UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549




FORM
10-Q


(Mark
One)




x   QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934




For the
quarterly period ended September 30, 2010




or




 ̈   TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF
1934




For the
transition period from _____________ to ________________




Commission
File Number:  000-09751




STATMON
TECHNOLOGIES CORP.




(Exact
name of registrant as specified in its charter)




Nevada
              
              83-0242652(State
      or other jurisdiction of incorporation or organization)
              
              (IRS
      Employer Identification No.)





3000
Lakeside Drive, Suite 300 South, Bannockburn, IL 60015


(Address
of principal executive offices) (Zip Code)





(847)
604-5366


(Registrant’s
telephone number, including area code)





Former
name, former address and former fiscal year, if changed since last
report:




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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes  x    No
 ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.





Large
      accelerated filer  ̈
            
            Accelerated
      filer  ̈Non-accelerated
      filer    ̈
            (Do
      not check if a smaller reporting company)
            Smaller
      reporting company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)


Yes   ̈  No x




Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.




Class
                
                Outstanding at October 31, 2010Common
      Stock, $.01 par value
                
                28,903,112





FORM
10-Q


STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES


September
30, 2010




TABLE
OF CONTENTS




Page(s)PART
      1 – FINANCIAL INFORMATIONItem
      1.  Financial Statements.Condensed
      Consolidated Balance Sheets at September 30, 2010 (unaudited) and March
      31, 2010
                                        3Condensed
      Consolidated Statements of Income for the Three Months Ended September 30,
      2010 and 2009 (unaudited)
                                        4Condensed
      Consolidated Statements of Income/(Operations) for the Six Months Ended
      September 30, 2010 and 2009 (unaudited)
                                        5Condensed
      Consolidated Statements of Stockholder’s Deficiency for the Six Months
      Ended September 30, 2010 (unaudited)
                                        6Condensed
      Consolidated Statements of Cash Flows for the Six Months Ended September
      30, 2010 and 2009 (unaudited)
                                        7Notes
      to Condensed Consolidated Financial Statements (unaudited)
                                        9Item
      2.  Management’s Discussion and Analysis of Financial Condition and
      Results of Operations.
                                        22Item
      3.  Quantitative and Qualitative Disclosures About Market
      Risk.
                                        28Item
      4.  Controls and Procedures.
                                        28PART
      II – OTHER INFORMATIONItem
      1.  Legal Proceedings.
                                        29Item
      1A. Risk Factors
                                        29Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds.
                                        29Item
      3.  Defaults Upon Senior Securities.
                                        29Item
      4.  (Removed and Reserved)
                                        29Item
      5.  Other Information.
                                        29Item
      6.  Exhibits.
                                        30SIGNATURES
                                        31Exhibits
                                        32Certifications
                                        34


2




Item
1.  Financial Statements.




STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS




September 30,
                                    
                                    
                                    March 31,2010
                                    
                                    
                                    2010(unaudited)ASSETSCurrent
      Assets:Accounts
      receivable, net of allowance of $13,813
                                    
                                    $
                                    156,316
                                    
                                    
                                    $
                                    436,013Inventories
                                    
                                    
                                    52,652
                                    
                                    
                                    
                                    39,485Prepaid
      expense and other current assets
                                    
                                    
                                    311,575
                                    
                                    
                                    
                                    77,154Total
      Current Assets
                                    
                                    
                                    520,543
                                    
                                    
                                    
                                    552,652Property
      and equipment, net of accumulated depreciation of $242,601 and $211,003,
      repectively
                                    
                                    
                                    125,845
                                    
                                    
                                    
                                    157,443Deferred
      financing costs, net of accumulated amortization of $0 and $54,157,
      respectively
                                    
                                    
                                    -
                                    
                                    
                                    
                                    8,871Security
      deposits and other assets
                                    
                                    
                                    44,793
                                    
                                    
                                    
                                    50,959Total
      Assets
                                    
                                    $
                                    691,181
                                    
                                    
                                    $
                                    769,925LIABILITIES AND STOCKHOLDERS'
      DEFICIENCYCurrent
      Liabilities:Notes
      payable (including $450,000 due to a related party), net of debt discount
      of $0 and $8,034, respectively
                                    
                                    $
                                    1,101,250
                                    
                                    
                                    $
                                    1,093,216Convertible
      notes payable, net of debt discount of $117,163 and $150,345,
      respectively
                                    
                                    
                                    1,873,337
                                    
                                    
                                    
                                    2,012,655Accounts
      payable
                                    
                                    
                                    1,185,546
                                    
                                    
                                    
                                    1,275,245Accrued
      expenses
                                    
                                    
                                    178,030
                                    
                                    
                                    
                                    584,230Accrued
      compensation and payroll taxes
                                    
                                    
                                    2,117,288
                                    
                                    
                                    
                                    1,924,210Interest
      payable (including $72,254 and $53,713 due to related party,
      respectively)
                                    
                                    
                                    529,103
                                    
                                    
                                    
                                    303,749Deferred
      revenue
                                    
                                    
                                    336,020
                                    
                                    
                                    
                                    453,326Derivative
      liability
                                    
                                    
                                    1,581,000
                                    
                                    
                                    
                                    3,885,000Total
      Current Liabilities
                                    
                                    
                                    8,901,574
                                    
                                    
                                    
                                    11,531,631Long-term
      Liabilities:Convertible
      notes payable, net of debt discount of $1,082,954 and $609,316,
      respectively
                                    
                                    
                                    225,526
                                    
                                    
                                    
                                    192,404Total
      Liabilities
                                    
                                    
                                    9,127,100
                                    
                                    
                                    
                                    11,724,035Commitments
      and ContingenciesStockholders'
      Deficiency:Preferred
      stock, $.01 par value, 10,000,000 shares authorized, none issued and
      outstanding
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Common
      stock, $.01 par value, 100,000,000 shares authorized, 28,903,112 and
      25,745,447 issued and outstanding, respectively
                                    
                                    
                                    289,031
                                    
                                    
                                    
                                    257,454Additional
      paid-in capital
                                    
                                    
                                    17,920,651
                                    
                                    
                                    
                                    17,068,256Accumulated
      deficit
                                    
                                    
                                    (26,645,601
                                    )
                                    
                                    
                                    (28,279,820
                                    )Total
      Stockholders' Deficiency
                                    
                                    
                                    (8,435,919
                                    )
                                    
                                    
                                    (10,954,110
                                    )Total
      Liabilities and Stockholders' Deficiency
                                    
                                    $
                                    691,181
                                    
                                    
                                    $
                                    769,925




See
accompanying notes to condensed consolidated financial statements
(unaudited).


3





STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


(Unaudited)




For the Three Months Ended September 30,2010
                
                
                2009Revenue
                
                $
                403,927
                
                
                $
                641,032Cost
      of Sales
                
                
                35,796
                
                
                
                60,388Gross
      Profit
                
                
                368,131
                
                
                
                580,644Selling,
      General and Administrative Expenses (including stock-based compensation of
      $121,500 and $0, repectively)
                
                
                1,013,496
                
                
                
                1,069,689Operating
      Loss
                
                
                (645,365
                )
                
                
                (489,045
                )Other
      (Income)/Expense:Interest
      (including $17,731 and $13,750 to related parties for 2010 and 2009
      periods, respectively)
                
                
                150,936
                
                
                
                44,490Interest
      expense related to warrants and conversion features issued in association
      with debt
                
                
                457,851
                
                
                
                49,900Amortization
      of debt discount
                
                
                205,458
                
                
                
                375,832Amortization
      of deferred financing costs
                
                
                -
                
                
                
                32,831Gain
      on change in fair value of derivatives
                
                
                (1,905,000
                )
                
                
                (1,047,000
                )Total
      Other (Income)/Expense
                
                
                (1,090,755
                )
                
                
                (543,947
                )NET
      INCOME
                
                $
                445,390
                
                
                $
                54,902NET
      INCOME PER SHARE - Basic
                
                $
                0.02
                
                
                $
                0.00NET
      INCOME PER SHARE - Diluted
                
                $
                0.00
                
                
                $
                0.00Weighted
      Average Number of Common Shares Outstanding - Basic
                
                
                29,574,312
                
                
                
                24,493,457Weighted
      Average Number of Common Shares Outstanding - Diluted
                
                
                42,770,232
                
                
                
                36,249,457




See
accompanying notes to condensed consolidated financial statements
(unaudited)


4




STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME/(OPERATIONS)


(Unaudited)




For the Six Months Ended September 30,2010
                  
                  
                  2009Revenue
                  
                  $
                  1,568,203
                  
                  
                  $
                  1,171,724Cost
      of Sales
                  
                  
                  103,910
                  
                  
                  
                  122,192Gross
      Profit
                  
                  
                  1,464,293
                  
                  
                  
                  1,049,532Selling,
      General and Administrative Expenses (including stock-based compensation of
      $222,750 and $34,000, repectively)
                  
                  
                  1,936,429
                  
                  
                  
                  2,111,716Operating
      Loss
                  
                  
                  (472,136
                  )
                  
                  
                  (1,062,184
                  )Other
      (Income)/Expense:Interest
      (including $31,481 and $27,500 to related parties for 2010 and 2009
      periods, respectively)
                  
                  
                  288,234
                  
                  
                  
                  97,304Interest
      expense related to warrants and conversion features issued in association
      with debt
                  
                  
                  661,202
                  
                  
                  
                  860,375Interest
      expense related to change in fair value of warrants and conversion
      features granted for ratchet provisions
                  
                  
                  -
                  
                  
                  
