UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  FORM 10-Q  (Mark One)  X.QUARTERLY REPORT UNDER 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_______  STRIKEFORCE TECHNOLOGIES, INC. (Exact name of small business issuer as specified in its charter)  NEW JERSEY
(State or other jurisdiction of incorporation
or organization)333-122113
(Commission file number)22-3827597
(I.R.S. Employer Identification No.)  1090 King Georges Post Road, Suite 603 Edison, NJ 08837 (Address of principal executive offices)  (732) 661-9641 (Issuers telephone number)  Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act (Check one):  Large Accelerated Filer . Accelerated Filer . Non-Accelerated Filer . Smaller Reporting Company X.  Indicate by check whether the registrant is a shell company (as defined in Rule 12b of the Exchange Act). Yes . No X.  State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date: As of August 6, 2009, the issuer had 18,857,456 outstanding shares of Common Stock.   STRIKEFORCE TECHNOLOGIES, INC.  FORM 10-Q  June 30, 2009   Page
NumbersPART I - FINANCIAL INFORMATIONItem 1.Condensed Consolidated Financial Statements (unaudited)3Condensed Consolidated Balance Sheets4Condensed Consolidated Statements of Operations5Condensed Consolidated Statements of Stockholders Deficit6Condensed Consolidated Statements of Cash Flows8Notes to Condensed Consolidated Financial Statements9Item 2.Management Discussion & Analysis of Financial Condition and Results of Operations33Item 3.Quantitative and Qualitative Disclosures About Market Risk45Item 4.Controls and Procedures45PART II - OTHER INFORMATIONItem1.Legal Proceedings45Item1A.Risk Factors46Item 2.Unregistered Sales of Equity Securities and Use of Proceeds48Item 3.Defaults Upon Senior Securities49Item 4.Submission of Matters to a Vote of Security Holders49Item 5.Other information49Item 6.Exhibits50   2   PART I - FINANCIAL INFORMATION  ITEM 1. FINANCIAL STATEMENTS   STRIKEFORCE TECHNOLOGIES, INC.  JUNE 30, 2009 AND 2008   INDEX TO FINANCIAL STATEMENTS   ContentsPage(s)Balance Sheets at June 30, 2009 (Unaudited) and December 31, 20084Statements of Operations for the Three and Six Months Ended June 30, 2009 and 2008 (Unaudited)5Statement of Stockholders Deficit for the Year Ended December 31, 20086Statement of Stockholders Deficit for the Six Months Ended June 30, 2009 (Unaudited)7Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008 (Unaudited)8Notes to the Financial Statements (Unaudited)9  3   STRIKEFORCE TECHNOLOGIES, INC. BALANCE SHEETS  ASSETSJune 30,
2009December 31,
2008(Unaudited)Current Assets:Cash and cash equivalents$24,025$43,030Restricted cash25,93380,737Accounts receivable49,87338,535Current portion of deferred royalties155,865326,808Prepayments and other current assets2,967-Total current assets258,663489,110Property and equipment, net7,57111,027Deferred royalties, net of current portion1,143,0121,127,935Website development cost, net6101,720Patents4,3294,329Security deposit8,6848,684Total Assets$1,422,869$1,642,805LIABILITIES AND STOCKHOLDERS' DEFICITCurrent Liabilities:Derivative financial instruments$493,405$510,689Current maturities of convertible notes payable, net of discount of $34,360and $67,335, respectively1,086,1521,163,177Current maturities of convertible notes payable - related parties419,255419,255Current maturities of notes payable165,208200,208Current maturities of notes payable - related parties683,500696,000Capital leases payable5,5325,532Accounts payable944,455899,387Accrued expenses1,769,8501,739,530Payroll taxes payable53,48153,481Due to factor209,192209,192Due to employees50,35849,877Total current liabilities5,880,3885,946,328Convertible secured notes payable820,508672,167Notes payable, net of current maturities and discount of $68,892 and $0, respectively2,260,2851,750,000Total Liabilities8,961,1818,368,495Commitments and contingenciesStockholders' DeficitPreferred stock at $0.10 par value; 10,000,000 shares authorized;none issued or outstanding--Common stock at $0.0001 par value; 100,000,000 shares authorized;18,824,123 and 17,121,124 shares issued and outstanding, respectively1,8831,712Additional paid-in capital11,343,66111,193,081Accumulated deficit(18,883,856)(17,920,483)Total Stockholders' Deficit(7,538,312)(6,725,690)Total Liabilities and Stockholders' Deficit$1,422,869$1,642,805  See accompanying notes to the financial statements.  4   STRIKEFORCE TECHNOLOGIES, INC. STATEMENTS OF OPERATIONS (UNAUDITED)  For the three monthsFor the six monthsended June 30,ended June 30,2009200820092008Revenues$63,967$65,010$147,233$115,245Cost of sales17,68718,05039,20140,829Gross profit46,28046,960108,03274,416Operating expenses:Selling, general and administrative expenses370,637442,459718,123914,670Research and development101,929107,512206,971207,781Total operating expenses472,566549,971925,0941,122,451Loss from operations(426,286)(503,011)(817,062)(1,048,035)Other (income) expense:Interest income(87)-(396)-Interest expense3,055144,8684,979291,384Financing expense(59,243)41,04693,103296,935Derivative instruments (income) expense, net250,28893,104(17,284)(999,364)Forgiveness of debt-(112,500)(2,485)(238,750)Loss on restructure of debt64,804-64,804-Other (income) expenses3,590-3,590-Total other (income) expense262,407166,518146,311(649,795)Net loss$(688,693)$(669,529)$(963,373)$(398,240)Net loss per common share - basic and diluted$(0.037)$(0.067)$(0.053)$(0.040)Weighted average number of common shares outstanding - basic and diluted18,550,5539,999,99918,238,1169,999,999  See accompanying notes to the financial statements.  5   STRIKEFORCE TECHNOLOGIES, INC. STATEMENT OF STOCKHOLDERS DEFICIT FOR THE YEAR ENDED DECEMBER 31, 2008  Common stock at
$0.0001 par valueAdditionalTotalPaid-inAccumulatedStockholders'SharesAmountCapitalDeficitDeficitBalance at December 31, 20079,999,999$1,000$10,759,732$(16,376,450)$(5,615,718)Issuance of shares of common stock for consulting services10,50011,3591,360Issuance of shares of common stock for financing7,110,546711187,098187,809Issuance of warrants in connection with promissory notes payable--44,321-44,321Issuance of stock options for employee stock option compensation--200,571-200,571Fractional shares due to rounding related to reverse stock split79----Net loss---(1,544,033)(1,544,033)Balance at December 31, 200817,121,124$1,712$11,193,081$(17,920,483)$(6,725,690)  See accompanying notes to the financial statements.  6   STRIKEFORCE TECHNOLOGIES, INC. STATEMENT OF STOCKHOLDERS DEFICIT FOR THE SIX MONTHS ENDED JUNE 30, 2009 (UNAUDITED)  Common stock at $0.0001 par valueAdditionalTotalPaid-inAccumulatedStockholders'SharesAmountCapitalDeficitDeficitBalance at December 31, 200817,121,124$1,712$11,193,081$(17,920,483)$(6,725,690)Issuance of shares of common stock for consulting services114,999124,5614,573Issuance of shares of common stock for financing1,588,000159125,761125,920Issuance of stock options for employee stock option compensation--20,258-20,258Net loss---(963,373)(963,373)Balance at June 30, 200918,824,123$1,883$11,343,661$(18,883,856)$(7,538,312)  See accompanying notes to the financial statements.  7   STRIKEFORCE TECHNOLOGIES, INC. STATEMENTS OF CASH FLOWS (UNAUDITED)  For the Six MonthsFor the Six MonthsEndedEndedJune 30, 2009June 30, 2008Cash flows from operating activities:Net income (loss)$(963,373)$(398,240)Adjustments to reconcile net income (loss) to net cashused in operating activities:Depreciation and amortization4,5667,243Forgiveness of debt9,544(238,750)Discount on notes payable-147,500Amortization of discount on convertible notes32,97553,674Amortization of deferred royalties155,866148,314Expense paid through issuance of note20,000-Mark to market on derivative financial instruments(17,284)(999,364)Issuance of stock options for employee stock option compensation20,258166,047Issuance of common stock, options and warrants for consulting services4,573-Issuance of common stock and warrants for financing expense45,0004,350Changes in operating assets and liabilities:Accounts receivable(11,338)10,172Prepaid expenses(2,967)(5,196)Accounts payable45,06810,897Accrued expenses206,146372,096Payroll taxes payable-106Common stock to be issued-164,611Amount received from (paid to) employees481(50,443)Net cash used in operating activities(450,485)(606,983)Cash flows from investing activities:Change in restricted cash44,804(748,430)Net cash provided by (used in) investing activities44,804(748,430)Cash flows from financing activities:Proceeds from notes payable455,000150,000Proceeds from notes payable, net of discount of $147,500 in 2008, in the form of restricted cash-1,327,500Proceeds from notes payable - related parties-70,000Payments of convertible notes payable - related parties-(54,936)Payments of notes payable(55,824)(104,789)Payments of convertible notes payable-(19,211)Payments of notes payable - related parties(12,500)(25,000)Net cash provided by financing activities386,6761,343,564Net change in cash(19,005)(11,849)Cash and cash equivalents at beginning of period43,03016,307Cash and cash equivalents at end of period$24,025$4,458Supplemental disclosure of cash flow information:Cash paid for:Interest$293,821$291,384Income taxes$1,091$2,435Non-cash investing and financing activities:Conversion of convertible notes payable into common stock$-$-Issuance of promissory note for consulting services$-$-Issuance of warrants for convertible notes$-$-Issuance of warrants for promissory notes$-$-  See accompanying notes to the financial statements.  8   STRIKEFORCE TECHNOLOGIES, INC. JUNE 30, 2009 and 2008 NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)  NOTE 1 - NATURE OF OPERATIONS  StrikeForce Technical Services Corporation was incorporated in August 2001 under the laws of the State of New Jersey. On September 3, 2004, the stockholders approved an amendment to the Certificate of Incorporation to change the name to StrikeForce Technologies, Inc. (StrikeForce or the Company). Prior to December 2002, the Company was a reseller of computer hardware, software products, and telecommunications equipment and services. In December 2002, the Company began to acquire the rights to intangible technology, which upon the consummation changed the direction of the Companys business. The Company is a software development and services company. The Company owns the exclusive right to license and develop various identification protection software products that were developed to protect computer networks from unauthorized access and to protect network owners and users from identity theft. The Company has developed a suite of products based upon the licenses and the Company is seeking to commercially exploit the products in the areas of financial services, eCommerce, corporate, government and consumer sectors. The technology developed by the Company and used in the Companys ProtectID® and GuardedID® products is the subject of two pending patent applications. The Companys firewall product is no longer being developed and the provisional patent application was allowed to expire. A fourth patent application relating to the Companys ProtectID® product was combined into the first ProtectID® pending patent application and the fourth application was allowed to lapse. The Companys operations are based in Edison, New Jersey.  NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Interim period  The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the rules and regulations of the United States Securities and Exchange Commission to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been included. These financial statements should be read in conjunction with the financial statements of the Company for the year ended December 31, 2008 and notes thereto contained in the Report on Form 10-K of the Company as filed with the United States Securities and Exchange Commission (SEC) on March 31, 2009. Interim results are not necessarily indicative of the results for the full year.  Reclassification  Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported losses.  Use of estimates  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reporting amounts of revenues and expenses during the reported period. Significant estimates include, but are not limited to, the estimated useful lives of property and equipment and website development costs. Actual results could differ from those estimates.  Cash equivalents  The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.  Accounts receivable  Trade accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts and sales returns. The allowance for doubtful accounts is the Companys best estimate of the amount of probable credit losses in the Companys existing accounts receivable. The Company determines the allowance based on historical write-off experience, customer specific facts and economic conditions. Bad debt expense is included in general and administrative expenses.  9   Outstanding account balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company had no recorded bad debt expense for the six months ended June 30, 2009 and 2008, respectively. There were no allowances for doubtful accounts at June 30, 2009 or 2008.  Property and equipment  Property and equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation of property and equipment is computed by the straight-line method (after taking into account their respective estimated residual values) over the assets estimated useful lives. Leasehold improvements, if any, are amortized on a straight-line basis over the lease period or the estimated useful life, whichever is shorter. Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in operations.  Leases  Lease agreements are evaluated to determine whether they are capital leases or operating leases in accordance with Statement of Financial Accounting Standards No. 13 Accounting for Leases, as amended (SFAS No. 13). When substantially all of the risks and benefits of property ownership have been transferred to the Company, as determined by the test criteria in SFAS No. 13, the lease then qualifies as a capital lease.  Capital lease assets are depreciated on an accelerated method, over the capital lease assets estimated useful lives consistent with the Companys normal depreciation policy for tangible fixed assets, but generally not exceeding the lease term. Interest charges are expensed over the period of the lease in relation to the carrying value of the capital lease obligation.  Rent expense for operating leases, which may include free rent or fixed escalation amounts in addition to minimum lease payments, is recognized on a straight-line basis over the duration of each lease term.  Deferred royalties  Deferred royalties represent stock based compensation paid by the Company for certain licenses that have been capitalized. Such licenses are utilized in connection with the Companys operations.  Website development cost  Website development cost is stated at cost less accumulated amortization. The cost of the website development is amortized on a straight-line basis over its estimated useful life of three years.  Patents  All costs incurred to the point when a patent application is to be filed are expensed as incurred as research and development cost. Patent application costs, generally legal costs, thereafter incurred are capitalized. Patents are amortized over the expected useful lives of the patents, which is generally 17 to 20 years for domestic patents and 5 to 20 years for foreign patents, once the patents are granted or are expensed if the patent application is rejected. The costs of defending and maintaining patents are expensed as incurred. As of June 30, 2009, the Company capitalized $4,329 in patent application costs as incurred with no amortization due to the fact that the patent applications are still pending.  Impairment of long-lived assets  Long-lived assets, which include property and equipment, deferred royalties, website development cost and patents are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable or the useful life is shorter than originally estimated.  The Company assesses the recoverability of its assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Fair value is generally determined using the assets expected future discounted cash flows or market value, if readily determinable. If assets are determined to be recoverable, but the useful lives are shorter than originally estimated, the net book value of the assets is depreciated over the newly determined remaining useful lives. The Company determined that there was no impairment based on managements evaluation at June 30, 2009 or 2008.  10   Fair value of financial instruments  The Company follows Statement of Financial Accounting Standards No. 107 Disclosures about fair value of Financial Instruments (SFAS No. 107) for disclosures about fair value of its financial instruments and has adopted Financial Accounting Standards Board (FASB) No. 157 Fair Value Measurements (SFAS No. 157) to measure the fair value of its financial instruments. SFAS No. 157 establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, SFAS No. 157 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by SFAS No. 157 are described below:  Level 1Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.Level 2Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.Level 3Pricing inputs that are generally observable inputs and not corroborated by market data.  As defined by SFAS No. 107, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale, which was further clarified as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The carrying amounts of the Companys financial assets and liabilities, such as cash, accounts receivable, prepayments and other current assets, accounts payable, taxes payable, accrued expenses and other current liabilities, approximate their fair values because of the short maturity of these instruments. The Companys notes payable and capital leases payable approximate the fair value of such instruments based upon managements best estimate of interest rates that would be available to the Company for similar financial arrangements at June 30, 2009 and 2008.  The Company does not have any assets or liabilities measured at fair value on a recurring or a non-recurring basis, consequently, the Company did not have any fair value adjustments for assets and liabilities measured at fair value at June 30, 2009 or 2008, nor gains or losses are reported in the statement of operations that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date for the interim period ended June 30, 2009 or 2008.  Discount on debt  The Company has allocated the proceeds received from convertible debt instruments between the underlying debt instruments and has recorded the conversion feature as a liability in accordance with Statement of Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133) and related interpretations. The conversion feature and certain other features that are considered embedded derivative instruments, such as a conversion reset provision, a penalty provision and redemption option, have been recorded at their fair value within the terms of SFAS No. 133 as its fair value can be separated from the convertible note and its conversion is independent of the underlying note value. The conversion liability is marked to market each reporting period with the resulting gains or losses shown on the Statement of Operations. The Company has also recorded the resulting discount on debt related to the warrants and conversion feature and is amortizing the discount using the effective interest rate method over the life of the debt instruments.  Derivatives  The Company accounts for derivatives in accordance with SFAS No. 133 and the related interpretations. SFAS No. 133, as amended, requires companies to recognize all derivative instruments as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value of a derivative instrument depends on: (i) whether the derivative has been designated and qualifies as part of a hedging relationship, and (ii) the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument based upon the exposure being hedged as either a fair value hedge, cash flow hedge or hedge of a net investment in a foreign operation. At June 30, 2009, the Company had not entered into any transactions which were considered hedges under SFAS No. 133.  11   Financial instruments  The Company evaluates its convertible debt, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under SFAS No. 133 and related interpretations including Emerging Issues Task Force (EITF) Issue No. 00-19 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock(EITF Issue No. 00-19). The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the Statement of Operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.  In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.  The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification under SFAS No. 133 are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.  The fair value model utilized to value the various compound embedded derivatives in the secured convertible notes comprises multiple probability-weighted scenarios under various assumptions reflecting the economics of the secured convertible notes, such as the risk-free interest rate, expected Company stock price and volatility, likelihood of conversion and or redemption, and likelihood of default status and timely registration. At inception, the fair value of the single compound embedded derivative was bifurcated from the host debt contract and recorded as a derivative liability which resulted in a reduction of the initial notional carrying amount of the secured convertible notes (as unamortized discount which will be amortized over the term of the notes under the effective interest method).  Revenue recognition  The Companys revenues are derived principally from the sale and installation of its various identification protection software products and related hardware and services. The Company recognizes revenue when it is realized or realizable and earned less estimated future returns. The Company follows the guidance of the United States Securities and Exchange Commissions Staff Accounting Bulletin (SAB) No. 101 Revenue Recognition (SAB No. 101), as amended by SAB No. 104 (SAB No. 104) for revenue recognition. The Company recognizes revenue when it is realized or realizable and earned less estimated future doubtful accounts. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. In addition to the aforementioned general policy, the following are the specific revenue recognition policies for each major category of revenue:  Hardware  Revenue from hardware sales is recognized when the product is shipped to the customer and there are either no unfulfilled Company obligations or any obligations that will not affect the customer's final acceptance of the arrangement. All cost of these obligations is accrued when the corresponding revenue is recognized. There were no revenues from fixed price long-term contracts.  