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, 2010  . 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 a shorter period that the registrant was required to submit and post such files). Yes . No X.  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See definition of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):  Large accelerated filer.Accelerated filer.Non-accelerated filer. (Do not check if a smaller reporting company)Smaller reporting companyX.  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act. Yes . No X.  State the number of shares outstanding of each of the issuers classes of equity securities, as of the latest practicable date: At August 5, 2010, there were 45,830,809shares of Common Stock, $0.0001 par value per share issued and outstanding     STRIKEFORCE TECHNOLOGIES, INC.  FORM 10-Q June 30, 2010   Page
NumbersPART I - FINANCIAL INFORMATIONItem 1.Condensed Consolidated Financial Statements (unaudited)Condensed Consolidated Balance Sheets5Condensed Consolidated Statements of Operations6Condensed Consolidated Statements of Stockholders Deficit7Condensed Consolidated Statements of Cash Flows9Notes to Condensed Consolidated Financial Statements10Item 2.Management Discussion & Analysis of Financial Condition and Results of Operations37Item 3Quantitative and Qualitative Disclosures About Market Risk50Item 4.Controls and Procedures51PART II - OTHER INFORMATIONItem1.Legal Proceedings51Item1A.Risk Factors51Item 2.Unregistered Sales of Equity Securities and Use of Proceeds55Item 3.Defaults Upon Senior Securities56Item 4.Removed and Reserved56Item 5Other information56Item 6.Exhibits57  2   PART I - FINANCIAL INFORMATION  Item 1. Financial Statements and Notes to Interim Financial Statements  General  The accompanying reviewed interim financial statements have been prepared in accordance with the instructions to Form 10-Q. Therefore, they do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders' equity in conformity with generally accepted accounting principles.  Except as disclosed herein, there has been no material change in the information disclosed in the notes to the financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2009.  In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature.  Operating results for the three and six months ended June 30, 2010 are not necessarily indicative of the results that can be expected for the year ending December 31, 2010.  3    STRIKEFORCE TECHNOLOGIES, INC.  JUNE 30, 2010 AND 2009   INDEX TO FINANCIAL STATEMENTS   ContentsPage(s)Balance Sheets at June 30, 2010 (Unaudited) and December 31, 20095Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009 (Unaudited)6Statement of Stockholders Deficit for the Year Ended December 31, 20097Statement of Stockholders Deficit for the Six Months Ended June 30, 2010 (Unaudited)8Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009 (Unaudited)9Notes to the Financial Statements (Unaudited)10   4   STRIKEFORCE TECHNOLOGIES, INC. BALANCE SHEETS


|                                                                                           |   |               |  |   |                  
|------------------------------------------------------------------------------------------ | - | ------------- |  | - | -----------------
|ASSETS                                                                                    
|                                                                                           |   | June 30,
2010 |  |   | December 31,
2009
|                                                                                           |   | (Unaudited)   |  |   |                  
|Current Assets:                                                                            |   |               |  |   |                  
|Cash and cash equivalents                                                                  | $ | 3,567         |  | $ | 67,821           
|Accounts receivable                                                                        |   | 23,219        |  |   | 23,932           
|Current portion of deferred royalties                                                      |   | -             |  |   | 326,808          
|Prepayments and other current assets                                                       |   | 9,489         |  |   | 38,764           
|Total current assets                                                                       |   | 36,275        |  |   | 457,325          
|                                                                                           |   |               |  |   |                  
|Property and equipment, net                                                                |   | 4,669         |  |   | 6,873            
|Deferred royalties, net of current portion                                                 |   | -             |  |   | 816,204          
|Website development cost, net                                                              |   | -             |  |   | 77               
|Patents                                                                                    |   | 4,329         |  |   | 4,329            
|Security deposit                                                                           |   | 8,684         |  |   | 8,684            
|Total Assets                                                                               | $ | 53,957        |  | $ | 1,293,492        
|                                                                                           |   |               |  |   |                  
|LIABILITIES AND STOCKHOLDERS' DEFICIT                                                     
|                                                                                           |   |               |  |   |                  
|Current Liabilities:                                                                       |   |               |  |   |                  
|Derivative financial instruments                                                           | $ | 586,973       |  | $ | 518,666          
|Current maturities of convertible notes payable, net of discount of $9,629                 |   |               |  |   |                  
|and $24,336, respectively                                                                  |   | 1,055,883     |  |   | 1,041,176        
|Convertible notes payable - related parties                                                |   | 419,255       |  |   | 419,255          
|Current maturities of notes payable                                                        |   | 1,655,000     |  |   | 100,000          
|Notes payable - related parties                                                            |   | 693,400       |  |   | 658,500          
|Capital leases payable                                                                     |   | 5,532         |  |   | 5,532            
|Accounts payable                                                                           |   | 1,005,165     |  |   | 924,906          
|Accrued expenses                                                                           |   | 2,725,177     |  |   | 2,275,771        
|Payroll taxes payable                                                                      |   | 53,481        |  |   | 53,481           
|Due to factor                                                                              |   | 209,192       |  |   | 209,192          
|Due to employees                                                                           |   | -             |  |   | 50,824           
|Total current liabilities                                                                  |   | 8,409,058     |  |   | 6,257,303        
|                                                                                           |   |               |  |   |                  
|Convertible secured notes payable                                                          |   | 810,508       |  |   | 820,508          
|Convertible notes payable, net of current maturities                                       |   | 80,000        |  |   | 50,000           
|Notes payable, net of current maturities and discount of $73,385 and $94,905, respectively |   | 849,414       |  |   | 2,277,864        
|Total Liabilities                                                                          |   | 10,148,980    |  |   | 9,405,675        
|                                                                                           |   |               |  |   |                  
|Commitments and contingencies                                                              |   |               |  |   |                  
|                                                                                           |   |               |  |   |                  
|Stockholders' Deficit                                                                      |   |               |  |   |                  
|Preferred 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;                          |   |               |  |   |                  
|43,400,624 and 24,194,999 shares issued and outstanding, respectively                      |   | 4,341         |  |   | 2,420            
|Additional paid-in capital                                                                 |   | 12,156,994    |  |   | 12,044,961       
|Accumulated deficit                                                                        |   | (22,256,358)  |  |   | (20,159,564)     
|Total Stockholders' Deficit                                                                |   | (10,095,023)  |  |   | (8,112,183)      
|Total Liabilities and Stockholders' Deficit                                                | $ | 53,957        |  | $ | 1,293,492        

5   STRIKEFORCE TECHNOLOGIES, INC. STATEMENTS OF OPERATIONS (UNAUDITED)  For the three monthsFor the six monthsended June 30,ended June 30,2010200920102009Revenues$47,534$63,967$102,384$147,233Cost of sales5,63917,68728,84239,201Gross profit41,89546,28073,542108,032Operating expenses:Selling, general and administrative expenses348,127370,637646,656718,123Research and development96,439101,929207,630206,971Total operating expenses444,566472,566854,286925,094Loss from operations(402,671)(426,286)(780,744)(817,062)Other (income) expense:Interest income-(87)-(396)Interest expense2,7553,0554,2084,979Financing expense148,500(59,243)277,35793,103Derivative instruments (income) expense, net5,767250,28875,288(17,284)Forgiveness of debt--(20,411)(2,485)Loss on restructure of debt-64,804-64,804Impairment of Deferred Royalties979,608-979,608-Other (income) expenses, net-3,590-3,590Total other (income) expense, net1,136,630262,4071,316,050146,311Loss before income taxes(1,539,301)(688,693)(2,096,794)(963,373)Income tax provision----Net loss$(1,539,301)$(688,693)$(2,096,794)$(963,373)Net loss per common share - basic and diluted$(0.04)$(0.04)$(0.07)$(0.05)Weighted average number of common shares outstanding - basic and diluted39,838,26118,550,55332,137,00218,238,116   6   STATEMENT OF STOCKHOLDERS DEFICIT FOR THE YEAR ENDED DECEMBER 31, 2009


|                                                                  |                                   |         |            |             |         |               |            |       |         |              |  |   |            
|----------------------------------------------------------------- | --------------------------------- | ------- | ---------- | ----------- | ------- | ------------- | ---------- | ----- | ------- | ------------ |  | - | -----------
|                                                                  | Common stock at
$0.0001 par value |         | Additional |             |         |               |            | Total
|                                                                  |                                   | Paid-in |            | Accumulated |         | Stockholders'
|                                                                  | Shares                            |         | Amount     |             | Capital |               | Deficit    |       | Deficit
|                                                                  |                                   |         |            |             |         |               |            |       |         |              |  |   |            
|Balance at December 31, 2008                                      | 17,121,124                        |         | $          | 1,712       |         | $             | 11,193,081 |       | $       | (17,920,483) |  | $ | (6,725,690)
|                                                                  |                                   |         |            |             |         |               |            |       |         |              |  |   |            
|Sale of shares of common stock including warrants                 | 3,250,000                         |         |            | 325         |         |               | 202,025    |       |         | -            |  |   | 202,350    
|                                                                  |                                   |         |            |             |         |               |            |       |         |              |  |   |            
|Issuance of shares of common stock for consulting services        | 676,875                           |         |            | 68          |         |               | 28,932     |       |         | -            |  |   | 29,000     
|                                                                  |                                   |         |            |             |         |               |            |       |         |              |  |   |            
|Issuance of shares of common stock for financing                  | 3,147,000                         |         |            | 315         |         |               | 250,855    |       |         | -            |  |   | 251,170    
|                                                                  |                                   |         |            |             |         |               |            |       |         |              |  |   |            
|Issuance of warrants in connection with convertible notes payable | -                                 |         |            | -           |         |               | 23,860     |       |         | -            |  |   | 23,860     
|                                                                  |                                   |         |            |             |         |               |            |       |         |              |  |   |            
|Issuance of stock options for employee stock option compensation  | -                                 |         |            | -           |         |               | 346,208    |       |         | -            |  |   | 346,208    
|                                                                  |                                   |         |            |             |         |               |            |       |         |              |  |   |            
|Net loss                                                          | -                                 |         |            | -           |         |               | -          |       |         | (2,239,081)  |  |   | (2,239,081)
|                                                                  |                                   |         |            |             |         |               |            |       |         |              |  |   |            
|Balance at December 31, 2009                                      | 24,194,999                        |         | $          | 2,420       |         | $             | 12,044,961 |       | $       | (20,159,564) |  | $ | (8,112,183)

