordance with FASB Interpretation No. 46 (R) Variable Interest Entities because we believe that SEP is a VIE in which we are the primary beneficiary. In the first six months of 2009, Tri-S recorded revenue from SEP of $3.1
million.

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 (the SBA) 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 its 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, 2008 (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.

In the second quarter of 2009, the Company sold substantially all of the operating assets (except accounts receivable) of Cornwall and its subsidiaries. In accordance with Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, (SFAS No. 144), a business component that is disposed of or classified as held for sale is reported as discontinued operations
if the cash flows of the component have been or will be eliminated from the ongoing operations of the Company, and the Company will no longer have any significant continuing involvement in the business component. The results of discontinued
operations have been aggregated and presented separately in the consolidated statements of operations.

Amounts related to the
discontinuance have been derived from the consolidated financial statements and accounting records of the Company using the historical basis of Cornwalls assets and liabilities to be disposed of and historical results of operations. See note 5
for more information on discontinued operations.

3. Restatement

Subsequent to June 30, 2009, the Company determined the previously issued consolidated financial statements for the

quarter and six months ended June 30, 2009 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



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errors in the Companys consolidated financial statements relate to an incorrect accrual for paid time off for the quarter and six months ended June 30, 2009. As a result of this
incorrect accrual, indirect 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 June 30,2009, are as follows: (i) indirect labor expense of $11,162,000 as opposed to indirect labor expense of $10,528,000 as
previously reported; (ii) cost of revenues of $32,408,000 as opposed to cost of revenues of $31,774,000 as previously reported; and (iii) gross profit of $1,290,000 as opposed to gross profit of $1,924,000 as previously reported; and
(iv) net loss of $2,819,000 as opposed to net loss of $2,185,000 as previously reported .

The restated amounts in the
consolidated financial statements for the six months ended June 30, 2009, are as follows: (i) indirect labor expense of $21,633,000 as opposed to indirect labor expense of $20,457,000 as previously reported; (ii) cost of revenues of
$61,375,000 as opposed to cost of revenues of $60,199,000 as previously reported; and (iii) gross profit of $1,645,000 as opposed to gross profit of $2,821,000 as reported in the Original Report; and (iv) net loss of $6,580,000 as opposed
to net loss of $5,404,000 as previously reported.

4. Liquidity

The Company has historically incurred operating losses and has not yet generated sufficient levels of cash flows from operating activities to
meet its scheduled debt service payments and other obligations. The Company has relied on its senior lenders, LSQ Funding Group, L.C. (LSQ) and BRE LLC (BRE and, together with LSQ, the Lenders), to fund operations
in excess of the borrowing base formula. Our Lenders and the Company entered into a forbearance agreement dated December 12, 2008 that extends our forbearance agreement through January 1, 2010 and that allows for such funding over the
Companys borrowing base and waives certain debt covenant defaults. If the balance outstanding under our agreements with our Lenders becomes immediately due and payable, as a result of the subjective acceleration clause or other provisions of
the loan agreements, and we are unable to raise significant capital or obtain from our Lenders additional waivers or an additional forbearance agreement, then we will not be able to satisfy our obligations to our Lenders, and our Lenders may proceed
to foreclose on the collateral and our business and financial condition will be materially and adversely affected.

Additionally, in November 2008, we completed our offer to exchange our outstanding 10% Convertible Promissory Notes due in 2008 (the 10% Notes) for our 14% Convertible Promissory Notes due 2010 (the New Notes) and
warrants to purchase shares of our common stock (the Exchange Offer). The Exchange Offer was completed on the terms and conditions set forth in our tender offer statement on Schedule TO, initially filed with the Securities and Exchange
Commission on August 20, 2008, as amended. In the Exchange Offer, approximately $6.6 million, or 86%, of the aggregate principal amount of the 10% Notes was tendered for New Notes and warrants.

The future success of the Company is dependent upon, among other things, our ability to: achieve and maintain satisfactory levels of
profitable operations; obtain and maintain adequate levels of debt and/or equity financing; and generate sufficient cash flow from operations to meet current and future debt obligations. We anticipate that, with the recently awarded contracts to
Paragon Systems, the board of directors approved initiatives to reduce expenses and the sale of our Cornwall business, along with the forbearance agreement with our Lenders, our cash flows will provide sufficient operating resources through
December 31, 2009.

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 $213,000 and $463,000 of
stock-based compensation expense for the six months ended June 30, 2009 and 2008, respectively, related to employee stock options, restricted stock and warrants. After recording the expense through June 30, 2009, there remained
approximately $282,000 of unrecognized compensation cost related to unvested employee stock options and restricted stock to be recognized over the next 1.8 years.