Software, Services and Maintenance  Revenue from time and service contracts is recognized as the services are provided. Revenue from delivered elements of one-time charge licensed software is recognized at the inception of the license term, provided the Company has vendor-specific objective evidence of the fair value of each delivered element. Revenue is deferred for undelivered elements. The Company recognizes revenue from the sale of software licenses, when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed and determinable, and collection of the resulting receivable is reasonably assured. Delivery generally occurs when the product is delivered to a common carrier. The Company assesses collection based on a number of factors, including past transaction history with the customer and the creditworthiness of the customer. The Company does not request collateral from customers. If the Company determines that collection of a fee is not reasonably assured, the Company defers the fee and recognizes revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash.Revenue from monthly software licenses is recognized on a subscription basis.  12   ASP Hosted Services  The Company offers an Application Service Provider hosted service whereby customer usage transactions are invoiced monthly on a cost per transaction basis. The service is sold via the execution of a Service Agreement between the Company and the customer. Initial set-up fees are recognized over the period in which the services are performed.  Revenue from fixed price long-term service contracts is recognized over the contract term based on the percentage of services that are provided during the period compared with the total estimated services to be provided over the entire contract. Losses on fixed price contracts are recognized during the period in which the loss first becomes apparent. Revenue from maintenance is recognized over the contractual period or as the services are performed. Revenue in excess of billings on service contracts is recorded as unbilled receivables and is included in trade accounts receivable. Billings in excess of revenue that is recognized on service contracts are recorded as deferred income until the aforementioned revenue recognition criteria are met.  Stock-based compensation and equity instruments issued to other than employees for acquiring goods or services  Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based Payment(SFAS No. 123R) using the modified prospective method. Under this method, compensation cost in the first quarter of 2006 includes the portion vesting in the period for (1) all share-based payments granted prior to, but not vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and (2) all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the revised provisions of SFAS No. 123R. The fair value of each option grant estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:  June 30,June 30,20092008Risk-free interest rate2.2% - 4.0%3.3% - 4.3%Dividend yield0.00%0.00%Expected volatility60% - 375%197% - 400%Expected option life5 - 10 years5 - 10 years  The expected life of the options has been determined using the simplified method as prescribed in SEC Staff Accounting Bulletin No. 107 (SAB No. 107). Results of prior periods do not reflect any restated amounts and the Company had no cumulative effect adjustment upon adoption of SFAS No. 123R under the modified prospective method. The Companys policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. Additionally, the Companys policy is to issue new shares of common stock to satisfy stock option exercises.  The fair value of each option award is estimated on the date of grant using a Black-Scholes option-pricing valuation model. The ranges of assumptions for inputs shown in the table above for 2009 and 2008 are as follows:  · The expected volatility is based on a combination of the historical volatility of the Companys and comparable companies stock over the contractual life of the options. · The Company uses historical data to estimate employee termination behavior. The expected life of options granted is derived from SAB 107 and represents the period of time the options are expected to be outstanding. · The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the contractual life of the option. · The expected dividend yield is based on the Companys current dividend yield as the best estimate of projected dividend yield for periods within the contractual life of the option.  Software development costs  Statement of Financial Accounting Standards No. 86 Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed (SFAS No. 86) requires capitalization of software development costs incurred subsequent to establishment of technological feasibility and prior to the availability of the product for general release to customers. Systematic amortization of capitalized costs begins when a product is available for general release to customers and is computed on a product-by-product basis at a rate not less than straight-line basis over the products remaining estimated economic life. To date, all costs have been accounted for as research and development costs and no software development cost has been capitalized. Total research and development costs for the six months ended June 30, 2009 and 2008 were $206,971 and $207,781, respectively.  13   Income taxes  The Company follows Statement of Financial Accounting Standards No. 109 Accounting for Income Taxes (SFAS No. 109), which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that includes the enactment date.  The Company adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48 Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No.109 (FIN 48). FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty (50) percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provisions of FIN 48.  Net loss per common share  Net loss per common share is computed pursuant to Statement of Financial Accounting Standards No. 128 Earnings Per Share (SFAS No. 128). Basic loss per share is computed by taking net loss divided by the weighted average number of common shares outstanding for the period. Diluted loss per share is computed by dividing net loss by the weighted average number of shares of common stock and potentially outstanding shares of common stock during each period to reflect the potential dilution that could occur from common shares issuable through stock options, warrants, and convertible debt, which excludes 1,427,297 shares of stock options, 1,488,743 shares of common stock issuable under warrants and 1,920,509 shares of common stock issuable under the conversion feature of the convertible notes payable for the six months ended June 30, 2009, and 830,703 shares of common stock to be issued, 2,539,088 shares of stock options, 1,161,577 shares of common stock issuable under warrants and 2,369,286 shares of common stock issuable under the conversion feature of the convertible notes payable for the six months ended June 30, 2008, respectively. These potential shares of common stock were not included as they were anti-dilutive.  Recently issued accounting pronouncements  On June 5, 2003, the United States Securities and Exchange Commission (SEC) adopted final rules under Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404), as amended by SEC Release No. 33-8934 on June 26, 2008. Commencing with its annual report for the year ending December 31, 2009, the Company will be required to include a report of management on its internal control over financial reporting. The internal control report must include a statement:  · Of managements responsibility for establishing and maintaining adequate internal control over its financial reporting; · Of managements assessment of the effectiveness of its internal control over financial reporting as of year end; and · Of the framework used by management to evaluate the effectiveness of the Companys internal control over financial reporting.  Furthermore, in the following fiscal year, it is required to file the auditors attestation report separately on the Companys internal control over financial reporting on whether it believes that the Company has maintained, in all material respects, effective internal control over financial reporting.  14   In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) Financial Accounting Standard (FAS) 157-4 Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. Based on the guidance, if an entity determines that the level of activity for an asset or liability has significantly decreased and that a transaction is not orderly, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transaction or quoted prices may be necessary to estimate fair value in accordance with Statement of Financial Accounting Standards (SFAS) No. 157 Fair Value Measurements. This FSP is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The company will adopt this FSP for its quarter ending June 30, 2009. There is no expected impact on the financial statements.  In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (APB) 28-1 Interim Disclosures about Fair Value of Financial Instruments. The FSP amends SFAS No. 107 Disclosures about Fair Value of Financial Instruments to require an entity to provide disclosures about fair value of financial instruments in interim financial information. This FSP is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The company will include the required disclosures in its quarter ending June 30, 2009.  In April 2009, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets. The FSP states that in developing assumptions about renewal or extension options used to determine the useful life of an intangible asset, an entity needs to consider its own historical experience adjusted for entity-specific factors. In the absence of that experience, an entity shall consider the assumptions that market participants would use about renewal or extension options. This FSP is to be applied to intangible assets acquired after January 1, 2009. The adoption of this FSP did not have an impact on the financial statements.  In May 2009, FASB issued FASB Statement No. 165 Subsequent events (SFAS No. 165) to be effective for the interim or annual financial periods ending after June15, 2009. SFAS No. 165 The objective of this Statement is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this Statement sets forth: 1. The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements. 2. The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements. 3. The disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The effect of adoption of SFAS No. 165 on the Companys financial position and results of operations is not expected to be material.  In June 2009, the FASB approved the FASB Accounting Standards Codification (the Codification) as the single source of authoritative nongovernmental U.S. GAAP to be launched on July 1, 2009. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the Codification will be considered non-authoritative. The Codification is effective for interim and annual periods ending after September 15, 2009. The Company does not expect the adoption to have a material impact on its consolidated financial position, results of operations or cash flows.  Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.  NOTE 3 - GOING CONCERN  The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As reflected in the accompanying financial statements, the Company had an accumulated deficit of $18,883,856 and a working capital deficiency of $5,621,725 at June 30, 2009 and had a net loss and cash used in operations of $963,373 and $450,485 for the six months ended June 30, 2009, respectively.  15   Currently, the Company is attempting to increase revenues and improve gross margins by implementing a revised sales and marketing strategy. In principle, the Company is redirecting its sales focus from direct sales to companies using an internal sales force, to selling through a distribution channel of Value Added Resellers and Original Equipment Manufacturers. The profit margin from this approach is more lucrative than selling direct due to the increase in sales volume of GuardedID® through a distribution channel strategy. This strategy, if successful, should increase the Companys sales and revenues allowing the Company to mitigate future losses. In addition, management has raised funds through convertible debt instruments and the sale of equity in order to help alleviate the working capital deficiency. Through the utilization of the public capital markets, the Company plans to raise the funds necessary to continue to expand and enhance its growth; however, there can be no assurance that they will be able to increase revenues or raise additional capital. The Company is currently in negotiations with investors to conclude the necessary working capital needs of the Company.  Management expects cash flows from operating activities to improve by the last quarter of 2009, primarily as a result of certain contracts, although there can be no assurance that such contracts will materialize in revenue sufficient to meet operating expenses and fund future operations. The accompanying financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. If it fails to generate positive cash flows or obtain additional financing when required, it may have to modify, delay or abandon some or all of its business and expansion plans.  NOTE 4 - DEFERRED ROYALTIES  On December 2, 2004, the Company issued NetLabs, as advance royalties, options to purchase 760,000 shares of the Companys common stock at a price of $3.60 per share to vest as follows: 253,000 shares at issuance, 253,000 shares at September 11, 2005 and 254,000 shares at September 11, 2006 for the exclusive rights to the intellectual property related to the patents pending for its Out-of-Band technology and firewall solutions, while clarifying that NetLabs still retains ownership.  The fair values for these options were measured at the end of each reporting period and were fixed at each vesting date using the Black-Scholes Option Pricing Model.  As of June 30, 2009 the options to purchase 253,000 shares that vested at issuance are valued (as fixed) at $1,066,395, the options to purchase 253,000 shares that vested at September 11, 2005 are valued (as fixed) at $1,529,132, and the options to purchase the final 254,000 shares (which vested on September 11, 2006) are valued (as fixed) at $264,160. The deferred royalties are being amortized over the term of the original NetLabs Agreement of ten (10) years which will terminate on August 31, 2013. At June 30, 2009, the total value of the deferred royalties, net of accumulated amortization of $1,560,810, is $1,298,877. For the six months ended June 30, 2009 and 2008, $155,866 and $148,314 of royalties were expensed, respectively.  The following table summarizes the annual amounts of deferred royalties that are amortized to general and administrative expenses over the next five (5) years:  2009$155,8652010311,7312011311,7312012311,7312013207,819Total deferred royalties$1,298,877Less current portion(155,865)Deferred royalties, net of current portion$1,143,012   16   NOTE 5 - CONVERTIBLE NOTES PAYABLE  Convertible notes payable at June 30, 2009 and December 31, 2008 consisted of the following:  June 30,
2009December 31,
2008(1) Convertible note bearing interest at 8% per annum maturing on March 28, 2008, with a conversion price of $9.00 per share. As of June 30, 2009, the Company and the note holder are in discussions regarding a settlement of the note balance.$235,000$235,000(2) Convertible non-interest bearing note, having a conversion price of $9.00 per share and maturing on June 30, 2006. In January 2007, the Company agreed to make periodic payments in order to repay the note in full by September 30, 2009.7,0007,000(3) Convertible notes bearing interest at 8% per annum with a conversion price of $9.00 per share. In July and August 2009 the notes were extended to mature on December 31, 2009.50,00050,000(4) Convertible note bearing interest at 8% per annum maturing on July 27, 2008, with a conversion price of $9.00 per share. In December 2008 the note was extended to June 30, 2009. In January 2009, the note holder combined the note balance and accrued interest owed into a purchase of nine units, each unit consisting of a 10% promissory note of $25,000 for a total of $225,000, maturing January 23, 2012 and 82,000 shares of the Companys common stock. An additional loan to the Company, in January 2009, of $100,000 by the note holder was included as part of the purchase of the nine units (see Notes 7 and 11).-100,000(5) Convertible note bearing interest at 8% per annum maturing on March 15, 2008, with a conversion price of $9.00 per share. In July 2008, the Company, the note holder and the Companys investor group agreed upon a settlement whereby the debt shall be assigned to the investor group by the Company and the investor group shall repay the agreed upon settlement amount to the note holder, in installments, through February 2009. The investor group made payments totaling $45,000 to the note holder from July 2008 to January 2009. In July 2009, the investor group and the note holder have agreed upon a revised final settlement whereby the investor group shall make a final payment of $14,900 to the note holder. The payment was made in July 2009 (see Note 13).55,00065,000(6) Convertible note bearing interest at 9% per annum maturing on June 9, 2009, with a conversion price of $1.40 per share. In August 2009 the note was extended to mature on December 9, 2009.200,000200,000(7) Convertible note bearing interest at 9% per annum maturing on September 29, 2009, with a conversion price of $0.80 per share.150,000150,000(8) Six units, sold in February 2007 to six individuals, each consisting of an 18% convertible note of $16,667 for a total of $100,000, maturing August 31, 2007, with a conversion price of $0.50 per share and 6,667 bonus shares of the Companys common stock, per individual, valued at $0.3988, for a total of 40,000 shares of common stock. Six months of prorated interest of $8,729, was due at closing and paid to the note holders. In November 2007 the notes were extended to April 30, 2008. Per the terms of the extensions, the Company repaid 20% of the note balances in November 2007. Of the remaining balances, 20% was due by January 31, 2008 and 60% plus accrued interest was due by April 30, 2008. The payments have been extended by the Company. In conjunction with the November extensions, the note holders shall receive an aggregate total of 20,000 shares of the Companys common stock per month (extension shares) with a value based on the closing market price of the stock on the 18th of each month. In June 2008, the Company paid $9,768 against the six notes. In November 2008, the Company and the six note holders agreed to an amendment to the unit purchase agreements whereby the open note balances, accrued interest and shares of common stock recorded but not yet issued were forgiven and cancelled. The Company also issued 320,928 warrants with an exercise price of $0.20 per share, expiring December 22, 2012 to five of the note holders. As of June 30, 2009, one note holder has not yet agreed to the final settlement balance and his note balance of $3,512 remains open. For the six months ended June 30, 2009 and 2008, the Company expensed $0 and $30,900, respectively, of financing expenses related to the shares issued for the note extensions and settlement (see Note 11).3,5123,512  17    (9) Convertible note executed in May 2007 bearing interest at 9% per annum maturing on May 1, 2009, with a conversion price of $0.35 per share. The Company issued 57,143 warrants with an exercise price of $0.70 per share and an expiration date of May 1, 2009. In May 2009 the note was extended to November 1, 2009.100,000100,000(10) Convertible notes executed in June 2007 bearing interest at 8% per annum maturing on June 29, 2009, with a conversion price of $0.20 per share. The Company issued 100,000 warrants with an exercise price of $0.40 per share and an expiration date of June 29, 2009. In July 2009 the notes were extended to mature on December 29, 2009.100,000100,000(11) Convertible note executed in July 2007 bearing interest at 8% per annum maturing on July 2, 2009, with a conversion price of $0.20 per share. The Company issued 100,000 warrants with an exercise price of $0.40 per share and an expiration date of July 2, 2009. In July 2009 the note was extended to mature on January 2, 2010.100,000100,000(12) Convertible notes executed in August 2007 bearing interest at 9% per annum maturing on August 9, 2009, with a conversion price of $0.25 per share. The Company issued 96,000 warrants with an exercise price of $0.40 per share and an expiration date of August 9, 2010. In July 2009 the notes were extended to mature on February 9, 2010.120,000120,000$1,120,512$1,130,512Less current maturities(1,120,512)(1,130,512)$-$-  Interest expense for the convertible notes payable for the six months ended June 30, 2009 and 2008 was $47,217 and $66,757, respectively.   18   NOTE 6 - CONVERTIBLE NOTES PAYABLE  RELATED PARTIES  Convertible notes payable  related parties at June 30, 2009 and December 31, 2008 consisted of the following:  June 30,
2009December 31,
