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
q                                          
Quarterly period ended: September 30, 2008  o
TRANSITION REPORT UNDER SECTION
13 OR 15(d) OF THE EXCHANGE ACT  For the transition period from
_______ to _______  STRIKEFORCE TECHNOLOGIES,
INC. (Exact name of small business issuer as
specified in its charter)   NEW JERSEY
(State or other jurisdiction of
incorporation or organization)
333-122113
(Commission file number)
22-3827597
(I.R.S. Employer Identification
No.)  1090 King Georges Post Road, Suite
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 o  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
Filer o       Smaller
Reporting Company  x  Indicate by check whether the registrant is
a shell company (as defined in Rule 12b of the Exchange Act).  Yes
o 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 November 5, 2008, the issuer had 10,000,078 outstanding shares of
Common Stock.     STRIKEFORCE
TECHNOLOGIES, INC.  FORM 10-Q  September 30, 2008  INDEX  PART I-- FINANCIAL INFORMATION
Page(s)Item 1.
Financial Statements
3Item 2.
Managements Discussion and Analysis of Financial
Condition
33Item 3
Quantitative and Qualitative Disclosures About
Market Risk
44Item 4.
Control and Procedures
45PART II-- OTHER INFORMATIONItem 1
Legal Proceedings
45Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds
46Item 3.
Defaults Upon Senior Securities
47Item 4.
Submission of Matters to a Vote of Security
Holders
47Item 5.
Other Information
47Item 6.
Exhibits and Reports on Form 8-K
48SIGNATURE
49   2   ITEM 1. FINANCIAL
STATEMENTS    STRIKEFORCE TECHNOLOGIES, INC.   INDEX TO FINANCIAL STATEMENTS  SEPTEMBER 30, 2008 AND 2007    Contents
Page(s)Balance Sheets at September 30, 2008 (Unaudited)
and December 31, 2007
4Statements of Operations for the Three and Nine
Months Ended September 30, 2008 and 2007 (Unaudited)
5Statement of Stockholders Deficit for the Year
Ended December 31, 2007 (Audited)
6Statement of Stockholders Deficit for the Nine
Months Ended September 30, 2008 (Unaudited)
7Statements of Cash Flows for the Nine Months Ended
September 30, 2008 and 2007 (Unaudited)
8       3   STRIKEFORCE
TECHNOLOGIES, INC. Balance Sheets  ASSETSSeptember 30,

December 31,2008

2007(Unaudited)Current Assets:Cash and cash equivalents
$
20,183
$
16,307Restricted cash

367,819

-Accounts receivable

44,091

32,960Current portion of deferred
royalties

326,808

326,808Prepayments and other current
assets

274

6,325Total current
assets

759,175

382,400Property and equipment, net

13,064

16,963Deferred royalties, net of current portion

1,202,092

1,424,563Website development cost, net

2,462

4,688Patents

4,329

4,329Security deposit

8,684

8,684Total Assets
$
1,989,806
$
1,841,627LIABILITIES AND STOCKHOLDERS'
DEFICITCurrent Liabilities:Convertible secured notes
payable
$
672,167
$
672,167Derivative financial
instruments

469,760

1,468,264Current maturities of
convertible notes payable, net of discount of $67,335 in 2008

1,267,454

800,000Convertible notes payable -
related parties

419,255

107,500Notes payable

311,461

281,250Notes payable - related
parties

696,000

25,000Capital leases payable

5,532

5,532Accounts payable

915,603

961,552Accrued expenses

1,642,340

1,187,762Payroll taxes payable

53,481

53,375Common stock to be issued

204,377

8,155Due to factor

209,192

209,192Due to employees

49,612

48,326Total current
liabilities

6,916,234

5,828,075Convertible notes payable, less current maturities,net of discount of $148,421 in
2007

-

636,579Convertible notes payable - related parties, net of
current portion

-

366,691Notes payable, net of current portion

1,700,000

-Notes payable - related parties, net of current
portion

-

626,000Total Liabilities

8,616,234

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;9,999,999 shares issued and
outstanding

1,000

1,000Additional paid-in
capital

10,950,840

10,759,732Accumulated deficit

(17,578,268)

(16,376,450)Total Stockholders'
Deficit

(6,626,428)

(5,615,718)Total Liabilities and Stockholders'
Deficit
$
1,989,806
$
1,841,627  See
accompanying notes to the financial statements  4   STRIKEFORCE
TECHNOLOGIES, INC. Statements of Operations for the Three and Nine
Months Ended September 30, 2008 and 2007  For the three months

For the nine monthsended September 30,

ended September 30,2008

2007

2008

2007Revenues
$
96,009
$
70,364
$
211,254
$
623,696Cost of sales

48,613

34,152

89,442

52,705Gross profit

47,396

36,212

121,812

570,991Operating expenses:Selling, general and
administrative expenses

377,604

800,571

1,292,274

1,903,057Research and development

117,210

92,370

324,991

273,872Total operating expenses

494,814

892,941

1,617,265

2,176,929Loss from operations

(447,418)

(856,729)

(1,495,453)

(1,605,938)Other (income) expense:Interest income

(8,889)

-

(8,889)

-Interest expense

2,404

2,953

293,788

12,090Financing expense

360,285

124,344

657,220

471,258Derivative instruments (income)
expense, net

860

(711,698)

(998,504)

26,275Forgiveness of debt

1,500

-

(237,250)

-Total other (income)
expense

356,160

(584,401)

(293,635)

509,623Net loss
$
(803,578)
$
(272,328)
$
(1,201,818)
$
(2,115,561)Net loss per common share - basic and diluted
$
(0.08)
$
(0.06)
$
(0.12)
$
(0.55)Weighted average number of common shares
outstanding - basic and diluted

9,999,999

4,808,109

9,999,999

3,829,343  See
accompanying notes to the financial statements  5   STRIKEFORCE
TECHNOLOGIES, INC. Statement of Stockholders Deficit for the Year Ended
December 31, 2007  Additional



TotalCommon Stock

Paid-in

Accumulated

Stockholders'Shares

Amount

Capital

Deficit

DeficitBalance at
December 31, 2006
2,884,449
$
288
$
9,086,449
$
(12,378,048)
$
(3,291,311)Sale of
shares of common stock including warrants
272,107

27

75,514

-

75,541Issuance of
shares of common stock for conversions of notes payable and accrued
interest
5,436,570

544

760,770

-

761,314Issuance of
shares of common stock for consulting services
677,424

68

87,434

-

87,502Issuance of
shares of common stock for financing
729,449

73

160,181

-

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
9,999,999
$
1,000
$
10,759,732
$
(16,376,450)
$
(5,615,718)  See
accompanying notes to the financial statements  6   STRIKEFORCE
TECHNOLOGIES, INC. Statement of Stockholders Deficit for the Nine Months
Ended September 30, 2008  Additional



TotalCommon Stock

Paid-in

Accumulated

Stockholders'Shares

Amount

Capital

Deficit

DeficitBalance at December 31, 2007
9,999,999
$
1,000
$
10,759,732
$
(16,376,450)
$
(5,615,718)Issuance of warrants in connection with
promissory notes payable
-

-

4,350

-

4,350Employee stock option compensation
-

-

186,758

-

186,758Net income
-

-

-

(1,201,818)

(1,201,818)Balance at September 30, 2008
9,999,999
$
1,000
$
10,950,840
$
(17,578,268)
$
(6,626,428)  See
accompanying notes to the financial statements  7   STRIKEFORCE
TECHNOLOGIES, INC. Statements of Cash Flows for the Nine Months
Ended September 30, 2008 and 2007 2008

2007Cash flows from operating activities:Net loss
$
(1,201,818)
$
(2,115,561)Adjustments to reconcile net
loss to net cashused in operating
activities:Depreciation and
amortization

9,858

13,324Forgiveness of debt

(237,250)

-Discount on notes payable

170,000

-Amortization of discount on
convertible notes

81,085

173,343Amortization of deferred
royalties

222,471

200,034Mark to market on derivative
financial instruments

(998,504)

76,674Employee stock option
compensation

186,758

336,124Issuance of common stock,
options and warrants for consulting services

-

72,819Issuance of common stock and
warrants for financing expense

4,350

140,963Changes in assets and
liabilities affecting operations:Accounts receivable

(11,131)

(268,014)Prepaid expenses

6,051

(895)Accounts payable

6,801

42,095Accrued expenses

454,580

363,321Payroll taxes payable

106

-Common stock to be issued

196,222

-Due to factor

-

172,450Due to employees

1,286

(11,141)Net cash used in operating activities

(1,109,135)

(804,464)Cash flows from investing activities:Purchases of property and
equipment

(3,733)

(3,987)Net cash used in investing activities

(3,733)

(3,987)Cash flows from financing activities:Proceeds from sale of common
stock and warrants

-

70,541Proceeds from convertible notes
payable

-

714,108Proceeds from notes
payable

150,000

250,000Proceeds from notes payable, net
of discount of $170,000, in the form of restricted cash

1,530,000

-Proceeds from notes payable -
related parties

100,000

22,000Payments of convertible notes
payable - related parties

(54,937)

(181,250)Payments of notes payable

(119,789)

(13,000)Payments of convertible notes
payable

(65,711)

-Payments of notes payable -
related parties

(55,000)

-Principal payments on capital
leases

-

(34,369)Net cash provided by financing
activities

1,484,563

828,030Net increase in cash

371,695

19,579Cash and cash equivalents at beginning of
period

16,307

7,455Cash and cash equivalents at end of period,
including restricted cash
$
388,002
$
27,034Supplemental disclosure of cash flow
information:Cash paid during the period
for:Interest
$
293,788
$
12,964Income
taxes
$

$
2,448Non-cash investing and financing
activities:Conversion of convertible notes
payable into common stock
$
-
$
508,726Issuance of warrants for
convertible notes
$
-
$
153,192Issuance of warrants for
promissory notes
$
4,350
$
- See
accompanying notes to the financial statements  8   STRIKEFORCE
TECHNOLOGIES, INC. NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 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 ProtectID® and GuardedID® products is the subject of
two pending patent applications. The Companys firewall product is no longer
being developed and the provisional patent application was allowed to expire. A
fourth patent application relating to the Companys ProtectID® product was
combined into the first ProtectID® pending patent application and the fourth
application was allowed to lapse.  The Companys operations are based in
Edison, New Jersey.  NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Interim
period  The accompanying
unaudited financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (U.S. GAAP) for
interim financial information and with the rules and regulations of the United
States Securities and Exchange Commission to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by U.S. GAAP for complete financial statements.  In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the financial position, results
of operations and cash flows for the interim periods have been included. These
financial statements should be read in conjunction with the financial statements
of the Company for the year ended December 31, 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 (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.  9   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 collectability. Account balances are
charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote. The Company
recorded bad debt expense of $0 and $221,600 for the nine months ended September
30, 2008 and 2007, respectively. There were no allowances for doubtful accounts
at September 30, 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 September 30, 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.  10   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
September 30, 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 September 30, 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.  11   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 collectability is reasonably assured.
In addition to the aforementioned general policy, the following are the specific
revenue recognition policies for each major category of revenue:  Hardware  Revenue from
hardware sales is recognized when the product is shipped to the customer and
there are either no unfulfilled Company obligations or any obligations that will
not affect the customer's final acceptance of the arrangement.  Any cost of
these obligations is accrued when the corresponding revenue is recognized.
 For the nine months ended September 30, 2008 and 2007, total hardware
revenues for products shipped or delivered were $21,852 and $8,333, representing
10.3% and 1.4% of total revenues, respectively.  There were no revenues
from fixed price long-term contracts.  Software, Services and
Maintenance  Revenue from time and service contracts is recognized as the
services are provided. Revenue from delivered elements of one-time charge
licensed software is recognized at the inception of the license term, provided
the Company has vendor-specific objective evidence of the fair value of each
delivered element.  Revenue is deferred for undelivered elements. The
Company recognizes revenue from the sale of software licenses, when persuasive
evidence of an arrangement exists, the product has been delivered, the fee is
fixed and determinable, and collection of the resulting receivable is reasonably
assured.  Delivery generally occurs when the product is delivered to a
common carrier. The Company assesses collection based on a number of factors,
including past transaction history with the customer and the creditworthiness of
the customer.  The Company does not request collateral from customers.
 If the Company determines that collection of a fee is not reasonably
assured, the Company defers the fee and recognizes revenue at the time
collection becomes reasonably assured, which is generally upon receipt of
cash.Revenue from monthly software
licenses is recognized on a subscription basis.  For the nine months ended
September 30, 2008 and 2007, total software, services and maintenance revenues
were $81,030 and $534,121 representing 38.4% and 85.6% of total revenues,
respectively.  ASP Hosted Services 
The Company offers an Application Service Provider hosted service whereby
customer usage transactions are invoiced monthly on a cost per transaction
basis.  The service is sold via the execution of a Service Agreement
between the Company and the customer.  Initial set-up fees are recognized
upon completion of service. For the nine months ended September 30, 2008 and
2007, total revenues for services provided were $108,372 and $81,242
representing 51.3% and 13.0% 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.  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:  12    September 30,