                  5,936,000Amortization
      of debt discount
                  
                  
                  464,338
                  
                  
                  
                  737,218Amortization
      of deferred financing costs
                  
                  
                  8,871
                  
                  
                  
                  125,974Gain
      on change in fair value of derivatives
                  
                  
                  (3,529,000
                  )
                  
                  
                  (5,307,000
                  )Total
      Other (Income)/Expense
                  
                  
                  (2,106,355
                  )
                  
                  
                  2,449,871NET
      INCOME/(LOSS)
                  
                  $
                  1,634,219
                  
                  
                  $
                  (3,512,055
                  )NET
      INCOME PER SHARE - Basic
                  
                  $
                  0.06
                  
                  
                  $
                  (0.15
                  )NET
      INCOME PER SHARE - Diluted
                  
                  $
                  0.01
                  
                  
                  $
                  (0.15
                  )Weighted
      Average Number of Common Shares Outstanding - Basic
                  
                  
                  29,321,868
                  
                  
                  
                  24,157,751Weighted
      Average Number of Common Shares Outstanding - Diluted
                  
                  
                  42,517,788
                  
                  
                  
                  24,157,751




See
accompanying notes to condensed consolidated financial statements
(unaudited)


5




STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIENCY


FOR
THE SIX MONTHS ENDED SEPTEMBER 30, 2010


(UNAUDITED)




Additional
                            
                            
                            
                            
                            
                            TotalCommon Stock
                            
                            
                            paid-in
                            
                            
                            Accumulated
                            
                            
                            Stockholders'Shares
                            
                            
                            Amount
                            
                            
                            capital
                            
                            
                            deficit
                            
                            
                            DeficiencyBalance,
      April 1, 2010
                            
                            
                            25,745,447
                            
                            
                            $
                            257,454
                            
                            
                            $
                            17,068,256
                            
                            
                            $
                            (28,279,820
                            )
                            
                            $
                            (10,954,110
                            )Issuance
      of common stock for investment advisory services
                            
                            
                            1,800,000
                            
                            
                            
                            18,000
                            
                            
                            
                            468,000
                            
                            
                            
                            -
                            
                            
                            
                            486,000Issuance
      of common stock for extension agreement
                            
                            
                            1,341,665
                            
                            
                            
                            13,417
                            
                            
                            
                            375,665
                            
                            
                            
                            -
                            
                            
                            
                            389,082Warrant
      exercise
                            
                            
                            16,000
                            
                            
                            
                            160
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            160Issuance
      of debt related penalty warrants
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            5,730
                            
                            
                            
                            -
                            
                            
                            
                            5,730Reclassification
      of warrants from liabilities
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            3,000
                            
                            
                            
                            -
                            
                            
                            
                            3,000Net
      Income
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,634,219
                            
                            
                            
                            1,634,219Balance,
      September 30, 2010
                            
                            
                            28,903,112
                            
                            
                            $
                            289,031
                            
                            
                            $
                            17,920,651
                            
                            
                            $
                            (26,645,601
                            )
                            
                            $
                            (8,435,919
                            )




See
accompanying notes to condensed consolidated financial statements
(unaudited)


6




STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)




For the Six Months Ended September 30,2010
                    
                    
                    2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income/(loss)
                    
                    $
                    1,634,219
                    
                    
                    $
                    (3,512,055
                    )Adjustments
      to reconcile net income/(loss) to net cash used in operating
      activities:Depreciation
                    
                    
                    31,598
                    
                    
                    
                    29,905Interest
      expense related to warrants and conversionfeatures
      issued in association with debt and ratchet
    provisions
                    
                    
                    661,202
                    
                    
                    
                    6,796,375Common
      stock issued for investment advisory services
                    
                    
                    222,750
                    
                    
                    
                    -Provision
      for doubtful accounts
                    
                    
                    -
                    
                    
                    
                    10,000Gain
      on change in fair value of derivatives
                    
                    
                    (3,529,000
                    )
                    
                    
                    (5,307,000
                    )Amortization
      of debt discount
                    
                    
                    464,338
                    
                    
                    
                    737,218Amortization
      of deferred financing costs
                    
                    
                    8,871
                    
                    
                    
                    125,974Deferred
      rent expense
                    
                    
                    (27,424
                    )
                    
                    
                    (40,618
                    )Stock
      based compensation
                    
                    
                    -
                    
                    
                    
                    34,000Changes
      in operating assets and liabilities:Accounts
      receivable
                    
                    
                    279,697
                    
                    
                    
                    21,371Inventories
                    
                    
                    (13,167
                    )
                    
                    
                    97,192Prepaid
      expense and other current assets
                    
                    
                    28,829
                    
                    
                    
                    (25,914
                    )Security
      deposits and other assets
                    
                    
                    6,166
                    
                    
                    
                    -Accounts
      payable
                    
                    
                    (89,699
                    )
                    
                    
                    312,079Accrued
      expenses
                    
                    
                    (43,360
                    )
                    
                    
                    -Accrued
      compensation and payroll taxes
                    
                    
                    193,078
                    
                    
                    
                    395,996Interest
      payable
                    
                    
                    104,248
                    
                    
                    
                    60,340Deferred
      revenue
                    
                    
                    (117,306
                    )
                    
                    
                    (67,262
                    )NET
      CASH USED IN OPERATING ACTIVITIES
                    
                    
                    (184,960
                    )
                    
                    
                    (332,399
                    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from convertible notes payable
                    
                    
                    747,300
                    
                    
                    
                    355,000Proceeds
      from exercise of warrants
                    
                    
                    160
                    
                    
                    
                    1,600Payments
      of convertible notes payable
                    
                    
                    (562,500
                    )
                    
                    
                    -Deferred
      financing costs
                    
                    
                    -
                    
                    
                    
                    (24,000
                    )NET
      CASH PROVIDED BY FINANCING ACTIVITIES
                    
                    
                    184,960
                    
                    
                    
                    332,600NET
      INCREASE IN CASH
                    
                    
                    -
                    
                    
                    
                    201CASH,
      BEGINNING OF PERIOD
                    
                    
                    -
                    
                    
                    
                    1,000CASH,
      END OF PERIOD
                    
                    $
                    -
                    
                    
                    $
                    1,201SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for:Interest
                    
                    $
                    36,121
                    
                    
                    $
                    24,372




See
accompanying notes to condensed consolidated financial statements
(unaudited)


7




STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)


(Unaudited)





For the Six Months Ended September
      30,2010
                              
                              
                              2009NON-CASH
      INVESTING AND FINANCING ACTIVITIES:Issuance
      of common stock to investment advisors debentures
                              
                              $
                              486,000
                              
                              
                              $
                              -Issuance
      of common stock for extension agreement
                              
                              $
                              389,082
                              
                              
                              $
                              -Reclassification
      of derivative liability to equity
                              
                              $
                              3,000
                              
                              
                              $
                              15,000Reclassification
      of warrants to derivative liability
                              
                              $
                              -
                              
                              
                              $
                              (107,000
                              )Cumulative
      effect of change in accounting principal on accumulated
      deficit
                              
                              $
                              -
                              
                              
                              $
                              491,006Cumulative
      effect of change in accounting principal on paid in
capital
                              
                              $
                              -
                              
                              
                              $
                              (2,600,261
                              )Issuance
      of common stock for conversion of convertible debentures
                              
                              $
                              -
                              
                              
                              $
                              25,000





See
accompanying notes to condensed consolidated financial statements
(unaudited)


8




STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2010 AND 2009


(Unaudited)





1.
            BUSINESS DESCRIPTION,
      GOING CONCERN AND ACCOUNTING
POLICIES




Company
Overview




Statmon
Technologies Corp. (the “Company”) is a wireless and fiber infrastructure
network management solution provider. “Axess”, our proprietary flagship software
application, and our supporting integration products are deployed in
telecommunications, media broadcast and navigation aid transmission networks to
optimize operations and keep them fully functional 24 hours a day, 7 days a
week, 52 weeks a year. A typical infrastructure network comprises a network
operations center (“NOC” or “Master Control”) plus a network of remote
transmission sites incorporating a wide range of devices, facilities management
and environmental control systems.




The
Statmon Platform is designed to self heal or preempt transmission failure by
automating the integration of all the different devices and disparate
technologies under a single control system, or permit corrective action at the
NOC. A tiered severity level alarm system at every site, down to the device
level, reports back to the NOC permitting manual adjustment or corrective action
without having to visit the site.  An authorized operator can drill down
and make manual adjustments to an individual device at a remote site from any
connected location including a wireless device such as a laptop or
Blackberry.




Architecturally
designed as a universal “Manager of Technologies” (“MOT”) application or
platform, wide scale network operations, regardless of disparate equipment
brands or incompatible technologies deployed at a NOC or remote site, can
automatically interact with each other while being managed from a single point
of control or “dashboard” style computer screen.  In real time, a proactive
alarm system reports to a NOC or designated wireless device for appropriate
attention or action. Adjusting the HVAC, the health of the uninterrupted power
supply (“UPS”) and diesel generator and the level of the fuel tank, as well as
disaster recovery, emergency power management,  and redundancy are all
proactive management capabilities of the Statmon Platform. The Statmon Platform
will keep remote sites operating even when part or all of the entire network are
down, automatically bringing the remote back on line when network operations are
restored.




The
marketing and distribution of our products are primarily facilitated by
value-added resellers (“VAR’s”), sales channel strategic partners and original
equipment manufacturer (“OEM”) collaborations. Sales channel partners are
developed and managed by an internal business development team and supported by
a direct sales force. The Company is seeking additional partners with
appropriate credentials for large scale implementations.