2008(1) Convertible note executed in November 2003 with the VP of Technology bearing interest at the prime rate plus 2% per annum with an extended maturity date of October 31, 2009, and a conversion price of $10.00 per share. The Company issued 500 warrants with an exercise price of $10.00 per share expiring November 10, 2013.$50,000$50,000(2) Convertible note executed in January 2004 with the VP of Technology bearing interest at the prime rate plus 4% per annum with an extended maturity date of October 31, 2009, and a conversion price of $10.00 per share. In April 2007, the interest calculation was amended from simple to compound effective April 1, 2007.7,5007,500(3) Convertible notes executed in February, June, September 2004 and August 2005 with the CEO bearing interest at an amended rate of 8% per annum with an extended maturity date of December 31, 2009, and a conversion price of $10.00 per share. The Company issued 1,800 warrants with an exercise price of $10.00 per share and expiration dates of February 4, 2014, September 7, 2014 and August 16, 2015.230,000230,000(4) Convertible notes executed in August, and September 2005 with a Software Developer bearing interest at 8% per annum with an extended maturity date of December 31, 2009, and a conversion price of $10.00 per share. The Company issued 150 warrants with an exercise price of $10.00 per share and expiration dates of August 26, 2015 and September 29, 2015.15,00015,000(5) Convertible note executed in September 2005 with a relative of the Chief Financial Officer bearing interest at 8% per annum with an extended maturity date of December 31, 2009, and a conversion price of $10.00 per share. The Company issued 50 warrants with an exercise price of $10.00 per share and an expiration date of December 7, 2015. In April 2007, the interest calculation was amended from simple to compound effective April 1, 2007.5,0005,000(6) Convertible note executed in December 2005 with a Software Developer bearing interest at 8% per annum with an extended maturity date of December 31, 2009, and a conversion price of $10.00 per share. The Company issued 100 warrants with an exercise price of $10.00 per share and an expiration date of December 6, 2015. In April 2007, the interest calculation was amended from simple to compound effective April 1, 2007.10,00010,000(7) Convertible notes executed in December 2005 and January 2006 with the Office Manager bearing interest at 8% per annum with an extended maturity date of December 31, 2009, and a conversion price of $10.00 per share. The Company issued 800 warrants with an exercise price of $10.00 per share and expiration dates of December 28, 2015 and January 9, 2016. In April 2007, the interest calculation was amended from simple to compound effective April 1, 2007.58,75558,755(8) Convertible notes executed in January and February 2006 with the CEO bearing interest at an amended rate of 8% per annum with an extended maturity date of December 31, 2009, and a conversion price of $10.00 per share. The Company issued 380 warrants with an exercise price of $10.00 per share and expiration dates of January 18, 2016 and February 28, 2016. In April 2007, the interest calculation was amended from simple to compound effective April 1, 2007.38,00038,000(9) Convertible note executed in March 2006 with a Software Developer bearing interest at 8% per annum with an extended maturity date of December 31, 2009, and a conversion price of $7.50 per share. The Company issued 50 warrants with an exercise price of $10.00 per share and an expiration date of March 6, 2016. In April 2007, the interest calculation was amended from simple to compound effective April 1, 2007.5,0005,000$419,255$419,255Less current maturities(419,255)(419,255)$-$-   19    At June 30, 2009 and 2008, accrued interest due for the convertible notes  related parties was $137,128 and $103,414, respectively, and is included in accrued expenses in the accompanying balance sheet. Interest expense for convertible notes payable  related parties for the six months ended June 30, 2009 and 2008 was $16,180 and $17,394, respectively.  NOTE 7 - NOTES PAYABLE  Notes payable at June 30, 2009 and December 31, 2008 consisted of the following:  June 30,
2009December 31,
2008(1) One unit consisting of a $100,000 promissory note and 20,000 shares of the Companys common stock, at $1.40, sold in May 2006. The note bears interest at 9% per annum and matured on August 28, 2006. Because the note was not fully repaid within a twenty (20) day grace period after the maturity date, the remaining outstanding principal and accrued and unpaid interest was convertible into shares of common stock of the Company at the sole option of the holder, at a conversion price equal to the lesser of (a) $2.20 or (b) ninety percent (90%) of the lowest VWAP, as defined, of the common stock during the thirty (30) trading days immediately preceding the date of conversion as quoted by Bloomberg, LP. The Company paid a placement agent fee of $7,000 relating to the promissory note. In January 2008, the Company executed a Forbearance Agreement with YA Global, the note holder, whereby YA Global has agreed to forbear from exercising its rights under the secured convertible debentures through February 27, 2008. The terms of the Forbearance Agreement also include a reduction in the YA Global Fixed Conversion Price to $0.065. In February 2008, the Forbearance Agreement was further extended to May 15, 2008. In May 2008, the Company executed a Forbearance Agreement with YA Global, the note holder, whereby YA Global has agreed to forbear from exercising its rights under the secured convertible debentures through October 15, 2008. In April 2009, the note was extended to December 31, 2010 and is not convertible until August 20, 2009.$100,000$100,000(2) Promissory note executed in June 2007, bearing interest at 9% per annum, maturing on December 14, 2007. In December 2007, the Company repaid $5,000 of the principal to the note holder and the note was extended to January 31, 2008. In January 2009, the note holder executed a forbearance agreement whereby he agreed to forbear his rights under the promissory note until March 31, 2009. Per the terms of the agreement, the Company made a $10,000 payment to the note holder in January 2009 and issued 500,000 shares of restricted common stock, at $0.07 per share, to be held in escrow with the note holders attorney. Per the terms of the forbearance agreement, the escrow shares were released to the note holder in April 2009 (see Note 11).35,00035,000(3) Promissory note executed in January 2008, bearing interest at 8% per annum, maturing on December 31, 2008. In December 2008, the note was extended to June 30, 2009. The Company made a payment of $94,792 to the note holder in December 2008. In June 2009, the note was extended to December 31, 2009.5,2085,208(4) Promissory note executed in January 2008, bearing interest at 18% per annum, maturing on July 31, 2008. In July 2008 the note was extended to December 31, 2008. In December 2008, the note was extended to June 30, 2009. In June 2009, the note was extended to December 31, 2009.50,00050,000(5) Seventy units, sold in 2008, with each unit consisting of a 10% promissory note of $25,000, maturing three years from the execution date and with a 10% discount rate, and 82,000 non-dilutable (for one year) restricted shares of the Companys common stock, at market price (see Notes 11 and 13).1,750,0001,750,000  20    (6) Promissory note executed in January 2009 for $225,000, bearing interest at 10% per annum, maturing on January 23, 2012. Per the terms of the promissory note, a note holder of a $100,000 convertible note, executed in July 2008, rolled the convertible note balance and accrued interest owed into a purchase of nine units with each unit consisting of a 10% promissory note of $25,000 for a total of $225,000 and 82,000 shares of the Companys common stock, valued at $0.06, for a total of 738,000 shares of common stock (see Note 11). An additional loan to the Company, in January 2009, of $100,000 by the note holder was included as part of the purchase of the nine units (see Note 5). The shares were issued in February 2009.225,000-(7) Promissory note executed in March 2009 for $50,000, bearing interest at 10% per annum, maturing on March 20, 2012. Per the terms of the promissory note, the note holder purchased two units with each unit consisting of a 10% promissory note of $25,000 and 50,000 restricted shares of the Companys common stock, at market price. The shares were issued in April 2009. In April 2009, the Company signed an agreement whereby the note shall be repaid from the proceeds of sales of the Companys products sold by the note holder who is a distributor for the Company. For the six months ended June 30, 2009, sales proceeds of $15,824 were applied to the note balance (see Notes 11 and 13).34,177-(8) Promissory note executed in April 2009 for $50,000, bearing interest at 10% per annum, maturing on April 10, 2012. Per the terms of the promissory note, the note holder purchased two units with each unit consisting of a 10% promissory note of $25,000 and 50,000 restricted shares of the Companys common stock, at market price. The shares were issued in April 2009. In April 2009, the Company signed an agreement whereby the note shall be repaid from the proceeds of sales of the Companys products sold by the note holder who is a distributor for the Company. For the six months ended June 30, 2009, no sales proceeds were applied to the note balance (see Notes 11 and 13).50,000-(9) Promissory note executed in April 2009 for $35,000, bearing interest at 15% per annum, maturing on December 31, 2009.35,000-(10) Promissory note executed in April 2009 for $50,000, bearing interest at 10% per annum, maturing on April 20, 2012. Per the terms of the promissory note, the note holder purchased two units with each unit consisting of a 10% promissory note of $25,000 and 50,000 restricted shares of the Companys common stock, at market price. The 100,000 shares were issued in June 2009.50,000-(11) Promissory note executed in May 2009 for $40,000, bearing interest at 10% per annum, maturing on July 15, 2009. The note will be repaid from the proceeds of a pending order that shall be invoiced in August 2009.40,000-(12) Promissory note executed in June 2009 for $25,000, bearing interest at 10% per annum, maturing on June 8, 2012. Per the terms of the promissory note, the note holder purchased one unit consisting of a 10% promissory note of $25,000 and 50,000 restricted shares of the Companys common stock, at market price. The shares were issued in June 2009.25,000-(13) Promissory note executed in June 2009 for $75,000, bearing interest at 10% per annum, maturing on June 25, 2012. Per the terms of the promissory note, the note holder purchased three units with each unit consisting of a 10% promissory note of $25,000 and 50,000 restricted shares of the Companys common stock, at market price. The issuance of the 150,000 shares is pending completion of the loan paperwork.75,000-(14) Promissory note executed in June 2009 for $20,000, bearing interest at 10% per annum, maturing on June 29, 2012. The note represents a payment made by the note holder to a third party for professional advertising services rendered. The Company did not receive funds directly from the note holder relating to this note.20,000-$2,494,385$1,950,208Less current maturities(165,208)(200,208)$2,329,177$1,750,000  Interest expense for notes payable for the six months ended June 30, 2009 and 2008 was $112,587 and $78,711, respectively.   21   NOTE 8 - NOTES PAYABLE  RELATED PARTIES  Notes payable  related parties at June 30, 2009 and December 31, 2008 consisted of the following:  June 30,
2009December 31,
2008(1) Promissory notes executed with the CEO bearing interest at an amended rate of 8% per annum with an extended maturity date of December 31, 2009.504,000504,000(2) Promissory note executed in May 2006 with the CEO bearing interest at 9% per annum with an extended maturity date of December 31, 2009. The Company issued 20,000 warrants with an exercise price of $1.30 per share and an expiration date of May 25, 2011. The fair value of the warrants issued was $24,300.100,000100,000(3) Promissory note executed in February 2007 with the CEO bearing interest at 8% per annum with an extended maturity date of December 31, 2009. The Company issued 8,800 warrants with an exercise price of $0.50 per share and an expiration date of February 21, 2012. The fair value of the warrants issued was $3,758.22,00022,000(4) Promissory notes executed in February 2008 with the former President bearing interest at 8% per annum with a maturity date of February 28, 2009. Per the terms of a settlement agreement reached with the former President in April 2009, the notes shall be repaid by monthly payments of $7,500 each. An initial payment of $12,500 was paid in April 2009 (see Note 13).57,50070,000$683,500$696,000Less current maturities(683,500)(696,000)$-$-  Interest expense for notes payable - related parties for the six months ended June 30, 2009 and 2008 was $27,902 and $27,767, respectively.  NOTE 9 - CONVERTIBLE SECURED NOTES PAYABLE  Convertible secured notes payable consisted of the following at June 30, 2009 and December 31, 2008:  June 30,
2009December 31,
2008Citco Global Custody NV (assigned from YA Global/Highgate)$542,588$672,167YA Global (April 2009 debenture)277,920-Total convertible secured notes payable$820,508$672,167  On April 27, 2005, the Company entered into an amended and restated 8% secured convertible debenture with YA Global Investments, LP, formerly Cornell Capital Partners, LP, (Amended YA Global Debenture) in the amount of $1,024,876, which terminated the two $500,000 debentures entered into with YA Global in December 2004 and January 2005. The new debenture entitles YA Global, at its option, to convert, the debenture, plus accrued interest, into shares of the Companys common stock at a price per share equal to the lesser of (i) the greater of $2.50 or an amount equal to 120% of the initial bid price or (ii) an amount equal to 80% of the lowest Volume Weighted Average Price, as defined, of the Companys common stock for the last five trading days immediately preceding the conversion date. If not converted, the entire principal amount and all accrued interest shall be due on the second year anniversary of the debenture. The Company, at its option, may redeem, with fifteen days advance written notice, a portion or all the outstanding convertible debentures. The redemption shall be 110% of the amount redeemed plus accrued interest remaining for the first six months of the executed debenture and after that time the redemption is 120% of the amount redeemed plus accrued interest remaining. The conversion feature and the Companys optional early redemption right have been bundled together as a single compound embedded derivative liability, and fair valued using a layered probability-weighted cash flow approach.   22   On April 27, 2005, the Company entered into a Securities Purchase Agreement (SPA) with Highgate House Funds, Ltd. (Highgate) pursuant to which the Company received $750,000 in exchange for two 7% secured convertible debentures amounting to $750,000 that mature in two (2) years, and the issuance of 15,000 shares of the Companys common stock. The first debenture funding occurred upon the signing of the SPA and the second debenture funding occurred upon the filing of the registration statement. The Company has agreed to reserve for issuance of 200,000 shares of the Companys common stock, which may be adjusted as agreed upon by the parties, to be issued to the debenture holder upon conversion of accrued interest and liquidated damages and additional shares of common stock required to be issued to the debenture holder in accordance with the SPA. Additionally, in accordance with the SPA, the Company is required to maintain in escrow and register with the SEC five times the number of shares of common stock that would be needed to satisfy the full conversion of all such convertible debentures outstanding and to issue additional shares as needed if the number of shares in escrow becomes less than that required. Further, following a notice of conversion, the investors may sell escrowed shares in the registered distribution before they are actually delivered, but, the investors will not engage in short sales. The terms of the secured debentures contain a limitation that precludes conversion when the amount of shares already owned by YA Global and Highgate, plus the amount of shares still outstanding to be converted, would exceed 4.99%. The limitation may be waived by YA Global upon 61 days advance written notification to the Company.In addition, on the third anniversary of the issuance date of the YA Global debenture and second anniversary of the issuance dates of the Highgate debentures, any outstanding principal or interest owed on the secured debentures will be converted into stock without any applicable limitation on the number of shares that may be converted.  The aforementioned debentures bear interest at a rate of 7% per annum, compounded monthly, and expire 2 years after the date of issuance. The debentures are convertible into shares of common stock at a conversion price equal to the lesser of (i) 120% of the average closing bid price for the 5 trading days immediately preceding the closing date; or (ii) 80% of the lowest closing bid price for the 5 trading days immediately preceding the date of conversion. In addition, the Company has the right to redeem the debentures, at any time prior to its maturity, upon 3 business days prior written notice to the holder. The redemption price is equal to 120% of the face amount redeemed plus accrued interest. In the event that the Company redeems the debentures within 180 days after the date of issuance, the redemption price shall be 110% of the face amount redeemed plus accrued interest. The conversion feature and the Companys optional early redemption right have been bundled together as a single compound embedded derivative liability, and fair valued using a layered probability-weighted cash flow approach.  In July 2006, the Company agreed to an anti-dilution adjustment with YA Global and Highgate whereby the conversion price of the secured convertible debentures was reduced to a fixed per share price equal to the lower of $0.85 or 80% of the lowest closing bid price during the five days preceding the conversion date.  The SPA contains certain negative covenants concerning assets, ownership, management and debt. The Company has paid $75,000 for structuring fees and expenses and $5,000 for commitment fees related to this SPA.  Interest expense for the convertible secured notes payable for the six months ended June 30, 2009 and 2008 was $15,952 and $25,655, respectively.  In January 2008, the Company executed a Forbearance Agreement with YA Global whereby YA Global and Highgate have agreed to forbear from exercising their rights under the secured convertible debentures through February 27, 2008. The terms of the Forbearance Agreement record the amount due to YA Global and Highgate by the Company to be $1,214,093, which includes principal, interest and the redemption premium. The terms also include a reduction in the YA Global and Highgate Fixed Conversion Price to $0.065. In connection with this Agreement, the Company issued to YA Global 500,000 contingency warrants with an exercise price of $0.15 per share. The warrants are exercisable for a period of five (5) years from date of issuance. The warrants are held in escrow and will only be released to YA Global if the total amount due by the Company is not paid to YA Global by February 29, 2008.  In February 2008, the Forbearance Agreement was amended and extended to May 15, 2008, including the terms of the contingency warrants. Per the terms of the amendment, YA Global and Highgate shall receive an additional 105 days of interest for a total amount of $28,328.84 additional interest. The additional interest plus a security deposit of $171,671.16 were paid to YA Global and Highgate per the terms of a debt assignment agreement executed with an investor group in February 2008, for a total amount paid to YA Global of $200,000 (see Note 13). The security deposit will be applied to the amount due YA Global and Highgate if the remaining balance due is paid in full by May 15, 2008. Otherwise, the security deposit will be applied to YA Global as liquidated damages.   23   In May 2008, the Company executed a Forbearance Agreement with YA Global that supersedes the January 2008 agreement and February 2008 amendment, whereby YA Global and Highgate have agreed to forbear from exercising their rights under the secured convertible debentures through October 15, 2008. Per the terms of the May 2008 Forbearance Agreement, the Company agreed to use its best efforts to make available sufficient authorized shares of its common stock to effect conversion of the entire amount outstanding, to YA Global and Highgate, by October 15, 2008. The terms of the contingency warrants became applicable to the terms of the May 2008 Forbearance Agreement. Additionally, per the terms of the agreement, the Companys investor group paid $75,000 to YA Global in May 2008 which is further broken down as:  · $17,268 (additional prepaid interest to YA Global from May 15, 2008 to October 15, 2008) · $7,181 (additional prepaid interest to Highgate from May 15, 2008 to October 15, 2008) · $27,840 (accrued interest due on the Highgate debenture dated April 26, 2005) · $22,711 (non-refundable extension payment that will be applied to the redemption amount if the remaining balance is paid in full by October 15, 2008)  The payment of the accrued interest of $27,840 for the Highgate April 26, 2005 debenture reduced the total amount of our indebtedness to YA Global and Highgate to $1,186,253 as agreed to in the May 2008 Forbearance Agreement.  In April 2009, the YA Global and Highgate secured convertible debentures were extended to December 31, 2010. Per the terms of the extension, the security deposit of $171,671 paid in March 2008 and the extension payment of $22,711 paid in May 2008 were applied to the YA Global debenture resulting in a remaining note balance of $233,065. The balance of the Highgate debenture remained $244,720.  In April 2009, the Company executed a secured convertible debenture with YA Global for $277,920, maturing on December 31, 2010. The debenture, which is not interest bearing, represents accrued interest owed on the existing YA Global and Highgate secured convertible debentures through April 23, 2009.  In April 2009, YA Global notified the Company that the April 2005 YA Global and May 2005 Highgate secured convertible debentures, related documents and the subsequent forbearance agreements have been assigned to Citco Global Custody NV (Citco Global) as of April 24, 2009. The Company recorded the assigned debentures as restructuring of troubled debt. The Company recorded the accrued interest on the assigned debentures through the extended due date of December 31, 2010 as a loss on restructured debt in the amounts of $33,893 on the assigned YA Global debenture and $30,911 on the assigned Highgate debenture. On April 24, 2009, the adjusted balance of the assigned debentures was $266,957 (YA Global assignment) and $275,631 (Highgate assignment).  Conversions to Common Stock  For the six months ended June 30, 2009 and 2008, Citco Global had no conversions.  For the six months ended June 30, 2009 and 2008, YA Global had no conversions.  For the six months ended June 30, 2009 and 2008, Highgate had no conversions.  