September 30,2008

2007Risk-free interest rate
3.3% - 5.2%

3.1% - 5.2%Dividend yield
0.00%

0.00%Expected volatility
166% - 397%

166% - 390%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
$105,161 and $336,124 for the nine months ended September 30, 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 nine months ended September 30, 2008 and 2007 were $324,991 and
$273,872, respectively.  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.  13   Net loss per common share  Net loss per common
share is computed pursuant to Statement of Financial Accounting Standards No.
128 Earnings Per Share (SFAS No. 128).  Basic loss per share is
computed by taking net loss divided by the weighted average number of common
shares outstanding for the period.  Diluted loss per share is computed by
dividing net loss by the weighted average number of shares of common stock and
potentially outstanding shares of common stock during each period to reflect the
potential dilution that could occur from common shares issuable through stock
options, warrants, and convertible debt, which excludes 1,000,685 shares of
common stock to be issued, 1,427,297 shares of stock options, 1,161,577 shares
of common stock issuable under warrants and 2,367,508 shares of common stock
issuable under the conversion feature of the convertible notes payable for the
nine months ended September 30, 2008, and 1,839,567 shares of stock options,
1,118,244 shares of common stock issuable under warrants and 3,532,416 shares of
common stock issuable under the conversion feature of the convertible notes
payable for the nine months ended September 30, 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. 33-8934 on June 26, 2008. Commencing with its annual report
for the fiscal year ending December 31, 2009, the Company will be required to
include a report of management on its internal control over financial reporting.
The internal control report must include a statement:  · Of managements
responsibility for establishing and maintaining adequate internal control over
its financial reporting;  · Of managements
assessment of the effectiveness of its internal control over financial reporting
as of year end; and  · Of the framework used
by management to evaluate the effectiveness of the Companys internal control
over financial reporting.  Furthermore, in the
following fiscal year, it is required to file the auditors attestation report
separately on the Companys internal control over financial reporting on whether
it believes that the Company has maintained, in all material respects, effective
internal control over financial reporting.  In 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.  14   In March 2008, the FASB issued FASB Statement No. 161Disclosures about Derivative Instruments and Hedging Activities an amendment of
FASB Statement No. 133 (SFAS No. 161), which changes the disclosure
requirements for derivative instruments and hedging
activities.  Pursuant to SFAS No.161, Entities are required to provide
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entitys financial
position, financial performance, and cash flows.  SFAS No. 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008 with early application encouraged. SFAS No.
161 encourages but does not require disclosures for earlier periods presented
for comparative purposes at initial adoption.  In years after initial
adoption, this Statement requires comparative disclosures only for periods
subsequent to initial adoption.  The Company does not expect the
adoption of SFAS No. 161 to have a material impact 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 $17,578,268 and a working capital
deficiency of $6,157,059 at September 30, 2008 and had a net loss and cash used
in operations of $1,201,818 and $1,109,135 for the nine months ended September
30, 2008, respectively.  Currently, the Company
is attempting to generate sufficient revenues and improve gross margins by
implementing a revised sales strategy. In principle, the Company is redirecting
its sales focus from direct sales to international channel sales, where the
Company is primarily selling through a channel of Distributors, Value Added
Resellers, Strategic Partners and Original Equipment Manufacturers. The revenues
from this approach are more lucrative than selling direct, due to the increase
in sales volume of GuardedID® and ProtectID® through the channel partners. This
strategy, if successful, should increase the Companys sales and revenues
allowing us to mitigate future losses. In addition, management has raised funds
through convertible debt instruments and the sale of equity in order to
alleviate the working capital deficiency. Through the utilization of the capital
markets, the Company is seeking to locate the additional funding necessary to
continue to expand and enhance its growth; however, there can be no assurance
that we will be able to increase revenues or raise additional capital. The
Company is currently in negotiations with other investors, but the success of
such negotiations cannot be assured.  The accompanying
consolidated financial statements do not include any adjustments that might be
necessary should we be unable to continue as a going concern. If we fail to
generate positive cash flows or obtain additional financing when required, we
may have to modify, delay or abandon some or all of our business and expansion
plans.  NOTE 4 - DEFERRED ROYALTIES  On December 2, 2004,
the Company issued NetLabs, as advance royalties, options to purchase 760,000
shares of the Companys common stock at a price of $3.60 per share to vest as
follows: 253,000 shares at issuance, 253,000 shares at September 11, 2005 and
254,000 shares at September 11, 2006 for the exclusive rights to the
intellectual property related to the patents pending for its Out-of-Band
technology and firewall solutions, while clarifying that NetLabs still retains
ownership.  The fair values for
these options 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   15   As of September 30, 2008 the options to purchase 253,000 shares
that vested at issuance are valued (as fixed) at $1,066,395, the options to
purchase 253,000 shares that vested at September 11, 2005 are valued (as fixed)
at $1,529,132, and the options to purchase the final 254,000 shares (which
vested on September 11, 2006) are valued (as fixed) at $264,160. The deferred
royalties are being amortized over the term of the original NetLabs Agreement of
ten (10) years which will terminate on August 31, 2013.  At September 30,
2008, the total value of the deferred royalties, net of accumulated amortization
of $1,330,787, is $1,528,900.  For the nine months ended September 30, 2008
and 2007, $222,471 and $200,034 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
$
104,3372009

303,8342010

303,8342011

303,8342012

303,8342013 and beyond

209,227Total deferred royalties
$
1,528,900Less current portion

(326,808)Deferred royalties, net of current portion
$
1,202,092  NOTE 5 - CONVERTIBLE NOTES PAYABLE  Convertible notes
payable at September 30, 2008 and December 31, 2007 consisted of the
following:  September 30, 2008

December 31, 2007(1) Convertible note bearing interest
at 8% per, with a conversion price of $9.00 per share, extended three
times through March 31, 2008. The Company issued 4,500 warrants with an
exercise price of $2.00 per share and expiring January 26, 2009, relating
to the first extension, and 10,000 restricted shares of the Companys
common stock at $0.50 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 nine months ended September 30, 2008 and
2007, the Company recorded $0 and $4,390, 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 14).
$
-
$
125,000(2) Convertible note bearing interest
at 8% per annum maturing on March 28, 2008, with a conversion price of
$9.00 per share. As of September 30, 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 $9.00 per share and maturing on June 30, 2006. In
January 2007, the Company agreed to make periodic payments in order to
repay the note in full by December 31, 2008.

7,000

15,000(4) Convertible note bearing interest
at 8% per annum maturing on June 20, 2008, with a conversion price of
$9.00 per share. In June 2008 the note was extended to December 31,
2008.

10,000

10,000(5) Convertible note bearing interest
at 8% per annum maturing on July 7, 2008, with a conversion price of $9.00
per share. In May 2008 the note was extended to December 31, 2008.

15,000

15,000(6) Convertible note bearing interest
at 8% per annum maturing on July 11, 2008, with a conversion price of
$9.00 per share. In July 2008 the note was extended to December 31,
2008.

15,000

15,000(7) Convertible note bearing interest
at 8% per annum maturing on July 27, 2008, with a conversion price of
$9.00 per share. In June 2008 the note was extended to December 31,
2008.

10,000

10,000(8) Convertible note bearing interest
at 8% per annum maturing on July 27, 2008, with a conversion price of
$9.00 per share. In May 2008 the note was extended to December 31,
2008.

100,000

100,000  16    (9) Convertible note bearing interest
at 8% per annum maturing on March 15, 2008, with a conversion price of
$9.00 per share. The Company issued 6,667 warrants with an exercise price
of $5.50 per share and expiring March 15, 2008. The fair value of the
warrants was $12,300. For the nine months ended September 30, 2008 and
2007, the Company recorded $1,025 and $4,613, respectively, in financing
expense related to the issuance of these warrants. In July 2008, the
Company, the note holder and the Companys investor group have agreed upon
a settlement whereby the debt shall be assigned to the investor group by
the Company and the investor group shall repay the agreed upon settlement
amount to the note holder, in installments, through February 2009. The
investor group made payments of $10,000 in July 2008 and $5,000 in
September 2008 (see Note 14).

85,000

100,000(10)  Convertible note bearing
interest at 9% per annum maturing on June 9, 2009, with a conversion price
of $1.40 per share. The Company issued 40,000 warrants with an exercise
price of $2.50 per share and expiring June 9, 2011. The fair value of the
warrants was $36,960. For the nine months ended September 30, 2008 and
2007, the Company recorded $9,240 and $9,240, 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 $0.80 per share. The Company issued 56,250 warrants with an
exercise price of $1.60 per share and expiring September 23, 2011. The
fair value of the warrants was $39,600. For the nine months ended
September 30, 2008 and 2007, the Company recorded $9,900 and $9,900,
respectively, in financing expense related to the issuance of these
warrants.

150,000

150,000(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 $0.50 per share and 6,667 bonus shares of
the Companys common stock, per individual, valued at $0.3988, for a total
of 40,000 shares of common stock. Six months of prorated interest of
$8,729, was due at closing and paid to the note holders. The Company paid
a placement agent fee of $10,000 and issued 8,000 shares of the Companys
common stock, at $0.3988, in March 2007. The Company also paid an escrow
agent fee of $500 and a legal fee of $1,000. For the nine months ended
September 30, 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 20,000 shares of the
Companys common stock per month (extension shares) with a value based
on the closing market price of the stock on the 18th of each
month. In November 2007, the Company issued 60,000 extension shares at
$0.07 per share to the note holders for the months of September through
November and 12,000 shares of common stock at $0.07 per share to the
placement agent in relation to the extensions. In December 2007, the
Company recorded 20,000 shares of common stock at $0.11 per share to the
note holders and 4,000 shares of common stock to the placement agent as
the December extension shares. In June 2008, the Company paid $9,768
against the six notes. For the months of January to September 2008, the
Company recorded 20,000 shares of common stock per month, with the shares
ranging from $0.15 to $0.29 per share, to the note holders and 4,000
shares of common stock per month to the placement agent as the January to
September 2008 extension shares. All of the above issued Company shares
have Rule 144 piggyback registration rights. For the nine months ended
September 30, 2008 and 2007, the Company expensed $45,060 and $0,
respectively, of financing expenses related to the shares recorded for the
note extensions.

70,232

80,000  17    (13) Convertible note executed in
March 2007 bearing interest at 18% per annum maturing on January 31, 2008,
with a conversion price of $0.25 per share, which has been extended three
times through January 31, 2008. The Company also issued 15,000 restricted
shares of common stock, valued at $0.39 per share. The Company issued
15,000 shares of restricted common stock and the note holder converted
interest of $3,513.70 into 15,971 shares of common stock both at $0.22 per
share relating to the first extension. The Company issued 15,000 shares of
restricted common stock and the note holder converted interest of
$3,402.74 into 16,204 shares of common stock both at $0.21 per share
relating to the second extension. The Company recorded 5,000 shares of
restricted common stock and recorded the note holders converted interest
of $3,402.74 into 15,467 shares of common stock both at $0.22 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 nine months ended
September 30, 2008 and 2007, the Company expensed $0 and $9,150,
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 14).

-

75,000(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 $0.50 per share and 12,000 bonus
shares of the Companys common stock, at $0.19 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 2,400 shares
of the Companys common stock, at $0.19, in May 2007 and an escrow agent
fee of $660.  For the nine months ended September 30, 2008 and 2007,
the Company expensed $0 and $2,736 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 5,000 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 5,000
shares of common stock at $0.07 per share to the note holder and 1,000
shares of common stock at $0.07 per share to the placement agent for the
November 2007 extension. In December 2007, the Company recorded 5,000
shares of common stock at $0.11 per share to the note holder and 1,000
shares of common stock to the placement agent as the December extension
shares. In June 2008, the Company paid $2,443 against the note. For the
months of January to September 2008, the Company recorded 5,000 shares of
common stock per month, with the shares ranging from $0.15 to $0.29 per
share, to the note holders and 1,000 shares of common stock per month to
the placement agent as the January to September 2008 extension shares. All
of the above issued Company shares have Rule 144 piggyback registration
rights. For the nine months ended September 30, 2008 and 2007, the Company
expensed $11,040 and $0, respectively, of financing expenses related to
the shares to be issued for the note extension.

17,557

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 $0.35 per share. The Company issued 57,143 warrants
with an exercise price of $0.70 per share and an expiration date of May 1,
2009. The fair value of the warrants issued was $10,114. For the nine
months ended September 30, 2008 and 2007, the Company recorded $3,793 and
$2,107, 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 $0.15 per share. The Company issued
120,000 warrants with an exercise price of $0.30 per share and an
expiration date of June 21, 2009. The fair value of the warrants issued
was $17,880. For the nine months ended September 30, 2008 and 2007, the
Company recorded $6,705 and $2,980, 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 14).

-

15,000  18    (17) Convertible notes executed in
June 2007 bearing interest at 8% per annum maturing on June 29, 2009, with
a conversion price of $0.20 per share. The Company issued 100,000 warrants
with an exercise price of $0.40 per share and an expiration date of June
29, 2009. The fair value of the warrants was $21,800. For the nine months
ended September 30, 2008 and 2007, the Company recorded $8,175 and $3,633,
respectively, in financing expense related to the issuance of these
warrants.

100,000

100,000(18) Convertible note executed in
July 2007 bearing interest at 8% per annum maturing on July 2, 2009, with
a conversion price of $0.20 per share. The Company issued 100,000 warrants
with an exercise price of $0.40 per share and an expiration date of July
2, 2009. The fair value of the warrants issued was $29,800. For the nine
months ended September 30, 2008 and 2007, the Company recorded $11,175 and
$3,725, 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 $0.25 per share. The Company issued 96,000
warrants with an exercise price of $0.40 per share and an expiration date
of August 9, 2010. The fair value of the warrants was $23,040. For the
nine months ended September 30, 2008 and 2007, the Company recorded $5,760
and $1,280, respectively, in financing expense related to the issuance of
these warrants.