Basis
of Presentation




The
unaudited condensed consolidated interim financial statements include the
accounts of the Company's wholly-owned subsidiaries, Statmon-eBI Solutions, LLC
and STC Software Corp.  All inter-company accounts and transactions have
been eliminated in consolidation.




These
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and the rules and regulations of the Securities and Exchange
Commission for interim financial statements. These financial statements reflect
all adjustments and accruals of a normal recurring nature that, in the opinion
of management, are necessary in order to make the financial statements not
misleading. The results for the interim periods presented are not necessarily
indicative of results to be expected for any future period.


9




1.
              BUSINESS DESCRIPTION,
      GOING CONCERN AND ACCOUNTING POLICIES,
continued




These
financial statements should be read in conjunction with the audited financial
statements and the notes thereto of all the entities included in the Company’s
2010 Annual Report on Form 10-K filed with the Securities Exchange
Commission.




Going
Concern




The
accompanying unaudited condensed consolidated interim financial statements have
been prepared in accordance with accounting principles generally accepted in the
Unites States of America ("US GAAP") for interim financial statement
information. The Company has incurred net losses of approximately $26.6 million
since inception. Additionally, the Company had a net working capital deficiency
of approximately $8.4 million at September 30, 2010.




As of
September 30, 2010, the Company has $1,990,500 of Convertible Debentures due
before September 30, 2011 of which $1,600,500 is past due.  The Company is
currently looking for alternatives to extend the due date or to obtain
additional financing to settle the outstanding debentures.  The Company
also has $1,101,250 in unsecured notes payable that are in default and has
accrued compensation and payroll tax obligations of $2,117,288 including
penalties and interest.




On
October 15, 2010, the Company received a notice of intent to levy from the
Internal Revenue Service against the Company’s assets for approximately $803,000
in connection with delinquent payroll taxes, interest and penalties. The Company
has the right to a hearing and is in the process of providing the requested
information and documents before the deadline of November 25, 2010. The Company
plans to settle or enter into a payment plan to settle the outstanding
obligations. The Company is currently seeking additional financing to settle the
outstanding payroll taxes, interest and penalties. If the Company is unable to
obtain additional financing or cannot structure a payment plan that it can
adhere to, it may be forced to curtail business operations or enter into Chapter
reorganization proceedings.




These
conditions raise substantial doubt about the Company’s ability to continue as a
going concern. The accompanying unaudited condensed consolidated interim
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.




As more
fully described in the Notes below, the Company funded its operations during the
six months ended September 30, 2010 by raising an additional $747,300 of
proceeds through the sale of Senior Secured Convertible Debentures. 
However, $562,500 was raised for the explicit purpose of paying
down debentures that came due.




Management
Plans




Management’s
plans with regard to the above matters encompass the following actions: 1)
obtain funding from new investors to alleviate the Company’s working capital
deficiency, 2) implement a plan to increase sales. The Company and its sales
channel partners have developed a pipeline of qualified sales opportunities. The
revenues from such prospective sales pipelines are expected to grow as the
existing and new sales channel partner relationships develop and 3)
Restructuring some of its debt. To help with its plan the Company has hired a
financial advisor to help raise capital. The Company’s continued existence is
dependent upon its ability to resolve its liquidity problems and increase
profitability in its current business operations.


10




1.
                BUSINESS DESCRIPTION,
      GOING CONCERN AND ACCOUNTING POLICIES,
continued


There can
be no assurances that the Company will be successful in obtaining the
aforementioned operating results, financing or refinancing, converting and/or
extending its notes payable. If not successful, the Company would seek to
negotiate other terms for the issuance of debt, and/or pursue bridge financing,
negotiate with suppliers for a reduction of debt through issuance of stock, and
seek to raise equity through the sale of its common and preferred stock. At this
time, management cannot assess the likelihood of achieving these objectives. If
the Company is unable to achieve these objectives or amounts due for debentures
and payroll taxes are unable to be paid, it may be forced to cease business
operations.




Revenue
Recognition




Product
revenues from the sale of software licenses are recognized when evidence of a
license agreement exists, the fees are fixed and determinable, collectability is
probable and vendor specific objective evidence exists to allocate the total fee
to elements of the arrangements. The Company's software license agreement
entitles licensees limited rights for upgrades and enhancements for the version
they have licensed.





The
Company requires its software product sales to be supported by a written
contract or other evidence of a sale transaction, which generally consists of a
customer purchase order or on-line authorization. These forms of evidence
clearly indicate the selling price to the customer, shipping terms, payment
terms (generally 30 days) and refund policy, if any. The selling prices of these
products are fixed at the time the sale is consummated.





Deferred
revenue represents revenue billed or collected for services not yet
rendered.




New
Accounting Pronouncements




In
October 2009, the Financial Accounting Standards Board (“FASB”) updated topic
605 on Revenue Recognition authoritative guidance on revenue recognition that
became effective for us beginning April 1, 2010, with earlier adoption
permitted.  Under the new guidance on arrangements that include software
elements, tangible products that have software components that are essential to
the functionality of the tangible product will no longer be within the scope of
the software revenue recognition guidance, and software- enabled products will
now be subject to other relevant revenue recognition guidance. 
Additionally, the FASB issued authoritative guidance on revenue arrangements
with multiple deliverables that are outside the scope of the software revenue
recognition guidance.  Under the new guidance, when vendor specific
objective evidence or third party evidence for deliverables in an arrangement
cannot be determined, a best estimate of the selling price is required to
separate deliverables and allocate arrangement consideration using the relative
selling price method.  The new guidance includes new disclosure
requirements on how the application of the relative selling price method affects
the timing and amount of revenue recognition.  The adoption of this new
guidance did not have a material impact on our financial
statements.




In June
2009, the FASB has issued Accounting Standards Update (ASU) 2009-16, Transfers and Servicing (Topic 860)
- Accounting for Transfers of Financial Assets. ASU 2009-16 will require
more information about transfers of financial assets, including securitization
transactions, eliminates the concept of a qualifying special-purpose entity and
changes the requirements for derecognizing financial assets. ASU 2009-16 is
effective at the start of a reporting entity’s first fiscal year beginning after
November 15, 2009.  The adoption of this new guidance did not have a
material impact on our financial statements.


11




1.
                BUSINESS DESCRIPTION,
      GOING CONCERN AND ACCOUNTING POLICIES,
continued


In
February 2010, the FASB issued Accounting Standards Update 2010-10 (ASU
2010-10), “Consolidation (Topic 810).” The amendments to the consolidation
requirements of Topic 810 resulting from the issuance of Statement 167 are
deferred for a reporting entity’s interest in an entity (1) that has all the
attributes of an investment company or (2) for which it is industry practice to
apply measurement principles for financial reporting purposes that are
consistent with those followed by investment companies. An entity that qualifies
for the deferral will continue to be assessed under the overall guidance on the
consolidation of variable interest entities in Subtopic 810-10 (before the
Statement 167 amendments) or other applicable consolidation guidance, such as
the guidance for the consolidation of partnerships in Subtopic 810- 20. The
deferral is effective as of the beginning of a reporting entity’s first annual
period that begins after November 15, 2009, and for interim periods within that
first annual reporting period, which coincides with the effective date of
Statement 167. Early application is not permitted. The adoption of this new
guidance did not have a material impact on our financial
statements.




In
January 2010, the FASB issued a standard pertaining to fair value disclosures
(ASU No. 2010-6) that requires a reporting entity to disclose separately
the amounts of significant transfers in and out of Level 1 and
Level 2, to describe the reasons for the transfers, and to disclose
separately certain additional information about purchases, sales, issuances, and
settlements of Level 3 items. This standard also requires an entity to
provide disclosures about the valuation techniques and inputs used to measure
fair value for both recurring and nonrecurring fair value measurements for
Level 2 and Level 3 items. The standard is effective for interim and
annual reporting periods beginning after December 15, 2009, except for the
Level 3 disclosure of activity, which is effective for fiscal years
beginning after December 15, 2010. We adopted the effective portions of
this standard as of April 1, 2010. The adoption of the effective portions
of this standard did not have a material impact on our consolidated financial
statements and management is currently evaluating the effect of the impact of
the separate disclosure requirements of Level 3 items.




In
February 2010, the FASB issued a standard that removed the requirement for an
SEC filer to disclose a date through which subsequent events have been evaluated
in both issued and revised financial statements (ASU No. 2010-09).
Generally, this standard was effective immediately upon issuance. The adoption
of this standard did not have a material impact on our consolidated financial
statements.




Reclassification




Certain
prior amounts have been reclassified to conform to current year
presentation.  These reclassifications had no impact on operating income
(loss) for any of the periods presented.




2.
            SENIOR SECURED
      ORIGINAL ISSUE DISCOUNT CONVERTIBLE DEBENTURE AND DERIVATIVE
      LIABILITIES




On March
5, 2008, the Company issued and sold debentures in a total principal amount of
$1,500,000, due March 5, 2010 (the “Debentures”) to accredited investors in a
private placement pursuant to a securities purchase agreement (the “Purchase
Agreement”).  The Debentures are the first tranche of up to an aggregate of
$4,038,000 of Original Issue Discount Senior Secured Convertible Debentures (for
an aggregate cash subscription amount of up to $3,365,000).  The Debentures
have an effective interest rate of approximately 10% per annum. After deducting
the expenses of the private placement, including prepaid interest, the Company
received net proceeds of approximately $1,190,000 related to Tranche
I.


