UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




———————




FORM
10-K




———————




x ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF






THE
SECURITIES EXCHANGE ACT OF 1934




For the
fiscal year ended: December 31,
2008


or




 ̈ TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF




THE
SECURITIES EXCHANGE ACT OF 1934




For the
transition period from: _____________ to _____________






SOMERSET
INTERNATIONAL GROUP, INC.


(Exact
name of registrant as specified in its charter)




———————




Delaware
            
            13-2795675(State
      or Other Jurisdiction
            (Commission
            (I.R.S.
      Employerof
      Incorporation or Organization)
            File
      Number)
            Identification
      No.)




90
Washington Valley Road, Bedminster, NJ 07921


(Address
of Principal Executive Office) (Zip Code)




(908)
-719-8909


(Registrant’s
telephone number, including area code)




N/A


(Former
name or former address, if changed since last report)


Securities
      registered pursuant to Section 12(b) of the Act:Title
      of each class
            
            Name
      of each exchange on which registeredCommon
      Stock, $.001 par value
            
            OTC
      Bulletin BoardSecurities
      registered pursuant to Section 12(g) of the Act:(Title
      of Class)


———————


Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes  ̈   
No x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes  ̈   
No x




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.




Yes x  
No  ̈




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
 information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.   x




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.




Large
accelerated filer  ̈   Accelerated
filer  ̈   Non-accelerated
filer  ̈   Smaller
reporting company x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes  ̈   
No x




The
aggregate market value of the registrant’s common stock held by non-affiliates
of the registrant, computed by reference to the closing price of a share of
common stock on June 30, 2008 was $1,384,692.




On March
31, 2009, there were 23,348,655 outstanding shares of the registrant’s common
stock, $.001 par value.







1




PART
I








Item
1.  Description of Business





(a)  State
of Incorporation; Offices and Facilities





Somerset International Group, Inc.
(“Somerset”) was incorporated under the laws of the State of Delaware in 1968.
Our current activity is the acquisition of profitable and near term profitable
private small and medium sized businesses that provide proprietary security
products and solutions for people and enterprises – from personal safety to
information security – and maximizing the profitability of our acquired entities
and to act as a holding company for such entities.





On June
30, 2007, we entered into a Stock Purchase Agreement (“Agreement”) in which
Secure, our wholly owned subsidiary, purchased all the shares of Meadowlands
Fire, Safety, and Electrical Supply Co., Inc., a New Jersey corporation, and
Vanwell Electronics, Inc., a New Jersey corporation (collectively “Meadowlands”)
from Keith Kesheneff and Kathryn Kesheneff, being all of the shareholders of
Meadowlands.  Pursuant to the Agreement, Secure acquired Meadowlands,
whereby Meadowlands became a wholly owned subsidiary of
Secure.  Meadowlands specializes in the distribution, sale,
installation and maintenance of fire and security equipment and systems that
include fire detection, video surveillance, and burglar alarm
equipment.  The results of operations for the acquired entity were
included in consolidated statements of operations beginning July 1,
2007





Effective
October 1, 2007, we entered into a Stock Purchase Agreement (“Agreement”) in
which Somerset purchased all the shares of Fire Control Electrical Systems,
Inc., a New Jersey corporation, ( “Fire Control”) from Vincent Bianco and Opie
Brinson, being all of the shareholders of Fire Control.  Pursuant to
the Agreement, Somerset acquired Fire Control whereby Fire Control became a
wholly owned subsidiary of Somerset.  Fire Control specializes in the
distribution, sale, installation and maintenance of fire and security equipment
and systems that include fire detection, video surveillance, and burglar alarm
equipment.  The results of operations for the acquired entity were
included in consolidated statements of operations beginning October 1,
2007.





Our
executive office is located at 90 Washington Valley Road, Bedminster, New
Jersey, 07921





(b)
Nature of Business





Our
current activity is the acquisition of profitable and near term profitable
private small and medium sized businesses and maximizing the profitability of
our acquired entities and to act as a holding company for such
entities.





One of
our subsidiaries, designs, assembles, installs and maintains a proprietary
personal security system for colleges and mental health facilities where
potential for crime exists.





Three of
our subsidiaries specialize in the distribution, sale, installation, and
maintenance of fire and security equipment and systems that include fire
detection, video surveillance, and burglar alarm equipment.




2





There are
three streams of revenues derived from these subsidiaries:


1.
              Equipment:


The
pricing for an equipment sale is generally established through a customer
purchase order and is a separate stand-alone arrangement.  Revenue is
recognized for equipment sales upon the delivery of the equipment, which is the
date on which customer becomes responsible for the payment of the
equipment.





2.
              Installation:


Installation
services are a separate stand-alone arrangement consisting of final connections
of the equipment and individual testing of the equipment pieces.  Such
services occur after electrical work has been contracted and supervised by the
customer, and completed by an outside third party.  Installation
services, when performed by the Company, are separately negotiated with the
customer, and are recognized upon completion of the service by the
Company.





3.
              Maintenance:


These are
separately priced contracts that are entered into with a customer typically
after the installation services are performed.  Maintenance services
are not bundled into any other service.  These maintenance services
are recognized as revenues as the services are performed.  These
services are billed at the end of the month after the service is provided or if
provided through a contractual arrangement then pre-billed for the defined
periods, i.e. quarterly, semi-annual, or annual. Deferred Revenue on the
Company’s balance sheet represents amounts billed to customers for maintenance
to be performed in future periods.





(c)
Corporate Developments





Pursuant
to the Agreement and Plan of Merger (the “Agreement”) between us, Secure System,
Inc. (“Secure” or “SSI”), a New Jersey corporation; and SECSYS Acquisition Corp.
(“SECSYS”), a New Jersey corporation and our wholly owned subsidiary, Secure
merged into SECSYS and as the surviving entity of the merger became our wholly
owned subsidiary. In consideration for the acquisition of all of the outstanding
shares of Secure, we paid a total of $500,000 to Secure to be used as working
capital and issued a total of 3,000,004 shares of our Series A Convertible
Preferred Stock to the shareholders of Secure. These shares of Preferred Stock
are convertible into shares of our common shares at the option of the
shareholder at the conversion rate of $.40 per share until September 30, 2007,
$.60 per share until September 30, 2008, and $.80 per share
thereafter.  These preferred shares were all converted to common stock
on September 30, 2007.





The
acquisition was financed through a short term bridge financing of $504,000.
Pursuant to the terms of the offering, we had a minimum raise of $500,000 and a
maximum raise of $700,000. As of March 11, 2005, we raised the minimum of
$500,000 and these proceeds were distributed to Secure as part of that
transaction. Each of the investors in this financing received six (6) month
notes with a twelve (12%) percent annual interest rate. For each dollar
invested, an investor received a note for a dollar repayable in full six months
from the date of the note and one share of our common stock. In addition, the
notes are convertible, at the option of the holder, into shares of common stock
at the price of $0.25 per share.  Consequentially, we issued a total
of 504,000 shares to these investors. Such notes were due and payable September
11, 2005. We had requested a ninety day extension on such notes and we received
approval from all of the noteholders. Although the ninety day extension has
passed as of March 28, 2006, none of the noteholders has declared a default and
we intend to repay any unconverted notes through the proceeds of additional
financings.




3





On June
30, 2007, we entered into a Stock Purchase Agreement (“Agreement”) in which
Secure, our wholly owned subsidiary, purchased all the shares of Meadowlands
Fire, Safety, and Electrical Supply Co., Inc., a New Jersey corporation, and
Vanwell Electronics, Inc., a New Jersey corporation (collectively “Meadowlands”)
from Keith Kesheneff and Kathryn Kesheneff, being all of the shareholders of
Meadowlands.  Pursuant to the Agreement, Secure acquired Meadowlands
whereby Meadowlands became a wholly owned subsidiary of
Secure.  Meadowlands specializes in the distribution, sale,
installation and maintenance of fire and security equipment and systems that
include fire detection, video surveillance, and burglar alarm
equipment.  The results of operations for the acquired entity will be
included in consolidated statements of operations beginning July 1,
2007.  The purchase was financed through the use of some of the
proceeds of the June 15, 2007 convertible debenture.





The acquisition was financed by using a
portion of the proceeds of the five year Convertible Debenture that we issued
with gross proceeds of $2,700,000.  Pursuant to this Debenture, we are
required to make mandatory interest only payments to the Investor in the amount
of 1/12th of the Interest due on the outstanding balance of the Debenture each
month for the first nine months after closing on the
acquisition.  Pursuant to this Debenture, we also are required to make
mandatory principal payments to the Investor throughout the life of the
Debenture.  For months 7 thru 12, we must pay $15,000 per month, for
months 13 thru 18 we must pay $35,000 per month, for months 19 thru 24 we must
pay $45,000, for month 25 thru month 35 we must pay $75,000 per month and on
month 36 all amounts then current will be due payable.





Effective October 1, 2007, we entered
into a Stock Purchase Agreement (“Agreement”) in which Somerset purchased all
the shares of Fire Control Electrical Systems, Inc., a New Jersey corporation
(collectively “Fire Control”) from Vincent A. Bianco and Opie F. Brinson, being
all of the shareholders of Fire Control.  Pursuant to the Agreement,
Somerset acquired Fire Control whereby Fire Control became a wholly owned
subsidiary of Somerset.  Fire Control specializes in the distribution,
sale, installation and maintenance of fire and security equipment and systems
that include fire detection, video surveillance, and burglar alarm
equipment.  The results of operations for the acquired entity will be
included in consolidated statements of operations beginning October 1,
2007.  The purchase was financed through the use of some of the
proceeds of the November 12, 2007 convertible debenture.





The acquisition was financed by using a
portion of the proceeds of the five year Convertible Debenture that we issued
with gross proceeds of $1,350,000.  Pursuant to this Debenture, we are
required to make mandatory interest only payments to the Investor in the amount
of 1/12th of the Interest due on the outstanding balance of the Debenture each
month for the first two months after closing on the acquisition.  The
first payment is due within thirty (30) days of Closing.  Pursuant to
this Debenture, we also are required to make mandatory principal payments to the
Investor throughout the life of the Debenture.  For months 3 thru 9,
we must pay $8,000 per month, for months 10 thru 15 we must pay $15,000 per
month, for months 16 thru 21 we must pay $20,000, for month 22 thru month 30 we
must pay $30,000 per month, for month 31 thru month 35 we must pay $40,000 per
month and on month 36 all amounts then current will be due payable.





(d)  2008
Revenues





Somerset’s
revenues were $4,732,444 for the twelve months ended December 31,
2008.




4





(e)
Patents and Trademarks





Somerset retained its patents and other
intellectual property, which is carried at a zero basis.





Somerset holds United States Patent No.
3,877,019, titled "Photo-measuring Materials Device for Computer Storage of
Photographic and Other Materials", granted April 8, 1975;  No.
3,908,078, titled "Method and Apparatus for Digital Recognition of Objects
Particularly Biological Materials", granted September 23, 1975; No. 4,613,269,
titled "Robotic Acquisition of Objects By Means Including Histogram Techniques",
granted September 23, 1986 and No. 4,642,813, titled "Electro-Optical Quality
Control Inspection of Elements on a Product", granted February 10, 1987.
Although Somerset relied primarily on its technological know-how and expertise
in the field of machine vision, some products were nevertheless based, in part,
on the technology underlying these patents.  No assurance can be given
as to the validity and scope of the protection provided by these
patents.





Somerset holds and used several
registered trademarks. "ORS" was used as a general identifying symbol in respect
of its Products. "i-bot" was used in conjunction with systems when adapted for
use with industrial robots and the related electronic grippers. "FLEXVISION"
identified a flexible image computer. The alignment products were identified by
"i-lign" and circuit board inspection systems were identified by "i-flex".
Somerset has also copyrighted critical software.





(f)
Employees





As
of March 31, 2009, Somerset has 1 employee, Secure has 8 employees, Meadowlands
has 14 employees, and Fire Control has 11 employees. No employees are currently
covered under collective bargaining agreements.





Item
2.  Description of Property





Somerset’s
executive office is located at 90 Washington Valley Road, Bedminster, New
Jersey, 07921. The Company leases such space on a month to month
basis.  Secure’s office is located at 1800 Bloomsbury, Ocean, NJ 08812
on a year to year basis and Meadowlands and Fire Control are located at 45 Pearl
Street, North Plainfield, NJ 07060 subject to a three year lease.





Item 3.
Legal Proceedings





On
September 4, 2008, Keith Kesheneff and Kathryn Kesheneff filed suit in Superior
Court in New Jersey against the Company claiming that they are owed $355,000 for
a purchase price adjustment note issued by the Company.  The Company
filed an answer, with counterclaims, on October 27, 2008, generally contesting
all claims.





In
January 2009, the holders of two promissory notes convertible into the Company’s
common stock filed suit in the Superior Court of New Jersey.  Each party
claims to be owed $20,000 in principal, approximately $11,400 of accrued
interest through December 31, 2008, and counsel fees.  The Company is
attempting to negotiate forbearance agreements.





In
January 2009, the holder of a promissory note convertible into the Company’s
common stock filed suit in the Superior Court of New Jersey.  The party
claims to be owed $54,000 in principal, approximately $30,900 of accrued
interest through December 31, 2008, and counsel fees.  The Company is
attempting to negotiate a forbearance agreement.




5





Item
4.  Submission of Matters to a Vote of Security Holders





On August 29, 2008, the Board of
Directors, with the approval of a majority of the shareholders of the Company,
adopted the 2008 Equity Incentive Plan (the “Plan”) which will be administered
by a compensation committee (the “Committee”) appointed by the
Board.