6. Sale of Cornwall

On May 13, 2009, the Company sold substantially
all of the operating assets (except accounts receivable) of Cornwall and its subsidiaries for a purchase price of $3.6 million, of which $629,000 is being held in escrow as of June 30, 2009 to secure the continuation of certain contracts
transferred as part of the sale. The decision to sell the Cornwall business was made so we could focus on growing our government business and reduce our overall debt load.



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Revenues and loss from the discontinued operations were as follows (in thousands):





|                                                        |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------- |  | -------------------------- | ----- | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                        |  | Three Months EndedJune 30, |       |   | Six Months EndedJune 30, |  
|                                                        |  | 2009                       |       |   | 2008                     |   |        | 2009 |  |   | 2008   |  
|Operations:                                             |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Revenues                                                |  | $                          | 2,182 |   |                          | $ | 10,178 |      |  | $ | 7,449  |   |  | $ | 20,352 |  
|                                                        |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Operating loss from discontinued operations, net of tax |  | $                          | (461  | ) |                          | $ | (397   | )    |  | $ | (1,035 | ) |  | $ | (568   | )
|Loss on disposal, net of tax                            |  |                            | (54   | ) |                          |   |       |      |  |   | (54    | ) |  |   |       |  
|                                                        |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Loss from discontinued operations, net of tax           |  | $                          | (515  | ) |                          | $ | (397   | )    |  | $ | (1,089 | ) |  | $ | (568   | )
|                                                        |  |                            |       |   |                          |   |        |      |  |   |        |   |  |   |        |  

Sold assets related to discontinued operations were as follows:



|                                  |  |   |      
|--------------------------------- |  | - | -----
|Prepaid expenses and other assets |  | $ | 14   
|Property and equipment, net       |  |   | 10   
|Goodwill                          |  |   | 2,078
|Intangibles, net                  |  |   | 1,327
|                                  |  |   |      
|                                  |  | $ | 3,429
|                                  |  |   |      

Fees associated with the sale of Cornwall amount to $0.2m.

7. Common and Preferred Stock

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

On
September 13, 2007, as a result of the Settlement Agreement (the Paragon Settlement Agreement) among Tri-S, Paragon Systems and Ronald G. Farrell, our Chief Executive Officer, and the former shareholders of Paragon Systems (the
Selling Shareholders), we cancelled the shares of the 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.

Also, on September 13, 2007, as a result of the Paragon Settlement Agreement, the Company issued to the Selling
Shareholders an aggregate of 700,000 shares of common stock and an aggregate of 100 shares of Series D Redeemable Preferred Stock, which (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 and are payable quarterly.

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. Our common stock does not have cumulative voting rights and has 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.

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 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.



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8. Debt and Other Obligations

Amended and Restated Credit Agreement

On October 18, 2005, we entered into a Credit Agreement (the Original Credit Agreement) with our Lenders, pursuant to which we borrowed $1,650,000 pursuant to a term loan with a maturity
date of October 1, 2007 (Term Loan A) and $3,500,000 pursuant to a term loan with a maturity date of October 1, 2009 (Term Loan B and, together with Term Loan A, the Term Loans). During the second
quarter of 2006, the Term Loans were paid in full.

In connection with the Original Credit Agreement, we entered into a
Factoring and Security Agreement (the Factoring Agreement) with LSQ, pursuant to which LSQ purchased from us from time to time certain accounts receivable at a discount of 0.7% and provided us with a professional accounts receivable
management service for a funds usage fee of the prime rate plus 1.0% on the funds advanced on the outstanding accounts receivable purchased. The Factoring Agreement had a $6,000,000 initial purchase limit and a four-year term which automatically
renewed unless we provided notice of our intent to terminate.

Pursuant to the Original Credit Agreement, we also entered into
(i) a Guaranty Agreement pursuant to which we unconditionally and irrevocably guarantee to our Lenders the prompt payment and performance of all of our obligations, indebtedness and liabilities to our Lenders, whether currently existing or
subsequently arising (the Obligations); and (ii) a Security Agreement, pursuant to which we granted to our Lenders a security interest in substantially all of our assets to secure all of the Obligations. Additionally, we have
entered into a Pledge Agreement pursuant to which we pledged to our Lenders the capital stock of Paragon Systems to secure all of our obligations under the Original Credit Agreement and related documents.



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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 (the 2007 Term Loan) with our Lenders to provide additional financing as needed to provide the capital we estimated was necessary to continue to
operate the business during 2007. The 2007 Term Loan matures on March 28, 2010. The 2007 Term Loan bears a 0.25% per month fee on the unused portion of the loan.

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. The Amended and Restated Credit Agreement 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, as may be amended from time to time (the Loan and Security Agreement), and (ii) a Supplemental Agreement to Amended and Restated Credit Agreement with our Lenders
(the Credit Agreement Supplement and, collectively, with the Amended and Restated Credit Agreement, the Loan and Security Agreement and all other agreements we have with our Lenders, the Loan Documents).