120,000

120,0001,334,789

1,585,000Less current maturities

(1,334,789)

(800,000)$
-
$
85,000  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 nine months ended September 30, 2008 and
2007 was $97,313 and $91,541, respectively.  NOTE 6 - CONVERTIBLE NOTES PAYABLE 
RELATED PARTIES  Convertible notes
payable  related parties at September 30, 2008 and December 31, 2007 consisted
of the following:  September 30,
2008

December 31,
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 $10.00 per share. The Company issued 500
warrants with an exercise price of $10.00 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 $10.00 per share. In April 2007, the interest
calculation was amended from simple to compound effective April 1,
2007.

7,500

7,500(3) Convertible notes executed in
February, June,  September 2004 and August 2005 with the CEO bearing
interest at an amended rate of 8% per annum with an extended maturity date
of February 28, 2009, and a conversion price of $10.00 per share. The
Company issued 1,800 warrants with an exercise price of $10.00 per share
and expiration dates of February 4, 2014, September 7, 2014 and August 16,
2015. 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(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 $10.00 per share. The Company issued 150 warrants with
an exercise price of $10.00 per share and expiration dates of August 26,
2015 and September 29, 2015. The 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  19    (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
$10.00 per share. The Company issued 500 warrants with an exercise price
of $10.00 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 $10.00 per share. The Company issued 50
warrants with an exercise price of $10.00 per share and an expiration date
of December 7, 2015. 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 $10.00 per share. The Company issued 100
warrants with an exercise price of $10.00 per share and an expiration date
of December 6, 2015. 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 $10.00 per share. The Company issued 800 warrants with
an exercise price of $10.00 per share and expiration dates of December 28,
2015 and January 9, 2016. 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 $10.00 per share. The Company issued 380
warrants with an exercise price of $10.00 per share and expiration dates
of January 18, 2016 and February 28, 2016. 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
$7.50 per share. The Company issued 50 warrants with an exercise price of
$10.00 per share and an expiration date of March 6, 2016. 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

5,000419,255

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 September 30, 2008
and 2007, accrued interest due for the convertible notes  related parties was
$112,166 and $75,644, respectively, and is included in accrued expenses in the
accompanying balance sheet. Interest expense for convertible notes payable 
related parties for the nine months ended September 30, 2008 and 2007 was
$26,145 and $29,896, respectively.  NOTE 7 - NOTES PAYABLE  Notes payable at
September 30, 2008 and December 31, 2007 consisted of the following:  20    September 30, 2008

December 31, 2007(1) One unit consisting of a $100,000
promissory note and 20,000 shares of the Companys common stock, at $1.40,
sold in May 2006. The note bears interest at 9% per annum and matured on
August 28, 2006. Because the note was not fully repaid within a twenty
(20) day grace period after the maturity date, the remaining outstanding
principal and accrued and unpaid interest was convertible into shares of
common stock of the Company at the sole option of the holder, at a
conversion price equal to the lesser of (a) $2.20 or (b) ninety
percent (90%) of the lowest VWAP, as defined, of the common stock
during the thirty (30) trading days immediately preceding the date of
conversion as quoted by Bloomberg, LP. The Company paid a placement agent
fee of $7,000 relating to the promissory note. In January 2008, the
Company executed a Forbearance Agreement with YA Global, the note holder,
whereby YA Global has agreed to forbear from exercising its rights under
the secured convertible debentures through February 27, 2008. The terms of
the Forbearance Agreement also include a reduction in the YA Global Fixed
Conversion Price to $0.065. In February 2008, the Forbearance Agreement
was further extended to May 15, 2008. In May 2008, the Company executed a
Forbearance Agreement with YA Global, the note holder, whereby YA Global
has agreed to forbear from exercising its rights under the secured
convertible debentures through October 15, 2008. The Company is pursuing
an extension.
$
100,000
$
100,000(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 25,000 bonus shares of the
Companys common stock, at $0.85, for a total of $150,000 and 150,000
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 15,000 shares of the Companys common stock, at $0.85,
in August 2006, paid an escrow agent fee of $3,000, a due diligence fee of
$7,500 and issued 5,000 shares of the Companys common stock, at $0.85, 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 46,250 extension shares
of the Companys common stock to the note holders who had open balances in
each of those months and 4,625 extension shares to the placement agent,
with the shares ranging from $0.10 to $0.435. For the month of December
2007, the Company recorded 1,875 extension shares of the Companys common
stock to the two remaining note holders who had open balances and 188
extension shares to the placement agent, at $0.11 per share. In June 2008,
the Company paid $2,289 against the two remaining notes. For the months of
January through September 2008, the Company recorded 15,959 extension
shares of the Companys common stock to the two remaining note holders who
had open balances and 1,5,96 extension shares to the placement agent, with
the shares ranging from $0.15 to $0.29. For the months of May through July
2007, the Company issued a total of 45,000 penalty shares of the Companys
common stock, ranging from $0.22 to $0.30, to all of the note holders per
the terms of the notes and 3,000 penalty shares, ranging from $0.22 to
$0.30, to the placement agent. All of the above issued shares have Rule
144 piggyback registration rights. For the nine months ended September 30,
2008 and 2007, the Company expensed $3,609 and $14,739, respectively, of
financing expenses related to the shares issued and to be issued for the
note extensions and penalties.

16,461

18,750(3)  Promissory note executed in
June 2007, bearing interest at 9% per annum, maturing on December 14,
2007.  The Company issued 10,000 warrants with an exercise price of
$0.50 per share with an expiration date of June 14, 2012. The fair value
of the warrants issued was $1,800.  For the nine months ended
September 30, 2008 and 2007, the Company recorded $0 and $1,200,
respectively, in financing expense related to the issuance of these
warrants. 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
September 30, 2008, the Company is pursuing a settlement agreement with
the note holder.

45,000

45,000  21    (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 55,000 restricted shares of common
stock, at $0.10 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 200,000 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 non-dilutable restricted shares
common stock, valued at $0.0092 per share, with Rule 144 piggyback
registration rights. For the nine months ended September 30, 2008 and
2007, the Company expensed $9,200 and $0, respectively, of financing
expenses related to the shares to be issued. In September 2008 the note
was extended to December 31, 2008.

100,000

-(8)  Promissory note executed in
January 2008, bearing interest at 18% per annum, maturing on July 31,
2008.  The Company issued 15,000 warrants with an exercise price of
$0.25 per share with an expiration date of January 31, 2013. The fair
value of the warrants issued was $4,350. For the nine months ended
September 30, 2008 and 2007, the Company recorded $4,350 and $0,
respectively, in financing expense related to the issuance of these
warrants.  In July 2008 the note was extended to December 31,
2008.

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 14), 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 nine months ended September 30, 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 14), 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 nine months ended September 30, 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 14), 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 nine months
ended September 30, 2008 and 2007, the Company expensed $6,200 and $0,
respectively, of financing expenses related to the shares to be issued.

100,000

-  22    (12) One unit, sold in April 2008 per
the terms of a term sheet executed with an investor group in January 2008
(see Note 14), 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 $2,500, related to the unit sold, as financing expense.
The Company recorded 62,000 shares of restricted common stock, with the
shares valued at $0.017 for 3,100 shares and $0.018 for 3,100 shares,
respectively, related to the unit sold. For the nine months ended
September 30, 2008 and 2007, the Company expensed $1,085 and $0,
respectively, of financing expenses related to the shares to be issued.

25,000

-(13) One unit, sold in July 2008 per
the terms of a term sheet executed with an investor group in January 2008
and amended in May 2008 (see Note 14), with each unit consisting of a 10%
promissory note of $25,000, maturing three years from the execution date
and with a 10% discount rate, and 82,000 non-dilutable (for one year)
restricted shares of the Companys common stock, at market price. The
Company expensed the discount rate of $2,500, related to the unit sold, as
financing expense. The Company recorded 82,000 shares of restricted common
stock, with the shares valued at $0.023, related to the units sold. For
the nine months ended September 30, 2008 and 2007, the Company expensed
$1,886 and $0, respectively, of financing expenses related to the shares
to be issued.

25,000

-(14) Six units, sold in August 2008
per the terms of a term sheet executed with an investor group in January
2008 and amended in May 2008 (see Note 14), with each unit consisting of a
10% promissory note of $25,000, maturing three years from the execution
date and with a 10% discount rate, and 82,000 non-dilutable (for one year)
restricted shares of the Companys common stock, at market price. The
Company expensed the discount rate of $15,000, related to the units sold,
as financing expense. The Company recorded 492,000 shares of restricted
common stock, with the shares valued at $0.011 for 164,000 shares and
$0.019 for 328,000 shares, related to the units sold. For the nine months
ended September 30, 2008 and 2007, the Company expensed $8,036 and $0,
respectively, of financing expenses related to the shares to be issued.

150,000

-(15) Two units, sold in September
2008 per the terms of a term sheet executed with an investor group in
January 2008 and amended in May 2008 (see Note 14), with each unit
consisting of a 10% promissory note of $25,000, maturing three years from
the execution date and with a 10% discount rate, and 82,000 non-dilutable
(for one year) restricted shares of the Companys common stock, at market
price. The Company expensed the discount rate of $5,000, related to the
unit sold, as financing expense. The Company recorded 164,000 shares of
restricted common stock, with the shares valued at $0.017, related to the
units sold. For the nine months ended September 30, 2008 and 2007, the
Company expensed $2,788 and $0, respectively, of financing expenses
related to the shares to be issued.

50,000

-2,011,461

281,250Less current maturities

(311,461)

(281,250)$
1,700,000
$
-  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 nine months ended September 30, 2008 and 2007 was $126,861
and $23,155, respectively.  23   NOTE 8 - NOTES PAYABLE  RELATED PARTIES  Notes payable  related
parties at September 30, 2008 and December 31, 2007 consisted of the
following:  September 30, 2008

December 31, 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(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 20,000
warrants with an exercise price of $1.30 per share and an expiration date
of May 25, 2011. The fair value of the warrants issued was $24,300.

100,000

100,000(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 8,800
warrants with an exercise price of $0.50 per share and an expiration date
of February 21, 2012. The fair value of the warrants issued was $3,758.
 For the nine months ended September 30, 2008 and 2007, the Company
recorded $0 and $3,758, 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 nine months ended September 30, 2008 and
2007 was $42,164 and $39,103, respectively.  NOTE 9 - CONVERTIBLE SECURED NOTES PAYABLE  Convertible secured
notes payable consisted of the following at September 30, 2008 and December 31,
2007:  September 30, 2008

December 31, 2007YA Global (formerly Cornell)
$
427,447
$
427,447Highgate House Funds, Ltd.