On August 29, 2008, the Board of
Directors, with the approval of a majority of the shareholders of the Company
entered into an amendment to extend the Employment Agreement dated January 6,
2004 between our company and John X. Adiletta for an additional 3 years from
January 6, 2009.








PART
II





Item
5.  Market for Registrant’s Common Equity, Related Stockholder
Matters, and Issued Purchases of Equity Securities





On November 10, 2004, the Company was
notified that it had received clearance from the National Association of
Securities Dealers (“NASD”) to have its Common Stock quoted on the Over the
Counter (“OTC”) Bulletin Board.





Our common stock is currently traded on
the OTC Bulletin Board under the symbol “SOSI.” Our common stock has been quoted
on the OTC Bulletin Board since November 10, 2004.  The following
table sets forth the range of high and low bid quotations for each quarter of
calendar year 2008, and the first quarter of calendar year 2009 up to March 30,
2009. These quotations as reported by the OTC Bulletin Board reflect
inter-dealer prices without retail mark-up, mark-down, or commissions and may
not necessarily represent actual transactions.





Year
                  Period
                  High
                  Low2008
                  First
                  $0.15
                  $0.102008
                  Second
                  $0.15
                  $0.082008
                  Third
                  $0.09
                  $0.032008
                  Fourth
                  $0.07
                  $0.032009
                  First
                  $0.05
                  $0.02





As of December 31, 2008, there were
approximately 414 holders of record of Somerset’s common stock.





Dividends





We have never paid dividends on our
common stock and do not anticipate paying such dividends in the foreseeable
future. The payment of future cash dividends by us on our common stock will be
at the discretion of our Board of Directors and will depend on our earnings,
financial condition, cash flows, capital requirements and other considerations
as our board of directors may consider relevant. Although dividends are not
limited currently by any agreements, it is anticipated that future agreements,
if any, with institutional lenders or others may limit our ability to pay
dividends on our common stock. Notwithstanding the above, we had agreed to issue
dividends to the holders of Series A Preferred Stock as set forth above. We are
not statutorily prohibited from paying dividends.




6





Warrants




As
of December 31, 2008, 13,115,000 warrants have been issued to seven warrant
holders. The warrant holders are entitled to purchase fully paid and
nonassessable shares of  our common stock, $.001 par value per share
at a per share purchase price in the following manner:





Issue
      Date
                Expiration
      Date
                Number
      of Shares of Common Stock
                Price
                Basis
      for Warrant issuance09/06/05
                09/05/10
                5,000
                $0.20
                Consulting
      Services09/06/05
                09/05/10
                5,000
                $0.18
                Consulting
      Services02/06/06
                02/05/09
                10,000
                **
                Stock
      Purchase Agreement05/26/06
                05/25/09
                15,000
                **
                Stock
      Purchase Agreement05/26/06
                05/25/09
                15,000
                **
                Stock
      Purchase Agreement08/15/06
                08/14/09
                25,000
                **
                Stock
      Purchase Agreement04/17/07
                04/16/10
                90,000
                **
                Stock
      Purchase Agreement06/15/07
                06/14/12
                7,000,000
                $0.05
                Convertible
      Debenture06/15/07
                06/14/10
                50,000
                $0.12
                Stock
      Purchase Agreement11/14/07
                11/13/12
                5,000,000
                $0.05
                Convertible
      Debenture09/08/08
                09/07/13
                900,000
                $0.001
                Amendment
      to Convertible DebentureTotal
                
                13,115,000





The
warrants may be exercised in full or in part (but not of a fractional share) by
the holder subject to ownership limitations under the respective
agreements.





Stock
Options





On August 29, 2008, the Board of
Directors, with the approval of a majority of the shareholders of the Company,
adopted the 2008 Equity Incentive Plan (the “Plan”) which will be administered
by a compensation committee (the “Committee”) appointed by the
Board.





There are
no options to purchase our securities outstanding.





Item
6.  Selected Financial Data




7





The table
below presents selected financial data for Somerset for the past two
years.





Results
      of Operations
                    For
      The Year Ended December 31,
                  
                  2008
                  
                  
                  2007Sales
                  
                  $
                  4,732,444
                  
                  
                  $
                  3,879,312Operating
      Expenses
                  
                  
                  6,160,659
                  
                  
                  
                  4,920,381Loss
      from Operations
                  
                  
                  (1,428,215
                  )
                  
                  
                  (1,041,068
                  )Net
      Loss attributable to Common Stockholders
                  
                  $
                  (2,007,719
                  )
                  
                  $
                  (1,753,078
                  )Basic
      Loss per Common Share
                  
                  $
                  (0.09
                  )
                  
                  $
                  (0.15
                  )





Financial
      Position at
                    December
      31,
                  2008
                  
                  
                  2007Total
      Assets
                  
                  $
                  5,426,940
                  
                  
                  $
                  6,908,443Total
      Liabilities
                  
                  
                  7,086,769
                  
                  
                  
                  6,578,053Shareholders
      Equity(Deficit)
                  
                  $
                  (1,659,829
                  )
                  
                  $
                  330,390








Item
7.  Management's Discussion of Financial Condition and Results of
Operations





This
Annual Report on Form 10-K includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 including,
without limitation, statements containing the words "believes," "anticipates,"
"intends," "expects," "estimates," "may," "will," "likely," "could" and words of
similar import. Such statements include statements concerning the Company's
business strategy, operations, cost savings initiatives, future compliance with
accounting standards, industry, economic performance, financial condition,
liquidity and capital resources, existing government regulations and changes in,
or the failure to comply with, governmental regulations.  All
statements in this report that are not historical are forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act as amended,
including statements regarding Somerset statements regarding future sales and
its efforts to attract new customers for its products and develop
new  products. Such statements are subject to risks and uncertainties
that could cause actual results to differ materially from those projected,
including, but not limited to, uncertainties relating to technologies, product
development, our ability to generate sufficient cash from operations or from
investors or lenders to fund product development and sales and marketing efforts
needed to attract new customers, operations, manufacturing, market acceptance,
cost and price of Somerset products, ability to attract new customers,
regulatory approvals, competition, intellectual property of others, and patent
protection and litigation.  The Company's actual results may differ
materially from the results discussed in such forward-looking statements because
of a number of factors, including those identified elsewhere in this Annual
Report on Form 10-K. Somerset expressly disclaims any obligation or undertaking
to release publicly any updated or revisions to any forward-looking statements
contained herein to reflect any change in its expectations with regard thereto
or any changeinevents, conditions, or
circumstances on which any such statements are based.





General




On June 30, 2007, we entered into a
Stock Purchase Agreement (“Agreement”) in which Secure, our wholly owned
subsidiary, purchased all the shares of Meadowlands Fire, Safety, and Electrical
Supply Co., Inc., a New Jersey corporation, and Vanwell Electronics, Inc., a New
Jersey corporation (collectively “Meadowlands”) from Keith Kesheneff and Kathryn
Kesheneff, being all of the shareholders of Meadowlands.  Pursuant to
the Agreement, Secure acquired Meadowlands whereby Meadowlands became a wholly
owned subsidiary of Secure.  The purchase was financed through the use
of some of the proceeds of the June 15, 2007 convertible debenture.




8




Effective October 1, 2007, we entered
into a Stock Purchase Agreement (“Agreement”) in which Somerset purchased all
the shares of Fire Control Electrical Systems, Inc., a New Jersey corporation
(collectively “Fire Control”) from Vincent A. Bianco and Opie F. Brinson, being
all of the shareholders of Fire Control.  Pursuant to the Agreement,
Somerset acquired Fire Control whereby Fire Control became a wholly owned
subsidiary of Somerset.  The purchase was financed through the use of
some of the proceeds of the November 12, 2007 convertible
debenture.





Critical
Accounting Policies and Estimates





The discussion and analysis of our
financial condition and results of operations are based upon our financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amount of assets and liabilities, revenues and expenses, including
stock issued for services and or compensation and related disclosure on
contingent assets and liabilities at the date of our financial statements.
Actual results may differ from these estimates under different assumptions and
conditions. Critical accounting policies are defined as those that are
reflective of significant judgments, estimates and uncertainties and potentially
result in materially different results under different assumptions and
conditions.





We have only established an allowance
for doubtful accounts for Secure’s subsidiary accounts receivable and Fire
Control. We analyzed the ability to collect accounts that are large, none of
which are currently past due for Secure. Historically, Secure has not incurred
bad debt expense and that trend is anticipated to
continue.  Management will evaluate Secure’s subsidiary allowance and
Fire Control on a periodic basis.


We account for our goodwill and
intangible assets pursuant to SFAS No. 142, Goodwill and Other Intangible
Assets. Under SFAS 142, intangibles with definite lives continue to be amortized
on a straight-line basis over the lesser of their estimated useful lives or
contractual terms. Goodwill and intangibles with indefinite lives are evaluated
at least annually for impairment.  The impairment test compares the
carrying amount of the reporting unit to its fair value.  Discounted
cash flows are utilized to determine the fair value of the assets being
evaluated.  The impairment test in 2008 and 2007 supported the
carrying value of goodwill, and as such, no write-down in the carrying value of
goodwill was recorded.





Revenues




Revenues of $4,732,444 for the year
ended December 31, 2008 increased by $853,132 over revenues of $3,879,312 during
the year ended December 31, 2007. Revenues increase $1,750,740 for the twelve
month period due to Meadowlands and Fire Control which were acquired in
2007.  This increase was offset by a decline in revenues of $897,608
for Secure. The decreases at Secure were primarily attributable to a decrease in
Equipment Sales and Installation Revenues of $716,419 and a decrease in
Maintenance Revenues of $181,189 for the same period.




9




Costs of
Goods Sold




Costs of Goods Sold for the year ended
December 31, 2008 decreased to $1,761,243, representing a decrease of $19,047
over costs of goods sold of $1,780,290 during the year ended December 31,
2007.  Increase of $576,762 in costs and expenses for the twelve month
period were attributable primarily to the acquisition of Meadowlands and Fire
Control which was offset by a decrease in costs of goods sold for Secure of
approximately $595,809.  The decrease at Secure was primarily
attributable to a decrease in cost of materials and factory overhead of
$238,126, and a decrease in installation and service costs of
$335,716.





Gross
Margin





Gross Margin for the year ended
December 31, 2008 increased to $2,971,201 representing an increase of $872,178
from a gross margin of $2,099,023 during the year ended December 31,
2007.  $1,173,977 of the increases in gross margin for the twelve
month period were attributable primarily to the acquisition of Meadowlands and
Fire Control offset by a decrease in gross margin for Secure of
$301,799.





Selling,
General, and Administrative Expenses (“SG&A”)





SG&A expenses for the year ended
December 31, 2008 of $4,399,416, increased by $1,259,325 over SG&A expenses
of $3,140,091 during the year ended December 31, 2007.  Selling
general and administrative expenses increased by $1,015,243, amortization
expense increased by $222,594, and depreciation expense increased by $21,488
from the year ended December 31, 2007.  The increase in selling,
general, and administrative expenses was primarily attributable to the
acquisition of Meadowlands and Fire Control.  Substantially, all of
the increase in amortization expense and depreciation was attributable to the
acquisition of Meadowlands and Fire Control.





Other
Income (Expense)




Other Expense increased to $560,500 for
the year ended December 31, 2008 from $443,167 during the year ended December
31, 2007, representing an increase of $117,333.  Interest expense for
the year ended December 31, 2008 increased by $151,060 to $567,594 from interest
expense of $416,534 during the year ended December 31, 2007. This increase is
primarily attributable to the interest on the convertible debentures issued in
June and November 2007, the promissory notes acquired with the merger with
Somerset-New Jersey, as well as from the promissory notes issued in conjunction
with the March 11, 2005 merger with Secure System, Inc. and issued during
2008.  Amortization expense of debt discount decreased to $0 for the
year ending December 31, 2008 from $24,000 during the year ended December 31,
2007.




Dividends
on Preferred Stock




Dividends on preferred stock for the
year ended December 31, 2008 were $0 versus $268,746 in dividends during the
year ended December 31, 2007, which represented a decrease of $268,746. These
dividends are attributable to the redeemable convertible preferred shares issued
in conjunction with the March 11, 2005 merger with Secure System,
Inc.  These preferred shares were all converted to common stock on
September 30, 2007.




10




Net
(Loss)





Net Loss attributable to common
stockholders for the year ended December 31, 2008 increased by $254,641 to
$2,007,719 from $1,753,078 during the year ended December 31,
2007.  The increase in net loss is offset by an increase in gross
margin described above for the period and primarily attributable to an increase
in selling, general, and administrative expenses for the year as described
above.





Liquidity
and Capital Resources




We are currently financing our
operations primarily through cash generated by financing activities in the form
of promissory notes, convertible debentures, and equity investments. We financed
our business acquisitions through the issuance of redeemable preferred stock,
cash generated from promissory notes, and convertible debentures.