24   NOTE 10 - FINANCIAL INSTRUMENTS  The secured convertible notes payable are hybrid instruments which contain an embedded derivative feature which would individually warrant separate accounting as a derivative instrument under SFAS No. 133. The embedded derivative feature has been bifurcated from the debt host contract, referred to as the "Compound Embedded Derivative Liability". The embedded derivative feature includes the conversion feature within the note and an early redemption option. The value of the embedded derivative liability was bifurcated from the debt host contract and recorded as a derivative liability, which resulted in a reduction of the initial carrying amount (as unamortized discount) of the notes. The unamortized discount is amortized to interest expense using the effective interest method over the life of the notes, or 12 months.  The secured convertible debentures issued to YA Global and Highgate have been accounted for in accordance with SFAS No. 133 and EITF 00-19. The Company has identified the above instruments having derivatives that require evaluation and accounting under the relevant guidance applicable to financial derivatives. These compound embedded derivatives have been bifurcated from their respective host debt contracts and accounted for as derivative liabilities in accordance with EITF 00-19. When multiple derivatives exist within convertible notes, they have been bundled together as a single hybrid compound instrument in accordance with SFAS No. 133 Derivatives Implementation Group Implementation Issue No. B-15, Embedded Derivatives: Separate Accounting for Multiple Derivative Features Embedded in a Single Hybrid Instrument. The compound embedded derivatives within the secured convertible notes have been recorded at fair value at the date of issuance; and are marked-to-market each reporting period with changes in fair value recorded to the Companys statement of operations as Derivative instrument expense, net. The Company has utilized a third party valuation consultant to fair value the compound embedded derivatives using a layered discounted probability-weighted cash flow approach. The fair value of the derivative liabilities are subject to the changes in the trading value of the Companys common stock, as well as other factors. As a result, the Companys financial statements may fluctuate from quarter-to-quarter based on factors, such as the price of the Companys stock at the balance sheet date and the amount of shares converted by note holders. Consequently, the financial position and results of operations may vary from quarter-to-quarter based on conditions other than operating revenues and expenses.  NOTE 11 - STOCKHOLDERS DEFICIT  Common Stock  On August 8, 2008, the shareholders of the Company authorized a 1 for 10 reverse stock split. All share and per share data in the financial statements and related notes have been restated to give retroactive effect to the reverse stock split.  Issuance of Stock for Services  In August 2005, the Company entered into a retainer agreement with an attorney, whereas the attorney will act as in house counsel for the Company with respect to all general corporate matters. The agreement is at will and required a payment of 1,000 shares of common stock, valued at $9.00 per share, due upon execution. The certificate for the 1,000 shares of common stock was issued in October 2005. Commencing on September 1, 2005, the fee structure also includes a monthly cash fee of $1,000 and the monthly issuance of 2,500 shares of common stock, valued at market. For the six months ended June 30, 2009, the Company issued 15,000 shares of common stock, valued at $773, all of which has been expensed as legal fees, related to the agreement.  In December 2007, the Company executed a consulting agreement with a financial advisor whereby the consultant will provide introduction of potential investors to the Company. As compensation for the services, the consultant shall receive a monthly fee in the amount of $5,000. The agreement can be terminated by either party by providing the other party with thirty days advance written notice. The consultant received 500,000 shares of the Companys common stock, valued at $0.065 per share. The shares are restricted and have piggyback registration rights upon the next registration statement filed by the Company. In April 2009, the Company executed a consulting agreement with the financial advisor whereby the consultant will provide introduction of potential investors to the Company. The agreement replaces the December 2007 agreement executed with the consultant. As compensation for the services, the consultant shall receive a monthly fee in the amount of $7,000. The consultant shall defer payment until the Company achieves monthly net income before taxes of $20,000. The agreement can be terminated by either party by providing the other party with thirty days advance written notice. In April 2009, the Company and the financial advisor executed an amendment to the consulting agreement whereby the consultant will receive additional compensation for the services of 400,000 shares of the Companys common stock, valued at $0.05 per share. The shares shall be issued in increments of 33,333 shares per month over a twelve month period (see Note 13). For the six months ended June 30, 2009, the Company issued 99,999 shares of common stock, valued at $3,800, all of which has been expensed as consulting fees, related to the agreement.  25   Issuance of Stock for Financing  In January 2008, the Company recorded 1,000,000 shares of common stock, valued at $0.0092 per share, issuable to an individual as consideration for a promissory note executed in January 2008 (see Note 7). The shares have Rule 144 piggyback registration rights. In 2008, the Company expensed $9,200 of financing expenses related to the shares which were issued in November 2008.  In accordance with a term sheet executed with an investment firm in January 2008, the Company sold 70 units to twenty-seven investors between January and December 2008. In 2008, the Company issued 5,740,000 shares of common stock, valued at $0.011 to $0.08 per share, issuable to the investors per the terms of the agreement (see Notes 7 and 13). All of the shares recorded relating to the term sheet are non-dilutable and have Rule 144 piggyback registration rights. For the six months ended June 30, 2009 and 2008, the Company expensed $0 and $115,029, respectively, of financing expenses related to the shares.  In December 2008, the Company issued 290,695 shares of common stock, valued at $0.095 per share, issuable to five note holders and the placement agent per an amendment executed in November 2008 to the February 2007 unit purchase agreements. Per the amendment, the shares of common stock recorded but not yet issued were forgiven and cancelled. The 240,000 shares of common stock recorded from December 2007 through September 2008 were cancelled in December 2008 and $46,800 in financing expense was reversed. For the six months ended June 30, 2009 and 2008, the Company expensed $0 and $30,900, respectively, of financing expenses related to the shares issued for the note extensions and settlement (see Note 5).  In December 2008, the Company cancelled 60,000 shares of common stock, recorded but not yet issued, issuable to a note holder and the placement agent per an amendment executed in November 2008 to the April 2007 unit purchase agreement. Per the amendment, the shares of common stock recorded but not yet issued were forgiven and cancelled. The 60,000 shares of common stock recorded from December 2007 through September 2008 were cancelled in December 2008 and $11,700 in financing expense was reversed. For the six months ended June 30, 2009 and 2008, the Company expensed $0 and $7,500, respectively, of financing expenses related to the shares issued for the note extensions.  In December 2008, the Company issued 59,384 shares of common stock, valued at $0.095 per share, issuable to two remaining note holders per an amendment executed in November 2008 to the July 2006 unit purchase agreements. Per the amendment, the shares of common stock recorded but not yet issued were forgiven and cancelled. The 19,618 shares of common stock recorded from December 2007 through September 2008 were cancelled in December 2008 and $3,836 in financing expense was reversed. For the six months ended June 30, 2009 and 2008, the Company expensed $0 and $2,541, respectively, of financing expenses related to the shares issued for the note extensions and settlement.  In January 2009, the Company executed a forbearance agreement with a note holder whereby the note holder agrees to forebear his rights under the promissory note until March 31, 2009. Per the terms of the agreement, the Company made a $10,000 payment to the note holder in January 2009 and issued 500,000 shares of restricted common stock, at $0.07 per share, to the note holder to be held in escrow with the note holders attorney. Per the terms of the forbearance agreement, the escrow shares were released to the note holder in April 2009 (see Note 7). Effective March 31, 2009, the note holder retains the right to accept shares of the Companys common stock in lieu of the Companys indebtedness. For the six months ended June 30, 2009 and 2008, the Company expensed $45,000 and $0, respectively, of financing expenses related to the shares.  In January 2009, the Company executed a promissory note for $225,000, bearing interest at 10% per annum, maturing on January 23, 2012. Per the terms of the promissory note, the note holder of a $100,000 convertible note, executed in July 2008, rolled the convertible note balance and accrued interest owed into a purchase of nine units with each unit consisting of a 10% promissory note of $25,000 for a total of $225,000 and 82,000 shares of the Companys common stock, valued at $0.06, for a total of 738,000 shares of common stock. An additional loan to the Company, in January 2009, of $100,000 by the note holder was included as part of the purchase of the nine units (see Notes 5 and 7). The shares were issued in February 2009. For the six months ended June 30, 2009 and 2008, the Company expensed $11,070 and $0, respectively, of financing expenses related to the shares.  In March 2009, the Company executed a promissory note for $50,000, bearing interest at 10% per annum, maturing on March 20, 2012. Per the terms of the promissory note, the note holder purchased two units with each unit consisting of a 10% promissory note of $25,000 and 50,000 restricted shares of the Companys common stock, at market price, for a total of 100,000 shares of common stock. The shares were issued in April 2009. For the six months ended June 30, 2009 and 2008, the Company expensed $417 and $0, respectively, of financing expenses related to the shares (see Notes 7 and 13).  26   In April 2009, the Company executed a promissory note for $50,000, bearing interest at 10% per annum, maturing on April 10, 2012. Per the terms of the promissory note, the note holder purchased two units with each unit consisting of a 10% promissory note of $25,000 and 50,000 restricted shares of the Companys common stock, at market price, for a total of 100,000 shares of common stock. The shares were issued in April 2009. For the six months ended June 30, 2009 and 2008, the Company expensed $417 and $0, respectively, of financing expenses related to the shares.  In May 2009, the Company executed a promissory note for $50,000, bearing interest at 10% per annum, maturing on May 27, 2012. Per the terms of the promissory note, the note holder purchased two units with each unit consisting of a 10% promissory note of $25,000 and 50,000 restricted shares of the Companys common stock, at market price, for a total of 100,000 shares of common stock. The shares were issued in May 2009. For the six months ended June 30, 2009 and 2008, the Company expensed $84 and $0, respectively, of financing expenses related to the shares.  In June 2009, the Company executed a promissory note for $25,000, bearing interest at 10% per annum, maturing on June 8, 2012. Per the terms of the promissory note, the note holder purchased one unit consisting of a 10% promissory note of $25,000 and 50,000 restricted shares of the Companys common stock, at market price. The shares were issued in June 2009. For the six months ended June 30, 2009 and 2008, the Company expensed $42 and $0, respectively, of financing expenses related to the shares.  Issuance of Warrants for Financing and Services  In connection with convertible notes, promissory notes, note settlements and consulting agreements executed between August 2003 and December 2008, the Company issued (i) warrants for 1,192,517 shares to note holders and (ii) warrants for 175,950 shares to consultants, all of which have been earned upon issuance. The fair value of these warrants granted, estimated on the date of grant, was $814,955, which has been recorded as additional paid-in capital, using the Black-Scholes option-pricing model with the following weighted-average assumptions:  Expected warrant life (year)2.00 to 5.00Expected volatility60% to 400%Risk-free interest rate1.40% to 5.16%Dividend yield0.00%  The table below summarizes the Companys warrants activity for the six months ended June 30, 2009:   Number of
Warrant
SharesExercise Price
Range Per ShareWeighted
Average
Exercise
PriceFair Value
at Date of
IssuanceIntrinsic
Value(in
thousands)Balance, January 1, 2008953,360$0.10 - $ 10.00$1.086$770,635$-Granted415,107$0.20 - $   0.25$0.202$44,320$-Cancelled-$-       $        -$-$-$-Balance, December 31, 20081,368,467$0.10 - $ 10.00$0.818$814,955$-Balance, June 30, 20091,368,467$0.10 - $ 10.00$0.818$814,955$-Earned and Exercisable, June 30, 20091,368,467$0.818$814,955$-  The following table summarizes information concerning outstanding and exercisable warrants as of June 30, 2009:  Warrants OutstandingWarrants ExercisableRange of Exercise PricesNumber OutstandingAverage Remaining Contractual Life (in years)Weighted-Average Exercise PriceNumber ExercisableWeighted-Average Exercise Price$10.008,0505.00$10.0008,050$10.000$1.00 - $5.00281,4172.002.436281,4172.436$0.10 - $0.801,079,0002.000.3251,079,0000.3251,368,4673.00$0.8181,368,467$0.818  27   NOTE 12 - STOCK BASED COMPENSATION  In September 2004, the stockholders approved the Equity Incentive Plan for its employees (Incentive Plan), effective April 1, 2004. Of the total authorized for issuance at June 30, 2009, 98,572,703 shares were available for future issuance.  2004 Equity Incentive Plan  The number of shares authorized for issuance under the Incentive Plan was increased to 10,000,000 in September 2006, 15,000,000 in March 2007, 20,000,000 in June 2007 and 100,000,000 in December 2007, by unanimous consent of the Board of Directors. In August 2008, the Company repurchased, at no cost, employee stock options totaling 1,111,791 shares of common stock from twelve employees as a result of a voluntary tender by the employees. The exercise price of the cancelled options ranged from $0.15 per share to $10.00 per share.  Option shares totaling 142,500 vest equally over a three year period beginning one-year from the date of grant, option shares totaling 200,000 vest in one-third increments of six months each over an eighteen month period from the date of grant and option shares totaling 1,084,797 vest over a one-year period from the date of grant.  The table below summarizes the Companys Incentive Plan stock option activity through June 30, 2009:  Number of
Option
SharesExercise Price
Range Per ShareWeighted
Average
Exercise
PriceWeighted
Average
Remaining
(in years)
Contractual
TermIntrinsic
Value(in
thousands)Balance, January 1, 20082,539,088$0.08 - $ 10.00$1.050-$-Granted-$0.15 - $ 10.00$--$-Cancelled1,111,791$0.08 - $ 10.00$1.823-$-Balance, December 31, 20081,427,29$0.08 - $ 10.00$0.448-$-Balance, June 30, 20091,427,29$0.08 - $ 10.00$0.448-$-Vested and Exercisable, June 30, 20091,427,29$0.448-$-  As of June 30, 2009, an aggregate of 1,427,297 options were outstanding under the incentive plan. The exercise price for 37,500 options is $10.00, for 105,000 options is $1.00, for 9,231 is $0.375, for 15,705 is $0.24, for 16,388 options is $0.23, for 325,577 options is $0.20, for 171,131 options is $0.17, for 259,743 options is $0.15 and 487,022 options is $0.08. As of June 30, 2008, an aggregate of 2,539,088 options were outstanding under the incentive plan. The exercise price for 183,000 options was $10.00, for 10,000 options was $5.00, for 277,500 options was $1.00, for 34,810 options was $0.99, for 40,543 options was $0.85, for 49,231 options was $0.70, for 49,372 options was $0.698, for 202,308 was $0.50, for 55,812 was $0.45, for 91,898 was $0.375, for 78,526 was $0.24, for 155,184 options was $0.23, for 377,308 options was $0.20, for 186,832 options was $0.17, for 259,743 options was $0.15 and for 487,021 options was $0.08. At June 30, 2009, there were 1,427,297 vested incentive plan stock options outstanding of which 487,022 options are exercisable at $0.08, 259,743 options are exercisable at $0.15, 171,131 options are exercisable at $0.17, 325,577 options are exercisable at $0.20, 16,388 options are exercisable at $0.23, 15,705 options are exercisable at $0.24, 9,231 options are exercisable at $0.375, 105,000 options are exercisable at $1.00 and 37,500 options are exercisable at $10.00.  As of June 30, 2009, there was no unrecognized compensation cost related to unvested share-based compensation arrangements that is expected to be recognized over a weighted-average period of 12 months.  The following table summarizes information concerning outstanding and exercisable Incentive Plan options as of June 30, 2009:  28    Options OutstandingOptions ExercisableRange of Exercise PricesNumber OutstandingAverage Remaining Contractual Life (in years)Weighted-Average Exercise PriceNumber ExercisableWeighted-Average Exercise Price$10.00037,5006.00$10.00037,500$10.000$1.000105,0008.001.000105,0001.000$0.080 - $0.3751,284,7979.000.1431,284,7970.1431,427,2977.67$0.4481,427,297$0.448  Non-Incentive Plan Stock Option Grants  Since December 31, 2005, the Company has outstanding an aggregate of 761,889 non-plan, non-qualified options for non-employees with 760,000 exercisable at $3.60 and 1,889 exercisable at $9.00 yielding a weighted average exercise price of $3.613 and no outstanding incentive options outside of the Plan.  NOTE 13 - COMMITMENTS AND CONTINGENCIES  Payroll Taxes  As of June 30, 2009, the Company owes $53,481 of payroll taxes, of which approximately $45,000 are delinquent from the year ended December 31, 2003. The Company has also recorded $32,462 of related estimated penalties and interest on the delinquent payroll taxes. Although the Company has not entered into any formal repayment agreements with the respective tax authorities, management plans to make payment as funds become available.  Lease Agreements  In January 2008, the Company executed a lease renewal agreement with its landlord. The term of the renewal is from February 1, 2008 through January 31, 2013. Per the terms of the renewal, the Company shall pay a monthly base rent of $6,356 with no rent payments due for the months of February 2008, February 2009 and February 2010. In September 2008, the Company commenced discussions with the landlord to reduce the rent by 50%, effective September 2008, for a period of six months. In November 2008, the Company executed a lease amendment with its landlord whereby the Company made reduced base rent payments of $3,049 per month for the months of September 2008 through February 2009. The base rent payments for the months of March through May 2009 shall be $6,356 per month. The base rent payments for the months of June through November 2009 shall be $9,996 per month. The base rent payments from December 2009 through the remainder of the lease term shall be $6,356 per month. The landlord agreed to waive late fees owed prior to November 2008 of $4,904 provided the Company does not default on the lease through November 30, 2009.  In June 2009, the Company executed a lease amendment with its landlord. Per the terms of the amendment, the Company agreed to move its headquarters to an alternate location in the landlords office park. The Company vacated Suite #108 and moved to Suite #603 on June 30, 2009. Per the terms of the amendment, the Company shall pay a monthly base rent of $3,807 commencing on July 1, 2009 through the lease termination date of January 31, 2013. In July 2009, the landlord waived $30,564 in fees due in arrears to the landlord by the Company. The landlord shall continue to hold the sum of $8,684 as the Companys security deposit.  In October 2008, the Company executed a lease termination agreement for certain office equipment. The Company and the leasing company executed a new one-year lease effective November 2008 for the equipment. Per the terms of the new lease, the Company shall make twelve monthly payments of $93.95 plus tax including a $1 purchase option upon lease termination.  Consulting Agreements  In January 2008, the Company executed a representation letter with an attorney whereby the attorney shall serve as general counsel to the Company. As compensation for the services, the attorney shall receive a monthly fee in the amount of $3,500, commencing in February 2008. The agreement can be terminated by either party by providing the other party with thirty days advance written notice. The Company terminated the agreement in April 2008.  29   In February 2008, the Company executed a representation letter with an attorney whereby the attorney shall serve as patent attorney to the Company. As compensation for the services, the attorney shall invoice the Company on an hourly basis. The Company paid a retainer of $5,000 to the attorney which was applied to the Companys first invoice. The agreement can be terminated by the Company at any time by providing the attorney with written notice.  In November 2008, the Company executed a consulting agreement with a marketing firm whereby the firm shall provide the Company with a marketing and advertising strategy and also design the Companys new web site and improve its internet presence. In November 2008, the Companys investor group paid a retainer of $18,000 to the firm. In December 2008, the Companys investor group paid the agreement Phase 1 fee of $17,500 to the firm (see Note 13 below). Phase 2 of the agreement is in progress and, upon its completion, the fee shall be $12,900. If the Company elects to proceed with the marketing firm once Phase 2 is completed, the monthly fee shall be $8,000. The Company has also agreed to pay a Success Fee to the firm in the amount of 5% of gross sales generated above the first $100,000 of gross sales of the Companys GuardedID® product between November 2008 and December 2009. Either party may terminate the agreement by providing sixty days written notice to the other party.  