7   STATEMENT OF STOCKHOLDERS DEFICIT FOR THE SIX MONTHS ENDED JUNE 30, 2010 (UNAUDITED)


|                                                                  |                                   |         |            |             |         |               |            |       |         |              |  |   |             
|----------------------------------------------------------------- | --------------------------------- | ------- | ---------- | ----------- | ------- | ------------- | ---------- | ----- | ------- | ------------ |  | - | ------------
|                                                                  | Common stock at
$0.0001 par value |         | Additional |             |         |               |            | Total
|                                                                  |                                   | Paid-in |            | Accumulated |         | Stockholders'
|                                                                  | Shares                            |         | Amount     |             | Capital |               | Deficit    |       | Deficit
|                                                                  |                                   |         |            |             |         |               |            |       |         |              |  |   |             
|Balance at December 31, 2009                                      | 24,194,999                        |         | $          | 2,420       |         | $             | 12,044,961 |       | $       | (20,159,564) |  | $ | (8,112,183) 
|                                                                  |                                   |         |            |             |         |               |            |       |         |              |  |   |             
|Issuance of shares of common stock for consulting services        | 3,015,000                         |         |            | 302         |         |               | 21,291     |       |         | -            |  |   | 21,593      
|                                                                  |                                   |         |            |             |         |               |            |       |         |              |  |   |             
|Issuance of shares of common stock for financing                  | 1,300,000                         |         |            | 130         |         |               | 18,170     |       |         | -            |  |   | 18,300      
|                                                                  |                                   |         |            |             |         |               |            |       |         |              |  |   |             
|Issuance of shares of common stock for debt settlement            | 14,500,000                        |         |            | 1,450       |         |               | 13,050     |       |         | -            |  |   | 14,500      
|                                                                  |                                   |         |            |             |         |               |            |       |         |              |  |   |             
|Issuance of shares of common stock for conversions of             | 390,625                           |         |            | 39          |         |               | 16,942     |       |         | -            |  |   | 16,981      
|secured convertible notes payable                                 |                                   |         |            |             |         |               |            |       |         |              |  |   |             
|                                                                  |                                   |         |            |             |         |               |            |       |         |              |  |   |             
|Issuance of warrants in connection with convertible notes payable | -                                 |         |            | -           |         |               | 2,980      |       |         | -            |  |   | 2,980       
|                                                                  |                                   |         |            |             |         |               |            |       |         |              |  |   |             
|Issuance of stock options for employee stock option compensation  | -                                 |         |            | -           |         |               | 39,600     |       |         | -            |  |   | 39,600      
|                                                                  |                                   |         |            |             |         |               |            |       |         |              |  |   |             
|Net loss                                                          | -                                 |         |            | -           |         |               | -          |       |         | (2,096,794)  |  |   | (2,096,794) 
|                                                                  |                                   |         |            |             |         |               |            |       |         |              |  |   |             
|Balance at June 30, 2010                                          | 43,400,624                        |         | $          | 4,341       |         | $             | 12,156,994 |       | $       | (22,256,358) |  | $ | (10,095,023)

8   STRIKEFORCE TECHNOLOGIES, INC. STATEMENTS OF CASH FLOWS (UNAUDITED)  For the
Six MonthsFor the
Six MonthsEndedEndedJune 30, 2010June 30, 2009Cash flows from operating activities:Net loss$(2,096,794)$(963,373)Adjustments to reconcile net loss to net cashused in operating activities:Depreciation and amortization2,2814,566Forgiveness of debt(20,411)(9,544)Amortization of discount on convertible notes36,22832,975Amortization of deferred royalties163,404155,866Expense paid through issuance of note-20,000Mark to market on derivative financial instruments75,288(17,284)Impairment of deferred royalties979,608-Issuance of stock options for employee stock option compensation39,60020,258Issuance of common stock, options and warrants for consulting services21,5934,573Issuance of common stock and warrants for financing expense21,28045,000Changes in operating assets and liabilities:Accounts receivable713(11,338)Prepaid expenses29,275(2,967)Accounts payable94,75864,156Accrued expenses469,817206,146Amount received from (paid to) employees(50,824)481Net cash used in operating activities(234,184)(450,485)Cash flows from investing activities:Change in restricted cash-44,804Net cash provided by investing activities-44,804Cash flows from financing activities:Proceeds from notes payable130,000455,000Proceeds from convertible notes payable30,000-Proceeds from notes payable - related parties81,520-Payments of notes payable(24,970)(55,824)Payments of notes payable - related parties(46,620)(12,500)Net cash provided by financing activities169,930386,676Net change in cash and cash equivalent(64,254)(19,005)Cash and cash equivalents at beginning of period67,82143,030Cash and cash equivalents at end of period$3,567$24,025Supplemental disclosure of cash flow information:Cash paid for:Interest$-$293,821Income taxes$-$1,091Non-cash investing and financing activities:Conversion of convertible notes payable into common stock$16,981$-Issuance of promissory note for consulting services$-$-Issuance of warrants for convertible notes$-$-Issuance of warrants for promissory notes$-$-   9   STRIKEFORCE TECHNOLOGIES, INC. JUNE 30, 2010 and 2009 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. 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 its strategy is to develop and exploit the products for customers in the areas of financial services, e-commerce, corporate, government, healthcare 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 operations are based in Edison, New Jersey.  NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Basis of presentation  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 8 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.  Interim results are not necessarily indicative of the results for the full year. These financial statements should be read in conjunction with the financial statements of the Company for the year ended December 31, 2009 and notes thereto contained in the Annual Report on Form 10-K of the Company as filed with the United States Securities and Exchange Commission (SEC) on May 4, 2010.  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, along with 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.  10   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, 2010 and 2009, respectively. There were no allowances for doubtful accounts at June 30, 2010 or December 31, 2009.  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 paragraph 840-10-25-1 of the FASB Accounting Standards Codification. When substantially all of the risks and benefits of property ownership have been transferred to the Company, as determined by the test criteria in paragraph 840-10-25-1 of the FASB Accounting Standards Codification, the lease then qualifies as a capital lease.  Capital lease assets are depreciated on a straight-line basis 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, 2010, 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 lives are shorter than originally estimated.  11   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 useful 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, , whichever is more reliably measurable . 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 management of the Company determined that there was an impairment of deferred royalties at June 30, 2010. Based on managements evaluation, the Company recorded impairment of deferred royalties of $979,608 at June 30, 2010. The Company determined that there was no impairment at June 30, 2009 or for the interim period then ended.  Fair value of financial instruments  The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB Accounting Standards Codification (Paragraph 820-10-35-37) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements.  To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 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 Paragraph 820-10-35-37 are described below:


| |         |                                                                                                                                                            
| | ------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | Level 1 | Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.                                             
| |         |                                                                                                                                                            
| | Level 2 | Pricing 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 3 | Pricing inputs that are generally observable inputs and not corroborated by market data.                                                                   

