UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.20549


_____________________




FORM 10-K


_____________________




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


THE SECURITIES EXCHANGE ACT OF 1934




For the fiscal year ended: December 31, 2010


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 of Incorporation or Organization)
(Commission File Number)
(I.R.S. Employer Identification No.)




90 Washington Valley Road, Bedminster, NJ07921


(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 ý




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 ý




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  ̈    No ý




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.   ý




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 ý




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




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 March31, 2011 was $130,752.




On March 31, 2011, there were 23,348,655 outstanding shares of the registrant’s common stock, $.001 par value.





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.





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 thedistribution, sale, installation, and maintenance of fire and security equipment and systems that include fire detection, video surveillance, and burglar alarm equipment.





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





On December 1, 2010, the Company received a notice of default from Dutchess Private Equities Fund requiring payment in full of outstanding obligations.  The Company is attempting to resolve these outstanding obligations with Dutchess Private Equities Fund.  There is no assurance that the Company will be successful in these attempts.





(d)  2010 Revenues





Somerset’s revenueswere$3,631,257for the twelve months ended December 31, 2010.





(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, 2011, Somerset has 1 employee, Secure has 6 employees, Meadowlands has 9 employees, and Fire Control has 7 employees. No employees are currently covered under collective bargaining agreements.








Item 2.  Description of Property





Somerset’sexecutiveofficeis 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 month to month basis and Meadowlands and Fire Control are located at 320 Essex Street, Suite 3, Stirling, NJ,07980 subject to a two year lease, expiring on February28, 2013.





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.





On June 26, 2009, the Company filed suit in the United States District Court for the District of New Jersey against TSG Capital Partners, LLC and others seeking to recover $105,000 in financing fees paid by the Company, plus damages for fraud, counsel fees, and interest.  The Company has served its complaint and is pursuing its claims.





On August 6, 2009, the holders of three promissory notes convertible into the Company’s common stock obtained judgments against the Company in the Superior Court of New Jersey totaling $157,636.31, plus costs of $720.00.





On January 19, 2010, the holders of promissory note convertible into the Company’s common stock filed suit against the Company demanding payment of the principal amount of $175,000.00, plus accrued interest, and counsel fees.  The Company has retained counsel to respond to the litigation and to interpose such defenses as are lawfully available.




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





None.





PART II





Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters, and IssuedPurchases 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 Pink Sheets 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 2010, and the first quarter of calendar year 2011 up to March 30, 2011. 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
Low2010
First
$0.015
$0.012010
Second
$0.01
$0.0152010
Third
$0.001
$0.00062010
Fourth
$0.003
$0.0052011
First
$0.09
$0.005





As of December 31, 2010, there were approximately 197 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. We are not statutorily prohibited from paying dividends.





Warrants





As of December 31, 2010, 12,950,000 warrants have been issued to two 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 issuance06/15/07
06/14/12
7,000,000
$  0.05

Convertible Debenture11/14/07
11/13/12
5,000,000
$  0.05

Convertible Debenture09/08/08
09/07/13
900,000
$0.001

Amendment to Convertible Debenture01/26/09
01/25/12
50,000
$0.001

Convertible NoteTotal

12,950,000





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.








As of December 31, 2010, 100,000 options have been issued to oneemployee.


Issue Date

Expiration Date

Number of Shares of Common Stock


Price04/02/09

04/01/12


100,000


$
0.015Total




100,000




Item 6.Selected Financial Data





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





Results of Operations

For The Year Ended December 31,

2010


2009Sales

$
3,631,257


$
4,219,561Operating Expenses


2,713,190



3,282,720Loss from Operations


(832,156
)


(929,419
)Net Loss attributable to Common Stockholders

$
(1,545,106
)

$
(1,653,834
)Basic Loss per Common Share

$
(0.07
)

$
(0.07
)





Financial Position at

December 31,
2010


2009Total Assets

$
3,842,051


$
4,802,022Total Liabilities


8,700,370



8,115,235Shareholders Equity(Deficit)

$
(4,858,319
)

$
(3,313,213
)




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 June15, 2007 convertible debenture.





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 write down inventory for estimated excess or obsolete inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.





