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: March 31,
2008





[ 
       ]
            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
            333-122113
            22-3827597(State or other jurisdiction of
      incorporation or organization)
            (Commission
      file number)
            (I.R.S. Employer Identification
      No.)




1090 King Georges Post Road,
Suite 108


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 is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company
filer.  See definition of “accelerated filer” and “large accelerated
filer” in Rule 12b-2 of the Exchange Act (Check one):






Large
Accelerated Filer o   Accelerated
Filer o       Non-Accelerated
Filero       Smaller
Reporting Companyx




Indicate
by check whether the registrant is a shell company (as defined in Rule 12b of
the Exchange Act).  Yes [ ] No [X]





State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: As of May 8, 2008, the issuer had 99,999,999
outstanding shares of Common Stock.






1







STRIKEFORCE TECHNOLOGIES, INC.










FORM
10-Q










March
31, 2008










INDEX












PART
I-- FINANCIAL INFORMATION




PageItem
      1.
            Financial
      Statements
            F-1-F-30Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition
            3Item
      3
            Quantitative
      and Qualitative Disclosures About Market Risk
            15Item
      4.
            Control
      and Procedures
            15




PART
II-- OTHER INFORMATION




Item
      1
            Legal
      Proceedings
            16Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            16Item
      3.
            Defaults
      Upon Senior Securities
            17Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            17Item
      5.
            Other
      Information
            17Item
      6.
            Exhibits
      and Reports on Form 8-K
            18SIGNATURE
            
            19








2




Item 1. FINANCIAL STATEMENTS


STRIKEFORCE
TECHNOLOGIES, INC.
 INDEX
TO FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
 
 
   Contents
              Page(s)Balance Sheets at
      March 31, 2008 (Unaudited) and December 31, 2007
              F-2Statements of
      Operations for the Three Months Ended March 31, 2008 and
    2007
              F-3Statement of
      Stockholders’ Deficit for the Year Ended December 31,
      2007
              F-4Statement of
      Stockholders’ Deficit for the Three Months Ended March 31,
      2008
              F-5Statements of Cash
      Flows for the Three Months Ended March 31, 2008 and
    2007
              F-6Notes to the
      Financial Statements (Unaudited)
              F-7 to
      F-30
 
  F-1






STRIKEFORCE TECHNOLOGIES, INC.


BALANCE SHEETS




ASSETS


March
      31,
              
              
              December
      31,2008
              
              
              2007(Unaudited)Current
      Assets:Cash
      and cash equivalents
              
              $
              27,217
              
              
              $
              16,307Restricted
      cash
              
              
              975,000
              
              
              
              -Accounts
      receivable
              
              
              32,443
              
              
              
              32,960Current
      portion of deferred royalties
              
              
              326,808
              
              
              
              326,808Prepayments
      and other current assets
              
              
              16,154
              
              
              
              6,325Total
      current assets
              
              
              1,377,622
              
              
              
              382,400Property
      and equipment, net
              
              
              13,516
              
              
              
              16,963Deferred
      royalties, net of current portion
              
              
              1,350,406
              
              
              
              1,424,563Website
      development cost, net
              
              
              3,946
              
              
              
              4,688Patents
              
              
              4,329
              
              
              
              4,329Security
      deposit
              
              
              8,684
              
              
              
              8,684Total
      Assets
              
              $
              2,758,503
              
              
              $
              1,841,627
 LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      Liabilities:Convertible
      secured notes payable
              
              $
              672,167
              
              
              $
              672,167Derivative
      financial instruments
              
              
              375,796
              
              
              
              1,468,264Current
      maturities of convertible notes payable
              
              
              719,000
              
              
              
              800,000Convertible
      notes payable - related parties
              
              
              419,255
              
              
              
              107,500Notes
      payable
              
              
              313,750
              
              
              
              281,250Notes
      payable - related parties
              
              
              696,000
              
              
              
              25,000Capital
      leases payable
              
              
              5,532
              
              
              
              5,532Accounts
      payable
              
              
              891,894
              
              
              
              961,552Accrued
      expenses
              
              
              1,360,417
              
              
              
              1,187,762Payroll
      taxes payable
              
              
              53,375
              
              
              
              53,375Common
      stock to be issued
              
              
              131,933
              
              
              
              8,155Due
      to factor
              
              
              209,192
              
              
              
              209,192Due
      to employees
              
              
              49,205
              
              
              
              48,326Total
      current liabilities
              
              
              5,897,516
              
              
              
              5,828,075Convertible
      notes payable, less current maturities,net
      of discount of $123,609 and $148,421, respectively
              
              
              646,391
              
              
              
              636,579Convertible
      notes payable - related parties, net of current portion
              
              
              -
              
              
              
              366,691Notes
      payable, net of current portion
              
              
              1,450,000
              
              
              
              -Notes
      payable - related parties, net of current portion
              
              
              -
              
              
              
              626,000Total
      Liabilities
              
              
              7,993,907
              
              
              
              7,457,345Commitments
      and contingenciesStockholders'
      DeficitPreferred
      stock at $0.10 par value; 10,000,000 shares authorized;none
      issued or outstanding
              
              
              -
              
              
              
              -Common
      stock at $0.0001 par value; 100,000,000 shares authorized;99,999,999
      shares issued and outstanding
              
              
              10,000
              
              
              
              10,000Additional
      paid-in capital
              
              
              10,859,757
              
              
              
              10,750,732Accumulated
      deficit
              
              
              (16,105,161
              )
              
              
              (16,376,450
              )Total
      Stockholders' Deficit
              
              
              (5,235,404
              )
              
              
              (5,615,718
              )Total
      Liabilities and Stockholders' Deficit
              
              $
              2,758,503
              
              
              $
              1,841,627
  F-2




STRIKEFORCE TECHNOLOGIES, INC.
 STATEMENTS OF OPERATIONS
 FOR THE THREE MONTHS ENDED MARCH 31,
2008 AND 2007
 (UNAUDITED)




2008
              
              
              2007Revenues
              
              $
              50,235
              
              
              $
              498,400Cost
      of sales
              
              
              22,779
              
              
              
              14,955Gross
      profit
              
              
              27,456
              
              
              
              483,445Operating
      expenses:Selling,
      general and administrative expenses
              
              
              472,211
              
              
              
              553,532Research
      and development
              
              
              100,269
              
              
              
              88,540Total
      operating expenses
              
              
              572,480
              
              
              
              642,072Loss
      from operations before other (income) expense
              
              
              (545,024
              )
              
              
              (158,627
              )Other
      (income) expense:Interest
      expense
              
              
              146,516
              
              
              
              4,087Financing
      expense
              
              
              255,889
              
              
              
              325,180Derivative
      instruments (income) expense, net
              
              
              (1,092,468
              )
              
              
              16,517Forgiveness
      of debt
              
              
              (126,250
              )
              
              
              -Total
      other (income) expense
              
              
              (816,313
              )
              
              
              345,784Net
      income (loss)
              
              $
              271,289
              
              
              $
              (504,411
              )Net
      income (loss) per common share - basic and diluted
              
              $
              0.003
              
              
              $
              (0.02
              )Weighted
      average number of common shares outstanding - basic and
      diluted
              
              
              99,999,999
              
              
              
              30,505,321




F-3




STRIKEFORCE TECHNOLOGIES, INC.
 STATEMENT OF STOCKHOLDERS
EQUITY
 FOR THE YEAR ENDED DECEMBER 31,
2007





Additional
              
              
              
              
              
              TotalCommon
      Stock
              
              
              Paid-in
              
              
              Accumulated
              
              
              Stockholders'Shares
              
              
              Amount
              
              
              Capital
              
              
              Deficit
              
              
              DeficitBalance
      at December 31, 2006
              
              
              28,844,494
              
              
              $
              2,884
              
              
              $
              9,083,853
              
              
              $
              (12,378,048
              )
              
              $
              (3,291,311
              )Sale
      of shares of common stock including warrants
              
              
              2,721,071
              
              
              
              272
              
              
              
              75,269
              
              
              
              -
              
              
              
              75,541Issuance
      of shares of common stock for conversions of
              
              
              54,365,697
              
              
              
              5,438
              
              
              
              755,876
              
              
              
              -
              
              
              
              761,314notes
      payable and accrued interestIssuance
      of shares of common stock for consulting services
              
              
              6,774,238
              
              
              
              677
              
              
              
              86,825
              
              
              
              -
              
              
              
              87,502Issuance
      of shares of common stock for financing
              
              
              7,294,499
              
              
              
              729
              
              
              
              159,525
              
              
              
              -
              
              
              
              160,254Issuance
      of warrants in connection with convertible notes payable
              
              
              -
              
              
              
              -
              
              
              
              153,192
              
              
              
              -
              
              
              
              153,192Issuance
      of warrants in connection with consulting services
              
              
              -
              
              
              
              -
              
              
              
              9,817
              
              
              
              -
              
              
              
              9,817Employee
      stock option compensation
              
              
              -
              
              
              
              -
              
              
              
              426,375
              
              
              
              -
              
              
              
              426,375Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (3,998,402
              )
              
              
              (3,998,402
              )Balance
      at December 31, 2007
              
              
              99,999,999
              
              
              $
              10,000
              
              
              $
              10,750,732
              
              
              $
              (16,376,450
              )
              
              $
              (5,615,718
              )




F-4




STRIKEFORCE TECHNOLOGIES, INC.
 STATEMENT OF STOCKHOLDERS
EQUITY
 FOR THE THREE MONTHS ENDED MARCH
31, 2008
 (UNAUDITED)






Additional
              
              
              
              
              
              TotalCommon
      Stock
              
              
              Paid-in
              
              
              Accumulated
              
              
              Stockholders'Shares
              
              
              Amount
              
              
              Capital
              
              
              Deficit
              
              
              DeficitBalance
      at December 31, 2007
              
              
              99,999,999
              
              
              $
              10,000
              
              
              $
              10,750,732
              
              
              $
              (16,376,450
              )
              
              $
              (5,615,718
              )Issuance
      of warrants in connection with promissory notes payable
              
              
              -
              
              
              
              -
              
              
              
              4,350
              
              
              
              -
              
              
              
              4,350Employee
      stock option compensation
              
              
              -
              
              
              
              -
              
              
              
              104,675
              
              
              
              -
              
              
              
              104,675Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              271,289
              
              
              
              271,289Balance
      at March 31, 2008
              
              
              99,999,999
              
              
              $
              10,000
              
              
              $
              10,859,757
              
              
              $
              (16,105,161
              )
              
              $
              (5,235,404
              )






F-5




STRIKEFORCE TECHNOLOGIES, INC.
 STATEMENTS OF CASH FLOWS
 FOR THE THREE MONTHS ENDED MARCH
31, 2008 AND 2007
 (UNAUDITED)
  2008
              
              
              2007Cash
      flows from operating activities:Net
      loss
              
              $
              271,289
              
              
              $
              (504,411
              )Adjustments
      to reconcile net loss to net cashused
      in operating activities:Depreciation
      and amortization
              
              
              4,189
              
              
              
              4,741Forgiveness
      of debt
              
              
              (126,250
              )
              
              
              -Amortization
      of deferred financing costs
              
              
              -
              
              
              
              10,284Discount
      on notes payable
              
              
              145,000
              
              
              
              -Amortization
      of discount on convertible notes
              
              
              24,812
              
              
              
              187,520Amortization
      of deferred royalties
              
              
              74,157
              
              
              
              70,659Mark
      to market on derivative financial instruments
              
              
              (1,092,468
              )
              
              
              16,517Employee
      stock option compensation
              
              
              104,675
              
              
              
              94,657Issuance
      of common stock, options and warrants for consulting
    services
              
              
              -
              
              
              
              45,148Issuance
      of common stock and warrants for financing expense
              
              
              4,350
              
              
              
              49,902Changes
      in assets and liabilities affecting operations:Accounts
      receivable
              
              
              517
              
              
              
              (271,349
              )Prepaid
      expenses
              
              
              (9,829
              )
              
              
              (2,520
              )Accounts
      payable
              
              
              15,797
              
              
              
              58,793Accrued
      expenses
              
              
              172,655
              
              
              
              115,702Common
      stock to be issued
              
              
              123,778
              
              
              
              -Due
      to employees
              
              
              (48,326
              )
              
              
              778Net
      cash used in operating activities
              
              
              (335,654
              )
              
              
              (123,579
              )Cash
      flows from investing activities:Investment
      in website
              
              
              -
              
              
              
              (565
              )Purchases
      of property and equipment
              
              
              -
              
              
              
              (1,689
              )Net
      cash used in investing activities
              
              
              -
              
              
              
              (2,254
              )Cash
      flows from financing activities:Proceeds
      from sale of common stock and warrants
              
              
              -
              
              
              
              53,691Proceeds
      from convertible notes payable
              
              
              -
              
              
              
              172,000Proceeds
      from notes payable
              
              
              150,000
              
              
              
              -Proceeds
      from notes payable - related parties
              
              
              70,000
              
              
              
              -Payments
      of convertible notes payable - related parties
              
              
              (54,936
              )
              
              
              -Payments
      of notes payable
              
              
              (117,500
              )
              
              
              (50,000
              )Proceeds
      from notes payable, net of discount of $145,000, in the form of restricted
      cash
              
              
              1,305,000
              
              
              
              -Payments
      of convertible notes payable
              
              
              (6,000
              )
              
              
              -Payments
      of notes payable - related parties
              
              
              (25,000
              )
              
              
              22,000Principal
      payments on capital leases
              
              
              -
              
              
              
              (5,393
              )Net
      cash provided by financing activities
              
              
              1,321,564
              
              
              
              192,298Net
      increase in cash
              
              
              985,910
              
              
              
              66,465Cash
      and cash equivalents at beginning of period
              
              
              16,307
              
              
              
              7,455Cash
      and cash equivalents at end of period, including restricted
      cash
              
              $
              1,002,217
              
              
              $
              73,920Supplemental
      disclosure of cash flow information:Cash
      paid during the period for:Interest
              
              $
              146,516
              
              
              $
              14,633Income
      taxes
              
              $
              -
              
              
              $
              -Non-cash
      investing and financing activities:Conversion
      of convertible notes payable into common stock
              
              $
              -
              
              
              $
              67,885Issuance
      of warrants for convertible notes
              
              $
              -
              
              
              $
              3,758




F-6




STRIKEFORCE
TECHNOLOGIES, INC.
 NOTES
TO THE FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
 (UNAUDITED)
 
 NOTE
1  - NATURE
OF OPERATIONS
 
 StrikeForce
Technical Services Corporation was incorporated in August 2001 under the laws of
the State of New Jersey. On September 3, 2004, the stockholders approved an
amendment to the Certificate of Incorporation to change the name to StrikeForce
Technologies, Inc. (“StrikeForce” or the “Company”).  Prior to
December 2002, the Company was a reseller of computer hardware, software
products, and telecommunications equipment and services. In December 2002, the
Company began to acquire the rights to intangible technology, which upon the
consummation changed the direction of the Company’s business.  The
Company is a software development and services company.  The Company
owns the exclusive right to license and develop various identification
protection software products that were developed to protect computer networks
from unauthorized access and to protect network owners and users from identity
theft.  The Company has developed a suite of products based upon the
licenses and the Company is seeking to commercially exploit the products in the
areas of financial services, eCommerce, corporate, government and consumer
sectors.  The technology developed
by the Company and used in the Company’s ProtectIDTM and GuardedID® products is
the subject of two pending patent applications. The Company’s firewall product
is no longer being developed and the provisional patent application was allowed
to expire. A fourth patent application relating to the Company’s ProtectIDTM
product was combined into the first ProtectIDTM pending patent application and
the fourth application was allowed to lapse.  The Company’s
operations are based in Edison, New Jersey.
  NOTE
2  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Interim
period
 
 The
accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“U.S. GAAP”) for interim financial information and with the rules and
regulations of the United States Securities and Exchange Commission to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by U.S. GAAP for complete financial
statements.  In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the financial position, results of operations and cash flows for the interim
periods have been included. These financial statements should be read in
conjunction with the financial statements of the Company for the year ended
December 31, 2007 and notes thereto contained in the Report on Form 10-KSB of
the Company as filed with the United States Securities and Exchange Commission
(the “SEC”) on March 31, 2008.  Interim results are not necessarily
indicative of the results for the full year.
 
 Reclassification
 
 Certain
amounts in the prior period financial statements have been reclassified to
conform to the current period presentation. These reclassifications had no
effect on reported losses.
 
 Use of
estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reporting amounts of revenues and expenses
during the reported period. Significant estimates include, but are not limited
to, the estimated useful lives of property and equipment and website development
costs. Actual results could differ from those estimates.
 
 Cash
equivalents
 
 The
Company considers all highly liquid investments with maturities of three months
or less at the time of purchase to be cash equivalents.
  F-7
 
 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.
 
 Outstanding
account balances are reviewed individually for collectibility. 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 bad debt expense for the three months ended March 31, 2008 or 2007.
There were no allowances for doubtful accounts at March 31, 2008 or
2007.
 
