UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C.  20549
  FORM
10-Q
  (Mark
One)
  ý   QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
  For the
quarterly period ended September 30, 2009
  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  ý  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  ý    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 ý
  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 November 5,
    2009Common
      Stock, $.01 par value
                    
                    24,201,447
 
 FORM
10-Q
  STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES
 September
30, 2009
  TABLE
OF CONTENTS
  Page(s)PART
      1 – FINANCIAL INFORMATIONItem
      1.  Financial Statements.Condensed
      Consolidated Balance Sheets at September 30, 2009 (unaudited) and March
      31, 2009
              
              
              3Condensed
      Consolidated Statements of Operations for the Three Months Ended September
      30, 2009 and 2008 (unaudited)
              
              
              4Condensed
      Consolidated Statements of Operations for the Six Months Ended September
      30, 2009 and 2008 (unaudited)
              
              
              5Condensed
      Consolidated Statements of Stockholder’s Deficiency for the Six Months
      Ended September 30, 2009 (unaudited)
              
              
              6Condensed
      Consolidated Statements of Cash Flows for the Six Months Ended September
      30, 2009 and 2008 (unaudited)
              
              
              7Notes
      to Condensed Consolidated Financial Statements (unaudited)
              
              
              9Item
      2.  Management’s Discussion and Analysis of Financial Condition
      and Results of Operations.
              
              
              21Item
      3.  Quantitative and Qualitative Disclosures About Market
      Risk.
              
              
              28Item
      4T.  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.  Submission of Matters to a Vote of Security
      Holders.
              
              
              30Item
      5.  Other Information.
              
              
              30Item
      6.  Exhibits.
              
              
              31SIGNATURES
              
              
              32Exhibits
              
              
              33Certifications
              
              
              34
 
 2
  Item 1.  Financial
Statements.
  STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE
SHEETS
  September
      30,2009
                  
                  
                  March
      31,(unaudited)
                  
                  
                  2009ASSETSCurrent
      Assets:Cash
                  
                  $
                  1,201
                  
                  
                  $
                  1,000Accounts
      receivable, net of allowance of $40,246 and $31,000,
      respectively
                  
                  
                  140,553
                  
                  
                  
                  171,924Inventories
                  
                  
                  43,192
                  
                  
                  
                  140,384Prepaid
      expense and other current assets
                  
                  
                  43,128
                  
                  
                  
                  17,214Total
      Current Assets
                  
                  
                  228,074
                  
                  
                  
                  330,522Property
      and equipment, net of accumulated depreciation of $180,422 and $150,517
      repectively
                  
                  
                  164,524
                  
                  
                  
                  194,429Deferred
      financing costs, net of accumulated amortization of $218,618 and $458,229
       repectively
                  
                  
                  104,028
                  
                  
                  
                  206,002Security
      deposits and other assets
                  
                  
                  50,959
                  
                  
                  
                  50,959Total
      Assets
                  
                  $
                  547,585
                  
                  
                  $
                  781,912LIABILITIES AND
      STOCKHOLDERS' DEFICIENCYCurrent
      Liabilities:Notes
      payable (including $450,000 and $200,000 due to a related party,
      respectively), net of debt discount of $30,882 and $0,
      respectively
                  
                  $
                  1,070,368
                  
                  
                  $
                  601,250Convertible
      notes payable, net of debt discount of $940,520 and $696,575,
      respectively
                  
                  
                  1,572,480
                  
                  
                  
                  803,425Accounts
      payable
                  
                  
                  1,432,900
                  
                  
                  
                  1,120,820Accrued
      expenses
                  
                  
                  222,809
                  
                  
                  
                  263,426Accrued
      compensation
                  
                  
                  1,605,731
                  
                  
                  
                  1,209,735Interest
      payable (including $51,692 and $39,480 due to related party,
      respectively)
                  
                  
                  295,505
                  
                  
                  
                  235,165Deferred
      revenue
                  
                  
                  320,019
                  
                  
                  
                  387,281Derivative
      liability
                  
                  
                  4,042,000
                  
                  
                  
                  —Total
      Current Liabilities
                  
                  
                  10,561,812
                  
                  
                  
                  4,621,102Long-term
      Liabilities:Notes
      payable (including $0 and $250,000 due to related party), net of debt
      discount of $0 and $53,856, respectively
                  
                  
                  —
                  
                  
                  
                  446,144Convertible
      notes payable, net of debt discount of $131,157 and $643,600,
      respectively
                  
                  
                  294,843
                  
                  
                  
                  394,401Total
      Liabilities
                  
                  
                  10,856,655
                  
                  
                  