We account for our goodwill and intangible assets pursuant to Professional Standards, which require that 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 2009 and 2008 supported the carrying value of goodwill, and as such, no write-down in the carrying value of goodwill was recorded.








Revenues





Revenues of $3,631,257 for the year ended December 31, 2010decreased by $588,304 over revenues of $4,219,561 during the year ended December 31, 2008. Equipment Sales revenues decreased by $435,567 for the twelve months ended December 31, 2010 versus the same period in 2009.  Installation revenues decreased by $84,566 and Maintenance revenues decreased by $68,171 for the twelve months ended December 31, 2010 versus the same period in 2009.





Costs of Goods Sold





Costs of Goods Sold for the year ended December 31, 2010decreased to $1,748,223, representing adecrease of $118,037 over costs of goods sold of $1,866,260during the year ended December 31, 2009.  This was primarily attributable to a decrease in cost of systems sold of $239,153and $18,109 in engineering and development costsfor the twelve months ended December 31, 2010 versus the same period in 2009, offsetby anincrease in installation and service costsof $118,027for the twelve months ended December 31, 2010 versus the same period in 2009.





Gross Margin





Gross Margin for the year ended December 31, 2010decreased to $1,883,034 representing andecrease of $470,267 from a gross margin of $2,353,301 during the year ended December 31, 2009.  This was a direct result of the net decreases in Revenues and the Cost of Goods Sold described above.





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





SG&A expenses for the year ended December 31, 2009 of $2,715,190 decreased by $567,530 over SG&A expenses of $3,282,720during the year ended December 31, 2008.  Selling general and administrative expenses decreased by $491,984, amortization expense decreased by $53,138, and depreciation expense increased by $22,408 from the year ended December 31, 2009.  This was primarily attributable to decrease in payroll expenses of $273,296, a decrease of $132,018 in professional and consulting fees, and a decrease in cost of financing of $33,089 for the twelve months ended December 31, 2010 versus the same period in 2009.





Other Income (Expense)





Other Expense decreased to $694,841 for the year ended December 31, 2010 from $716,471 during the year ended December 31, 2009, representing a decrease of $21,630.  Interest expense for the year ended December 31, 2010 increased by $37,268 to $713,401 from interest expense of $676,133 during the year ended December 31, 2009. This is primarily attributable to the interest expense on the Dutchess convertible debentures issued in June 2007 and November 2007and the notes issued in 2009.





Net (Loss)





Net Loss attributable to common stockholders for the year ended December 31, 2010decreased by $108,728 to $1,545,106 from $1,653,834 during the year ended December 31, 2009.  The decrease in net loss is primarily attributable to thedecrease in gross margin described above for the period and thedecrease 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.





Substantially all principal payments due under the terms of the Dutchess Debentures during 2010 are in arrears.  Partial payments of interest on these debentures were made during 2010.  The failure to pay any principal or interest due under these debentures within ten days of the due date is considered an “event of default”.  As such, the entire balance of principal and interest on the Dutchess Notes are payable on demand.On December 1, 2010, the Company received a notice of default from Dutchess Private Equities Fund requiring payment in full of outstanding obligations.  The Company is attempting to resolve these outstanding obligations with Dutchess Private Equities Fund.  There is no assurance that the Company will be successful in these attempts.





At December31, 2010, the Company had negative working capital of approximately $7,605,866.





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.





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 January 2010, the Financial Accounting Standards Board (FASB) issued Update 2010-06,"Fair Value Measurements and Disclosures (Topic 820):  Improving Disclosures about Fair Value Measurements", which is effective for annual reporting periods beginning after December 15, 2009 except for the disclosures about purchases, sales, issuance and settlements in the rollforward of activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010.  This update modifies current professional standards to require certain disclosures as follows:





The amounts of significant transfers in and out of Level 1 and 2 fair value measurements and the reasons for those transfers.





Information in the reconciliation of fair value measurements using significant unobservable inputs (Level 3) about purchases, sales, issuance and settlements (that is, on a gross basis rather than as one net number).





Fair value measurement disclosures for each class of assets and liabilities.