 Property and
equipment
 
 Property
and equipment are recorded at cost. Expenditures for major additions and
betterments are capitalized.  Maintenance and repairs are charged to
operations as incurred. Depreciation of property and equipment is computed by
the straight-line method (after taking into account their respective estimated
residual values) over the assets estimated useful lives. Leasehold improvements,
if any, are amortized on a straight-line basis over the lease period or the
estimated useful life, whichever is shorter. Upon sale or retirement of
property and equipment, the related cost and accumulated depreciation are
removed from the accounts and any gain or loss is reflected in
operations.
 
 Leases
 
 Lease
agreements are evaluated to determine whether they are capital leases or
operating leases in accordance with Statement of Financial Accounting Standards
No. 13 “Accounting for
Leases”, as amended (“SFAS No. 13”). When substantially all of the risks
and benefits of property ownership have been transferred to the Company, as
determined by the test criteria in SFAS No. 13, the lease then qualifies as a
capital lease.
 
 Capital
lease assets are depreciated on an accelerated method, over the capital lease
assets estimated useful lives consistent with the Company’s normal depreciation
policy for tangible fixed assets, but generally not exceeding the lease term.
Interest charges are expensed over the period of the lease in relation to the
carrying value of the capital lease obligation.
 
 Rent
expense for operating leases, which may include free rent or fixed escalation
amounts in addition to minimum lease payments, is recognized on a straight-line
basis over the duration of each lease term.
 
 Deferred
royalties
 
 Deferred
royalties represent stock based compensation paid by the Company for certain
licenses that have been capitalized. Such licenses are utilized in connection
with the Company’s operations.
 
 Website development
cost
 
 Website
development cost is stated at cost less accumulated amortization. The cost of
the website development is amortized on a straight-line basis over its estimated
useful life of three years.
 
 Patents
 
 All costs
incurred to the point when a patent application is to be filed are expensed as
incurred as research and development cost. Patent application costs, generally
legal costs, thereafter incurred are capitalized. Patents are amortized over the
expected useful lives of the patents, which is generally 17 to 20 years for
domestic patents and 5 to 20 years for foreign patents, once the patents
are granted or are expensed if the patent application is rejected. The
costs of defending and maintaining patents are expensed as incurred. As of March
31, 2008, the Company capitalized $4,329 in patent application costs as incurred
with no amortization due to the fact that the patent applications are still
pending.
 
 Impairment of long-lived
assets
 
 Long-lived
assets, which include property and equipment, deferred royalties, website
development cost and patents are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of assets may not be
recoverable or the useful life is shorter than originally
estimated.
  F-8
 
 The
Company assesses the recoverability of its assets by comparing the projected
undiscounted net cash flows associated with the related asset or group of assets
over their remaining lives against their respective carrying amounts.
Impairment, if any, is based on the excess of the carrying amount over the fair
value of those assets. Fair value is generally determined using the asset’s
expected future discounted cash flows or market value, if readily determinable.
If assets are determined to be recoverable, but the useful lives are shorter
than originally estimated, the net book value of the assets is depreciated over
the newly determined remaining useful lives. The Company determined that there
was no impairment based on management’s evaluation at March 31, 2008 or
2007.
 
 Fair value of financial
instruments
 
 The fair
value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties.  The carrying
amounts of financial assets and liabilities, such as cash, trade accounts
receivable, prepayments, notes payable, capital leases payable, accounts
payable, accrued expenses, payroll taxes payable, due to factor and due to
employees, approximate their fair values because of the short maturity of these
instruments and market rates of interest.
 
 Discount on
debt
  The
Company has allocated the proceeds received from convertible debt instruments
between the underlying debt instruments and has recorded the conversion feature
as a liability in accordance with Statement of Financial Accounting Standards
No. 133 “Accounting for
Derivative Instruments and Hedging Activities” (“SFAS No. 133”) and
related interpretations. The conversion feature and certain other features that
are considered embedded derivative instruments, such as a conversion reset
provision, a penalty provision and redemption option, have been recorded at
their fair value within the terms of SFAS No. 133 as its fair value can be
separated from the convertible note and its conversion is independent of the
underlying note value. The conversion liability is marked to market each
reporting period with the resulting gains or losses shown on the Statement of
Operations. The Company has also recorded the resulting discount on debt related
to the warrants and conversion feature and is amortizing the discount using the
effective interest rate method over the life of the debt
instruments.
 
 Derivatives
 
 The
Company accounts for derivatives in accordance with SFAS No. 133 and the related
interpretations. SFAS No. 133, as amended, requires companies to recognize all
derivative instruments as either assets or liabilities in the balance sheet at
fair value. The accounting for changes in the fair value of a derivative
instrument depends on: (i) whether the derivative has been designated and
qualifies as part of a hedging relationship, and (ii) the type of hedging
relationship. For those derivative instruments that are designated and qualify
as hedging instruments, a company must designate the hedging instrument based
upon the exposure being hedged as either a fair value hedge, cash flow hedge or
hedge of a net investment in a foreign operation. At March 31, 2008, the Company
had not entered into any transactions which were considered hedges under SFAS
No. 133.
 
 Financial
instruments
 
 The
Company evaluates its convertible debt, options, warrants or other contracts to
determine if those contracts or embedded components of those contracts qualify
as derivatives to be separately accounted for under SFAS No. 133 and related
interpretations including Emerging Issues Task Force (“EITF”) Issue No. 00-19
“Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock”(“EITF Issue No. 00-19”). The result of this accounting treatment
is that the fair value of the embedded derivative is marked-to-market each
balance sheet date and recorded as a liability. In the event that the fair value
is recorded as a liability, the change in fair value is recorded in the
Statement of Operations as other income or expense. Upon conversion or exercise
of a derivative instrument, the instrument is marked to fair value at the
conversion date and then that fair value is reclassified to equity.
 
 In
circumstances where the embedded conversion option in a convertible instrument
is required to be bifurcated and there are also other embedded derivative
instruments in the convertible instrument that are required to be bifurcated,
the bifurcated derivative instruments are accounted for as a single, compound
derivative instrument.
 
 The
classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is re-assessed at the end of
each reporting period. Equity instruments that are initially classified as
equity that become subject to reclassification under SFAS No. 133 are
reclassified to liability at the fair value of the instrument on the
reclassification date. Derivative instrument liabilities are classified in the
balance sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument is expected within 12 months of the
balance sheet date.
  F-9
 
 The fair
value model utilized to value the various compound embedded derivatives in the
secured convertible notes comprises multiple probability-weighted scenarios
under various assumptions reflecting the economics of the secured convertible
notes, such as the risk-free interest rate, expected Company stock price and
volatility, likelihood of conversion and or redemption, and likelihood of
default status and timely registration.  At inception, the fair value
of the single compound embedded derivative was bifurcated from the host debt
contract and recorded as a derivative liability which resulted in a reduction of
the initial notional carrying amount of the secured convertible notes (as
unamortized discount which will be amortized over the term of the notes under
the effective interest method).
 
 Revenue
recognition
 
 The
Company’s revenues are derived principally from the sale and installation of its
various identification protection software products and related hardware and
services.  The Company recognizes revenue when it is realized or
realizable and earned less estimated future returns. The Company considers
revenue realized or realizable and earned when it has persuasive evidence of an
arrangement that the product has been shipped or the services have been rendered
to the customer, the sales price is fixed or determinable, and collectibility 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.  Any cost of these obligations is accrued when the
corresponding revenue is recognized.  For the three months ended March
31, 2008 and 2007, total hardware revenues for products shipped or delivered
were $640 and $0, representing 1.3% and 0% of total revenues,
respectively.  There were no revenues from fixed price long-term
contracts.
 
 Software
– Revenue from delivered elements of one-time charge licensed software is
recognized at the inception of the license term, provided the Company has
vendor-specific objective evidence of the fair value of each delivered
element.  Revenue is deferred for undelivered elements. The Company
recognizes revenue from the sale of software licenses, when persuasive evidence
of an arrangement exists, the product has been delivered, the fee is fixed and
determinable, and collection of the resulting receivable is reasonably
assured.  Delivery generally occurs when the product is delivered to a
common carrier.  The Company assesses collection based on a
number of factors, including past transaction history with the customer and the
creditworthiness of the customer.  The Company does not request
collateral from customers.  If the Company determines that collection
of a fee is not reasonably assured, the Company defers the fee and recognizes
revenue at the time collection becomes reasonably assured, which is generally
upon receipt of cash. Revenue from monthly software licenses is recognized
on a subscription basis.  For the three months ended March 31, 2008
and 2007, total software revenues for software shipped or delivered were $23,249
and $470,200 representing 46.3% and 94.3% of total revenues,
respectively.
 
 Services
– Revenue from time and service contracts is recognized as the services are
provided.  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 upon completion of service. For the three months ended March 31,
2008 and 2007, total revenues for services provided were $26,346 and
$28,200 representing 52.4% and 5.7% of total revenues,
respectively.
 
 Revenue
from fixed price long-term service contracts is recognized over the contract
term based on the percentage of services that are provided during the period
compared with the total estimated services to be provided over the entire
contract.  Losses on fixed price contracts are recognized during the
period in which the loss first becomes apparent.  Revenue from
maintenance is recognized over the contractual period or as the services are
performed.  Revenue in excess of billings on service contracts is
recorded as unbilled receivables and is included in trade accounts
receivable.  Billings in excess of revenue that is recognized on
service contracts are recorded as deferred income until the aforementioned
revenue recognition criteria are met.
  F-10
 
 Stock based
compensation
 
 Effective
January 1, 2006, the Company adopted the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123 (revised 2004) “Share-Based Payment”(“SFAS
No. 123R”) using the modified prospective method. Under this method,
compensation cost in the first quarter of 2006 includes the portion vesting in
the period for (1) all share-based payments granted prior to, but not vested as
of January 1, 2006, based on the grant date fair value estimated in accordance
with the original provisions of SFAS No. 123 and (2) all share-based payments
granted subsequent to January 1, 2006, based on the grant date fair value
estimated in accordance with the revised provisions of SFAS No.
123R.  The fair value of each option grant estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
  March
      31,
                  2008
                
                
                March 31,
                  2007Risk-free
      interest rate
                
                
                4.0%
      - 5.2
                %
                
                
                4.5%
      - 4.8
                %Dividend
      yield
                
                
                0.00%
                
                
                
                0.00%Expected
      volatility
                
                
                200%
      - 400
                %
                
                
                166%
      - 198
                %Expected
      option life
                
                5 -
      10 years
                
                
                5 -
      10 years
 
 The
expected life of the options has been determined using the simplified method as
prescribed in SEC Staff Accounting Bulletin No. 107 (“SAB No. 107”). Results of
prior periods do not reflect any restated amounts and the Company had no
cumulative effect adjustment upon adoption of SFAS No. 123R under the modified
prospective method. The Company’s policy is to recognize compensation cost for
awards with only service conditions and a graded vesting schedule on a
straight-line basis over the requisite service period for the entire award.
Additionally, the Company’s policy is to issue new shares of common stock to
satisfy stock option exercises.
 
 The
adoption of SFAS No. 123R increased the Company’s reported operating loss and
net loss by $104,675 and $94,657 for the three months ended March 31, 2008 and
2007, respectively. The expense is classified as selling, general and
administrative expense on the statement of operations.
 
 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 2008 and 2007 are as follows:
 
 ·The
      expected volatility is based on a combination of the historical volatility
      of the Company’s and comparable companies’ stock over the contractual life
      of the options.
 
 ·The
      Company uses historical data to estimate employee termination behavior.
      The expected life of options granted is derived from SAB 107 and
      represents the period of time the options are expected to be
      outstanding.
 
 ·The
      risk-free interest rate is based on the U.S. Treasury yield curve in
      effect at the time of grant for periods within the contractual life of the
      option.
 
 ·The
      expected dividend yield is based on the Company’s current dividend yield
      as the best estimate of projected dividend yield for periods within the
      contractual life of the option.
 
 Software development
costs
 
 Statement
of Financial Accounting Standards No. 86 “Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed” (“SFAS No.
86”) requires capitalization of software development costs incurred subsequent
to establishment of technological feasibility and prior to the availability of
the product for general release to customers.  Systematic amortization
of capitalized costs begins when a product is available for general release to
customers and is computed on a product-by-product basis at a rate not less than
straight-line basis over the product’s remaining estimated economic
life.  To date, all costs have been accounted for as research and
development costs and no software development cost has been
capitalized.  Total research and development costs for the three
months ended March 31, 2008 and 2007 were $100,269 and $88,540,
respectively.
  F-11
 
 Income
taxes
 
 The
Company follows Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes”
(“SFAS No. 109”), which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are based on the differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Deferred
tax assets are reduced by a valuation allowance to the extent management
concludes it is more likely than not that the assets will not be realized.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the statements
of operations in the period that includes the enactment date.
 
 Net loss per common
share
 
 Net loss
per common share is computed pursuant to Statement of Financial Accounting
Standards No. 128 “Earnings
Per Share” (“SFAS No. 128”).  Basic loss per share is computed
by taking net loss divided by the weighted average number of common shares
outstanding for the period.  Diluted loss per share is computed by
dividing net loss by the weighted average number of shares of common stock and
potentially outstanding shares of common stock during each period to reflect the
potential dilution that could occur from common shares issuable through stock
options, warrants, and convertible debt, which excludes 6,098,170 shares of
common stock to be issued, 25,390,884 shares of stock options, 11,615,772 shares
of common stock issuable under warrants and 24,077,080 shares of common stock
issuable under the conversion feature of the convertible notes payable for the
three months ended March 31, 2008, and 9,850,753 shares of stock options,
3,957,579 shares of common stock issuable under warrants and 9,502,015 shares of
common stock issuable under the conversion feature of the convertible notes
payable for the three months ended March 31, 2007, respectively. These potential
shares of common stock were not included as they were
anti-dilutive.
 
 Recently issued accounting
pronouncements
 
 On June
5, 2003, the United States Securities and Exchange Commission (“SEC”) adopted
final rules under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”),
as amended by SEC Release No. 33-8889 on February 1, 2008. Commencing with its
annual report for the fiscal year ending December 31, 2008, the Company will be
required to include a report of management on its internal control over
financial reporting. The internal control report must include a
statement:
 
 ·Of
      management’s responsibility for establishing and maintaining adequate
      internal control over its financial
reporting;
 
 ·Of
      management’s assessment of the effectiveness of its internal control over
      financial reporting as of year end;
and
 
 ·Of
      the framework used by management to evaluate the effectiveness of the
      Company’s internal control over financial
  reporting.
 
 Furthermore,
in the following fiscal year, it is required to file the auditor’s attestation
report separately on the Company’s internal control over financial reporting on
whether it believes that the Company has maintained, in all material respects,
effective internal control over financial reporting.
 
 On
September 15, 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 157 “Fair Value Measurements”
("SFAS No. 157").  SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements.  SFAS No. 157 is effective as of the beginning of the
first fiscal year beginning after November 15, 2007.  The Company does
not anticipate that the adoption of this statement will have a material effect
on the Company’s financial condition and results of operations.
 
 On
February 15, 2007, the FASB issued Statement of Financial Accounting Standards
No. 159“The Fair Value Option forFinancial Assets and
Financial Liabilities: Including an amendment of FASB Statement No. 115”
(“SFAS No. 159”). SFAS No. 159 permits all entities to elect to measure many
financial instruments and certain other items at fair value with changes in fair
value reported in earnings. SFAS No. 159 is effective as of the beginning of the
first fiscal year that begins after November 15, 2007, with earlier adoption
permitted. The Company does not anticipate that the adoption of this statement
will have a material effect on the Company’s financial condition and results of
operations.
  F-12
 
 In June
2007, the Emerging Issues Task Force of the FASB issued EITF Issue No. 07-3
“Accounting for Nonrefundable Advance
Payments for Goods or Services to be Used in Future Research andDevelopment Activities”
(“EITF Issue No. 07-3”) which is effective for fiscal years beginning after
December 15, 2007.  EITF Issue No. 07-3 requires that nonrefundable
advance payments for future research and development activities be deferred and
capitalized.  Such amounts will be recognized as an expense as the
goods are delivered or the related services are performed.  The
Company does not expect the adoption of EITF Issue No. 07-3 to have a material
impact on the financial results of the Company.
 
 In
December 2007, the FASB issued FASB Statement No. 141 (Revised 2007)“Business Combinations” (“SFAS
No. 141(R)”), which requires the Company to record fair value estimates of
contingent consideration and certain other potential liabilities during the
original purchase price allocation, expense acquisition costs as incurred and
does not permit certain restructuring activities previously allowed under
Emerging Issues Task Force Issue No. 95-3 to be recorded as a component of
purchase accounting.  SFAS No. 141(R) applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008, except for the presentation and disclosure requirements, which shall
be applied retrospectively for all periods presented. The Company will adopt
this standard at the beginning of the Company’s year ending December 31, 2008
for all prospective business acquisitions. The Company has not determined the
effect that the adoption of SFAS No. 141(R) will have on the financial results
of the Company.
 