In April 2009, the Company executed a consulting agreement with a financial advisor whereby the consultant will provide introduction of potential investors to the Company. The agreement replaces the December 2007 agreement executed with the consultant. As compensation for the services, the consultant shall receive a monthly fee in the amount of $7,000. The consultant shall defer payment until the Company achieves monthly net income before taxes of $20,000. The agreement can be terminated by either party by providing the other party with thirty days advance written notice. In April 2009, the Company and the financial advisor executed an amendment to the consulting agreement whereby the consultant will receive additional compensation for the services of 400,000 shares of the Companys common stock, valued at $0.05 per share. The shares shall be issued in increments of 33,333 shares per month over a twelve month period (see Note 11).  Investor Group  In January 2008, the Company executed a term sheet with an investor group whereby the group will assist the Company on an ongoing best efforts basis in order for the Company to obtain financing of up to $2,500,000 in the form of up to 100 units, each unit containing a $25,000 promissory note and 62,000 non-dilutable (for one year), restricted shares of the Companys common stock. The promissory notes shall have a three year term, bearing interest at 10% per annum, with a 10% discount rate. All funds received as a result of the sale of the units shall be held in an escrow account that shall be managed by the investor groups assigned representative. Upon repayment of the Companys open secured notes and receipt of a release of indebtedness from YA Global and Highgate, the intellectual property of the Company will be pledged to the note holders in the investor group until such time that the unsecured notes and accrued interest of the investor group are repaid in full. In January 2008, the Company sold 37 units to the investor group for a total of $925,000 in promissory notes with a discount of $92,500. In November 2008, the Company issued 2,294,000 shares of common stock in relation to the units sold. In February 2008, the Company sold 17 units to the investor group for a total of $425,000 in promissory notes with a discount of $42,500. In November 2008, the Company issued 1,054,000 shares of common stock in relation to the units sold. In March 2008, the Company sold 4 units to the investor group for a total of $100,000 in promissory notes with a discount of $10,000. In November 2008, the Company issued 248,000 shares of common stock in relation to the units sold. In April 2008, the Company sold 1 unit to the investor group for a total of $25,000 in promissory notes with a discount of $2,500. In November 2008, the Company issued 62,000 shares of common stock in relation to the unit sold. In May 2008, the Company executed an amendment to the term sheet whereby the number of restricted and non-dilutable shares of the Companys common stock to be issued per unit sold was increased from 62,000 shares to 82,000 shares. The increase was applied retroactively to those investors who purchased units as of the date of the amendment. In November 2008, in accordance with the amendment, the Company issued 1,180,000 shares of the Companys common stock, valued at $0.02 per share, and computed as 20,000 shares multiplied by 59 units to reflect the retroactive increase in the shares to be issued to the investors who purchased units as of the date of the amendment. In July 2008, the Company sold 1 unit to the investor group for a total of $25,000 in promissory notes with a discount of $2,500. In November 2008, the Company issued 82,000 shares of common stock in relation to the unit sold. In August 2008, the Company sold 6 units to the investor group for a total of $150,000 in promissory notes with a discount of $15,000. In November 2008, the Company issued 492,000 shares of common stock in relation to the units sold. In September 2008, the Company sold 2 units to the investor group for a total of $50,000 in promissory notes with a discount of $5,000. In November 2008, the Company issued 164,000 shares of common stock in relation to the units sold. In December 2008, the Company sold 2 units to the investor group for a total of $50,000 in promissory notes, with no discount, and the Company issued 164,000 shares of common stock in relation to the units sold (see Notes 7 and 11). The investor group advanced funds totaling $50,000 in February 2008, $280,000 in March 2008, $74,070 in April 2008, $80,000 in May 2008, $95,000 in June 2008, $125,000 in July 2008, $71,000 in August 2008, $77,000 in September 2008, $73,000 in October 2008, $86,000 in November 2008, $118,000 in December 2008, $15,000 in January 2009 and $25,000 in February 2009, respectively, to the Company. The funds being held in escrow are classified as restricted cash on the Companys balance sheets.  30   In February 2008, the Company executed a Debt Assignment and Security Designation Agreement with the investor group whereby the Company has assigned the debt owed as convertible secured notes payable to YA Global and Highgate to the investor group. The investor group paid a total of $200,000 to YA Global and Highgate in February 2008 for additional interest and the security deposit owed in relation to the extended and amended forbearance agreement the Company and YA Global executed in February 2008 and $75,000 in May 2008 for additional interest, partial accrued interest and an extension fee owed in relation to the new forbearance agreement the Company and YA Global executed in May 2008 (see Note 9).  In February 2008, the Company executed an Assignment and Settlement Agreement with a trade vendor whereby the Company has assigned the debt owed to the vendor, in the amount of $48,750, to the investor group. Per the terms of the Settlement Agreement, the Company remitted $12,500 to the vendor as full settlement of its indebtedness to the vendor.  In February 2008, the Company assigned a convertible promissory note in the amount of $15,000 to the investor group and the note holder agreed to an amount of $3,000 as full settlement of the note. The settlement amount was paid to the note holder by the investor group in February 2008.  In March 2008, the Company assigned a convertible promissory note in the amount of $75,000 to the investor group and the note holder agreed to an amount of $15,000 as full settlement of the note. The settlement amount was paid to the note holder by the investor group in March 2008.  In April 2008, the Company assigned a convertible promissory note in the amount of $125,000 to the investor group and the note holder agreed to an amount of $12,500 as full settlement of the note. The settlement amount was paid to the note holder by the Company in April 2008.  In April 2008, the Company executed an Assignment Agreement with the investor group whereby the Company has transferred ownership of a March 2008 receivable, in the amount of $22,520, to the investor group. The receivable was paid in May 2008.  In July 2008, the Company and a note holder agreed upon a settlement whereby a convertible promissory note in the amount of $100,000 shall be assigned to the investor group by the Company and the investor group shall repay the agreed upon settlement amount of $45,000 to the note holder, in installments, through February 2009. The investor group made payments of $10,000 in July 2008, $5,000 in September 2008, $15,000 in October 2008, $5,000 in December 2008 and $10,000 in January 2009 to the note holder. In July 2009, the investor group and the note holder have agreed upon a revised final settlement whereby the investor group shall make a final payment of $14,900 to the note holder. The payment was made in July 2009 (see Note 5).  In September 2008, the Company executed an Assignment and Settlement Agreement with a trade vendor whereby the Company has assigned the debt owed to the vendor, in the amount of $21,400, to the investor group. Per the terms of the Settlement Agreement, the investor group remitted $5,000 to the vendor as full settlement of its indebtedness to the vendor.  In November 2008, the investor group paid a retainer of $18,000 to a marketing firm in relation to a consulting agreement the Company executed with the firm in November 2008 (see Note 13 above).  In December 2008, the investor group paid a fee of $17,500 to a marketing firm in relation to a consulting agreement the Company executed with the firm in November 2008 (see Note 13 above).  Settlement Agreement  In April 2009, the Company executed a settlement agreement with its former President whereby the Company has agreed to make monthly payments of $7,500, beginning in June 2009, in order to repay promissory notes, accrued interest, deferred payroll and expenses in the amount of $139,575 owed to its former President. The Company paid an initial installment payment of $12,500 to its former President in April 2009. The payment was applied to the February 2008 promissory note balance owed to the Companys former President (see Note 8).  31   Loan Repayment Agreement  In April 2009, the Company signed an agreement whereby two promissory notes executed with an unrelated company shall be repaid from the proceeds of sales of the Companys products sold by the note holder who is a distributor for the Company. For the six months ended June 30, 2009, sales proceeds of $15,824 were applied to the note balance (see Notes 7 and 11).  Due to Factor  In March 2007, the Company entered into a sale and subordination agreement with a factoring firm whereby the Company sold its rights to two invoices, from February 2007 and March 2007, totaling $470,200 to the factor. Upon signing the agreement and providing the required disclosures, the factor remitted 65%, or $144,440, of the February 2007 invoice and a certain percentage of $53,010 of the March 2007 invoice to the Company. The Company paid a $500 credit review fee to the factor relating to the agreement. Per the terms of the agreement, once the Companys client remits the invoice amount to the factor, the factor deducts a discount fee from the remaining balance of the factored invoices and forwards the net proceeds to the Company. The discount fee is computed as a percentage of the face amount of the invoice as follows: 2.25% fee for invoices paid within 30 days of the down payment date with an additional 1.125% for each 15 day period thereafter. In September 2007, the February 2007 factored invoice was deemed uncollectible and was written off as bad debt expense. In December 2007, the March 2007 factored invoice was deemed uncollectible and was written off as bad debt expense. In February 2008, the Company and the factor have agreed to a total settlement amount of $75,000 to be paid by the Company to the factor in September 2008 unless both parties mutually agree to extend the due date. In September 2008, the Company and the factor reached a verbal agreement to extend the due date to December 31, 2008. The Company is pursuing an extension. As of June 30, 2009, the balance due to the factor by the Company was $209,192 including interest.  NOTE 14 - CONCENTRATION OF CREDIT RISK  Customers and Credit Concentrations  Revenue concentrations for the six months ended June 30, 2009 and 2008 and the Receivables concentrations at June 30, 2009 and December 31, 2008 are as follows:  Net Sales
for the Six Months EndedAccounts receivable
atJune 30,
2009June 30,
2008June 30,
2009December 31,
2008Customer A23.7%23.8%5.3%20.7%Customer B19.7%17.4%10.9%-%Customer C12.1%23.5%4.6%11.7%Customer D10.2%-%40.1%38.8%Customer E9.5%9.9%5.0%4.8%75.2%74.6%65.9%76.0%  A reduction in sales from or loss of such customers would have a material adverse effect on the Companys results of operations and financial condition.  32   NOTE 15 - SUBSEQUENT EVENTS   The Company has evaluated all events that occurred after the balance sheet date but before financial statements were available to be issued to determine if they must be reported. The Management of the Company determined that there were certain reportable subsequent events to be disclosed as follows:  Notes Payable  Promissory note executed in July 2009 for $35,000, bearing interest at 10% per annum, maturing on July 14, 2012. Per the terms of the promissory note, the note holder purchased 1.4 units with each unit consisting of a 10% promissory note of $25,000 and 50,000 restricted shares of the Companys common stock, at market price. The issuance of the 70,000 shares is pending completion of the loan paperwork.  Consulting Agreement  In July 2009, the Company issued 33,333 shares of its restricted common stock, valued at $0.05 per share, per the terms of an April 2009 consulting agreement executed with a financial advisor (see Notes 11 and 13).  Assignments  In July 2009, the Company assigned $12,000 of the proceeds from a June 2009 invoice in the amount of $12,535 to an unrelated party. The Company received a net amount of $11,750 in July 2009 from the assignee. As consideration for executing the assignment, the Company has agreed to pay a $250 assignment fee to the assignee.  In August 2009, the Company transferred the July 2009 assignment of $12,000 to an alternate invoice in the amount of $25,000 dated August 2009 and issued a new assignment to the unrelated party. The Company received the additional assignment funds of $13,000 in August 2009 from the assignee. As consideration for executing the assignment, the Company issued 100,000 shares of restricted common stock, valued at $0.005 per share, to a relative of the assignee.  33   ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  Forward-Looking Statements  The information in this quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a safe harbor" for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward looking statements. Forward-looking statements reflect management's current expectations and are inherently uncertain. Our actual results may differ significantly from management's expectations. Important factors that could cause actual results to differ materially from our expectations are disclosed in this quarterly report as well as in our annual report on Form 10-K for the year ended December 31, 2008 as filed with the United States Securities and Exchange Commission (SEC) on March 31, 2009.  The following discussion and analysis should be read in conjunction with the financial statements of StrikeForce Technologies, Inc., included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.  Background  StrikeForce Technologies, Inc. (hereinafter referred to as we, us, our, SFT, StrikeForce and the Company) is a software development and services company that offers a suite of integrated computer network security products using proprietary technology. We were organized in August 2001 under New Jersey law as Strike Force Technical Services, Inc. We initially conducted operations as an integrator and reseller of computer hardware and telecommunications equipment and services. In December 2002, and formally memorialized by an agreement in September 2003, we acquired certain intellectual property rights and patent pending technology from NetLabs.com including the rights to further develop and sell their principal technology and certain officers of NetLabs.com joined StrikeForce as officers and directors of our Company. We subsequently changed our name to StrikeForce Technologies, Inc., under which we had conducted our business since August 2001. Our strategy is to develop and exploit our suite of network security products for customers in the corporate, financial, government, insurance, e-commerce and consumer sectors. We plan to grow our business primarily through this channel and also from internally generated sales, rather than by acquisitions. We have no subsidiaries and we conduct our operations from our corporate office in Edison, New Jersey.  The Company owns the exclusive right to license and develop various identification protection software products to protect computer networks from unauthorized access and to protect network owners and users from identity theft. The Company has developed a suite of products partly based upon the exclusive license and the Company is seeking to commercially exploit the products in the areas of financial services, e-commerce, corporate, government and consumer sectors. We are a development stage business and have had nominal revenues since our formation. On August 3, 2005 the Companys registration statement on Form SB-2 was declared effective by the Securities and Exchange Commission and on December 14, 2005 the Company received its clearance for quotation on the Over-The-Counter Bulletin Board. On November 2, 2006, the Company filed a Post-Effective Amendment to its Form SB-2 Registration Statement with the SEC. The SEC declared the Companys Post-effective Amendment effective on November 8, 2006.  We began our operations in 2001 as a reseller and integrator of computer hardware and iris biometric technology. We derived the majority of our revenues as an integrator from the time we started our operations through the first half of 2003. In December 2002, upon the acquisition of the licensing rights to certain intellectual property and patent pending technology from NetLabs.com, we shifted the focus of our business to developing and marketing our own suite of security products. Based upon the acquired licensing rights and additional research and development, the Company has now developed various identification protection software products to protect computer networks from unauthorized access and to protect network owners and users from identity theft. The Company is seeking to commercially exploit the products in the areas of financial services, e-commerce, corporate, government, insurance and consumer sectors. We have had increasing nominal revenues since our formation. We have maintained our relationship with LG as a reseller, primarily for the resale of biometric identification equipment, such as iris scanners, that can be used with our software products.  34   We completed the development of our ProtectID® platform at the end of June 2006 and we completed the core development of our keyboard encryption and anti-keylogger online product, GuardedID®, in December 2006, which is currently being sold and distributed. We are currently in Beta with our new GuardedID® Premium and Enterprise Editions, which protects Windows applications and other desktop data fields from keyloggers, which is a major development for the Company. We seek to locate customers in a variety of ways. These include contracts primarily with value added resellers and distributors (both inside the United States and globally), direct sales calls initiated by our internal staff, exhibitions at security and technology trade shows, through the media, consulting agreements and through our own and agent relationships. Our sales generate revenue either as an Original Equipment Manufacturer (OEM) model, through a Hosting/License agreement, bundled with other companys products or through direct purchase by customers. We price our products for hosted consumer transactions based on the number of transactions in which our software products are utilized. We also price our products for business applications based on the number of users. These pricing models provide the Company with one-time, monthly, quarterly and yearly recurring revenues. We are also generating revenues from annual maintenance contracts, renewal fees and project an increase in revenues based upon the execution of various agreements that we have recently closed and are being implemented.  We generated all of our 2009 and 2008 revenues of $147,233, for the six months ended June 30, 2009, and $115,245, for the six months ended June 30, 2008, from the sales of our security products. We market our products to financial service firms, e-commerce companies, government agencies and the enterprise market in general and with virtual private networks, as well as technology service companies that service all the above markets. We seek such sales through our own direct efforts and primarily through distributors, resellers and third party agents. We are also seeking to license the technology as original equipment with computer hardware and software manufacturers. We are engaged in production installations and pilot projects with various distributors, resellers and direct customers, as well as having reached additional reseller agreements with strategic vendors globally. Our GuardedID® product is also being sold directly to consumers, primarily through the Internet as well as distributors, resellers, third party agents and potential Original Equipment Manufacturer ("OEM") agreements by bundling GuardedID® with their products, which provides a value-add to their own products and offerings, as well as to the Enterprise.  We have incurred substantial losses since our inception. We believe that our products provide a cost-effective and technologically competitive solution to address the problems of network security and identity theft in general. There can be no assurance, however, that our products will continue to gain acceptance in the commercial marketplace or that one of our competitors will not introduce technically superior products. The products that we offer to customers are discussed in Item 1, Business, in our Annual Report on Form 10-K filed on March 31, 2009.  We operate primarily as a software development company, providing security software products and services, to be sold to enterprises, Internet consumer businesses and consumers, both directly and through sales channels comprised of distributors, resellers, agents and OEM relationships, globally. We are focusing primarily on developing sales through channel relationships in which our products are offered by other manufacturers, distributors, value-added resellers and agents, globally. We also sell our suite of security products directly from our Edison, NJ office, which also augments our channel partner relationships. It is our strategy that these channel relationships will provide the greater percentage of our revenues ongoing. Examples of the channel relationships that we are pursuing include our attempts to establish OEM relationships with other security technology and software providers that would integrate or bundle the enhanced security capabilities of ProtectID® and or GuardedID® into their own product lines. These would include providers of networking software and manufacturers of computer and telecommunications hardware and software that provide managed services, as well as all markets interested in increasing the value of their products and packages, such as financial services software, anti-virus and identity theft product companies.  