The carrying amounts of the Companys financial assets and liabilities, such as cash and cash equivalents, accounts receivable, prepayments and other current assets, accounts payable, accrued expenses, payroll taxes payable, and due to factor, approximate their fair values because of the short maturity of these instruments.  The Companys notes payable, convertible notes payable, convertible secured 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, 2010 and 2009.  The Company revalues its derivative liability at every reporting period and recognizes gains or losses in the Statements of Operations that are attributable to the change in the fair value of the derivative liability.  The Company has no other assets or liabilities measured at fair value on a recurring basis.  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 paragraph 815-15-25-1 of the FASB Accounting Standards Codification. 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 paragraph 815-15-25-1 of the FASB Accounting Standards Codification 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 in 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 codification 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, 2010, the Company had not entered into any transactions which were considered hedges.   12   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 paragraph 815-15-25-1 of the FASB Accounting Standards Codification and paragraph 815-40-25 of the FASB Accounting Standards Codification. 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 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 applies paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. The Company recognizes revenue when it is realized or realizable and earned.  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 costs of these obligations are 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 or the software is downloaded via email delivery or an FTP web site. 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.  ASP Hosted (Cloud) 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.  13   Fixed price service contracts- Revenue from fixed price service contracts is recognized over the term of the contract 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 for obtaining employee services and equity instruments issued to parties other than employees for acquiring goods or services  The Company accounts for its stock based compensation in which the Company obtains employee services in share-based payment transactions under the recognition and measurement principles of the fair value recognition provisions of section 718-10-30 of the FASB Accounting Standards Codification and accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance of section 505-50-30 of the FASB Accounting Standards Codification. Pursuant to paragraph 718-10-30-6 of the FASB Accounting Standards Codification, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.  The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the third-party performance is complete or the date on which it is probable that performance will occur.  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 30,20102009Risk-free interest rate1.6%2.2% - 4.0%Dividend yield0.00%0.00%Expected volatility292%60% - 375%Expected option life3 years5 - 10 years  The expected life of the options has been determined using the simplified method as prescribed in paragraph 718-10-S99-1 FN77 of the FASB Accounting Standards Codification.  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 2010 and 2009 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 paragraph 718-10-S99-1 of the FASB Accounting Standards Codification 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.  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.  14   Software development costs  Paragraph 985-20-25-3 of FASB Accounting Standards Codification 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, 2010 and 2009 were $207,630 and $206,971, respectively.  Income taxes  The Company accounts for income taxes under Section 740-10-30 of the FASB Accounting Standards Codification.  Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.  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 section 740-10-25 of the FASB Accounting Standards Codification (Section 740-10-25).  Section 740-10-25 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 Section 740-10-25, 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 percent (50%) likelihood of being realized upon ultimate settlement.  Section 740-10-25 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 Section 740-10-25.  Net loss per common share  Net loss per common share is computed pursuant to section 260-10-45 of the FASB Accounting Standards Codification.  Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period.  Diluted net 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 7,527,309 shares of stock options, 2,168,467 shares of common stock issuable under warrants and 17,654,755 shares of common stock issuable under the conversion feature of the convertible notes payable for the six months ended June 30, 2010, and 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, respectively. These potential shares of common stock were not included as they were anti-dilutive.  Commitment and contingencies  The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.  15   Cash flows reporting  The Company adopted paragraph 230-10-45-24 of the FASB Accounting Standards Codification for cash flows reporting, classifies cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category, and uses the indirect or reconciliation method (Indirect method) as defined by paragraph 230-10-45-25 of the FASB Accounting Standards Codification to report net cash flow from operating activities by adjusting net income to reconcile it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating cash receipts and payments and all accruals of expected future operating cash receipts and payments and (b) all items that are included in net income that do not affect operating cash receipts and payments.  The Company reports the reporting currency equivalent of foreign currency cash flows, using the current exchange rate at the time of the cash flows and the effect of exchange rate changes on cash held in foreign currencies is reported as a separate item in the reconciliation of beginning and ending balances of cash and cash equivalents and separately provides information about investing and financing activities not resulting in cash receipts or payments in the period pursuant to paragraph 830-230-45-1 of the FASB Accounting Standards Codification.  Subsequent events  The Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company will evaluate subsequent events through the date when the financial statements are issued.  Pursuant to ASU 2010-09 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued when they are widely distributed to users, such as through filing them on EDGAR.  Recently issued accounting pronouncements  In January 2010, the FASB issued the FASB Accounting Standards Update No. 2010-01 Equity Topic 505  Accounting for Distributions to Shareholders with Components of Stock and Cash, which clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share (EPS)).  Those distributions should be accounted for and included in EPS calculations in accordance with paragraphs 480-10-25- 14 and 260-10-45-45 through 45-47 of the FASB Accounting Standards codification.  The amendments in this Update also provide a technical correction to the Accounting Standards Codification.  The correction moves guidance that was previously included in the Overview and Background Section to the definition of a stock dividend in the Master Glossary.  That guidance indicates that a stock dividend takes nothing from the property of the corporation and adds nothing to the interests of the stockholders.  It also indicates that the proportional interest of each shareholder remains the same, and is a key factor to consider in determining whether a distribution is a stock dividend.  In January 2010, the FASB issued the FASB Accounting Standards Update No. 2010-02 Consolidation Topic 810  Accounting and Reporting for Decreases in Ownership of a Subsidiary  a Scope Clarification, which provides amendments to Subtopic 810-10 and related guidance within U.S. GAAP to clarify that the scope of the decrease in ownership provisions of the Subtopic and related guidance applies to the following:  1. A subsidiary or group of assets that is a business or nonprofit activity 2. A subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture 3. An exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity (including an equity method investee or joint venture).  The amendments in this Update also clarify that the decrease in ownership guidance in Subtopic 810-10 does not apply to the following transactions even if they involve businesses:  1. Sales of in substance real estate.  Entities should apply the sale of real estate guidance in Subtopics 360-20 (Property, Plant, and Equipment) and 976-605 (Retail/Land) to such transactions. 2. Conveyances of oil and gas mineral rights.  Entities should apply the mineral property conveyance and related transactions guidance in Subtopic 932-360 (Oil and Gas-Property, Plant, and Equipment) to such transactions.  If a decrease in ownership occurs in a subsidiary that is not a business or nonprofit activity, an entity first needs to consider whether the substance of the transaction causing the decrease in ownership is addressed in other U.S. GAAP, such as transfers of financial assets, revenue recognition, exchanges of nonmonetary assets, sales of in substance real estate, or conveyances of oil and gas mineral rights, and apply that guidance as applicable. If no other guidance exists, an entity should apply the guidance in Subtopic 810-10.  16   In January 2010, the FASB issued the FASB Accounting Standards Update No. 2010-06 Fair Value Measurements and Disclosures (Topic 820) Improving Disclosures about Fair Value Measurements, which provides amendments to Subtopic 820-10 that require new disclosures as follows:  1. Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. 2. Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number).  This Update provides amendments to Subtopic 820-10 that clarify existing disclosures as follows:  1. Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2. Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3.  This Update also includes conforming amendments to the guidance on employers' disclosures about postretirement benefit plan assets (Subtopic 715-20). The conforming amendments to Subtopic 715-20 change the terminology from major categoriesof assets to classesof assets and provide a cross reference to the guidance in Subtopic 820-10 on how to determine appropriate classes to present fair value disclosures. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  In February 2010, the FASB issued the FASB Accounting Standards Update No. 2010-09 Subsequent Events (Topic 855) Amendments to Certain Recognition and Disclosure Requirements, which provides amendments to Subtopic 855-10 as follows:  1. An entity that either (a) is an SEC filer or(b) is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets) is required to evaluate subsequent events through the date that the financial statements are issued. If an entity meets neither of those criteria, then it should evaluate subsequent events through the date the financial statements are available to be issued. 2. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC's requirements. 3. The scope of the reissuance disclosure requirements is refined to include revised financial statements only. The term revised financial statementsis added to the glossary of Topic 855. Revised financial statements include financial statements revised either as a result of correction of an error or retrospective application of U.S. generally accepted accounting principles.  All of the amendments in this Update are effective upon issuance of the final Update, except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010.  In April 2010, the FASB issued the FASB Accounting Standards Update No. 2010-17 Revenue Recognition  Milestone Method (Topic 605) Milestone Method of Revenue Recognition, which provides guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. A vendor can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive.  Determining whether a milestone is substantive is a matter of judgment made at the inception of the arrangement. The following criteria must be met for a milestone to be considered substantive. The consideration earned by achieving the milestone should:  1. Be commensurate with either of the following:  a. The vendor's performance to achieve the milestone b. The enhancement of the value of the item delivered as a result of a specific outcome resulting from the vendor's performance to achieve the milestone  17    2. Relate solely to past performance  3. Be reasonable relative to all deliverables and payment terms in the arrangement.  A milestone should be considered substantive in its entirety. An individual milestone may not be bifurcated. An arrangement may include more than one milestone, and each milestone should be evaluated separately to determine whether the milestone is substantive. Accordingly, an arrangement may contain both substantive and nonsubstantive milestones.  A vendor's decision to use the milestone method of revenue recognition for transactions within the scope of the amendments in this Update is a policy election. Other proportional revenue recognition methods also may be applied as long as the application of those other methods does not result in the recognition of consideration in its entirety in the period the milestone is achieved.  A vendor that is affected by the amendments in this Update is required to provide all of the following disclosures:  1. A description of the overall arrangement 2. A description of each milestone and related contingent consideration 3. A determination of whether each milestone is considered substantive 4. The factors that the entity considered in determining whether the milestone or milestones are substantive 5. The amount of consideration recognized during the period for the milestone or milestones.  The amendments in this Update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. If a vendor elects early adoption and the period of adoption is not the beginning of the entity's fiscal year, the entity should apply the amendments retrospectively from the beginning of the year of adoption. Additionally, a vendor electing early adoption should disclose the following information at a minimum for all previously reported interim periods in the fiscal year of adoption:  1. Revenue 2. Income before income taxes 3. Net income 4. Earnings per share 5. The effect of the change for the captions presented.  A vendor may elect, but is not required, to adopt the amendments in this Update retrospectively for all prior periods.  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 $22,256,358 and a working capital deficiency of $8,372,783 at June 30, 2010 and had a net loss of $2,096,794 and cash used in operations of $234,184 for the six months ended June 30, 2010, respectively.  While the Company is attempting to generate sufficient revenues, the Companys cash position may not be sufficient enough to support the Companys daily operations.  Management intends to raise additional funds by way of a public or private offering or debt financing.  Management believes that the actions presently being taken to further implement its business plan and generate sufficient revenues provide the opportunity for the Company to continue as a going concern.  While the Company believes in the viability of its strategy to generate sufficient revenues and in its ability to raise additional funds, there can be no assurances to that effect.  The ability of the Company to continue as a going concern is dependent upon the Companys ability to further implement its business plan and generate sufficient revenues.  The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.  18   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 authentication 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.  The management of the Company determined that there was an impairment of deferred royalties at June 30, 2010. Based on managements evaluation, the Company recorded impairment of deferred royalties of $979,608 at June 30, 2010.  NOTE 5 - CONVERTIBLE NOTES PAYABLE  Convertible notes payable at June 30, 2010 and December 31, 2009 consisted of the following:


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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | June 30,
2010 |   | December 31,
2009
| | (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, 2010, the Company has not received a response from the note holder regarding a settlement agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | $ | 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. As of June 30, 2010, the Company has not received a response from the note holder regarding a settlement agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | 7,000         |   | 7,000            
| | (3) Convertible notes bearing interest at 8% per annum with a conversion price of $9.00 per share. In December 2009 the notes were extended to mature on December 31, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | 50,000        |   | 50,000           
| | (4) Convertible note bearing interest at 9% per annum maturing on June 9, 2009, with a conversion price of $1.40 per share. In February 2010 the note was extended to mature on December 9, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | 200,000       |   | 200,000          
| | (5) Convertible note bearing interest at 9% per annum maturing on September 29, 2009, with a conversion price of $0.80 per share. In May 2010 the note was extended to mature on December 31, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | 150,000       |   | 150,000          
| | (6) 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, 2010, one note holder has not yet agreed to the final settlement balance and his note balance of $3,512 remains open. In 2008, Company expensed $45,060 of financing expenses related to the shares issued for the note extensions and settlement (see Note 11). |   | 3,512         |   | 3,512            
| | (7) Convertible note executed in May 2007 bearing interest at 9% per annum with an extended maturity date of November 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 2010 the note was extended to December 31, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | 100,000       |   | 100,000          

19


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| | (8) 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 January 2010 the notes were extended to mature on December 29, 2010.                                                                                                                                                                                                              |   | 100,000   |   | 100,000  
| | (9) 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 March 2010 the note was extended to mature on January 2, 2011 and in April 2010 the Company issued 100,000 warrants with an exercise price of $0.015 per share and an expiration date of April 8, 2013 related to the extension (see Note 15).                                      |   | 100,000   |   | 100,000  
| | (10) 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, 2009.  In July 2009 the notes were extended to mature on February 9, 2010. In February 2010, one of the notes, for $20,000, was extended to mature on August 8, 2010. In April 2010, the remaining notes were extended to mature on August 9, 2010. The Company is pursuing extensions. |   | 120,000   |   | 120,000  
| | (11) Convertible notes executed in December 2009 bearing interest at 9% per annum maturing on December 1, 2012, with a conversion price of $0.105 per share. The Company issued 200,000 warrants with an exercise price of $0.10 per share and an expiration date of December 1, 2012. For the six months ended June 30, 2010 and 2009, the Company expensed $3,977 and $0, respectively, of financing expenses related to the warrants issued for the notes.                                                                                                    |   | 50,000    |   | 50,000   
| | (12) Convertible note executed in March 2010 for $250,000, bearing interest at 8% per annum, maturing on March 31, 2015. If the loan is funded in full within 180 days of execution, then the note holder may lend up to an additional $500,000 to the Company. In March 2010, the Company received the first tranche of $30,000 from the note holder.                                                                                                                                                                                                           |   | 30,000    |   | -        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | $ | 1,145,512 | $ | 1,115,512
| | Less long term portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | (80,000)  |   | (50,000) 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | 1,065,512 |   | 1,065,512
| | Less discount on convertible notes payable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | (9,629)   |   | (24,336) 
| | Current maturities, net of discount                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | $ | 1,055,883 | $ | 1,041,176

Interest expense for the convertible notes payable for the six months ended June 30, 2010 and 2009 was $47,830 and $47,217, respectively.  NOTE 6 - CONVERTIBLE NOTES PAYABLE  RELATED PARTIES  Convertible notes payable  related parties at June 30, 2010 and December 31, 2009 consisted of the following:


| |                                                                                                                                                                                                                                                                                                                                                                                                                   |   |               |   |                  
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------- | - | -----------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                   |   | June 30,
2010 |   | December 31,
2009
| | (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 September 30, 2010, 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 September 30, 2010, 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.                                                                               |   | 7,500         |   | 7,500            
| | (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, 2010, 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. |   | 230,000       |   | 230,000          

20


| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |         |   |        
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | - | ------- | - | -------
| | (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 June 30, 2010, 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. The Company is pursuing an extension.                                                                                                        |   | 15,000  |   | 15,000 
| | (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 June 30, 2010, 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. The Company is pursuing an extension.               |   | 5,000   |   | 5,000  
| | (6)  Convertible note executed in December 2005 with a software developer bearing interest at 8% per annum with an extended maturity date of June 30, 2010, 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. The Company is pursuing an extension.                                    |   | 10,000  |   | 10,000 
| | (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 June 30, 2010, 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. The Company is pursuing an extension. |   | 58,755  |   | 58,755 
| | (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, 2010, 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.                               |   | 38,000  |   | 38,000 
| | (9) Convertible note executed in March 2006 with a software developer bearing interest at 8% per annum with an extended maturity date of June 30, 2010, 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. The Company is pursuing an extension.                                             |   | 5,000   |   | 5,000  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | $ | 419,255 | $ | 419,255