 In
December 2007, the FASB issued FASB Statement No. 160“Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51” (“SFAS
No. 160”), which causes noncontrolling interests in subsidiaries to be included
in the equity section of the balance sheet.  SFAS No. 160 applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008, except for the presentation and disclosure requirements,
which shall be applied retrospectively for all periods presented.  The
Company will adopt this standard at the beginning of the Company’s year ending
December 31, 2008 for all prospective business acquisitions.  The
Company has not determined the effect that the adoption of SFAS No. 160 will
have on the financial results of the Company.
 
 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 $16,105,161 and a working capital
deficiency of $4,519,894 at March 31, 2008 and had a net income and cash used in
operations of $271,289 and $335,654 for the three months ended March 31, 2008,
respectively.
 
 Currently, the Company is attempting to
increase revenues and improve gross margins by implementing a revised sales and
marketing strategy. In principle, the Company is redirecting its sales focus
from direct sales to companies using an internal sales force, to selling through
a distribution channel of Value Added Resellers and Original Equipment
Manufacturers. The profit margin from this approach is more lucrative than
selling direct due to the increase in sales volume of GuardedID® through a
distribution channel strategy. This strategy, if successful, should increase the
Company’s sales and revenues allowing the Company to mitigate future losses. In
addition, management has raised funds through convertible debt instruments and
the sale of equity in order to help alleviate the working capital deficiency.
Through the utilization of the public capital markets, the Company plans to
raise the funds necessary to continue to expand and enhance its growth; however,
there can be no assurance that they will be able to increase revenues or raise
additional capital. The Company is currently in negotiations with investors to
conclude the necessary working capital needs of the Company.
 
 Management
expects cash flows from operating activities to improve by the third quarter of
2008, primarily as a result of certain contracts, although there can be no
assurance that such contracts will materialize in revenue sufficient to meet
operating expenses and fund future operations.  The accompanying
financial statements do not include any adjustments that might be necessary
should the Company be unable to continue as a going concern. If it fails to
generate positive cash flows or obtain additional financing when required, it
may have to modify, delay or abandon some or all of its business and expansion
plans.
  F-13
 
 NOTE
4 - DEFERRED
ROYALTIES
 
 On
December 2, 2004, the Company issued NetLabs, as advance royalties, options to
purchase 7,600,000 shares of the Company’s common stock at a price of $0.36 per
share to vest as follows: 2,530,000 shares at issuance, 2,530,000 shares at
September 11, 2005 and 2,540,000 shares at September 11, 2006 for the exclusive
rights to the intellectual property related to the patents pending for its
“Out-of-Band” technology and firewall solutions, while clarifying that NetLabs
still retains ownership.
 
 The fair
values for these options are measured at the end of each reporting period and
are fixed at each vesting date using the Black-Scholes Option Pricing
Model.
 
 Measurement
is based upon the Black-Scholes Model using the following
assumptions:
 
 December
      31, 2005
                December
      31, 2006Share
      price
                
                $0.90
                $0.12Expected
      volatility
                
                29.00%
                152.00%Risk-free
      interest rate
                
                4.35%
                4.96%Expected
      life
                
                5
      years
                5
      years
 
 As of
March 31, 2008 the options to purchase 2,530,000 shares that vested at issuance
are valued (as fixed) at $1,066,395, the options to purchase 2,530,000 shares
that vested at September 11, 2005 are valued (as fixed) at $1,529,132, and the
options to purchase the final 2,540,000 shares (which vested on September 11,
2006) are valued (as fixed) at $264,160. The deferred royalties are being
amortized over the term of the original NetLabs Agreement of ten (10) years
which will terminate on August 31, 2013.  At March 31, 2008, the total
value of the deferred royalties, net of accumulated amortization of $1,182,473,
is $1,677,214.  For the three months ended March 31, 2008 and 2007,
$74,157 and $70,659 of royalties were expensed, respectively.
 
 The
following table summarizes the annual amounts of deferred royalties that are
amortized to general and administrative expenses over the next five (5)
years and thereafter:
 
 2008
                
                $
                252,6512009
                
                303,8342010
                
                303,8342011
                
                303,8342012
                
                303,8342013
      and beyond
                
                209,227Total
      deferred royalties
                
                1,677,214Less
      current portion
                
                (326,808
                )Deferred
      royalties, net of current portion
                
                $
                1,350,406
 
 NOTE
5 - CONVERTIBLE
NOTES PAYABLE
 
 Convertible
notes payable at March 31, 2008 and December 31, 2007 consisted of the
following:
 
 2008
                
                
                2007(1)  
      Convertible note bearing interest at 8% per, with a conversion price of
      $0.90 per share, extended three times through March 31, 2008. The Company
      issued 45,000 warrants with an exercise price of $0.20 per share and
      expiring January 26, 2009, relating to the first extension, and 100,000
      restricted shares of the Company’s common stock at $0.05 per share,
      relating to the second extension. No consideration was given for the third
      extension. The fair value of the warrants was $4,878. For the three months
      ended March 31, 2008 and 2007, the Company recorded $0 and $488,
      respectively, in financing expenses related to the issuance of the
      warrants. In April 2008, the Company assigned the note to the Company’s
      investor group and the note holder agreed to an amount of $12,500 as full
      settlement of the note. The settlement amount was paid to the note holder
      by the Company in April 2008 (see Note 15).
                
                $
                125,000
                
                
                $
                125,000
  F-14
 (2)  
      Convertible note bearing interest at 8% per annum maturing on March 28,
      2008, with a conversion price of $0.90 per share. As of March 28, 2008,
      the Company and the note holder are in discussions regarding a settlement
      of the note balance.
                    
                    
                    235,000
                    
                    
                    
                    235,000(3)  
      Convertible non-interest bearing note with a public relations firm for
      services rendered, having a conversion price of $0.90 per share and
      maturing on June 30, 2006. In January 2007, the Company agreed to make
      periodic payments in order to repay the note in full by June 30,
      2008.
                    
                    
                    9,000
                    
                    
                    
                    15,000(4)  
      Convertible note bearing interest at 8% per annum maturing on June 20,
      2008, with a conversion price of $0.90 per share.
                    
                    
                    10,000
                    
                    
                    
                    10,000(5) 
       Convertible note bearing interest at 8% per annum maturing on July
      7, 2008, with a conversion price of $0.90 per share.
                    
                    
                    15,000
                    
                    
                    
                    15,000(6)  
      Convertible note bearing interest at 8% per annum maturing on July 11,
      2008, with a conversion price of $0.90 per share.
                    
                    
                    15,000
                    
                    
                    
                    15,000(7) 
       Convertible note bearing interest at 8% per annum maturing on July
      27, 2008, with a conversion price of $0.90 per share.
                    
                    
                    10,000
                    
                    
                    
                    10,000(8)  
      Convertible note bearing interest at 8% per annum maturing on July 27,
      2008, with a conversion price of $0.90 per share.
                    
                    
                    100,000
                    
                    
                    
                    100,000(9)   Convertible
      note bearing interest at 8% per annum maturing on March 15, 2008, with a
      conversion price of $0.90 per share. The Company issued 66,667 warrants
      with an exercise price of $0.55 per share and expiring March 15, 2008. The
      fair value of the warrants was $12,300. For the three months ended March
      31, 2008 and 2007, the Company recorded $1,025 and $1,538, respectively,
      in financing expense related to the issuance of these warrants. As of
      March 15, 2008, the Company and the note holder are in discussions
      regarding a settlement of the note balance.
                    
                    
                    100,000
                    
                    
                    
                    100,000(10)
      Convertible note bearing interest at 9% per annum maturing on June 9,
      2009, with a conversion price of $0.14 per share. The Company issued
      400,000 warrants with an exercise price of $0.25 per share and expiring
      June 9, 2011. The fair value of the warrants was $36,960. For the three
      months ended March 31, 2008 and 2007, the Company recorded $3,080 and
      $3,080, respectively, in financing expense related to the issuance of
      these warrants.
                    
                    
                    200,000
                    
                    
                    
                    200,000(11)
      Convertible note bearing interest at 9% per annum maturing on September
      29, 2009, with a conversion price of $0.08 per share. The Company issued
      562,500 warrants with an exercise price of $0.16 per share and expiring
      September 23, 2011. The fair value of the warrants was $39,600. For the
      three months ended March 31, 2008 and 2007, the Company recorded $3,300
      and $3,300, respectively, in financing expense related to the issuance of
      these warrants.
                    
                    
                    150,000
                    
                    
                    
                    150,000
  F-15
 (12)
      Six units, sold in February 2007, to six individuals; each unit consists
      of an 18% convertible note of $16,667 for a total of $100,000, maturing
      August 31, 2007, with a conversion price of $0.05 per share and 66,667
      bonus shares of the Company’s common stock, per individual, valued at
      $0.03988, for a total of 400,000 shares of common stock. Six months of
      prorated interest of $8,729, was due at closing and paid to the note
      holders. The Company paid a placement agent fee of $10,000 and issued
      80,000 shares of the Company’s common stock, at $0.03988, in March 2007.
      The Company also paid an escrow agent fee of $500 and a legal fee of
      $1,000. For the three months ended March 31, 2008 and 2007, the Company
      expensed $0 and $19,142, respectively, of financing expenses related to
      the issuance of the shares. 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 200,000 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 November 2007, the Company issued 600,000 extension
      shares at $0.007 per share to the note holders for the months of September
      through November and 120,000 shares of common stock at $0.007 per share to
      the placement agent in relation to the extensions. In December 2007, the
      Company recorded 200,000 shares of common stock at $0.011 per share to the
      note holders and 40,000 shares of common stock to the placement agent as
      the December extension shares. For the months of January to March 2008,
      the Company recorded 200,000 shares of common stock per month at $0.021,
      $0.029 and $0.025, respectively, per share to the note holders and 40,000
      shares of common stock per month to the placement agent as the January to
      March 2008 extension shares. All of the above issued Company shares have
      Rule 144 piggyback registration rights. For the three months ended March
      31, 2008 and 2007, the Company expensed $18,000 and $0, respectively, of
      financing expenses related to the shares recorded for the note
      extensions.
                  
                  
                  80,000
                  
                  
                  
                  80,000(13)
      Convertible note executed in March 2007 bearing interest at 18% per annum
      maturing on January 31, 2008, with a conversion price of $0.025 per share,
      which has been extended three times through January 31, 2008. The Company
      also issued 150,000 restricted shares of common stock, valued at $0.039
      per share. The Company issued 150,000 shares of restricted common stock
      and the note holder converted interest of $3,513.70 into 159,714 shares of
      common stock both at $0.022 per share relating to the first extension. The
      Company issued 150,000 shares of restricted common stock and the note
      holder converted interest of $3,402.74 into 162,035 shares of common stock
      both at $0.021 per share relating to the second extension. The Company
      recorded 50,000 shares of restricted common stock and recorded the note
      holder’s converted interest of $3,402.74 into 154,670 shares of common
      stock both at $0.022 per share relating to the third extension. All of the
      Company’s shares of common stock issued in connection with the convertible
      notes and the extensions have Rule 144 piggyback registration rights. For
      the three months ended March 31, 2008 and 2007, the Company expensed $0
      and $5,850, respectively, in financing expenses related to the issuance of
      the shares for the note and extensions. In March 2008, the Company
      assigned the note to the Company’s investor group and the note holder
      agreed to an amount of $15,000 as full settlement of the note. The
      settlement amount was paid to the note holder by the investor group in
      March 2008 (see Note 15).
                  
                  
                  -
                  
                  
                  
                  75,000
   F-16
  (14)
      One unit, sold in April 2007, consisting of an 18% convertible note
      payable of $25,000, maturing October 24, 2007, with a conversion price of
      $0.05 per share and 120,000 bonus shares of the Company’s common stock, at
      $0.019 per share, . Six months of prorated interest of $2,250, due at
      closing was paid to the note holder. The Company paid a placement agent
      fee of $3,209 and issued 24,000 shares of the Company’s common stock, at
      $0.019, in May 2007 and an escrow agent fee of $660. For the three months
      ended March 31, 2008 and 2007, the Company expensed $0 and $0 of financing
      expenses related to the issuance of the shares. In November 2007 the note
      was extended to April 30, 2008. Per the terms of the extension, the
      Company repaid 20% of the note balance in November 2007. Of the remaining
      note balance, 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 extension, the note holder shall
      receive 50,000 restricted 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 November 2007, the Company issued 50,000 shares of
      common stock at $0.007 per share to the note holder and 10,000 shares of
      common stock at $0.007 per share to the placement agent for the November
      2007 extension. In December 2007, the Company recorded 50,000 shares of
      common stock at $0.011 per share to the note holder and 10,000 shares of
      common stock to the placement agent as the December extension shares. For
      the months of January to March 2008, the Company recorded 50,000 shares of
      common stock per month at $0.021, $0.029 and $0.025, respectively, per
      share to the note holders and 10,000 shares of common stock per month to
      the placement agent as the January to March 2008 extension shares. All of
      the above issued Company shares have Rule 144 piggyback registration
      rights. For the three months ended March 31, 2008 and 2007, the Company
      expensed $4,500 and $0, respectively, of financing expenses related to the
      shares to be issued for the note extension.
                  
                  
                  20,000
                  
                  
                  
                  20,000(15)
      Convertible note executed in May 2007 bearing interest at 9% per annum
      maturing on May 1, 2009, with a conversion price of $0.035 per share. The
      Company issued 571,429 warrants with an exercise price of $0.07 per share
      and an expiration date of May 1, 2009. The fair value of the warrants
      issued was $10,114. For the three months ended March 31, 2008 and 2007,
      the Company recorded $1,264 and $0, respectively, in financing expense
      related to the issuance of these warrants.
                  
                  
                  100,000
                  
                  
                  
                  100,000(16)
      Convertible note for $15,000 executed in June 2007 bearing interest at 9%
      per annum maturing on June 21, 2009, with a conversion price of $0.015 per
      share. The Company issued 1,200,000 warrants with an exercise price of
      $0.03 per share and an expiration date of June 21, 2009. The fair value of
      the warrants issued was $17,880. For the three months ended March 31, 2008
      and 2007, the Company recorded $2,235 and $0, respectively, in financing
      expense related to the issuance of these warrants. In February 2008, the
      Company assigned the note to the Company’s investor group and the note
      holder agreed to an amount of $3,000 as full settlement of the note. The
      settlement amount was paid to the note holder by the investor group in
      February 2008 (see Note 15).
                  
                  
                  -
                  
                  
                  
                  15,000(17)
      Convertible notes executed in June 2007 bearing interest at 8% per annum
      maturing on June 29, 2009, with a conversion price of $0.02 per share. The
      Company issued 1,000,000 warrants with an exercise price of $0.04 per
      share and an expiration date of June 29, 2009. The fair value of the
      warrants was $21,800. For the three months ended March 31, 2008 and 2007,
      the Company recorded $2,725 and $0, respectively, in financing expense
      related to the issuance of these warrants.
                  
                  
                  100,000
                  
                  
                  
                  100,000
  F-17
 (18)
      Convertible note executed in July 2007 bearing interest at 8% per annum
      maturing on July 2, 2009, with a conversion price of $0.02 per share. The
      Company issued 1,000,000 warrants with an exercise price of $0.04 per
      share and an expiration date of July 2, 2009. The fair value of the
      warrants issued was $29,800. For the three months ended March 31, 2008 and
      2007, the Company recorded $3,725 and $0, respectively, in financing
      expense related to the issuance of these warrants.
                  
                  
                  100,000
                  
                  
                  
                  100,000(19)
      Convertible notes executed in August 2007 bearing interest at 9% per annum
      maturing on August 9, 2009, with a conversion price of $0.025 per share.
      The Company issued 960,000 warrants with an exercise price of $0.04 per
      share and an expiration date of August 9, 2010. The fair value of the
      warrants was $23,040. For the three months ended March 31, 2008 and 2007,
      the Company recorded $1,920 and $0, respectively, in financing expense
      related to the issuance of these warrants.
                  
                  
                  120,000
                  
                  
                  
                  120,0001,489,000
                  
                  
                  
                  1,585,000Less
      current maturities
                  
                  
                  (719,000
                  )
                  
                  
                  (800,000
                  )$
                  770,000
                  
                  
                  $
                  785,000
  The
Black-Scholes Option Pricing Model was used to calculate the fair value of all
the above mentioned warrants.
 
 Interest
expense for the convertible notes payable for the three months ended March 31,
2008 and 2007 was $35,852 and $21,625, respectively.
 
 NOTE
6 -  CONVERTIBLE NOTES PAYABLE – RELATED PARTIES
 
 Convertible
notes payable – related parties at March 31, 2008 and December 31, 2007
consisted of the following:
 2008
                    
                    
                    2007(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, 2008, and a conversion price of $1.00 per
      share. The Company issued 5,000 warrants with an exercise price of $1.00
      per share expiring November 10, 2013. The fair value of the warrants
      issued was $2,038.  In April 2007, the interest calculation was
      amended from simple to compound effective April 1, 2007.
                    
                    $
                    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, 2008, and a conversion price of
      $1.00 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 February 28, 2009, and a
      conversion price of $1.00 per share. The Company issued 18,000 warrants
      with an exercise price of $1.00 per share and expiration dates of February
      4, 2014, September 7, 2014 and August 16, 2015. The fair value of the
      warrants issued was $3,387. In April 2007, the interest calculation was
      amended from simple to compound effective April 1,
      2007.
                    