244,720

244,720Total convertible secured notes payable
$
672,167
$
672,167   24   On April 27, 2005, the Company entered into an amended and
restated 8% secured convertible debenture with YA Global Investments, LP,
formerly Cornell Capital Partners, LP, (Amended YA Global Debenture) in the
amount of $1,024,876, which terminated the two $500,000 debentures entered into
with YA Global in December 2004 and January 2005.  The new debenture
entitles YA Global, at its option, to convert, the debenture, plus accrued
interest, into shares of the Companys common stock at a price per share equal
to the lesser of (i) the greater of $2.50 or an amount equal to 120% of the
initial bid price or (ii) an amount equal to 80% of the lowest Volume Weighted
Average Price, as defined, of the Companys common stock for the last five
trading days immediately preceding the conversion date. If not converted,
the entire principal amount and all accrued interest shall be due on the second
year anniversary of the debenture.  The Company, at its option, may redeem,
with fifteen days advance written notice, a portion or all the outstanding
convertible debentures.  The redemption shall be 110% of the amount
redeemed plus accrued interest remaining for the first six months of the
executed debenture and after that time the redemption is 120% of the amount
redeemed plus accrued interest remaining.  The conversion feature and the
Companys optional early redemption right have been bundled together as a single
compound embedded derivative liability, and fair valued using a layered
probability-weighted cash flow approach.  On April 27, 2005, the
Company entered into a Securities Purchase Agreement (SPA) with Highgate House
Funds, Ltd. (Highgate) pursuant to which the Company received $750,000 in
exchange for two 7% secured convertible debentures amounting to $750,000 that
mature in two (2) years, and the issuance of 15,000 shares of the Companys
common stock. The first debenture funding occurred upon the signing of the SPA
and the second debenture funding occurred upon the filing of the registration
statement.  The Company has agreed to reserve for issuance of 200,000
shares of the Companys common stock, which may be adjusted as agreed upon by
the parties, to be issued to the debenture holder upon conversion of accrued
interest and liquidated damages and additional shares of common stock required
to be issued to the debenture holder in accordance with the SPA. Additionally,
in accordance with the SPA, the Company is required to maintain in escrow and
register with the SEC five times the number of shares of common stock that would
be needed to satisfy the full conversion of all such convertible debentures
outstanding and to issue additional shares as needed if the number of shares in
escrow becomes less than that required.  Further, following a notice of
conversion, the investors may sell escrowed shares in the registered
distribution before they are actually delivered, but, the investors will not
engage in short sales.  The terms of the secured debentures contain a
limitation that precludes conversion when the amount of shares already owned by
YA Global and Highgate, plus the amount of shares still outstanding to be
converted, would exceed 4.99%.  The limitation may be waived by YA Global
upon 61 days advance written notification to the Company.In addition, on the third anniversary of the
issuance date of the YA Global debenture and second anniversary of the issuance
dates of the Highgate debentures, any outstanding principal or interest owed on
the secured debentures will be converted into stock without any applicable
limitation on the number of shares that may be converted.  The aforementioned
debentures bear interest at a rate of 7% per annum, compounded monthly, and
expire 2 years after the date of issuance.  The debentures are convertible
into shares of common stock at a conversion price equal to the lesser of (i)
120% of the average closing bid price for the 5 trading days immediately
preceding the closing date; or (ii) 80% of the lowest closing bid price for the
5 trading days immediately preceding the date of conversion.  In addition,
the Company has the right to redeem the debentures, at any time prior to its
maturity, upon 3 business days prior written notice to the holder.  The
redemption price is equal to 120% of the face amount redeemed plus accrued
interest.  In the event that the Company redeems the debentures within 180
days after the date of issuance, the redemption price shall be 110% of the face
amount redeemed plus accrued interest.  The conversion feature and the
Companys optional early redemption right have been bundled together as a single
compound embedded derivative liability, and fair valued using a layered
probability-weighted cash flow approach.  In July 2006, the
Company agreed to an anti-dilution adjustment with YA Global and Highgate
whereby the conversion price of the secured convertible debentures was reduced
to a fixed per share price equal to the lower of $0.85 or 80% of the lowest
closing bid price during the five days preceding the conversion date.  The SPA contains
certain negative covenants concerning assets, ownership, management and debt.
The Company has paid $75,000 for structuring fees and expenses and $5,000 for
commitment fees related to this SPA.  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 nine months ended September 30, 2008
and 2007 was $38,592 and $66,326, respectively.  25   In January 2008, the Company executed a Forbearance Agreement with
YA Global whereby YA Global and Highgate have agreed to forbear from exercising
their rights under the secured convertible debentures through February 27, 2008.
The terms of the Forbearance Agreement record the amount due to YA Global and
Highgate by the Company to be $1,214,093, which includes principal, interest and
the redemption premium. The terms also include a reduction in the YA Global and
Highgate Fixed Conversion Price to $0.065. In connection with this Agreement,
the Company issued to YA Global 500,000 contingency warrants with an exercise
price of $0.15 per share. The warrants are exercisable for a period of five (5)
years from date of issuance. The warrants are held in escrow and will only be
released to YA Global if the total amount due by the Company is not paid to YA
Global by February 29, 2008.  In February 2008, the
Forbearance Agreement was amended and extended to May 15, 2008, including the
terms of the contingency warrants. Per the terms of the amendment, YA Global and
Highgate shall receive an additional 105 days of interest for a total amount of
$28,328.84 additional interest. The additional interest plus a security deposit
of $171,671.16 were paid to YA Global and Highgate per the terms of a debt
assignment agreement executed with an investor group in February 2008, for a
total amount paid to YA Global of $200,000. The security deposit will be applied
to the amount due YA Global and Highgate if the remaining balance due is paid in
full by May 15, 2008. Otherwise, the security deposit will be applied to YA
Global as liquidated damages.  In May 2008, the
Company executed a Forbearance Agreement with YA Global that supersedes the
January 2008 agreement and February 2008 amendment, whereby YA Global and
Highgate have agreed to forbear from exercising their rights under the secured
convertible debentures through October 15, 2008.  Per the terms of the May
2008 Forbearance Agreement, the Company agreed to use its best efforts to make
available sufficient authorized shares of its common stock to effect conversion
of the entire amount outstanding, to YA Global and Highgate, by October 15,
2008. The terms of the contingency warrants became applicable to the terms of
the May 2008 Forbearance Agreement.  Additionally, per the terms of the
agreement, the Companys investor group paid $75,000 to YA Global in May 2008
which is further broken down as:  · $17,268 (additional
prepaid interest to YA Global from May 15, 2008 to October 15, 2008)  · $7,181 (additional
prepaid interest to Highgate from May 15, 2008 to October 15, 2008)  · $27,840 (accrued
interest due on the Highgate debenture dated April 26, 2005)  · $22,711 (non-refundable
extension payment that will be applied to the redemption amount if the remaining
balance is paid in full by October 15, 2008)  The payment of the
accrued interest of $27,840 for the Highgate April 26, 2005 debenture reduced
the total amount of our indebtedness to YA Global and Highgate to $1,186,253 as
agreed to in the May 2008 Forbearance Agreement.  The Company is in
discussions with YA Global regarding an extension to the May 2008 Forbearance
Agreement, which was in effect until October 15, 2008. The Company and YA Global
are negotiating an extension which would extend and amend the Forbearance
Agreement to the end of the second quarter of 2009, but a final agreement has
not yet been completed.  Conversions to
Common Stock  For the nine months
ended September 30, 2008, YA Global had no conversions.  For the nine months
ended September 30, 2007, YA Global converted $407,500 of the April 27, 2005
debenture into 2,703,749 shares of the Companys common stock, pursuant to the
terms of the Securities Purchase Agreement. The conversion price ranged from
$0.096 to $0.34 per share.  For the nine months
ended September 30, 2008, Highgate had no conversions.  For the nine months
ended September 30, 2007, Highgate converted $20,279.64 of the May 6, 2005
debenture into 59,046 shares of the Companys common stock, pursuant to the
terms of the Securities Purchase Agreement. The conversion price was $0.34 per
share.  26   NOTE 10 -
FINANCIAL INSTRUMENTS  The secured convertible
notes payable are hybrid instruments which contain an embedded derivative
feature which would individually warrant separate accounting as a derivative
instrument under SFAS No. 133. The embedded derivative feature has been
bifurcated from the debt host contract, referred to as the "Compound Embedded
Derivative Liability". The embedded derivative feature includes the conversion
feature within the note and an early redemption option. The value of the
embedded derivative liability was bifurcated from the debt host contract and
recorded as a derivative liability, which resulted in a reduction of the initial
carrying amount (as unamortized discount) of the notes. The unamortized discount
is amortized to interest expense using the effective interest method over the
life of the notes, or 12 months.  The secured convertible
debentures issued to YA Global and Highgate have been accounted for in
accordance with SFAS No. 133 and EITF 00-19. The Company has identified the
above instruments having derivatives that require evaluation and accounting
under the relevant guidance applicable to financial derivatives.  These
compound embedded derivatives have been bifurcated from their respective host
debt contracts and accounted for as derivative liabilities in accordance with
EITF 00-19.  When multiple derivatives exist within convertible notes, they
have been bundled together as a single hybrid compound instrument in accordance
with SFAS No. 133 Derivatives Implementation Group Implementation Issue No.
B-15, Embedded Derivatives: Separate Accounting for Multiple Derivative
Features Embedded in a Single Hybrid Instrument. The compound embedded
derivatives within the secured convertible notes have been recorded at fair
value at the date of issuance; and are marked-to-market each reporting period
with changes in fair value recorded to the Companys statement of operations as
Derivative instrument expense, net.  The Company has utilized a third
party valuation consultant to fair value the compound embedded derivatives using
a layered discounted probability-weighted cash flow approach. The fair value of
the derivative liabilities are subject to the changes in the trading value of
the Companys common stock, as well as other factors.  As a result, the
Companys financial statements may fluctuate from quarter-to-quarter based on
factors, such as the price of the Companys stock at the balance sheet date and
the amount of shares converted by note holders. Consequently, the financial
position and results of operations may vary from quarter-to-quarter based on
conditions other than operating revenues and expenses.  NOTE 11 - STOCKHOLDERS DEFICIT  Common Stock  On August 8, 2008, the
shareholders of the Company authorized a 1 for 10 reverse stock split. All share
and per share data in the financial statements and related notes have been
restated to give retroactive effect to the reverse stock split.  Issuance of Stock
for Services  In August 2005, the
Company entered into a retainer agreement with an attorney, whereas the attorney
will act as in house counsel for the Company with respect to all general
corporate matters.  The agreement is at will and required a payment of
1,000 shares of common stock, valued at $9.00 per share, due upon execution.
 The certificate for the 1,000 shares of common stock was issued in October
2005.   Commencing on September 1, 2005, the fee structure also
includes a monthly cash fee of $1,000 and the monthly issuance of 250 shares of
common stock, valued at market.  For the nine months ended September 30,
2008, the Company recorded 2,250 shares of common stock, valued at $485, all of
which has been expensed as legal fees, related to the agreement.  In December 2007, the
Company executed a consulting agreement with a financial advisor whereby the
consultant will provide introduction of potential investors to the Company. As
compensation for the services, the consultant shall receive a monthly fee in the
amount of $5,000. The agreement can be terminated by either party by providing
the other party with thirty days advance written notice. The consultant received
500,000 shares of the Companys common stock, valued at $0.065 per share.
 The shares are restricted and have piggyback registration rights upon the
next registration statement filed by the Company.  Issuance of Stock
for Financing  In January 2008, the
Company recorded 100,000 shares of common stock, valued at $0.092 per share,
issuable to an individual as consideration for a promissory note executed in
January 2008 (see Note 7). The shares have Rule 144 piggyback registration
rights. For the nine months ended September 30, 2008, the Company expensed
$9,200 of financing expenses related to the shares.  27   In accordance with a term sheet executed with an investment firm
in January 2008, the Company sold 59 units to twenty-two 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. In April 2008, the Company recorded 62,000 shares of common
stock, valued at $0.017 to $0.018 per share, issuable to two investors per the
terms of the agreement.  In May 2008, in accordance with an amendment to
the term sheet the Company signed with the investor firm, the Company recorded
1,180,000 shares of the Companys common stock, valued at $0.02 per share, to
reflect the retroactive increase in the shares to be issued to the investors who
purchased units as of the date of the amendment.  The increase recorded was
20,000 shares for each unit sold (see Note 14). In July 2008, the Company
recorded 82,000 shares of common stock, valued at $0.023 per share, issuable to
one investor per the terms of the agreement. In August 2008, the Company
recorded 492,000 shares of common stock, valued at $0.011 to $0.019 per share,
issuable to two investors per the terms of the agreement.  In September
2008, the Company recorded 164,000 shares of common stock, valued at $0.017 per
share, issuable to one investor per the terms of the agreement. All of the
shares recorded relating to the term sheet are non-dilutable and have Rule 144
piggyback registration rights.  For the nine months ended September 30,
2008, the Company expensed $127,739 of financing expenses related to the
shares.  Warrants  At September 30, 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:
6,667 warrants with an exercise price of $5.50 per share, 40,000 warrants with
an exercise price of $2.50 per share, 4,500 warrants with an exercise price of
$2.00 per share, 56,250 warrants with an exercise price of $1.60 per share,
 57,143 warrants with an exercise price of $0.70 per share,  446,000
warrants with an exercise price of $0.40 per share and 120,000 warrants with an
exercise price of $0.30 per share. 383,810 warrants have a two year exercise
term, 100,500 warrants have a three year exercise term and 246,250 warrants have
a five year exercise term.  At September 30, 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 $10.00 per share and have an exercise term of ten years.
 At September 30, 2008, 3,100 warrants will expire in the year 2013, 1,650
warrants expire in the year 2014, 2,170 warrants in the year 2015 and 1,130
warrants in the year 2016.  At September 30, 2008,
the Company issued warrants related to its notes payable.  The warrants
entitle the note holder to purchase the Companys common stock at $0.25 per
share for 15,000 warrants and $0.50 per share for 10,000 warrants with an
exercise term of five years.  At September 30, 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 $0.50 per share for 8,800 warrants and $1.30 per share for a 20,000
warrants with an exercise term of five years.  NOTE 12 - STOCK BASED COMPENSATION  In September 2004, the
stockholders approved the Equity Incentive Plan for its employees (Incentive
Plan), effective April 1, 2004.  Of the total authorized for issuance at
September 30, 2008, 8,572,703 shares were available for future issuance.  2004 Equity
Incentive Plan  The number of shares
authorized for issuance under the Incentive Plan was increased to 1,000,000 in
September 2006, 1,500,000 in March 2007, 2,000,000 in June 2007 and 10,000,000
in December 2007, by unanimous consent of the Board of Directors. In August
2008, the Company repurchased, at no cost, employee stock options totaling
1,111,791 shares of common stock from twelve employees as a result of a
voluntary tender by the employees.  The exercise price of the cancelled
options ranged from $0.15 per share to $10.00 per share.  Option shares totaling
142,500 vest equally over a three year period beginning one-year from the date
of grant, option shares totaling 200,000 vest in one-third increments of six
months each over an eighteen month period from the date of grant and option
shares totaling 1,084,797 vest over a one-year period from the date of
grant.  The table below
summarizes the Companys Incentive Plan stock option activity through September
30, 2008:  28    Number of
Option Shares

Exercise Price
Range Per Share

Weighted Average Exercise
Price

Weighted Average Remaining
(in years)

Aggregate Intrinsic
Value (in thousands)Balance,
December 31, 2005
183,000
$
10.00
$
10.000