We
completed the Secure merger by obtaining a short term bridge financing of
$504,000. Pursuant to the terms of the offering, we had a minimum raise of
$500,000 and a maximum raise of $700,000. As of March 11, 2005, we raised the
minimum of $500,000 and these proceeds were distributed to Secure as part of
that transaction. Each of the investors in this financing received nine (6)
month notes with a twelve (12%) percent annual interest rate. For each dollar
invested, an investor received a note for a dollar repayable in full nine months
from the date of the note and one share of our common stock. In addition, the
notes are convertible, at the option of the holder, into shares of common stock
at the price of $0.25 per share.  Consequentially, we issued a total
of 504,000 shares to these investors. Such notes were due and payable September
11, 2005. We had requested a ninety day extension on such notes and we received
approval from all of the noteholders. Although the ninety day extension had
passed as of March 28, 2006, none of the noteholders has declared a default and
we intend to repay any unconverted notes through the proceeds of additional
financings.  As of September 30, 2007, $430,000 of principal amount
and all related accrued interest to date has been retired through cash payments
due of $180,000 and the balance converted to common stock in accordance with the
terms of the private placement.





We completed the Meadowlands
acquisition by using a portion of the proceeds of the five year Convertible
Debenture that we issued with gross proceeds of $2,700,000.  Pursuant
to this Debenture, we are required to make mandatory interest only payments to
the Investor in the amount of 1/12th of the Interest due on the outstanding
balance of the Debenture each month for the first nine months after closing on
the acquisition.  Pursuant to this Debenture, we also are required to
make mandatory principal payments to the Investor throughout the life of the
Debenture.  As to this Debenture, commencing on December 30,
2007, the Company agreed to make the following monthly amortizing
payments:





·
            December
      30, 2007 – May 31, 2008 Fifteen thousand dollars
      ($15,000)/month


·
            June
      30, 2008 Thirty-five thousand dollars
($35,000)


·
            July
      31, 2008 Fifteen thousand dollars
($15,000)


·
            August
      31, 2008 – December 30, 2008 Two thousand dollars
      ($2,000)/month


·
            January
      31, 2009 – May 31, 2009 Forty-five thousand dollars
      ($45,000)/month


·
            June
      30, 2009 thereafter until the face amount is paid in full Seventy-five
      thousand dollars ($75,000)/month





11


We completed the Fire Control acquisition by using a portion of the proceeds of
the five year Convertible Debenture that we issued with gross proceeds of
$1,350,000.  Pursuant to this Debenture, we are required to make
mandatory interest only payments to the Investor in the amount of 1/12th of the
Interest due on the outstanding balance of the Debenture each month for the
first two months after closing on the acquisition.  The first payment
is due within thirty (30) days of Closing.  Pursuant to this
Debenture, we also are required to make mandatory principal payments to the
Investor throughout the life of the Debenture.





As to the November Debenture, commencing on December 30, 2007,  the
Company shall make the following monthly amortizing payments:





·
            January
      31, 2008 – July 31, 2008 Eight thousand dollars
  ($8,000)


·
            August
      31, 2008 – January 31, 2009 Three thousand dollars
  ($3,000)


·
            February
      28, 2009 – July 31, 2009 Twenty thousand dollars
      ($20,000)/month


·
            August
      31, 2009 – April 30, 2010 Thirty thousand dollars
      ($30,000)/month


·
            May
      31, 2010 thereafter until the face amount is paid in full Forty thousand
      dollars ($40,000)/month





At December 31, 2008, the Company had negative working capital of approximately
$2,979,000.  It is for these factors that our auditors have issued an
explanatory paragraph with regard to our ability to continue as a going
concern.




We plan to establish a source of revenues sufficient to cover our operating
costs by acquiring additional companies that are generating positive cash flows
from operating activities either at acquisition or projected to do so in the
future , thereby furthering the objective of becoming profitable and generating
positive cash flow from operating activities on a consolidated
basis.  The funds needed to continue operations over the next twelve
months will be raised from accredited investors and/or institutional investors
as in the previous financings. During this period, the Company will attempt to
reduce or defer expenses until the capital is available.  These
conditions raise substantial doubt about the Company’s ability to continue as a
going concern.  The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.





Our need for capital may change
dramatically as a result of any additional business acquisition or combination
transaction.  There can be no assurance that we will identify any
additional suitable business, product, technology or opportunity in the
future.  Further, even if we locate a suitable target, there can be no
assurance that we would be successful in consummating any acquisition or
business consolidation on favorable terms or that we will be able to profitably
manage the business, product, or technology, if acquired, or otherwise
engaged.  The Company intends to acquire cash flow positive companies
of such size or number that will allow it to continue as a going
concern.  If we are unable to obtain debt and/or equity financing on
reasonable terms, we could be forced to delay or scale back our plans for
expansion. Consequently, there is substantial doubt about our ability to
continue to operate as a going concern.




12




Management intends to ask pertinent questions of the proposed candidates or
opportunities in the course of its diligence phase.  Management will
rely heavily on a business plan, financial statements and projections, and
management’s views of the future.  Unless something comes to
management’s attention as a result of its review of the proposed candidate’s
audited financial statements, which causes management to have serious concerns
on the viability or integrity of the financial records and business projections,
which would result in a disqualification of such candidate, a transaction would
be approved by the Board of Directors.  When a transaction requires
shareholder approval, a shareholder meeting must be held and a shareholder vote
taken.  A proxy statement would be mailed to shareholders informing
them of the meeting and requesting their vote.  However, in lieu of
holding a meeting, a majority of shareholders may sign a Shareholder’s
Resolution approving of such transaction.  If a meeting is not held,
an information statement must be mailed to all of its shareholder’s informing
them of the action taken by the majority shareholders.





Recent
Accounting Pronouncements





In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, and
(“SFAS No. 157”), which defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
SFAS No. 157 will be effective for the Company beginning January 1, 2008.
Management is currently evaluating the effect SFAS No. 157 will have on the
Company’s financial condition or results of operations.





Effective
January 1, 2008, the Company adopted SFAS No. 159 "The Fair Value Option for
Financial Assets and Financial Liabilities" (SFAS 159). SFAS 159 allows an
entity the irrevocable option to elect fair value for the initial and subsequent
measurement for specified financial assets and liabilities on a
contract-by-contract basis. The Company did not elect to adopt the fair value
option under this Statement for any of its financial instruments.





In
December 2007, the FASB revised Statement of Financial Accounting Standard N.
141 (SFAS 141R), “Business Combinations”, which is effective for 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.  Early application is not permitted before that
date.  SFAS 141R requires assets and liabilities recorded in a
business combination to be recorded at fair value and replaces the
cost-allocation process under the prior standard.  In addition, SFAS
141R requires separate recognition of acquisition costs and requires recognition
of contractual contingencies at fair value as of the acquisition
date.  Further, the revised standard requires capitalization of
research and development assets and requires fair value recognition of
contingent consideration as of the acquisition date.   The
Company is currently evaluating the potential impact of this
pronouncement.





13




In March
2008, the FASB issued Statement of Financial Accounting Standard No. 161 (SFAS
161), “Disclosures about Derivative Instruments and Hedging Activities—an
amendment of FASB Statement No. 133”, which is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after November 15,
2008.  Early application is encouraged.  SFAS 161 changes
the disclosure requirements for derivative instruments and hedging activities.
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.  The Statement requires that objectives for using derivative
instruments be disclosed in terms of underlying risk and accounting
designation.  In addition, the standard requires tabular disclosure of
fair value of derivative instruments and their gains and loss, requires
disclosure regarding credit risk related contingent features of the Company’s
derivative instruments and requires cross referencing within the footnote
disclosures regarding information about derivative
instruments.   The Company does not expect that this
pronouncement will have a significant impact on its financial condition or
results of operations.





In
December 2007, the FASB issued Statement of Financial Accounting Standard No.
160 (SFAS 160), “Non-Controlling Interests in Consolidated Financial Statements,
An Amendment of Accounting Research Bulletin No. 51”, which is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008.  Early application is not permitted before
that date.  SFAS 160 changes the terminology of minority interests,
which will now be known as non-controlling interest and requires that
non-controlling interests be clearly identified within stockholders’ equity as a
separate component from the parent company’s equity and net income or loss
attributable to non-controlling interests be clearly identified and presented on
the face of the consolidated statement of operations.  In addition,
the standard requires adequate disclosure between interests of the parent
company and interests of the non-controlling equity
holders.   The Company does not expect that this pronouncement
will have a significant impact on its financial condition or results of
operations.





Effective
January 1, 2008, the Company adopted SFAS No. 157, "Fair Value
Measurements" (SFAS 157).  In February 2008, the FASB issued FASB
Staff Position No. FAS 157-2, "Effective Date of FASB Statement
No. 157", which provides a one year deferral of the effective date of
SFAS 157 for non-financial assets and non-financial liabilities, except
those that are recognized or disclosed in the financial statements at fair value
at least annually.  Therefore, the Company has adopted the provisions
of SFAS 157 with respect to its financial assets and liabilities
only.  SFAS 157 defines fair value, establishes a framework for
measuring fair value under generally accepted accounting principles and enhances
disclosures about fair value measurements. Fair value is defined under
SFAS 157 as the exchange price that would be received for an asset or paid
to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date.  Valuation techniques used to
measure fair value under SFAS 157 must maximize the use of observable
inputs and minimize the use of unobservable inputs.  The standard
describes a fair value hierarchy based on three levels of inputs, of which the
first two are considered observable and the last unobservable, that may be used
to measure fair value which are the following:




14




●
            Level
      1— Quoted prices in active markets for identical assets or
      liabilities.




●
            Level
      2— Inputs other than Level 1 that are observable, either directly or
      indirectly, such as quoted prices for similar assets or liabilities;
      quoted prices in markets that are not active; or other inputs that are
      observable or can be corroborated by observable market data for
      substantially the full term of the assets or
  liabilities.





●
            Level
      3— Unobservable inputs that are supported by little or no market activity
      and that are significant to the fair value of the assets or
      liabilities.





Since these financial statements had no
fair value measurements that would require fair value disclosure under this
pronouncement, the adoption of this statement did not have a material impact on
the Company's consolidated results of operations and financial
condition.




Item
8.    Financial Statements and Supplementary Data





Financial Statements and schedules
filed herewith are listed in the table of contents to the financial statements
on page F-1.





Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure





None.





Item
9(A). Controls and Procedures





Evaluation of disclosure
controls and procedures





The Company's management evaluated,
with the participation of its President, the effectiveness of the
design/operation of its disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the SEC Act of 1934) as of December 31,
2008.  Based on such evaluation, the President of the Company
concluded that its disclosure controls and procedures are designed to ensure
that information required to be disclosed by the Company in the reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
rules and regulations of the Securities and Exchange Commission and is not
operating in an effective manner.





Our
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of our financial statements for external reporting purposes in
accordance with U.S. generally accepted accounting principles. Under the
supervision and with the participation of management, including our President,
we conducted a review, evaluation, and assessment of the effectiveness of our
internal control over financial reporting as of December 31, 2008 based upon the
criteria set forth in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).




15




During
management’s evaluation of internal controls over financial reporting, the
following material weaknesses in the internal control over financial reporting
procedures were found:





·
            There
      is no Audit Committee in place as required by the Sarbanes-Oxley Act of
      2002.


·
            There
      is no Whistleblower Policy adopted and communicated to all staff and
      management.  On March 23, 2009, prior to filing the 10-K, this
      deficiency was remediated.


·
            There
      are no controls in place to ensure complete and accurate recording of all
      trade payables, accrued liabilities and accrued
  purchases.


·
            There
      are no controls in place to determine that the inventory valuation has not
      been impaired due to obsolescence and or reduction of net realizable value
      below cost.





·
            There
      is no independent review of expenditures that are approved by the CEO by
      the Audit Committee to ensure validity of
  expenditures.


·
            There
      is no independent review of expenditure classifications to ensure they are
      complete and accurate.


·
            All
      spreadsheets that are used in connection with preparation of the financial
      statements are not independently re-calculated, reviewed and approved by
      management.


·
            There
      is no independent review and re-calculation of stockholders’ equity
      section of the financial statement.


·
            There
      is no independent review and re-calculation of investments in subsidiaries
      and other equity investment values represented in the financial
      statements.


·
            There
      is no independent review by company management that financial statements
      are prepared in conformity with GAAP and SEC reporting requirements as
      well as related footnote disclosures based on current GAAP and SEC
      standards.





Based on
the material weaknesses noted above, management concludes that the internal
controls over financial reporting are not effective.  Management will
be undertaking remediation efforts on a cost-effective basis to remediate
material weaknesses during the next fiscal year.  Based on cost
constraints not all material weaknesses are expected to be
remediated.  As a result, internal controls over financial reporting
are expected to remain not effective until revenues from operations are
sufficient to support additional internal controls and the formation of an audit
committee.





There
were no changes in internal control over financial reporting (as defined in
Rules 13a-15(f) and 15(d)-15(f) under the SEC Act of 1934) identified in
connection with the evaluation as of December 31, 2008 by the President, which
occurred during the most recent fiscal quarter, which have materially affected,
or are reasonably likely to materially affect, internal control over financial
reporting.





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 rules of the Securities and Exchange
Commission that permit the company to provide only management’s report in this
annual report.




16





Part
III





Item
10.  Directors and Executive Officers and Corporate
Governance





The
directors and executive officers of the Company are:





Name
                      Positions
      with registrant and age as of March 31, 2009
                      Has
      served as director sinceJohn
      X. Adiletta
                      President,
      Chief Executive Officer, Chairman, 60
                      February,
      2004


John X.
Adiletta, President, Chief Executive Officer and a member of the Board of
Directors of the Company since February 12, 2004, at which time Somerset
International Group Inc., a New Jersey corporation 45% owned by Mr. Adiletta
purchased the majority of the controlling stock held by J.R.S. Holdings
L.L.C.  Mr. Adiletta is a senior executive with over 38 years of
multi-functional experience in the telecommunication services, mobile and
modular facilities leasing, and vehicle leasing industries.  Mr.
Adiletta currently serves on the Board of Directors of Output Services Group,
Inc., a privately held company.