The Amended and Restated Credit Agreement continues to provide for the $2,500,000 2007 Term Loan contemplated by the Original Credit
Agreement. Under the Amended and Restated Credit Agreement, interest on the 2007 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 2007 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 2007 Term Loan requires us to pay a Minimum Balance Fee, as described in the Amended and
Restated Credit Agreement, if the 2007 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. Prior to repayment of the 2007 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% (but not less than 11%) and (ii) unbilled accounts receivable at a rate equal to the Prime Rate plus 4.5% (but
not less than 12%). In addition, until the 2007 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 2007 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 includes a subjective
acceleration clause and expires on October 31, 2010.

Under the Credit Agreement Supplement, anytime the 2007 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 the outstanding 2007 Term Loan plus all outstanding Advances less the borrowing base) less (ii) $60,000 or such lesser amount as will reduce the overadvance fee to zero. In addition, the Credit
Agreement Supplement requires that we issue to our Lenders a four-year warrant to purchase 30,000 shares of common stock, at an exercise price of $3.00 per share, for each month in which an overadvance under the Loan and Security Agreement exists.
In no event shall such warrants issued to Lenders under the Credit Agreement Supplement be exercisable in the aggregate for greater than 420,000 shares of common stock. As of June 30, 2009, the Company has issued 420,000 warrants to our Lender.

All of our obligations under the Loan Documents 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.



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The outstanding balance under the Loan Documents as of June 30, 2009, is approximately
$26.3 million. Additionally, from time to time during 2008 and 2009, we have borrowed more than the maximum amount allowable under the availability formula under the Loan and Security 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 Loan Documents and the outstanding borrowings exceeded the borrowing base as defined. On March 26, 2008, we entered into an Amendment and Forbearance Agreement, as amended from time to time (the
Forbearance Agreement), with our Lenders. Pursuant to the Forbearance Agreement, our Lenders waived certain specified defaults under the Loan Documents and agreed to forebear from exercising all remedies available to them in connection
with such existing defaults until the earlier of (i) a potential equity or subordinated debt offering by us or (ii) January 1, 2009. On December 12, 2008, the Forbearance Agreement was amended to extend the end of the forbearance
period from January 1, 2009 to January 1, 2010.

If an event of default under the Loan Documents 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 with an 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 was $8,015,000 upon issuance. 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 was allocated to the 10% Notes and $1,908,000 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 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 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 was amortized to
interest expense over the remaining life of the 10% Notes.

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 in the private placement expired in September and October of 2008.

The 10% Notes with an outstanding principal balance of approximately $7.6 million matured in September and October 2008. On November 13, 2008, we completed the Exchange Offer in which approximately
$6.6 million, or 86%, of the aggregate principal amount of the 10% Notes was tendered for New Notes and warrants.

On
December 16, 2008, we issued to each of two accredited investors: (i) a promissory note with a principal amount of $25,000, which is convertible into shares of our common stock at a conversion price of $1.75 per share, accrues interest on
the principal amount at a rate of 14% per annum and matures on November 13, 2010; and (ii) a five-year warrant to purchase 2,604 shares of our common stock at an exercise price of $0.75 per share. Each of the investors agreed to
accept the promissory note and warrant in full repayment of the 10% convertible promissory note with an outstanding principal amount of $25,000, which matured in September 2008, previously issued by us to such investor.

On January 8, 2009, we issued to each of two accredited investors: (i) a promissory note with a principal amount of $37,500, which
is convertible into shares of our common stock at a conversion price of $1.75 per share, accrues interest on the principal amount at a rate of 14% per annum and matures on November 13, 2010; and (ii) a five-year warrant to purchase
3,906 shares of common stock at an exercise price of $0.95 per share. Each of the investors agreed to accept the promissory note and warrant in full repayment of the 10% convertible promissory note with an outstanding principal amount of $37,500,
which matured in October 2008, previously issued by us to such investor.



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On February 3, 2009, we issued to an accredited investor: (i) a promissory note
with a principal amount of $50,000, which is convertible into shares of our common stock at a conversion price of $1.75 per share, accrues interest on the principal amount at a rate of 14% per annum and matures on November 13, 2010; and
(ii) a five-year warrant to purchase 5,208 shares of our common stock at an exercise price of $0.75 per share. The investor agreed to accept the promissory note and warrant in full repayment of the 10% convertible promissory note with an
outstanding principal amount of $50,000, which matured in October 2008, previously issued by us to such investor.

9. 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 June 30, 2009 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 June 30,
2009, the total amount of interest and penalties accrued was $187,787. 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 2006 to 2008 for
all jurisdictions remain open to examination.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

At June 30, 2009, the Company had cumulative gross
Federal income tax net operating loss (NOL) carryforwards of approximately $19.2 million available to reduce future amounts of taxable income, as a result of taxable losses form operations from 2007 to current and the sale of the
Cornwall Group assets and subsequent worthless stock deduction. If not utilized to offset future taxable income the current NOL will expire between 2027 and 2029. Additionally, the Company acquired through its acquisition of Cornwall 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 $1.3 million of tax effected state NOLs. If not utilized to offset future state taxable income, the state NOLs will expire between 2020 and 2029. For the quarter ended June 30, 2009, management has recorded a total
valuation allowance of $3.3 million against its deferred tax assets including the NOLs.