$
---Granted
451,455
$
0.70 - $ 1.00
$
0.920


$
---Balance,
December 31, 2006
634,455
$
0.70 - $ 1.00
$
3.540


$
---Granted
1,904,633
$
0.08 - $ 5.00
$
0.221


$
---Balance,








---December
31, 2007
2,539,088
$
0.08 - $ 10.00
$
1.050


$
---Cancelled
1,111,791
$
0.15 - $ 10.00
$
1.823


$
---Balance,
September 30, 2008
1,427,297
$
0.08 - $ 10.00
$
0.448


$
---Vested and
Exercisable, September 30, 2008
1,275,184


$
0.448


$
---  As of September 30,
2008, an aggregate of 1,427,297 options were outstanding under the incentive
plan.  The exercise price for 37,500 options is $10.00, for 105,000 options
is $1.00, for 9,231 is $0.375, for 15,705 is $0.24, for 16,388 options is $0.23,
for 325,577 options is $0.20, for 171,131 options is $0.17, for 259,743 options
is $0.15 and 487,022 options is $0.08. As of September 30, 2007, an aggregate of
1,839,567 options were outstanding under the incentive plan.  The exercise
price for 183,000 options was $10.00, for 10,000 options was $5.00, for 277,500
options was $1.00, for 34,810 options was $0.99, for 40,543 options was $0.85,
for 49,231 options was $0.70, for 49,372 options was $0.698, for 202,308 was
$0.50, for 55,812 was $0.45, for 91,898 was $0.375, for 78,526 was $0.24, for
155,184 options was $0.23, for 164,808 options was $0.20, for 186,832 options
was $0.17 and for 259,743 options was $0.15.  At September 30, 2008, there
were 1,275,184 vested incentive plan stock options outstanding of which 446,436
options are exercisable at $0.08, 259,743 options are exercisable at $0.15,
171,131 options are exercisable at $0.17, 240,161 options are exercisable at
$0.20, 16,388 options are exercisable at $0.23, 15,705 options are exercisable
at $0.24, 9,231 options are exercisable at $0.375, 78,750 options are
exercisable at $1.00 and 37,639 options are exercisable at $10.00.  As of September 30,
2008, there was $33,900 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.  The following table
summarizes information concerning outstanding and exercisable Incentive Plan
options as of September 30, 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$10.000

37,500

7.00
$
10.000

37,639
$
10.000$1.000

105,000

9.00

1.000

78,750

1.000$0.080 - $0.375

1,284,797

10.00

0.143

1,158,795

0.1431,427,297

8.67
$
0.448

1,275,184
$
0.448  Non-Incentive Plan
Stock Option Grants  Since December 31,
2005, the Company has outstanding an aggregate of 761,889 non-plan,
non-qualified options for non-employees with 760,000 exercisable at $3.60 and
1,889 exercisable at $9.00 yielding a weighted average exercise price of $3.613
and no outstanding incentive options outside of the Plan.  29   NOTE 13 - OTHER (INCOME)
EXPENSE  Other (income) expense
consisted of the following at September 30, 2008 and 2007:  September 30, 2008

September 30, 2007Interest income
$
(8,889)
$
-Interest expense

293,788

12,090Financing expense

657,220

471,258Derivative instruments (income) expense, net

(998,504)

26,275Forgiveness of debt (*)

(237,250)