At June 30, 2010 and 2009, accrued interest due for the convertible notes  related parties was $179,738 and $137,128, 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, 2010 and 2009 was $20,160 and $16,180, respectively.  21   NOTE 7 - NOTES PAYABLE  Notes payable at June 30, 2010 and December 31, 2009 consisted of the following:


| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |               |   |                  
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------- | - | -----------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | June 30,
2010 |   | December 31,
2009
| | (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. The note was convertible as of August 20, 2009. | $ | 100,000       | $ | 100,000          
| | (2) 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 Note 11).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | 1,750,000     |   | 1,750,000        
| | (3) 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. The shares were issued in February 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | 225,000       |   | 225,000          
| | (4) 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, 2010 and 2009, sales proceeds of $11,519 and $15,824, respectively, were applied to the note balance (see Notes 11 and 13).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | -             |   | 11,519           
| | (5) 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, 2010 and 2009, sales proceeds of $36,489 and $0, respectively, were applied to the note balance  (see Notes 11 and 13).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | 36,549        |   | 50,000           

22


| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |        |  |       
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------ |  | ------
| | (6) Promissory note executed in May 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 (see Note 11).                                                                                                                                                                                                                                                                                                                                                 |  | 50,000 |  | 50,000
| | (7) 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 customer order that was invoiced in August 2009. In October 2009, the note holder transferred the promissory note balance and accrued interest owed into a purchase of two units with each unit consisting of a 10% promissory note of $25,000 for a total of $50,000 and 82,000 shares of the Companys common stock, valued at market price, for a total of 164,000 shares of common stock, issued in November 2009. An additional loan paid to the Company, in October 2009, of $8,000 by the note holder was included as part of the purchase of the two units (see Note 11). |  | 50,000 |  | 50,000
| | (8) 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 (see Note 11).                                                                                                                                                                                                                                                                                                                                                                          |  | 25,000 |  | 25,000
| | (9) 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, for a total of 150,000 shares of common stock. The shares were issued in August 2009 (see Note 11).                                                                                                                                                                                                                                                                                                      |  | 75,000 |  | 75,000
| | (10) 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, for a total of 70,000 shares of common stock.  The shares were issued in August 2009 (see Note 11).                                                                                                                                                                                                                                                                                                       |  | 35,000 |  | 35,000
| | (11) Promissory note executed in August 2009 for $25,000, bearing interest at 10% per annum, maturing on August 18, 2012. Per the terms of the promissory note, the note holder purchased one unit consisting of a 10% promissory note of $25,000 and 75,000 restricted shares of the Companys common stock, at market price (see Note 11).                                                                                                                                                                                                                                                                                                                                                                                                         |  | 25,000 |  | 25,000
| | (12) Promissory note executed in September 2009 for $50,000, bearing interest at 10% per annum, maturing on September 2, 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 April 2009 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 also applies to this note. For the six months ended June 30, 2010, no sales proceeds were applied to the note balance (see Notes 11 and 13).                          |  | 50,000 |  | 50,000
| | (13) Promissory note executed in October 2009 for $50,000, maturing on October 20, 2012. Per the terms of the promissory note, the note holder purchased 3/4 unit with each unit consisting of a 10% promissory note of $25,000 and 133,333 restricted shares of the Companys common stock, at market price, for a total of 100,000 shares of common stock (see Note 11).                                                                                                                                                                                                                                                                                                                                                                           |  | 18,750 |  | 18,750
| | (14) Promissory note executed in December 2009 for $7,500, bearing interest at 10% per annum, maturing on December 4, 2012.  As inducement for making the note, the note holder received 150,000 restricted shares of the Companys common stock, at market price (see Note 11).                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | 7,500  |  | 7,500 
| | (15) Promissory note executed in April 2010 for $80,000, bearing interest at 10% per annum, maturing on July 23, 2010. As inducement for making the note, the note holder received 500,000 restricted shares of the Companys common stock, at market price (see Note 11).                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | 80,000 |  | -     

23


| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |             |   |          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------- | - | ---------
| | (16) Promissory note executed in May 2010 for $50,000, bearing interest at 10% per annum, maturing on May 21, 2013.  As inducement for making the note, the note holder received 200,000 restricted shares of the Companys common stock, at market price The April 2009 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 also applies to this note. For the six months ended June 30, 2010, no sales proceeds were applied to the note balance (see Notes 11 and 13). |   | 50,000      |   | -        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | $ | 2,577,799   | $ | 2,472,769
| | Less current maturities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | (1,655,000) |   | (100,000)
| | Less discount on notes payable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | (73,385)    |   | (94,905) 
| | Total, net of current maturities and discount                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | $ | 849,414     | $ | 2,277,864

Interest expense for notes payable for the six months ended June 30, 2010 and 2009 was $124,012 and $112,587, respectively.  NOTE 8 - NOTES PAYABLE  RELATED PARTIES  Notes payable  related parties at June 30, 2010 and December 31, 2009 consisted of the following:


| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |               |   |                  
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | - | ------------- | - | -----------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | June 30,
2010 |   | December 31,
2009
| | (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, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                              | $ | 504,000       | $ | 504,000          
| | (2) Promissory note executed in May 2006 with the CEO bearing interest at 9% per annum with an extended maturity date of December 31, 2010.  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.                                                                                                                                                                                                                                                                             |   | 100,000       |   | 100,000          
| | (3) Promissory note executed in February 2007 with the CEO bearing interest at 8% per annum with an extended maturity date of December 31, 2010. 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.                                                                                                                                                                                                                                                                      |   | 22,000        |   | 22,000           
| | (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. Per the terms of an amendment to the settlement agreement executed in September 2009, the Company paid an additional $25,000 in 2009 and $17,500 to its former President for the six months ended June 30, 2010 (see Note 13). |   | 15,000        |   | 32,500           
| | (5) Promissory note executed in March 2010 with the CEO for $50,000, bearing interest at 10% per annum, maturing on April 30, 2010. 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, which were issued in March 2010. In May 2010, the maturity date was extended to October 31, 2010.                                                                                                        |   | 50,000        |   | -                
| | (6) Promissory note executed in June 2010 with the CEO for $2,400, non-interest bearing, maturing on August 31, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | 2,400         |   | -                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | $ | 693,400       | $ | 658,500          