Description of valuation techniques and inputs used to measure fair value for both recurring and non recurring fair value measurements that fall into either Level 2 or Level 3.





In October 2009, FASB issued Update No. 2009-13, "Revenue Recognition: Multiple-Deliverable Revenue Arrangements which is effective for fiscal years beginning on or after June 15, 2010 which requires certain disclosures regarding multiple deliverable revenue arrangements as well as addressing the accounting for multiple deliverable arrangements to enable reporting entities to account for product and services separately rather than a combined unit.  The Company is currently evaluating the impact of this pronouncement.





In October 2009, FASB issued Update No. 2009-14, "Software: Certain Revenue Arrangements That Include Software Elements”, which is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.  The update impacts the recognition of revenue arrangements that include both tangible products and software elements and related disclosures.  The Company is currently evaluating the impact of this pronouncement.





In October 2009, FASB issued Update No. 2009-15, "Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing”, which amends current professional standards regarding share-lending arrangements that have been terminated as a result of counterparty default prior to December 15, 2009.  The Company is currently evaluating the impact of this pronouncement.





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





Not applicable, as no audit was performed.





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, 2010.  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, 2010 based upon the criteria set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).





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 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, 2010 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.





Part III





Item 10.  Directors and Executive Officers and Corporate Governance





The directors and executive officers of the Company are:


Name
Positions with registrant
Has served asand age as of March 31, 2010
director sinceJohn X. Adiletta
President,
February, 2004Chief Executive Officer,Chairman, 62





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 40 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, 2010.





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, 2010, 2009 and 2008 in all capacities for the accounts of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO).




Name and Principal

Annual
RestrictedPosition
Year
Compensation
Stock AwardsJohn X. Adiletta, CEO
2010
$366,000
02009
$366,000
02008
$366,000
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 anadditional 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 January6,2009 though January5, 2010.On January 6, 2010, Mr. Adiletta signed anadditional agreement, in which he agreed to permanently waive the 2010 salary increase provided for in his employment agreement. The additional agreement is for the period of January6,2010thoughJanuary5, 2011.On January 6, 2011, Mr. Adiletta signed an additional agreement, in which he agreed to permanently waive the 2011 salary increase provided for in his employment agreement. The additional agreement is for the period of January 6, 2011though January 5, 2012.





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





The Company has a 401(k) retirement savings 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, 2010 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

Number of Shares
Percentof Class
Name
Beneficially Owned
of ClassCommon
John X. Adiletta
5,750,000
24.62%c/o90 Washington Valley RoadBedminster,New Jersey09721Common
William F. Farley
4,980,436
21.33%c/o90 Washington Valley RoadBedminster,New Jersey07921Voting
All Directors andOfficers as a group
5,750,000
24.62%




Item 13. Certain Relationships and Related Transactions





The stockholder note payable was $388,528 at December31, 2008. The note plus accrued interest matured on December 31, 2001. 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.





Item14.Principal Accounting Fees and Services





Audit Fees





For the Company's fiscal year ended December 31, 2010there was no audit performed and therefore no fees.  For the Company's fiscal year ended December 31, 2008, the Company was billed approximately $122,000, for professional services rendered for the audit and review of its financial statements.





Tax Fees





For the Company's fiscal years ended December 31, 2010 and 2009, the Company incurred no fees for preparation of its corporate income tax returns.





All Other Fees





None for 2010 and 2009.





Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.








Effective May 6, 2003, the Securities and Exchange Commission adopted rules that require that before our auditor is engaged by us to render any auditing or permitted non-audit related service, the engagement be:





-approved by our audit committee; or





-entered into pursuant to pre-approval policies and procedures established by the audit committee, provided the policies and procedures are detailed as to the particular  service,  the  audit committee is informed of each service, and such policies and procedures do not include delegation of the audit committee's responsibilities to management.





We do not have an audit committee.  Our entire board of directors pre-approves all services provided by our independent auditors.





The pre-approval process has just been implemented in response to the new rules. Therefore, our board of directors does not have records of whatpercentage of the above fees was pre-approved.  However, all of the above services and fees were reviewed and approved by the entire board of directors either before or after the respective services were rendered.