-Total other (income) expense
$
(293,635)
$
509,623  (*) For the nine months
ended September 30, 2008 and 2007, the Company recorded forgiveness of debt from
settlements with certain note holders and trade vendors in the amount of
$238,750 and $0, respectively.  NOTE 14 - COMMITMENTS AND
CONTINGENCIES  Payroll
Taxes  As of September 30,
2008, the Company owes $53,481 of payroll taxes, of which approximately $45,000
are delinquent from the year ended December 31, 2003. The Company has also
recorded $32,462 of related estimated penalties and interest on the delinquent
payroll taxes.  Although the Company has not entered into any formal
repayment agreements with the respective tax authorities, management plans to
make payment as funds become available.  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 $6,356 with no rent
payments due for the months of February 2008, February 2009 and February 2010.
In September 2008, the Company commenced discussions with the landlord to reduce
the rent by 50%, effective September 2008, for a period of six months.  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.  30   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 unit sold. The investor
group advanced funds totaling $50,000 in February 2008, $280,000 in March 2008,
$74,070 in April 2008, $80,000 in May 2008, $95,000 in June 2008 and $125,000 in
July 2008, respectively, to the Company. The funds being held in escrow are
classified as restricted cash on the balance sheets.  In May 2008, the
Company executed an amendment to the term sheet whereby the number of restricted
and non-dilutable shares of the Companys common stock to be issued per unit
sold was increased from 62,000 shares to 82,000 shares. The increase was applied
retroactively to those investors who purchased units as of the date of the
amendment. In accordance with the amendment, the Company recorded 1,180,000
shares of the Companys common stock, valued at $0.02 per share, and computed as
20,000 shares multiplied by 59 units to reflect the retroactive increase in the
shares to be issued to the investors who purchased units as of the date of the
amendment (see Note 14). In July 2008, the Company sold 1 unit to the investor
group for a total of $25,000 in promissory notes with a discount of $2,500. The
Company shall issue 82,000 shares of common stock in relation to the unit sold.
In August 2008, the Company sold 6 units to the investor group for a total of
$150,000 in promissory notes with a discount of $15,000. The Company shall issue
492,000 shares of common stock in relation to the units sold. In September 2008,
the Company sold 2 units to the investor group for a total of $50,000 in
promissory notes with a discount of $5,000. The Company shall issue 164,000
shares of common stock in relation to the units sold.  In
February 2008, the Company executed a Debt Assignment and Security Designation
Agreement with the investor group whereby the Company has assigned the debt owed
as convertible secured notes payable to YA Global and Highgate to the investor
group. The investor group paid a total of $200,000 to YA Global and Highgate in
February 2008 for additional interest and the security deposit owed in relation
to the extended and amended forbearance agreement the Company and YA Global
executed in February 2008 and $75,000 in May 2008 for additional interest,
partial accrued interest and an extension fee owed in relation to the new
forbearance agreement the Company and YA Global executed in May 2008 (see Note
9).  In
February 2008, the Company executed an Assignment and Settlement Agreement with
a trade vendor whereby the Company has assigned the debt owed to the vendor, in
the amount of $48,750, to the investor group.  Per the terms of the
Settlement Agreement, the Company remitted $12,500 to the vendor as full
settlement of its indebtedness to the vendor.  In
February 2008, the Company assigned a convertible promissory note in the amount
of $15,000 to the investor group and the note holder agreed to an amount of
$3,000 as full settlement of the note. The settlement amount was paid to the
note holder by the investor group in February 2008 (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.  In
July 2008, the Company and a note holder agreed upon a settlement whereby a
convertible promissory note in the amount of $100,000 shall be assigned to the
investor group by the Company and the investor group shall repay the agreed upon
settlement amount to the note holder, in installments, through February 2009.
The investor group made payments of $10,000 in July 2008 and $5,000 in September
2008 to the note holder (see Note 5).  31   In September 2008, the Company executed an Assignment and
Settlement Agreement with a trade vendor whereby the Company has assigned the
debt owed to the vendor, in the amount of $21,400, to the investor group.
 Per the terms of the Settlement Agreement, the investor group remitted
$5,000 to the vendor as full settlement of its indebtedness to the vendor.  Due to Factor  In March 2007, the
Company entered into a sale and subordination agreement with a factoring firm
whereby the Company sold its rights to two invoices, from February 2007 and
March 2007, totaling $470,200 to the factor.  Upon signing the agreement
and providing the required disclosures, the factor remitted 65%, or $144,440, of
the February 2007 invoice and a certain percentage of $53,010 of the March 2007
invoice to the Company.  The Company paid a $500 credit review fee to the
factor relating to the agreement.  Per the terms of the agreement, once the
Companys client remits the invoice amount to the factor, the factor deducts a
discount fee from the remaining balance of the factored invoices and forwards
the net proceeds to the Company.  The discount fee is computed as a
percentage of the face amount of the invoice as follows: 2.25% fee for invoices
paid within 30 days of the down payment date with an additional 1.125% for each
15 day period thereafter. In September 2007, the February 2007 factored invoice
was deemed uncollectible and was written off as bad debt expense. In December
2007, the March 2007 factored invoice was deemed uncollectible and was written
off as bad debt expense. In February 2008, the Company and the factor have
agreed to a total settlement amount of $75,000 to be paid by the Company to the
factor in September 2008 unless both parties mutually agree to extend the due
date. In September 2008, the Company and the factor reached a verbal agreement
to extend the due date to December 31, 2008. As of September 30, 2008, the
balance due to the factor by the Company was $209,192 including interest.  NOTE 15 - ANNUAL MEETING OF
SHAREHOLDERS  The Companys annual
meeting of shareholders was held on August 8, 2008.  At the annual meeting,
the Company's shareholders voted upon the following matters:  (1)  The election
of five members to the Company's Board of Directors to hold office until the
Company's next Annual Meeting of Stockholders in 2009 or until each Directors
successor is duly elected and qualified; and  (2)  The
ratification of the appointment of Li & Company, PC, as the Company's
independent certified public accountants; and  (3)  The enactment
of a one for ten reverse stock split (1:10), to be effective as of the filing of
an amendment to the Company's Articles of Incorporation with the New Jersey
Secretary of State and upon the receipt of regulatory approval.  Per the results
recorded on the Report of Inspector of Election, Mark L. Kay, Robert Denn, Mark
Corrao, Ramarao Pemmaraju and George Waller were elected as the Companys Board
of Directors; Li & Company, PC was ratified as the Companys independent
certified public accountants; and a one for ten reverse stock split (1:10) was
approved. On September 30, 2008, the New Jersey Secretary of State approved the
Companys Restated Certificate of Incorporation. On October 31, 2008, the
Company received regulatory approval for the effectuation of the one for ten
reverse stock split (1:10) at the open of business on November 3, 2008 at which
time the Companys new ticker symbol will be SFOR.  NOTE 16 - CONCENTRATION OF CREDIT
RISK  (i) Customers and
Credit Concentrations  Five (5) customers
accounted for 30.0%, 19.2%, 15.3%, 9.5% and 8.5% of net sales for the nine
months ended September 30, 2008 and two (2) customers accounted for 51.4% and
26.3% of the total accounts receivable as of September 30, 2008, respectively.
Three (3) customers accounted for 75.4%, 7.9% and 4.0% of net sales for the nine
months ended September 30, 2007 and three (3) different customers accounted for
86.6%, 7.0% and 5.0% of the total accounts receivable as of September 30, 2007,
respectively.  NOTE 17 - SUBSEQUENT EVENTS  Lease
Agreement  In October 2008, the
Company executed a lease termination agreement for certain office equipment. The
Company and the leasing company executed a new one-year lease effective November
2008 for the equipment. Per the terms of the new lease, the Company shall make
twelve monthly payments of $93.95 plus tax including a $1 purchase option upon
lease termination.   32   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 year
ended December 31, 2007 as filed with the United States Securities and Exchange
Commission (SEC) on March 31, 2008.  The following discussion and analysis
should be read in conjunction with the financial statements of StrikeForce
Technologies, Inc., included herewith. This discussion should not be construed
to imply that the results discussed herein will necessarily continue into the
future, or that any conclusion reached herein will necessarily be indicative of
actual operating results in the future. Such discussion represents only the best
present assessment of our management.  Background  StrikeForce Technologies, Inc. (hereinafter
referred to as we, us, our, SFT, StrikeForce and the Company) is a
software development and services company that offers a suite of integrated
computer network security products using proprietary technology. We were
organized in August 2001 under New Jersey law as Strike Force Technical
Services, Inc. We initially conducted operations as an integrator and reseller
of computer hardware and telecommunications equipment and services. In December
2002, and formally memorialized by an agreement in September 2003, we acquired
certain intellectual property rights and patent pending technology from
NetLabs.com including the rights to further develop and sell their principal
technology and certain officers of NetLabs.com joined StrikeForce as officers
and directors of our Company. We subsequently changed our name to StrikeForce
Technologies, Inc., under which we had conducted our business since August 2001.
Our strategy is to develop and exploit our suite of network security products
for customers in the corporate, financial, government, insurance, e-commerce and
consumer sectors. We plan to grow our business primarily through this channel
and also from internally generated sales, rather than by acquisitions. We have
no subsidiaries and we conduct our operations from our corporate office in
Edison, New Jersey.  The Company owns the exclusive right to
license and develop various identification protection software products to
protect computer networks from unauthorized access and to protect network owners
and users from identity theft. The Company has developed a suite of
products partly based upon the exclusive license and the Company is seeking to
commercially exploit the products in the areas of financial services,
e-commerce, corporate, government and consumer sectors. We are a
development stage business and have had nominal revenues since our formation. On
August 3, 2005 the Companys registration statement on Form SB-2 was declared
effective by the Securities and Exchange Commission and on December 14, 2005 the
Company received its clearance for quotation on the Over-The-Counter Bulletin
Board. On November 2 2006, the Company filed a Post-Effective Amendment to its
Form SB-2 Registration Statement with the SEC.  The SEC declared the
Companys Post-effective Amendment effective on November 8, 2006.  We began our operations in 2001 as a
reseller and integrator of computer hardware and iris biometric technology. We
derived the majority of our revenues as an integrator from the time we started
our operations through the first half of 2003. In December 2002, upon the
acquisition of the licensing rights to certain intellectual property and patent
pending technology from NetLabs.com, we shifted the focus of our business to
developing and marketing our own suite of security products. Based upon the
acquired licensing rights and additional research and development, the Company
has now developed various identification protection software products to protect
computer networks from unauthorized access and to protect network owners and
users from identity theft. The Company is seeking to commercially exploit
the products in the areas of financial services, e-commerce, corporate,
government, insurance and consumer sectors. We have had increasing nominal
revenues since our formation.  We have maintained our relationship with
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.  33   We completed the
development of our ProtectID® platform at the end of June 2006 and we completed
the core development of our keyboard encryption and anti-keylogger product,
GuardedID®, in December 2006, which is currently being sold and distributed. We
seek to locate customers in a variety of ways. These include contracts primarily
with value added resellers and distributors (both inside the United States and
globally), direct sales calls initiated by our internal staff, exhibitions at
security and technology trade shows, through the media, consulting agreements
and through our own and agent relationships. Our sales generate revenue either
as an Original Equipment Manufacturer (OEM) model, through a Hosting/License
agreement, bundled with other companys products or through direct purchase by
customers. We price our products for hosted consumer transactions based on the
number of transactions in which our software products are utilized. We also
price our products for business applications based on the number of users. These
pricing models provide the Company with one-time, monthly, quarterly and yearly
recurring revenues. We are also generating revenues from annual maintenance
contracts, renewal fees and project an increase in revenues based upon the
execution of various agreements that we have recently closed and are being
implemented.  We generated all of our 2008 and 2007
revenues of $211,254 and $623,696, respectively from the sales of our security
products. $485,274 of our 2007 revenues were deemed uncollectible and were
charged off in the third and fourth quarters of 2007. We market our products to
financial service firms, e-commerce companies, government agencies and the
enterprise market in general and with virtual private networks, as well as
technology service companies that service all the above markets. We seek such
sales through our own direct efforts and primarily through distributors,
resellers and third party agents. We are also seeking to license the technology
as original equipment with computer hardware and software manufacturers. We are
engaged in production installations and pilot projects with various
distributors, resellers and direct customers, as well as having reached
additional reseller agreements with strategic vendors globally. Our GuardedID®
product is also being sold directly to consumers, primarily through the Internet
as well as distributors, resellers, third party agents and potential Original
Equipment Manufacturer ("OEM") agreements by bundling GuardedID® with their
products, which could provide a value-add to their own products and
offerings.  We have incurred substantial losses since
our inception. We believe that our products provide a cost-effective and
technologically competitive solution to address the problems of network security
and identity theft in general. There can be no assurance, however, that our
products will continue to gain acceptance in the commercial marketplace or that
one of our competitors will not introduce technically superior products.
 The products that we offer to customers are discussed in Item 1,
Description of Business, in 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 ProtectID® and or GuardedID® into their own product lines. These
would include providers of networking software and manufacturers of computer and
telecommunications hardware and software that provide managed services, as well
as all markets interested in increasing the value of their products and
packages, such as financial services software, anti-virus and identity theft
product companies.  Our primary target markets include
financial services such as banks, insurance companies and savings institutions,
e-commerce based services companies, telecommunications and cellular carriers,
technology software companies, government agencies and consumers. For the near
term, we are narrowly focusing our concentration on short sales-cycle customers
and strategic problem areas, such as where compliance with government
regulations are key, stolen passwords used to acquire private information
illegally, as well as remote users for medium to large size companies. Because
we anticipate growing market demand, we are developing a sizeable global
reseller and distribution channel as a strategy to generate, manage and fulfill
demand for our products across market segments, minimizing the requirement for
an increase in our staff. We intend to minimize the concentration on our initial
direct sales efforts in the future as our distribution and reseller channels
develop globally.  We intend to generate revenue through fees
for ProtectID® and ValidateID, based on consumer volumes of usage in the
e-commerce and financial services markets, one time per person fees in the
enterprise markets, set-up and recurring transaction fees when the product is
hosted, yearly maintenance fees and other one-time fees. GuardedID® pricing is
for an annual license and we discount for volume purchases. GuardedID® pricing
models, especially when bundling through OEM contracts, include monthly and
quarterly recurring revenues. We also provide our clients a choice of operating
our software internally by licensing or through our hosting service. GuardedID®
requires a download on each and every computer it protects, whether for
employees or consumers.  34   Use of
Estimates  Management's Discussion and Analysis of
Financial Condition is based upon our financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. When preparing our financial statements, we make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reporting amounts of revenues and expenses
during the reported period. Significant estimates include, but are not limited
to, the estimated useful lives of property and equipment and website development
costs. Actual results could differ from those estimates.  Results of Operations  THREE MONTHS ENDED SEPTEMBER 30, 2008
COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2007  Revenues for the three months ended
September 30, 2008 were $96,009 compared to $70,364 for the three months ended
September 30, 2007, an increase of $25,645 or 36.5%. The increase in revenues
was primarily due to the sales of our newly developed GuardedID® keyboard
encryption and anti-keylogger technology, service fees and the renewal of
several software maintenance plans related to the sales of our software.  Revenues generated consisted of hardware
and software sales, services and maintenance sales, revenue from sign on fees
and recurring transaction revenues. Hardware sales for the three months ended
September 30, 2008 were $20,434 compared to $0 for the three months ended
September 30, 2007, an increase of $20,434. The increase in hardware revenues
was primarily due to the increase in the Companys sales of our
one-time-password token key-fobs. Software, services and maintenance sales for
the three months ended September 30, 2008 were $20,910 compared to $33,515 for
the three months ended September 30, 2007, a decrease of $12,605. The decrease
in software, services and maintenance revenues was primarily due to the renewal
of several maintenance plans related to our software sales in 2007. Sign on fees
for access to our hosted service provider to utilize our ASP transaction model
amounted to $0 for the three months ended September 30, 2008 compared to $2,000
for the three months ended September 30, 2007, a decrease of $2,000. The
decrease was due to the reduction in signing up new e-commerce clients.
Transaction revenues from the ASP hosting model were $54,665 for the three
months ended September 30, 2008 and $34,849 for the three months ended September
30, 2007, an increase of $19,816.  The increase was caused by an increased
number of transactions being processed through the ASP hosting facility.  Cost of revenues for the three months ended
September 30, 2008 was $48,613 compared to $34,152 for the three months ended
September 30, 2007, an increase of $14,461, or 42.3%. 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
September 30, 2008 was $47,396 compared to $36,212 for the three months ended
September 30, 2007, an increase of $11,184, or 30.1%. The increase in gross
profit was primarily due to the sales of our newly developed GuardedID® keyboard
encryption and anti-keylogger technology, service fees and the renewal of
several software maintenance plans related to the sales of our software. Gross
profit as a percentage of sales decreased to 49.4% from 51.5% due to the
increase in processing fees incurred as a result of the increase in the volume
of transactions relating to our ASP hosting service.  Research and development expenses for the
three months ended September 30, 2008 were $117,210 compared to $92,370 for the
three months ended September 30, 2007, an increase of $24,840, or 26.9%. The
increase is primarily attributable to the increase in resources relating to
Version 2.0 of our GuardedID® keyboard encryption & anti-keylogger
technology, which is now in beta testing. The salaries, benefits and overhead
costs of personnel conducting research and development of our software products
comprise research and development expenses.  Selling, general and administrative