Interest expense for notes payable - related parties for the six months ended June 30, 2010 and 2009 was $27,849 and $27,902, respectively.  24   NOTE 9 - CONVERTIBLE SECURED NOTES PAYABLE  Convertible secured notes payable consisted of the following at June 30, 2010 and December 31, 2009:  June 30,
2010December 31,
2009Citco Global Custody NV (assigned from YA Global/Highgate)$542,588$542,588YA Global (April 2009 debenture)267,920277,920Total convertible secured notes payable$810,508$820,508  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.  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.  25   Interest expense for the convertible secured notes payable for the six months ended June 30, 2010 and 2009 was $0 and $15,952, respectively.  In January 2008, we 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. Based on the terms of the Forbearance Agreement we recorded an amount due to YA Global and Highgate from us of $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 was 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.  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, 2010 and 2009, Citco Global had no conversions.  For the six months ended June 30, 2010, YA Global converted $10,000.00 of the April 23, 2009 debenture into 390,625 shares of the Companys common stock, pursuant to the terms of the Securities Purchase Agreement. The conversion price was $0.0256 per share and the conversion date was March 1, 2010.  26   For the six months ended June 30, 2009, YA Global had no conversions.  For the six months ended June 30, 2010 and 2009, Highgate had no conversions.  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 paragraph 815-15-25-1 of the FASB Accounting Standards Codification. 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, further assigned to Citco Global, have been accounted for in accordance with paragraph 815-15-25-1 of the FASB Accounting Standards Codification and paragraph 815-40-25 of the FASB Accounting Standards Codification. 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 paragraph 815-40-25 of the FASB Accounting Standards Codification.  When multiple derivatives exist within convertible notes, they have been bundled together as a single hybrid compound 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.  27   NOTE 11 - STOCKHOLDERS DEFICIT  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 (3) 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 Note 7). 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, $25,000 in February 2009, $7,000 in August 2009 and $8,845 in December 2009, respectively, to the Company. The December 2009 advances depleted the funds and the respective investor group bank accounts were closed. The funds that were being held in escrow were classified as restricted cash on the Companys balance sheets.  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. The YA Global and Highgate secured notes were subsequently assigned to Citco Global in April 2009 (see Note 9).  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. The investor group also replaced three outstanding stale checks dated from 2008 for a total amount of $25,000 with an additional July 2009 payment. The remaining note balance of $40,100 plus accrued interest to date was forgiven.  In December 2009, the Company executed an Indemnity Agreement with the investor group whereby the investor group and its managing agent shall be indemnified from any future judgments, claims and related expenses filed against the Company.  28   Issuance of Stock for Services  In August 2005, the Company entered into a retainer agreement with an attorney, whereas the attorney will act as 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, 2010 and 2009, the Company issued no shares of common stock, and 15,000 shares of common stock, valued at $773, respectively, all of which has been expensed as legal fees, related to the agreement. In January 2010, the Company terminated the agreement as of December 28, 2009.  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. In August 2009, the Company and the financial advisor executed an amendment to the consulting agreement whereby the issuance of the remaining shares owed to the consultant relating to the agreement were accelerated for immediate issuance (see Note 13). In 2009, the Company issued 400,000 shares of common stock, valued at $13,600, all of which has been expensed as consulting fees, related to the agreement. In January 2010, the Company terminated the agreement as of October 31, 2009.  In November 2009, the Company executed a website development agreement with a consultant whereby the consultant will provide website design and development services to the Company. As compensation for the services, the consultant received a deposit fee of $3,750 and shall receive additional milestone fees in the total amount of $3,750. As additional compensation, the consultant received 46,875 shares of the Companys common stock, valued at $0.08 per share. Upon project completion, the consultant shall receive an additional 46,875 shares of the Companys common stock. As of June 30, 2010, the Company has recorded $9,000 as prepaid expenses relating to the deposit paid, the shares issued and the next milestone invoice (see Note 13).  In December 2009, the Company issued 100,000 shares of its common stock, valued at $0.05 per share, to a distributor as additional compensation for services rendered. The Company expensed $5,000 as consulting fees, related to the shares issued.  In December 2009, the Company entered into a retainer agreement with an attorney, whereas the attorney will act as house counsel for the Company with respect to all general corporate matters.  The agreement is at will and required a payment of 100,000 shares of common stock, valued at $0.05 per share, due upon execution. Commencing on January 1, 2010, 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.  In December 2009, the Company issued 100,000 shares of common stock, valued at $5,000, all of which has been expensed as legal fees, related to the agreement (see Note 13). For the six months ended June 30, 2010, the Company issued 15,000 shares of common stock, valued at $593, which has been expensed as legal fees, related to the agreement.  In June 2010, the Company entered into a consultant agreement with an investor services firm whereby the consultant will serve as an investment consultant to the Company. For acting in this role, the consultant received 3,000,000 shares of the Companys common stock, valued at $21,000 and issued to seven parties, which has been expensed as consulting fees (see Note 13).  29   Issuance of Stock for Financing  In January 2009, the Company executed a forbearance agreement with a note holder whereby the note holder agreed 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. The note holder retained the right to accept shares of the Companys common stock in lieu of the Companys indebtedness. In September 2009, the Company issued an additional 300,000 shares of unrestricted common stock to the note holder in order to provide sufficient shares of common stock to pay off its indebtedness per the terms of the forbearance agreement (see Note 7). For the six months ended June 30, 2010 and 2009, the Company expensed $833 and $45,000, 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, 2010 and 2009, the Company expensed $5,535 and $5,535, 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, 2010 and 2009, the Company expensed $417 and $0, respectively, of financing expenses related to the shares (see Notes 7 and 13).  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. For the six months ended June 30, 2010 and 2009, the Company expensed $417 and $0, respectively, of financing expenses related to the shares (see Notes 7 and 13).  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 June 2009. For the six months ended June 30, 2010 and 2009, the Company expensed $250 and $0, respectively, of financing expenses related to the shares (see Note 7).  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, 2010 and 2009, the Company expensed $125 and $0, respectively, of financing expenses related to the shares (see Note 7).  In June 2009, the Company executed a promissory note for $75,000, bearing interest at 10% per annum, maturing on June 12, 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, for a total of 150,000 shares of common stock. The shares were issued in August 2009. For the six months ended June 30, 2010 and 2009, the Company expensed $500 and $0, respectively, of financing expenses related to the shares (see Note 7).  In July 2009, the Company executed a promissory note 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, for a total of 70,000 shares of common stock. The shares were issued in August 2009. For the six months ended June 30, 2010 and 2009, the Company expensed $233 and $0, respectively, of financing expenses related to the shares (see Note 7).  30   In August 2009, the Company transferred the July 2009 assignment of $12,000 to an alternate accounts receivable invoice in the amount of $25,000 dated August 2009 and issued a new assignment to an unrelated party. As consideration for executing the July 2009 assignment, the Company paid an assignment fee of $250 to the assignee. As consideration for executing the August 2009 assignment, the Company issued 100,000 shares of restricted common stock, valued at $0.022 per share, to a relative of the assignee. The August 2009 assignment of $25,000 was repaid to the assignee in September 2009. In 2009, the Company expensed $2,200 of financing expenses related to the shares.  In August 2009, the Company executed a promissory note for $25,000, bearing interest at 10% per annum, maturing on August 18, 2012. Per the terms of the promissory note, the note holder purchased one unit consisting of a 10% promissory note of $25,000 and 75,000 restricted shares of the Companys common stock, at market price. The shares were issued in August 2009. For the six months ended June 30, 2010 and 2009, the Company expensed $250 and $0, respectively, of financing expenses related to the shares (see Note 7).  In September 2009, the Company executed a promissory note for $50,000, bearing interest at 10% per annum, maturing on September 2, 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. For the six months ended June 30, 2010 and 2009, the Company expensed $458 and $0, respectively, of financing expenses related to the shares (see Notes 7 and 13).  In September 2009, the Company assigned a September 2009 accounts receivable invoice in the amount of $25,000 to an unrelated party. As consideration for executing the assignment, the Company issued 100,000 shares of restricted common stock, valued at $0.099 per share, to a relative of the assignee. In 2009, the Company expensed $9,900 of financing expenses related to the shares (see Note 7). The assignment of $25,000 was repaid to the assignee in October 2009.  In September 2009, the Company executed a non-interest bearing promissory note for $60,000, maturing on December 31, 2009. As consideration for executing the note, the Company issued 250,000 shares of restricted common stock, valued at $0.099 per share, to the note holder. In 2009, the Company expensed $24,750 of financing expenses related to the shares (see Note 7). The note was repaid in December 2009.  In October 2009, the Company executed a promissory note for $50,000, bearing interest at 10% per annum, maturing on October 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 82,000 restricted shares of the Companys common stock, valued at $0.10 per share, for a total of 164,000 shares of common stock. The shares were issued in November 2009. For the six months ended June 30, 2010 and 2009, the Company expensed $1,367 and $0, respectively, of financing expenses related to the shares (see Note 7).  In October 2009, the Company executed a promissory note for $18,750, bearing interest at 10% per annum, maturing on October 27, 2012. Per the terms of the promissory note, the note holder purchased three/fourths of one unit with each unit consisting of a 10% promissory note of $25,000 and 133,333 restricted shares of the Companys common stock, valued at $0.10 per share, for a total of 100,000 shares of common stock. For the six months ended June 30, 2010 and 2009, the Company expensed $833 and $0, respectively, of financing expenses related to the shares (see Note 7).  In December 2009, the Company executed a promissory note for $7,500, bearing interest at 10% per annum, maturing on December 4, 2012. As consideration for executing the note, the Company issued 150,000 shares of restricted common stock, valued at $0.10 per share, to the note holder. For the six months ended June 30, 2010 and 2009, the Company expensed $1,250 and $0, respectively, of financing expenses related to the shares (see Note 7).  In March 2010, the Company executed a promissory note for $50,000 with its CEO, bearing interest at 10% per annum, maturing on April 30, 2010. 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, valued at $0.025 per share, for a total of 100,000 shares of common stock. For the six months ended June 30, 2010 and 2009, the Company expensed $2,500 and $0, respectively, of financing expenses related to the shares (see Note 8). In May 2010, the maturity date was extended to October 31, 2010.  In April 2010, the Company executed a promissory note for $80,000, bearing interest at 10% per annum, maturing on July 23, 2010. As consideration for executing the note, the Company issued 500,000 shares of restricted common stock, valued at $0.021 per share, to the note holder. For the six months ended June 30, 2010 and 2009, the Company expensed $10,500 and $0, respectively, of financing expenses related to the shares (see Note 7).  31   In May 2010, the Company executed a promissory note for $50,000, bearing interest at 10% per annum, maturing on May 21, 2013. As consideration for executing the note, the Company issued 200,000 shares of restricted common stock, valued at $0.009 per share, to the note holder. For the six months ended June 30, 2010 and 2009, the Company expensed $50 and $0, respectively, of financing expenses related to the shares (see Notes 7 and 13).  Settlement of trade accounts payable of $141,000 for 60,000,000 unrestricted shares of its common stock  In March 2010, the Company reached a settlement with a vendor, whereby the vendor accepted (i) 60,000,000 shares of its common stock valued at $0.001 per share or $60,000 in aggregate, and (ii) forgiveness of debt of $81,000. As part of the settlement, the Company issued 14,500,000 shares of its common stock to eight parties and reduced its trade debt to the vendor by $14,500 in March 2010.  In May 2010, the Company issued 500,000 shares of its common stock, valued at $3,500 and expensed as financing expenses, to the assignee as consideration for continuing to assist the Company in obtaining financing.  Sale of Shares of Common Stock  In October 2009, the Company sold to an individual certain units which contained common stock and warrants. The Company issued 1,000,000 shares of its common stock at $0.08 per share, in November 2009, and 500,000 warrants with an exercise price of $0.05 per share, all of which are exercisable for a period of three years from the date of issuance.  In November 2009, the Company sold to an individual certain units which contained common stock. The Company issued 250,000 shares of its common stock at $0.10 per share.  In November 2009, the Company sold to an individual certain units which contained common stock. The Company issued 2,000,000 shares of its common stock at $0.10 per share in December 2009.  Issuance of Warrants for Financing and Services  For the interim periods ended June 30, 2010 or 2009, there were no warrants issued for financing and services. The table below summarizes the Companys warrant activities through June 30, 2010:  Number of
Warrant
SharesExercise
Price
Range Per
ShareWeighted
Average
Exercise
PriceFair Value
at Date of
IssuanceIntrinsic
Value(in
thousands)Balance, January 1, 20091,368,467$0.10 - $ 10.00$0.818$770,635$-Granted700,000$0.10 - $   0.12$0.114$44,320$-Cancelled-$-       $        -$-$-$-Balance,  December 31, 20092,068,467$0.10 - $ 10.00$0.580$814,955$-Granted-$-       $        -$-$-$-Balance, June 30, 20102,168,4670.015 - $ 10.000.554881,645$-Earned and Exercisable, June 30, 20102,168,467$$0.554$881,645$-  The following table summarizes information concerning outstanding and exercisable warrants as of June 30, 2010:  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 - $5.50281,4172.002.444281,4172.444$0.10 - $0.801,879,0002.000.2271,879,0000.2422,168,4673.00$0.5542,168,467$0.554   32   NOTE 12 - STOCK BASED COMPENSATION  2004 Equity Incentive Plan  In September 2004, the stockholders approved the Equity Incentive Plan for its employees (Incentive Plan), effective April 1, 2004. 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 (12) 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, option shares totaling 1,084,797 vest over a one (1) year period from the date of grant, option shares totaling 2,000,012 vest over a three (3) month period from the date of grant and option shares totaling 4,100,000 vested upon issuance.  At June 30, 2010, 92,472,691 shares were available for future issuance.  The table below summarizes the Companys Incentive Plan stock option activities through June 30, 2010:  Number of