                  5,461,647Commitments
      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, 24,067,474 and
      23,807,474 issued and outstanding, respectively
                  
                  
                  240,674
                  
                  
                  
                  238,074Additional
      paid-in capital
                  
                  
                  16,415,203
                  
                  
                  
                  19,026,089Accumulated
      deficit
                  
                  
                  (26,964,947
                  )
                  
                  
                  (23,943,898
                  )Total
      Stockholders' Deficiency
                  
                  
                  (10,309,070
                  )
                  
                  
                  (4,679,735
                  )Total
      Liabilities and Stockholders' Deficiency
                  
                  $
                  547,585
                  
                  
                  $
                  781,912
  See
accompanying notes to condensed consolidated financial statements
(unaudited).
  3
  STATMON TECHNOLOGIES CORP. AND
SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
 (Unaudited)
 
 For
      the Three Months Ended
                  September
      30,2009
                
                
                2008Revenue
                
                $
                641,032
                
                
                $
                1,115,883Cost
      of Sales
                
                
                60,388
                
                
                
                154,180Gross
      Profit
                
                
                580,644
                
                
                
                961,703Selling,
      General and Administrative Expenses
                
                
                1,069,689
                
                
                
                1,152,128Operating
      Loss
                
                
                (489,045
                )
                
                
                (190,425
                )Other
      (Income) Expense:Interest
      (including $13,750 and $13,712 to related parties for 2009 and 2008
      periods, respectively)
                
                
                44,490
                
                
                
                34,184Common
      stock and warrants issued in association with debt
                
                
                49,900
                
                
                
                6,075Amortization
      of debt discount
                
                
                375,832
                
                
                
                334,666Amortization
      of deferred financing costs
                
                
                32,831
                
                
                
                191,756Gain
      on change in fair value of derivatives
                
                
                (1,047,000
                )
                
                
                —Total
      Other (Income) Expense
                
                
                (543,947
                )
                
                
                566,681NET
      INCOME (LOSS)
                
                $
                54,902
                
                
                $
                (757,106
                )NET
      INCOME (LOSS) PER SHARE - Basic and Diluted
                
                $
                0.00
                
                
                $
                (0.03
                )Weighted
      Average Number of Common Shares Outstanding -Basic
      and Diluted
                
                
                24,493,457
                
                
                
                23,769,971
 
 See
accompanying notes to condensed consolidated financial statements
(unaudited).
  4
 
 STATMON TECHNOLOGIES CORP. AND
SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
 (Unaudited)
 
 For
      the Six Months Ended
                    September
      30,2009
                  
                  
                  2008Revenue
                  
                  $
                  1,171,724
                  
                  
                  $
                  2,051,358Cost
      of Sales
                  
                  
                  122,192
                  
                  
                  
                  275,177Gross
      Profit
                  
                  
                  1,049,532
                  
                  
                  
                  1,776,181Selling,
      General and Administrative Expenses
                  
                  
                  2,111,716
                  
                  
                  
                  2,343,762Operating
      Loss
                  
                  
                  (1,062,184
                  )
                  
                  
                  (567,581
                  )Other
      Expense:Interest
      (including $27,500 and $27,274 to related parties for 2009 and 2008
      periods, respectively)
                  
                  
                  97,304
                  
                  
                  
                  90,743Common
      stock and warrants issued in association with debt
                  
                  
                  6,796,375
                  
                  
                  
                  20,925Amortization
      of debt discount
                  
                  
                  737,218
                  
                  
                  
                  561,146Amortization
      of deferred financing costs
                  
                  
                  125,974
                  
                  
                  
                  232,646Gain
      on change in fair value of derivatives
                  
                  
                  (5,307,000
                  )
                  
                  
                  —Total
      Other Expense
                  
                  
                  2,449,871
                  
                  
                  
                  905,460NET
      LOSS
                  
                  $
                  (3,512,055
                  )
                  
                  $
                  (1,473,041
                  )NET
      LOSS PER SHARE - Basic and Diluted
                  
                  $
                  (0.15
                  )
                  
                  $
                  (0.06
                  )Weighted
      Average Number of Common Shares Outstanding -Basic
      and Diluted
                  
                  
                  24,157,751
                  
                  
                  
                  23,695,204
  See
accompanying notes to condensed consolidated financial statements
(unaudited)
 
 5
  STATMON TECHNOLOGIES CORP. AND
SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIENCY
 (UNAUDITED)
 
 Additional
                  
                  
                  
                  
                  