expenses for the three months ended September 30, 2008 were $377,604 compared to
$800,571 for the three months ended September 30, 2007, a decrease of $422,967
or 52.8%. The net decrease was due primarily to decreases in our promotional,
marketing and professional fees which occurred in the three months ended
September 30, 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 September 30, 2008 was $356,160 as compared to ($584,401) for the three
months ended September 30, 2007, representing an increase of $940,561, or 161%.
The increase was primarily due to the net mark to market changes in the fair
value of derivative financial instruments relating to the convertible secured
promissory notes.  35   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 loss for the three months ended
September 30, 2008 was $803,578 compared to a net loss of $272,328 for the three
months ended September 30, 2007, an increase of $531,250, or 195%. The increase
in our net loss was primarily due to the net mark to market changes in the fair
value of derivative financial instruments relating to the convertible secured
promissory notes.  NINE MONTHS ENDED SEPTEMBER 30, 2008
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2007  Revenues for the nine months ended
September 30, 2008 were $211,254 compared to $623,696 for the nine months ended
September 30, 2007, a decrease of $412,442 or 66.1%. The decrease in revenues
was primarily due to the amount of a one-time sale of our newly developed
GuardedID® keyboard encryption and anti-keylogger technology that occurred in
the first quarter of 2007. Of the total sales for the nine months ended
September 30, 2007, $485,274 (of the revenues) were deemed uncollectible and
were charged off in the third and fourth quarters of 2007.  Revenues generated consisted of hardware
and software sales, services and maintenance sales, revenue from sign on fees
and recurring transaction revenues. Hardware sales for the nine months ended
September 30, 2008 were $21,852 compared to $8,333 for the nine months ended
September 30, 2007, an increase of $13,519. The increase in hardware revenues
was primarily due to the increase in the Companys sales of our
one-time-password token key-fobs. Software, services and maintenance sales for
the nine months ended September 30, 2008 were $81,030 compared to $534,121 for
the nine months ended September 30, 2007, a decrease of $453,091. The decrease
in software, services and maintenance revenues was primarily due to the amount
of a one-time sale of our newly developed GuardedID® keyboard encryption and
anti-keylogger technology that occurred in the first quarter of 2007 and was
subsequently written off. Sign on fees for access to our hosted service provider
to utilize our ASP transaction model amounted to $6,250 for the nine months
ended September 30, 2008 compared to $2,000 for the nine months ended September
30, 2007, an increase of $4,250. The increase was due to the increase in signing
up new e-commerce clients. Transaction revenues from the ASP hosting model were
$102,122 for the nine months ended September 30, 2008 and $79,242 for the nine
months ended September 30, 2007, an increase of $22,880. The increase was caused
by an increased number of transactions being processed through the ASP hosting
facility.  Cost of revenues for the nine months ended
September 30, 2008 was $89,442 compared to $52,705 for the nine months ended
September 30, 2007, an increase of $36,737, or 69.7%. The increase was
primarily due to the processing fees incurred as a result of the increase in
transactions relating to our ASP hosting service.  Gross profit for the nine months ended
September 30, 2008 was $121,812 compared to $570,991 for the nine months ended
September 30, 2007, a decrease of $449,179, or 78.7%. The decrease in gross
profit was primarily due to the amount of a one-time sale of our newly developed
GuardedID® keyboard encryption and anti-keylogger technology that occurred in
the first quarter of 2007 and was subsequently written off. Gross profit as a
percentage of sales decreased to 57.7% from 91.6% due an increased number of
transactions being processed through the ASP hosting facility due to the
addition of new e-commerce clients which result in a lower profit margin than
our other products and services.  Research and development expenses for the
nine months ended September 30, 2008 were $324,991 compared to $273,872 for the
nine months ended September 30, 2007, an increase of $51,119, or 18.7%. The
increase is primarily attributable to the increase in resources relating to the
Version 2.0 of our GuardedID® keyboard encryption and anti-keylogger technology,
which is now in beta testing. The salaries, benefits and overhead costs of
personnel conducting research and development of our software products comprise
research and development expenses.  Selling, general and administrative
expenses for the nine months ended September 30, 2008 were $1,292,274 compared
to $1,903,057 for the nine months ended September 30, 2007, a decrease of
$610,783 or 32.1%. The net decrease was due primarily to decreases in our
promotional, marketing and professional fees which occurred in the nine months
ended September 30, 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 nine months
ended September 30, 2008 was ($293,635) as compared to $509,623 for the nine
months ended September 30, 2007, representing a decrease in other expense of
$803,258, or 158%. The decrease was primarily due to the forgiveness of certain
debt and to net mark to market changes of ($998,504) in the fair value of
derivative financial instruments relating to the convertible secured promissory
notes.  36   Our net loss for
the nine months ended September 30, 2008 was $1,201,818 compared to a net loss
of $2,115,561 for the nine months ended September 30, 2007, a decrease of
$913,743, or 43.2%. The decrease in our net loss was primarily due to the
forgiveness of certain debt and 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 September 30,
2008 were $759,175, including $20,183 in cash and $367,819 in restricted cash.
Additionally, we had a stockholders deficiency in the amount of $6,626,428 at
September 30, 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 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 $469,760, which will only be
realized on the conversion of the derivatives, or settlement of the debentures.  We financed our operations during the nine
months ended September 30, 2008 primarily through debt and equity financing,
with minimal sources of cash resulting from recurring revenues from our security
products and services and maintenance sales.  We expect that we will rely,
at least in the near future, on debt and equity financings, although such
sources are not assured. If such sources are available, there is also no
assurance that such financing can be obtained at terms that would be acceptable
to the Company. Inherently, as time progresses and corporate exposure in the
market grows, we hope to attain additional revenue from the sales of our
security products and services. Until this is accomplished, we will continue to
attempt to secure additional financing through both the public and private
market sectors to meet our ongoing commitments of capital expenditures.  At September 30, 2008, $427,447 in
aggregate principal amount of the YA Global debentures was issued and
outstanding.  At September 30, 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 agreed to
forbear from exercising their rights under the secured convertible debentures
through February 27, 2008. The terms of the Forbearance Agreement record the
amount due to YA Global and Highgate by the Company to be $1,214,093, which
includes principal, interest and the redemption premium. The terms also include
a reduction in the YA Global and Highgate Fixed Conversion Price to $0.065. In
connection with this Agreement, the Company issued to YA Global 500,000
contingency warrants with an exercise price of $0.15 per share. The warrants are
exercisable for a period of five (5) years from date of issuance. The warrants
are held in escrow and will only be released to YA Global if the total amount
due by the Company is not paid to YA Global by February 29, 2008. The total
amount of our indebtedness to YA Global and Highgate in the amount of
$1,214,093, as agreed to in the Forbearance Agreement, is further broken down
as:  · $427,447 (YA Global
secured convertible debenture) · $204,775 (YA Global
accrued and unpaid interest on debenture) · $85,489 (YA Global 20%
redemption premium) · $244,720 (Highgate
secured convertible debenture) · $86,937 (Highgate
accrued and unpaid interest on debentures) · $48,944 (Highgate 20%
redemption premium) · $100,000 (YA Global
promissory note dated May 1, 2006) · $15,781 (YA Global
accrued and unpaid interest on note)  In February 2008, the Forbearance Agreement
was amended and extended to May 15, 2008, including the terms of the contingency
warrants. Per the terms of the amendment, YA Global and Highgate shall receive
an additional 105 days of interest for a total amount of $28,328.84 additional
interest. The additional interest plus a security deposit of $171,671.16 were
paid to YA Global and Highgate per the terms of a debt assignment agreement
executed with the StrikeForce Investor Group (SIG) in February 2008, for a
total amount paid to YA Global of $200,000. The security deposit will be applied
to the amount due YA Global and Highgate if the remaining balance is paid in
full by May 15, 2008. Otherwise, the security deposit will be applied to YA
Global as liquidated damages.  37   In May 2008, the
Company executed a Forbearance Agreement with YA Global that supersedes the
January 2008 agreement and February 2008 amendment, whereby YA Global and
Highgate have agreed to forbear from exercising their rights under the secured
convertible debentures through October 15, 2008.  Per the terms of the May
2008 Forbearance Agreement, the Company agreed to use its best efforts to make
available sufficient authorized shares of its common stock to effect conversion
of the entire amount outstanding, to YA Global and Highgate, by October 15,
2008. The terms of the contingency warrants became applicable to the terms of
the May 2008 Forbearance Agreement.  Additionally, per the terms of the
agreement, the SIG paid $75,000 to YA Global in May 2008 which is further broken
down as:  · $17,268 (additional
prepaid interest to YA Global from May 15, 2008 to October 15, 2008) · $7,181 (additional
prepaid interest to Highgate from May 15, 2008 to October 15, 2008) · $27,840 (accrued
interest due on the Highgate debenture dated April 26, 2005) · $22,711 (non-refundable
extension payment that will be applied to the redemption amount if the remaining
balance is paid in full by October 15, 2008)  The payment of the accrued interest of
$27,840 for the Highgate April 26, 2005 debenture reduced the total amount of
our indebtedness to YA Global and Highgate to $1,186,253 as agreed to in the May
2008 Forbearance Agreement.  The Company is in discussions with YA
Global regarding an extension to the May 2008 Forbearance Agreement, which was
in effect until October 15, 2008. The Company and YA Global are negotiating an
extension which would extend and amend the Forbearance Agreement to the end of
the second quarter of 2009, but a final agreement has not yet been
completed.  During the nine months ended September 30,
2008, the Company repaid a total of $35,211 of unsecured convertible notes to
nine unrelated parties.  In accordance with the terms of seven of the
convertible notes the Company is recording restricted common shares as bonus
extension shares on a monthly basis to the note holders. Additionally, during
the nine months ended September 30, 2008, the Company reached settlement
agreements and assigned to the SIG a total of $215,000 of unsecured notes with
three unrelated parties.  During the nine months ended September 30,
2008, the Company repaid a total of $54,936 of unsecured convertible notes to
two related parties.  The Company issued unsecured notes during
the nine months ended September 30, 2008 in an aggregate total of $150,000 to
one unrelated party and an aggregate total of $1,700,000 to twenty-six unrelated
parties per the term sheet executed with the SIG in January 2008 and amended in
May 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-six unrelated parties in the SIG
until such time that the unsecured notes and accrued interest of the SIG are
repaid in full. Additionally, during the nine months ended September 30, 2008,
the Company repaid a total of $104,789 of unsecured notes to four unrelated
parties. In accordance with the terms of six of the notes the Company is
recording restricted common shares as bonus extension shares on a monthly basis
to the two remaining note holders. Additionally, during the nine months ended
September 30, 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 nine months ended September 30, 2008 in an aggregate total of $100,000 to
two related parties. Additionally, during the nine months ended September 30,
2008, the Company repaid a total of $55,000 of unsecured notes to two related
parties.  Summary of Funded Debt  As of September 30, 2008 the Companys open
unsecured promissory note balance was $2,011,461, 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 $2.20 per share or 90% of VWAP thirty day
average prior to the date of conversion)  current portion · $16,461 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 · $1,700,000 to twenty
unrelated individuals through term sheet with the SIG  As of September 30, 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  38   As of September
30, 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 September 30, 2008 the Companys open
convertible note balances were $1,267,454, net of discount on convertible notes
of $67,335, listed as follows:  · $235,000 to an
unrelated company (03/05 unsecured debenture) - current portion · $7,000 to an unrelated
company (06/05 unsecured debenture)  current portion · $10,000 to an unrelated
individual (06/05 unsecured debenture) - current portion · $140,000 to four
unrelated individuals (07/05 unsecured debentures) - current portion · $85,000 to an unrelated
individual (03/06 unsecured debenture) - current portion · $200,000 to an
unrelated individual (06/06 unsecured debenture)  current portion · $150,000 to an
unrelated individual (09/06 unsecured debenture)  current portion · $70,232 to six
unrelated individuals (02/07 unsecured debentures) - current portion · $17,557 to an unrelated
individual (04/07 unsecured debenture)  current portion · $100,000 to an
unrelated individual (05/07 unsecured debenture)  current portion · $100,000 to an
unrelated individual (06/07 unsecured debentures)  current portion · $100,000 to an
unrelated individual (07/07 unsecured debenture)  current portion · $120,000 to four
unrelated individuals (08/07 unsecured debentures)  current portion  As of September 30, 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 equity and the issuance of certain debt instruments,
including promissory and convertible notes. If we issue additional shares of
common stock, the value of shares of existing stockholders is likely to be
diluted.  However, the terms of the convertible
secured debentures issued to certain of the existing stockholders require that
we obtain the consent of such stockholders prior to our entering into subsequent
financing arrangements. No assurance can be given that we will be able to obtain
additional financing, that we will be able to obtain additional financing on
terms that are favorable to us or that the holders of the secured debentures
will provide their consent to permit us to enter into subsequent financing
arrangements.  Our future revenues and profits, if any,
will primarily depend upon our ability to secure sales of our suite of network
security and anti-malware products. We do not presently generate significant
revenue from the sales of our products. Although management believes that our
products are competitive for customers seeking a high level of network security,
we cannot forecast with any reasonable certainty whether our products will gain
acceptance in the marketplace and if so by when.  Except for the limitations imposed upon us
respective to the convertible secured debentures of YA Global and Highgate,
there are no trends, material or known, which will restrict either short term or
long-term liquidity.  Off-Balance Sheet Arrangements  We do not have any off balance sheet
arrangements that are reasonably likely to have a current or future effect on
our financial condition, revenues, results of operations, liquidity or capital
expenditures.  39   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 a net loss of
$1,201,818 for the nine months ended September 30, 2008, compared to a net loss
of $2,115,561 for the nine months ended September 30, 2007. At September 30,
2008, the Company's accumulated deficit was $17,578,268, its working capital
deficiency was $6,157,059 and approximately 77% of its assets consist of
deferred royalties. Additionally, for the nine months ended September 30, 2008,
we had negative cash flows from operating activities of $1,109,135. 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 international channel sales, where the Company is primarily
selling through a channel of Distributors, Value Added Resellers, Strategic
Partners and Original Equipment Manufacturers. The revenues from this approach
are more lucrative than selling direct, due to the increase in sales volume of
GuardedID® and ProtectID® through the channel partners. This strategy, if
successful, should increase the Companys sales and revenues allowing us to
mitigate future losses. In addition, management has raised funds through
convertible debt instruments and the sale of equity in order to alleviate the
working capital deficiency. Through the utilization of the capital markets, the
Company is seeking to locate the additional funding necessary to continue to
expand and enhance its growth; however, there can be no assurance that we will
be able to increase revenues or raise additional capital. The Company is
currently in negotiations with other investors, but the success of such
negotiations cannot be assured.  The accompanying consolidated financial
statements do not include any adjustments that might be necessary should we be
unable to continue as a going concern. If we fail to generate positive cash
flows or obtain additional financing when required, we may have to modify, delay
or abandon some or all of our business and expansion plans.  Critical Accounting Policies  In accordance with accounting principles
generally accepted in the United States of America (U.S. GAAP), we record
certain assets at the lower of cost or fair market value. In determining the
fair value of certain of our assets, we must make judgments, estimates and
assumptions regarding circumstances or trends that could affect the value of
theses assets, such as economic conditions. Those judgments, estimates and
assumptions are based on information available to us at that time. Many of those
conditions, trends and circumstances are outside our control and if changes were
to occur in the events, trends or other circumstances on which our judgments or
estimates were based, we may be required under U.S. GAAP to adjust those
estimates that are affected by those changes. Changes in such estimates may
require that we reduce the carrying value of the affected assets on our balance
sheet (which are commonly referred to as write downs of the assets
involved).  It is our practice to establish reserves or
allowances to record adjustments or write-downs in the carrying value of
assets, such as accounts receivable. Such write-downs are recorded as charges to
income or increases in the expense in our Statement of Operations in the periods
when such reserves or allowances are established or increased. As a result, our
judgments, estimates and assumptions about future events can and will affect not
only the amounts at which we record such assets on our balance sheet but also
our results of operations.  In making our estimates and assumptions, we
follow U.S. GAAP applicable to our business and those that we believe will
enable us to make fair and consistent estimates of the fair value of assets and
establish adequate reserves or allowances. Set forth below is a summary of the
accounting policies that we believe are material to an understanding of our
financial condition and results of operations.  40   Discount on
Debt  The Company has allocated the proceeds
received from convertible debt instruments between the underlying debt
instruments and has recorded the conversion feature as a liability in accordance
with Statement of Financial Accounting Standards No. 133 Accounting for
Derivative Instruments and Hedging Activities (SFAS No. 133) and related
interpretations. The conversion feature and certain other features that are
considered embedded derivative instruments, such as a conversion reset
provision, a penalty provision and redemption option, have been recorded at
their fair value within the terms of SFAS No. 133 as its fair value can be
separated from the convertible note and its conversion is independent of the
underlying note value. The conversion liability is marked to market each
reporting period with the resulting gains or losses shown on the Statement of
Operations. The Company has also recorded the resulting discount on debt related
to the warrants and conversion feature and is amortizing the discount using the
effective interest rate method over the life of the debt instruments.  Derivative Financial Instruments  We do not use derivative instruments to
hedge exposures to cash flow, market, or foreign currency risks.  The Company evaluates its convertible debt,
options, warrants or other contracts to determine if those contracts or embedded
components of those contracts qualify as derivatives to be separately accounted
for under SFAS No. 133 and related interpretations including Emerging Issues
Task Force (EITF) Issue No. 00-19 Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock(EITF Issue No. 00-19). The result of this accounting treatment is that
the fair value of the embedded derivative is marked-to-market each balance sheet