PART IV





Item 15.  Exhibits, Financial Statement Schedules





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




None.





(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 Actof 2002.





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





*Filed as an exhibit to our December 31, 2008 Form 10k filed with the SEC on


March 31, 2009.








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:  March31, 2011
By:
/s/ John X. AdilettaJohn X. AdilettaChief Executive Officer





SOMERSET INTERNATIONAL GROUP, INC. AND SUBSIDIARIES


CONTENTS TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER 31, 2010





UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
PageUnaudited Balance Sheets
F-2December 31, 2010 and 2009Unaudited Statements of OperationsFor the Years Ended December 31, 2010 and 2009
F-3Unaudited Statements of Stockholders' Equity (Deficit)For the Years Ended December 31, 2010 and 2009
F-4Unaudited Statements of Cash FlowsFor the Years Ended December 31, 2010 and 2009
F-5Notes to Unaudited Consolidated Financial Statements
F-6- F-22





F-1


SOMERSET INTERNATIONAL GROUP, INC. AND SUBSIDIARIES


(SEE NOTE 1B – BASIS OF PRESENTATION)


UNAUDITED CONSOLIDATED BALANCE SHEET


DECEMBER 31, 2010 AND 2009





2010


2009ASSETSCurrent Assets:Cash and cash equivalents

$
34,726


$
43,633Accounts receivable, net


446,158



572,548Inventories


599,858



615,379Prepaid expenses


4,208



84,208Other current assets


9,554



10,265Total Current Assets


1,094,504



1,326,033Property and equipment, net


92,251



127,617Other Assets:Deposits


7,120



7,120Deferred financing costs, net


19,138



116,676Customer Lists, net


428,683



1,024,221Goodwill


2,200,355



2,200,355Total other assets


2,655,296



3,348,372TOTAL ASSETS

$
3,842,051


$
4,802,022LIABILITIES AND STOCKHOLDERS’ EQUITY(DEFICIT)Current Liabilities:Accounts payable and accrued expenses

$
1,770,036


$
1,685,102Promissory notes payable - current


1,448,116



1,493,017Dutchess promissory notes payable - current


3,875,920



3,875,920Accrued interest payable


1,364,882



791,290Deferred revenue


241,416



269,906Total Current Liabilities


8,700,370



8,115,235TOTAL LIABILITIES


8,700,370



8,115,235Stockholders’ Equity(Deficit):Common Stock, 200,000,000 shares authorized,


23,349



23,349$.001 par value, 23,348,655 and 23,333,655shares issued and outstanding in 2009 and 2008 respectivelyCapital in excess of par value


31,367,243



31,367,243Accumulated deficit


(36,248,911
)


(34,703,805
)Total Stockholders’ (Deficit)


(4,858,319
)


(3,313,213
)TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT)

$
3,842,051


$
4,802,022





See accompanying Notes to the Consolidated Financial Statements




F-2




SOMERSET INTERNATIONAL GROUP, INC. AND SUBSIDIARIES


UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS


(SEE NOTE 1B – BASIS OF PRESENTATION)


FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009








2010


2009RevenuesEquipment sales

$
1,011,271


$
1,446,838Installation revenues


875,520



960,086Maintenance revenues


1,744,466



1,812,637Total revenues


3,631,257



4,219,561Costs of goods soldMaterial cost of systems sold


733,365



972,518Install and service costs


893,911



775,884Engineering and development


120,947



117,858Total costs of goods sold


1,748,223



1,866,260Gross margin


1,883,034



2,353,301Selling, general, and administrative expensesSelling, general, and administrative expense


1,994,927



2,486,911Depreciation expense


27,187



49,595Amortization expense


693,076



746,214Total selling, general, and administrative expenses


2,715,190



3,282,720Loss from operations


(832,156
)


(929,419
)Other Income(Expense)Interest expense


(713,401
)


(676,133
)Other income (expense)


18,560



(40,338
)Total other expense


694,841



(716,471
)Loss before income taxes


(1,526,997
)


(1,645,890
)Provision for income taxes


18,109



7,944Net loss


(1,545,106
)


(1,653,834
)Net loss attributable to common stockholders

$
(1,545,106
)