Term of
Office:





Our sole director is appointed for a
one-year term to hold office until the next annual general meeting of our
shareholders or until removed from office in accordance with our bylaws. Our
officers are appointed by our Board of Directors and hold office until removed
by the Board.





All officers and directors listed above
will remain in office until the next annual meeting of our stockholders, and
until their successors have been duly elected and qualified. There are no
agreements with respect to the election of Directors. We have not compensated
our Directors for service on our Board of Directors, any committee thereof, or
reimbursed for expenses incurred for attendance at meetings of our Board of
Directors and/or any committee of our Board of Directors. Officers are appointed
annually by our Board of Directors and each Executive Officer serves at the
discretion of our Board of Directors. We do not have any standing committees.
Our Board of Directors may in the future determine to pay Directors’ fees and
reimburse Directors for expenses related to their activities.




None of our Officers and/or Directors
have filed any bankruptcy petition, been convicted of or been the subject of any
criminal proceedings or the subject of any order, judgment or decree involving
the violation of any state or federal securities laws within the past five (5)
years.





Certain Legal
Proceedings:




No director, nominee for director, or
executive officer of the Company has appeared as a party in any legal proceeding
material to an evaluation of his ability or integrity during the past five
years.





Compliance with 16(A) of the
Exchange Act:





Section 16(a) of the Exchange Act
requires the Company’s officers and directors, and persons who beneficially own
more than 10% of a registered class of the Company’s equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission and are required to furnish copies to the Company. To the best of the
Company’s knowledge, all reports required to be filed were timely filed in
fiscal year ended December 31, 2008.




17




Code of
Ethics:





The Company has adopted a Code of
Ethics applicable to its Chief Executive Officer and Chief Financial Officer.
This Code of Ethics is filed herewith as an exhibit.





Item
11.  Executive Compensation





The following summary compensation
table sets forth all compensation paid by Somerset during the fiscal years ended
December 31, 2008, 2007 and 2006 in all capacities for the accounts of the Chief
Executive Officer (CEO) and Chief Financial Officer (CFO).





Name
      and Principal Position
                          Year
                          Annual  Compensation
                          Restricted
      Stock AwardsJohn
      X. Adiletta, CEO
                          2008
                          $366,000
                          02007
                          $332,750
                          02006
                          $302,500
                          0




John X.
Adiletta, our Chairman, President and CEO, entered into an employment Agreement
with Somerset-NJ in January 2004, pursuant to which he currently receives a base
salary of $250,000 (subject to a minimum upward adjustment of 10% annually).
Pursuant to our merger with Somerset-NJ we assumed the obligations set forth in
the employment agreement. Mr. Adiletta is also eligible for such bonus
compensation as may be determined by the Board of Directors from time to time,
as well as a bonus of five percent (5%) of the earnings before interest,
depreciation, and amortization based on our audited consolidated results. The
employment agreement terminates on December 31, 2009. The agreement contains
non-competition and termination non-solicitation provisions which survive the
termination of Mr. Adiletta’s employment for one year. In the event of
termination of employment without cause, the agreement provides that we shall:
(1) pay Mr. Adiletta severance equaling the greater of the balance of the
term of the agreement or one year’s salary, (2) provide to Mr. Adiletta
certain medical (including disability) and vacation benefits; and (3) within 3
months of termination, pay to Mr. Adiletta an amount equal to the bonus
paid to Mr. Adiletta in the preceding year under the agreement. In the
event of a change of control, as defined in the agreement, Mr. Adiletta may
at his election, at any time within one year after such event, terminate the
agreement with 60 days prior written notice. Upon such termination,
Mr. Adiletta is entitled to: (1) a lump-sum severance payment equal to 200%
of Mr. Adiletta’s annual salary rate in effect as of the termination, or if
greater, such rate in effect immediately prior to the change in control of
Somerset, (2) an amount equal to 200% of his bonus for the previous year; and
(3) for a eighteen (18) month period after such termination certain disability,
accident and group health insurance benefits.  On August 29, 2008, the
Board of Directors, with the approval of a majority of the shareholders of the
Company entered into an amendment to extend the Employment Agreement dated
January 6, 2004 for an additional 3 years from January 6, 2009.  On
January 6, 2009, Mr. Adiletta signed an additional agreement, in which he agreed
to permanently waive the 2009 salary increase provided for in his employment
agreement. The additional agreement is for the period of January 6, 2009 though
January 5, 2010.





18




Directors
do not receive any monetary remuneration for their services as
such.





The Company does not have a pension
plan.





Item
12.  Security Ownership of Certain Beneficial Owners and
Management





The following table sets forth the
number and percentage of the shares of Somerset’s voting stock owned as of March
31, 2009 by all persons known to Somerset who own more than 5% of the
outstanding number of such shares, by all directors of Somerset, and by all
officers and directors of Somerset as a group.  Unless otherwise
indicated, each of the stockholders has sole voting and investment power with
respect to the shares beneficially owned.




Title
      of Class
                          Name
                          Number
      of Shares Beneficially Owned
                          Percent
      of ClassCommon
                          John
      X. Adilettac/o
      90 Washington Valley Road Bedminster, New Jersey 09721
                          5,750,000
                          24.62%Common
                          William
      F. Farley  c/o 90 Washington Valley Road Bedminster, New Jersey
      07921
                          4,980,436
                          21.33%Voting
                          All
      Directors and Officers as a group
                          5,750,000
                          24.62%




Item 13.
Certain Relationships and Related Transactions





The stockholder note payable was
$388,528 at December 31, 2008. The note plus accrued interest matured on
December 31, 2007. On July 1, 2004, the Company amended the note to add accrued
interest through June 30, 2004 of $266,855 to the principal amount of $503,602.
The new principal amount of the note was repaid with a $150,000 payment on March
11, 2005 and monthly payments of $17,928 including annual interest at 10%
beginning March 1, 2006 and ending July 1, 2009.  Payments are
currently in arrears.




On December 31, 2007, the Company
approved the issuance of 1,700,000 shares of restricted common stock to John X.
Adiletta, the Company’s President and Chief Executive Officer. These shares are
being issued based on the conversion of $100,000 in salary owed to John X.
Adiletta at the rate of $0.05 per share.  Such shares were issued
pursuant to an exemption from registration at Section 4(2) of the Securities Act
of 1933 and are restricted in accordance with Rule 144 of the Securities Act of
1933.





19





Item
14.  Principal Accounting Fees and Services





Audit
Fees





For the Company's fiscal years ended
December 31, 2008 and December 31, 2007, the Company was billed approximately
$122,000 and $115,000, respectively for professional services rendered for the
audit and review of its financial statements, as well as the issuance of
consents on registration statements.





Tax
Fees





For the Company's fiscal years ended
December 31, 2008 and 2007, the Company incurred $0 and $6,505, respectively for
preparation of its corporate income tax returns.





All Other
Fees





None for 2008 and 2007.








PART
IV





Item
15.  Exhibits, Financial Statement Schedules





(a)
Reports on Form 8-K and Form 8K-A




On
January 2, 2008, the Company filed an 8K for the issuance of shares to John X.
Adiletta, Dian Griesel and. James K. Moran.




On
January 28, 2008, the Company filed an 8K for the Stock Purchase Agreement from
Fire Control Electrical Systems, Inc. and that the Company entered into a
convertible debenture with Dutchess Private Equities Fund, Ltd.
  On April
11, 2008, the Company filed an 8K to disclose that Secure System, Inc. a wholly
owed subsidiary of the Company had renewed its contract with the State of New
York’s Office of Mental Health.
  On August
22, 2008, the Company filed an 8K to disclose that it had entered into a
convertible promissory note with an accredited investor for $50,000 with a
conversion rate of $.25 per share.
  On
September 16, 2008, the Company filed an 8K to disclose it entered into an
amendment to its (i) Debenture dated June 12, 2007 (the “June Debenture”)
between Dutchess Private Equities Fund, Ltd. and the Company; and (ii) Debenture
dated November 13, 2007 between Dutchess and the Company.


20


On
September 22, 2008, the Company filed an 8K that the Board of Directors of the
Company had adopted the 2008 Equity Incentive Plan and entered into an amendment
to extend the Employment Agreement dated January 6, 2004 between the Company and
John X. Adiletta for an additional 3 years.
 
 On
October 22, 2008, the Company filed an 8K to disclose that the Company had
entered into a convertible promissory note with an accredited investor for
$150,000 with a conversion rate of $.25 per share.
 
 On
December 19, 2008, the Company filed an 8K that it had issued 175,000 shares of
the Company’s common stock to BrandQuest Development Group, Inc. for services
rendered.











(b)
Exhibits





14                         Code
of Ethics





31.1                      Certification
of John X. Adiletta pursuant to 18U.S.C. Section 1350 as adopted pursuant
toSection 302 of the Sarbanes-Oxley Act of 2002.





32.1                      Certification
of John X. Adiletta pursuant to 18U.S.C. Section 1350 as adopted pursuant
toSection 906 of the Sarbanes-Oxley Act of 2002.





.





Signatures





Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned hereunto duly
authorized.








SOMERSET INTERNATIONAL GROUP, INC.(Registrant)Date:  March
      31, 2009
              By:
              /s/ John
      X. AdilettaJohn
      X. Adiletta,Chief
      Executive Officer


21





SOMERSET
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES


CONTENTS
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008





PageREPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                                                    F-2CONSOLIDATED
      FINANCIAL STATEMENTSBalance
      Sheets December 31, 2008 and 2007
                                                    F-3Statements
      of Operations
                                                      For
      the Years Ended December 31, 2008 and 2007
                                                    F-4Statements
      of Stockholders' Equity (Deficit)
                                                      For
      the Years Ended December 31, 2008 and 2007
                                                    F-5
      - F-6Statements
      of Cash Flows
                                                      For
      the Years Ended December 31, 2008 and 2007
                                                    F-7Notes
      to Consolidated Financial Statements
                                                    F-8
      -
F-25


F-1




Report of
Independent Registered Public Accounting Firm











To the
Board of Directors of Somerset International Group, Inc. and
Subsidiaries:





We have
audited the accompanying consolidated balance sheets of Somerset International
Group, Inc. and Subsidiaries as of December 31, 2008 and 2007, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the two years in the period then ended.  These
consolidated financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Somerset
International Group, Inc. and Subsidiaries as of December 31, 2008 and 2007, and
the consolidated results of their operations and their cash flows for each of
the two years in the period then ended in conformity with accounting principles
generally accepted in the United States of America.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern.  As discussed in Note 1B
to the consolidated financial statements, the Company had net losses for the
years ended December 31, 2008 and 2007 of approximately $2,008,000 and
$1,484,000, respectively, an accumulated deficit of approximately $33,050,000
and a stockholders’ deficit of $1,660,000 as of December 31, 2008 and the
Company utilized net cash in operating activities of approximately $167,000 for
the year then ended. In addition, at December 31, 2008, the Company had a
working capital deficit of approximately $2,979,000. Management’s plan with
respect to this matter are discussed in Note 1B and includes plans for
additional financing to fund its current operations, and additional financing to
acquire or develop other business opportunities.  These factors raise
substantial doubt about the Company’s ability to continue as a going
concern.  The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.











/s/
WithumSmith+Brown, P.C.