                  TotalCommon
      Stock
                  
                  
                  paid-in
                  
                  
                  Accumulated
                  
                  
                  Stockholders'Shares
                  
                  
                  Amount
                  
                  
                  capital
                  
                  
                  deficit
                  
                  
                  DeficiencyBalance,
      April 1, 2009
                  
                  
                  23,807,474
                  
                  
                  
                  238,074
                  
                  
                  
                  19,026,089
                  
                  
                  
                  (23,943,898
                  )
                  
                  
                  (4,679,735
                  )Cumulative
      effect of a change in accounting principle - reclassification of
      equity-linked financial instruments to derivative
    liabilities
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (2,600,261
                  )
                  
                  
                  491,006
                  
                  
                  
                  (2,109,255
                  )Warrant
      Exercise
                  
                  
                  160,000
                  
                  
                  
                  1,600
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,600Conversion
      of Convertible Debentures
                  
                  
                  100,000
                  
                  
                  
                  1,000
                  
                  
                  
                  24,000
                  
                  
                  
                  —
                  
                  
                  
                  25,000Reclassification
      of derivative liability to equity
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  15,000
                  
                  
                  
                  —
                  
                  
                  
                  15,000Reclassification
      of equity to derivative liability
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (107,000
                  )
                  
                  
                  —
                  
                  
                  
                  (107,000
                  )Stock-based
      compensation
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  34,000
                  
                  
                  
                  —
                  
                  
                  
                  34,000Issuance
      of debt related penalty warrants
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  7,875
                  
                  
                  
                  —
                  
                  
                  
                  7,875Issuance
      of warrants related to a settlement agreement
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  15,500
                  
                  
                  
                  —
                  
                  
                  
                  15,500Net
      Loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (3,512,055
                  )
                  
                  
                  (3,512,055
                  )Balance,
      September 30, 2009
                  
                  
                  24,067,474
                  
                  
                  
                  240,674
                  
                  
                  
                  16,415,203
                  
                  
                  
                  (26,964,947
                  )
                  
                  
                  (10,309,070
                  )
  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
      30,2009
                  
                  
                  2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                  
                  $
                  (3,512,055
                  )
                  
                  $
                  (1,473,041
                  )Adjustments
      to reconcile net loss to net cash used inoperating
      activities:Depreciation
                  
                  
                  29,905
                  
                  
                  
                  29,543Common
      stock and warrants issued in association with debt
                  
                  
                  6,796,375
                  
                  
                  
                  20,925Common
      stock issued for interest
                  
                  
                  —
                  
                  
                  
                  17,646Provision
      for doubtful accounts
                  
                  
                  10,000
                  
                  
                  
                  —Gain
      on change in fair value of derivatives
                  
                  
                  (5,307,000
                  )
                  
                  
                  —Amortization
      of debt discount
                  
                  
                  737,218
                  
                  
                  
                  561,146Amortization
      of deferred financing costs
                  
                  
                  125,974
                  
                  
                  
                  232,646Deferred
      rent expense
                  
                  
                  (40,618
                  )
                  
                  
                  (28,940
                  )Non-cash
      stock based compensation charge
                  
                  
                  34,000
                  
                  
                  
                  53,250Changes
      in operating assets and liabilities:Accounts
      receivable
                  
                  
                  21,371
                  
                  
                  
                  (54,753
                  )Inventories
                  
                  
                  97,192
                  
                  
                  
                  (10,922
                  )Prepaid
      expense and other current assets
                  
                  
                  (25,914
                  )
                  
                  
                  119,423Security
      deposits and other assets
                  
                  
                  —
                  
                  
                  
                  22,175Accounts
      payable
                  
                  
                  312,079
                  
                  
                  
                  (126,683
                  )Accrued
      expenses
                  
                  
                  —
                  
                  
                  
                  (60,059
                  )Accrued
      compensation
                  
                  
                  395,996
                  
                  
                  
                  61,975Interest
      payable
                  
                  
                  60,340
                  
                  
                  
                  33,637Deferred
      revenue
                  
                  
                  (67,262
                  )
                  
                  
                  (16,860
                  )NET
      CASH USED IN OPERATING ACTIVITIES
                  
                  
                  (332,399
                  )
                  
                  
                  (618,892
                  )CASH
      FLOWS USED IN INVESTING ACTIVITIES:Purchase
      of property and equipment
                  
                  
                  —
                  
                  
                  
                  (12,702
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from convertible notes payable
                  
                  
                  355,000
                  
                  
                  
                  865,000Proceeds
      from exercise of warrants
                  
                  
                  1,600
                  
                  
                  
                  —Repayment
      of notes payable
                  
                  
                  —
                  
                  
                  