12




2.
              SENIOR SECURED
      ORIGINAL ISSUE DISCOUNT CONVERTIBLE DEBENTURE AND DERIVATIVE
      LIABILITIES,
continued






During
the six months ended September 30, 2008, the Company issued and sold the second
tranche (“Tranche II”) of debentures in total principal amount of $1,038,000,
due two years from the issuance of the securities, under the same debenture
facility.  The terms are substantially the same and the Company received
net proceeds after deducting the expenses of the private placement of
approximately $865,000 related to Tranche II.




In
connection with the private placement, the investors also initially received
warrants (the “Warrants”) to purchase up to 2,583,474 shares of the Company’s
common stock, which terminate five years from the closing date (the “Termination
Date”) and initially had an exercise price of $1.20 per share. Based on the
terms of the agreement, the Warrants may also be exercised by means of a
cashless exercise.  On the Termination Date, the Warrant shall be
automatically exercised via cashless exercise. Based on the reduced exercise
price of the warrants issued in conjunction with Tranche III (See below), the
exercise price of the Warrants were reduced to $0.50 and by the terms of the
original agreement, the investors were issued an additional 3,616,864 warrants
based on the terms of the original Tranche I and II agreements.




From
April 1, 2009 through September 30, 2010 , the Company issued and sold a portion
of the third tranche (“Tranche III”)of debentures in total principal amount of
$1,734,480, due two years from the issuance of the securities, under the same
debenture facility.   In connection with the private placement, the
investors also received warrants to purchase up to 6,937,920 shares of the
Company’s common stock, which terminate in five years and have an exercise price
of $0.50 per share. Based on the terms of the agreement, the Warrants may also
be exercised by means of a cashless exercise.




The
initial conversion price (“Initial Conversion Price”) of both Tranche I and
Tranche II of Debentures was $0.9824 per share.  The conversion price of
Tranche III was $0.25.  Based on the reduced conversion price of the
Debentures issued in conjunction with Tranche III, the conversion price of the
Debentures from Tranches I and II were reduced to $0.25 based on the terms of
the original agreement governing their issuance.  To record the change in
the fair value of the conversion price reduction and the warrant exercise price
reduction, the Company recorded a $5,936,000 interest charge which is recorded
in “Interest expense related to change in fair value of warrants and conversion
features issued in association with debt” on the condensed consolidated
statement of operations for the six months ended September 30,
2009.




The
Company adopted the provisions of an update on ASC Topic 815 Derivatives and
Hedging on April 1, 2009 and the warrants and convertible features on the
debentures, which were previously classified as equity, are now classified as
liabilities and are recorded at fair value.  The Company used a
Black-Scholes pricing model to determine the value of the warrants and
conversion features.  The model uses sourced inputs such as interest rates,
stock price and volatility, the selection of which requires management judgment
and requires that the fair value of these liabilities be remeasured at the end
of every reporting period with the change in fair value reported in the
statement of operations.




On
Tranche I and II, the gross redemption value of $2,538,000 was recorded net of a
discount of $2,526,000.  The debt discount consisted of $423,000 related to
the original issue discount, $1,815,000 related to the allocated fair value of
the warrants, $1,323,000 relates to the beneficial conversion feature of the
note reduced by deemed interest of $1,035,000 due to the fact that the proceeds
in some of the issuances were less than the fair value issued in the
transaction.   The debt discount is charged to interest expense
ratably over the life of the loan. During the six months ended September 30,
2010 and 2009, the Company amortized $150,345 and $633,230 respectively of debt
discount related to Tranches I and II.




The gross
proceeds of $1,734,480 related to Tranche III were recorded net of a discount of
$1,734,480.  The debt discount consisted of $289,080 related to the
original issue discount, $2,174,000 related to the fair value of the warrants
and 1,010,000 related to the fair value of the conversion feature of the note
reduced by $1,738,600 of deemed interest that was expensed immediately. 
During the six months ended September 30, 2010 and 2009, the Company amortized
$305,958 and $81,014 respectively of debt discount related to Tranche
III.


13




2.
                SENIOR SECURED
      ORIGINAL ISSUE DISCOUNT CONVERTIBLE DEBENTURE AND DERIVATIVE
      LIABILITIES,
continued


The
derivative liabilities were valued using the Black-Scholes model with the
following assumptions.




September 30,
                          
                          
                          Tranche III
                          
                          
                          March 31,
                          
                          
                          Tranche I & II2010
                          
                          
                          Inception
                          
                          
                          2010
                          
                          
                          InceptionConversion
      Feature:Risk-free
      interest rate
                          
                          
                          0.27
                          %
                          
                          
                          0.88%-1.26
                          %
                          
                          
                          0.43
                          %
                          
                          
                          2.0%
      -4.25
                          %Expected
      volatility
                          
                          
                          192.41
                          %
                          
                          
                          154.9%-192.4
                          %
                          
                          
                          176.79
                          %
                          
                          
                          106.7%-112.0
                          %Expected
      life (in years)
                          
                          
                          0.50-2.00
                          
                          
                          
                          2.00
                          
                          
                          
                          0.02-2.00
                          
                          
                          
                          2.00Expected
      dividend yield
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Warrants:Risk-free
      interest rate
                          
                          
                          0.64%-1.27
                          %
                          
                          
                          1.74%-2.75
                          %
                          
                          
                          1.65%-2.60
                          %
                          
                          
                          0.50%-2.50
                          %Expected
      volatility
                          
                          
                          192.41
                          %
                          
                          
                          154.9%-192.4
                          %
                          
                          
                          176.79
                          %
                          
                          
                          105.1%-155.1
                          %Expected
      life (in years)
                          
                          
                          2.43-5.00
                          
                          
                          
                          5.00
                          
                          
                          
                          2.93-5.0
                          
                          
                          
                          5.00Expected
      dividend yield
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -




Under
additional provisions of the securities purchase agreements related to such
Debentures, the Company was required to meet certain revenue minimums in fiscal
year 2009 which were not met.  Based on not meeting the revenue minimums,
the Company was required to issue to each investor, on a pro-rata basis,
additional warrants (the “Additional Warrants”) to purchase up to, in the
aggregate, 676,800 shares of the Company’s common stock related to Tranches I
and II.  The Additional Warrants are in the same form as the Warrants
described above, have a term of exercise equal to five (5) years following their
issuance, and shall have an exercise price of $0.01 per share. During the year
ended March 31, 2010, The Company has issued 400,000 and 276,800 penalty
warrants to the debenture holders in Tranche I and Tranche II, respectively
related to this penalty. The fair value of these warrants is $124,743 based on a
Black Scholes model and The Company recorded this penalty during the year ended
March 31, 2009 as that is the period when the revenue shortfall occurred. 
  The Company also failed to meet revenue minimums in Fiscal 2010 and in
the twelve months ended June 30, 2010 and is required to issue to certain
Tranche III investors 131,400 and 24,600 penalty warrants valued at $38,000 and
$4,000, respectively based on a Black Scholes model. The Company recorded
$38,000 of this penalty during the year ended March 31, 2010 and $4,000 during
the quarter ended June 30, 2010 as that is the period when the revenue
shortfalls occurred.  Tranche III has similar provisions to receive up to
523,392 similar warrants based on the existing Tranche III issuance if the
Company fails to meet revenue minimums twelve month periods through June 30,
2011.




On March
5, 2010, $1,125,000 of Tranche I debentures became due.  The Company
entered negotiations with the Tranche I holders and obtained an extension to May
31, 2010 by issuing 1,341,665 shares of our common stock as an extension fee.
The common stock was valued at $0.29 and we recorded $389,082 related to this
issuance as interest expense in the year ended March 31, 2010. On July 30, 2010,
$562,500 was paid to the holders of the debentures that became due on May 31,
2010. On November 16, 2010, we received a demand for repayment notice from the
holders of the Tranche I debentures for their outstanding balance of $612,266
which includes principal and interest.  The Company intends to continue
settlement and compromise discussions with these debenture holders. In the event
the Company is unable to reach settlements with these debenture holders in a
timely manner this may lead to litigation between the parties. (See Note
10)




As of
September 30, 2010, $1,038,000 of Tranche II debentures are past due. We have an
obligation to issue to the Tranche II holders extension shares as an extension
fee on the same terms as Tranche I.  We will be issuing 1,211,064 shares of
common stock to the Tranche II holders during the quarter ended December 31,
2010.  We have valued the shares at $0.10 and have recorded $121,106 in
interest expense during the quarter ended September 30, 2010.  We have not
yet settled these debentures and the Company is in the process of raising
additional capital through the issuance of additional debentures to settle the
remaining balance.


14




2.
                SENIOR SECURED
      ORIGINAL ISSUE DISCOUNT CONVERTIBLE DEBENTURE AND DERIVATIVE
      LIABILITIES,
continued


The gross
amount of maturities under the Secured Senior Secured Original Issue Discount
Convertible Debentures (not netted to include the debt discount and assuming
that the debenture is not converted into common stock) is $1,990,500 and
$1,308,480 for the twelve months ended September 30, 2011 and 2012,
respectively.