Option
SharesExercise Price
Range Per ShareWeighted
Average
Exercise
PriceWeighted
Average
Remaining
(in years)
Contractual
TermIntrinsic
Value(in
thousands)Balance, January 1, 20091,427,297$0.08 -  $ 10.00$0.448-$-Granted4,100,000$0.08$0.080-$-Cancelled-$-$--$-Balance, December 31, 20095,527,297$0.08 -  $ 10.00$0.175-$-Granted2,000,012$0.02$0.020-$-Balance, June 30, 20107,527,309$0.02 -  $ 10.000.134$-Vested and Exercisable, June 30, 20107,527,309$0.134-$-  As of June 30, 2010, an aggregate of 7,527,309 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, 4,587,022 options is $0.08 and for 2,000,012 options is $0.02. 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. At June 30, 2010, there were 7,527,309 vested incentive plan stock options outstanding of which 2,000,012 options are exercisable at $0.02, 4,587,022 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, 2010, 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, 2010:   33    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$1.000105,0007.001.000105,0001.000$0.020 - $0.3757,384,8098.000.0686,051,6060.0687,527,3097.67$0.1346,194,106$0.134  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, 2010, 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 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.  Consulting Agreements  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 11). 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. The Company terminated the agreement in June 2009.  In November 2009, the Company executed a website redesign and development agreement with a design firm whereby the firm shall design the Companys new web site and improve its internet presence. As compensation for the services, the consultant received a deposit fee of $3,750 and shall receive additional milestone fees in the total amount of $3,750. As additional compensation, the consultant received 46,875 shares of the Companys common stock, valued at $0.10 per share. Upon project completion, the consultant shall receive an additional 46,875 shares of the Companys common stock (see Note 11).  In December 2009, the Company entered into a retainer agreement with an attorney, whereas the attorney will act as house counsel for the Company with respect to all general corporate matters.  The agreement is at will and required a payment of 100,000 shares of common stock, valued at $0.05 per share, due upon execution. Commencing on January 1, 2010, 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 (see Note 11).  34   In June 2010, the Company entered into a consultant agreement with an investor services firm whereby the consultant will serve as an investment consultant to the Company. The consultant shall receive commissions based on financing raised or sales made as a result of its efforts. The agreement terminates on October 25, 2010. For acting in this role, the consultant received 3,000,000 shares of the Companys common stock, valued at $21,000 and issued to seven parties (see Note 11).  Term Sheet  In November 2009, the Company executed a term sheet with a venture capital firm whereby the firm shall potentially fund the Company in an amount up to $3,500,000. As of December 31, 2009, the firm was undertaking the due diligence process relating to the term sheet.  In December 2009, the Company paid a one-time good faith expense deposit of $15,000 to the firm. As of June 30, 2010, the Company and the venture capital firm were in discussions relating to the term sheet.  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 company paid an installment payment of $7,500 to its former President in September 2009. In September 2009, the Company executed an amendment to the settlement agreement whereby the payment terms and amount were revised. Effective September 2009, the Company shall make a $2,500 payment to its former President per Company payroll period. In the event the Company does not process a full payroll, the Company shall pay a proportionate percentage of the payment owed equal to the percentage of the total Company net payroll amount paid. For the six months ended June 30, 2010 and 2009, the Company paid $17,500 and $12,500, respectively, to its former President per the terms of the agreement and amendment. All of the payments made in accordance with the agreement and subsequent amendment were applied to the February 2008 promissory note balance owed to the Companys former President (see Note 8).  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. In September 2009, the Company executed an additional promissory note with the unrelated company that is included in the loan repayment agreement. In May 2010, the Company executed an additional promissory note with the unrelated company that is included in the loan repayment agreement. For the six months ended June 30, 2010 and 2009, sales proceeds of $24,970 and $15,824, respectively, were applied to the balance of the notes (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, 2010, 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, 2010 and 2009 and the receivables concentrations at June 30, 2010 and December 31, 2009 are as follows:  35    Net Sales for the
Six Months EndedAccounts receivable atJune 30
2010June 30,
2009June 30
2010December 31, 2009Customer A23.9%19.7%14.3%16.1%Customer B21.7%23.7%-%31.5%Customer C21.5%12.1%17.1%25.1%Customer D11.9%8.5%52.6%-%Customer E2.4%-%10.8%-%81.4%64.0%94.8%72.7%  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.  NOTE 15 - SUBSEQUENT EVENTS   The Company has evaluated all events that occurred after the balance sheet date through the date when the financial statements were issued.  The Management of the Company determined that there were certain reportable subsequent events to be disclosed as follows:  Notes Payable  Related Parties  In July 2010, the Company executed a promissory note with its CEO in the amount of $13,500. The note does not bear interest and the principal is due September 30, 2010.  Conversions to Common Stock  In July 2010, YA Global converted $6,900.00 of the April 23, 2009 debenture into 2,430,185 shares of the Companys common stock, pursuant to the terms of the Securities Purchase Agreement. The conversion price was $0.002104 for 1,235,741 shares and $0.0036 per share for 1,194,444 shares.  Stock Based Compensation  In July 2010, the Company issued stock options to purchase 7,500,000 shares of common stock to nine employees. The options were issued in accordance with the Companys 2004 Equity Incentive Plan. The options are exercisable at $0.0085 per share and expire in July 2015. The shares vest on July 1, 2010 for 50% of the issuance with the remainder vesting on October 1, 2010.  Assignment  In July 2010, the Company assigned the proceeds from a June 2010 invoice in the amount of $12,206 to an unrelated party. The Company received $11,456, net of the assignment fee of $750, in July 2010 from the assignee. The Company received the invoice payment in August 2010 and repaid the full assignment amount to the assignee.   36   In this Quarterly Report on Form 10-Q, Company, our company, us, SFT, StrikeForce, we and our refer to StrikeForce Technologies, Inc. unless the context requires otherwise.  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, 2009 as filed with the United States Securities and Exchange Commission (SEC) on May 4, 2010. Management will elect additional changes to revenue recognition to comply with the most conservative SEC recognition on a forward going accrual basis as the model is replicated with other similar markets (i.e. SBDC). The Companys actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth therein.  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. 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. In addition, 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 have conducted our business since August 2003. Our strategy is to develop and market our suite of network security products to the corporate, financial, government, insurance, e-commerce and consumer sectors. We plan to grow our business primarily through internally generated sales, rather than by acquisitions. We have no subsidiaries and we conduct our operations from our corporate office in Edison, New Jersey.  We own 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.  We have developed a suite of products partly based upon this exclusive license that is targeted to the financial services, e-commerce, corporate, government, healthcare and consumer sectors. We are a development stage business and have had nominal revenues since our formation. On August 3, 2005, our registration statement on Form SB-2 was declared effective by the Securities and Exchange Commission (the SEC) and on December 14, 2005, we received our clearance for quotation on the Over-The-Counter Bulletin Board. On November 2 2006, we filed a Post-Effective Amendment to our Form SB-2 Registration Statement with the SEC.  The SEC declared our 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. From the time we started our operations through the first half of 2003, we derived the majority of our revenues as an integrator. 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, we have developed various identification protection software products to protect computer networks from unauthorized access and to protect network owners and users from identity theft.  37   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 product, GuardedID®, in December 2006, with continuous enhancements, which is currently being sold and distributed. 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 internationally), direct sales calls initiated by our internal staff, exhibitions at security and technology trade shows, through the media, through 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 our company with one-time, monthly, quarterly and yearly recurring revenues. We are also generating revenues from annual maintenance contracts, renewal fees and expect 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 revenues of $102,384 for the six months ended June 30, 2010, and $147,233, for the six months ended June 30, 2009, 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 internationally. Our GuardedID® product is also being sold directly to consumers, primarily through the Internet as well as distributors, resellers, third party agents and potential OEM agreements by bundling GuardedID® with their products (providing a value-add to their own products and offerings).  We have incurred substantial losses since our inception. Our management believes 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.  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, internationally. 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 sales-cycle customers and strategic problem areas, such as where compliance with government regulations are key, stolen passwords used to acquire private information illegally, as well as remote users for medium to large size companies. Because we anticipate a 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 an 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 internationally.  We intend to generate revenue through fees for ProtectID® 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 license 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.  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, along with the 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.  38   Results of Operations  THREE MONTHS ENDED JUNE 30, 2010 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2009  Revenues for the three months ended June 30, 2010 were $47,534 compared to $63,967 for the three months ended June 30, 2009, a decrease of $16,433 or 25.7%. The decrease in revenues was primarily due to the decrease in sales of our software products and by the phasing out of our ValidateID® product offering, in order to provide increased focus on our GuardedID® keystroke encryption product.  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, 2010 were $0 compared to $0 for the three months ended June 30, 2009. Software, services and maintenance sales for the three months ended June 30, 2010 were $42,107 compared to $40,382 for the three months ended June 30, 2009, an increase of $1,725. The increase in software, services and maintenance revenues was primarily due to the increase in sales of our software products. 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, 2010 compared to $0 for the three months ended June 30, 2009. Transaction revenues from the ASP hosting model were $5,427 for the three months ended June 30, 2010 compared to $23,585 for the three months ended June 30, 2009, a decrease of $18,158. The decrease was caused by the phasing out of our ValidateID® product offering, in order to provide greater focus on our GuardedID® keystroke encryption product.  Cost of revenues for the three months ended June 30, 2010 was $5,639 compared to $17,687 for the three months ended June 30, 2009, a decrease of $12,048, or 68.1%. The decrease resulted primarily from reduced support costs from the phasing out of our ValidateID® product offering. Cost of revenues as a percentage of total revenues for the three months ended June 30, 2010 was 11.9% compared to 27.7% for the three months ended June 30, 2009.. The decrease reflects lower support costs for  GaurdedID® vs. ValidateID®.  Gross profit for the three months ended June 30, 2010 was $41,895 compared to $46,280 for the three months ended June 30, 2009, a decrease of $4,385, or 9.5%. The decrease in gross profit was primarily due to the decrease in sales of our software products caused by the phasing out of our ValidateID® product offering, in order to provide greater focus on our GaurdedID® keystroke encryption product.  Research and development expenses for the three months ended June 30, 2010 were $96,439 compared to $101,929 for the three months ended June 30, 2009, a decrease of $5,490, or 5.4%. The decrease was primarily attributable to the slight decrease in time expended by our research and development personnel. 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, 2010 were $348,127 compared to $370,637 for the three months ended June 30, 2009, a decrease of $22,510 or 6.1%. The net decrease was due primarily to decreases in professional fees and rent expense. 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, 2010 was $1,136,630 as compared to $262,407 for the three months ended June 30, 2009, representing an increase of $874,223, or 333%. The increase was primarily due to the impairment of deferred royalties that we recorded in the quarter ended June 30, 2010.  Our net loss for the three months ended June 30, 2010 was $1.539,301 compared to a net loss of $688,693 for the three months ended June 30, 2009, an increase of $850,608, or 124%. The increase in our net loss was due to the impairment of deferred royalties that we recorded in the quarter ended June 30, 2010 and the phasing out of our ValidateID® product offering.  SIX MONTHS ENDED JUNE 30, 2010 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2009  Revenues for the six months ended June 30, 2010 were $102,384 compared to $147,233 for the six months ended June 30, 2009, a decrease of $44,849 or 30.5%. The decrease in revenues was primarily due to the decrease in sales of our software products caused by the phasing out of our ValidateID® product offering.  39   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, 2010 were $565 compared to $849 for the six months ended June 30, 2009, a decrease of $284. The decrease in hardware revenues was primarily due to the decrease in our sales of our one-time-password token key-fobs. Software, services and maintenance sales for the six months ended June 30, 2010 were $73,414 compared to $84,672 for the six months ended June 30, 2009, a decrease of $11,258. The decrease in software, services and maintenance revenues was primarily due to the decrease in sales of our software products. Sign on fees for access to our hosted service provider to utilize our ASP transaction model amounted to $0 for the six months ended June 30, 2010 compared to $2,000 for the six months ended June 30, 2009, a decrease of $2,000. The decrease resulted from the phasing out of our ValidateID® product offering. Transaction revenues from the ASP hosting model were $28,405 for the six months ended June 30, 2010 compared to $59,712 for the six months ended June 30, 2009, a decrease of $31,307. The decrease resulted primarily from the phasing out of our ValidateID® product offering.  