$
(1,653,834
)Basic and diluted net loss per common share

$
(0.07
)

$
(0.07
)Weighted Average Number of Common Shares


23,348,655



23,348,573





See accompanying Notes to the Consolidated Financial Statements




F-3




SOMERSET INTERNATIONAL GROUP, INC. AND SUBSIDIARIES


UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)


(SEE NOTE 1B – BASIS OF PRESENTATION)


FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009




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, 2008


-


$
-



23,333,655


$
23,334



-



-


$
31,366,808


$
(33,049,971
)

$
(1,659,829
)Net Loss


-



-



-



-



-



-



-



(1,653,834
)


(1,653,834
)Issuance of Common Stock for cash


-



-



15,000



15



-



-



435



-



450Balance at December 31, 2009


-


$
-



23,348,655


$
23,349



-



-


$
31,367,243


$
(34,703,805
)

$
(3,313,213
)
  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, 2009


-


$
-



23,348,655


$
23,655



-



-


$
31,367,243


$
(34,703,805
)

$
(3,313,213
)Net Loss


-



-



-



-



-



-



-



(1,545,106
)


(1,545,106
)Balance at December 31, 2009


-


$
-



23,348,655


$
23,349



-



-


$
31,367,243


$
(36,248,911
)

$
(4,858,319
)






F-4




SOMERSET INTERNATIONAL GROUP, INC. AND SUBSIDIARIES


UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS


(SEE NOTE 1B – BASIS OF PRESENTATION)


FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009








Cash Flows From Operating Activities:

2010


2009Net Loss

$
(1,545,106
)

$
(1,653,834
)Adjustments to reconcile net loss tonet cash used in operating activities:Depreciation


27,187



49,595Amortization


693,076



746,214Gain on sale of equipment


--



--Changes in operating assets and liabilities:Accounts receivable


126,390



72,685Inventories


15,521



(127,223
)Prepaid expense


80,000



(79,999
)Other current assets


711



179Deposits


-



2,705Accounts payable and accrued expenses


84,934



418,747Accrued interest payable


573,592



514,425Deferred revenue


(28,490
)


1,825Net Cash Used inOperating Activities


27,815



(54,681
)Cash Flows From Investing Activities:Purchase of equipment


--



--Proceeds from sale of fixed assets


8,179



--Net Cash Provided by (Used in) Investing Activities


8,179



--Cash Flows From Financing Activities:Payment ofDutchess debentures


--



--Proceeds from issuance of notes payable


--



80,000Payment of seller note


--



--Payment of promissory notes


(44,901
)


(47,418
)Payment of stockholder note payable


--



--Net Cash Provided by (Used in ) Financing Activities


(44,901
)


32,582Net Change in Cash and Cash Equivalents


(8,907
)


(22,099
)Cash at Beginning of the Year


43,633



65,732Cash at End of the Year

$
34,726


$
43,633Cash paid for:Interest

$
133,026


$
158,856Income Taxes

$
18,109


$
7,942Non Cash Investing & Financing Activities:Promissory note incurred upon acquisition of equipment

$
--


$
61,339Stock issued in conjunction with issuance of notes payable

$
--


$
450




See accompanying Notes to the Consolidated Financial Statements




F-5





Note 1.Business and Basis of Presentation





A.           Nature of the Business





Somerset International Group, Inc. (the “Company”) is in the businessof 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.





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 unaudited consolidated financial statements included herein have not been audited by the Company’s independent registered accounting firm.  Therefore, these statements have not been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  The accompanying unaudited consolidated 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.  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, 2010 and 2009 of approximately $1,545,000and $1,654,000, respectively, and had an accumulated deficit of approximately $36,249,000 and a stockholders’ deficit of approximately $4,858,000 as of December 31, 2010.  The Company also contributed net cash in operating activities of approximately $27,815in 2010. In addition at December 31, 2010, the Company has a working capital deficit of approximately $7,606,000. 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.





F-6





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 $31,000 and $31,000 as of December 31, 2010 and 2009, respectively, based on its historical collectability.