3.
            NOTES
      PAYABLE




Notes
payable at September 30, 2010 and March 31, 2010 consist of the
following:




As ofSeptember 30, 2010
                          
                          
                          March 31, 2010Notes
      Payable - Delis - related party
                          
                          [a]
                          
                          $
                          200,000
                          
                          
                          $
                          200,000Notes
      Payable - various
                          
                          [b]
                          
                          
                          401,250
                          
                          
                          
                          401,250Senior
      Subordinated Notes Payable - Thieme Consulting, Inc. - related
      party
                          
                          [c]
                          
                          
                          250,000
                          
                          
                          
                          250,000Senior
      Subordinated Notes Payable, net of debt discount of $0 and $8,034,
      respectively
                          
                          [d]
                          
                          
                          250,000
                          
                          
                          
                          241,966Short-Term
      Notes Payable
                          
                          
                          
                          $
                          1,101,250
                          
                          
                          $
                          1,093,216





[a]
            On
      April 27, 2007, the Company sold a unit consisting of (i) a $200,000
      principal amount secured promissory note bearing interest at 10% per annum
      and due 180 days from the date of issuance, (ii) 150,000 shares of common
      stock and (iii) warrants to purchase 150,000 shares of common stock
      exercisable at a price of $1.00 per share for a term of five years. 
      This note matured on October 24, 2007.  Since the Company did not
      repay the note by the maturity date, per the default terms of the note,
      the Company issued an additional 100,000 shares of common stock and
      warrants to purchase 100,000 shares of its common stock at an exercise
      price of $1.00 per share with a term of five years as consideration for an
      extension of the due date of the note to October 24,
  2008.




The
Company is negotiating an extension or conversion to shares of common
stock that would supersede such extension agreement subject to approval from the
majority of the secured debenture holders.  There can be no assurance that
it will be able to obtain such an extension or approval from the majority of the
debenture holders.  This note is secured by a second lien on all of the
assets of the Company.




[b]
            These
      Units generally consisted of (i) a promissory note bearing interest
      generally at 10% per annum, (ii) a share of the Company’s common stock and
      (iii) three or five-year warrant to purchase shares of common stock at an
      exercise price between $1.00 and $2.00 per share.  The total amount
      of these notes is $401,250 and represents eight notes with initial
      maturity dates between November 19, 2002 and October 21,
    2008.


15




3.
              NOTES
      PAYABLE,continued






At
September 30, 2010, all these notes are in default, plus interest of $271,741.
Upon default, most notes accrue interest at 15% per annum and provide for the
issuance of monthly warrants, exercisable at the same price as the original
warrants granted with the unit, as a penalty until the repayment of the notes in
full.  The Company accrued $17,938 of interest and granted 45,000 penalty
warrants, valued at $5,730 related to such notes during the six months ended
September 30, 2010.  The Company will continue to grant 7,500 penalty
warrants per month related to such notes in default until the notes are
repaid.




[c]
            An
      existing note in the amount of $250,000 matured and on March 5, 2008, the
      Company entered into a new promissory note with Thieme Consulting, Inc.
      for $250,000.  This new note is subordinated to the Debentures
      described in Note 2 above.  In consideration for entering into the
      new note and subordinating its first security position, the Company repaid
      all of the accrued interest due on the October 2001 notes of
      $243,896.  The new note had a maturity date of June 4, 2010 and
      accrued interest of 10% during the life of the loan and now bears interest
      at 15% per annum after the due date of the note. The Company is presently
      in discussions to extend the due date of the note. During the six months
      ended September 30, 2010, the Company has incurred $16,481 of interest
      expense related to this note and at September 30, 2010, the Company has
      accrued $68,605 of interest due on this
note.




[d]
            An
      existing note in the amount of $250,000 matured and on March 5, 2008, the
      Company entered into a new promissory note with a secured promissory note
      holder.  This new note is subordinated to the notes in Note 5 and [c]
      above. In consideration for entering into the new note, the Company
      converted all of the accrued interest due on the August 2004 note of
      $125,445 into shares of restricted common stock at $1.00 per share, issued
      703,871 shares of restricted common stock in exchange for 1,759,676
      warrants and issued a new warrant to purchase 250,000 shares of common
      stock exercisable for a five-year term at $1.20 per share which expire on
      March 5, 2013.    The new note had a maturity date of June 4,
      2010 and accrued interest at 10% during the life of the note and now bears
      interest at 15% per annum after the due date of the note.  The
      Company is presently in discussions to extend the due date of the
      note.  The fair value of the instruments issued in the exchange
      agreement approximated the instruments that were exchanged for and no gain
      or loss was recorded related to this transaction during the year ended
      March 31, 2008.   During the year ended March 31, 2009, the
      Company issued 22,917 shares of common stock valued at $12,147 in lieu of
      interest through February 2009.  On October 20, 2009, the Company
      issued 133,973 shares of common stock valued at $0.25 per share in lieu of
      cash interest payments for $15,959 of accrued interest on the note through
      October 20, 2009 as well as to prepay $17,534 for future interest on the
      note through maturity.  During the six months ended September 30,
      2010, the Company has incurred $12,021 of interest expense related to this
      note and at September 30, 2010, the Company has accrued $12,021 of
      interest due on this note.




4.
            STOCKHOLDERS’
      EQUITY




During
      the six months ended September 30, 2010, the Company issued 1,800,000
      shares of common stock valued at $0.27 for financial advisory
      services.  The term of the agreement is for one year beginning April
      15, 2010 and the Company recorded the fair value of the common stock
      issued for future consulting services as a prepaid expense and will be
      recording the expense over the life of the contract.  The Company
      also issued 1,341,665 shares of common stock valued at $0.29 as an
      extension fee to Tranche I holders to extend the due date of their
      debentures from March 5, 2010 to May 31, 2010.  We recorded this
      expense as interest expense during the three months ended March 31,
      2010.  The Company also issued 16,000 shares of common stock to a
      Tranche II debenture holder upon the exercise of $0.01 penalty
      warrants.


16




5.
            COMMITMENTS AND
      CONTINGENCIES




[a] 
Accrued
Compensation and Payroll Taxes  - During the years 2001 through
2008, The Company considered its Chief Executive Officer and its Chief
Technology Officer to be consultants of the Company rather than employees, as a
result of the Company’s non-compliance with the terms of their original
employment agreements. If the Chief Executive Officer and the Chief Technology
Officer were classified as employees during the above period, the Company would
have been required to withhold and remit payroll taxes to the respective taxing
authorities.




This
position may be subject to audit by the Internal Revenue Service and other state
and local taxing authorities, which, upon review, could result in an unfavorable
outcome if it is determined that such individuals’ compensation should have been
reported on the basis of an employee rather than a consultant.




The
Company has recorded charges of approximately $1,023,000 for additional
compensation (including penalties and interest) on behalf of the Chief Executive
Officer and the Chief Technology Officer should the Company be challenged by the
taxing authorities and it is determined their position is without
merit.




In
addition, the Company was delinquent in filing certain of its payroll returns
(including the remittance of taxes) totaling approximately $1,094,000 which
includes payroll taxes, related penalties and interest computed through
September 30, 2010.  The Company filed these tax returns on July 7, 2010,
is current with its payroll tax filing but may be subject to additional interest
and penalties.




On
October 15, 2010, we received a notice of an intent to levy and the right to a
hearing from the Internal Revenue Service against the Company’s assets for
approximately $803,000.  We are in the process of providing the requested
information and documents before November 25, 2010 and plan to exercise our
right to a hearing.  At that hearing, we intend to settle or enter into a
payment plan to settle our outstanding obligations.




[b]Product
Liability Insurance - The manufacture and sale of the Company’s products
involve the risk of product liability claims.  It does not carry product
liability insurance.  Pursuant to its software licensing agreements and
contracts, the Company makes every effort to limit any product liability to the
dollar value of the transaction, however, a successful claim brought against it
could require it to pay substantial damages and result in harm to its business
reputation, remove its products from the market or otherwise adversely affect
its business and operations.




6.
            FAIR VALUE
      MEASUREMENTS




On April
1, 2008, the Company implemented ASC 850 Fair Value Measurements and Disclosures
which provides a single definition of fair value, a framework for measuring fair
value, and expanded disclosures concerning fair value and clarifies that the
exchange price is the price in an orderly transaction between market
participants to sell an asset or transfer a liability at the measurement date
and emphasizes that fair value is a market-based measurement and not an
entity-specific measurement.




It also
established the following hierarchy used in fair value measurements and expanded
the required disclosures of assets and liabilities measured at fair
value:


17




6.
              FAIR VALUE
      MEASUREMENTS,
continued




•
            Level
      1 – Inputs use quoted prices in active markets for identical assets or
      liabilities that the Company has the ability to
  access.




•
            Level
      2 – Inputs use other inputs that are observable, either directly or
      indirectly. These inputs include quoted prices for similar assets and
      liabilities in active markets as well as other inputs such as interest
      rates and yield curves that are observable at commonly quoted
      intervals.




•
            Level
      3 – Inputs are unobservable inputs, including inputs that are available in
      situations where there is little, if any, market activity for the related
      asset or liability.




In
instances where inputs used to measure fair value fall into different levels in
the above fair value hierarchy, fair value measurements in their entirety are
categorized based on the lowest level input that is significant to the
valuation. The Company’s assessment of the significance of particular inputs to
these fair measurements requires judgment and considers factors specific to each
asset or liability.





Liabilities measured at fair value on a
recurring basis at September 30, 2010 are as follows:





Quoted Prices in
                        Active Markets for
                        Identical Liabilities
                        (Level 1)
                      
                      
                      Significant
                        Other
                        Observable
                        Inputs
                        (Level 2)
                      
                      
                      Significant
                        Unobservable
                        Inputs
                        (Level 3)
                      
                      
                      Balance at
                        September 30, 2010Conversion
      Features
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      398,000
                      
                      
                      $
                      398,000Warrant
      liability
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      1,183,000
                      
                      
                      $
                      1,183,000$
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      1,581,000
                      
                      
                      $
                      1,581,000





Financial
assets are considered Level 3 when their fair values are determined using
pricing models, discounted cash flow methodologies or similar techniques and at
least one significant model assumption or input is unobservable.  Our Level
3 liabilities consist of derivative liabilities associated with the debentures
and warrants that contain exercise price reset provisions.