date and recorded as a liability. In the event that the fair value is recorded
as a liability, the change in fair value is recorded in the Statement of
Operations as other income or expense. Upon conversion or exercise of a
derivative instrument, the instrument is marked to fair value at the conversion
date and then that fair value is reclassified to equity.  In circumstances where the embedded
conversion option in a convertible instrument is required to be bifurcated and
there are also other embedded derivative instruments in the convertible
instrument that are required to be bifurcated, the bifurcated derivative
instruments are accounted for as a single, compound derivative instrument.  The classification of derivative
instruments, including whether such instruments should be recorded as
liabilities or as equity, is re-assessed at the end of each reporting period.
Equity instruments that are initially classified as equity that become subject
to reclassification under SFAS No. 133 are reclassified to liability at the fair
value of the instrument on the reclassification date. Derivative instrument
liabilities are classified in the balance sheet as current or non-current based
on whether or not net-cash settlement of the derivative instrument is expected
within 12 months of the balance sheet date.  The fair value model utilized to value the
various compound embedded derivatives in the secured convertible notes comprises
multiple probability-weighted scenarios under various assumptions reflecting the
economics of the secured convertible notes, such as the risk-free interest rate,
expected Company stock price and volatility, likelihood of conversion and or
redemption, and likelihood of default status and timely registration.  At
inception, the fair value of the single compound embedded derivative was
bifurcated from the host debt contract and recorded as a derivative liability
which resulted in a reduction of the initial notional carrying amount of the
secured convertible notes (as unamortized discount which will be amortized over
the term of the notes under the effective interest method).  The Company accounts for derivatives in
accordance with SFAS No. 133 and the related interpretations. SFAS No. 133, as
amended, requires companies to recognize all derivative instruments as either
assets or liabilities in the balance sheet at fair value. The accounting for
changes in the fair value of a derivative instrument depends on: (i) whether the
derivative has been designated and qualifies as part of a hedging relationship,
and (ii) the type of hedging relationship. For those derivative instruments that
are designated and qualify as hedging instruments, a company must designate the
hedging instrument based upon the exposure being hedged as either a fair value
hedge, cash flow hedge or hedge of a net investment in a foreign operation.  The derivatives (convertible debentures)
issued on December 20, 2004 and January 18, 2005 (amended April 27, 2005) and on
April 27, 2005 and May 6, 2005 have been accounted for in accordance with
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS No. 133) and the
related interpretations. SFAS No. 133, as amended and the Financial Accounting
Standards Board Emerging Issues Task Force Issue Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Companys Own
Stock (EITF No. 00-19).  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.  41   The compound
embedded derivatives within the Convertible Notes have been recorded at fair
value at the date of issuance; and are marked-to-market each reporting period
with changes in fair value recorded to the Companys Statement of Operations as
Net change in fair value of derivative liabilities. The Company has utilized a
third party valuation consultant to fair value the embedded derivatives using
layered discounted probability-weighted cash flow approach. We have developed a
financial model to value the compound embedded derivatives analyzing the
conversion features, redemption options and penalty provisions. Additionally,
our model has been developed to incorporate managements assessment of the
various potential outcomes relating to the specific features and provisions
contained in the convertible debt instruments.  The six primary events that can occur which
will affect the value of the compound embedded derivatives are (a) payments made
in cash, (b) payments made with stock, (c) the holder converts the note(s), (d)
the company redeems the note(s), (e) the company fails to register the common
shares related to the convertible debt and (f) the company defaults on the note
(s).  The primary factors driving the economic
value of the embedded derivatives are the same as the Black-Scholes factors,
except that they are incorporated intrinsically into the binomial calculations
for this purpose. Those factors are stock price, stock volatility, trading
volume, outstanding shares issued, beneficial shares owned by the holder,
interest rate, whether or not a timely registration has been obtained, change in
control, event of default, and the likelihood of obtaining alternative
financing. We assigned probabilities to each of these potential scenarios over
the initial term, and at each quarter, the remaining term of the underlying
financial instrument. The financial model generates a quarterly cash flow over
the remaining life of the underlying debentures and assigns a risk-weighted
probability to the resultant cash flow. We then assigned a discounted weighted
average cash flow over the potential scenarios which were compared to the
discounted cash flow of the debentures without the subject embedded derivatives.
The result is a value for the compound embedded derivatives at the point of
issue and at subsequent quarters.  The fair value of the derivative
liabilities are subject to the changes in the trading value of the Companys
common stock, as well as other factors. As a result, the Companys financial
statements may fluctuate from quarter-to-quarter based on factors, such as the
price of the Companys stock at the balance sheet date and the amount of shares
converted by YA Global and Highgate. Consequently, our financial position and
results of operations may vary from quarter-to-quarter based on conditions other
than our operating revenues and expenses.  Software Development Costs  Statement of Financial Accounting Standards
No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed (SFAS No. 86) requires capitalization of software
development costs incurred subsequent to establishment of technological
feasibility and prior to the availability of the product for general release to
customers. Systematic amortization of capitalized costs begins when a product is
available for general release to customers and is computed on a
product-by-product basis at a rate not less than straight-line basis over the
products remaining estimated economic life. To date, all costs have been
accounted for as research and development costs and no software development cost
has been capitalized.  Management will evaluate the net realizable
value of software costs capitalized by comparing estimated future gross revenues
reduced by the estimated future costs of completing, disposing of and
maintaining the software. These costs also include the costs of performing
maintenance and customer support required by us.  Revenue Recognition  The Companys revenues are derived
principally from the sale and installation of its various identification
protection software products and related hardware and services.  The
Company recognizes revenue when it is realized or realizable and earned less
estimated future returns. The Company considers revenue realized or realizable
and earned when it has persuasive evidence of an arrangement that the product
has been shipped or the services have been rendered to the customer, the sales
price is fixed or determinable, and collectability is reasonably assured. In
addition to the aforementioned general policy, the following are the specific
revenue recognition policies for each major category of revenue:  We recognize revenue from the sales of
software licenses when persuasive evidence of an arrangement exists, the product
has been delivered, the fee is fixed and determinable and collection of the
resulting receivable is reasonably assured. Delivery generally occurs when the
product is delivered to a common carrier.  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.  42   We recognize
revenue for maintenance services ratably over the contract term. Our training
and consulting services are billed at hourly rates and we generally recognize
revenue as these services are performed. However, upon execution of a contract,
we determine whether any services included within the arrangement require us to
perform significant work either to alter the underlying software or to build
additional complex interfaces so that the software performs as the customer
requests. If these services are included as part of an arrangement, we recognize
the fee using the percentage of completion method. We determine the percentage
of completion based on our estimate of costs incurred to date compared with the
total costs budgeted to complete the project.  Impairment of Long-lived Assets  Long-lived assets, which include property
and equipment, deferred royalties, website development cost and patents are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of assets may not be recoverable or the useful life is
shorter than originally estimated.  The Company assesses the recoverability of
its assets by comparing the projected undiscounted net cash flows associated
with the related asset or group of assets over their remaining lives against
their respective carrying amounts. Impairment, if any, is based on the excess of
the carrying amount over the fair value of those assets. Fair value is generally
determined using the assets expected future discounted cash flows or market
value, if readily determinable. If assets are determined to be recoverable, but
the useful lives are shorter than originally estimated, the net book value of
the assets is depreciated over the newly determined remaining useful lives.  Stock Based Transactions  We have concluded various transactions
where we paid the consideration in shares of our common stock and/or warrants or
options to purchase shares of our common stock. These transactions include:  -
Acquiring the services of various
professionals who provided us with a range of corporate consultancy
services, including developing business and financial models, financial
advisory services, strategic planning, development of business plans,
investor presentations and advice and assistance with investment funding;  -
Retaining the services of our
Advisory Board to promote the business of the Company;  -
Settlement of our indebtedness; and  -
Providing incentives to attract,
retain and motivate employees who are important to our success.  When our stock is used, the transactions
are valued using the price of the shares on the date they are issued or if the
value of the asset or service being acquired is available and is believed to
fairly represent its market value, the transaction is valued using the value of
the asset or service being provided.  When options or warrants to purchase our
stock are used in transactions with third parties or our employees, the
transaction is valued using the Black-Scholes valuation method. The
Black-Scholes valuation method is widely used and accepted as providing the fair
market value of an option or warrant to purchase stock at a fixed price for a
specified period of time. Black-Scholes uses five (5) variables to establish
market value of stock options or warrants:  - strike price (the price to be paid for a
share of our stock);  - price of our stock on the day options or
warrants are granted;  - number of days that the options or
warrants can be exercised before they expire;  - trading volatility of our stock; and  - annual interest rate on the day the
option or warrant is granted.  The determination of expected volatility
requires management to make an estimate and the actual volatility may vary
significantly from that estimate. Accordingly, the determination of the
resulting expense is based on a management estimate.  43   Recently
Issued Accounting Pronouncements     On June 5, 2003, the United States
Securities and Exchange Commission (SEC) adopted final rules under Section 404
of the Sarbanes-Oxley Act of 2002 (Section 404), as amended by SEC Release No.
33-8934 on June 26, 2008. Commencing with its annual report for the fiscal year
ending December 31, 2009, the Company will be required to include a report of
management on its internal control over financial reporting. The internal
control report must include a statement:  · Of managements
responsibility for establishing and maintaining adequate internal control over
its financial reporting;  · Of managements
assessment of the effectiveness of its internal control over financial reporting
as of year end; and  · Of the framework used
by management to evaluate the effectiveness of the Companys internal control
over financial reporting.  Furthermore, in the following fiscal year,
it is required to file the auditors attestation report separately on the
Companys internal control over financial reporting on whether it believes that
the Company has maintained, in all material respects, effective internal control
over financial reporting.  In 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.  In March 2008, the FASB issued FASB
Statement No. 161Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement No. 133 (SFAS No. 161), which
changes the disclosure requirements for derivative instruments and hedging
activities.  Pursuant to SFAS No.161, Entities are required to provide
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entitys financial
position, financial performance, and cash flows.  SFAS No. 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008 with early application encouraged. SFAS No.
161 encourages but does not require disclosures for earlier periods presented
for comparative purposes at initial adoption.  In years after initial
adoption, this Statement requires comparative disclosures only for periods
subsequent to initial adoption.  The Company does not expect the
adoption of SFAS No. 161 to have a material impact 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.  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.   44   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 September
30, 2008, that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.  PART II - OTHER INFORMATION   ITEM 1. LEGAL PROCEEDINGS  The Company is not currently a party to,
nor is any of its property currently the subject of, any material legal
proceeding. None of the Companys directors, officers or affiliates is involved
in a proceeding adverse to the Companys business or has a material interest
adverse to the Companys business.  In January 2008, a money judgment in the
amount of sixty nine thousand nine hundred fifty two dollars, for past due
payables, in favor of Lewis PR, a California corporation, against the Company
was entered into the Superior Court of California, County of San Diego. In
February 2008, a settlement agreement was reached between the parties whereby
Lewis PR will receive a payment of thirteen thousand dollars by September 2008
as full settlement of the debt. A payment of $6,500 was made in October 2008.
The Company is pursuing a revised settlement agreement with the debtor.  45   In February
2008, summonses were filed in the Superior Court of the State of New Jersey
against the Company and its CEO demanding payment on a promissory note in the
amount of forty five thousand dollars. In October 2008, a money judgment in the
amount of forty nine thousand two hundred sixty three dollars, for a past due
note, in favor of the note holder, against the Company was entered into the
Superior Court of New Jersey, County of Middlesex. 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 and the note holder have agreed upon a settlement whereby the debt
shall be assigned to the SIG by the Company and the SIG shall repay the agreed
upon settlement amount to the note holder, in installments, through February
2009. The SIG made payments of $10,000 in July 2008 and $5,000 in September 2008
to the note holder.   ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS  In July 2008, the Company recorded 1,646
shares of the Companys common stock at $0.22 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 165
shares of the Companys common stock at $0.22 per share to the placement agent.  In July 2008, the Company recorded 20,000
shares of the Companys common stock at $0.22 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
4,000 shares of the Companys common stock at $0.22 per share to the placement
agent.  In July 2008, the Company recorded 5,000
shares of the Companys common stock at $0.22 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
1,000 shares of the Companys common stock at $0.22 per share to the placement
agent.  In July 2008, the Company sold 1 unit, per
the terms of a term sheet executed with the SIG in January 2008 and amended in
May 2008, with each unit consisting of a 10% promissory note of $25,000,
maturing three years from the execution date and with a 10% discount rate, and
82,000 non-dilutable (for one year) restricted shares of the Companys common
stock. The Company recorded 82,000 restricted shares of common stock, at $0.023
per share.  In August 2008, the Company recorded 1,646
shares of the Companys common stock at $0.19 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 165
shares of the Companys common stock at $0.19 per share to the placement agent.  In August 2008, the Company recorded 20,000
shares of the Companys common stock at $0.19 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
4,000 shares of the Companys common stock at $0.19 per share to the placement
agent.  In August 2008, the Company recorded 5,000
shares of the Companys common stock at $0.19 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
1,000 shares of the Companys common stock at $0.19 per share to the placement
agent.  In August 2008, the Company sold 6 units,
per the terms of a term sheet executed with the SIG in January 2008 and amended
in May 2008, with each unit consisting of a 10% promissory note of $25,000,
maturing three years from the execution date and with a 10% discount rate, and
82,000 non-dilutable (for one year) restricted shares of the Companys common
stock. The Company recorded 164,000 restricted shares of common stock, at $0.011
per share, and 328,000 restricted shares of common stock, at $0.019 per
share.  In August 2008, the Company repurchased, at
no cost, employee stock options totaling 1,111,791 shares of common stock from
twelve employees as a result of a voluntary tender by the employees.  The
options were issued in accordance with the Companys 2004 Equity Incentive Plan.
The exercise price of the cancelled options ranged from $0.15 per share to
$10.00 per share.  In September 2008, the Company recorded
1,646 shares of the Companys common stock at $0.18 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 165 shares of the Companys common stock at $0.18 per share to the
placement agent.  In September 2008, the Company recorded
20,000 shares of the Companys common stock at $0.18 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 4,000 shares of the Companys common stock at $0.18 per share to the
placement agent.  46   In September
2008, the Company recorded 5,000 shares of the Companys common stock at $0.18
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 1,000 shares of the Companys common stock at $0.18 per share
to the placement agent.  In September 2008, the Company sold 2
units, per the terms of a term sheet executed with the SIG in January 2008 and
amended in May 2008, with each unit consisting of a 10% promissory note of
$25,000, maturing three years from the execution date and with a 10% discount
rate, and 82,000 non-dilutable (for one year) restricted shares of the Companys
common stock. The Company recorded 164,000 restricted shares of common stock, at
$0.017 per share.  In September 2008, the Company recorded 750
shares of its common stock, valued at $0.13 per share for 250 shares and $0.20
per share for 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  The Companys annual meeting of
shareholders was held on August 8, 2008.  At the annual meeting, the
Company's shareholders voted upon the following matters:  (1) The election of five
members to the Company's Board of Directors to hold office until the Company's
next Annual Meeting of Stockholders in 2009 or until each Directors successor
is duly elected and qualified; and  (2) The ratification of the
appointment of Li & Company, PC, as the Company's independent certified
public accountants; and  (3) The enactment of a one
for ten reverse stock split (1:10), to be effective as of the filing of an
amendment to the Company's Articles of Incorporation with the New Jersey
Secretary of State and upon the receipt of regulatory approval.  Per the results recorded on the Report of
Inspector of Election, Mark L. Kay, Robert Denn, Mark Corrao, Ramarao Pemmaraju
and George Waller were elected as the Companys Board of Directors; Li &
Company, PC was ratified as the Companys independent certified public
accountants; and a one for ten reverse stock split (1:10) was approved. On
September 30, 2008, the New Jersey Secretary of State approved the Companys
Restated Certificate of Incorporation. On October 31, 2008, the Company received
regulatory approval for the effectuation of the one for ten reverse stock split
(1:10) at the open of business on November 3, 2008 at which time the Companys
new ticker symbol became SFOR.  All share and per share data in the Form
10-Q, financial statements and related notes have been restated to give
retroactive effect to the reverse stock split.   ITEM 5. OTHER INFORMATION  Not applicable.   47   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.  48   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: November 13,
2008
By: /s/ Mark L. KayMark L. KayChief Executive OfficerDated: November 13,
2008
By: /s/ Mark Joseph CorraoMark Joseph CorraoChief Financial Officer and Principal Accounting
Officer   49