Our primary target markets include financial services such as banks, insurance companies and savings institutions, e-commerce based services companies, telecommunications and cellular carriers, technology software companies, government agencies and consumers. For the near term, we are narrowly focusing our concentration on short to medium sales-cycle customers and strategic problem areas, such as where compliance with government regulations are key, stolen passwords used to acquire private information illegally (including data breaches), as well as internal and remote users for medium to large size companies. Because we anticipate growing market demand, we are developing a sizeable global reseller and distribution channel as a strategy to generate, manage and fulfill demand for our products across market segments, minimizing the requirement for a large increase in our staff. We intend to minimize the concentration on our initial direct sales efforts in the future as our distribution and reseller channels develop globally.  We intend to generate revenue through transaction fees for ProtectID® and ValidateID®, based on consumer volumes of usage in the e-commerce and financial services markets, one time per person fees in the enterprise markets, set-up and recurring transaction fees when the product is hosted, yearly maintenance fees and other one-time fees. GuardedID® pricing is for an annual subscription and we discount for volume purchases. GuardedID® pricing models, especially when bundling through OEM contracts, include monthly and quarterly recurring revenues. We also provide our clients a choice of operating our software internally by licensing or through our hosting service. GuardedID® requires a download on each and every computer it protects, whether for employees or consumers.  35   Use of Estimates  Management's Discussion and Analysis of Financial Condition is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. When preparing our financial statements, we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reporting amounts of revenues and expenses during the reported period. Significant estimates include, but are not limited to, the estimated useful lives of property and equipment and website development costs. Actual results could differ from those estimates.  Results of Operations  THREE MONTHS ENDED JUNE 30, 2009 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2008  Revenues for the three months ended June 30, 2009 were $63,967 compared to $65,010 for the three months ended June 30, 2008, a decrease of $1,043 or 1.6%. The decrease in revenues was primarily due to the decrease in signing up new e-commerce clients.  Revenues generated consisted of hardware and software sales, services and maintenance sales, revenue from sign on fees and recurring transaction revenues. Hardware sales for the three months ended June 30, 2009 were $0 compared to $778 for the three months ended June 30, 2008, a decrease of $778. The decrease in hardware revenues was primarily due to the decrease in the Companys sales of our one-time-password token key-fobs. Software, services and maintenance sales for the three months ended June 30, 2009 were $40,382 compared to $36,756 for the three months ended June 30, 2008, an increase of $3,626. The increase in software, services and maintenance revenues was primarily due to the increase in sales of our newly developed GuardedID® keyboard encryption and anti-keylogger technology. Sign on fees for access to our hosted service provider to utilize our ASP transaction model amounted to $0 for the three months ended June 30, 2009 compared to $6,000 for the three months ended June 30, 2008, a decrease of $6,000. The decrease was due to the decrease in signing up new e-commerce clients. Transaction revenues from the ASP hosting model were $23,585 for the three months ended June 30, 2009 and $21,476 for the three months ended June 30, 2008, an increase of $2,109. The increase was caused by an increased number of transactions being processed by our clients through the ASP hosting facility.  Cost of revenues for the three months ended June 30, 2009 was $17,687 compared to $18,050 for the three months ended June 30, 2008, a decrease of $363, or 2.0%. The decrease resulted primarily from a reduction in purchases resulting from the increase in the Companys sales of our own suite of security software products which entails a lower cost of revenues.  Gross profit for the three months ended June 30, 2009 was $46,280 compared to $46,960 for the three months ended June 30, 2008, a decrease of $680, or 1.5%. The decrease in gross profit was primarily due to the decrease in signing up new e-commerce clients.  Research and development expenses for the three months ended June 30, 2009 were $101,929 compared to $107,512 for the three months ended June 30, 2008, a decrease of $5,583, or 5.2%. The decrease is primarily attributable to the decrease in third party engineering resources utilized in the second quarter of 2009 as compared to the second quarter of 2008. The salaries, benefits and overhead costs of personnel conducting research and development of our software products comprise research and development expenses.  Selling, general and administrative (SGA) expenses for the three months ended June 30, 2009 were $370,637 compared to $442,459 for the three months ended June 30, 2008, a decrease of $71,822 or 16.2%. The net decrease was due primarily to decreases in our promotional, marketing and professional fees. Selling, general and administrative expenses consist primarily of salaries, benefits and overhead costs for executive and administrative personnel, insurance, fees for professional services, including consulting, legal, and accounting fees, travel costs, non-cash stock compensation expense for the issuance of stock to non-employees and other general corporate expenses.  Other (income) expense for the three months ended June 30, 2009 was $262,407 as compared to $166,518 for the three months ended June 30, 2008, representing an increase in other expense of $95,889, or 57.6%. The increase was primarily due to the variation in net mark to market changes in the fair value of derivative financial instruments relating to the convertible secured promissory notes, which totaled $250,288 for the three months ended June 30, 2009.  Our net loss for the three months ended June 30, 2009 was $688,693 compared to a net loss of $669,529 for the three months ended June 30, 2008, an increase in net loss of $19,164, or 2.9%. The increase in our net loss was primarily due to the variation in net mark to market changes in the fair value of derivative financial instruments relating to the convertible secured promissory notes.  36   SIX MONTHS ENDED JUNE 30, 2009 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2008  Revenues for the six months ended June 30, 2009 were $147,233 compared to $115,245 for the six months ended June 30, 2008, an increase of $31,988 or 27.8%. The increase in revenues was primarily due to the increase in sales of our newly developed GuardedID® keyboard encryption and anti-keylogger technology and by an increased number of transactions being processed by our clients through the ASP hosting facility.  Revenues generated consisted of hardware and software sales, services and maintenance sales, revenue from sign on fees and recurring transaction revenues. Hardware sales for the six months ended June 30, 2009 were $849 compared to $1,418 for the six months ended June 30, 2008, a decrease of $569. The decrease in hardware revenues was primarily due to the decrease in the Companys sales of our one-time-password token key-fobs. Software, services and maintenance sales for the six months ended June 30, 2009 were $84,672 compared to $60,120 for the six months ended June 30, 2008, an increase of $24,552. The increase in software, services and maintenance revenues was primarily due to the increase in sales of our newly developed GuardedID® keyboard encryption and anti-keylogger technology. Sign on fees for access to our hosted service provider to utilize our ASP transaction model amounted to $2,000 for the six months ended June 30, 2009 compared to $6,250 for the six months ended June 30, 2008, a decrease of $4,250. The decrease was due to the decrease in signing up new e-commerce clients. Transaction revenues from the ASP hosting model were $59,712 for the six months ended June 30, 2009 and $47,457 for the six months ended June 30, 2008, an increase of $12,255. The increase was caused by an increased number of transactions being processed by our clients through the ASP hosting facility.  Cost of revenues for the six months ended June 30, 2009 was $39,201 compared to $40,829 for the six months ended June 30, 2008, a decrease of $1,628, or 4.0%. The decrease resulted primarily from a reduction in purchases resulting from the increase in the Companys sales of our own suite of security software products which entails a lower cost of revenues.  Gross profit for the six months ended June 30, 2009 was $108,032 compared to $74,416 for the six months ended June 30, 2008, an increase of $33,616, or 45.2%. The increase in gross profit was primarily due to the increase in sales of our newly developed GuardedID® keyboard encryption and anti-keylogger technology and by an increased number of transactions being processed by our clients through the ASP hosting facility.  Research and development expenses for the six months ended June 30, 2009 were $206,971 compared to $207,781 for the six months ended June 30, 2008, a decrease of $810, or 0.4%. The decrease is primarily attributable to the decrease in third party engineering resources utilized in the first half of 2009 as compared to the first half of 2008. The salaries, benefits and overhead costs of personnel conducting research and development of our software products comprise research and development expenses.  Selling, general and administrative (SGA) expenses for the six months ended June 30, 2009 were $718,123 compared to $914,670 for the six months ended June 30, 2008, a decrease of $196,547 or 21.5%. The net decrease was due primarily to decreases in our promotional, marketing and professional fees. Selling, general and administrative expenses consist primarily of salaries, benefits and overhead costs for executive and administrative personnel, insurance, fees for professional services, including consulting, legal, and accounting fees, travel costs, non-cash stock compensation expense for the issuance of stock to non-employees and other general corporate expenses.  Other (income) expense for the six months ended June 30, 2009 was $146,311 as compared to ($649,795) for the six months ended June 30, 2008, representing an increase in other expense of $796,106, or 123%. The increase was primarily due to the variation in net mark to market changes in the fair value of derivative financial instruments relating to the convertible secured promissory notes, which totaled ($17,284) for the six months ended June 30, 2009.  Our net loss for the six months ended June 30, 2009 was $963,373 compared to a net loss of $398,240 for the six months ended June 30, 2008, an increase in net loss of $565,133, or 142%. The increase in our net loss was primarily due to the variation in net mark to market changes in the fair value of derivative financial instruments relating to the convertible secured promissory notes.  Liquidity and Capital Resources  Our total current assets at June 30, 2009 were $258,663, including $24,025 in cash and $25,993 in restricted cash as compared with $1,103,613 in total current assets at June 30, 2008, which included cash of $4,458 and $748,430 in restricted cash. Additionally, we had a stockholders deficiency in the amount of $7,538,312 at June 30, 2009 as compared to a stockholders deficiency of $5,843,561 at June 30, 2008. The increase in the deficiency is a result of the Companys net losses and funding through an increased debt position from convertible debentures and promissory notes rather than the sale of stock. We have historically incurred recurring losses and have financed our operations through loans, principally from affiliated parties such as our directors, and from the proceeds of debt and equity financing. The liabilities include a computed liability for the fair value of derivatives of $493,405, which will only be realized on the conversion of the derivatives, or settlement of the debentures.  37   We financed our operations during the six months ended June 30, 2009 through debt and equity financing, recurring revenues from our ProtectID® and ValidateID® hosting platforms and sales of our GuardedID® keystroke encryption technology. We expect that we will rely, at least in the near future, on a substantial percentage of the sales of our GuardedID® product and a limited number of customers for our other products revenues and may continue to have customer concentrations. Inherently, as time progresses and corporate exposure in the market grows, we hope to attain greater numbers of customers and the concentrations would then diminish. Until this is accomplished, we will continue to attempt to secure additional financing through both the public and private market sectors to meet our continuing commitments of capital expenditures and until our sales revenue can provide greater liquidity.  The number of common shares outstanding increased from 9,999,999 shares at the six months ended June 30, 2008 to 18,824,123 at the six months ended June 30, 2009, an increase of 88.2%. The increase in the number of common shares outstanding was primarily due to the number of shares issued related to financing and consulting.  We do not expect to resell biometric iris equipment over the next twelve months as we concentrate more on our core authentication and keyboard encryption and anti-keylogger software products.  We have historically incurred losses and we anticipate that we will not generate any significant revenues until the last quarter of 2009. Our operations presently require funding of approximately $106,000 per month. Management believes, but cannot provide assurances, that we will be profitable over the next 12 months based on some potential clients contracting with the Company in the financial industry, technology, insurance, enterprise, government, insurance and consumer sectors in the United States, Latin America, Europe and Asia. There can be no assurance, however, that the sales anticipated will materialize or that we will achieve the profitability we have forecasted.  At June 30, 2009, $542,588 in aggregate principal amount of the Citco Global Custody NV (Citco) debentures was issued and outstanding.  At June 30, 2009, $277,920 in aggregate principal amount of the YA Global Investments, LP (YA Global) debenture remained outstanding.  In January 2008, the Company executed a Forbearance Agreement with YA Global whereby YA Global and Highgate House Funds, Ltd (Highgate) agreed to forbear from exercising their rights under the secured convertible debentures through February 27, 2008. The terms of the Forbearance Agreement record the amount due to YA Global and Highgate by the Company to be $1,214,093, which includes principal, interest and the redemption premium. The terms also include a reduction in the YA Global and Highgate Fixed Conversion Price to $0.065. In connection with this Agreement, the Company issued to YA Global 500,000 contingency warrants with an exercise price of $0.15 per share. The warrants are exercisable for a period of five (5) years from date of issuance. The warrants are held in escrow and will only be released to YA Global if the total amount due by the Company is not paid to YA Global by February 29, 2008. The total amount of our indebtedness to YA Global and Highgate in the amount of $1,214,093, as agreed to in the Forbearance Agreement, is further broken down as:  · $427,447 (YA Global secured convertible debenture) · $204,775 (YA Global accrued and unpaid interest on debenture) · $85,489 (YA Global 20% redemption premium) · $244,720 (Highgate secured convertible debenture) · $86,937 (Highgate accrued and unpaid interest on debentures) · $48,944 (Highgate 20% redemption premium) · $100,000 (YA Global promissory note dated May 1, 2006) · $15,781 (YA Global accrued and unpaid interest on note)  In February 2008, the Forbearance Agreement was amended and extended to May 15, 2008, including the terms of the contingency warrants. Per the terms of the amendment, YA Global and Highgate shall receive an additional 105 days of interest for a total amount of $28,328.84 additional interest. The additional interest plus a security deposit of $171,671.16 were paid to YA Global and Highgate per the terms of a debt assignment agreement executed with the StrikeForce Investor Group (SIG) in February 2008, for a total amount paid to YA Global of $200,000. The security deposit will be applied to the amount due YA Global and Highgate if the remaining balance is paid in full by May 15, 2008. Otherwise, the security deposit will be applied to YA Global as liquidated damages.  38   In May 2008, the Company executed a Forbearance Agreement with YA Global that supersedes the January 2008 agreement and February 2008 amendment, whereby YA Global and Highgate have agreed to forbear from exercising their rights under the secured convertible debentures through October 15, 2008. Per the terms of the May 2008 Forbearance Agreement, the Company agreed to use its best efforts to make available sufficient authorized shares of its common stock to effect conversion of the entire amount outstanding, to YA Global and Highgate, by October 15, 2008. The terms of the contingency warrants became applicable to the terms of the May 2008 Forbearance Agreement. Additionally, per the terms of the agreement, the SIG paid $75,000 to YA Global in May 2008 which is further broken down as:  · $17,268 (additional prepaid interest to YA Global from May 15, 2008 to October 15, 2008) · $7,181 (additional prepaid interest to Highgate from May 15, 2008 to October 15, 2008) · $27,840 (accrued interest due on the Highgate debenture dated April 26, 2005) · $22,711 (non-refundable extension payment that will be applied to the redemption amount if the remaining balance is paid in full by October 15, 2008)  The payment of the accrued interest of $27,840 for the Highgate April 26, 2005 debenture reduced the total amount of our indebtedness to YA Global and Highgate to $1,186,253 as agreed to in the May 2008 Forbearance Agreement.  In April 2009, the YA Global and Highgate secured convertible debentures were extended to December 31, 2010. Per the terms of the extension, the security deposit of $171,671 paid in March 2008 and the extension payment of $22,711 paid in May 2008 were applied to the YA Global debenture resulting in a remaining note balance of $233,065. The balance of the Highgate debenture remained $244,720.  In April 2009, the Company executed a secured convertible debenture with YA Global for $277,920, maturing on December 31, 2010. The debenture, which is not interest bearing, represents accrued interest owed on the existing YA Global and Highgate secured convertible debentures through April 23, 2009.  In April 2009, YA Global notified the Company that the April 2005 YA Global and May 2005 Highgate secured convertible debentures, related documents and the subsequent forbearance agreements have been assigned to Citco Global Custody NV as of April 24, 2009. The Company recorded the assigned debentures as restructuring of troubled debt. The Company recorded the accrued interest on the assigned debentures through the extended due date of December 31, 2010 as a loss on restructured debt in the amounts of $33,893 on the assigned YA Global debenture and $30,911 on the assigned Highgate debenture. On April 24, 2009, the adjusted balance of the assigned debentures was $266,957 (YA Global assignment) and $275,631 (Highgate assignment).  During the six months ended June 30, 2009, the Company repaid a total of $10,000 of unsecured convertible notes to one unrelated party. Additionally, during the six months ended June 30, 2009, a note holder of a $100,000 convertible note, executed in July 2008, rolled the convertible note balance and accrued interest owed into a purchase of nine units with each unit consisting of a 10% promissory note of $25,000 and 82,000 shares of the Companys common stock, valued at $0.06.  The Company issued unsecured notes during the six months ended June 30, 2009 in an aggregate total of $600,000 to six unrelated parties. Additionally, during the six months ended June 30, 2009, the Company repaid a total of $55,824 of unsecured notes to three unrelated parties.  During the six months ended June 30, 2009, the Company repaid a total of $12,500 of unsecured notes to one related party.  Summary of Funded Debt  As of June 30, 2009 the Companys open unsecured promissory note balance was $2,425,493, net of discount on promissory notes of $68,892, listed as follows:  · $100,000 to YA Global (in April 2009 the note was extended to December 31, 2010. The note shall become convertible if not repaid by August 20, 2010.) · $110,208 to an unrelated individual  current portion = $90,208 · $35,000 to an unrelated individual  current portion · $265,000 to an unrelated individual  current portion = $40,000 · $84,177 to an unrelated company · $125,000 to an unrelated individual · $25,000 to an unrelated individual · $1,750,000 to twenty unrelated individuals through term sheet with the SIG  39   As of June 30, 2009 the Companys open unsecured related party promissory note balances were $683,500, listed as follows:  · $626,000 to our CEO  current portion · $57,500 to our former President  current portion  As of June 30, 2009 the Companys open convertible secured note balances were $672,167, listed as follows:  · $427,447 to YA Global (04/05 amended secured debenture) · $244,720 to Highgate (05/05 secured debenture)  As of June 30, 2009 the Companys open convertible note balances were $1,086,152, net of discount on convertible notes of $34,360, listed as follows:  · $235,000 to an unrelated company (03/05 unsecured debenture) - current portion · $7,000 to an unrelated company (06/05 unsecured debenture)  current portion · $10,000 to an unrelated individual (06/05 unsecured debenture) - current portion · $40,000 to three unrelated individuals (07/05 unsecured debentures) - current portion · $55,000 to an unrelated individual (03/06 unsecured debenture) - current portion · $200,000 to an unrelated individual (06/06 unsecured debenture)  current portion · $150,000 to an unrelated individual (09/06 unsecured debenture)  current portion · $3,512 to an unrelated individual (02/07 unsecured debenture)  current portion · $100,000 to an unrelated individual (05/07 unsecured debenture)  current portion · $100,000 to an unrelated individual (06/07 unsecured debentures)  current portion · $100,000 to an unrelated individual (07/07 unsecured debenture)  current portion · $120,000 to four unrelated individuals (08/07 unsecured debentures)  current portion  As of June 30, 2009 the Companys open convertible note balances - related parties were $419,255, listed as follows:  · $268,000 to our CEO  current portion · $57,500 to our VP of Technical Services  current portion · $30,000 to a relative of our CTO & one of our Software Developers  current portion · $5,000 to a relative of our CFO  current portion · $58,755 to our Office Manager  current portion  Based on present revenues and expenses, we are unable to generate sufficient funds internally to sustain our current operations. We must raise additional capital or other borrowing sources to continue our operations. It is managements plan to seek additional funding through the sale of equity and the issuance of certain debt instruments, including promissory and convertible notes. If we issue additional shares of common stock, the value of shares of existing stockholders is likely to be diluted.  