                    
                    230,000
                    
                    
                    
                    230,000
  F-18
  (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 February 28, 2009, and a conversion price of $1.00 per share. The
      Company issued 1,500 warrants with an exercise price of $1.00 per share
      and expiration dates of August 26, 2015 and September 29, 2015. The fair
      value of the warrants issued was $372. In April 2007, the interest
      calculation was amended from simple to compound effective April 1,
      2007.
                    
                    
                    15,000
                    
                    
                    
                    15,000(5)  
      Convertible note executed in August 2005 with the President bearing
      interest at 8% per annum with an extended maturity date of December 31,
      2007, and a conversion price of $1.00 per share. The Company issued 5,000
      warrants with an exercise price of $1.00 per share and an expiration date
      of August 26, 2015. The fair value of the warrants issued was $1,230. In
      April 2007, the interest calculation was amended from simple to compound
      effective April 1, 2007. The note was repaid in full in February
      2008.
                    
                    
                    -
                    
                    
                    
                    50,000(6)  
      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 February 28, 2009, and a conversion price of $1.00 per
      share. The Company issued 500 warrants with an exercise price of $1.00 per
      share and an expiration date of December 7, 2015. The fair value of the
      warrants issued was $127. In April 2007, the interest calculation was
      amended from simple to compound effective April 1, 2007.
                    
                    
                    5,000
                    
                    
                    
                    5,000(7)  
      Convertible note executed in December 2005 with a Software Developer
      bearing interest at  8% per annum with an extended maturity date
      of February 28, 2009, and a conversion price of $1.00 per share. The
      Company issued 1,000 warrants with an exercise price of $1.00 per share
      and an expiration date of December 6, 2015. The fair value of the warrants
      issued was $427. In April 2007, the interest calculation was amended from
      simple to compound effective April 1, 2007.
                    
                    
                    10,000
                    
                    
                    
                    10,000(8)  
      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 February 28, 2009, and a conversion price of $1.00 per share. The
      Company issued 8,000 warrants with an exercise price of $1.00 per share
      and expiration dates of December 28, 2015 and January 9, 2016. The fair
      value of the warrants issued was $3,145.  In April 2007, the
      interest calculation was amended from simple to compound effective April
      1, 2007.
                    
                    
                    58,755
                    
                    
                    
                    63,691(9)  
      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 February 28, 2009, and a conversion price of $1.00 per
      share. The Company issued 3,800 warrants with an exercise price of $1.00
      per share and expiration dates of January 18, 2016 and February 28, 2016.
      The fair value of the warrants issued was $415.  In April 2007,
      the interest calculation was amended from simple to compound effective
      April 1, 2007.
                    
                    
                    38,000
                    
                    
                    
                    38,000(10)
      Convertible note executed in March 2006 with a Software Developer bearing
      interest at 8% per annum with an extended maturity date of February 28,
      2009, and a conversion price of $0.75 per share. The Company issued 500
      warrants with an exercise price of $1.00 per share and an expiration date
      of March 6, 2016. The fair value of the warrants issued was $45. In April
      2007, the interest calculation was amended from simple to compound
      effective April 1, 2007.
                    
                    
                    5,000
                    
                    
                    
                    5,000
  F-19
  419,255
                    
                    
                    
                    474,191Less
      current maturities
                    
                    
                    (419,255
                    )
                    
                    
                    (107,500
                    )$
                    -
                    
                    
                    $
                    366,691
 The
Black-Scholes Option Pricing Model was used to calculate the fair value of all
the above mentioned warrants.
 
 At March
31, 2008 and 2007, accrued interest due for the convertible notes – related
parties was $94,916 and $55,406, respectively, and is included in accrued
expenses in the accompanying balance sheet. Interest expense for convertible
notes payable – related parties for the three months ended March 31, 2008 and
2007 was $8,895 and $9,659, respectively.
 
 NOTE
7 - NOTES
PAYABLE
 
 Notes
payable at March 31, 2008 and December 31, 2007 consisted of the
following:
 2008
                  
                  
                  2007(1)  
      One unit consisting of a $100,000 promissory note and 200,000 shares of
      the Company’s common stock, at $0.14, 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) $0.22 or (b) ninety percent (90%) of the lowest Volume Weighted
      Average Price, 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 $0.0065. In February 2008, the Forbearance Agreement
      was further extended to May 15, 2008.
                  
                  $
                  100,000
                  
                  
                  $
                  100,000
  F-20
  (2)  
      Six units sold in July 2006 to six individuals, each unit consisting of a
      12% promissory note of $25,000, maturing January 10, 2007 and 250,000
      bonus shares of the Company’s common stock, at $0.085, for a total of
      $150,000 and 1,500,000 shares of common stock. Six months interest of
      $9,000, due at closing was paid to the note holders. The Company paid a
      placement agent fee of $15,000 and issued 150,000 shares of the Company’s
      common stock, at $0.085, in August 2006, paid an escrow agent fee of
      $3,000, a due diligence fee of $7,500 and issued 50,000 shares of the
      Company’s common stock, at $0.085, to the placement agent in July 2006. In
      January 2007, the Company extended the maturity date of five of the
      promissory notes, totaling $100,000, to March 10, 2007 and increased the
      interest rate of the promissory notes to 20% per annum. The remaining
      promissory note in the amount of $50,000 was paid in full in February
      2007. In March, May, July and August 2007, the Company paid $81,250
      against the five remaining notes. For the months of February through
      November 2007, the Company issued 462,500 extension shares of the
      Company’s common stock to the note holders who had open balances in each
      of those months and 46,250 extension shares to the placement agent, with
      the shares ranging from $0.010 to $0.0435,. For the month of December
      2007, the Company recorded 18,750 extension shares of the Company’s common
      stock to the two remaining note holders who had open balances and 1,875
      extension shares to the placement agent, at $0.011 per share. For the
      months of January through March 2008, the Company recorded 56,250
      extension shares of the Company’s common stock to the two remaining note
      holders who had open balances and 5,625 extension shares to the placement
      agent, with the shares ranging from $0.021 to $0.029. For the months of
      May through July 2007, the Company issued a total of 450,000 penalty
      shares of the Company’s common stock, ranging from $0.022 to $0.03, to all
      of the note holders per the terms of the notes and 30,000 penalty shares,
      ranging from $0.022 to $0.03, to the placement agent. All of the above
      issued shares have Rule 144 piggyback registration rights. For the three
      months ended March 31, 2008 and 2007, the Company expensed $1,547 and
      $7,535, respectively, of financing expenses related to the shares issued
      and to be issued for the note extensions and penalties.
                  
                  
                  18,750
                  
                  
                  
                  18,750(3)  
      Promissory note executed in June 2007, bearing interest at 9% per annum,
      maturing on December 14, 2007.  The Company issued 100,000
      warrants with an exercise price of $0.05 per share with an expiration date
      of June 14, 2012. The fair value of the warrants issued was
      $1,800.  In December 2007, the Company repaid $5,000 of the
      principal to the note holder and the note was extended to January 31,
      2008. As of March 31, 2008, the Company is pursuing a settlement agreement
      with the note holder.
                  
                  
                  45,000
                  
                  
                  
                  45,000(4)  
      Promissory note for $15,000 executed in November 2007, bearing interest at
      8% per annum, maturing on May 21, 2008 with a financial consultant for
      services to be rendered per the terms of an agreement executed in November
      2007. In March 2008, the agreement was terminated and the note was
      cancelled.
                  
                  
                  -
                  
                  
                  
                  15,000(5)  
      Promissory note for $52,500 executed in December 2007, bearing interest at
      12% per annum, maturing on September 6, 2008. The Company issued 550,000
      restricted shares of common stock, at $0.01 per share. The note was repaid
      in full in March 2008.
                  
                  
                  -
                  
                  
                  
                  52,500(6)  
      Promissory note for $50,000 executed in December 2007, bearing interest at
      8% per annum, maturing on December 31, 2008. The Company released the
      2,000,000 pledge shares that were being held in escrow relating to two
      other notes executed with the same individual. The note was repaid in full
      in March 2008.
                  
                  
                  -
                  
                  
                  
                  50,000(7)  
      Promissory note executed in January 2008, bearing interest at 8% per
      annum, maturing on September 30, 2008.  The Company recorded
      1,000,000 shares of restricted common stock, valued at $0.0092 per share,
      with Rule 144 piggyback registration rights.  For the three
      months ended March 31, 2008 and 2007, the Company expensed $9,200 and $0,
      respectively, of financing expenses related to the shares to be
      issued.
                  
                  
                  100,000
                  
                  
                  
                  -
  F-21
 
 (8)   Promissory note executed in January 2008, bearing
      interest at 18% per annum, maturing on July 31, 2008.  The
      Company issued 150,000 warrants with an exercise price of $0.025 per share
      with an expiration date of January 31, 2013. The fair value of the
      warrants issued was $4,350. For the three months ended March 31, 2008 and
      2007, the Company recorded $1,450 and $0, respectively, in financing
      expense related to the issuance of these warrants.
                  
                  
                  50,000
                  
                  
                  
                  -(9)   Thirty-seven units, sold in January 2008 per the
      terms of a term sheet executed with an investor group in January 2008 (see
      Note 15), 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 62,000 non-dilutable (for one year) restricted shares of the Company’s
      common stock, at market price. The Company expensed the discount rate of
      $92,500, related to the units sold, as financing expense. The Company
      recorded 2,294,000 shares of restricted common stock, with the shares
      ranging from $0.023 to $0.025, related to the units sold. For the three
      months ended March 31, 2008 and 2007, the Company expensed $53,010 and $0,
      respectively, of financing expenses related to the shares to be
      issued.
                  
                  
                  925,000
                  
                  
                  
                  -(10) Seventeen units, sold in February 2008 per the terms of a term
      sheet executed with an investor group in January 2008 (see Note 15), 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 62,000
      non-dilutable (for one year) restricted shares of the Company’s common
      stock, at market price. The Company expensed the discount rate of $42,500,
      related to the units sold, as financing expense. The Company recorded
      1,054,000 shares of restricted common stock, with the shares ranging from
      $0.028 to $0.038, related to the units sold. For the three months ended
      March 31, 2008 and 2007, the Company expensed $31,124 and $0,
      respectively, of financing expenses related to the shares to be
      issued.
                  
                  
                  425,000
                  
                  
                  
                  -(11) Four units, sold in March 2008 per the terms of a term sheet
      executed with an investor group in January 2008 (see Note 15), 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 62,000
      non-dilutable (for one year) restricted shares of the Company’s common
      stock, at market price. The Company expensed the discount rate of $10,000,
      related to the units sold, as financing expense. The Company recorded
      248,000 shares of restricted common stock, with the shares valued at
      $0.025, related to the units sold. For the three months ended March 31,
      2008 and 2007, the Company expensed $6,200 and $0, respectively, of
      financing expenses related to the shares to be
    issued.
                  
                  
                  100,000
                  
                  
                  
                  -1,763,750
                  
                  
                  
                  281,250Less
      current maturities
                  
                  
                  (313,750
                  )
                  
                  
                  (281,250
                  )$
                  1,450,000
                  
                  
                  $
                  -
  The
Black-Scholes Option Pricing Model was used to calculate the fair value of all
the above mentioned warrants.
 
 Interest
expense for notes payable for the three months ended March 31, 2008 and 2007 was
$33,275 and $5,030, respectively.
 
 NOTE
8 - NOTES
PAYABLE – RELATED PARTIES
 
 Notes
payable – related parties at March 31, 2008 and December 31, 2007 consisted of
the following:
 2008
                  
                  
                  2007(1)  
      Promissory notes executed in March 2004 with the CEO bearing interest
      at  an amended rate of 8% per annum with an extended maturity
      date of February 28, 2009.
                  
                  $
                  105,000
                  
                  
                  $
                  105,000(2)  
      Promissory note executed in November 2004 with the CEO bearing interest at
      an amended rate of 8% per annum with an extended maturity date of February
      28, 2009.
                  
                  
                  84,000
                  
                  
                  
                  84,000
  F-22
  (3)  
      Promissory notes executed in January 2006 with the President, non-interest
      bearing, with an extended maturity date of December 31, 2007. The note was
      repaid in full in February 2008.
                  
                  
                  -
                  
                  
                  
                  10,000(4)  
      Promissory notes executed in February and April 2006 with the CEO bearing
      interest at 8% per annum with an extended maturity date of February 28,
      2009.
                  
                  
                  315,000
                  
                  
                  
                  315,000(5)  
      Promissory notes executed in February and March 2006 with the President
      bearing interest at 8% per annum with an extended maturity date of
      December 31, 2007.  The notes were repaid in full in February
      2008.
                  
                  
                  -
                  
                  
                  
                  15,000(6) 
       Promissory note executed in May 2006 with the CEO bearing interest
      at 9% per annum with an extended maturity date of February 28,
      2009.  The Company issued 200,000 warrants with an exercise
      price of $0.13 per share and an expiration date of May 25, 2011. The fair
      value of the warrants issued was $24,300.
                  
                  
                  100,000
                  
                  
                  
                  100,000(7)  
      Promissory note executed in February 2007 with the CEO bearing interest at
      8% per annum with an extended maturity date of February 28, 2009. The
      Company issued 88,000 warrants with an exercise price of $0.05 per share
      and an expiration date of February 21, 2012. The fair value of the
      warrants issued was $3,758.  For the three months ended March
      31, 2008 and 2007, the Company recorded $0 and $1,879, respectively, in
      financing expense related to the issuance of these
    warrants.
                  
                  
                  22,000
                  
                  
                  
                  22,000(8)  
      Promissory notes executed in February 2008 with the President bearing
      interest at 8% per annum with a maturity date of February 28,
      2009.
                  
                  
                  70,000
                  
                  
                  
                  -696,000
                  
                  
                  
                  651,000Less
      current maturities
                  
                  
                  (696,000
                  )
                  
                  
                  (25,000
                  )$
                  -
                  
                  
                  $
                  626,000
  The
Black-Scholes Option Pricing Model was used to calculate the fair value of all
the above mentioned warrants.
 
 Interest
expense for notes payable - related parties for the three months ended March 31,
2008 and 2007 was $13,636 and $12,891, respectively.
 
 NOTE
9 - CAPITAL
LEASE PAYABLE
 
 The
aggregate minimum remaining lease payments under capital leases consisted of the
following at March 31, 2008:
 
 March 31,
      2008Due
      period ending March 31, 2008
                
                $
                5,532Less:
      amount representing interest
                
                
                -Net
      present value of capital lease obligations
                
                
                5,532Current
      portion of capital lease payable
                
                
                (5,532
                )Capital
      lease payable, net of current portion
                
                $
                -
 
 The
capital leases listed above relate to property and equipment with a book value
of $11,830.
 
 NOTE
10 - CONVERTIBLE
SECURED NOTES PAYABLE
 
 Convertible
secured notes payable consisted of the following at March 31, 2008 and December
31, 2007:
 
 2008
                
                
                2007YA
      Global (formerly Cornell)
                
                $
                427,447
                
                
                $
                427,447Highgate
      House Funds, Ltd.
                
                
                244,720
                
                
                
                244,720Total
      convertible secured notes payable
                
                $
                672,167
                
                
                $
                672,167
 
 F-23
 
 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 $0.25 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 150,000 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 2,000,000 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 $0.085 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.
  F-24
 
 In August
2007, the Company was notified by YA Global of its legal name change to YA
Global Investments, LP.
 
 Interest
expense for convertible secured notes payable for the three months ended March
31, 2008 and 2007 was $12,859 and $24,268, respectively.
 
 In
January 2008, the Company executed a Forbearance Agreement with YA Global
whereby YA Global and Highgate have agreed to forbear from exercising their
rights under the secured convertible debentures through February 27, 2008. The
terms of the Forbearance Agreement record the amount due to YA Global and
Highgate by the Company to be $1,214,093, which includes principal, interest and
the redemption premium. The terms also include a reduction in the YA Global and
Highgate Fixed Conversion Price to $0.0065. In connection with this Agreement,
the Company issued to YA Global 5,000,000 contingency warrants with an exercise
price of $0.015 per share. The warrants are exercisable for a period of five (5)
years from date of issuance. The warrants are held in escrow and will only be
released to YA Global if the total amount due by the Company is not paid to YA
Global by February 29, 2008.
 
 In
February 2008, the Forbearance Agreement was amended and extended to May 15,
2008, including the terms of the contingency warrants. Per the terms of the
amendment, YA Global and Highgate shall receive an additional 105 days of
interest for a total amount of $28,328.84 additional interest. The additional
interest plus a security deposit of $171,671.16 were paid to YA Global and
Highgate per the terms of a debt assignment agreement executed with an investor
group in February 2008, for a total amount paid to YA Global of $200,000. 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.
 
 Conversions to Common
Stock
 
 For the
three months ended March 31, 2008, YA Global had no conversions.
 
 For the
three months ended March 31, 2007, YA Global converted $35,000 of the April 27,
2005 debenture into 1,838,235 shares of the Company’s common stock, pursuant to
the terms of the Securities Purchase Agreement. The conversion price ranged from
$0.012 to $0.034 per share.
 