The
following table provides a summary of the changes in fair value, including net
transfers in and/or out, of all financial assets measured at fair value on a
recurring basis using significant unobservable inputs during the six months
ended September 30, 2010.


18




6.
                FAIR VALUE
      MEASUREMENTS,
continued


Conversion
                            
                            
                            WarrantFeature
                            
                            
                            Liability
                            
                            
                            TotalBalance
      April, 1, 2010
                            
                            $
                            1,445,000
                            
                            
                            $
                            2,440,000
                            
                            
                            $
                            3,885,000Total
      realized/unrealized (gains) or lossesIncluded
      in other income (expense)
                            
                            
                            (1,605,000
                            )
                            
                            
                            (1,924,000
                            )
                            
                            
                            (3,529,000
                            )Included
      in stockholder's equity
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Purchases,
      issuances or settlements
                            
                            
                            558,000
                            
                            
                            
                            667,000
                            
                            
                            
                            1,225,000Transfers
      in and /or out of Level 3
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Balance
      September 30, 2010
                            
                            $
                            398,000
                            
                            
                            $
                            1,183,000
                            
                            
                            $
                            1,581,000




The
Company does not enter into derivative contracts for purposes of risk management
nor speculation.  However, the Company has entered into agreements whose
terms require that we classify certain freestanding warrants and embedded
conversion features as liabilities for accounting purposes.  Our
derivatives are classified as derivative liabilities in short-term liabilities
on the balance sheet and the change in their fair value is recorded in other
(income) expense on the statement of operations.




7.
            NET INCOME/LOSS PER
      SHARE




Basic net
income/loss per share is computed by dividing the net income/loss applicable to
common stockholders by the weighted-average number of shares of common stock
outstanding for the period. Diluted net income/loss per share reflects potential
dilution of securities by adding other potential common shares, including stock
warrants and shares issuable upon the conversion of convertible notes payable,
to the weighted-average number of common shares outstanding for a period, if
dilutive.





The
Company’s computation of weighted average per share includes 671,200 and 596,800
shares exercisable at $0.01 per share at September 30, 2010 and 2009,
respectively.


19




7.
                NET INCOME/LOSS PER
      SHARE,
continued
  The
following tables set forth the components used in the computation of basic and
diluted income per share:





For the Six Months EndedSeptember 30,2010*
                  
                  
                  2009**Numerator:Net
      Income/(Loss)
                  
                  $
                  1,634,219
                  
                  
                  $
                  (3,512,055
                  )Amortization
      of debt discount
                  
                  
                  464,338
                  
                  
                  
                  -(Gain)/Loss
      in change in value of conversion features
                  
                  
                  (1,605,000
                  )
                  
                  
                  -Net
      Income/(Loss) attributable to common stockholders
                  
                  $
                  493,557
                  
                  
                  $
                  (3,512,055
                  )Denominator:Weighted
      average common shares outstanding, basic
                  
                  
                  29,321,868
                  
                  
                  
                  24,157,751Common
      shares issued upon conversion of debentures
                  
                  
                  13,195,920
                  
                  
                  
                  -Weighted
      average common shares outstanding, diluted
                  
                  
                  42,517,788
                  
                  
                  
                  24,157,751Net
      Income/(Loss) per share - Basic
                  
                  $
                  0.06
                  
                  
                  $
                  (0.15
                  )Net
      Income/(Loss) per share - Diluted
                  
                  $
                  0.01
                  
                  
                  $
                  (0.15
                  )





For the Three Months EndedSeptember 30,2010*
                
                
                2009**Numerator:Net
      Income/(Loss)
                
                $
                445,390
                
                
                $
                54,902Amortization
      of debt discount
                
                
                205,458
                
                
                
                375,832(Gain)/Loss
      in change in value of conversion features
                
                
                (618,000
                )
                
                
                (519,000
                )Net
      Income/(Loss) attributable to common stockholders
                
                $
                32,848
                
                
                $
                (88,266
                )Denominator:Weighted
      average common shares outstanding, basic
                
                
                29,574,312
                
                
                
                24,493,457Common
      shares issued upon conversion of debentures
                
                
                13,195,920
                
                
                
                11,756,000Weighted
      average common shares outstanding, diluted
                
                
                42,770,232
                
                
                
                36,249,457Net
      Income/(Loss) per share - Basic
                
                $
                0.02
                
                
                $
                0.00Net
      Income/(Loss) per share - Diluted
                
                $
                0.00
                
                
                $
                0.00





* Potential common shares of 16,396,456
were excluded from the computation of diluted earnings per share as their
exercise prices were greater than the average market price of the common stock
during the period.





**
Potential common shares of 27,846,498 (outstanding warrants that can be
exercised into 16,090,498 shares of common stock and outstanding convertible
debentures that can converted into 11,756,000 shares of common stock) were
excluded from the computation of diluted earnings per share as their inclusion
would be anti-dilutive or would not effect on net income/(loss) per
share.


20


8.
            CUSTOMER
      CONCENTRATION




The
Company sold a substantial portion of its product and services to three
customers, News Corp, FLO TV and the State of Maryland during the six months
ended September 30, 2010 and 2009. Sales to these customers were approximately
56%, 21% and 0% of total sales, respectively for the six months ended September
30, 2010 and 0%, 63% and 20% of total sales, respectively for the six months
ended September 30, 2009.  Sales to these customers were approximately
0%, 39%, and 0% of total sales, respectively for the three months ended
September 30, 2010 and 0%, 55% and 36% of total sales, respectively for the
three months ended September 30, 2009.




Accounts
receivable balance for these customers was approximately $18,000, $30,100 and
$12,965, respectively at September 30, 2010 and $0, $92,000 and $0, respectively
at September 30, 2009.




On
October 5, 2010, Qualcomm announced they were discontinuing the transmission of
their FLO TV mobile TV direct to the consumer including AT&T and Verizon
subscribers.  Qualcomm also announced their plans to repurpose the
national FLO network and they are actively seeking partners in the broadcast TV,
cable and wireless carrier telecom markets to utilize the national FLO
transmission network to meet the growing imbalance between mobile data supply
and the demand for high quality video and print content for richer video user
experience.




On
October 6, 2010 Statmon received a 90 day notice terminating our FLO TV software
maintenance and services agreement.  In this transition period we
expect that sales to FLO TV will be minimal if any.




9.
            RESEARCH AND
      DEVELOPMENT




Research
and development expenditures are charged to operations as incurred. Research and
development expenditures were approximately $637,000 and $655,000 for the six
months ended September 30, 2010 and 2009, respectively. Research and development
expenditures were approximately $312,000 and $309,000 for the three months ended
September 30, 2010 and 2009, respectively.




10.
              SUBSEQUENT
      EVENTS
  On
November 16, 2010 the Company received a letter of demand from an attorney
representing all three secured Tranche I debenture holders.  The letter
demanded payment of the combined outstanding balance including principal and
interest of approximately $612,000. The debt matured on May 31, 2010 and was not
repaid by the company in accordance with the terms of the debenture agreement.
The letter of demand also stated their intention to exercise all their legal
rights to collect these amounts including interest and costs. The company
intends to continue settlement and compromise discussions with these debenture
holders.  On July 30, 2010 the same three debenture holders were
repaid $562,500 of their principal and $15,811 of interest and on April 15, 2010
were issued 1,341,665 extension shares.  In the event the company is unable
to reach settlements with these debenture holders in a timely manner this may
lead to litigation between the parties.
  The
Company and their legal counsel are in the process of determining the impact, if
any, as to whether or not such demand letter affects any other remaining
outstanding obligations.


21


Item 2.  Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.




Recent Developments for the
Company




Statmon
Technologies Corp. is a facilities and network infrastructure solution provider.
“Axess”, our proprietary flagship software application, and our supporting
integration products are widely deployed in  mainstream media
broadcast, telecommunications, building and facilities management as well as
aviation navigation aid transmission networks. The Statmon solution is deployed
to optimize operations across the infrastructure and remote site network and
ensure operations remain healthy and fully functional at all times.




A typical
infrastructure network comprises a network operations center (“NOC”) or master
control (“MC”), plus, a wide area network of remote transmission sites (the
“Network”). The remote sites typically involve a wide range of incompatible
electronic equipment manufacturers and digital communication devices, building
and facilities management control devices, as well as environmental monitoring
systems including security alarms, surveillance cameras, digital entry pads,
thermostats and interfaces for ventilation duct controllers, the HVAC system and
emergency power generators.




The
Statmon solution is designed to preempt transmission or operational failure with
a self healing matrix automating the continuous integration of all the disparate
devices and technologies under a single “umbrella” control
system.  The Statmon solution also permits manual corrective action at
the NOC or from a wireless connected device such as a laptop, iPhone/iPad, Droid
or Blackberry smart phone from any location. There is a tiered severity level
alarm system activated at every site, interfaced down to the individual devices,
and reporting back up northbound to a NOC, including logging any automated
adjustments or permitting manual adjustment or corrective action without a field
technician having to physically travel to the NOC facility or to the remote
site.  Authorized operators can drill down through the Axess software
screens in real time and observe what is taking place with any individual device
or system and make management and control adjustments as required at the
site.