                  (50,000
                  )Deferred
      financing costs
                  
                  
                  (24,000
                  )
                  
                  
                  (143,026
                  )NET
      CASH PROVIDED BY FINANCING ACTIVITIES
                  
                  
                  332,600
                  
                  
                  
                  671,974NET
      INCREASE IN CASH
                  
                  
                  201
                  
                  
                  
                  40,380CASH,
      BEGINNING OF PERIOD
                  
                  
                  1,000
                  
                  
                  
                  73,076CASH,
      END OF PERIOD
                  
                  $
                  1,201
                  
                  
                  $
                  113,456SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for:Interest
                  
                  $
                  24,372
                  
                  
                  $
                  20,284
 
 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
      30,2009
                  
                  
                  2008NON-CASH
      INVESTING AND FINANCING ACTIVITIES:Cumulative
      effect of change in accounting principalon
      accumulated deficit
                  
                  $
                  491,006
                  
                  
                  $
                  —Cumulative
      effect of change in accounting principalon
      paid in capital
                  
                  $
                  (2,600,261
                  )
                  
                  $
                  —Issuance
      of common stock for conversion of convertibledebentures
                  
                  $
                  25,000
                  
                  
                  $
                  —Reclassification
      of derivative liability to equity
                  
                  $
                  15,000Reclassification
      of warrants to derivative liability
                  
                  $
                  (107,000
                  )Issuance
      of warrants related to debt acquisition
                  
                  $
                  —
                  
                  
                  $
                  397,997Issuance
      of common stock and warrants to financial advisors
                  
                  $
                  —
                  
                  
                  $
                  248,670Issuance
      of warrants to placement agents
                  
                  $
                  —
                  
                  
                  $
                  31,500Beneficial
      conversion related to convertible debentures
                  
                  $
                  —
                  
                  
                  $
                  427,564
 
 See
accompanying notes to condensed consolidated financial statements
(unaudited)
  8


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (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
2009 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
and assume that the Company will continue as a going concern. The Company has
incurred net losses of approximately $27.0 million since inception.
Additionally, the Company had a net working capital deficiency of approximately
$10.3 million at September 30, 2009. 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, 2009 by raising an additional $355,000 of
proceeds through the sale of Senior Secured Convertible Debentures.




Management
Plans




In order
to reduce debt and simultaneously maximize growth and expansion of operations,
the Company has required capital infusions to augment its total capital needs.
While the Company anticipates its future operations will be cash flow positive,
delays in customer’s implementation timelines, payment schedules and delivery
roll outs directly impact short-term cash flow expectations causing the Company
to increase its borrowings.  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.




During
the first six months of Fiscal 2010, the Company has closed $355,000 of proceeds
related to the third tranche of the OID note financing, the net proceeds were
used to reduce certain obligations. There can be no guarantee 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 stock. At this time, management cannot assess the likelihood of
achieving these objectives. If the Company is unable to achieve these
objectives, it may be forced to cease business operations, sell assets and/or
seek protection under applicable bankruptcy laws.




10




1.
                  Business Description,
      Going Concern and Accounting Policies
  (continued)


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, collectibility 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.




Subsequent
Events




Management
has evaluated subsequent events or transactions occurring through November 23,
2009, the date the financial statements were issued.  The Company is
not aware of any additional subsequent events which would require recognition or
disclosure in the condensed consolidated financial statements.




New
Accounting Pronouncements




In
October 2009, the Financial Accounting Standards Board  (“FASB”)
updated topic 605 on Revenue Recognition authoritative guidance on revenue
recognition that will become 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. We believe adoption of this new guidance will not have a
material impact on our financial statements.




In June
2009, the FASB issued new accounting guidance, under SFAS No. 166
“Accounting for Transfers of Financial Assets -- an amendment of FASB Statement
No. 140”. This standard has not yet been integrated into the Codification.
This guidance requires additional disclosures concerning a transferor’s
continuing involvement with transferred financial assets, eliminates the concept
of a “qualifying special-purpose entity” and changes the requirements for
derecognizing financial assets. This guidance is effective for fiscal years
beginning after November 15, 2009. The Company is currently evaluating the
impact that the adoption of this guidance will have on its condensed
consolidated financial statements.