 For the
three months ended March 31, 2008, Highgate had no conversions.
 
 For the
three months ended March 31, 2007, Highgate converted $20,279.64 of the May 6,
2005 debenture into 590,460 shares of the Company’s common stock, pursuant to
the terms of the Securities Purchase Agreement. The conversion price was $0.034
per share.
 
 NOTE
11 -  FINANCIAL INSTRUMENTS
 
 The
secured convertible notes payable are hybrid instruments which contain an
embedded derivative feature which would individually warrant separate accounting
as a derivative instrument under SFAS No. 133. The embedded derivative feature
has been bifurcated from the debt host contract, referred to as the "Compound
Embedded Derivative Liability". The embedded derivative feature includes the
conversion feature within the note and an early redemption option. The value of
the embedded derivative liability was bifurcated from the debt host contract and
recorded as a derivative liability, which resulted in a reduction of the initial
carrying amount (as unamortized discount) of the notes. The unamortized discount
is amortized to interest expense using the effective interest method over the
life of the notes, or 12 months.
 
 The
secured convertible debentures issued to YA Global and Highgate have been
accounted for in accordance with SFAS No. 133 and EITF 00-19. The Company has
identified the above instruments having derivatives that require evaluation and
accounting under the relevant guidance applicable to financial
derivatives.  These compound embedded derivatives have been bifurcated
from their respective host debt contracts and accounted for as derivative
liabilities in accordance with EITF 00-19.  When multiple derivatives
exist within convertible notes, they have been bundled together as a single
hybrid compound instrument in accordance with SFAS No. 133 Derivatives
Implementation Group Implementation Issue No. B-15, “Embedded Derivatives:
Separate Accounting for Multiple Derivative Features Embedded in a Single Hybrid
Instrument”. The compound embedded derivatives within the secured convertible
notes have been recorded at fair value at the date of issuance; and are
marked-to-market each reporting period with changes in fair value recorded to
the Company’s statement of operations as “Derivative instrument expense,
net”.  The Company has utilized a third party valuation consultant to
fair value the compound embedded derivatives using a layered discounted
probability-weighted cash flow approach. The fair value of the derivative
liabilities are subject to the changes in the trading value of the Company’s
common stock, as well as other factors.  As a result, the Company’s
financial statements may fluctuate from quarter-to-quarter based on factors,
such as the price of the Company’s stock at the balance sheet date and the
amount of shares converted by note holders. Consequently, the financial position
and results of operations may vary from quarter-to-quarter based on conditions
other than operating revenues and expenses.
  F-25
 
 NOTE
12 - STOCKHOLDERS’
DEFICIT
 
 Issuance of Stock for
Services
 
 In August
2005, the Company entered into a retainer agreement with an attorney, whereas
the attorney will act as in house counsel for the Company with respect to all
general corporate matters.  The agreement is at will and required a
payment of 10,000 shares of common stock, valued at $0.90 per share, due upon
execution.  The certificate for the 10,000 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
three months ended March 31, 2008, the Company recorded 7,500 shares of common
stock, valued at $198, all of which has been expensed as legal fees, related to
the agreement.
 
 In
December 2007, the Company executed a consulting agreement with a financial
advisor whereby the consultant will provide introduction of potential investors
to the Company. As compensation for the services, the consultant shall receive a
monthly fee in the amount of $5,000. The agreement can be terminated by either
party by providing the other party with thirty days advance written notice. The
consultant received 5,000,000 shares of the Company’s common stock, valued at
$0.0065 per share.  The shares are restricted and have piggyback
registration rights upon the next registration statement filed by the
Company.
 
 Issuance of Stock for
Financing
 
 In
January 2008, the Company recorded 1,000,000 million shares of common stock,
valued at $0.0092 per share, issuable to an individual as consideration for a
promissory note executed (see Note 7). The shares have Rule 144 piggyback
registration rights. For the three months ended March 31, 2008, the Company
expensed $9,200 of financing expenses related to the shares.
 
 In
accordance with a term sheet executed with an investment firm in January 2008,
the Company sold 58 units to twenty investors.  In January 2008, the
Company recorded 2,294,000 shares of common stock, valued at $0.023 to $0.025
per share, issuable to twelve investors per the terms of the agreement. In
February 2008, the Company recorded 1,054,000 shares of common stock, valued at
$0.028 to $0.038 per share, issuable to seven investors per the terms of the
agreement. In March 2008, the Company recorded 248,000 shares of common stock,
valued at $0.025 per share, issuable to one investor per the terms of the
agreement (see Note 15).  The shares have Rule 144 piggyback
registration rights.  For the three months ended March 31, 2008, the
Company expensed $90,344 of financing expenses related to the
shares.
 
 Warrants
 
 At March
31, 2008, the Company issued warrants related to its convertible notes
payable.  The warrants entitle the note holders to purchase the
Company’s common stock at: 66,667 warrants with an exercise price of $0.55 per
share, 400,000 warrants with an exercise price of $0.25 per share, 45,000
warrants with an exercise price of $0.20 per share, 562,500 warrants with an
exercise price of $0.16 per share,  571,429 warrants with an exercise
price of $0.07 per share,  4,460,000 warrants with an exercise price
of $0.04 per share and 1,200,000 warrants with an exercise price of $0.03 per
share. 3,838,096 warrants have a two year exercise term, 1,005,000 warrants have
a three year exercise term and 2,462,500 warrants have a five year exercise
term.
 
 At March
31, 2008, the Company issued warrants related to its convertible notes payable –
related parties.  The warrants entitle the note holders to purchase
the Company’s common stock at $1.00 per share and have an exercise term of ten
years.  At March 31, 2008, 31,000 warrants will expire in the year
2013, 16,500 warrants expire in the year 2014, 21,700 warrants in the year 2015
and 11,300 warrants in the year 2016.
 
 At March
31, 2008, the Company issued warrants related to its notes
payable.  The warrants entitle the note holder to purchase the
Company’s common stock at $0.025 per share for 150,000 warrants and $0.05 per
share for 100,000 warrants with an exercise term of five years.
  F-26
 
 At March
31, 2008, the Company issued warrants related to its notes payable – related
parties.  The warrants entitle the note holder to purchase the
Company’s common stock at $0.05 per share for 88,000 warrants and $0.13 per
share for a 200,000 warrants with an exercise term of five years.
 
 NOTE
13 -  STOCK BASED COMPENSATION
 
 In
September 2004, the stockholders approved the Equity Incentive Plan for its
employees (“Incentive Plan”), effective April 1, 2004.  Of the total
authorized for issuance at March 31, 2008, 74,609,116 shares were available for
future issuance.
  2004 Equity Incentive
Plan
 
 The
number of shares authorized for issuance under the Incentive Plan was increased
to 10,000,000 in September 2006, 15,000,000 in March 2007, 20,000,000 in June
2007 and 100,000,000 in December 2007, by unanimous consent of the Board of
Directors. Option shares totaling 4,705,000 vest equally over a three year
period beginning one-year from the date of grant, option shares totaling
2,125,000 vest in one-third increments of six months each over an eighteen month
period from the date of grant and option shares totaling 18,560,884 vest over a
one-year period from the date of grant.
  The table
below summarizes the Company’s Incentive Plan stock option activity through
March 31, 2008:
 
 
 
 Number of
                  Option Shares
                
                
                Exercise Price Range
                  Per Share
                
                
                Weighted Average Exercise Price
                
                Weighted Average
                  Remaining
                  (in
      years)
                  Contractual Term
                
                Aggregate
      Intrinsic
                  Value
                  (in
      thousands)Balance,
      December 31, 2005
                
                
                1,830,000
                
                
                $
                1.00
                
                
                $
                1.0000
                
                
                
                $
                ---Granted
                
                
                4,514,553
                
                
                $
                0.0698
      - $ 0.10
                
                
                $
                0.0920
                
                
                
                $
                ---Balance,
      December 31, 2006
                
                
                6,344,553
                
                
                $
                0.0698
      - $ 0.10
                
                
                $
                0.3539
                
                
                
                $
                ---Granted
                
                
                19,046,331
                
                
                $
                0.008
      - $ 0.50
                
                
                $
                0.0221
                
                
                
                $
                ---Balance,December
      31, 2007
                
                
                25,390,884
                
                
                $
                0.008
      -  $ 1.00
                
                
                $
                0.1050
                
                
                
                $
                ---Granted
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                $
                ---Balance,March
      31, 2008
                
                
                25,390,884
                
                
                $
                0.008
      - $ 1.00
                
                
                $
                0.1050
                
                
                
                $
                ---Vested
      and Exercisable, March 31, 2008
                
                
                18,450,567
                
                
                
                
                
                
                $
                0.1050
                
                
                
                $
                ---
 
 As of
March 31, 2008, an aggregate of 25,390,884 options were outstanding under the
incentive plan.  The exercise price for 1,830,000 options is $1.00,
for 100,000 options is $0.50, for 2,775,000 options is $0.10, for 348,096
options is $0.099, for 405,432 options is $0.085, for 492,309 options is $0.07,
for 493,716 options is $0.0698, for 2,023,084 is $0.05, for 558,119 is $0.045,
for 918,976 is $0.0375, for 785,255 is $0.024, for 1,551,842 options is $0.023,
for 3,773,081 options is $0.02, for 1,868,324 options is $0.017, for 2,597,435
options is $0.015 and 4,870,215 options is $0.008. As of March 31, 2007, an
aggregate of 9,850,753 options were outstanding under the incentive plan. The
exercise price for 1,830,000 options was $1.00, for 2,775,000 options was $0.10,
for 348,096 options was $0.099, for 405,432 options was $0.085, for 492,309
options was $0.07, for 493,716 options was $0.0698, for 1,243,850 options was
$0.05, for 558,119 options was $0.045, for 918,976 options was $0.0375 and for
785,255 options was $0.024.. At March 31, 2008, there were 18,450,567 vested
incentive plan stock options outstanding of which 2,029,256 options are
exercisable at $0.008, 2,164,529 options are exercisable at $0.015, 1,556,937
options are exercisable at $0.017, 1,996,852 options are exercisable at $0.02,
1,551,842 options are exercisable at $0.023, 785,255 options are exercisable at
$0.024, 918,976 options are exercisable at $0.0375, 558,119 options are
exercisable at $0.045, 1,828,276 options are exercisable at $0.05, 493,716
options are exercisable at $0.0698, 492,309 options are exercisable at $0.07,
405,432 options are exercisable at $0.085, 348,096 options are exercisable at
$0.099, 1,472,917 options are exercisable at $0.10, 33,333 options are
exercisable at $0.50 and 1,814,722 options are exercisable at
$1.00.
 
 As of
March 31, 2008, there was $179,109 of total unrecognized compensation cost
related to unvested share-based compensation arrangements that is expected to be
recognized over a weighted-average period of 12 months.
  F-27
  
 The
following table summarizes information concerning outstanding and exercisable
Incentive Plan options as of March 31, 2008:
  Options
      Outstanding
                
                Options
      ExercisableRange of Exercise Prices
                
                
                Number
      Outstanding
                
                Average
      Remaining Contractual Life (in years)
                
                Weighted-Average
      Exercise Price
                
                Number
      Exercisable
                
                Weighted-Average
      Exercise Price$
                1.0000
                
                
                
                1,830,000
                
                7.00
                
                $
                1.0000
                
                1,789,722
                
                $
                1.0000$
                0.0698
      - $0.50
                
                
                
                4,614,553
                
                9.00
                
                
                0.1008
                
                2,931,291
                
                
                0.1008$
                0.0080
      - $0.05
                
                
                
                18,946,331
                
                10.00
                
                
                0.0267
                
                9,258,370
                
                
                0.026725,390,884
                
                8.67
                
                $
                0.1050
                
                13,979,383
                
                $
                0.1050
 
 Non-Incentive Plan Stock
Option Grants
 
 Since
December 31, 2005, the Company has outstanding an aggregate of 7,618,889
non-plan, non-qualified options for non-employees with 7,600,000 exercisable at
$0.36 and 18,889 exercisable at $0.90 yielding a weighted average exercise price
of $0.3613 and no outstanding incentive options outside of the
Plan.
 
 NOTE14-  OTHER (INCOME)
EXPENSE
 
 Other
(income) expense consisted of the following at March 31, 2008 and
2007:
 
 March 312008
                
                
                2007Interest
      expense
                
                $
                146,516
                
                
                $
                4,087Financing
      expense
                
                
                255,889
                
                
                
                325,180Derivative
      instruments (income) expense, net
                
                
                (1,092,468
                )
                
                
                16,517Forgiveness
      of debt (*)
                
                
                (126,250
                )
                
                
                -Total
      other (income) expense
                
                $
                (816,313
                )
                
                $
                345,784
  (*) For
the three months ended March 31, 2008 and 2007, the Company recorded forgiveness
of debt from settlements with certain note holders and trade vendors in the
amount of $126,250 and $0, respectively.
 
 NOTE
15-  COMMITMENTS AND CONTINGENCIES
 
 Payroll
Taxes
 
 As of
March 31, 2008, the Company owes $53,375 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.
 
 Service
Agreement
 
 In
December 2007, the Company executed a service agreement with an ASP hosting
service provider to serve as a data center and co-location services provider for
the Company’s ASP clients. As compensation for the services, the hosting service
shall receive a monthly fee in the amount of $999. The Company paid a set-up fee
of $350 upon signing the agreement. The term of the agreement is for one year
with automatic one year renewal terms. As of February 2008, all of the Company’s
ASP hosted clients were migrated to the new service.
 
 Lease
Agreement
 
 In
January 2008, the Company executed a lease renewal agreement with its landlord.
The term of the renewal is from February 1, 2008 through January 31,
2013.  Per the terms of the renewal, the Company shall pay a monthly
base rent of $6,355.56 with no rent payments due for the months of February
2008, February 2009 and February 2010.
  F-28
 
 Consulting
Agreements
 
 In
January 2008, the Company executed a representation letter with an attorney
whereby the attorney shall serve as general counsel to the Company. As
compensation for the services, the attorney shall receive a monthly fee in the
amount of $3,500, commencing in February 2008. The agreement can be terminated
by either party by providing the other party with thirty days advance written
notice.
 
 In
February 2008, the Company executed a representation letter with an attorney
whereby the attorney shall serve as patent attorney to the Company. As
compensation for the services, the attorney shall invoice the Company on an
hourly basis. The Company paid a retainer of $5,000 to the attorney which was
applied to the Company’s first invoice. The agreement can be terminated by the
Company at any time by providing the attorney with written notice.
 
 Investor
Group
 
 In
January 2008, the Company executed a term sheet with an investor group whereby
the group will assist the Company on an ongoing best efforts basis in order for
the Company to obtain financing of up to $2,500,000 in the form of up to 100
units, each unit containing a $25,000 promissory note and 62,000 non-dilutable
(for one year), restricted shares of the Company’s common stock. The promissory
notes shall have a three year term, bearing interest at 10% per annum, with a
10% discount rate. All funds received as a result of the sale of the units shall
be held in an escrow account that shall be managed by the investor group’s
assigned representative. Upon repayment of the Company’s open secured notes and
receipt of a release of indebtedness from YA Global and Highgate, the
intellectual property of the Company will be pledged to the note holders in the
investor group until such time that the unsecured notes and accrued interest of
the investor group are repaid in full. In January 2008, the Company sold 37
units to the investor group for a total of $925,000 in promissory notes with a
discount of $92,500. The Company shall issue 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. The Company shall issue 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. The
Company shall issue 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. The Company shall
issue 62,000 shares of common stock in relation to the units sold (see Note 17.)
The investor group advanced funds totaling $50,000 in February 2008, $280,000 in
March 2008, $74,070 in April 2008 and $40,000 in May 2008, respectively, to the
Company. The funds being held in escrow are classified as restricted cash on the
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 executed in
February 2008 with YA Global (see Note 10).
 
 In
February 2008, the Company executed an Assignment and Settlement Agreement with
a trade vendor whereby the Company has assigned the debt owed to the vendor, in
the amount of $48,750, to the investor group.  Per the terms of the
Settlement Agreement, the Company remitted $12,500 to the vendor as full
settlement of its indebtedness to the vendor.
 
 In
February 2008, the Company assigned a convertible promissory note in the amount
of $15,000 to the investor group and the note holder agreed to an amount of
$3,000 as full settlement of the note. The settlement amount was paid to the
note holder by the investor group in February 2008 (see Note 5).
  In March
2008, the Company assigned a convertible promissory note in the amount of
$75,000 to the investor group and the note holder agreed to an amount of $15,000
as full settlement of the note. The settlement amount was paid to the note
holder by the investor group in March 2008 (see Note 5).
  In April
2008, the Company assigned a convertible promissory note in the amount of
$125,000 to the investor group and the note holder agreed to an amount of
$12,500 as full settlement of the note. The settlement amount was paid to the
note holder by the Company in April 2008 (see Note 5).
  In April
2008, the Company executed an Assignment Agreement with the investor group
whereby the Company has transferred ownership of a March 2008 receivable, in the
amount of $22,520, to the investor group.
  F-29
 
 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. As of March 31, 2008, the balance due to the factor by the Company
was $209,192 including interest. 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 no later than ninety days from the settlement date.
 