An
important “value add” of the Statmon solution is the preemption of failure at
remote sites while simultaneously optimizing the performance of the entire
network economically.  Any Network downtime typically has a mission
critical or direct financial impact on the customers’ top line revenue
generation, operating profit and the all important customer experience or
satisfaction.  The ROI and investment payback periods relative to the
purchase cost of the Statmon solution compared to the operators loss of revenue
or the real costs of being “off the air” typically are highly
attractive.  Advertisers do not pay for commercials that do not go to
air or demand expensive make good air time. Mobile device and cell phone users
are expecting higher levels of customer experience and are quick to switch
service providers if the cell sites in their area are constantly down or
dropping connections. Geographically, the Statmon Platform streamlines the
network engineering work flow and remote site field trips and maintenance
process, reducing operating and outsourcing costs and facilitating the
reallocation of resources with economics.  The Statmon solution can
dramatically facilitate the green policies being implemented by all levels of
corporate and government entities.   Architecturally designed as
a universal “Manager of Technologies” application or platform, wide scale
network operations, regardless of disparate equipment brands or incompatible
technologies deployed at a NOC or remote site, can automatically interact with
each other while being managed from a single point of control or “dashboard”
style computer or smart phone screen.  In real time, proactive alarm
systems report up northbound to a NOC or designated wireless device for
appropriate attention or action. Adjusting the HVAC, monitoring the health of
the uninterrupted power supply and diesel generator including the level
of  fuel in the diesel tank, as well as proactive disaster recovery
actions, emergency power management, and redundancy are all proactive management
capabilities of the Statmon Platform. The Statmon solution will keep remote
sites operating independently even when part or the entire entire network are
down, automatically bringing the remote site back on line when network
operations are restored.


22


Telecommunications
infrastructure and high speed networks in both developed and developing
countries around the world are being aggressively upgraded to meet the growing
subscriber demand for communication services and new
applications/features.  In developing countries, wireless networks
provide an affordable alternative to the more expensive hardwire or landline
infrastructure.  Notable are the third generation, or 3G, wireless and
infrastructure transmission networks which are being upgraded to handle the
rapid call traffic increases, wireless high speed broadband and convergence of
digital media delivery and additional data services for the wireless and IPTV
fiber markets. Cable systems are offering telecommunication and high speed
broadband services to their customers and upgrading their networks including
deploying Statmon’s proprietary “Accurate” Local People Meter monitoring
platform which interfaces with directly with Nielsen for market research
purposes. Statmon’s unique RF (radio frequency) background and knowhow in the
mainstream media broadcast industry places us in a strategic position to provide
high end solutions for the enhanced telecommunications networks offering video
and enriched multimedia content.




The
marketing and distribution of our products is primarily facilitated by third
party sales channel partners, value added resellers, black label and original
equipment manufacturer collaborations (“Channel Partners” or “Strategic
Partners”). Channel Partners are developed and managed by an internal business
development team and supported by a direct sales and engineering support
force.  We have a history as an innovative technology leader for
remote site facilities management, transmission remote control and monitoring in
the traditional television, radio, satellite and cable broadcast industries. The
traditional network television market is undergoing a resurgence of activity and
reformatting as the digital and high definition (“HD”) television, cable and
satellite delivery systems realign their operating and business models post the
analog switchover including offering additional digital channels that
individually focus on HD programming, continuous news coverage and weather
reporting, sports and special interest coverage. Now that analog broadcasting
has officially been turned off the digital HD network broadcast operations are
being streamlined or rationalized with central casting, regional hubs and
unmanned remote site transmission operations. The traditional radio markets are
retrofitting to multi band digital transmission in order to remain competitive
with satellite radio, mobile TV, multimedia and music content direct to cell
phone or mobile device offerings for automobiles, trucks, public transport and
the military.




Between
2006 and 2010 wireless telecommunications technology leader Qualcomm,
Incorporated, through its wholly owned subsidiaries MediaFLO Technologies Inc.,
and FLO TV Inc., constructed from scratch, a national high speed broadcast
transmission network on relocated spectrum acquired from the Federal government
for a approximately $900 million. Statmon’s Axess and related products were
installed to control and monitor 527 transmission sites from the San Diego based
NOC.  The FLO TV transmission network was designed to provide up to 25
channels of live television and video content directly to the AT&T and
Verizon cell phone subscriber base as well as the automotive mobile TV
subscriber markets through Ford Motor Co., Chrysler and General Motors Corp OEM
agreements.




On
October 5, 2010, Qualcomm announced they were discontinuing all transmission of
their FLO TV mobile TV service, direct to the consumer including AT&T and
Verizon wireless subscribers.  Qualcomm simultaneously announced their
desire to repurpose the FLO network and they are actively seeking partners in
the broadcast TV, cable and wireless carrier telecom markets ideally to utilize
the national FLO transmission network to meet the growing imbalance between
mobile data supply and the demand for high quality video and print content for
richer video user experience. The other possibility is the sale of the spectrum
without the network.




Statmon
received a 90 day notice of termination of its FLO TV software maintenance
services contracts on October 6, 2010.  In the three- and six-months
ended September 30, 2010 39% and 21% of our revenues have come from FLO
TV.   We expect other existing and new customers in our sales
pipelines to mitigate the loss on the FLO TV business which since inception had
generated approximately $7,800,000 in sales.


23


In
addition to our core broadcast business we have commenced penetrating and with
adequate operating capital are poised to pursue rapid expansion into additional
vertical markets, including the wireless telecommunications (cell phone), mobile
TV, IPTV over fiber networks, microwave telecommunications, multimedia, gaming,
power grid and emergency power management, government infrastructure management,
homeland security, military communications, surveillance and other markets where
centrally controlled  network management, embedded industrial systems
and wide scale remote monitoring and control solutions are being
implemented.




We
believe our products have broad application in the wireless, landline and fiber
segments of the telecommunications industries providing network management,
alarm monitoring and remote site control, transmission, buildings and facilities
management solutions for many of the new planned networks, as well as the
upgrades and wide scale infrastructure enhancements. In developing countries,
wireless infrastructure networks are being developed as viable alternatives to
wired networks. Economic remote site management is vital for viable carrier
operations.




We expect
the wireless and infrastructure markets to experience sustained growth over the
next ten to twenty years as the carriers and infrastructure service providers
compete to provide superior and additional wide-ranging services, including
enriched video and high quality content to mobile devices, wireless broadband
and other related mobile data delivery services customers expect. We believe
that our background in the mainstream broadcast transmission industry at the
highest TV and radio network levels plus our three year involvement with
wireless technology leader Qualcomm places us in a credible position to satisfy
the operational needs of the mainstream telecommunications, wireless and
infrastructure providers for RF and content delivery, as well as overall
communications network, building and remote site management and
control.




Our
significant clients in the present and in the past include News Corporation –
Fox Television, General Electric – NBC Universal & Telemundo Television
Networks (in the process of being acquired by Comcast), Time Warner - Turner
Broadcast Systems, CNN, Cox Communications; Belo Corp. Television, Qualcomm -
FLO TV; CBS Corporation Television and Radio Networks; The Walt Disney Company -
ABC Television and Radio Networks; Univision Communications Television and Radio
Network,; Australian Government owned Air Services of Australia (the Australian
equivalent to the FAA); Tribune Company Television; and Statmon’s current sales
channel and integration partners include National TeleConsultants (“NTC”),
Comprehensive Technical Group (“CTG”), Sealevel Systems, Cascadiant - InfraCell,
Trilithic, Harris Broadcast, Pixelmetrix, Nautel Navigation, BTS Ireland and
Sound Broadcast Services, Ltd.




Off-Balance
Sheet Arrangements




We do not
have any off-balance sheet debt nor did we have any transactions, arrangements,
obligations (including contingent obligations) or other relationships with any
unconsolidated entities or other persons that may have material current or
future effect on financial conditions, changes in the financial conditions,
results of operations, liquidity, capital expenditures, capital resources, or
significant components of revenue or expenses.




For the Three Months Ended
September 30, 2010 and 2009




Results
From Operations




Revenues-
Revenues were $403,927 and $641,032 for the three months ended September 30,
2010 and 2009, respectively. The decrease in revenues of approximately
$237,000 is due to a slowdown in revenues associated with FLO
TV.  Revenues to FLO TV were 39% and 55% for the three months ended
September 30, 2010 and 2009, respectively


24


Cost of
Sales - Cost of sales were $35,796 and $60,388 for the three months ended
September 30, 2010 and 2009, respectively. Overall gross profit percentage
remained constant at 91% in the three months ended September 30, 2010 compared
to September 30, 2009.




Selling, General
and Administrative Expenses - Selling, general and administrative
expenses were $1,013,496 and $1,069,689 for the three months ended September 30,
2010 and 2009, respectively, a decrease of approximately $56,000.  The
decrease in selling, general and administrative expenses is attributed to a
decrease in payroll costs of approximately $160,000 which is primarily based on
headcount reductions mitigated by an increase of $121,500 in non-cash stock
based compensation for investment advisory services.




Other
Income/(Expense )- Other Income/(Expense) was $1,090,755 of other income
compared to $543,947 of  other income for the three months ended
September 30, 2010 and 2009, respectively.  The approximately
$547,000  increase can be attributed to a gain on a change in the fair
value of derivatives of $1,905,000 and $1,047,000 for the three months ended
September 30, 2010 and 2009, respectively.  The increase in the gain
is primarily due to the fact that our stock price decreased at a greater
percentage during the three months ended September 30, 2010 compared to the
three months ended September 30, 2009 which made our outstanding warrants and
conversion features less valuable.




Net
Income/(Loss) - As a result of the above, for the three months ended
September 30, 2010, the Company recorded net income of $445,390 compared to net
income of $54,902 for the same period the previous year.