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 June 30, 2009, management recorded a total valuation
allowance of approximately $8.3 million against its deferred tax assets including the NOLs.

For both of the three
months ended June 30, 2009 and 2008, the Companys effective tax rate was 0.0%. For the three months ended June 30, 2009, 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 $3.3 million against the deferred tax asset offsetting its income tax from operations and the additional loss as a result of the worthless stock deduction resulting from the Cornwall Group asset sale.

10. 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 and six months ended June 30, 2009 and 2008, 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.

11. 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



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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 the Board.

During 2008, the Company and Mr. Farrell agreed to amend his employment agreement as follows: (i) to reduce his annual salary by
(a) 25% during the period from January 1, 2009 through June 30, 2009 and (b) 50% during the period from July 1, 2009 through June 30, 2010; and (ii) to grant to Mr. Farrell (a) 100,000 shares of common
stock on the date the amendment to his employment agreement is executed and (b) 81,406 shares of common stock on January 1, 2009. Notwithstanding the foregoing, the reduction in Mr. Farrells annual salary shall not affect the
calculation of bonus, severance or other amounts which Mr. Farrell is entitled to receive, and which are calculated with reference to Mr. Farrells base salary, under his employment agreement and such bonus, severance and
other amounts will be calculated and made as if the reduction in Mr. Farrells annual salary had not occurred. The stock grants, if made, will be made pursuant and subject to the terms and conditions of the Companys 2004 Stock
Incentive Plan, as amended and restated (the Incentive Plan).

The Company and Mr. Farrell further agreed the
stock grants will vest in a manner such that an aggregate of 10,000 shares will vest on the last day of each month during the period from January 1, 2009 through May 31, 2010, and the remaining unvested shares underlying the stock grants
will vest on June 30, 2010. Notwithstanding the foregoing, if the Company experiences a change in control (as defined in the Incentive Plan), or if Mr. Farrell resigns, is terminated from his position, ceases to be the
Companys Chief Executive Officer or otherwise ceases to be employed by the Company, then all shares underlying the stock grants which have not vested by the end of the month in which such change in control occurs, or at the time of such
resignation, termination or cessation, will be forfeited.

During 2007, the Company entered into an employment agreement with
Nicolas V. Chater, pursuant to which Mr. Chater has agreed to serve as the Companys Chief Financial Officer until June 30, 2010. Pursuant to the employment agreement, the Company has agreed to pay Mr. Chater for his service as
the Companys Chief Financial Officer as follows: (i) a base salary at a rate of $250,000 per year, (ii) an annual retention bonus equal to $25,000 per year and (iii) an annual performance bonus equal to 3% of the Companys
EBITDA 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 employment 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.

The Company has also granted to Mr. Chater, pursuant to 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 equal to the fair market value of our 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 our common stock on each anniversary of the execution of the employment agreement, with such options vesting
equally over a two-year period. These options will have an exercise price equal to the fair market value of our common stock on the date of grant. In November 2008, the Compensation Committee of the Board of Directors determined to grant 50,000
restricted shares of our common stock in lieu of such options.

12. Sales to Major Customers

During the six months ended June 30, 2009 and 2008, respectively, 89%, and 69% of the Companys revenue was earned under contracts
with various Federal government agencies through its Paragon Systems/SEP subsidiary. At June 30, 2009, three customers individually accounted for at least 10% of total revenue: the Department of Homeland SecuritySouthern California ($15.2
million or 22% of revenue), the Social Security Administration ($11.3 million or 16% of revenue) and Department of Homeland Security  Georgia ($7.0 million or 10% of revenue). At June 30, 2009 and 2008, approximately 94% and 79% of
accounts receivable were due from various Federal government agencies, respectively.



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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.