C.
Propertyand 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.





Currently, Secure System, Inc. has five customers which accounted for all of their revenues. Meadowlands has approximately 200 active accounts and Fire Control has approximately 150 active accounts which accounted for all of their revenues.  While our goal is to diversify Secure’sand 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 ofEstimates:





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.  Most critical are the fair value estimates related to the net tangible and identifiable assets of acquired companies, as well as customer lists and the estimated fair value of reporting units used when evaluating Goodwill for impairment.




F-7





F.
Income Taxes:





The Company files tax returns in the U.S. federal jurisdiction and various states.  The Company has no open years prior to 2006.





The Company adopted the accounting pronouncement dealing with uncertain tax positions as of January 1, 2009.  Upon adoption of this accounting pronouncement, the Company had no unrecognized tax benefits.  Furthermore, the Company had no unrecognized tax benefits at December 31, 2010.





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 Group, Inc., its wholly owned subsidiaries Fire Control Electrical Systems, Inc. and Secure System, Inc., and Secure System Inc.’s wholly owned subsidiaries Meadowlands Electronics Inc., and Vanwell Electronics Inc.  All significant intercompany accounts and transactions have been eliminated in consolidation.





I.
Reclassifications:





Certain reclassifications were made to the 2009 financial statements in order to conform to the 2010 financial statement presentation.  Such reclassifications had no effect on 2009’s reported net loss.





J.
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 2009 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-8





K.
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.





L.
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-9




M.
Loss Per Share:





The Company computes net loss per share in accordance with Professional Standards and utilizes guidance provided by SEC Staff Accounting Bulletin No. 98 (SAB 98). Under these provisions 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, 2010 and 2009, 4,208,505 and 4,208,505of 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.





N.
Advertising Costs:





Advertising costs are treated as period costs and expenses as incurred.  During the years ended December 31, 2010 and 2009 advertising costs totaled approximately $0 and $6,832, respectively, and are included in operating expenses in the accompanying consolidated statements of income.





O.
Goodwill and Intangible Assets:





Goodwill and intangible assets result primarily from acquisitions accounted for under the purchase method. In accordance with Professional Standards, 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, 2010, no impairment charge was necessary.





In accordance with Professional Standards, 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 lossesby 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 2010 and 2009 supported the carrying value of goodwill, and as such, no write-down in the carrying value of goodwill was recorded.





In accordance withProfessional Standards, 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-10





Note 3.Recent Accounting Pronouncements





In January 2010, the Financial Accounting Standards Board (FASB) issued Update 2010-06,"Fair Value Measurements and Disclosures (Topic 820):  Improving Disclosures about Fair Value Measurements", which is effective for annual reporting periods beginning after December 15, 2009 except for the disclosures about purchases, sales, issuance and settlements in the rollforward of activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010.  This update modifies current professional standards to require certain disclosures as follows:





The amounts of significant transfers in and out of Level 1 and 2 fair value measurements and the reasons for those transfers.





Information in the reconciliation of fair value measurements using significant unobservable inputs (Level 3) about purchases, sales, issuance and settlements (that is, on a gross basis rather than as one net number).





Fair value measurement disclosures for each class of assets and liabilities.





Description of valuation techniques and inputs used to measure fair value for both recurring and non recurring fair value measurements that fall into either Level 2 or Level 3.





In October 2009, FASB issued Update No. 2009-13, "Revenue Recognition: Multiple-Deliverable Revenue Arrangements which is effective for fiscal years beginning on or after June 15, 2010 which requires certain disclosures regarding multiple deliverable revenue arrangements as well as addressing the accounting for multiple deliverable arrangements to enable reporting entities to account for product and services separately rather than a combined unit.  The Company is currently evaluating the impact of this pronouncement.





In October 2009, FASB issued Update No. 2009-14, "Software: Certain Revenue Arrangements That Include Software Elements”, which is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.  The update impacts the recognition of revenue arrangements that include both tangible products and software elements and related disclosures.  The Company is currently evaluating the impact of this pronouncement.





In October 2009, FASB issued Update No. 2009-15, "Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing”, which amends current professional standards regarding share-lending arrangements that have been terminated as a result of counterparty default prior to December 15, 2009.  The Company is currently evaluating the impact of this pronouncement.