However, the terms of the convertible secured debentures issued to certain of the existing stockholders require that we obtain the consent of such stockholders prior to our entering into subsequent financing arrangements. No assurance can be given that we will be able to obtain additional financing, that we will be able to obtain additional financing on terms that are favorable to us or that the holders of the secured debentures will provide their consent to permit us to enter into subsequent financing arrangements.  Our future revenues and profits, if any, will primarily depend upon our ability to secure sales of our suite of network security and anti-malware products. We do not presently generate significant revenue from the sales of our products. Although management believes that our products are competitive for customers seeking a high level of network security, we cannot forecast with any reasonable certainty whether our products will gain acceptance in the marketplace and if so by when.  Except for the limitations imposed upon us respective to the convertible secured debentures of YA Global and Highgate, there are no trends, material or known, which will restrict either short term or long-term liquidity.  Off-Balance Sheet Arrangements  We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.  40   Going Concern  We are assuming that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have incurred net operating losses of $963,373 for the six months ended June 30, 2009, compared to a net operating loss of $398,240 for the six months ended June 30, 2008. At June 30, 2009, the Company's accumulated deficit was $18,883,856, its working capital deficiency was $5,621,725 and approximately 91% of its assets consist of deferred royalties. Additionally, for the six months ended June 30, 2009, we had negative cash flows from operating activities of $450,485. Since our inception, we have incurred losses, had an accumulated deficit, and have experienced negative cash flows from operations. The expansion and development of our business may require additional capital. These conditions raise substantial doubt about our ability to continue as a going concern.  We have issued three-year and two-year secured debentures in 2004 and 2005 that are convertible into shares of our common stock to YA Global Investments, LP and Highgate House Funds, Ltd., respectively. Under the terms of the secured debentures, we are restricted in our ability to issue additional securities as long as any portion of the principal or interest on the secured debentures remains outstanding. In April 2009, YA Global notified the Company that the April 2005 YA Global and May 2005 Highgate secured convertible debentures, related documents and the subsequent forbearance agreements have been assigned to Citco Global Custody NV as of April 24, 2009. Additionally, we have issued a two-year secured debenture in 2009 that is convertible into shares of our common stock to YA Global. Under the terms of the secured debenture, we are restricted in our ability to issue additional securities as long as any portion of the principal on the secured debenture remains outstanding.  Currently, the Company is attempting to generate sufficient revenues and improve gross margins by implementing a revised sales strategy. In principle, the Company is redirecting its sales focus from direct sales to international channel sales, where the Company is primarily selling through a channel of Distributors, Value Added Resellers, Strategic Partners and Original Equipment Manufacturers. The revenues from this approach are more lucrative than selling direct, due to the increase in sales volume of GuardedID® and ProtectID® through the channel partners. This strategy, if successful, should increase the Companys sales and revenues allowing us to mitigate future losses. In addition, management has raised funds through convertible debt instruments and the sale of equity in order to alleviate the working capital deficiency. Through the utilization of the capital markets, the Company is seeking to locate the additional funding necessary to continue to expand and enhance its growth; however, there can be no assurance that we will be able to increase revenues or raise additional capital. The Company is currently in negotiations with other investors, but the success of such negotiations cannot be assured.  The accompanying consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern. If we fail to generate positive cash flows or obtain additional financing when required, we may have to modify, delay or abandon some or all of our business and expansion plans.  Critical Accounting Policies  In accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), we record certain assets at the lower of cost or fair market value. In determining the fair value of certain of our assets, we must make judgments, estimates and assumptions regarding circumstances or trends that could affect the value of theses assets, such as economic conditions. Those judgments, estimates and assumptions are based on information available to us at that time. Many of those conditions, trends and circumstances are outside our control and if changes were to occur in the events, trends or other circumstances on which our judgments or estimates were based, we may be required under U.S. GAAP to adjust those estimates that are affected by those changes. Changes in such estimates may require that we reduce the carrying value of the affected assets on our balance sheet (which are commonly referred to as write downs of the assets involved).  It is our practice to establish reserves or allowances to record adjustments or write-downs in the carrying value of assets, such as accounts receivable. Such write-downs are recorded as charges to income or increases in the expense in our Statement of Operations in the periods when such reserves or allowances are established or increased. As a result, our judgments, estimates and assumptions about future events can and will affect not only the amounts at which we record such assets on our balance sheet but also our results of operations.  In making our estimates and assumptions, we follow U.S. GAAP applicable to our business and those that we believe will enable us to make fair and consistent estimates of the fair value of assets and establish adequate reserves or allowances. Set forth below is a summary of the accounting policies that we believe are material to an understanding of our financial condition and results of operations.  41   Discount on Debt  The Company has allocated the proceeds received from convertible debt instruments between the underlying debt instruments and has recorded the conversion feature as a liability in accordance with Statement of Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133) and related interpretations. The conversion feature and certain other features that are considered embedded derivative instruments, such as a conversion reset provision, a penalty provision and redemption option, have been recorded at their fair value within the terms of SFAS No. 133 as its fair value can be separated from the convertible note and its conversion is independent of the underlying note value. The conversion liability is marked to market each reporting period with the resulting gains or losses shown on the Statement of Operations. The Company has also recorded the resulting discount on debt related to the warrants and conversion feature and is amortizing the discount using the effective interest rate method over the life of the debt instruments.  Derivative Financial Instruments  We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks.  The Company evaluates its convertible debt, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under SFAS No. 133 and related interpretations including Emerging Issues Task Force (EITF) Issue No. 00-19 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock(EITF Issue No. 00-19). The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the Statement of Operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.  In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.  The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification under SFAS No. 133 are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.  The fair value model utilized to value the various compound embedded derivatives in the secured convertible notes comprises multiple probability-weighted scenarios under various assumptions reflecting the economics of the secured convertible notes, such as the risk-free interest rate, expected Company stock price and volatility, likelihood of conversion and or redemption, and likelihood of default status and timely registration. At inception, the fair value of the single compound embedded derivative was bifurcated from the host debt contract and recorded as a derivative liability which resulted in a reduction of the initial notional carrying amount of the secured convertible notes (as unamortized discount which will be amortized over the term of the notes under the effective interest method).  The Company accounts for derivatives in accordance with SFAS No. 133 and the related interpretations. SFAS No. 133, as amended, requires companies to recognize all derivative instruments as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value of a derivative instrument depends on: (i) whether the derivative has been designated and qualifies as part of a hedging relationship, and (ii) the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument based upon the exposure being hedged as either a fair value hedge, cash flow hedge or hedge of a net investment in a foreign operation.  The derivatives (convertible debentures) issued on December 20, 2004 and January 18, 2005 (amended April 27, 2005) and on April 27, 2005 and May 6, 2005 have been accounted for in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133) and the related interpretations. SFAS No. 133, as amended and the Financial Accounting Standards Board Emerging Issues Task Force Issue Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock (EITF No. 00-19).  42   The Company has identified the Citco debentures, assigned from YA Global and Highgate, and the YA Global April 2009 debenture have compound embedded derivatives. These compound embedded derivatives have been bifurcated from their respective host debt contracts and accounted for as derivative liabilities in accordance with EITF 00-19. When multiple derivatives exist within the Convertible Notes, they have been bundled together as a single hybrid compound instrument in accordance with SFAS No. 133 Derivatives Implementation Group Implementation Issue No. B-15, Embedded Derivatives: Separate Accounting for Multiple Derivative Features Embedded in a Single Hybrid Instrument.  The compound embedded derivatives within the Convertible Notes have been recorded at fair value at the date of issuance; and are marked-to-market each reporting period with changes in fair value recorded to the Companys Statement of Operations as Net change in fair value of derivative liabilities. The Company has utilized a third party valuation consultant to fair value the embedded derivatives using layered discounted probability-weighted cash flow approach. We have developed a financial model to value the compound embedded derivatives analyzing the conversion features, redemption options and penalty provisions. Additionally, our model has been developed to incorporate managements assessment of the various potential outcomes relating to the specific features and provisions contained in the convertible debt instruments.  The six primary events that can occur which will affect the value of the compound embedded derivatives are (a) payments made in cash, (b) payments made with stock, (c) the holder converts the note(s), (d) the company redeems the note(s), (e) the company fails to register the common shares related to the convertible debt and (f) the company defaults on the note (s).  The primary factors driving the economic value of the embedded derivatives are the same as the Black-Scholes factors, except that they are incorporated intrinsically into the binomial calculations for this purpose. Those factors are stock price, stock volatility, trading volume, outstanding shares issued, beneficial shares owned by the holder, interest rate, whether or not a timely registration has been obtained, change in control, event of default, and the likelihood of obtaining alternative financing. We assigned probabilities to each of these potential scenarios over the initial term, and at each quarter, the remaining term of the underlying financial instrument. The financial model generates a quarterly cash flow over the remaining life of the underlying debentures and assigns a risk-weighted probability to the resultant cash flow. We then assigned a discounted weighted average cash flow over the potential scenarios which were compared to the discounted cash flow of the debentures without the subject embedded derivatives. The result is a value for the compound embedded derivatives at the point of issue and at subsequent quarters.  The fair value of the derivative liabilities are subject to the changes in the trading value of the Companys common stock, as well as other factors. As a result, the Companys financial statements may fluctuate from quarter-to-quarter based on factors, such as the price of the Companys stock at the balance sheet date and the amount of shares converted by YA Global and Highgate. Consequently, our financial position and results of operations may vary from quarter-to-quarter based on conditions other than our operating revenues and expenses.  Software Development Costs  Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed (SFAS No. 86) requires capitalization of software development costs incurred subsequent to establishment of technological feasibility and prior to the availability of the product for general release to customers. Systematic amortization of capitalized costs begins when a product is available for general release to customers and is computed on a product-by-product basis at a rate not less than straight-line basis over the products remaining estimated economic life. To date, all costs have been accounted for as research and development costs and no software development cost has been capitalized.  Management will evaluate the net realizable value of software costs capitalized by comparing estimated future gross revenues reduced by the estimated future costs of completing, disposing of and maintaining the software. These costs also include the costs of performing maintenance and customer support required by us.  Revenue Recognition  The Companys revenues are derived principally from the sale and installation of its various identification protection software products and related hardware and services. The Company recognizes revenue when it is realized or realizable and earned less estimated future returns. The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement that the product has been shipped or the services have been rendered to the customer, the sales price is fixed or determinable, and collectability is reasonably assured. In addition to the aforementioned general policy, the following are the specific revenue recognition policies for each major category of revenue:  We recognize revenue from the sales of software licenses when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed and determinable and collection of the resulting receivable is reasonably assured. Delivery generally occurs when the product is delivered to a common carrier.  43   We assess collection based on a number of factors, including past transaction history with the customer and the creditworthiness of the customer. We do not request collateral from our customers. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon the receipt of cash.  For technology arrangements with multiple obligations (for example, undelivered software, maintenance and support), we allocate revenue to each component of the arrangement using the residual value method based on the fair value or the fixed agreement of the undelivered elements. Accordingly, we defer technology revenue in the amount equivalent to the fair value or the fixed agreement of the undelivered elements.  We recognize revenue for maintenance services ratably over the contract term. Our training and consulting services are billed at hourly rates and we generally recognize revenue as these services are performed. However, upon execution of a contract, we determine whether any services included within the arrangement require us to perform significant work either to alter the underlying software or to build additional complex interfaces so that the software performs as the customer requests. If these services are included as part of an arrangement, we recognize the fee using the percentage of completion method. We determine the percentage of completion based on our estimate of costs incurred to date compared with the total costs budgeted to complete the project.  Impairment of Long-lived Assets  Long-lived assets, which include property and equipment, deferred royalties, website development cost and patents are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable or the useful life is shorter than originally estimated.  The Company assesses the recoverability of its assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Fair value is generally determined using the assets expected future discounted cash flows or market value, if readily determinable. If assets are determined to be recoverable, but the useful lives are shorter than originally estimated, the net book value of the assets is depreciated over the newly determined remaining useful lives.  Stock Based Transactions  We have concluded various transactions where we paid the consideration in shares of our common stock and/or warrants or options to purchase shares of our common stock. These transactions include:  · Acquiring the services of various professionals who provided us with a range of corporate consultancy services, including developing business and financial models, financial advisory services, strategic planning, development of business plans, investor presentations and advice and assistance with investment funding; · Retaining the services of our Advisory Board to promote the business of the Company; · Settlement of our indebtedness; and · Providing incentives to attract, retain and motivate employees who are important to our success.  When our stock is used, the transactions are valued using the price of the shares on the date they are issued or if the value of the asset or service being acquired is available and is believed to fairly represent its market value, the transaction is valued using the value of the asset or service being provided.  When options or warrants to purchase our stock are used in transactions with third parties or our employees, the transaction is valued using the Black-Scholes valuation method. The Black-Scholes valuation method is widely used and accepted as providing the fair market value of an option or warrant to purchase stock at a fixed price for a specified period of time. Black-Scholes uses five (5) variables to establish market value of stock options or warrants:  · strike price (the price to be paid for a share of our stock); · price of our stock on the day options or warrants are granted; · number of days that the options or warrants can be exercised before they expire; · trading volatility of our stock; and · annual interest rate on the day the option or warrant is granted.  The determination of expected volatility requires management to make an estimate and the actual volatility may vary significantly from that estimate. Accordingly, the determination of the resulting expense is based on a management estimate.  44   Recently Issued Accounting Pronouncements     On June 5, 2003, the United States Securities and Exchange Commission (SEC) adopted final rules under Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404), as amended by SEC Release No. 33-8934 on June 26, 2008. Commencing with its annual report for the fiscal year ending December 31, 2009, the Company will be required to include a report of management on its internal control over financial reporting. The internal control report must include a statement:  · Of managements responsibility for establishing and maintaining adequate internal control over its financial reporting; · Of managements assessment of the effectiveness of its internal control over financial reporting as of year end; and · Of the framework used by management to evaluate the effectiveness of the Companys internal control over financial reporting.  Furthermore, in the following fiscal year, it is required to file the auditors attestation report separately on the Companys internal control over financial reporting on whether it believes that the Company has maintained, in all material respects, effective internal control over financial reporting.  In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) Financial Accounting Standard (FAS) 157-4 Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. Based on the guidance, if an entity determines that the level of activity for an asset or liability has significantly decreased and that a transaction is not orderly, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transaction or quoted prices may be necessary to estimate fair value in accordance with Statement of Financial Accounting Standards (SFAS) No. 157 Fair Value Measurements. This FSP is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The company will adopt this FSP for its quarter ending June 30, 2009. There is no expected impact on the financial statements.  