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 |        |   | Discontinuedoperations -Cornwall |   |        | Paragon Systems/SEP |  |   | Holding Co. |  
|For the six months ended June 30, 2009, as previously reported |  |       |        |   |                                  |   |        |                     |  |   |             |   |  |   |        |  
|Revenues                                                       |  | $     | 63,020 |   |                                  | $ |       |                     |  | $ | 63,020      |   |  | $ |       |  
|Amortization and depreciation                                  |  |       | 496    |   |                                  |   |       |                     |  |   | 265         |   |  |   | 231    |  
|Operating income (loss)                                        |  |       | (1,465 | ) |                                  |   |       |                     |  |   | 670         |   |  |   | (2,135 | )
|Interest expense, net                                          |  |       | 2,860  |   |                                  |   |       |                     |  |   | 724         |   |  |   | 2,136  |  
|Loss from discontinued operations, net of tax                  |  |       | (1,089 | ) |                                  |   | (1,089 | )                   |  |   |            |   |  |   |       |  
|Current assets                                                 |  |       | 20,787 |   |                                  |   | 1,493  |                     |  |   | 19,165      |   |  |   | 129    |  
|Goodwill                                                       |  |       | 7,747  |   |                                  |   |       |                     |  |   | 7,747       |   |  |   |       |  
|Other intangibles                                              |  |       | 583    |   |                                  |   |       |                     |  |   |            |   |  |   | 583    |  
|Total assets                                                   |  |       | 29,689 |   |                                  |   | 1,493  |                     |  |   | 27,454      |   |  |   | 742    |  
|                                                               |  |       |        |  
|                                                               |  | Total |        |   | Discontinuedoperations -Cornwall |   |        | Paragon Systems/SEP |  |   | Holding Co. |  
|For the six months ended June 30, 2009, as restated            |  |       |        |   |                                  |   |        |                     |  |   |             |   |  |   |        |  
|Revenues                                                       |  | $     | 63,020 |   |                                  | $ |       |                     |  | $ | 63,020      |   |  | $ |       |  
|Amortization and depreciation                                  |  |       | 496    |   |                                  |   |       |                     |  |   | 265         |   |  |   | 231    |  
|Goodwill impairment loss                                       |  |       |       |   |                                  |   |       |                     |  |   |            |   |  |   |       |  
|Operating income (loss)                                        |  |       | (2,641 | ) |                                  |   |       |                     |  |   | (506        | ) |  |   | (2,135 | )
|Interest expense, net                                          |  |       | 2,860  |   |                                  |   |       |                     |  |   | 724         |   |  |   | 2,136  |  
|Loss from discontinued operations, net of tax                  |  |       | (1,089 | ) |                                  |   | (1,089 | )                   |  |   |            |   |  |   |       |  
|Current assets                                                 |  |       | 20,787 |   |                                  |   | 1,493  |                     |  |   | 19,165      |   |  |   | 129    |  
|Goodwill                                                       |  |       | 7,747  |   |                                  |   |       |                     |  |   | 7,747       |   |  |   |       |  
|Other intangibles                                              |  |       | 583    |   |                                  |   |       |                     |  |   |            |   |  |   | 583    |  
|Total assets                                                   |  |       | 29,689 |   |                                  |   | 1,493  |                     |  |   | 27,454      |   |  |   | 742    |  
|                                                               |  |       |        |  
|                                                               |  | Total |        |   | Discontinuedoperations -Cornwall |   |        | Paragon Systems/SEP |  |   | Holding Co. |  
|For the six months ended June 30, 2008                         |  |       |        |   |                                  |   |        |                     |  |   |             |   |  |   |        |  
|Revenues                                                       |  | $     | 44,459 |   |                                  | $ |       |                     |  | $ | 44,459      |   |  | $ |       |  
|Amortization and depreciation                                  |  |       | 552    |   |                                  |   |       |                     |  |   | 269         |   |  |   | 283    |  
|Operating loss                                                 |  |       | (1,325 | ) |                                  |   |       |                     |  |   | 799         |   |  |   | (2,124 | )
|Interest expense, net                                          |  |       | 2,064  |   |                                  |   |       |                     |  |   | 458         |   |  |   | 1,606  |  
|Loss from discontinued segment, net of tax                     |  |       | (568   | ) |                                  |   | (568   | )                   |  |   |            |   |  |   |       |  
|Current assets                                                 |  |       | 29,822 |   |                                  |   | 6,345  |                     |  |   | 23,321      |   |  |   | 156    |  
|Goodwill                                                       |  |       | 16,078 |   |                                  |   | 8,331  |                     |  |   | 7,747       |   |  |   |       |  
|Other intangibles                                              |  |       | 2,802  |   |                                  |   | 2,359  |                     |  |   | 201         |   |  |   | 242    |  
|Total assets                                                   |  |       | 49,523 |   |                                  |   | 17,131 |                     |  |   | 31,950      |   |  |   | 442    |  