 NOTE
16-  CONCENTRATION OF CREDIT RISK
 
 (i)Customers and Credit
Concentrations
 
 Three
customers accounted for 44.8%, 34.6% and 10.1% of net sales for the three months
ended March 31, 2008 and 69.4%, 17.0% and 5.4% of the total accounts receivable
as of March 31, 2008, respectively. Three customers accounted for 94.3%, 2.7%
and 2.2% of net sales for the three months ended March 31, 2007 and three
customers accounted for 93.9%, 2.7% and 2.5% of the total accounts receivable as
of March 31, 2007.
 
 NOTE
17-  SUBSEQUENT EVENTS
 
 Notes
Payable
 
 One unit,
sold in April 2008 per the terms of a term sheet executed with an investor group
in January 2008 (see Note 15,) with each unit consisting of a 10% promissory
note of $25,000, maturing three years from the date of execution and with a 10%
discount rate, and 62,000 non-dilutable (for one year) restricted shares of the
Company’s common stock will be issued, at market price.
 F-30




ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION





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-KSB for the fiscal year ended December 31, 2007.




The
following discussion and analysis should be read in conjunction with the
financial statements of StrikeForce Technologies, Inc., included herewith. This
discussion should not be construed to imply that the results discussed herein
will necessarily continue into the future, or that any conclusion reached herein
will necessarily be indicative of actual operating results in the future. Such
discussion represents only the best present assessment of our
management.





Background




StrikeForce
Technologies, Inc. (hereinafter referred to as “we”, “us”, “our”, “SFT”,
“StrikeForce” and “the Company”) is a software development and services company
that offers a suite of integrated computer network security products using
proprietary technology. We were organized in August 2001 under New Jersey law as
Strike Force Technical Services, Inc. We initially conducted operations as an
integrator and reseller of computer hardware and telecommunications equipment
and services. In December 2002, and formally memorialized by an agreement in
September 2003, we acquired certain intellectual property rights and patent
pending technology from NetLabs.com including the rights to further develop and
sell their principal technology and certain officers of NetLabs.com joined
StrikeForce as officers and directors of our Company. We subsequently changed
our name to StrikeForce Technologies, Inc., under which we had conducted our
business since August 2001. Our strategy is to develop and exploit our suite of
network security products for customers in the corporate, financial, government,
insurance, e-commerce and consumer sectors. We plan to grow our business through
the channel and internally generated sales, rather than by acquisitions. We have
no subsidiaries and we conduct our operations from our corporate office in
Edison, New Jersey.




The
Company owns the exclusive right to license and develop various identification
protection software products to protect computer networks from unauthorized
access and to protect network owners and users from identity theft. The
Company has developed a suite of products based upon the exclusive license and
the Company is seeking to commercially exploit the products in the areas of
financial services, e-commerce, corporate, government and consumer
sectors. We are a development stage business and have had nominal revenues
since our formation. On August 3, 2005 the Company’s registration statement on
Form SB-2 was declared effective by the Securities and Exchange Commission and
on December 14, 2005 the Company received its clearance for quotation on the
Over-The-Counter Bulletin Board. On November 2 2006, the Company filed a
Post-Effective Amendment to its Form SB-2 Registration Statement with the
SEC.  The SEC declared the Company’s Post-effective Amendment
effective on November 8, 2006.




We began
our operations in 2001 as a reseller and integrator of computer hardware and
iris biometric technology. We derived the majority of our revenues as an
integrator from the time we started our operations through the first half of
2003. In December 2002, upon the acquisition of the licensing rights to certain
intellectual property and patent pending technology from NetLabs.com, we shifted
the focus of our business to developing and marketing our own suite of security
products. Based upon the acquired licensing rights the Company has now developed
various identification protection software products to protect computer networks
from unauthorized access and to protect network owners and users from identity
theft. The Company is seeking to commercially exploit the products in the
areas of financial services, e-commerce, corporate, government, insurance and
consumer sectors. We have had increasing nominal revenues since our
formation.  We have maintained our relationship with Panasonic and LG
as a reseller, primarily for the resale of biometric identification equipment,
such as iris scanners, that can be used with our software products. We generated
nominal revenues from our activities as a reseller during 2007 and
2006.




3




We
completed the development of our ProtectIDTM 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, which is currently being sold and
distributed. We seek to locate customers in a variety of ways. These include
contracts with value added resellers and distributors (both inside the United
States and globally), direct sales calls initiated by our internal staff,
exhibitions at security and technology trade shows, through the media,
consulting agreements and through our own and agent relationships. Our sales
generate revenue either as an Original Equipment Manufacturer (OEM) model,
through a Hosting/License agreement, or through direct purchase by customers. We
price our products for hosted consumer transactions based on the number of
transactions in which our software products are utilized. We also price our
products for business applications based on the number of users. These pricing
models provide the Company with one-time, monthly, quarterly and yearly
recurring revenues. We are also generating revenues from annual maintenance
contracts, renewal fees and project an increase in revenues based upon the
execution of various agreements that we have recently closed.




For the
three months ended March 31, 2008, we generated all of our 2008 revenues of
$50,235 from the sales of our security products and for the three months ended
March 31, 2007 we generated all of our 2007 revenues of $498,400 from the sales
of our security products. We intend to 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 intend to 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 resellers and direct
customers, as well as having reached reseller agreements with strategic vendors
globally. Our GuardedID® product is also being sold directly to consumers,
primarily through the Internet as well as distributors, resellers, third party
agents and potential Original Equipment Manufacturer ("OEM") agreements by
bundling GuardedID® which could provide a value-add to their own products and
offerings.




We have
incurred losses since our inception. We believe that our products provide a
cost-effective and technologically competitive solution to address the problems
of network security and identity theft in general. There can be no assurance,
however, that our products will continue to gain acceptance in the commercial
marketplace or that one of our competitors will not introduce a technically
superior product.  The products that we offer to customers are
discussed in Item 1, Description of Business of our annual report on Form
10-KSB filed on March 31, 2008.




We
operate primarily as a software development company, providing security software
products and services, to be sold to enterprises, Internet consumer businesses
and consumers, both directly and through sales channels comprised of
distributors, resellers, agents and OEM relationships, globally. We are focusing
primarily on developing sales through “channel” relationships in which our
products are offered by other manufacturers, distributors, value-added resellers
and agents, globally. We also sell our suite of security products directly from
our Edison, NJ office, which also augments our channel partner relationships. It
is our strategy that these “channel” relationships will provide the greater
percentage of our revenues ongoing. Examples of the channel relationships that
we are pursuing include our attempts to establish OEM relationships with other
security technology and software providers that would integrate or bundle the
enhanced security capabilities of ProtectIDTM 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 insurance, anti-virus and identity
theft product companies.




Our
primary target markets include financial services such as banks 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 stolen
passwords used to acquire private information illegally as well as remote users
for medium to large size companies. Because we anticipate growing market demand,
we are developing a sizeable global reseller and distribution channel as a
strategy to generate, manage and fulfill demand for our products across market
segments. We intend to minimize the concentration on our initial direct sales
efforts in the future as our reseller channel develops globally.




4




We intend
to generate revenue through fees for ProtectIDTM and ValidateIDTM, 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.




Use
of Estimates





Management's
Discussion and Analysis or Plan of Operations are based upon our financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. When preparing our financial
statements, we make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reporting amounts of revenues and
expenses during the reported period. Significant estimates include, but are not
limited to, the estimated useful lives of property and equipment and website
development costs. Actual results could differ from those
estimates.




Results
of Operations





THREE
MONTHS ENDED MARCH 31, 2008 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2007





Revenues
for the three months ended March 31, 2008 were $50,235 compared to $498,400 for
the three months ended March 31, 2007, a decrease of $448,165 or 90.0%. The
decrease in revenues was primarily due to the amount of one-time sales of our
newly developed GuardedID® keyboard encryption and anti-keylogger technology
that occurred in the first quarter of 2007.





Revenues
generated consisted of hardware sales, software sales, revenue from sign on fees
and recurring transaction revenues. Hardware sales for the three months ended
March 31, 2008 were $640 compared to $0 for the three months ended March 31,
2007, an increase of $640. The resultant increase in hardware revenues was
primarily due to the 2008 revenues from the sale of our technology that requires
hardware for our security software products. Software sales for the three months
ended March 31, 2008 were $23,249 compared to $470,200 for the three months
ended March 31, 2007, a decrease of $446,951. The resultant decrease in software
revenues was primarily due to the amount of one-time sales of our newly
developed GuardedID® keyboard encryption and anti-keylogger technology that
occurred in the first quarter of 2007. Sign on fees for our ASP transaction
model amounted to $250 for the three months ended March 31, 2008 compared to $0
for the three months ended March 31, 2007, an increase of $250. The resultant
increase was due to the increase in signing up new e-commerce clients.
Transaction revenues from the ASP hosting model were $26,096 for the three
months ended March 31, 2008 and $28,200 for the three months ended March 31,
2007, a decrease of $2,104.  The resultant decrease was caused by a
reduced number of transactions being processed through the ASP hosting
facility.





Cost of
revenues for the three months ended March 31, 2008 was $22,779 compared to
$14,955 for the three months ended March 31, 2007, an increase of $7,824, or
52.3%. The increase was primarily due to the increase in processing fees
incurred as a result of the transactions relating to our ASP hosting
service.





Gross
profit for the three months ended March 31, 2008 was $27,456 compared to
$483,445 for the three months ended March 31, 2007, a decrease of $455,989, or
94.3%. The decrease in gross profit was primarily due to the amount of one-time
sales of our newly developed GuardedID® keyboard encryption and anti-keylogger
technology that occurred in the first quarter of 2007. Gross profit as a
percentage of sales decreased to 54.7% from 97.0% due to the decrease in the
sales of our software products which entails a higher gross margin than the
gross margin we earn from sales of the transactions relating to our ASP hosting
service.





Research and development expenses for
the three months ended March 31, 2008 were $100,269 compared to $88,540 for the
three months ended March 31, 2007, an increase of $11,729, or 13.3%. The
increase is primarily attributable to the increase in resources relating to our
GuardedID® keyboard encryption & anti-keylogger technology which is now in
beta release and testing. The salaries, benefits and overhead
costs of personnel conducting research and development of our software products
comprise research and development expenses.




5





Selling,
general and administrative expenses for the three months ended March 31, 2008
were $472,211 compared to $553,532 for the three months ended March 31, 2007, a
decrease of $81,321 or 14.7%. The net decrease was due primarily to decreases in
our staffing, promotion and marketing and professional fees which occurred in
the three months ended March 31, 2008. 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 March 31, 2008 was ($816,313) as
compared to $345,784 for the three months ended March 31, 2007, representing a
decrease in other (income) expense of $1,162,097, or 336%. The increase was
primarily due to net mark to market changes of ($1,092,468) in the fair value of
derivative financial instruments relating to the convertible secured promissory
notes.





Derivative
instruments (income) expense represents the change in the fair value of the net
derivative liability at period end, using a layered discounted
probability-weighted cash flow approach. Interest expense derivatives represent
the amortization of discount on the initial valuation of the derivatives, or the
amortization of the change after any modification of debt. The change represents
the amortization for both of the YA Global Investments, LP (“YA Global”),
formerly Cornell Capital Partners, LP, and Highgate House Funds, Ltd
(“Highgate”) debentures.





Our net
income for the three months ended March 31, 2008 was $271,289 compared to a net
loss of ($504,411) for the three months ended March 31, 2007, an increase of
$775,700, or 154%. The increase in our net income was primarily due to 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 March 31, 2008 were $1,377,622, including $27,217 in cash
and $975,000 in restricted cash. Additionally, we had a stockholders’
deficiency in the amount of $5,235,404 at March 31, 2008. The increase in the
deficiency is a result of the Company’s overall net losses and funding through
an increased debt position from convertible debentures and promissory notes
rather than the sale of stock. We have historically incurred recurring losses
and have financed our operations through loans, principally from affiliated
parties such as our directors, and from the proceeds of debt and equity
financing. The liabilities include a computed liability for the fair value of
derivatives of $375,796, which will only be realized on the conversion of the
derivatives, or settlement of the debentures.





We
financed our operations during the three months ended March 31, 2008 through
debt and equity financing, recurring revenues from our ProtectIDTM hosting
platform and sales of our GuardedID® keystroke encryption technology. We expect
that we will rely, at least in the near future, on a substantial percentage of
the sales of our GuardedID® product and a limited number of customers for our
other products revenues and may continue to have customer concentrations.
Inherently, as time progresses and corporate exposure in the market grows, we
hope to attain greater numbers of customers and the concentrations would then
diminish. Until this is accomplished, we will continue to attempt to secure
additional financing through both the public and private market sectors to meet
our continuing commitments of capital expenditures and until our sales revenue
can provide greater liquidity.





We do not
expect to resell a significant amount of biometric iris equipment over the next
twelve months as we concentrate more on our core authentication and keyboard
encryption and anti-keylogger software products.





We have
historically incurred losses and we anticipate that we will not generate any
significant revenues until the third quarter of 2008. Our operations presently
require funding of approximately $135,000 per month. Management believes, but
cannot provide assurances, that we will be profitable over the next 12 months
based on some potential clients contracting with the Company in the financial
industry, technology, insurance, enterprise, government, insurance and consumer
sectors in the United States, Latin America, Europe and Asia. There can be no
assurance, however, that the sales anticipated will materialize or that we will
achieve the profitability we have forecasted.





At March
31, 2008, $427,447 in aggregate principal amount of the YA Global debentures was
issued and outstanding.




6





At March
31, 2008, $244,720 in aggregate principal amount of the Highgate debentures
remained outstanding.





In
January 2008, the Company executed a Forbearance Agreement with YA Global
whereby YA Global and Highgate have agreed to forbear from exercising their
rights under the secured convertible debentures through February 27, 2008. The
terms of the Forbearance Agreement record the amount due to YA Global and
Highgate by the Company to be $1,214,093, which includes principal, interest and
the redemption premium. The terms also include a reduction in the YA Global and
Highgate Fixed Conversion Price to $0.0065. In connection with this Agreement,
the Company issued to YA Global 5,000,000 contingency warrants with an exercise
price of $0.015 per share. The warrants are exercisable for a period of five (5)
years from date of issuance. The warrants are held in escrow and will only be
released to YA Global if the total amount due by the Company is not paid to YA
Global by February 29, 2008. The total amount of our indebtedness to YA Global
and Highgate in the amount of $1,214,093, as agreed to in the Forbearance
Agreement, is further broken down as:





·
            $427,447
      (YA Global secured convertible
debenture)


·
            $204,775
      (YA Global accrued and unpaid interest on
  debenture)


·
            $85,489
      (YA Global 20% redemption premium)


·
            $244,720
      (Highgate secured convertible
debenture)


·
            $86,937
      (Highgate accrued and unpaid interest on
  debentures)


·
            $48,944
      (Highgate 20% redemption premium)


·
            $100,000
      (YA Global promissory note dated May 1,
2006)


·
            $15,781
      (YA Global accrued and unpaid interest on
note)




In
February 2008, the Forbearance Agreement was amended and extended to May 15,
2008, including the terms of the contingency warrants. Per the terms of the
amendment, YA Global and Highgate shall receive an additional 105 days of
interest for a total amount of $28,328.84 additional interest. The additional
interest plus a security deposit of $171,671.16 were paid to YA Global and
Highgate per the terms of a debt assignment agreement executed with 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 is paid in full by May 15, 2008. Otherwise, the security
deposit will be applied to YA Global as liquidated damages.




During
the three months ended March 31, 2008, the Company repaid a total of $6,000 of
unsecured convertible notes to one unrelated party.  Additionally,
during the three months ended March 31, 2008, the Company reached settlement
agreements and assigned to its investor group a total of $90,000 of unsecured
notes with two unrelated parties.




During
the three months ended March 31, 2008, the Company repaid a total of $54,937 of
unsecured convertible notes to two related parties.




The
Company issued unsecured notes during the three months ended March 31, 2008 in
an aggregate total of $150,000 to one unrelated party and an aggregate total of
$1,450,000 to twenty unrelated parties per the term sheet executed with an
investor group in January 2008. 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 twenty unrelated
parties in the investor group until such time that the unsecured notes and
accrued interest of the investor group are repaid in full. Additionally, during
the three months ended March 31, 2008, the Company repaid a total of $102,500 of
unsecured notes to one unrelated party. In accordance with the terms of six of
the notes the Company is issuing restricted common shares as bonus extension
shares on a monthly basis to the two remaining note holders. Additionally,
during the three months ended March 31, 2008, the Company terminated a
consulting agreement with a financial advisor thereby canceling the unsecured
note in the amount of $15,000 issued to the advisor for services to be
rendered.




The
Company issued unsecured notes during the three months ended March 31, 2008 in
an aggregate total of $70,000 to a related party. Additionally, during the three
months ended March 31, 2008, the Company repaid a total of $25,000 of unsecured
notes to one related party.