In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (APB) 28-1 Interim Disclosures about Fair Value of Financial Instruments. The FSP amends SFAS No. 107 Disclosures about Fair Value of Financial Instruments to require an entity to provide disclosures about fair value of financial instruments in interim financial information. This FSP is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The company will include the required disclosures in its quarter ending June 30, 2009.  In April 2009, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets. The FSP states that in developing assumptions about renewal or extension options used to determine the useful life of an intangible asset, an entity needs to consider its own historical experience adjusted for entity-specific factors. In the absence of that experience, an entity shall consider the assumptions that market participants would use about renewal or extension options. This FSP is to be applied to intangible assets acquired after January 1, 2009. The adoption of this FSP did not have an impact on the financial statements.  In May 2009, FASB issued FASB Statement No. 165 Subsequent events (SFAS No. 165) to be effective for the interim or annual financial periods ending after June15, 2009. SFAS No. 165 The objective of this Statement is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this Statement sets forth: 1. The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements. 2. The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements. 3. The disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The effect of adoption of SFAS No. 165 on the Companys financial position and results of operations is not expected to be material.  In June 2009, the FASB approved the FASB Accounting Standards Codification (the Codification) as the single source of authoritative nongovernmental U.S. GAAP to be launched on July 1, 2009. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the Codification will be considered non-authoritative. The Codification is effective for interim and annual periods ending after September 15, 2009. The Company does not expect the adoption to have a material impact on its consolidated financial position, results of operations or cash flows.   Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.  45   ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   We do not hold any derivative instruments and do not engage in any hedging activities.  ITEM 4. CONTROLS AND PROCEDURES  Evaluation of Disclosure Controls and Procedures.  Our management team, under the supervision and with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), as of the last day of the fiscal period covered by this report, June 30, 2009. The term disclosure controls and procedures means our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  Our principal executive officer and our principal financial officer, are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Management is required to base its assessment of the effectiveness of our internal control over financial reporting on a suitable, recognized control framework, such as the framework developed by the Committee of Sponsoring Organizations (COSO). The COSO framework, published in Internal Control-Integrated Framework, is known as the COSO Report. Our principal executive officer and our principal financial officer, have has chosen the COSO framework on which to base its assessment. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2009.  It should be noted that any system of controls, however well designed and operated, can provide only reasonable and not absolute assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of certain events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.  Changes in Internal Control Over Financial Reporting  There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  PART II - OTHER INFORMATION   ITEM 1. LEGAL PROCEEDINGS  The Company is not currently a party to, nor is any of its property currently the subject of, any material legal proceeding. None of the Companys directors, officers or affiliates is involved in a proceeding adverse to the Companys business or has a material interest adverse to the Companys business.  In January 2008, a money judgment in the amount of sixty nine thousand nine hundred fifty two dollars, for past due payables, in favor of Lewis PR, a California corporation, against the Company was entered into the Superior Court of California, County of San Diego. In February 2008, a settlement agreement was reached between the parties whereby Lewis PR will receive a payment of thirteen thousand dollars by September 2008 as full settlement of the debt. A payment of $6,500 was made in October 2008. The Company is pursuing a revised settlement agreement with the debtor.  46   In February 2008, summonses were filed in the Superior Court of the State of New Jersey against the Company and its CEO demanding payment on a promissory note in the amount of forty five thousand dollars. In October 2008, a money judgment in the amount of forty nine thousand two hundred sixty three dollars, for a past due note, in favor of the note holder, against the Company was entered into the Superior Court of New Jersey, County of Middlesex. In January 2009, the Company executed a forbearance agreement with the note holder whereby the note holder agreed to forbear his rights under the promissory note until March 31, 2009. Per the terms of the agreement, the Company made a $10,000 payment to the note holder in January 2009 and issued 500,000 shares of restricted common stock to the note holder that were held in escrow with the note holders attorney. Per the terms of the forbearance agreement, the escrow shares were released to the note holder in April 2009. Effective March 31, 2009, the note holder retains the right to accept shares of the Companys common stock in lieu of the Companys indebtedness. The Company is pursuing an extension to the forbearance agreement.  In April 2008, a summons was filed in the Superior Court of the State of New Jersey against the Company demanding payment on a convertible promissory note in the amount of one hundred thousand dollars. The Company and the note holder have agreed upon a settlement whereby the debt shall be assigned to the SIG by the Company and the SIG shall repay the agreed upon settlement amount of $45,000 to the note holder, in installments, through February 2009. The SIG made payments totaling $45,000 to the note holder from July 2008 to January 2009. In July 2009, the SIG and the note holder have agreed upon a revised final settlement whereby the SIG shall make a final payment of $14,900 to the note holder. The payment was made in July 2009.   ITEM 1A - Risk Factors  There have been no material changes in the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008. However, the following risk factors, in addition to risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008 should be considered.  OUR COMMON STOCK IS SUBJECT TO PENNY STOCK REGULATION  Our shares are subject to the provisions of Section 15(g) and Rule 15g-9 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), commonly referred to as the "penny stock" rule. Section 15(g) sets forth certain requirements for transactions in penny stocks and Rule 15g-9(d)(1) incorporates the definition of penny stock as that used in Rule 3a51-1 of the Exchange Act. The Commission generally defines penny stock to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. Rule 3a51-1 provides that any equity security is considered to be penny stock unless that security is: registered and traded on a national securities exchange meeting specified criteria set by the Commission; authorized for quotation on the NASDAQ Stock Market; issued by a registered investment company; excluded from the definition on the basis of price (at least $5.00 per share) or the registrant's net tangible assets; or exempted from the definition by the Commission. Since our shares are deemed to be "penny stock", trading in the shares will be subject to additional sales practice requirements on broker/dealers who sell penny stock to persons other than established customers and accredited investors.  FINRASALES PRACTICE REQUIREMENTS MAY ALSO LIMIT A STOCKHOLDER'S ABILITY TO BUY AND SELL OUR STOCK.  In addition to the penny stock rules described above, the Financial Industry Regulatory Authority (FINRA) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.  FAILURE TO ACHIEVE AND MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND OPERATING RESULTS.  It may be time consuming, difficult and costly for us to develop and implement the additional internal controls, processes and reporting procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal auditing and other finance staff in order to develop and implement appropriate additional internal controls, processes and reporting procedures. If we are unable to comply with these requirements of the Sarbanes-Oxley Act, we may not be able to obtain the independent accountant certifications that the Sarbanes-Oxley Act requires of publicly traded companies.  47   If we fail to comply in a timely manner with the requirements of Section 404 of the Sarbanes-Oxley Act regarding internal control over financial reporting or to remedy any material weaknesses in our internal controls that we may identify, such failure could result in material misstatements in our financial statements, cause investors to lose confidence in our reported financial information and have a negative effect on the trading price of our common stock.  Pursuant to Section 404 of the Sarbanes-Oxley Act and current SEC regulations, beginning with our annual report on Form 10-K for our period ending December 31, 2007, we will be required to prepare assessments regarding internal controls over financial reporting and beginning with our annual report on Form 10-K for our period ending December 31, 2008, furnish a report by our management on our internal control over financial reporting. We have begun the process of documenting and testing our internal control procedures in order to satisfy these requirements, which is likely to result in increased general and administrative expenses and may shift management time and attention from revenue-generating activities to compliance activities. While our management is expending significant resources in an effort to complete this important project, there can be no assurance that we will be able to achieve our objective on a timely basis. There also can be no assurance that our auditors will be able to issue an unqualified opinion on managements assessment of the effectiveness of our internal control over financial reporting. Failure to achieve and maintain an effective internal control environment or complete our Section 404 certifications could have a material adverse effect on our stock price.  In addition, in connection with our on-going assessment of the effectiveness of our internal control over financial reporting, we may discover material weaknesses in our internal controls as defined in standards established by the Public Company Accounting Oversight Board, or the PCAOB. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The PCAOB defines significant deficiency as a deficiency that results in more than a remote likelihood that a misstatement of the financial statements that is more than inconsequential will not be prevented or detected.  In the event that a material weakness is identified, we will employ qualified personnel and adopt and implement policies and procedures to address any material weaknesses that we identify. However, the process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. We cannot assure you that the measures we will take will remediate any material weaknesses that we may identify or that we will implement and maintain adequate controls over our financial process and reporting in the future.  Any failure to complete our assessment of our internal control over financial reporting, to remediate any material weaknesses that we may identify or to implement new or improved controls, or difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of the periodic management evaluations of our internal controls and, in the case of a failure to remediate any material weaknesses that we may identify, would adversely affect the annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting that are required under Section 404 of the Sarbanes-Oxley Act. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.  WE DO NOT INTEND TO PAY DIVIDENDS  We do not anticipate paying cash dividends on our common stock in the foreseeable future. We may not have sufficient funds to legally pay dividends. Even if funds are legally available to pay dividends, we may nevertheless decide in our sole discretion not to pay dividends. The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors our board of directors may consider relevant. There is no assurance that we will pay any dividends in the future, and, if dividends are rapid, there is no assurance with respect to the amount of any such dividend.  OPERATING HISTORY AND LACK OF PROFITS COULD LEAD TO WIDE FLUCTUATIONS IN OUR SHARE PRICE. THE PRICE AT WHICH YOU PURCHASE OUR COMMON SHARES MAY NOT BE INDICATIVE OF THE PRICE THAT WILL PREVAIL IN THE TRADING MARKET. YOU MAY BE UNABLE TO SELL YOUR COMMON SHARES AT OR ABOVE YOUR PURCHASE PRICE, WHICH MAY RESULT IN SUBSTANTIAL LOSSES TO YOU. THE MARKET PRICE FOR OUR COMMON SHARES IS PARTICULARLY VOLATILE GIVEN OUR STATUS AS A RELATIVELY UNKNOWN COMPANY WITH A SMALL AND THINLY TRADED PUBLIC FLOAT.  48   The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our share price is attributable to a number of factors. First, as noted above, our common shares are sporadically and thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative or risky investment due to our limited operating history and lack of profits to date, and uncertainty of future market acceptance for our potential products. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. Many of these factors are beyond our control and may decrease the market price of our common shares, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common shares will be at any time, including as to whether our common shares will sustain their current market prices, or as to what effect that the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price.  Shareholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the volatility of our share price.  SHOULD ONE OR MORE OF THE FOREGOING RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED, INTENDED OR PLANNED.  ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS  In April 2009, the Company issued 100,000 restricted shares of common stock, at $0.05 per share, relating to the March 2009 sale of 2 units, with each unit consisting of a 10% promissory note of $25,000, maturing three years from the execution date, and 50,000 restricted shares of the Companys common stock.  In April 2009, the Company sold 2 units, with each unit consisting of a 10% promissory note of $25,000, maturing three years from the execution date, and 50,000 restricted shares of the Companys common stock. The Company issued 100,000 restricted shares of common stock, at $0.05 per share.  In May 2009, the Company sold 2 units, with each unit consisting of a 10% promissory note of $25,000, maturing three years from the execution date, and 50,000 restricted shares of the Companys common stock. The Company issued 100,000 restricted shares of common stock, at $0.03 per share in June 2009.  In June 2009, the Company sold 1 unit, consisting of a 10% promissory note of $25,000, maturing three years from the execution date, and 50,000 restricted shares of the Companys common stock. The Company issued 50,000 restricted shares of common stock, at $0.03 per share.  In June 2009, the Company issued 7,500 shares of its common stock, valued at $0.025 per share for 2,500 shares, $0.034 per share for 2,500 shares and $0.05 per share for 2,500 shares, and issuable to a law firm as compensation for general counsel legal services rendered.  In June 2009, the Company issued 99,999 shares of its common stock, valued at $0.03 per share for 33,333 shares, $0.034 per share for 33,333 shares and $0.05 per share for 33,333 shares, and issuable to a consultant as compensation for consulting services rendered. All of the above offerings and sales were deemed to be exempt under Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended.   49   ITEM 3. DEFAULTS UPON SENIOR SECURITIES  Not applicable.   ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  The Companys annual meeting of shareholders was held on August 8, 2008. At the annual meeting, the Company's shareholders voted upon the following matters:  (1) The election of five members to the Company's Board of Directors to hold office until the Company's next Annual Meeting of Stockholders in 2009 or until each Directors successor is duly elected and qualified; and   (2) The ratification of the appointment of Li & Company, PC, as the Company's independent certified public accountants; and  (3) The enactment of a one for ten reverse stock split (1:10), to be effective as of the filing of an amendment to the Company's Articles of Incorporation with the New Jersey Secretary of State and upon the receipt of regulatory approval.  Per the results recorded on the Report of Inspector of Election, Mark L. Kay, Robert Denn, Mark Corrao, Ramarao Pemmaraju and George Waller were elected as the Companys Board of Directors; Li & Company, PC was ratified as the Companys independent certified public accountants; and a one for ten reverse stock split (1:10) was approved. On September 30, 2008, the New Jersey Secretary of State approved the Companys Restated Certificate of Incorporation. On October 31, 2008, the Company received regulatory approval for the effectuation of the one for ten reverse stock split (1:10) at the open of business on November 3, 2008 at which time the Companys new ticker symbol became SFOR.  All share and per share data in the Form 10-Q, financial statements and related notes have been restated to give retroactive effect to the reverse stock split.   ITEM 5. OTHER INFORMATION  Not applicable.   50   ITEM 6. EXHIBITS   Exhibit NumberDescription3.1Amended and Restated Certificate of Incorporation of StrikeForce Technologies, Inc.(1)3.2By-laws of StrikeForce Technologies, Inc. (1)10.12004 Stock Option Plan. (1)10.2Securities Purchase Agreement dated December 20, 2004, by and among StrikeForce Technologies, Inc. and Cornell Capital Partners, LP. (1)10.3Secured Convertible Debenture with Cornell Capital Partners, LP. (1)10.4Investor Registration Rights Agreement dated December 20, 2004, by and between StrikeForce Technologies, Inc. and Cornell Capital Partners, LP in connection with the Securities Purchase Agreement.(2)10.5Escrow Agreement, dated December 20, 2004, by and between StrikeForce Technologies, Inc. and Cornell Capital Partners, LP in connection with the Securities Purchase Agreement. (2)10.6Security Agreement dated December 20, 2004, by and between StrikeForce Technologies, Inc. and Cornell Capital Partners, LP in connection with the Securities Purchase Agreement. (1)10.7Secured Convertible Debenture with Cornell Capital Partners, LP dated January 18, 2005. (1)10.8Royalty Agreement with NetLabs.com, Inc. and Amendments. (1)10.9Employment Agreement dated as of May 20, 2003, by and between StrikeForce Technologies, Inc. and Mark L. Kay. (1)10.10Amended and Restated Secured Convertible Debenture with Cornell Capital Partners, LP dated April 27, 2005. (1)10.11Amendment and Consent dated as of April 27, 2005, by and between StrikeForce Technologies, Inc. and Cornell Capital Partners, LP. (1)10.12Securities Purchase Agreement dated as of April 27, 2005 by and between StrikeForce Technologies, Inc. and Highgate House Funds, Ltd. (1)10.13Investor Registration Rights Agreement dated as of April 27, 2005 by and between StrikeForce Technologies, Inc. and Highgate House Funds, Ltd. (2)10.14Secured Convertible Debenture with Highgate House Funds, Ltd. dated April 27, 2005. (2)10.15Escrow Agreement dated as of April 27, 2005 by and between StrikeForce Technologies, Inc., Highgate House Funds, Ltd. and Gottbetter & Partners, LLP. (1)10.16Escrow Shares Escrow Agreement dated as of April 27, 2005 by and between StrikeForce Technologies, Inc., Highgate House Funds, Ltd. and Gottbetter & Partners, LLP. (1)10.17Security Agreement dated as of April 27, 2005 by and between StrikeForce Technologies, Inc. and Highgate House Funds, Ltd. (1)10.18Network Service Agreement with Panasonic Management Information Technology Service Company dated August 1, 2003 (and amendment). (1)10.19Client Non-Disclosure Agreement. (1)10.20Employee Non-Disclosure Agreement. (1)10.21Secured Convertible Debenture with Highgate House Funds, Ltd. dated May 6, 2005. (2)10.22Termination Agreement with Cornell Capital Partners, LP dated February 19, 2005. (1)10.23Securities Purchase Agreement with WestPark Capital, Inc. (4)10.24Form of Promissory Note with WestPark Capital, Inc. (4)10.25Investor Registration Rights Agreement with WestPark Capital, Inc. (4)31.1Certification by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, promulgated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3)31.2Certification by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, promulgated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3)32.1Certification by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, promulgated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3)32.2Certification by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, promulgated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3)  (1) Filed as an exhibit to the Registrants Form SB-2 dated as of May 11, 2005 and incorporated herein by reference. (2) Filed as an exhibit to the Registrants Amendment No. 1 to Form SB-2 dated as of June 27, 2005 and incorporated herein by reference. (3) Filed herewith. (4) Filed as an exhibit to the Registrants Form 8-K dated August 1, 2006 and incorporated herein by reference.  51   SIGNATURES  In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.   STRIKEFORCE TECHNOLOGIES, INC. Dated: August 18, 2009By: /s/ Mark L. KayMark L. KayChief Executive OfficerDated: August 18, 2009By: /s/ Mark Joseph CorraoMark Joseph CorraoChief Financial Officer and
Principal Accounting Officer     52