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|                                                                 |  |       |        |   |                                  |   |        |                     |  |             |        |  |   |        |  
|---------------------------------------------------------------- |  | ----- | ------ | - | -------------------------------- | - | ------ | ------------------- |  | ----------- | ------ |  | - | ------ | -
|                                                                 |  | Total |        |   | Discontinuedoperations -Cornwall |   |        | Paragon Systems/SEP |  | Holding Co. |       
|For the three months ended June 30, 2009, as previously reported |  |       |        |   |                                  |   |        |                     |  |             |        |  |   |        |  
|Revenues                                                         |  | $     | 33,698 |   |                                  | $ |       |                     |  | $           | 33,698 |  | $ |       |  
|Amortization and depreciation                                    |  |       | 265    |   |                                  |   |       |                     |  |             | 148    |  |   | 117    |  
|Operating income (loss)                                          |  |       | (201   | ) |                                  |   |       |                     |  |             | 826    |  |   | (1,027 | )
|Interest expense, net                                            |  |       | 1,476  |   |                                  |   |       |                     |  |             | 374    |  |   | 1,102  |  
|Loss from discontinued operations, net of tax                    |  |       | (515   | ) |                                  |   | (515   | )                   |  |             |       |  |   |       |  
|Current assets                                                   |  |       | 20,787 |   |                                  |   | 1,493  |                     |  |             | 19,165 |  |   | 129    |  
|Goodwill                                                         |  |       | 7,747  |   |                                  |   |       |                     |  |             | 7,747  |  |   |       |  
|Other intangibles                                                |  |       | 583    |   |                                  |   |       |                     |  |             |       |  |   | 583    |  
|Total assets                                                     |  |       | 29,689 |   |                                  |   | 1,493  |                     |  |             | 27,454 |  |   | 742    |  
|                                                                 |  |       |        |  
|                                                                 |  | Total |        |   | Discontinuedoperations -Cornwall |   |        | Paragon Systems/SEP |  | Holding Co. |       
|For the three months ended June 30, 2009, as restated            |  |       |        |   |                                  |   |        |                     |  |             |        |  |   |        |  
|Revenues                                                         |  | $     | 33,698 |   |                                  | $ |       |                     |  | $           | 33,698 |  | $ |       |  
|Amortization and depreciation                                    |  |       | 265    |   |                                  |   |       |                     |  |             | 148    |  |   | 117    |  
|Goodwill Impairment Loss                                         |  |       |        |   |                                  |   |        |                     |  |             |        |  |   |        |  
|Operating income (loss)                                          |  |       | (835   | ) |                                  |   |       |                     |  |             | 192    |  |   | (1,027 | )
|Interest expense, net                                            |  |       | 1,476  |   |                                  |   |       |                     |  |             | 374    |  |   | 1,102  |  
|Loss from discontinued operations, net of tax                    |  |       | (515   | ) |                                  |   | (515   | )                   |  |             |       |  |   |       |  
|Current assets                                                   |  |       | 20,787 |   |                                  |   | 1,493  |                     |  |             | 19,165 |  |   | 129    |  
|Goodwill                                                         |  |       | 7,747  |   |                                  |   |       |                     |  |             | 7,747  |  |   |       |  
|Other intangibles                                                |  |       | 583    |   |                                  |   |       |                     |  |             |       |  |   | 583    |  
|Total assets                                                     |  |       | 29,689 |   |                                  |   | 1,493  |                     |  |             | 27,454 |  |   | 742    |  
|                                                                 |  |       |        |  
|                                                                 |  | Total |        |   | Discontinuedoperations -Cornwall |   |        | Paragon Systems/SEP |  | Holding Co. |       
|For the three months ended June 30, 2008                         |  |       |        |   |                                  |   |        |                     |  |             |        |  |   |        |  
|Revenues                                                         |  | $     | 28,168 |   |                                  | $ |       |                     |  | $           | 28,168 |  | $ |       |  
|Amortization and depreciation                                    |  |       | 282    |   |                                  |   |       |                     |  |             | 140    |  |   | 142    |  
|Operating loss                                                   |  |       | (174   | ) |                                  |   |       |                     |  |             | 712    |  |   | (886   | )
|Interest expense, net                                            |  |       | 1,299  |   |                                  |   |       |                     |  |             | 336    |  |   | 963    |  
|Loss from discontinued segment, net of tax                       |  |       | (397   | ) |                                  |   | (397   | )                   |  |             |       |  |   |       |  
|Current assets                                                   |  |       | 29,822 |   |                                  |   | 6,345  |                     |  |             | 23,321 |  |   | 156    |  
|Goodwill                                                         |  |       | 16,078 |   |                                  |   | 8,331  |                     |  |             | 7,747  |  |   |       |  
|Other intangibles                                                |  |       | 2,802  |   |                                  |   | 2,359  |                     |  |             | 201    |  |   | 242    |  
|Total assets                                                     |  |       | 49,523 |   |                                  |   | 17,131 |                     |  |             | 31,950 |  |   | 442    |  



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

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 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 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 at 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 2009 and 2008, 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



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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, restricted stock and warrants 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 June 30, 2009 Compared to Three Months Ended
June 30, 2008

Revenue.Revenue increased $5.5 million to $33.7 million, or 19.5%, for the three months ended
June 30, 2009, as compared to revenue of $28.2 million for the three months ended June 30, 2008. The increase in revenue is primarily due to seven new Federal government contracts obtained by Paragon Systems, net of four contract
expirations.