Somerville,
NJ


March
31, 2009








F-2


SOMERSET INTERNATIONAL GROUP, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


DECEMBER
31, 2008 AND 2007





2008
                    
                    
                    2007ASSETSCurrent
      Assets:Cash
      and cash equivalents
                    
                    $
                    65,732
                    
                    
                    $
                    350,110Accounts
      receivable, net
                    
                    
                    645,233
                    
                    
                    
                    951,177Inventories
                    
                    
                    488,156
                    
                    
                    
                    572,707Prepaid
      expenses
                    
                    
                    4,209
                    
                    
                    
                    8,982Other
      current assets
                    
                    
                    10,444
                    
                    
                    
                    20,838Total
      Current Assets
                    
                    
                    1,213,774
                    
                    
                    
                    1,903,814Property
      and equipment, net
                    
                    
                    115,873
                    
                    
                    
                    77,331Other
      Assets:Deposits
                    
                    
                    9,825
                    
                    
                    
                    9,825Deferred
      financing costs, net
                    
                    
                    215,000
                    
                    
                    
                    313,333Non
      compete covenant, net
                    
                    
                    --
                    
                    
                    
                    37,313Customer
      Lists, net
                    
                    
                    1,619,185
                    
                    
                    
                    2,213,107Software,
      net
                    
                    
                    --
                    
                    
                    
                    12,743Distribution
      agreements, net
                    
                    
                    52,928
                    
                    
                    
                    140,622Goodwill
                    
                    
                    2,200,355
                    
                    
                    
                    2,200,355Total
      other assets
                    
                    
                    4,097,293
                    
                    
                    
                    4,927,298TOTAL
      ASSETS
                    
                    $
                    5,426,940
                    
                    
                    $
                    6,908,443LIABILITIES
      AND STOCKHOLDERS’ EQUITY(DEFICIT)Current
      Liabilities:Accounts
      payable and accrued expenses
                    
                    $
                    1,264,356
                    
                    
                    $
                    793,389Promissory
      notes payable - current
                    
                    
                    1,360,561
                    
                    
                    
                    1,116,109Dutchess
      promissory notes payable - current
                    
                    
                    1,023,000
                    
                    
                    
                    461,000Accrued
      interest payable
                    
                    
                    276,865
                    
                    
                    
                    201,225Deferred
      revenue
                    
                    
                    268,081
                    
                    
                    
                    310,911Total
      Current Liabilities
                    
                    
                    4,192,863
                    
                    
                    
                    2,882,634Dutchess
      promissory notes payable – non-current
                    
                    
                    2,853,407
                    
                    
                    
                    3,574,000Stockholder
      note payable - non-current
                    
                    
                    --
                    
                    
                    
                    121,419Promissory
      notes payable – non-current portion
                    
                    
                    40,499
                    
                    
                    
                    --TOTAL
      LIABILITIES
                    
                    
                    7,086,769
                    
                    
                    
                    6,578,053Stockholders’
      Equity(Deficit):Common
      Stock, 200,000,000 shares authorized,
                    
                    
                    23,334
                    
                    
                    
                    23,059$.001
      par value, 23,333,655 and 23,058,655 shares issued and outstanding in 2008
      and 2007 respectivelyCapital
      in excess of par value
                    
                    
                    31,366,808
                    
                    
                    
                    31,349,583Accumulated
      deficit
                    
                    
                    (33,049,971
                    )
                    
                    
                    (31,042,252
                    )Total
      Stockholders’ Equity(Deficit)
                    
                    
                    (1,659,829
                    )
                    
                    
                    330,390TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY(DEFICIT)
                    
                    $
                    5,426,940
                    
                    
                    $
                    6,908,443





See
accompanying Notes to the Consolidated Financial Statements




F-3


SOMERSET INTERNATIONAL GROUP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007








2008
                
                
                2007RevenuesEquipment
      sales
                
                $
                2,440,907
                
                
                $
                2,282,936Installation
      revenues
                
                
                536,364
                
                
                
                542,523Maintenance
      revenues
                
                
                1,755,173
                
                
                
                1,053,853Total
      revenues
                
                
                4,732,444
                
                
                
                3,879,312Costs
      of goods soldMaterial
      cost of systems sold
                
                
                1,249,264
                
                
                
                978,158Install
      and service costs
                
                
                376,012
                
                
                
                644,198Engineering
      and development
                
                
                135,967
                
                
                
                157,934Total
      costs of goods sold
                
                
                1,761,243
                
                
                
                1,780,290Gross
      margin
                
                
                2,971,201
                
                
                
                2,099,023Selling,
      general, and administrative expensesSelling,
      general, and administrative expense
                
                
                3,530,298
                
                
                
                2,515,055Depreciation
      expense
                
                
                37,918
                
                
                
                16,430Amortization
      expense
                
                
                831,200
                
                
                
                608,606Total
      selling, general, and administrative expenses
                
                
                4,399,416
                
                
                
                3,140,091Loss
      from operations
                
                
                (1,428,215
                )
                
                
                (1,041,068
                )Other
      Income(Expense)Amortization
      of debt discount
                
                
                --
                
                
                
                (24,000
                )Interest
      expense
                
                
                (567,594
                )
                
                
                (416,534
                )Other
      income (expense)
                
                
                7,094
                
                
                
                (2,633
                )Total
      other expense
                
                
                (560,500
                )
                
                
                (443,167
                )Loss
      before income taxes
                
                
                (1,988,715
                )
                
                
                (1,484,235
                )Provision
      for income taxes
                
                
                19,004
                
                
                
                97Net
      loss
                
                
                (2,007,719
                )
                
                
                (1,484,332
                )Dividends
      on preferred stock
                
                
                --
                
                
                
                268,746Net
      loss attributable to common stockholders
                
                $
                (2,007,719
                )
                
                $
                (1,753,078
                )Basic
      and diluted net loss per common share
                
                $
                (0.09
                )
                
                $
                (0.15
                )Weighted
      Average Number of Common Shares
                
                
                23,170,528
                
                
                
                11,525,387





See
accompanying Notes to the Consolidated Financial Statements





F-4




SOMERSET
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)


FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007








PREFERRED
      STOCK
                
                COMMON
      STOCK
                
                CLASS
      A
                  COMMON
      STOCK
                
                CAPITAL
      IN
                
                
                
                TOTAL
                  STOCKHOLDERS’SHARES
                
                PAR
      VALUE
                
                SHARES
                
                PAR
      VALUE
                
                SHARES
                
                PAR
      VALUE
                
                EXCESS
      OF PAR
                
                ACCUMULATED
      DEFICIT
                
                EQUITY
      (DEFICIT)Balance
      at December 31, 2006
                -
                $
                -
                
                6,933,676
                $
                6,934
                
                -
                
                -
                $
                26,551,273
                $
                (29,289,174)
                $
                (2,730,967)Net
      Loss
                -
                
                -
                
                -
                
                -
                
                -
                
                -
                
                -
                
                (1,484,332)
                
                (1,484,332)Issuance
      of dividends on Convertible Redeemable Preferred Stock
                -
                
                -
                
                -
                
                -
                
                -
                
                -
                
                -
                
                (268,746)
                
                (268,746)Issuance
      of Common Stock for services
                -
                
                -
                
                50,000
                
                50
                
                -
                
                -
                
                9,950
                
                -
                
                10,000Issuance
      of Common Stock for cash
                -
                
                -
                
                60,000
                
                60
                
                -
                
                -
                
                6,144
                
                -
                
                6,204Issuance
      of Common Stock for cash
                -
                
                -
                
                84,700
                
                85
                
                -
                
                -
                
                15,839
                
                -
                
                15,924Issuance
      of Common Stock for cash and warrants
                -
                
                -
                
                50,000
                
                50
                
                -
                
                -
                
                23,950
                
                -
                
                24,000Issuance
      of Common Stock for extension of debt terms
                -
                
                -
                
                50,000
                
                50
                
                -
                
                -
                
                7,450
                
                -
                
                7,500Issuance
      of Common Stock for conversion of debt
                -
                
                -
                
                2,459,173
                
                2,459
                
                -
                
                -
                
                399,632
                
                -
                
                402,091Issuance
      of Common Stock to
                  Seller
                -
                
                -
                
                666,666
                
                667
                
                -
                
                -
                
                99,333
                
                -
                
                100,000Issuance
      of Common Stock for conversion of debt
                -
                
                -
                
                572,240
                
                572
                
                -
                
                -
                
                85,264
                
                -
                
                85,836Issuance
      of Common Stock for conversion of redeemable preferred
    stock
                -
                
                -
                
                9,932,200
                
                9,932
                
                -
                
                -
                
                3,962,948
                
                -
                
                3,972,880Return
      of Common Stock for services
                -
                
                -
                
                (300,000)
                
                (300)
                
                -
                
                -
                
                (59,700)
                
                -
                
                (60,000)Issuance
      of Common Stock to
                  Seller
                -
                
                -
                
                500,000
                
                500
                
                -
                
                -
                
                149,500
                
                
                
                150,000Issuance
      of Common Stock for
                  services
                -
                
                -
                
                300,000
                
                300
                
                -
                
                -
                
                14,700
                
                -
                
                15,000Issuance
      of Common Stock for payment of an accrued liability to an
      officer
                -
                
                -
                
                1,700,000
                
                1,700
                
                -
                
                -
                
                83,300
                
                -
                
                85,000Balance
      at December 31, 2007
                -
                $
                -
                
                23,058,655
                $
                23,059
                
                -
                
                -
                $
                31,349,583
                $
                (31,042,252)
                $
                330,390


See
accompanying Notes to the Consolidated Financial Statements


F-5


SOMERSET
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)


FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007




PREFERRED
      STOCK
                
                COMMON
      STOCK
                
                CLASS
      A
                  COMMON
      STOCK
                
                CAPITAL
      IN
                
                
                
                TOTAL
                  STOCKHOLDERS’SHARES
                
                PAR
      VALUE
                
                SHARES
                
                PAR
      VALUE
                
                SHARES
                
                PAR
      VALUE
                
                EXCESS
      OF PAR
                
                ACCUMULATED
      DEFICIT
                
                EQUITY
      (DEFICIT)Balance
      at December 31, 2007
                -
                $
                -
                
                23,058,655
                $
                23,059
                
                -
                
                -
                $
                31,349,583
                $
                (31,042,252)
                $
                330,390Net
      Loss
                -
                
                -
                
                -
                
                -
                
                -
                
                -
                
                -
                
                (2,007,719)
                
                (2,007,719)Issuance
      of Common Stock for in connection with notes payable
                -
                
                -
                
                25,000
                
                25
                
                -
                
                -
                
                2,225
                
                -
                
                2,250Issuance
      of Common Stock for in connection with notes payable
                -
                
                -
                
                75,000
                
                75
                
                -
                
                -
                
                2,925
                
                -
                
                3,000Issuance
      of Common Stock for
                  services
                -
                
                -
                
                175,000
                
                175
                
                -
                
                -
                
                12,075
                
                -
                
                12,250Balance
      at December 31, 2008
                -
                $
                -
                
                23,333,655
                $
                23,334
                
                -
                
                -
                $
                31,366,808
                $
                (33,049,971)
                $
                (1,659,829)








See
accompanying Notes to the Consolidated Financial
Statements


F-6


SOMERSET
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007




Cash
      Flows From Operating Activities:
                    
                    2008
                    
                    
                    2007Net
      Loss
                    
                    $
                    (2,007,719
                    )
                    
                    $
                    (1,484,332
                    )Adjustments
      to reconcile net loss tonet
      cash used in operating activities:Amortization
      of debt discount
                    
                    
                    --
                    
                    
                    
                    24,000Depreciation
                    
                    
                    37,918
                    
                    
                    
                    16,430Amortization
                    
                    
                    831,200
                    
                    
                    
                    608,606Gain
      on sale of equipment
                    
                    
                    (2,500
                    )
                    
                    
                    --Stock
      issued for services
                    
                    
                    12,250
                    
                    
                    
                    25,000Stock
      issued to settle accrued compensation
                    
                    
                    --
                    
                    
                    
                    85,000Other
      adjustments
                    
                    
                    --
                    
                    
                    
                    (50,000
                    )Stock
      issued for interest
                    
                    
                    --
                    
                    
                    
                    195,427Changes
      in operating assets and liabilities:Accounts
      receivable
                    
                    
                    305,944
                    
                    
                    
                    174,842Inventories
                    
                    
                    84,551
                    
                    
                    
                    38,794Prepaid
      expense
                    
                    
                    4,773
                    
                    
                    
                    63,880Other
      current assets
                    
                    
                    10,395
                    
                    
                    
                    1,062Deposits
                    
                    
                    --
                    
                    
                    
                    11,450Accounts
      payable and accrued expenses
                    
                    
                    517,677
                    
                    
                    
                    (863,732
                    )Accrued
      interest payable
                    
                    
                    80,890
                    
                    
                    
                    (45,723
                    )Deferred
      revenue
                    
                    
                    (42,830
                    )
                    
                    
                    (47,678
                    )Employment
      contracts payable
                    
                    
                    --
                    
                    
                    
                    (6,939
                    )Net
      Cash Used in Operating Activities
                    
                    
                    (167,451
                    )
                    
                    
                    (1,253,913
                    )Cash
      Flows From Investing Activities:Acquisition
      of subsidiaries, net of cash acquired
                    
                    
                    --
                    
                    
                    
                    (1,542,306
                    )Purchase
      of equipment
                    
                    
                    (19,830
                    )
                    
                    
                    (53,161
                    )Proceeds
      from sale of fixed assets
                    
                    
                    26,300
                    
                    
                    
                    --Net
      Cash Provided by (Used in) Investing Activities
                    
                    
                    6,470
                    
                    
                    
                    (1,595,467
                    )Cash
      Flows From Financing Activities:Proceeds
      from issuance of Dutchess debentures
                    
                    
                    --
                    
                    
                    
                    3,695,000Payment
      of Dutchess debentures
                    
                    
                    (206,000
                    )
                    
                    
                    (15,000
                    )Proceeds
      from issuance of notes payable
                    
                    
                    200,000
                    
                    
                    
                    95,000Proceeds
      from issuance of stock
                    
                    
                    --
                    
                    
                    
                    46,128Payment
      of seller note
                    
                    
                    (104,165
                    )
                    
                    
                    (124,998
                    )Payment
      of promissory notes
                    
                    
                    (13,232
                    )
                    
                    
                    (375,000
                    )Payment
      for return and retirement of stock
                    
                    
                    --
                    
                    
                    
                    (10,000
                    )Payment
      of stockholder note payable
                    
                    
                    --
                    
                    
                    
                    (113,239
                    )Net
      Cash Provided by (Used in ) Financing Activities
                    
                    
                    (123,397
                    )
                    
                    
                    3,197,892Net
      Change in Cash and Cash Equivalents
                    
                    
                    (284,378
                    )
                    
                    
                    348,512Beginning
      of the Year
                    
                    
                    350,110
                    
                    
                    
                    1,598End
      of the Year
                    
                    $
                    65,732
                    
                    
                    $
                    350,110Cash
      paid for:Interest
                    
                    $
                    574,878
                    
                    
                    $
                    274,330Income
      Taxes
                    
                    $
                    19,004
                    
                    
                    $
                    97Non
      Cash Investing & Financing Activities:Promissory
      note incurred upon acquisition of equipment
                    
                    $
                    80,430
                    
                    
                    $
                    --Accretion
      of preferred stock dividends
                    
                    $
                    --
                    
                    
                    $
                    268,746Conversion
      of convertible redeemablepreferred
      shares to common stock
                    
                    $
                    --
                    
                    
                    $
                    3,972,880Conversion
      of convertible debt to common stock
                    
                    $
                    --
                    
                    
                    $
                    300,000Deferred
      finance cost paid with note payable
                    
                    $
                    --
                    
                    
                    $
                    355,000




See
accompanying Notes to the Consolidated Financial Statements




F-7




Note
1.  Business and Basis of Presentation









A.
            Nature of the
Business




Somerset
International Group, Inc. (the “Company”) is in the business of acquiring
profitable or near term profitable private small and medium sized businesses
that provide proprietary security products and solutions for people and
enterprises – from personal safety to information security – and maximizing the
profitability of our acquired entities and to act as a holding company for such
entities. On July 7, 2004, we entered into a Plan and Agreement of Merger with
Secure Systems, Inc., a New Jersey corporation, which provides wireless security
products and services marketed throughout the United States.