F-11





Note 4.Inventory





Inventory consists of the following at December 31, 2010:




2010


2009Raw materials

$
479,083


$
429,978Work in progress


69,885



116,553Finished goods


50,100



68,848Total

$
599,068


$
615,379




Note 5.Property, Equipment, and Leasehold Improvements


2010


2009Equipment

$
311,490


$
311,490Furniture


97,203



97,203Leasehold Improvements


69,108



69,108Vehicles


480,496



488,676Total


958,297



966,477Accumulated Depreciation


866,046



(838,860
)Property, Equipment, and Leasehold Improvements, net

$
92,251


$
127,617





Depreciation expense for the years ended December 31, 2010 and 2009 was $27,187 and $49,595, respectively.





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.  All notes past their respective payment due dates are in default.  On December 1, 2010, the Company received a notice of default from Dutchess Private Equities Fund requiring payment in full of outstanding obligations.  The Company is attempting to resolve these outstanding obligations with Dutchess Private Equities Fund.  There is no assurance that the Company will be successful in these attempts.




F-12





The following is a summary of those obligations:





Various Notes Payable:


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


2010


2009Note 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



20,000June 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



20,833September 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



50,000Note issued in October 2008, with interest at 15% per annum, convertible at $.25 per share.  Payment due date is April 2009.


150,000



150,000Note issued in January 2009, with interest at 15% per annum, convertible at $.25 per share.  Payment due date is April 2009.[c]


30,000



--Note issued in January 2009, with interest at 15% per annum, convertible at $.25 per share.  Payment due date is April 2009. [d]


50,000



--10% stockholder note payable, with monthly payments of $17,928.  Payments are in arrears.


388,528



388,528Vehicle Loans


34,755



79,656Total notes payable


1,448,116



1,493,017Less Current Portion


1,448,116



1,360,561Long Term Portion

$
--


$
--




F-13


[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.




[c]:  In connection with the January 2009$30,000 note, the Company issued 15,000 shares of stock valued at approximately $450, which was recorded as a debt discount paid and is amortizable over the life of the debt.  Debt discount related to the conversion feature is insignificant to these financial statements.




[b]:  In connection with the January 2009 $50,000 note, thedebt discount related to the conversion feature and warrant issued is insignificant to these financial statements.




Dutchess Notes Payable:




Dutchess notes payable consist of the following at December 31:




2010


2009June 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]

$
2,582,720


$
2,582,720November 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]


1,293,200



1,293,200Total Dutchess notes payable


3,875,920



3,875,920Less Current Portion


3,875,920



3,875,920Long Term Portion

$
--


$
--





[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.




F-14





[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 theCompany 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





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




F-15





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.





The Dutchess notes are securitized by the assets of the company.Substantially all principal payments due under the terms of the Dutchess Debentures during 2010 are in arrears.  Partial payments of interest on these debentures were made during 2009 and through March 31, 2009.  The failure to pay any principal or interest due under these debentures within ten days of the due date is considered an “event of default”.  As such, the entire balance of principal and interest on The Dutchess Notes are payable on demand.On December 1, 2010, the Company received a notice of default from Dutchess Private Equities Fund requiring payment in full of outstanding obligations.  The Company is attempting to resolve these outstanding obligations with Dutchess Private Equities Fund.  There is no assurance that the Company will be successful in these attempts.





Note 7.Preferred Stock





The preferred stock of the Company has a par value of $.001 per share and100,000,000 shares have been authorized to be issued. No shares of preferredstock were issued or outstanding at December 31, 2010 and 2009.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.





Note 8. Related Party Transactions





The balance of the stockholder note payable was $388,528bothat December31, 2010 and 2009. 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, 2010.





Note 9.Stockholders’ Equity (Deficit)





As of December 31, 2010, 200,000,000 shares of Common Stock are authorized, 23,348,655 shares of common stock issued and outstanding, and held by 197 shareholders. There are also 13,100,000 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.