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 63.0% of revenue in 2009 and 62.6% of revenue in 2008. 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 33.1% of revenue in 2009 and 31.6% of revenue in 2008.

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, as a percentage of revenue, was 96.2% in 2009 and 94.4% in 2008.

Selling, General
and Administrative Expense.Selling, general and administrative expenses as a percentage of revenue was 6.0% in 2009 and 5.7% in 2008. 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 $417,000 to $2.0 million, or 26.0%, for the three months ended June 30, 2009, as compared
to $1.6 million for the three months ended June 30, 2008. This increase is primarily due to higher bank fees associated with higher revenue, and increased personnel costs to support the growth in business.

Interest Expense, Net. Interest expense relates to the interest incurred on our Loan and Security Agreement, the 2007 Term Loan and
the interest expense incurred on our 10% Notes and New Notes. Interest expense increased $177,000, or 13.6%, to $1.5 million for the three months ended June 30, 2009, as compared to interest expense of $1.3 million for the three months ended
June 30, 2008. The increase is primarily due to higher outstanding balances on our Loan and Security Agreement in 2009.

Income Tax Expense (Benefit).The loss before income taxes for the three months ended June 30, 2009, resulted in no tax expense or benefit. The loss before income taxes for the three months ended June 30, 2008, resulted in
a tax benefit of $55,000.

Results of OperationsSix Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008

Revenue.Revenue increased $18.6 million to $63.0 million, or 41.9%, for the six months ended June 30, 2009,
as compared to revenue of $44.4 million for the six months ended June 30, 2008. The increase in revenue is primarily due to seven new Federal government contracts obtained by Paragon Systems, net of four contract expirations.



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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 63.0% of revenue in 2009 and 61.9% of revenue in 2008. 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 34.3% of revenue in 2009 and 32.7% of revenue in 2008.

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, as a percentage of revenue, was 97.4% in 2009 and 94.9% in 2008.

Selling, General and Administrative Expense.Selling, general and administrative expenses as a percentage of revenue was 6.4% in 2009 and 7.4% in 2008. 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 $770,000 to $4.0 million, or
23.3%, for the six months ended June 30, 2009, as compared to $3.3 million for the six months ended June 30, 2008. This increase is primarily due to higher bank fees associated with higher revenue, and increased personnel costs to support
the growth in business.

Interest Expense, Net. Interest expense relates to the interest incurred on our Loan and
Security Agreement, the 2007 Term Loan and the interest expense incurred on our 10% Notes and New Notes. Interest expense increased $796,000, or 37.9%, to $2.9 million for the six months ended June 30, 2009, as compared to interest expense of
$2.1 million for the six months ended June 30, 2008. The increase is primarily due to higher outstanding balances on our Loan and Security Agreement in 2009.

Income Tax Expense (Benefit).The loss before income taxes for the six months ended June 30, 2009, resulted in tax expense of $2,000. The loss before income taxes for the six months ended
June 30, 2008, resulted in a tax benefit of $8,000.

Liquidity and Capital Resources

As of June 30, 2009, we had a zero cash balance. For the six months ended June 30, 2009, cash used by operating activities was $6.6
million primarily due to the net loss of $6.5 million, the increase of unbilled revenues and trade accounts receivable of $2.4 million, and the decrease of accrued liabilities of $0.6 million. Cash provided by financing activities was $5.6 million
primarily due to the proceeds from our asset-based lending facility.

The outstanding balance under the Loan Documents as of
June 30, 2009, is approximately $26.3 million. Additionally, from time to time during 2008 and 2009, we have borrowed more than the maximum amount allowable under the availability formula under the Amended and Restated 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 Loan Documents and the outstanding borrowings exceeded the borrowing base as defined. On March 26, 2008, we entered into the
Forbearance Agreement with our Lenders. Pursuant to the Forbearance Agreement, our Lenders waived certain specified defaults under the Loan Documents and agreed to forebear from exercising all remedies available to our Lenders in connection with
such existing defaults until the earlier of a potential equity or subordinated debt offering or January 1, 2009. On December 12, 2008, the Forbearance Agreement was amended to extend the end of the Forbearance period from January 1,
2009 to January 1, 2010.

We have historically incurred losses and has not yet generated sufficient levels of cash flows
from operating activities to meet our scheduled debt service payments and other obligations. On November 13, 2008, we completed the Exchange Offer pursuant to which we exchanged approximately $6.5 million, or 86%, of the aggregate principal
amount of our outstanding 10% Notes for our New Notes and warrants.

The future success of the Company is dependent upon,
among other things, our ability to achieve and maintain satisfactory levels of profitable operations, obtain and maintain adequate levels of debt and/or equity financing, and provide sufficient cash flow from operations to meet current and future
obligations. We anticipate the recently awarded contracts along with the initiatives



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instituted to maximize cash flows and raise additional equity will alleviate any short-term liquidity issues facing us and will contribute toward achieving profitability and positive cash flow.