Cost of revenues for the six months ended June 30, 2010 was $28,842 compared to $39,201 for the six months ended June 30, 2009, a decrease of $10,359, or 26.4%. The decrease resulted primarily from the phasing out of our ValidateID® product offering. Cost of revenues as a percentage of total revenues for the six months ended June 30, 2010 was 28.2% compared to 26.6% for the six months ended June 30, 2009. The decrease reflects lower support costs for  GaurdedID® vs. ValidateID®..  Gross profit for the six months ended June 30, 2010 was $73,542 compared to $108,032 for the six months ended June 30, 2009, a decrease of $34,490, or 32.0%. The decrease in gross profit was primarily due to the decrease in sales of our software products caused by the phasing out of our ValidateID® product offering, in order to provide greater focus on our GuardedID® keystroke encryption product.  Research and development expenses for the six months ended June 30, 2010 were $207,630 compared to $206,971 for the six months ended June 30, 2009, an increase of $659, or 0.3%. 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, 2010 were $646,656 compared to $718,123 for the six months ended June 30, 2009, a decrease of $71,467 or 10.0%. The net decrease was due primarily to decreases in professional fees and rent expense. 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, 2010 was $1,316,050 as compared to $146,311 for the six months ended June 30, 2009, representing an increase in other expense of $1,169,739, or 800%. The increase was primarily due to the impairment of deferred royalties that we recorded in the quarter ended June 30, 2010 and the increase in net, mark to market changes in the fair value of derivative financial instruments relating to the convertible secured promissory notes.  Our net loss for the six months ended June 30, 2010 was $2,096,794 compared to a net loss of $963,373 for the six months ended June 30, 2009, an increase in net loss of $1,133,421, or 118%. The increase in our net loss was due to the impairment of deferred royalties that we recorded in the quarter ended June 30, 2010, to the decrease in sales of our software products caused by the phasing out of our ValidateID® product offering, in order to provide greater focus on our GuardedID® keystroke encryption product and by the increase 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, 2010 were $36,275, including $3,567 in cash and $0 in restricted cash as compared with $258,663 in total current assets at June 30, 2009, which included cash of $24,025 and $25,993 in restricted cash. Additionally, we had a stockholders deficiency in the amount of $10,095,023 at June 30, 2010 as compared to a stockholders deficiency of $7,538,312 at June 30, 2009. The increase in the deficiency is a result of our net losses. 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 $586,973, which will only be realized on the conversion of the derivatives, or settlement of the debentures.   40   our ProtectID® and ValidateID® hosting platforms, sales of our ProtectID® licensed platform and sales of our GuardedID® keystroke encryption technology. Management anticipates that we will rely, at least in the near future, on a substantial percentage of the sales of our GuardedID® and ProtectID® products. We phased out our ValidateID® product offering at the end of April 2010, in order to provide greater focus on our GuardedID® keystroke encryption product. . We anticipate that we will have a limited number of customers for our other products and may continue to have customer concentrations. Inherently, as time progresses and corporate exposure in the market grows, management believes, but cannot guarantee, we will attain greater numbers of customers and the concentrations would then diminish. Until this is accomplished, management will continue to attempt to secure additional financing through both the public and private market sectors to meet our continuing research and development and operating expenditures, until our sales revenue can provide greater liquidity.  The number of common shares outstanding increased from 18,824,123 shares at the six months ended June 30, 2009 to 43,400,624 at the six months ended June 30, 2010, an increase of 131%. The increase in the number of common shares outstanding was primarily due to the number of shares issued relating to debt settlement, financing, and consulting fees satisfied in common shares.  We have historically incurred losses and we anticipate that we will not generate any significant revenues until the fourth quarter of 2010. Our operations presently require funding of approximately $106,000 per month. Management believes, but cannot provide assurances, that we will be profitable within the next nine months, based on recently executed contracts and potential contracts we anticipate closing by the end of the third quarter of 2010 in the financial industry, technology, insurance, enterprise, government, 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, 2010, $542,588 in aggregate principal amount of the Citco Global Custody NV (Citco Global) debentures, as assigned by YA Global and Highgate in April 2009 (see below), was issued and outstanding.  At June 30, 2010, $267,920 in aggregate principal amount of the YA Global Investments, LP (YA Global) debenture remained outstanding.  In January 2008, we 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. Based on the terms of the Forbearance Agreement we recorded an amount due to YA Global and Highgate from us of $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 Forbearance Agreement, we issued to YA Global 500,000 contingency common stock purchase warrants with an exercise price of $0.15 per share. The common stock purchase warrants are exercisable for a period of five (5) years from date of issuance. The common stock purchase warrants are held in escrow and would only be released to YA Global if the total amount due by our company was 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 common stock purchase warrants. Per the terms of the amendment, YA Global and Highgate received 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. The security deposit will be applied to the amount due YA Global and Highgate if the remaining balance due of $1,042,421.84 is paid in full by May 15, 2008. Otherwise, the security deposit will be applied to YA Global as liquidated damages.  In May 2008, we 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, we agreed to use our 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 common stock purchase 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:  41    · $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, we 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 us 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. Management recorded the assigned debentures as restructuring of troubled debt. Management 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, 2010, YA Global converted $10,000 of the April 23, 2009 debenture into 390,625 shares of the Companys common stock, pursuant to the terms of the Securities Purchase Agreement. The conversion was made on March 1, 2010 at a conversion price of $0.0256 per share.  During the six months ended June 30, 2010, we issued an unsecured convertible note in an aggregate total of $30,000 to one unrelated party.  During the six months ended June 30, 2010, we issued unsecured notes in an aggregate total of $130,000 to two unrelated parties. Additionally, during the six months ended June 30, 2010, we repaid a total of $24,970 of unsecured notes to one unrelated party.  During the six months ended June 30, 2010, we issued unsecured notes in an aggregate total of $81,520 to one related party. Additionally, during the six months ended June 30, 2010, we repaid a total of $46,620 of unsecured notes to two related parties.  Summary of Funded Debt  As of June 30, 2010 our companys open unsecured promissory note balance was $2,504,414, net of discount on promissory notes of $73,385, 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.)  current portion · $18,750 to an unrelated individual · $355,000 to an unrelated individual  current portion = $80,000 · $136,549 to an unrelated company · $210,000 to an unrelated company · $7,500 to an unrelated individual · $1,750,000 to twenty unrelated individuals through term sheet with the SIG  current portion = $1,475,000  As of June 30, 2010 our companys open unsecured related party promissory note balances were $693,400, listed as follows:  · $678,400 to our CEO  current portion · $15,000 to our former President  current portion  42   As of June 30, 2010 our companys open convertible secured note balances were $810,508, listed as follows:  · $542,588 to Citco Global (as assigned in 04/09 by YA Global and Highgate) · $267,920 to YA Global (04/09 secured debenture)  As of June 30, 2010 our companys open convertible note balances were $1,135,883, net of discount on convertible notes of $9,629, 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 · $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 three unrelated individuals (08/07 unsecured debentures)  current portion · $50,000 to two unrelated individuals (12/09 unsecured debentures) · $30,000 to an unrelated company (03/10 unsecured debenture)  As of June 30, 2010 our 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. In the third quarter of 2009, we executed contracts with two international clients, for our ProtectID® and GuardedID® products, respectively.  Except for the limitations imposed upon us respective to the convertible secured debentures of Citco Global and YA Global, 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.  43   Going Concern  The Report Of Our Independent Registered Public Accounting Firm Contains Explanatory Language That Substantial Doubt Exists About Our Ability To Continue As A Going Concern  The independent auditors report on our financial statements contains explanatory language that substantial doubt exists about our ability to continue as a going concern. The report states that we depend on the continued contributions of our executive officers to work effectively as a team, to execute our business strategy and to manage our business. The loss of key personnel, or their failure to work effectively, could have a material adverse effect on our business, financial condition, and results of operations. If we are unable to obtain sufficient financing in the near term or achieve profitability, then we would, in all likelihood, experience severe liquidity problems and may have to curtail our operations. If we curtail our operations, we may be placed into bankruptcy or undergo liquidation, the result of which will adversely affect the value of our common shares.  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 $2,096,794 for the six months ended June 30, 2010, compared to a net operating loss of $963,373 for the six months ended June 30, 2009. At June 30, 2010, the Company's accumulated deficit was $22,256,358 and its working capital deficiency was $8,372,783. Additionally, for the six months ended June 30, 2010, we had negative cash flows from operating activities of $234,184. 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.  While the Company is attempting to generate sufficient revenues, the Companys cash position may not be sufficient enough to support the Companys daily operations.  Management intends to raise additional funds by way of a public or private offering or debt financing.  Management believes that the actions presently being taken to further implement its business plan and generate sufficient revenues provide the opportunity for the Company to continue as a going concern.  While the Company believes in the viability of its strategy to generate sufficient revenues and in its ability to raise additional funds, there can be no assurances to that effect.  The ability of the Company to continue as a going concern is dependent upon the Companys ability to further implement its business plan and generate sufficient revenues.  The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.  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.  44   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.  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 paragraph 815-15-25-1 of the FASB Accounting Standards Codification. 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 paragraph 815-15-25-1 of the FASB Accounting Standards Codification 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 common stock purchase 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, common stock purchase warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under paragraph 815-15-25-1 of the FASB Accounting Standards Codification and paragraph 815-40-25 of the FASB Accounting Standards Codification. 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 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 codification 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 as derivatives to be separately accounted for under paragraph 815-15-25-1 of the FASB Accounting Standards Codification and paragraph 815-40-25 of the FASB Accounting Standards Codification.  45   The Company has identified the Citco Global 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 paragraph 815-15-25-1 of the FASB Accounting Standards Codification and paragraph 815-40-25 of the FASB Accounting Standards Codification. The codification requires that when multiple derivatives exist within the Convertible Notes, they have been bundled together as a single hybrid compound 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 Citco Global, 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  Paragraph 985-20-25-3 of FASB Accounting Standards Codification 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.  Revenue Recognition  The Company applies paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. The Company recognizes revenue when it is realized or realizable and earned. 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 costs of these obligations are accrued when the corresponding revenue is recognized.  There were no revenues from fixed price long-term contracts.  46   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 or the software is downloaded via email delivery or an FTP web site. 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.  ASP Hosted (Cloud) 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.  Fixed price service contracts- Revenue from fixed price service contracts is recognized over the term of the contract 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.  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 lives are 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 useful 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, whichever is more reliably measurable. 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 common stock purchase 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 common stock purchase 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 common stock purchase warrants:  47   - strike price (the price to be paid for a share of our stock);  - price of our stock on the day options or common stock purchase warrants are granted;  - number of days that the options or common stock purchase warrants can be exercised before they expire;  - trading volatility of our stock; and  - annual interest rate on the day the option or common stock purchase 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.  Recently Issued Accounting Pronouncements      In January 2010, the FASB issued the FASB Accounting Standards Update No. 2010-01 Equity Topic 505  Accounting for Distributions to Shareholders with Components of Stock and Cash, which clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share (EPS)).  Those distributions should be accounted for and included in EPS calculations in accordance with paragraphs 480-10-25- 14 and 260-10-45-45 through 45-47 of the FASB Accounting Standards codification.  The amendments in this Update also provide a technical correction to the Accounting Standards Codification.  The correction moves guidance that was previously included in the Overview and Background Section to the definition of a stock dividend in the Master Glossary.  That guidance indicates that a stock dividend takes nothing from the property of the corporation and adds nothing to the interests of the stockholders.  It also indicates that the proportional interest of each shareholder remains the same, and is a key factor to consider in determining whether a distribution is a stock dividend.  In January 2010, the FASB issued the FASB Accounting Standards Update No. 2010-02 Consolidation Topic 810  Accounting and Reporting for Decreases in Ownership of a Subsidiary  a Scope Clarification, which provides amendments to Subtopic 810-10 and related guidance within U.S. GAAP to clarify that the scope of the decrease in ownership provisions of the Subtopic and related guidance applies to the following:  1. A subsidiary or group of assets that is a business or nonprofit activity  2. A subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture  3. An exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity (including an equity method investee or joint venture).  