F-16





The following is a summary of warrants outstanding at December 31, 2010:





Issue Date
Expiration Date
Number of Shares of Common Stock
Price

Basis for Warrant issuance06/15/07
06/14/12
7,000,000
$0.05

Convertible Debenture11/14/07
11/13/12
5,000,000
$0.05

Convertible Debenture09/08/08
09/07/13
900,000
$0.001

Amendment to Convertible Debenture01/26/09
01/25/12
50,000
$0.001

Convertible NoteTotal

12,950,000





As of December 31, 2010, 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 December31, 2010, 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 2010 and 2009:




Date

Shares Issued

Consideration
AmountJanuary 2009

15,000 at approximately $0.03 per share

Private Placement

$
450





Note 10.Acquisition Agreements





None.





Note 11.  Intangibles and Goodwill





Following is a summary of intangibles subject to amortization at December 31, 2010:




F-17





Intangibles subject to amortization:
GrossAmount

Accumulated Amortization

NetCustomer Lists

$
2,805,700


$
2,376,227


$
429,473Distribution Agreements


165,505



165,505



--$
2,971,205


$
2,542,345


$
428,860





Amortization expense related to these assets for 2010and 2009was approximately $594,743 annually.  Estimated amortization expense for each of the ensuing years through December 31, 2012 is, approximately $405,993 and $23,485.




The following table summarizes the activity in goodwill for 2009 and 2010:




Beginning balance 1/1/2009, net

$
2,200,3552009 activity


0Ending balance 12/31/2009, net

$
2,200,3552010 activity


0Ending balance 12/31/2010, net

$
2,200,355




The Company’s annual impairment test indicated that no impairment had occurred in 2010 and 2009 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 anadditional 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 January6,2009 though January5, 2010.On January 6, 2010, Mr. Adiletta signed anadditional agreement, in which he agreed to permanently waive the 2010 salary increase provided for in his employment agreement. The additional agreement is for the period of January6,2010 though January5, 2011.On January 6, 2011, Mr. Adiletta signed anadditional agreement, in which he agreed to permanently waive the 2011 salary increase provided for in his employment agreement. The additional agreement is for the period of January6, 2011thoughJanuary5, 2012.The President and CEO’s compensation for the year ended December 31, 2010 was $366,000.




F-18





Secure leases its facility on a month to month basis at a monthly rent of $4,521.





Meadowlands and Fire Control are co-located and lease their facility through a two year lease that terminates on February 28, 2013, at a monthly rent of $3,750.





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.  The parties recently agreed upon settlement terms.  A form of settlement agreement is being reviewed by counsel.





On June 26, 2009, the Company filed suit in the United States District Court for the District of New Jersey against TSG Capital Partners, LLC and others seeking to recover $105,000 in financing fees paid by the Company, plus damages for fraud, counsel fees, and interest.  The Company has served its complaint and is pursuing its claims.





On August 6, 2009, the holders of three promissory notes convertible into the Company’s common stock obtained judgments against the Company in the Superior Court of New Jersey totaling $157,636.31, plus costs of $720.00.





On January 19, 2010, the holders of promissory note convertible into the Company’s common stock filed suit against the Company demanding payment of the principal amount of $175,000.00, plus accrued interest, and counsel fees.  The Company has retained counsel to respond to the litigation and to interpose such defenses as are lawfully available.





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:




2010


2009Tax Benefit at U.S. statutory rate

$
(388,000
)

$
(388,000
)Non Deductible Expenses






--Change in valuation allowance


388,000



485,000Provision for income taxes

$
--


$
--





Federal net operating loss carryforwards

$
2,193,000


$
2,193 ,000State net operating loss carryforwards


480,000



480,000Other


79,000



79,000Valuation allowance


(2,752,000
)


(2,752,000
)Net deferred tax asset

$
--


$
--





F-19


The Company has federal and state net operating loss carry forwards of approximately $8,468,000 and $7,300,000, respectively.  Such carryforwards expire at various times through 2028 and may be limited due to ownership changes.  Such losses are limited 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 100,000 shares issued under the Plan.





Note 15.Subsequent Events





The Company has evaluated subsequent events through March 31, 2010 which is the date these financial statements were issued, and has determined that there are no events requiring recognition or disclosure in these financial statements.














F-20