On June 30,
2007, we entered into a Stock Purchase Agreement (“Agreement”) in which Secure,
our wholly owned subsidiary, purchased all the shares of Meadowlands Fire,
Safety, and Electrical Supply Co., Inc., a New Jersey corporation, and Vanwell
Electronics, Inc., a New Jersey corporation (collectively “Meadowlands”) from
Keith Kesheneff and Kathryn Kesheneff, being all of the shareholders of
Meadowlands.  Pursuant to the Agreement, Secure acquired Meadowlands,
whereby Meadowlands became a wholly owned subsidiary of
Secure.  Meadowlands specializes in the distribution, sale,
installation and maintenance of fire and security equipment and systems that
include fire detection, video surveillance, and burglar alarm equipment (see
Note 10).





Effective
October 1, 2007, we entered into a Stock Purchase Agreement (“Agreement”) in
which Somerset purchased all the shares of Fire Control Electrical Systems,
Inc., a New Jersey corporation, ( “Fire Control”) from Vincent Bianco and Opie
Brinson, being all of the shareholders of Fire Control.  Pursuant to
the Agreement, Somerset acquired Fire Control, whereby Fire Control became a
wholly owned subsidiary of Somerset.  Fire Control specializes in the
distribution, sale, installation and maintenance of fire and security equipment
and systems that include fire detection, video surveillance, and burglar alarm
equipment.  The results of operations for the acquired entity will be
included in consolidated statements of operations beginning October 1, 2007 (see
Note 10).





Our
executive office is located at 90 Washington Valley Road, Bedminster, New
Jersey, 07921. Customers
are located primarily in the northeastern United States.




B.
            Basis of
  Presentation




The
accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern.  This
contemplates the realization of assets and the liquidation of liabilities in the
normal course of business. Currently, the Company does not have significant cash
or other material assets, nor does it have operations or a source of revenue
which is adequate to cover its administrative costs for a period in excess of
one year and allow it to continue as a going concern.  This
contemplates the realization of assets and the liquidation of liabilities in the
normal course of business. Management is actively involved in exploring business
opportunities which they believe will allow the Company to increase
shareholder’s value and allow it to continue as a going
concern.




F-8




In order to
continue operations, the Company requires additional capital infusions to
acquire or develop business opportunities.  Management continues to
search out financing opportunities to finance its operations. If management is
unsuccessful in this regard, they would seek to sell or dissolve the
Company.  The Company had net losses for the years ended December 31,
2008 and 2007 of approximately $2,008,000 and $1,484,000, respectively, and had
an accumulated deficit of approximately $33,050,000 and a stockholders’ deficit
of approximately $1,660,000 as of December 31, 2008.  The Company also
utilized net cash in operating activities of approximately $167,000 in 2008. In
addition at December 31, 2008, the Company has a working capital deficit of
approximately $2,979,000. The Company will require financing to fund its current
operations and will require additional financing to acquire or develop other
business opportunities.  These conditions raise substantial doubt
about the Company’s ability to continue as a going concern.  The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.




Note
2.  Significant Accounting Policies




A.
            Cash and cash
      equivalents




Cash and cash
equivalents include cash on hand and in the bank, as well as all short-term
securities held for the primary purpose of general liquidity.  Such
securities normally mature within three months from the date of
acquisition.




B.
            Accounts
      Receivables




Accounts
receivables are uncollateralized customer obligations due under normal trade
terms requiring payment within 30 days from the invoice
date.  Accounts receivables are stated at the amount billed to the
customer.  Interest is not billed or accrued.  Accounts
receivables in excess of 90 days old are considered
delinquent.  Payments to accounts receivables are allocated to the
specific invoices identified on the customers remittance advice or, if
unspecified, are applied to the oldest invoice.  The Company has an
allowance for doubtful accounts of approximately $41,000 and $74,000 as of
December 31, 2008 and 2007, respectively, based on its historical
collectability.





C.
            Property
      and  Equipment




Property,
equipment, and leasehold improvements are stated at
cost.  Depreciation is provided on a straight-line method over the
estimated useful lives of the assets ranging from two-seven
years.  Leasehold improvements are depreciated over the lesser of
their useful lives or the term of the lease.  Expenditures for
maintenance and repairs are charged to expense as incurred.




D.
              Concentration of Credit
      Risk:
  The Company
maintains its cash in bank deposit accounts at high credit quality financial
institutions.  The balances, at times, may exceed federally insured
limits.





F-9




Currently,
Secure System, Inc. has five customers which accounted for all of their
revenues. Meadowlands has approximately 200 accounts and Fire Control has
approximately 150 accounts which accounted for all of their
revenues.  While our goal is to diversify Secure’s and Fire Control’s
customer base, Secure expects to continue to depend upon a relatively small
number of customers for a significant percentage of its revenues for the
foreseeable future. Significant reductions in sales to any of our customers may
have a material adverse effect on us by reducing our revenues and our gross
margins.




E.
              Use of
  Estimates:
  The preparation
of financial statements in conformity with United States generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures including the disclosure of
contingent assets and liabilities.  Accordingly, actual results could
differ from those estimates.  Such estimates include the fair value
estimates related to the net tangible and identifiable assets of acquired
companies and the estimated fair value of reporting units used when evaluating
Goodwill for impairment.


F.
              Income
  Taxes:
 Deferred income tax assets and liabilities are recognized for the differences
between financial and income tax reporting basis of assets and liabilities based
on enacted tax rates and laws. The deferred income tax provision or benefit
generally reflects the net change in deferred income tax assets and liabilities
during the year. The current income tax provision reflects the tax consequences
of revenues and expenses currently taxable or deductible on the Company’s
various income tax returns for the year reported. The Company’s deferred tax
items are net operating loss carryforwards, other items, and related deferred
tax assets and have been offset by a valuation allowance for the same
amount.




G.
            Fair Value of Financial
      Instruments:




The
carrying amounts of cash, accounts receivable, accounts payable, promissory
notes payable, and stockholder note payable approximate fair value because of
the terms of these financial instruments.




H.
            Principles of
      Consolidation:




The consolidated financial statements include the operations of Somerset
International, Inc., its wholly owned subsidiaries Fire Control Security
Systems, Inc. and Secure System, Inc., and Secure System Inc.’s wholly owned
subsidiaries Meadowlands Fire, Safety, and Electrical Supply Co., Inc., and
Vanwell Electronics Inc.  All significant intercompany accounts and
transactions have been eliminated in consolidation.




I.
            Stock Based Compensation and Stock
      Sales:




Stock and warrants issued for employee compensation services have been
determined based on the value of the instrument issued at date of issuance for
such services.  In addition, during 2007 and 2008 the Company issued
warrants as part of certain sales of common stock.  The value of these
warrants has been included in additional paid in capital as part of the value of
the overall stock sale.




F-10




J.
            Revenue
  Recognition:


Installation, subscription and
maintenance revenues include installation of equipment and testing at customer
sites, fees for leased wireless equipment, and fees for equipment maintenance.
These revenues are recognized as the services are performed, or ratably over
time in the case of fees that may be billed quarterly or semi-annually in
advance. Revenues related to pre-billed services are deferred until the service
is provided and thereby earned. Equipment revenue is recognized when the
equipment is delivered to the customer. The Company recognizes revenue only when
persuasive evidence of an arrangement exists, when delivery of merchandise has
occurred or services have been rendered, the fee is established and is
determinable and collection is reasonably assured.





The
Company has three separate and distinct revenue streams – equipment sales,
installation and maintenance.





The
description of each stream is as follows:





·
              Equipment:





The
pricing for an equipment sale is generally established through a customer
purchase order and is a separate stand-alone arrangement.  Revenue is
recognized for equipment sales upon the delivery of the equipment, which is the
date on which customer becomes responsible for the payment of the
equipment.





·
              Installation:


Installation
services are a separate stand-alone arrangement consisting of final connections
of the equipment and individual testing of the equipment pieces.  Such
services occur after electrical work has been contracted and supervised by the
customer, and completed by an outside third party.  Installation
services, when performed by the Company, are separately negotiated with the
customer, and are recognized upon completion of the service by the
Company.





·
              Maintenance:


These are
separately priced contracts that are entered into with a customer typically
after the installation services are performed.  Maintenance services
are not bundled into any other service.  These maintenance services
are recognized as revenues as the services are performed.  These
services are billed at the end of the month after the service is provided or if
provided through a contractual arrangement then pre-billed for the defined
periods, i.e. quarterly, semi-annual, or annual. Deferred Revenue on the
Company’s balance sheet represents amounts billed to customers for maintenance
to be performed in future periods.




K.
              Inventory:





Inventory consists primarily of parts and work in process products held for
sale. Inventory, at year end, is stated at the lower of cost or market, with
cost being determined on a first in/first out basis.




F-11


L.
              Loss Per
  Share:




The Company computes net loss per share
under the provisions of SFAS No. 128, “Earnings per Share” (SFAS 128), and
utilizes guidance provided by SEC Staff Accounting Bulletin No. 98 (SAB 98).
Under the provisions of SFAS 128 and SAB 98, basic loss per share is computed by
dividing the Company’s net loss for the period by the weighted-average number of
shares of common stock outstanding during the period. Diluted net loss per share
excludes potential common shares if the effect is anti-dilutive. Diluted
earnings per share are determined in the same manner as basic earnings per share
except that the number of shares is increased assuming exercise of dilutive
stock options and warrants using the treasury stock method. As the Company had a
net loss, the impact of the assumed exercise of the stock options and warrants
is anti-dilutive and as such, these amounts have been excluded from the
calculation of diluted loss per share. For the periods ended December 31, 2008
and 2007, 3,859,314 and 3,047,514 of common stock equivalent shares were
excluded from the computation of diluted net loss per share after considering
ownership limitations of certain warrants and conversion features.




M.
            Goodwill and Intangible
      Assets:


Goodwill and intangible assets result
primarily from acquisitions accounted for under the purchase method. In
accordance with Statement of Financial Accounting Standards (“SFAS") No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142") goodwill and intangible
assets with indefinite lives are not amortized but are subject to impairment by
applying a fair value based test. Intangible assets with finite useful lives
related to software, customer lists, covenant not to compete and other
intangibles are being amortized on a straight-line basis over the estimated
useful life of the related asset, generally three to seven years.  As
of December 31, 2008, no impairment charge was necessary.




In
accordance with SFAS No.142, the Company reviews the carrying value of goodwill
and intangible assets with indefinite lives annually or on an interim basis in
certain circumstances as required. The Company measures impairment losses by
comparing carrying value to fair value. The impairment test compares the
carrying amount of the reporting unit to its fair value.  Discounted
cash flows are utilized to determine the fair value of the assets being
evaluated.  The impairment test in 2008 and 2007 supported the
carrying value of goodwill, and as such, no write-down in the carrying value of
goodwill was recorded.




In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets," long-lived assets used in operations are reviewed for
impairment whenever events or change circumstances indicate that carrying
amounts may not be recoverable. For long-1ived assets to be held used, the
Company recognizes an impairment loss only if its carrying amount is not
recoverable through its undiscounted cash flows and measures the impairment loss
based on the difference between carrying amount and fair value.




F-12




Note
3.  Recent Accounting Pronouncements





Effective
January 1, 2008, the Company adopted SFAS No. 157, "Fair Value Measurements"
(SFAS 157). In February 2008, the FASB issued FASB Staff Position
No.  FAS 157-2, "Effective Date of FASB Statement No. 157", which
provides a one year deferral of the effective date of SFAS 157 for non-financial
assets and non-financial liabilities, except those that are recognized or
disclosed in the financial statements at fair value at least annually.
Therefore, the Company has adopted the provisions of SFAS 157 with respect to
its financial assets and liabilities only.  SFAS 157 defines fair
value, establishes a framework for measuring fair value under generally accepted
accounting principles and enhances disclosures about fair value
measurements.  Fair value is defined under SFAS 157 as the exchange
price that would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the
measurement date.  Valuation techniques used to measure fair value
under SFAS 157 must maximize the use of observable inputs and minimize the use
of unobservable inputs. The standard describes a fair value hierarchy based on
three levels of inputs, of which the first two are considered observable and the
last unobservable, that may be used to measure fair value which are the
following:





• Level
1—Quoted prices in active markets for identical assets or
liabilities.




• Level
2—Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities.




• Level
3—Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or
liabilities.