The amendments in this Update also clarify that the decrease in ownership guidance in Subtopic 810-10 does not apply to the following transactions even if they involve businesses:  1. Sales of in substance real estate.  Entities should apply the sale of real estate guidance in Subtopics 360-20 (Property, Plant, and Equipment) and 976-605 (Retail/Land) to such transactions.  2. Conveyances of oil and gas mineral rights.  Entities should apply the mineral property conveyance and related transactions guidance in Subtopic 932-360 (Oil and Gas-Property, Plant, and Equipment) to such transactions.  If a decrease in ownership occurs in a subsidiary that is not a business or nonprofit activity, an entity first needs to consider whether the substance of the transaction causing the decrease in ownership is addressed in other U.S. GAAP, such as transfers of financial assets, revenue recognition, exchanges of nonmonetary assets, sales of in substance real estate, or conveyances of oil and gas mineral rights, and apply that guidance as applicable. If no other guidance exists, an entity should apply the guidance in Subtopic 810-10.  In January 2010, the FASB issued the FASB Accounting Standards Update No. 2010-06 Fair Value Measurements and Disclosures (Topic 820) Improving Disclosures about Fair Value Measurements, which provides amendments to Subtopic 820-10 that require new disclosures as follows:  3. Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers.  48    4. Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number).  This Update provides amendments to Subtopic 820-10 that clarify existing disclosures as follows:  3. Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities.  4. Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3.  This Update also includes conforming amendments to the guidance on employers' disclosures about postretirement benefit plan assets (Subtopic 715-20). The conforming amendments to Subtopic 715-20 change the terminology from major categoriesof assets to classesof assets and provide a cross reference to the guidance in Subtopic 820-10 on how to determine appropriate classes to present fair value disclosures. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  In February 2010, the FASB issued the FASB Accounting Standards Update No. 2010-09 Subsequent Events (Topic 855) Amendments to Certain Recognition and Disclosure Requirements, which provides amendments to Subtopic 855-10 as follows:  1. An entity that either (a) is an SEC filer or(b) is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets) is required to evaluate subsequent events through the date that the financial statements are issued. If an entity meets neither of those criteria, then it should evaluate subsequent events through the date the financial statements are available to be issued.  2. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC's requirements.  3. The scope of the reissuance disclosure requirements is refined to include revised financial statements only. The term revised financial statementsis added to the glossary of Topic 855. Revised financial statements include financial statements revised either as a result of correction of an error or retrospective application of U.S. generally accepted accounting principles.  All of the amendments in this Update are effective upon issuance of the final Update, except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010.  In April 2010, the FASB issued the FASB Accounting Standards Update No. 2010-17 Revenue Recognition  Milestone Method (Topic 605) Milestone Method of Revenue Recognition, which provides guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. A vendor can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive.  Determining whether a milestone is substantive is a matter of judgment made at the inception of the arrangement. The following criteria must be met for a milestone to be considered substantive. The consideration earned by achieving the milestone should:  1. Be commensurate with either of the following:  a. The vendor's performance to achieve the milestone  b. The enhancement of the value of the item delivered as a result of a specific outcome resulting from the vendor's performance to achieve the milestone  2. Relate solely to past performance  3. Be reasonable relative to all deliverables and payment terms in the arrangement.  49   A milestone should be considered substantive in its entirety. An individual milestone may not be bifurcated. An arrangement may include more than one milestone, and each milestone should be evaluated separately to determine whether the milestone is substantive. Accordingly, an arrangement may contain both substantive and nonsubstantive milestones.  A vendor's decision to use the milestone method of revenue recognition for transactions within the scope of the amendments in this Update is a policy election. Other proportional revenue recognition methods also may be applied as long as the application of those other methods does not result in the recognition of consideration in its entirety in the period the milestone is achieved.  A vendor that is affected by the amendments in this Update is required to provide all of the following disclosures:  6. A description of the overall arrangement 7. A description of each milestone and related contingent consideration 8. A determination of whether each milestone is considered substantive 9. The factors that the entity considered in determining whether the milestone or milestones are substantive 10. The amount of consideration recognized during the period for the milestone or milestones.  The amendments in this Update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. If a vendor elects early adoption and the period of adoption is not the beginning of the entity's fiscal year, the entity should apply the amendments retrospectively from the beginning of the year of adoption. Additionally, a vendor electing early adoption should disclose the following information at a minimum for all previously reported interim periods in the fiscal year of adoption:  6. Revenue 7. Income before income taxes 8. Net income 9. Earnings per share 10. The effect of the change for the captions presented.  A vendor may elect, but is not required, to adopt the amendments in this Update retrospectively for all prior periods.  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.  Subsequent Events  On February 24, 2010, the FASB issued guidance in the Subsequent Events topic of the FASC to provide updates including: (1) requiring the company to evaluate subsequent events through the date in which the financial statements are issued; (2) amending the glossary of the Subsequent Events topic to include the definition of SEC filer and exclude the definition of Public entity; and (3) eliminating the requirement to disclose the date through which subsequent events have been evaluated. This guidance was prospectively effective upon issuance. The adoption of this guidance did not impact the Companys results of operations of financial condition.  The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.  Additional Information  We file reports and other materials with the Securities and Exchange Commission.  These documents may be inspected and copied at the Commissions Public Reference Room at 450 Fifth Street, N.W., Washington, D.C., 20549.  You can obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330.  You can also get copies of documents that the Company files with the Commission through the Commissions Internet site at www.sec.gov.  ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   We do not hold any derivative instruments and do not engage in any hedging activities.  50   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, 2010. 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 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, 2010.  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.   ITEM 1A - Risk Factors  You should carefully consider the following risk factors together with the other information contained in this Interim Report on Form 10-Q, and in prior reports pursuant to the Securities Exchange Act of 1934, as amended and the Securities Act of 1933, as amended, including those contained in our Annual Report on Form 10-K for the year ended December 31, 2009.  If any of the risks factors actually occur, our business, financial condition or results of operations could be materially adversely affected. In such cases, the trading price of our common stock could decline. We believe there are no changes that constitute material changes from the risk factors previously disclosed in the prior reports pursuant to the Securities Exchange Act of 1934, as amended and the Securities Act of 1933 and include or reiterate the following risk factors:  51   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.  FINRA SALES 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.  BECAUSE WE ARE QUOTED ON THE OTCBB INSTEAD OF AN EXCHANGE OR NATIONAL QUOTATION SYSTEM, OUR INVESTORS MAY HAVE A TOUGHER TIME SELLING THEIR STOCK OR EXPERIENCE NEGATIVE VOLATILITY ON THE MARKET PRICE OF OUR STOCK.  Our common stock is traded on the OTCBB. The OTCBB is often highly illiquid.  There is a greater chance of volatility for securities that trade on the OTCBB as compared to a national exchange or quotation system. This volatility may be caused by a variety of factors, including the lack of readily available price quotations, the absence of consistent administrative supervision of bid and ask quotations, lower trading volume, and market conditions. Investors in our common stock may experience high fluctuations in the market price and volume of the trading market for our securities. These fluctuations, when they occur, have a negative effect on the market price for our securities. Accordingly, our stockholders may not be able to realize a fair price from their shares when they determine to sell them or may have to hold them for a substantial period of time until the market for our common stock improves.  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.  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.  52   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, 2010, 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, 2011, 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.  53   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.  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.  VOLATILITY IN OUR COMMON SHARE PRICE MAY SUBJECT US TO SECURITIES LITIGATION, THEREBY DIVERTING OUR RESOURCES THAT MAY HAVE A MATERIAL EFFECT ON OUR PROFITABILITY AND RESULTS OF OPERATIONS.  As discussed in the preceding risk factors, 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. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert managements attention and resources.  IF WE ARE UNABLE TO CONTINUE AS A GOING CONCERN, INVESTORS MAY FACE A COMPLETE LOSS OF THEIR INVESTMENT.  The independent auditors report on our financial statements contains explanatory language that substantial doubt exists about our ability to continue as a going concern. The report states that we depend on the continued contributions of our executive officers to work effectively as a team, to execute our business strategy and to manage our business. The loss of key personnel, or their failure to work effectively, could have a material adverse effect on our business, financial condition, and results of operations. If we are unable to obtain sufficient financing in the near term or achieve profitability, then we would, in all likelihood, experience severe liquidity problems and may have to curtail our operations. If we curtail our operations, we may be placed into bankruptcy or undergo liquidation, the result of which will adversely affect the value of our common shares.  54   COMPLIANCE WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC DISCLOSURE WILL RESULT IN ADDITIONAL EXPENSES AND POSE CHALLENGES FOR OUR MANAGEMENT TEAM.  Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations promulgated thereunder, the Sarbanes-Oxley Act and SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the U.S. public markets. Our management team will need to devote significant time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.  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.  Special Note Regarding Forward-Looking Statements  This filing contains forward-looking statements about our business, financial condition and prospects that reflect our managements assumptions and good faith beliefs based on information currently available. We can give no assurance that the expectations indicated by such forward-looking statements will be realized. If any of our assumptions should prove incorrect, or if any of the risks and uncertainties underlying such expectations should materialize, our actual results may differ materially from those indicated by the forward-looking statements.  The key factors that are not within our control and that may have a direct bearing on operating results include, but are not limited to, acceptance of our proposed services and the products we expect to market, our ability to establish a customer base, managements ability to raise capital in the future, the retention of key employees and changes in the regulation of our industry.  There may be other risks and circumstances that management may be unable to predict. When used in this filing, words such as, believes, expects, intends, plans, anticipates, estimates and similar expressions are intended to identify and qualify forward-looking statements, although there may be certain forward-looking statements not accompanied by such expressions.  ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS  In April 2010, the Company issued 500,000 shares of its common stock, valued at $0.021 per share, and issuable to an individual as consideration for a promissory note executed with the individual.  In April 2010, the Company issued warrants to purchase 100,000 shares of common stock to an unrelated individual as consideration for extending his convertible promissory notes. The warrants are exercisable at $0.015 per share and expire in April 2013.  In May 2010, the Company issued 500,000 unrestricted shares of its common stock to an unrelated party, valued at $0.007, pursuant to a settlement agreement reached with a vendor.  In June 2010, the Company issued 200,000 shares of its common stock, valued at $0.009 per share, and issuable to a company as consideration for a promissory note executed with the company.  In June 2010, the Company issued 7,500 shares of its common stock, valued at $0.01 per share for 2,500 shares, $0.0022 per share for 2,500 shares and $0.06 per share for 2,500 shares, and issuable to a law firm as compensation for general counsel legal services rendered.  In June 2010, the Company issued 3,000,000 restricted shares of its common stock to seven unrelated parties, valued at $0.007, pursuant to a consultant agreement reached with a investment consultant.  55   All of the above offerings and sales were made in reliance upon the exemption from registration under Rule 506 of Regulation D promulgated under the Securities Act of 1933 and/or Section 4(2) of the Securities Act of 1933, based on the following: (a) the investors confirmed to us that they were accredited investors, as defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933 and had such background, education and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in the securities; (b) there was no public offering or general solicitation with respect to the offering; (c) the investors were provided with certain disclosure materials and all other information requested with respect to our company; (d) the investors acknowledged that all securities being purchased were restricted securities for purposes of the Securities Act of 1933, and agreed to transfer such securities only in a transaction registered under the Securities Act of 1933 or exempt from registration under the Securities Act; and (e) a legend was placed on the certificates representing each such security stating that it was restricted and could only be transferred if subsequent registered under the Securities Act of 1933or transferred in a transaction exempt from registration under the Securities Act of 1933.   ITEM 3. DEFAULTS UPON SENIOR SECURITIES  Not applicable.   ITEM 4. REMOVED AND RESERVED    ITEM 5. OTHER INFORMATION  Not applicable.   56   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.  57   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 23, 2010By: /s/ Mark L. KayMark L. KayChief Executive OfficerDated: August 23, 2010By: /s/ Philip E. BlockerPhilip E. BlockerChief Financial Officer and Principal Accounting Officer   58