7




Summary
of Funded Debt




As of
March 31, 2008 the Company’s open unsecured promissory note balance was
$1,763,750, listed as follows:




·
            $100,000
      to YA Global (this note by its terms became convertible into shares of
      common stock as of September 17, 2006 at the lesser of $0.22 per share or
      90% of VWAP thirty day average prior to the date of conversion) – current
      portion


·
            $18,750
      to two unrelated individuals through investment firm placement – current
      portion


·
            $150,000
      to an unrelated individual – current
portion


·
            $45,000
      to an unrelated individual – current
portion


·
            $1,450,000
      to twenty unrelated individuals through term sheet with investor
      group




As of
March 31, 2008 the Company’s open unsecured related party promissory note
balances were $696,000, listed as follows:




·
            $626,000
      to our CEO – current portion


·
            $70,000
      to our President – current portion




As of
March 31, 2008 the Company’s open convertible secured note balances were
$672,167, listed as follows:




·
            $427,447
      to YA Global (04/05 amended secured debenture) – current
      portion


·
            $244,720
      to Highgate (05/05 secured debenture) – current
  portion




As of
March 31, 2008 the Company’s open convertible note balances were $1,365,391, net
of discount on convertible notes of $123,609, listed as follows:




·
            $125,000
      to an unrelated individual (01/05 unsecured debenture) - current
      portion


·
            $235,000
      to an unrelated company (03/05 unsecured debenture) - current
      portion


·
            $9,000
      to an unrelated company (06/05 unsecured debenture) – current
      portion


·
            $10,000
      to an unrelated individual (06/05 unsecured debenture) - current
      portion


·
            $140,000
      to four unrelated individuals (07/05 unsecured debentures) - current
      portion


·
            $100,000
      to an unrelated individual (03/06 unsecured debenture) - current
      portion


·
            $200,000
      to an unrelated individual (06/06 unsecured
  debenture)


·
            $150,000
      to an unrelated individual (09/06 unsecured
  debenture)


·
            $80,000
      to six unrelated individuals (02/07 unsecured debentures) - current
      portion


·
            $20,000
      to an unrelated individual (04/07 unsecured debenture) – current
      portion


·
            $100,000
      to an unrelated individual (05/07 unsecured
  debenture)


·
            $100,000
      to an unrelated individual (06/07 unsecured
  debentures)


·
            $100,000
      to an unrelated individual (07/07 unsecured
  debenture)


·
            $120,000
      to four unrelated individuals (08/07 unsecured
  debentures)




As of
March 31, 2008 the Company’s open convertible note balances - related parties
were $419,255, listed as follows:




·
            $268,000
      to our CEO – current portion


·
            $57,500
      to our VP of Technical Services – current
  portion


·
            $30,000
      to a relative of our CTO & one of our Software Developers – current
      portion


·
            $5,000
      to a relative of our CFO – current
portion


·
            $58,755
      to our Office Manager – current
portion




Based on
present revenues and expenses, we are unable to generate sufficient funds
internally to sustain our current operations. We must raise additional capital
or other borrowing sources to continue our operations.  It is
management’s plan to seek additional funding through the sale of common stock
and the issuance of notes and debentures, including notes and debentures
convertible into common stock. If we issue additional shares of common stock,
the value of shares of existing stockholders is likely to be
diluted.




8




However,
the terms of the convertible secured debentures issued to certain of the
existing stockholders require that we obtain the consent of such stockholders
prior to our entering into subsequent financing arrangements. No assurance can
be given that we will be able to obtain additional financing, that we will be
able to obtain additional financing on terms that are favorable to us or that
the holders of the secured debentures will provide their consent to permit us to
enter into subsequent financing arrangements.




Our
future revenues and profits, if any, will primarily depend upon our ability to
secure sales of our suite of network security and anti-malware products. We do
not presently generate significant revenue from the sales of our products.
Although management believes that our products are competitive for customers
seeking a high level of network security, we cannot forecast with any reasonable
certainty whether our products will gain acceptance in the marketplace and if so
by when.




Except
for the limitations imposed upon us respective to the convertible secured
debentures of YA Global and Highgate, there are no trends, material or known,
which will restrict either short term or long-term liquidity.




Off-Balance
Sheet Arrangements




We do not
have any off balance sheet arrangements that are reasonably likely to have a
current or future effect on our financial condition, revenues, results of
operations, liquidity or capital expenditures.




Going
Concern





We are
assuming that we will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. We have recorded net operating income of $271,289 for the three
months ended March 31, 2008, compared to a net operating loss of ($504,411) for
the three months ended March 31, 2007. At March 31, 2008, the Company's
accumulated deficit was $16,105,161, its working capital deficiency was
$4,519,894 and approximately 61% of its assets consist of deferred royalties.
Additionally, for the three months ended March 31, 2008, we had negative cash
flows from operating activities of $335,654. 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 and Highgate,
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.





Currently,
the Company is attempting to generate sufficient revenues and improve gross
margins by implementing a revised sales strategy. In principle, the Company is
redirecting its sales focus from direct sales to channel sales, where the
Company is primarily selling through a distribution channel of Value Added
Resellers, Strategic Partners and Original Equipment Manufacturers. The revenues
from this approach are more lucrative than selling direct due to the increase in
sales volume of GuardedID® and ProtectIDTM through the channel partners. This
strategy, if successful, should increase the Company’s sales and revenues
allowing us to mitigate future losses. In addition, management has raised funds
through convertible debt instruments and the sale of equity in order to
alleviate the working capital deficiency. Through the utilization of the public
capital markets, the Company plans to raise the funds necessary to continue to
expand and enhance its growth; however, there can be no assurance that we will
be able to increase revenues or raise additional capital. The Company is
currently in negotiations with other investors to conclude the necessary working
capital needs of the Company.





Our
management expects cash flows from operating activities to improve over the next
twelve months, primarily as a result of certain contracts, although there can be
no assurance that such contracts will materialize in revenue sufficient to meet
operating expenses and fund future operations.  The accompanying
consolidated financial statements do not include any adjustments that might be
necessary should we be unable to continue as a going concern. If we fail to
generate positive cash flows or obtain additional financing when required, we
may have to modify, delay or abandon some or all of our business and expansion
plans.




9





Critical
Accounting Policies





In
accordance with accounting principles generally accepted in the United States of
America (“U.S. GAAP”), we record certain assets at the lower of cost or fair
market value. In determining the fair value of certain of our assets, we must
make judgments, estimates and assumptions regarding circumstances or trends that
could affect the value of theses assets, such as economic conditions. Those
judgments, estimates and assumptions are based on information available to us at
that time. Many of those conditions, trends and circumstances are outside our
control and if changes were to occur in the events, trends or other
circumstances on which our judgments or estimates were based, we may be required
under U.S. GAAP to adjust those estimates that are affected by those changes.
Changes in such estimates may require that we reduce the carrying value of the
affected assets on our balance sheet (which are commonly referred to as “write
downs” of the assets involved).





It is our
practice to establish reserves or allowances to record adjustments or
“write-downs” in the carrying value of assets, such as accounts receivable. Such
write-downs are recorded as charges to income or increases in the expense in our
Statement of Operations in the periods when such reserves or allowances are
established or increased. As a result, our judgments, estimates and assumptions
about future events can and will affect not only the amounts at which we record
such assets on our balance sheet but also our results of
operations.





In making
our estimates and assumptions, we follow U.S. GAAP applicable to our business
and those that we believe will enable us to make fair and consistent estimates
of the fair value of assets and establish adequate reserves or allowances. Set
forth below is a summary of the accounting policies that we believe are material
to an understanding of our financial condition and results of
operations.




Discount
on Debt




The
Company has allocated the proceeds received from convertible debt instruments
between the underlying debt instruments and has recorded the conversion feature
as a liability in accordance with Statement of Financial Accounting Standards
No. 133 “Accounting for
Derivative Instruments and Hedging Activities” (“SFAS No. 133”) and
related interpretations. The conversion feature and certain other features that
are considered embedded derivative instruments, such as a conversion reset
provision, a penalty provision and redemption option, have been recorded at
their fair value within the terms of SFAS No. 133 as its fair value can be
separated from the convertible note and its conversion is independent of the
underlying note value. The conversion liability is marked to market each
reporting period with the resulting gains or losses shown on the Statement of
Operations. The Company has also recorded the resulting discount on debt related
to the warrants and conversion feature and is amortizing the discount using the
effective interest rate method over the life of the debt
instruments.




Derivative
Financial Instruments




We do not
use derivative instruments to hedge exposures to cash flow, market, or foreign
currency risks.




The
Company evaluates its convertible debt, options, warrants or other contracts to
determine if those contracts or embedded components of those contracts qualify
as derivatives to be separately accounted for under SFAS No. 133 and related
interpretations including Emerging Issues Task Force (“EITF”) Issue No. 00-19
“Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock”(“EITF Issue No. 00-19”). The result of this accounting treatment
is that the fair value of the embedded derivative is marked-to-market each
balance sheet date and recorded as a liability. In the event that the fair value
is recorded as a liability, the change in fair value is recorded in the
Statement of Operations as other income or expense. Upon conversion or exercise
of a derivative instrument, the instrument is marked to fair value at the
conversion date and then that fair value is reclassified to equity.




In
circumstances where the embedded conversion option in a convertible instrument
is required to be bifurcated and there are also other embedded derivative
instruments in the convertible instrument that are required to be bifurcated,
the bifurcated derivative instruments are accounted for as a single, compound
derivative instrument.





The
classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is re-assessed at the end of
each reporting period. Equity instruments that are initially classified as
equity that become subject to reclassification under SFAS No. 133 are
reclassified to liability at the fair value of the instrument on the
reclassification date. Derivative instrument liabilities are classified in the
balance sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument is expected within 12 months of the
balance sheet date.




10





The fair
value model utilized to value the various compound embedded derivatives in the
secured convertible notes comprises multiple probability-weighted scenarios
under various assumptions reflecting the economics of the secured convertible
notes, such as the risk-free interest rate, expected Company stock price and
volatility, likelihood of conversion and or redemption, and likelihood of
default status and timely registration.  At inception, the fair value
of the single compound embedded derivative was bifurcated from the host debt
contract and recorded as a derivative liability which resulted in a reduction of
the initial notional carrying amount of the secured convertible notes (as
unamortized discount which will be amortized over the term of the notes under
the effective interest method).




The
Company accounts for derivatives in accordance with SFAS No. 133 and the related
interpretations. SFAS No. 133, as amended, requires companies to recognize all
derivative instruments as either assets or liabilities in the balance sheet at
fair value. The accounting for changes in the fair value of a derivative
instrument depends on: (i) whether the derivative has been designated and
qualifies as part of a hedging relationship, and (ii) the type of hedging
relationship. For those derivative instruments that are designated and qualify
as hedging instruments, a company must designate the hedging instrument based
upon the exposure being hedged as either a fair value hedge, cash flow hedge or
hedge of a net investment in a foreign operation.




The
derivatives (convertible debentures) issued on December 20, 2004 and January 18,
2005 (amended April 27, 2005) and on April 27, 2005 and May 6, 2005 have been
accounted for in accordance with Statement of Financial Accounting Standards No.
133, “Accounting for
Derivative Instruments and Hedging Activities” (“SFAS No. 133”) and the
related interpretations. SFAS No. 133, as amended and the Financial Accounting
Standards Board Emerging Issues Task Force Issue“Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock” (“EITF No. 00-19”).




The
Company has identified the YA Global and Highgate debentures have compound
embedded derivatives. These compound embedded derivatives have been bifurcated
from their respective host debt contracts and accounted for as derivative
liabilities in accordance with EITF 00-19. When multiple derivatives exist
within the Convertible Notes, they have been bundled together as a single hybrid
compound instrument in accordance with SFAS No. 133 Derivatives Implementation
Group Implementation Issue No. B-15, Embedded Derivatives: Separate Accounting
for Multiple Derivative Features Embedded in a Single Hybrid
Instrument”.




The
compound embedded derivatives within the Convertible Notes have been recorded at
fair value at the date of issuance; and are marked-to-market each reporting
period with changes in fair value recorded to the Company’s Statement of
Operations as “Net change in fair value of derivative liabilities”. The Company
has utilized a third party valuation consultant to fair value the embedded
derivatives using layered discounted probability-weighted cash flow approach. We
have developed a financial model to value the compound embedded derivatives
analyzing the conversion features, redemption options and penalty provisions.
Additionally, our model has been developed to incorporate management’s
assessment of the various potential outcomes relating to the specific features
and provisions contained in the convertible debt instruments.




The six
primary events that can occur which will affect the value of the compound
embedded derivatives are (a) payments made in cash, (b) payments made with
stock, (c) the holder converts the note(s), (d) the company redeems the note(s),
(e) the company fails to register the common shares related to the convertible
debt and (f) the company defaults on the note (s).




The
primary factors driving the economic value of the embedded derivatives are the
same as the Black-Scholes factors, except that they are incorporated
intrinsically into the binomial calculations for this purpose. Those factors are
stock price, stock volatility, trading volume, outstanding shares issued,
beneficial shares owned by the holder, interest rate, whether or not a timely
registration has been obtained, change in control, event of default, and the
likelihood of obtaining alternative financing. We assigned probabilities to each
of these potential scenarios over the initial term, and at each quarter, the
remaining term of the underlying financial instrument. The financial model
generates a quarterly cash flow over the remaining life of the underlying
debentures and assigns a risk-weighted probability to the resultant cash flow.
We then assigned a discounted weighted average cash flow over the potential
scenarios which were compared to the discounted cash flow of the debentures
without the subject embedded derivatives. The result is a value for the compound
embedded derivatives at the point of issue and at subsequent
quarters.




11




The fair
value of the derivative liabilities are subject to the changes in the trading
value of the Company’s common stock, as well as other factors. As a result, the
Company’s financial statements may fluctuate from quarter-to-quarter based on
factors, such as the price of the Company’s stock at the balance sheet date and
the amount of shares converted by YA Global and Highgate. Consequently, our
financial position and results of operations may vary from quarter-to-quarter
based on conditions other than our operating revenues and expenses.




Software
Development Costs




Statement
of Financial Accounting Standards No. 86, “Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed” (“SFAS No.
86”) requires capitalization of software development costs incurred subsequent
to establishment of technological feasibility and prior to the availability of
the product for general release to customers. Systematic amortization of
capitalized costs begins when a product is available for general release to
customers and is computed on a product-by-product basis at a rate not less than
straight-line basis over the product’s remaining estimated economic life. To
date, all costs have been accounted for as research and development costs and no
software development cost has been capitalized.




Management
will evaluate the net realizable value of software costs capitalized by
comparing estimated future gross revenues reduced by the estimated future costs
of completing, disposing of and maintaining the software. These costs also
include the costs of performing maintenance and customer support required by
us.




Revenue
Recognition




The
Company’s revenues are derived principally from the sale and installation of its
various identification protection software products and related hardware and
services.  The Company recognizes revenue when it is realized or
realizable and earned less estimated future returns. The Company considers
revenue realized or realizable and earned when it has persuasive evidence of an
arrangement that the product has been shipped or the services have been rendered
to the customer, the sales price is fixed or determinable, and collectibility is
reasonably assured. In addition to the aforementioned general policy, the
following are the specific revenue recognition policies for each major category
of revenue:




We
recognize revenue from the sales of software licenses when persuasive evidence
of an arrangement exists, the product has been delivered, the fee is fixed and
determinable and collection of the resulting receivable is reasonably assured.
Delivery generally occurs when the product is delivered to a common
carrier.




We assess
collection based on a number of factors, including past transaction history with
the customer and the creditworthiness of the customer. We do not request
collateral from our customers. If we determine that collection of a fee is not
reasonably assured, we defer the fee and recognize revenue at the time
collection becomes reasonably assured, which is generally upon the receipt of
cash.




For
technology arrangements with multiple obligations (for example, undelivered
software, maintenance and support), we allocate revenue to each component of the
arrangement using the residual value method based on the fair value or the fixed
agreement of the undelivered elements. Accordingly, we defer technology revenue
in the amount equivalent to the fair value or the fixed agreement of the
undelivered elements.




We
recognize revenue for maintenance services ratably over the contract term. Our
training and consulting services are billed at hourly rates and we generally
recognize revenue as these services are performed. However, upon execution of a
contract, we determine whether any services included within the arrangement
require us to perform significant work either to alter the underlying software
or to build additional complex interfaces so that the software performs as the
customer requests. If these services are included as part of an arrangement, we
recognize the fee using the percentage of completion method. We determine the
percentage of completion based on our estimate of costs incurred to date
compared with the total costs budgeted to complete the project.




12




Impairment
of Long-lived Assets




Long-lived
assets, which include property and equipment, deferred royalties, website
development cost and patents are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of assets may not be
recoverable or the useful life is shorter than originally
estimated.




The
Company assesses the recoverability of its assets by comparing the projected
undiscounted net cash flows associated with the related asset or group of assets
over their remaining lives against their respective carrying amounts.
Impairment, if any, is based on the excess of the carrying amount over the fair
value of those assets. Fair value is generally determined using the asset’s
expected future discounted cash flows or market value, if readily determinable.
If assets are determined to be recoverable, but the useful lives are shorter
than originally estimated, the net book value of the assets is depreciated over
the newly determined remaining useful lives.