Effective
January 1, 2008, the Company adopted SFAS No. 159 "The Fair Value Option for
Financial Assets and Financial Liabilities" (SFAS 159). SFAS 159 allows an
entity the irrevocable option to elect fair value for the initial and subsequent
measurement for specified financial assets and liabilities on a
contract-by-contract basis. The Company did not elect to adopt the fair value
option under this Statement for any of its financial instruments.





Since
these financial statements had no fair value measurements that would require
fair value disclosure under this pronouncement, the adoption of this statement
did not have a material impact on the Company's consolidated results of
operations and financial condition.







F-13




In March 2008, the FASB issued
Statement of Financial Accounting Standard No. 161 (SFAS 161), “Disclosures
about Derivative Instruments and Hedging Activities—an amendment of FASB
Statement No. 133”, which is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after November 15,
2008.  Early application is encouraged.  SFAS 161 changes
the disclosure requirements for derivative instruments and hedging activities.
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.  The Statement requires that objectives for using derivative
instruments be disclosed in terms of underlying risk and accounting
designation.  In addition, the standard requires tabular disclosure of
fair value of derivative instruments and their gains and loss, requires
disclosure regarding credit risk related contingent features of the Company’s
derivative instruments and requires cross referencing within the footnote
disclosures regarding information about derivative
instruments.   The Company does not expect that this
pronouncement will have a significant impact on its financial condition or
results of operations.





In
December 2007, the FASB issued Statement of Financial Accounting Standard No.
160 (SFAS 160), “Non-Controlling Interests in Consolidated Financial Statements,
An Amendment of Accounting Research Bulletin No. 51”, which is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008.  Early application is not permitted before
that date.  SFAS 160 changes the terminology of minority interests,
which will now be known as non-controlling interest and requires that
non-controlling interests be clearly identified within stockholders’ equity as a
separate component from the parent company’s equity and net income or loss
attributable to non-controlling interests be clearly identified and presented on
the face of the consolidated statement of operations.  In addition,
the standard requires adequate disclosure between interests of the parent
company and interests of the non-controlling equity
holders.   The Company does not expect that this pronouncement
will have a significant impact on its financial condition or results of
operations.





In
December 2007, the FASB revised Statement of Financial Accounting Standard No.
141 (SFAS 141R), “Business Combinations”, which is effective for 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.  Early application is not permitted before that
date.  SFAS 141R requires assets and liabilities recorded in a
business combination to be recorded at fair value and replaces the
cost-allocation process under the prior standard.  In addition, SFAS
141R requires separate recognition of acquisition costs and requires recognition
of contractual contingencies at fair value as of the acquisition
date.  Further, the revised standard requires capitalization of
research and development assets and requires fair value recognition of
contingent consideration as of the acquisition date.   The
Company is currently evaluating the potential impact of this
pronouncement.





Note
4.  Inventory





Inventory
consists of the following:




2008
                
                
                2007Raw
      materials
                
                $
                398,468
                
                
                $
                467,457Work
      in progress
                
                
                81,188
                
                
                
                95,250Finished
      goods
                
                
                8,500
                
                
                
                10,000Total
                
                $
                488,156
                
                
                $
                572,707





F-14





Note 5.
 Property and Equipment




2008
                      
                      
                      2007Equipment
                      
                      $
                      309,034
                      
                      
                      $
                      308,002Furniture
                      
                      
                      97,203
                      
                      
                      
                      97,173Leasehold
      Improvements
                      
                      
                      69,108
                      
                      
                      
                      69,108Vehicles
                      
                      
                      428,354
                      
                      
                      
                      442,638Total
                      
                      
                      903,699
                      
                      
                      
                      916,921Accumulated
      Depreciation
                      
                      
                      (787,826
                      )
                      
                      
                      (839,590
                      )Property
      and Equipment, net
                      
                      $
                      115,873
                      
                      
                      $
                      77,331








Note
6.  Promissory Notes Payable




The
Company’s debt obligations are comprised of Dutchess notes payable issued in
connection with the Company’s acquisitions of Vanwell and Meadowlands and their
acquisition of Fire Control and other various notes payable.  The following
is a summary of those obligations:





Various
Notes Payable:


Outstanding
balances on notes payable consist of the following at December 31:


2008
                
                
                2007Note
      issued in January 2004 with interest at 12% per annum, convertible at
      $0.25 per share.  Payment due date was extended to December 31,
      2005.
                
                $
                175,000
                
                
                $
                175,000Note
      issued in June 2004 with interest at 12% per annum, convertible at $0.25
      per share.  Payment due date was extended to December 31, 2005.
      [a]
                
                
                100,000
                
                
                
                100,000Notes
      issued in March 2005, with interest at 15% per annum, convertible at $0.15
      per share. Payment due date was extended to December 31,
    2005.
                
                
                74,000
                
                
                
                74,000Note
      issued in April 2005 with interest at 12% per annum, convertible at the
      lesser of $0.15 per share.  Payment due date was extended to December
      31, 2005. [b]
                
                
                20,000
                
                
                
                20,000
  F-15
  June
      2007, interest bearing short term note issued to the sellers in connection
      Vanwell and Meadowlands acquisition, convertible into the Company’s common
      stock at $0.40 per share.
                
                
                20,833
                
                
                
                125,000September
      2007, non-interest bearing short term note issued to the sellers in
      connection Vanwell and Meadowlands acquisition.
                
                
                355,000
                
                
                
                355,000Note
      issued in August 2008, with interest at 15% per annum, convertible at $.25
      per share.  Payment due date is March 2009.
                
                
                50,000
                
                
                
                --Note
      issued in October 2008, with interest at 15% per annum, convertible at
      $.25 per share.  Payment due date is April 2009.
                
                
                150,000
                
                
                
                --10%
      stockholder note payable, with monthly payments of $17,928.  Payments
      are in arrears.
                
                
                388,528
                
                
                
                388,528Vehicle
      Loans
                
                
                67,699
                
                
                
                --Total
      notes payable
                
                
                1,401,060
                
                
                
                1,237,528Less
      Current Portion
                
                
                1,360,561
                
                
                
                1,116,109Long
      Term Portion
                
                $
                40,499
                
                
                $
                121,419





[a]:
 In connection with the June 2004 note, the Company issued 100,000 shares
of stock valued at approximately $15,000, which was recorded as a debt discount
paid and is amortizable over the life of the debt.  Due to limitations on
conversion, debt discount related to the warrants and conversion feature is
insignificant to these financial statements.




[b]:
 In connection with the April 2005 note, the Company issued 20,000 shares
of stock valued at approximately $6,000, which was recorded as a debt discount
paid and is amortizable over the life of the debt.  Due to limitations on
conversion, debt discount related to the warrants and conversion feature is
insignificant to these financial statements.




Dutchess
Notes Payable:




Dutchess
notes payable consist of the following at December 31:




2008
                
                
                2007June
      2007 14% convertible note payable, as amended, with Dutchess Private
      Equities Fund, Ltd., with payments as described below, convertible at the
      lesser of $0.20 per share or 75% of the lowest closing bid price for the
      previous 10 business days [a]
                
                $
                2,581,207
                
                
                $
                2,685,000November
      2007 14% convertible note payable, as amended, with Dutchess Private
      Equities Fund, Ltd., with payments as described below, convertible at the
      lesser of $0.10 per share or 75% of the lowest closing bid price for the
      previous 10 business days [b]
                
                
                1,295,200
                
                
                
                1,350,000Total
      Dutchess notes payable
                
                
                3,876,407
                
                
                
                4,035,000Less
      Current Portion
                
                
                1,023,000
                
                
                
                461,000Long
      Term Portion
                
                $
                2,853,407
                
                
                $
                3,574,000





F-16


[a]:
 In connection with the June 2007 note, the Company issued, as amended, a
5-year warrant to purchase 7,000,000 shares of stock with an exercise price of
$.05 per share. Deferred financing costs paid to Dutchess, amounting to $205,000
are amortizable over the life of the debt.  Due to limitations on
conversion, debt discount related to the warrants and conversion feature is
insignificant to these financial statements.





[b]:
 In connection with the November 2007 note, the Company issued a 5-year
warrant to purchase 5,000,000 shares of stock with an exercise price of $0.05
per share. Deferred financing costs paid to Dutchess, amounting to $150,000 are
amortizable over the life of the debt.  Due to limitations on conversion,
debt discount related to the warrants and conversion feature is insignificant to
these financial statements.





On
September 8, 2008, Somerset International Group, Inc. (the “Company”) entered
into an amendment to its Debenture dated June 12, 2007 (the “June Debenture”)
between Dutchess Private Equities Fund, Ltd. (“Dutchess”) and the Company; and a
debenture dated November 13, 2007 (the “November Debenture”) between Dutchess
and the Company (collectively, the Debenture”).  Pursuant to the
amendment, the parties agreed to the following:









1.
            The
      Company shall pay interest at the rate of 14% per annum, compounded
      daily, on the unpaid face amount of the debenture to
      Dutchess with monthly interest payments at 12% of the
      interest accrued on the principal balance of the a debenture from the last
      interest payment until such time as the current interest payment is due
      and payable and the remaining 2% of the interest due and payable upon
      request from Dutchess or upon the maturity
date.




2.
            The
      Company warrants that no indebtedness of the Company is senior to the
      Debenture in right of payment, whether with respect to interest,
      damages or upon liquidation or dissolution or
  otherwise.




3.
            As
      to the June Debenture, commencing on December 30, 2007,  the
      Company agreed to make the following monthly amortizing
      payments:





·
            December
      30, 2007 – May 31, 2008 Fifteen thousand dollars
      ($15,000)/month


·
            June
      30, 2008 Thirty-five thousand dollars
($35,000)


·
            July
      31, 2008 Fifteen thousand dollars
($15,000)


·
            August
      31, 2008 – December 30, 2008 Two thousand dollars
      ($2,000)/month


·
            January
      31, 2009 – May 31, 2009 Forty-five thousand dollars
      ($45,000)/month


·
            June
      30, 2009 thereafter until the face amount is paid in full Seventy-five
      thousand dollars ($75,000)/month




F-17





4.
            As
      to the November Debenture, commencing on December 30, 2007,  the
      Company shall make the following monthly amortizing
    payments:





·
            January
      31, 2008 – July 31, 2008 Eight thousand dollars
  ($8,000)


·
            August
      31, 2008 – January 31, 2009 Three thousand dollars
  ($3,000)


·
            February
      28, 2009 – July 31, 2009 Twenty thousand dollars
      ($20,000)/month


·
            August
      31, 2009 – April 30, 2010 Thirty thousand dollars
      ($30,000)/month


·
            May
      31, 2010 thereafter until the face amount is paid in full Forty thousand
      dollars ($40,000)/month





As
additional consideration for Dutchess to enter into this Amendment, the Company
issued a warrant to Dutchess to purchase up to 900,000 shares of the Company’s
common stock with an exercise price equal to par value.  Dutchess’s
ownership of the Company’s shares is limited to 4.99% of shares issued and
outstanding.   The fair value of these warrants is not material
to these financial statements.  This warrant is not freely tradable by
Dutchess.





Future
principal maturities on the Dutchess notes payable approximate the
following:





2009
                  
                  $
                  1,023,0002010
                  
                  
                  1,293,0002011
                  
                  
                  1,470,0002012
                  
                  
                  90,400$
                  3,876,400





The
Dutchess notes are securitized by the assets of the company.





Note
7.  Preferred Stock




The preferred stock of the Company has
a par value of $.001 per share and 100,000,000 shares have been authorized to be
issued. No shares of preferred stock were issued or outstanding at December 31,
2008 and 2007.





As of
December 31, 2008 and 2007, no shares of Series A Redeemable Convertible
Preferred Stock are issued and outstanding.  On September 28, 2007, in
accordance with the terms of the Series A Preferred Stock, all of the holders of
preferred stock converted such stock to common stock.





Our
Board of Directors has the authority, without further action by the
shareholders, to issue from time to time the preferred stock in one or more
series for such consideration and with such relative rights, privileges,
preferences and restrictions that the Board may determine. The preferences,
powers, rights and restrictions of different series of preferred stock may
differ with respect to dividend rates, amounts payable on liquidation, voting
rights, conversion rights, redemption provisions, sinking fund provisions and
purchase funds and other matters. The issuance of preferred stock could
adversely affect the voting power or other rights of the holders of common
stock.





F-18




Note 8.
Related Party Transactions




The balance of the stockholder note
payable was $388,528 both at December 31, 2008 and 2007. The original
stockholder note was partially repaid with a $150,000 payment on March 11, 2005
and monthly payments of $17,928 including annual interest at 10% beginning March
1, 2006 and ending July 1, 2009.  Such payments are in arrears as of
December 31, 2008.





On December 31, 2007, the Company approved the issuance of 1,700,000 shares of
restricted common stock to John X. Adiletta, the Company’s President and Chief
Executive Officer. These shares are being issued based on the conversion of
$100,000 in compensation owed to John X. Adiletta at the rate of $0.05 per
share.  Such shares were issued pursuant to an exemption from
registration at Section 4(2) of the Securities Act of 1933 and are restricted in
accordance with Rule 144 of the Securities Act of 1933.





Note
9.  Stockholders’ Equity (Deficit)




As of December 31, 2008, 200,000,000
shares of Common Stock are authorized, 23,333,655 shares of common stock issued
and outstanding, and held by 414 shareholders. There are also 13,115,000
warrants issued and outstanding.  Holders of our common stock are
entitled to one vote for each share on all matters submitted to a stockholder
vote.