For the Six Months Ended
September 30, 2010 and 2009




Results
From Operations




Revenues-
Revenues were $1,568,203 and $1,171,724 for the six months ended September 30,
2010 and 2009, respectively. The increase in revenues of approximately
$396,000 is due to an approximately $875,000 national monitoring solution that
was sold in 2010 mitigated by a decrease in revenues of approximately $396,000
associated with FLO TV.




Cost of
Sales - Cost of sales were $103,910 and $122,192 for the six months ended
September 30, 2010 and 2009, respectively. Overall gross profit percentage
increased to 93% in the six months ended September 30, 2010 compared to 90% in
the six months ended September 30, 2009 due to an increase, as a percentage of
sales, in software sales and support services during the period.




Selling, General
and Administrative Expenses - Selling, general and administrative
expenses were $1,936,429 and $2,111,716 for the six months ended September 30,
2010 and 2009, respectively, a decrease of approximately $175,000.  The
decrease in selling, general and administrative expenses is attributed to a
decrease in payroll costs of approximately $324,000 which is primarily based on
headcount reductions mitigated by an increase of $222,750 in non-cash stock
based compensation for investment advisory services.




Other
Income/(Expense )- Other Income/(Expense) was $2,106,355 of other income
compared to $2,449,871 of  other expense for the six months ended
September 30, 2010 and 2009, respectively.  The approximately
$4,556,000 increase in other income can be attributed to the reduction in
interest expense related to a change in fair value of warrants and conversion
features granted for ratchet provisions of $5,936,000 which was due to the
expense that we incurred in the six months ended September 30, 2009 related to
additional warrants and conversion features that we were required to issue due
to repricing provisions in our debenture agreements.


25


We
recorded a gain on a change in the fair value of derivatives of $3,529,000 and
$5,307,000 for the six months ended September 30, 2010 and 2009,
respectively.  This decrease in the gain is primarily due to the fact
that our stock price decreased at a lower percentage during the six months ended
September 30, 2010 compared to the six months ended September 30, 2009 which
made our outstanding warrants and conversion features less
valuable.




Net
Income/(Loss) - As a result of the above, for the six months ended
September 30, 2010, the Company recorded net income of $1,634,219 compared to a
net loss of $3,512,055 for the same period the previous year.




Liquidity
and Capital Resources




The cash
balance was $0 as of September 30, 2010 and 2009.





Net cash
used in operating activities was $184,960 and $332,399 for the six months ended
September 30, 2010 and 2009, respectively.  The use of cash in 2010
and 2009 is primarily the result of funding the net operating loss of $472,136
(which included non-cash expenses of $226,924) and $1,062,184 (which included
non-cash expenses of $23,287) for the six months ended September 30, 2010 and
2009, respectively.





Net cash
provided by financing activities was $184,960 and $332,600 for the six months
ended September 30, 2010 and 2009, respectively.  Net cash provided by
financing activities was primarily the result of funding related to Tranche III
of the Company’s private placement of such debentures less payments related to
Tranche I of the debentures.





As of
September 30, 2010, the Company had a working capital deficiency of
approximately $8.4 Million including short-term notes payable, convertible notes
payable and accrued interest of approximately $3,421,000, net of applicable debt
discount of approximately $117,000.  We also have long-term
convertible debentures of approximately $226,000, net of an applicable debt
discount of approximately $1,082,000.  In addition, the Company is
delinquent in remitting accrued compensation and payroll taxes totaling
approximately $2,117,000.





On
October 15, 2010, the Company received a notice of intent to levy from the
Internal Revenue Service against the Company’s assets for approximately $803,000
in connection with delinquent payroll taxes, interest and penalties. The Company
has the right to a hearing and is in the process of providing the requested
information and documents before the deadline of November 25, 2010. The Company
plans to settle or enter into a payment plan to settle the outstanding
obligations.





In order
to continue its operations through and beyond September 2011, the Company will
need to increase revenue, repay or obtain extensions on its existing short-term
debt, pay or settle payroll tax obligations and raise additional working capital
through the sale of debt or equity securities in addition to the completion of
its placement of debentures.





There can
be no assurance that the Company will be able to raise the capital it requires
in this time frame or at all or that it will be able to raise the capital on
terms acceptable to it. In addition, there can be no assurances that the Company
will be successful in obtaining extensions of its notes, if required or be able
to pay amounts due on payroll tax returns. If it is not successful, the Company
would seek to negotiate other terms for the issuance of debt, pursue bridge
financing, negotiate with suppliers for a reduction of debt through issuance of
stock, and/or seek to raise equity through the sale of its common stock. At this
time management cannot assess the likelihood of achieving these objectives. If
the Company is unable to achieve these objectives, the Company may be forced to
cease its business operations, sell its assets and/or enter into Chapter
reorganization proceedings.


26


Except as
provided above, the Company has no present commitment that is likely to result
in its liquidity increasing or decreasing in any material way. In addition,
except as noted above, the Company knows of no trend, additional demand, event
or uncertainty that will result in, or that is reasonably likely to result in,
the Company’s liquidity increasing or decreasing in any material way. The
Company has no material commitments for capital expenditures. The Company knows
of no material trends, favorable or unfavorable, in its capital
resources.





The
accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America and
assume that the Company will continue as a going concern.




Going
Concern




The
Company has incurred net losses of approximately $26.6 million since inception.
Additionally, the Company had a net working capital deficiency of approximately
$8.4 million at September 30, 2010. These conditions raise substantial doubt
about the Company’s ability to continue as a going concern. The accompanying
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. Primarily as a result of its recurring losses and
its lack of liquidity, the Company has received a report from its independent
registered public accountants, included with its annual report on Form 10-K for
the year ended March 31, 2010, that included an explanatory paragraph describing
the conditions that raise substantial doubt about the Company’s ability to
continue as a going concern.




Inflation
and Seasonality




Inflation
has not materially affected the Company during the past fiscal
year.  The Company’s business is not seasonal in
nature.


27


Item 3 – Quantitative and
Qualitative Disclosures About Market Risk.




(Not
Applicable)




Item 4. 
Controls and Procedures.




Evaluation and Disclosure
Controls and Procedures




The
Company, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the design and operation of the
Company's "disclosure controls and procedures," as such term is defined in Rules
13a-15e promulgated under the Exchange Act.  Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the disclosure controls and
procedureswere not effective as of the end of the period covered by this
report due to a material weakness identified by management relating to the lack
of sufficient accounting resources.




Based
upon its evaluation, our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, has concluded there are
material weaknesses with respect to its internal control over financial
reporting as defined in Rule 13a-15(e).




The
material weaknesses identified by management relates to the lack of sufficient
accounting resources and the lack of documentation of the performance of key
controls and document retention. We have engaged outside consultants to perform
financial reporting functions and perform routine record
keeping.  Consequently, our financial reporting function is limited
which makes it difficult to report our financial information with the SEC timely
and our control environment does not provide an appropriate segregation of
duties or documentation of the performance of key controls.




In order
to correct this material weakness, the Company has hired outside consultants to
assist with financial statement preparation and reporting needs and plans to
hire internal full-time accounting personnel during fiscal 2011.  We
also intend to augment internal accounting personnel with consultants as needed
to ensure that management will have adequate resources in order to attain
complete reporting of financial information in a timely manner and provide a
further level of segregation of financial responsibilities.




A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are
met.  Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues,
if any, within a company have been detected. Such limitations include the fact
that human judgment in decision-making can be faulty and that breakdowns in
internal control can occur because of human failures, such as simple errors or
mistakes or intentional circumvention of the established process.




Changes in Internal Controls
Over Financial Reporting




There
were no changes to the internal controls during the quarter ended September 30,
2010 that have materially affected or that are reasonably likely to materially
affect the internal controls over financial reporting.


28


PART
II - OTHER INFORMATION




Item 1.
            Legal
      Proceedings




Not
Applicable




Item
1A. Risk Factors




Not
Applicable




Item 2.
            Unregistered
      Sales of Equity Securities and Use of
Proceeds





Between
April 1 and September 30, 2010, the Company sold Debentures to investors as
follows:





•
            The
      Company issued an additional $896,760 principal amount of the Debentures
      and received net proceeds of $747,300 related to Tranche III of the
      private placement of such Debentures. In connection with the Debentures,
      the Company issued five-year warrants to purchase 3,587,040 shares of
      common stock at $0.50 per share. The Debentures are convertible into
      common stock at $0.25 per share.







Item
      3.
            Defaults
      Upon Senior Securities.





None.




Item 4.
            (Removed
      and Reserved)




Item 5.
            Other
      Information.




Not
Applicable


29





Item
      6.
            Exhibits





(a)
            Exhibits


31.1
            Certificate
      of Geoffrey P. Talbot, Chief Executive Officer and Chief Financial
      Officer, pursuant to Section 302 of the Sarbanes Oxley Act of
      2002.


32.1
            Certificate
      of Geoffrey P. Talbot, Chief Executive Officer and Chief Financial
      Officer, pursuant to Section 906 of the Sarbanes Oxley Act of
      2002.


30




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 thereunto
duly authorized.




Date:
      November 22, 2010
                  /s/Geoffrey
      P. Talbot/s/Name: Geoffrey
      P. TalbotTitle: Chief
      Executive Officer and Chief Financial Officer


31




EXHIBIT
INDEX





Exhibit
                    
                    Description31.1
                    
                    Certificate
      of Geoffrey P. Talbot, Chief Executive Officer and Chief Financial
      Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.32.1
                    
                    Certificate
      of Geoffrey P. Talbot, Chief Executive Officer and Chief Financial
      Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.




32