Stock
Based Transactions





We have
concluded various transactions where we paid the consideration in shares of our
common stock and/or warrants or options to purchase shares of our common stock.
These transactions include:





-
            Acquiring
      the services of various professionals who provided us with a range of
      corporate consultancy services, including developing business and
      financial models, financial advisory services, strategic planning,
      development of business plans, investor presentations and advice and
      assistance with investment funding;




-
            Retaining
      the services of our Advisory Board to promote the business of the
      Company;




-
            Settlement
      of our indebtedness; and




-
            Providing
      incentives to attract, retain and motivate employees who are important to
      our success.





When our
stock is used, the transactions are valued using the price of the shares on the
date they are issued or if the value of the asset or service being acquired is
available and is believed to fairly represent its market value, the transaction
is valued using the value of the asset or service being provided.





When
options or warrants to purchase our stock are used in transactions with third
parties or our employees, the transaction is valued using the Black-Scholes
valuation method. The Black-Scholes valuation method is widely used and accepted
as providing the fair market value of an option or warrant to purchase stock at
a fixed price for a specified period of time. Black-Scholes uses five (5)
variables to establish market value of stock options or warrants:





- strike
price (the price to be paid for a share of our stock);





- price
of our stock on the day options or warrants are granted;





- number
of days that the options or warrants can be exercised before they
expire;





- trading
volatility of our stock; and





- annual
interest rate on the day the option or warrant is granted.





The
determination of expected volatility requires management to make an estimate and
the actual volatility may vary significantly from that estimate. Accordingly,
the determination of the resulting expense is based on a management
estimate.





Recently
Issued Accounting Pronouncements





On June
5, 2003, the United States Securities and Exchange Commission (“SEC”) adopted
final rules under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”),
as amended by SEC Release No. 33-8889 on February 1, 2008. Commencing with its
annual report for the fiscal year ending December 31, 2008, the Company will be
required to include a report of management on its internal control over
financial reporting. The internal control report must include a
statement:




13





·
            Of
      management’s responsibility for establishing and maintaining adequate
      internal control over its financial
reporting;


·
            Of
      management’s assessment of the effectiveness of its internal control over
      financial reporting as of year end;
and


·
            Of
      the framework used by management to evaluate the effectiveness of the
      Company’s internal control over financial
  reporting.




Furthermore,
in the following fiscal year, it is required to file the auditor’s attestation
report separately on the Company’s internal control over financial reporting on
whether it believes that the Company has maintained, in all material respects,
effective internal control over financial reporting.






On
September 15, 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 157 “Fair Value Measurements”
("SFAS No. 157").  SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements.  SFAS No. 157 is effective as of the beginning of the
first fiscal year beginning after November 15, 2007.  The Company does
not anticipate that the adoption of this statement will have a material effect
on the Company’s financial condition and results of operations.




On
February 15, 2007, the FASB issued Statement of Financial Accounting Standards
No. 159“The Fair Value Option
for Financial Assets and Financial Liabilities: Including an amendment of FASB
Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits all entities to
elect to measure many financial instruments and certain other items at fair
value with changes in fair value reported in earnings. SFAS No. 159 is effective
as of the beginning of the first fiscal year that begins after November 15,
2007, with earlier adoption permitted. The Company does not anticipate that the
adoption of this statement will have a material effect on the Company’s
financial condition and results of operations.




In June
2007, the Emerging Issues Task Force of the FASB issued EITF Issue No. 07-3
“Accounting for Nonrefundable
Advance Payments for Goods or Services to be Used in Future Research and
Development Activities” (“EITF Issue No. 07-3”) which is effective for
fiscal years beginning after December 15, 2007.  EITF Issue No. 07-3
requires that nonrefundable advance payments for future research and development
activities be deferred and capitalized.  Such amounts will be
recognized as an expense as the goods are delivered or the related services are
performed.  The Company does not expect the adoption of EITF Issue No.
07-3 to have a material impact on the financial results of the
Company.




In
December 2007, the FASB issued FASB Statement No. 141 (Revised 2007)“Business Combinations”
(“SFAS No. 141(R)”), which requires the Company to record fair value estimates
of contingent consideration and certain other potential liabilities during the
original purchase price allocation, expense acquisition costs as incurred and
does not permit certain restructuring activities previously allowed under
Emerging Issues Task Force Issue No. 95-3 to be recorded as a component of
purchase accounting.  SFAS No. 141(R) applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008, except for the presentation and disclosure requirements, which shall
be applied retrospectively for all periods presented. The Company will adopt
this standard at the beginning of the Company’s year ending December 31, 2008
for all prospective business acquisitions. The Company has not determined the
effect that the adoption of SFAS No. 141(R) will have on the financial results
of the Company.




In
December 2007, the FASB issued FASB Statement No. 160“Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51” (“SFAS
No. 160”), which causes noncontrolling interests in subsidiaries to be included
in the equity section of the balance sheet.  SFAS No. 160 applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008, except for the presentation and disclosure requirements,
which shall be applied retrospectively for all periods presented.  The
Company will adopt this standard at the beginning of the Company’s year ending
December 31, 2008 for all prospective business acquisitions.  The
Company has not determined the effect that the adoption of SFAS No. 160 will
have on the financial results of the Company.




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.




14




ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK




The
Company is subject to certain market risks, including changes in interest rates
and currency exchange rates.  The Company does not undertake any specific
actions to limit those exposures.




ITEM 4. CONTROLS AND PROCEDURES





Under the
supervision and with the  participation  of our
management,  including our
Chief  Executive  Officer and
Chief  Financial  Officer,  we  evaluated  the
effectiveness  of
the  design  and  operation  of
our  disclosure  controls  and
procedures  (as such term is  defined  in
Rule  13a-15(e)  under the  Securities Exchange
Act of 1934 (the "Exchange Act")).  Disclosure  controls and
procedures are the controls and other procedures that we designed to ensure that
we record,
process,  summarize  and  report  in a
timely  manner  the  information  we
must disclose in reports that we file with or submit to
the  Securities  and Exchange Commission under the Exchange
Act. Based on this evaluation, our Chief Executive Officer and our Chief
Financial Officer concluded that our disclosure controls
and  procedures  were  effective  as of
the end of the  period  covered  by this
report.





Disclosure
controls and procedures are controls and procedures that are designed to ensure
that  information  required to
be  disclosed  in our reports  filed or submitted
under the Securities Exchange Act is
recorded,  processed,  summarized and
reported,  within the time periods  specified in the
Securities and Exchange Commission's  rules
and  forms.  Disclosure  controls  and  procedures  include,
without limitation,  controls and procedures designed to ensure that
information required  to be  disclosed  in
our  reports  filed  under  the  Exchange  Act
is accumulated and  communicated to management,  including
our principal  executive officer and our
principal  financial  officer,  as
appropriate,  to allow timely decisions regarding required
disclosure.




ITEM
4A(T). MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING.




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the company in accordance with as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control
over financial reporting is designed to provide reasonable assurance regarding
the (i) effectiveness and efficiency of operations, (ii) reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles, and (iii)
compliance with applicable laws and regulations.  Our internal
controls framework is based on the criteria set forth in the Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




Management’s
assessment of the effectiveness of the small business issuer’s internal control
over financial reporting is as of the year ended December 31, 2007. We believe
that internal control over financial reporting is effective. We have not
identified any, current material weaknesses considering the nature and extent of
our current operations and any risks or errors in financial reporting under
current operations.




This
annual report does not include an attestation report of the company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the SEC that permit the
Company to provide only management’s report in this annual report.




CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING.




There was
no change in our internal control over financial reporting that occurred during
the fiscal quarter ended March 31, 2008, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.




15




PART
II - OTHER INFORMATION





ITEM 1. LEGAL PROCEEDINGS





The
Company is not currently a party to, nor is any of its property currently the
subject of, any material legal proceeding. None of the Company’s directors,
officers or affiliates is involved in a proceeding adverse to the Company’s
business or has a material interest adverse to the Company’s
business.





In
January 2008, a money judgment in the amount of sixty nine thousand nine hundred
fifty two dollars, for past due payables, in favor of Lewis PR, a California
corporation, against the Company was entered into the Superior Court of
California, County of San Diego. In February 2008, a settlement agreement was
reached between the parties whereby Lewis PR will receive a payment of thirteen
thousand dollars by September 2008 as full settlement of the debt.





In
February 2008, summonses were filed in the Superior Court of the State of New
Jersey against the Company and its CEO demanding payment on a promissory note in
the amount of forty five thousand dollars. The Company is pursuing a settlement
agreement with the note holder.





In April
2008, a summons was filed in the Superior Court of the State of New Jersey
against the Company demanding payment on a convertible promissory note in the
amount of one hundred thousand dollars. The Company is pursuing a settlement
agreement with the note holder.





ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS





In
January 2008, the Company executed a promissory note in the amount of $100,000
with an unrelated individual, bearing interest at 8% per annum, maturing on
September 30, 2008. The Company recorded 1,000,000 restricted shares of common
stock, at $0.0092 per share.





In
January 2008, the Company executed a promissory note in the amount of $50,000
with an unrelated individual, bearing interest at 18% per annum, maturing on
July 31, 2008. The individual received warrants to purchase 150,000 shares of
the Company’s common stock at an exercise price of $0.025 per share with a term
of five years from the effective date.





In
January 2008, the Company recorded 18,750 shares of the Company’s common stock
at $0.021 per share to the two remaining note holders relating to promissory
notes executed in July 2006, as bonus extension shares.  In connection
with the shares, the Company recorded 1,875 shares of the Company’s common stock
at $0.021 per share to the placement agent.




In
January 2008, the Company recorded 200,000 shares of the Company’s common stock
at $0.021 per share to the six note holders relating to convertible promissory
notes executed in February 2007, as bonus extension shares.  In
connection with the shares, the Company recorded 40,000 shares of the Company’s
common stock at $0.021 per share to the placement agent.




In
January 2008, the Company recorded 50,000 shares of the Company’s common stock
at $0.021 per share to a note holder relating to a convertible promissory note
executed in April 2007, as bonus extension shares.  In connection with
the shares, the Company recorded 10,000 shares of the Company’s common stock at
$0.021 per share to the placement agent.




In
January 2008, the Company sold 37 units, per the terms of a term sheet executed
with an investor group in January 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 62,000 non-dilutable (for one year) restricted
shares of the Company’s common stock. The Company recorded 2,294,000 restricted
shares of common stock, at $0.023 per share for 2,170,000 shares and $0.025 for
124,000 shares.




In
February 2008, the Company recorded 18,750 shares of the Company’s common stock
at $0.029 per share to the two remaining note holders relating to promissory
notes executed in July 2006, as bonus extension shares.  In connection
with the shares, the Company recorded 1,875 shares of the Company’s common stock
at $0.029 per share to the placement agent.




16




In
February 2008, the Company recorded 200,000 shares of the Company’s common stock
at $0.029 per share to the six note holders relating to convertible promissory
notes executed in February 2007, as bonus extension shares.  In
connection with the shares, the Company recorded 40,000 shares of the Company’s
common stock at $0.029 per share to the placement agent.




In
February 2008, the Company recorded 50,000 shares of the Company’s common stock
at $0.029 per share to a note holder relating to a convertible promissory note
executed in April 2007, as bonus extension shares.  In connection with
the shares, the Company recorded 10,000 shares of the Company’s common stock at
$0.029 per share to the placement agent.




In
February 2008, the Company sold 17 units, per the terms of a term sheet executed
with an investor group in January 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 62,000 non-dilutable (for one year) restricted
shares of the Company’s common stock. The Company recorded 1,054,000 restricted
shares of common stock, at $0.028 per share for 558,000 shares, $0.029 per share
for 372,000 shares and $0.038 for 124,000 shares.




In March
2008, the Company recorded 18,750 shares of the Company’s common stock at $0.025
per share to the two remaining note holders relating to promissory notes
executed in July 2006, as bonus extension shares.  In connection with
the shares, the Company recorded 1,875 shares of the Company’s common stock at
$0.025 per share to the placement agent.




In March
2008, the Company recorded 200,000 shares of the Company’s common stock at
$0.025 per share to the six note holders relating to convertible promissory
notes executed in February 2007, as bonus extension shares.  In
connection with the shares, the Company recorded 40,000 shares of the Company’s
common stock at $0.025 per share to the placement agent.




In March
2008, the Company recorded 50,000 shares of the Company’s common stock at $0.025
per share to a note holder relating to a convertible promissory note executed in
April 2007, as bonus extension shares.  In connection with the shares,
the Company recorded 10,000 shares of the Company’s common stock at $0.025 per
share to the placement agent.




In March
2008, the Company sold 4 units, per the terms of a term sheet executed with an
investor group in January 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 62,000 non-dilutable (for one year) restricted
shares of the Company’s common stock. The Company recorded 248,000 restricted
shares of common stock, at $0.025 per share.




In March
2008, the Company recorded 7,500 shares of its common stock, valued at $0.022
per share for 2,500 shares, $0.028 per share for 2,500 shares and $0.029 per
share for 2,500 shares, and issuable to a law firm as compensation for general
counsel legal services rendered.




All of
the above offerings and sales were deemed to be exempt under Rule 506 of
Regulation D and Section 4(2) of the Securities Act of 1933, as
amended.




ITEM 3. DEFAULTS UPON SENIOR
SECURITIES





Not
applicable.





ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS





Not
applicable.





ITEM 5. OTHER INFORMATION





Not
applicable.




17




ITEM 6. EXHIBITS





Exhibit Number
            Description3.1
            Amended
      and Restated Certificate of Incorporation of StrikeForce Technologies,
      Inc.(1)3.2
            By-laws
      of StrikeForce Technologies, Inc. (1)10.1
            2004
      Stock Option Plan. (1)10.2
            Securities
      Purchase Agreement dated December 20, 2004, by and among StrikeForce
      Technologies, Inc. and Cornell Capital Partners, LP.
(1)10.3
            Secured
      Convertible Debenture with Cornell Capital Partners, LP.
    (1)10.4
            Investor
      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)10.5
            Escrow
      Agreement, dated December 20, 2004, by and between StrikeForce
      Technologies, Inc. and Cornell Capital Partners, LP in connection with the
      Securities Purchase Agreement. (2)10.6
            Security
      Agreement dated December 20, 2004, by and between StrikeForce
      Technologies, Inc. and Cornell Capital Partners, LP in connection with the
      Securities Purchase Agreement. (1)10.7
            Secured
      Convertible Debenture with Cornell Capital Partners, LP dated January 18,
      2005. (1)10.8
            Royalty
      Agreement with NetLabs.com, Inc. and Amendments. (1)10.9
            Employment
      Agreement dated as of May 20, 2003, by and between StrikeForce
      Technologies, Inc. and Mark L. Kay. (1)10.10
            Amended
      and Restated Secured Convertible Debenture with Cornell Capital Partners,
      LP dated April 27, 2005. (1)10.11
            Amendment
      and Consent dated as of April 27, 2005, by and between StrikeForce
      Technologies, Inc. and Cornell Capital Partners, LP.
(1)10.12
            Securities
      Purchase Agreement dated as of April 27, 2005 by and between StrikeForce
      Technologies, Inc. and Highgate House Funds, Ltd. (1)10.13
            Investor
      Registration Rights Agreement dated as of April 27, 2005 by and between
      StrikeForce Technologies, Inc. and Highgate House Funds, Ltd.
      (2)10.14
            Secured
      Convertible Debenture with Highgate House Funds, Ltd. dated April 27,
      2005. (2)10.15
            Escrow
      Agreement dated as of April 27, 2005 by and between StrikeForce
      Technologies, Inc., Highgate House Funds, Ltd. and Gottbetter &
      Partners, LLP. (1)10.16
            Escrow
      Shares Escrow Agreement dated as of April 27, 2005 by and between
      StrikeForce Technologies, Inc., Highgate House Funds, Ltd. and Gottbetter
      & Partners, LLP. (1)10.17
            Security
      Agreement dated as of April 27, 2005 by and between StrikeForce
      Technologies, Inc. and Highgate House Funds, Ltd. (1)10.18
            Network
      Service Agreement with Panasonic Management Information Technology Service
      Company dated August 1, 2003 (and amendment). (1)10.19
            Client
      Non-Disclosure Agreement. (1)10.20
            Employee
      Non-Disclosure Agreement. (1)10.21
            Secured
      Convertible Debenture with Highgate House Funds, Ltd. dated May 6, 2005.
      (2)10.22
            Termination
      Agreement with Cornell Capital Partners, LP dated February 19, 2005.
      (1)10.23
            Securities
      Purchase Agreement with WestPark Capital, Inc. (4)10.24
            Form
      of Promissory Note with WestPark Capital, Inc. (4)10.25
            Investor
      Registration Rights Agreement with WestPark Capital, Inc.
    (4)31.1
            Certification
      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)31.2
            Certification
      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)32.1
            Certification
      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)32.2
            Certification
      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.




18











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: May
      15, 2008
              By:
              /s/ Mark L. KayMark
      L. KayChief
      Executive Officer




Dated: May
      15, 2008
              By:
              /s/ Mark Joseph
      CorraoMark Joseph
      CorraoChief
      Financial Officer and Principal Accounting Officer


















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