The following is a summary of warrants
outstanding at December 31, 2008:





Issue
      Date
                Expiration
      Date
                Number
      of Shares of Common Stock
                Price
                Basis
      for Warrant issuance09/06/05
                09/05/10
                5,000
                $0.20
                Consulting
      Services09/06/05
                09/05/10
                5,000
                $0.18
                Consulting
      Services02/06/06
                02/05/09
                10,000
                **
                Stock
      Purchase Agreement05/26/06
                05/25/09
                15,000
                **
                Stock
      Purchase Agreement05/26/06
                05/25/09
                15,000
                **
                Stock
      Purchase Agreement08/15/06
                08/14/09
                25,000
                **
                Stock
      Purchase Agreement04/17/07
                04/16/10
                90,000
                **
                Stock
      Purchase Agreement06/15/07
                06/14/12
                7,000,000
                $0.05
                Convertible
      Debenture06/15/07
                06/14/10
                50,000
                $0.12
                Stock
      Purchase Agreement11/14/07
                11/13/12
                5,000,000
                $0.05
                Convertible
      Debenture09/08/08
                09/07/13
                900,000
                $0.001
                Amendment
      to Convertible DebentureTotal
                
                13,115,000






F-19




**  The
warrants are exercisable at $.30 if exercised within the twelve months from the
date of the warrant; $.40 if exercised within 12 months to 24 months from the
date of the warrant; and $.50 if exercised within 24 months to 36 months from
the date of the warrant.





As of December 31, 2008, intrinsic
value associated with outstanding warrants is not significant.





Holders of common stock do not have
cumulative voting rights.  Therefore, holders of a majority of the
shares of common stock voting for the election of directors can elect all of the
directors. Holders of our common stock representing a majority of the voting
power of our capital stock issued and outstanding and entitled to vote,
represented in person or by proxy, are necessary to constitute a quorum at any
meeting of our stockholders. A vote by the holders of a majority of our
outstanding shares is required to effectuate certain fundamental corporate
changes such as liquidation, merger or an amendment to our Articles of
Incorporation.





In addition, we also have Class A
common stock, which has a par value of $.0035 per share and 12,000,000 shares
have been authorized to be issued. As of December 31, 2008, there are no shares
of Class A common stock issued and outstanding. Both common stock and Class A
common stock have the same voting rights.





The following is a summary of common
stock issued by the Company during 2008 and 2007:




Date
                
                Shares
      Issued [a]
                
                Consideration
                
                AmountJanuary
      2007
                
                50,000
      at $0.20 per share
                
                Consulting
      services
                
                $
                10,000March
      2007
                
                60,000
      at $0.10 per share
                
                Purchase
      – Unrestricted Shares
                
                
                6,204June
      2007
                
                84,700
      at $0.19 per share
                
                Purchase
      – Unrestricted Shares
                
                
                15,924June
      2007
                
                50,000
      at $0.20 per share
                
                Waiver
      for recent financing.
                
                
                10,000June
      2007
                
                666,666
      at $.015 per share
                
                Stock
      purchase agreement
                
                
                100,000June
      2007
                
                50,000
      at $0.15 per share
                
                Private
      Placement
                
                
                7,500June
      2007
                
                332,152
      at $0.25 per share
                
                Conversion
      of notes payable
                
                
                83,038June
      2007
                
                2,127,021
      unrestricted shares at $0.15 per share
                
                Conversion
      of notes payable
                
                
                319,053June
      2007
                
                572,240
      unrestricted shares at $0.15 per share
                
                Conversion
      of notes payable
                
                
                85,836October
      2007
                
                9,932,200
      at $0.40 per share
                
                Conversion
      of preferred stock
                
                
                3,972,880November
      2007
                
                500,000
      at $0.30 per share
                
                Stock
      purchase agreement
                
                
                150,000December
      2007
                
                1,700,000
      at approximately $0.06 per share
                
                Payment
      of accrued officer compensation
                
                
                85,000December
      2007
                
                300,000
      at $0.05 per share
                
                Consulting
      services
                
                
                15,000August
      2008
                
                25,000
      at approximately $0.09 per share
                
                Private
      Placement
                
                
                2,250October
      2008
                
                75,000
      at approximately $0.04 per share
                
                Private
      Placement
                
                
                3,000November
      2008
                
                175,000
      at approximately $0.07 per share
                
                Consulting
      services
                
                $
                12,250





F-20





Note
10.  Acquisition Agreements




On June 30, 2007, we entered into a
Stock Purchase Agreement (“Agreement”) in which Secure, our wholly owned
subsidiary, purchased all the shares of Meadowlands Fire, Safety, and Electrical
Supply Co., Inc., a New Jersey corporation, and Vanwell Electronics, Inc., a New
Jersey corporation (collectively “Meadowlands”) from Keith Kesheneff and Kathryn
Kesheneff, being all of the shareholders of Meadowlands.  Pursuant to the
Agreement, Secure acquired Meadowlands whereby Meadowlands became a wholly owned
subsidiary of Secure.  Meadowlands specializes in the distribution, sale,
installation and maintenance of fire and security equipment and systems that
include fire detection, video surveillance, and burglar alarm equipment.
 The results of operations for the acquired entity were included in
consolidated statements of operations beginning July 1, 2007.




The
allocation of the total purchase price of Meadowlands Fire, Safety, and
Electrical Supply Co., Inc., and Vanwell Electronics, Inc.’s net tangible and
identifiable assets was based on their estimated fair value as of June 30, 2007.
The total purchase price of $1,955,000 has been allocated as
follows:





Customer
      list
                
                $
                1,210,000Distribution
      agreement
                
                
                73,120Tangible
      assets acquired and liabilities assumed:Other
      current assets
                
                
                927,974Non-current
      assets
                
                
                5,447Accounts
      payable and accrued liabilities
                
                
                (261,541
                )Total
      purchase price
                
                $
                1,955,000




The
$1,955,000 purchase price was paid as follows:





Cash
                
                $
                1,250,000Seller
      note
                
                
                250,000Common
      stock
                
                
                100,000Promissory
      note
                
                
                355,000Total
      purchase price
                
                $
                1,955,000





F-21




Amortization
related to the customer list and distribution agreement is approximately
$340,000 per year for the next 4 years.




Effective
October 1, 2007, we entered into a Stock Purchase Agreement (“Agreement”) in
which Somerset purchased all the shares of Fire Control Electrical Systems,
Inc., a New Jersey corporation, ( “Fire Control”) from Vincent Bianco and Opie
Brinson, being all of the shareholders of Fire Control.  Pursuant to the
Agreement, Somerset acquired Fire Control whereby Fire Control became a wholly
owned subsidiary of Somerset.  Fire Control specializes in the
distribution, sale, installation and maintenance of fire and security equipment
and systems that include fire detection, video surveillance, and burglar alarm
equipment.  The results of operations for the acquired entity were included
in consolidated statements of operations beginning October 1, 2007.




Pursuant to the agreement, the Company agreed to pay additional
consideration in the event that certain working capital thresholds were met in
the form of two promissory notes.  Such thresholds were not met and
the additional consideration was not required.





In
addition, if the Adjusted EBITDA of Fire Control Electrical Systems, for the
twelve-month period ended June 30, 2007 had been less than One Hundred Twenty
Five Thousand and 00/100 Dollars ($125,000) there would have been an adjustment
to the Purchase Price as defined by the agreement.





The
allocation of the total purchase price of Fire Control net tangible and
identifiable assets was based on their estimated fair value as of September 30,
2007. The total purchase price of $500,000 has been allocated as
follows:





Customer
      list
                
                $
                600,000Distribution
      agreement
                
                
                92,405Cash
                
                
                56,694Accounts
      Receivable, net
                
                
                281,147Inventory
                
                
                133,819Prepaid
      Expenses
                
                
                22,925Deposits
                
                
                2,925Fixed
      Assets
                
                
                26,368Other
      Assets
                
                
                12,346Accrued
      Expenses
                
                
                (182,978
                )Deferred
      Revenue
                
                
                (215,295
                )Other
      liabilities
                
                
                (330,356
                )$
                500,000





F-22




The
$500,000 purchase price was paid as follows:





Cash
                  $
                  $350,000Common
      stock
                  
                  150,000$
                  $500,000





Amortization
related to the customer list and distribution agreement is approximately
$176,000 per year for the next 4 years.





Note
11.  Intangibles and Goodwill





Following
is a summary of intangibles subject to amortization at December 31,
2008:





Intangibles
      subject to amortization:
                
                Gross
      Amount
                
                
                Accumulated
      Amortization
                
                
                NetCustomer
      Lists
                
                $
                2,805,700
                
                
                $
                1,186,515
                
                
                $
                1,619,185Covenants
      not to Compete
                
                
                195,226
                
                
                
                195,226
                
                
                
                --Distribution
      Agreements
                
                
                165,505
                
                
                
                112,577
                
                
                
                52,928Software
                
                
                214,600
                
                
                
                214,600
                
                
                
                --$
                3,381,031
                
                
                $
                1,708,918
                
                
                $
                1,672,113





Amortization
expense related to these assets for 2008 and 2007 was approximately
$731,700 and $504,000 respectively.  Estimated amortization expense
for each of the ensuing years through December 31, 2012 is, approximately,
$648,000, $595,000, $406,000, and $23,000.




The
following table summarizes the activity in goodwill for 2007 and
2006:




Beginning
      balance 1/1/2007, net
                
                $
                2,200,3552007
      activity
                
                
                0Ending
      balance 12/31/2007, net
                
                $
                2,200,3552008
      activity
                
                
                0Ending
      balance 12/31/2008, net
                
                $
                2,200,355




F-23




The
Company’s annual impairment test indicated that no impairment had occurred in
2008 and 2007 relating to the Secure reporting unit.







Note
12.  Commitments and Contingencies




The Company has entered into an
employment agreement with the President and CEO that became effective January 6,
2004. The employment agreement has a term of five years. In the event of
termination of employment without cause, the agreement provides that the Company
shall pay severance equaling the greater of the balance of the term of the
agreement or one year’s salary.  On August 29, 2008, the Board of
Directors, with the approval of a majority of the shareholders of the Company
entered into an amendment to extend the employment agreement dated January 6,
2004 for an additional 3 years from January 6, 2009.  On January 6,
2009, the President and CEO signed an additional agreement, in which he agreed
to permanently waive the fiscal 2009 salary increase provided for in his
employment agreement. The additional agreement is for the period of January 6,
2009 though January 5, 2010.  The President and CEO’s compensation for
the year ended December 31, 2008 was $366,000.





Secure leases its facility on a year to
year basis at a monthly rent of $4,821.





Meadowlands leased its facility through
a three year lease that terminated on February 28, 2009, at a monthly rent of
$3,450.  Effective March 1, 2009, it relocated its facilities to those
occupied by Fire Control.





Fire
Control leases its facility through a three year lease that expires December 31,
2010 at a monthly rent of $4,800.




In the
normal course of business, the Company is subject to various proceedings and
claims, the resolution of which will not, in management's opinion, have a
material adverse affect on the Company's financial position or results of
operations.


Note
13.  Income Taxes:





The reconciliation of income tax
expense computed at the U.S. federal statutory rate to the provision for income
taxes is as follows for the year ended December 31:




2008
                
                
                2007Tax
      Benefit at U.S. statutory rate
                
                $
                (485,000
                )
                
                $
                (305,000
                )Non
      Deductible Expenses
                
                
                --
                
                
                
                --Change
      in valuation allowance
                
                
                485,000
                
                
                
                305,000Provision
      for income taxes
                
                $
                --
                
                
                $
                --




F-24


Federal
      net operating loss carryforwards
                
                $
                1,805
      ,000
                
                
                $
                1,320,000State
      net operating loss carryforwards
                
                
                394,000
                
                
                
                287,000Other
                
                
                79,000
                
                
                
                79,000Valuation
      allowance
                
                
                (2,278,000
                )
                
                
                (1,686,000
                )Net
      deferred tax asset
                
                $
                --
                
                
                $
                --





The
Company has federal and state net operating loss carry forwards of approximately
$7,300,000 and $5,327,000, respectively.  Such carryforwards expire at
various times through 2028 and may be limited due to ownership changes.
 Such losses are limited to due to a change in control.







Note
14.  Equity Incentive Plan





On August 29, 2008, the Board of
Directors, with the approval of a majority of the shareholders of the Company,
adopted the 2008 Equity Incentive Plan (the “Plan”) which will be administered
by a compensation committee (the “Committee”) appointed by the
Board.





The total
number of shares reserved and available for grant and issuance is 2,500,000
shares.  The maximum number of shares granted to a participant may not
exceed 20% of the total shares subject to the Plan.  Only directors,
officers, employees, consultants, and advisors of the Company and its
subsidiaries are eligible for awards under the Plan.  Additionally,
the awards granted under the Plan may not be transferred or
assigned.





Options
may be granted to eligible persons, and the exercise period and price, as
defined in the Plan, shall be determined by the Committee.  Share
limits and shares available under the Plan, outstanding awards, as well as the
prices of awards are subject to adjustment if certain events occur.





There
have been no shares issued under the Plan.





Note
15.  Subsequent Events





In
January 2009, the Company entered into a convertible promissory note with an
accredited investor for $30,000 with a conversion rate of $.25 per share. In
accordance with the note the Company issued the investor 15,000 shares of the
Company’s common stock.  Such shares were issued pursuant to an
exemption from registration at Section 4(2) of the Securities Act of 1933 and
are restricted in accordance with Rule 144 of the Securities Act of
1933.