If an event of default under the Loan Documents 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.

Item 4T. Controls and Procedures

In connection with preparing an amendment to our Quarterly Report for the quarter ended June 30, 2009, our Chief Executive Officer and Chief Financial Officer evaluated our disclosure controls and
procedures as of the end of the period covered by such 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 paid time off. 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 paid time off were not followed.

Our Chief Executive Officer and Chief Financial Officer again have evaluated our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act as of June 30, 2009. Based on such
evaluation, such officers have concluded that, as of June 30, 2009, a material weakness in our internal control over financial reporting did exist in that we did not maintain effective controls over the completeness and accuracy of the
liabilities relating to paid time off. Specifically, effective controls which were designed and in place to ensure the complete and accurate recording of these accruals and related expenses were not followed.

The company hired additional financial staff during the second quarter of 2009 however the reconciliations of the certain accounts were not
properly prepared as of June 30, 2009. In order to remedy this weakness the Company intends on providing additional training to the financial staff as well as providing additional oversight from the financial department of the corporate office.

There were no additional changes in our internal control over financial reporting that occurred during the second quarter of
2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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 amendment to be signed on its behalf
by the undersigned thereunto duly authorized.



|                        |  |  |  |  |  |                            |  |                                                            
|----------------------- |  |  |  |  |  | -------------------------- |  | -----------------------------------------------------------
|                        |  |  |  |  |  | TRI-S SECURITY CORPORATION
|                        |  |  | 
|Date: December 23, 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                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|2.1         |  | Asset Purchase Agreement, dated May 13, 2009, among the Company, Florida Business I, Inc., formerly known as The Cornwall Group, Inc., and certain of its affiliates, and U.S.
Security Associates, Inc. (The Schedules to the Asset Purchase Agreement have been omitted from this Quarterly Report pursuant to Item 601(b)(2) of Regulation S-K, and the Company agrees to furnish copies of such omitted Schedules supplementally to
the SEC upon request.) |  | Incorporated by reference to Exhibit 2.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2009. 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|3.1         |  | Amended and Restated Articles of Incorporation.                                                                                                                                                                                                                                                                                                                                                                                                                |  | Incorporated by reference to Exhibit 3.1 to the Companys Registration Statement on Form S-1 (No. 333-119737).                
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|3.2         |  | Amended and Restated Bylaws.                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | Incorporated by reference to Exhibit 3.2 to the Companys Registration Statement 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 to Exhibit 3.1 to the Companys Current Report on Form 8-K filed on September 19, 2007.             
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|3.4         |  | Articles of Amendment to Amended and Restated Articles of Incorporation, dated August 5, 2009.                                                                                                                                                                                                                                                                                                                                                                 |  | Incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K filed on August 11, 2009.                
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|3.5         |  | Amendment to the Amended and Restated Bylaws of the Company, adopted September 13, 2007.                                                                                                                                                                                                                                                                                                                                                                       |  | Incorporated by reference to Exhibit 3.2 to the Companys Current Report on Form 8-K filed on September 19, 2007.             
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|3.6         |  | Amendment to the Amended and Restated Bylaws of the Company, adopted December 13, 2007.                                                                                                                                                                                                                                                                                                                                                                        |  | Incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K filed on December 19, 2007.              
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|4.1         |  | Rights Agreement, dated August 7, 2009, between the Company and Registrar and Transfer Company.                                                                                                                                                                                                                                                                                                                                                                |  | Incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K filed on August 11, 2009.                
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.1        |  | Escrow Agreement, dated May 13, 2009, among The Cornwall Group, Inc. and certain of its affiliates, U.S. Security Associates, Inc. and SunTrust Bank.                                                                                                                                                                                                                                                                                                          |  | Incorporated by reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2009.
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.2        |  | Non-Compete Agreement, dated May 13, 2009, among the Company, The Cornwall Group, Inc. and certain of its affiliates, and U.S. Security Associates, Inc.                                                                                                                                                                                                                                                                                                       |  | Incorporated by reference to Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2009.
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.3        |  | Assignment and Assumption Agreement, dated May 13, 2009, among The Cornwall Group, Inc. and certain of its affiliates, and U.S. Security Associates, Inc.                                                                                                                                                                                                                                                                                                      |  | Incorporated by reference to Exhibit 10.4 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2009.



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|     |  |                                                                                                                                    |  |                                                                                                                               
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------
|     |  |                                                                                                                                   
|10.4 |  | Bill of Sale, dated May 13, 2009, among The Cornwall Group, Inc. and certain of its affiliates, and U.S. Security Associates, Inc. |  | Incorporated by reference to Exhibit 10.5 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2009.
|     |  |                                                                                                                                   
|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.                                                                                                               



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