11




1.
                  Business Description,
      Going Concern and Accounting Policies
  (continued)


In June
2009, the FASB issued new accounting guidance, under SFAS No. 167
“Amendments to FASB Interpretation No. 46(R)”, which changes how a
reporting entity determines when an entity that is insufficiently capitalized or
is not controlled through voting (or similar rights) should be consolidated.
This standard has not yet been integrated into the Codification. The
determination of whether a reporting entity is required to consolidate another
entity is based on, among other things, the other entity’s purpose and design
and the reporting entity’s ability to direct the activities of the other entity
that most significantly impact the other entity’s economic performance. An
ongoing reassessment is required of whether a company is the primary beneficiary
of a variable interest entity. A reporting entity will be required to disclose
how its involvement with a variable interest entity affects the reporting
entity’s financial statements. This guidance is effective for fiscal years
beginning after November 15, 2009, and interim periods within those fiscal
years. Management is currently evaluating the requirements of this guidance and
has not yet determined the impact on the Company’s condensed consolidated
financial statements




Recently
Adopted Accounting Pronouncements




In June
2009, the FASB issued new accounting guidance that established the FASB
Accounting Standards Codification, ("Codification" or “ASC”) as the
single source of authoritative GAAP to be applied by nongovernmental
entities, except for the rules and interpretive releases of the SEC under
authority of federal securities laws, which are sources of authoritative
GAAP for SEC registrants. The FASB will no longer issue new standards in the
form of Statements, FASB Staff Positions, or Emerging Issues Task Force
Abstracts; instead the FASB will issue Accounting Standards Updates. Accounting
Standards Updates will not be authoritative in their own right as they will only
serve to update the Codification. These changes and the Codification itself do
not change GAAP. This new guidance became effective for interim and annual
periods ending after September 15, 2009. Other than the manner in which new
accounting guidance is referenced, the adoption of this guidance did not have a
material impact on the Company’s condensed consolidated financial
statements.




In
December 2007, the FASB updated ASC Topic 810 on Consolidations. This
guidance establishes accounting and reporting standards for the noncontrolling
interests in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a noncontrolling interest in a subsidiary, sometimes called a
minority interest, is an ownership interest in the consolidated entity that
should be reported as equity in the consolidated financial statements.
Additionally, the amounts of consolidated net income attributable to both the
parent and the noncontrolling interest must be reported separately on the face
of the income statement. The adoption of this guidance did not have a material
impact on the Company’s condensed consolidated financial
statements.




In March 2008, the FASB issued new
accounting guidance, under ASC Topic 815 on Derivatives and Hedging, which
amends and expands existing disclosure requirements to require qualitative
disclosure about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in
derivative agreements. This guidance is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. The adoption of this guidance did not have a
material impact on the Company’s condensed consolidated financial
statements.




In May
2008, the FASB issued new accounting guidance, primarily codified under ASC
Topic 470 on Debt related to the Accounting for Convertible Debt Instruments
That May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlement). Current guidance specifies that the liability and equity components
of convertible debt instruments that may be settled in cash upon conversion
(including partial cash settlement) be separately accounted for in a manner that
reflects an issuer’s nonconvertible debt borrowing rate and requires
retrospective application for all periods presented. The adoption did not have a
material impact on the Company’s condensed consolidated results of operations or
financial condition for all periods presented




12




1.
                  Business Description,
      Going Concern and Accounting Policies
  (continued)


In
June 2008, the FASB updated the ASC Topic 815 on Derivatives and
Hedging.  The update provides guidance on how to determine if certain
instruments (or embedded features) are considered indexed to our own
stock.  It requires companies to use a two-stepapproach to evaluate an instrument’s contingent exercise
provisions and settlement provisions in determining whether the instrument is
considered to be indexed to its own stock and thus exempt from the application
of derivative accounting. Although this update is effective for fiscal years
beginning after December 15, 2008, any outstanding instrument at the date
of adoption requires retrospective application of the accounting through a
cumulative effect adjustment to retained earnings upon adoption. The adoption of
this topic update has affected the accounting for (i) certain freestanding
warrants that contain exercise price adjustment features and (ii) conversion
features that also contain price adjustment features.  Our warrants
and conversion features with these features are no longer deemed to be indexed
to the company’s own stock and are no longer classified as
equity.  Instead, these warrants and conversion features were
reclassified as a derivative liability on April 1, 2009 as a result of this
updated ASC.  The fair value of the derivative liability as of April
1, 2009 was $2,109,000 and was recorded as a cumulative adjustment to our
stockholders’ deficiency.




In
May 2009, the FASB issued new accounting guidance, under ASC Topic 855 on
Subsequent Events, which sets forth: 1) the period after the balance sheet date
during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements; 2) the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements; and 3) the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. This guidance
was effective for interim and annual periods ending after June 15, 2009.
The adoption of this guidance did not have a material impact on the Company’s
condensed consolidated financial statements.




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.




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 7,568,526 warrants
to obtain the same warrant coverage as the Tranche III agreement.  The
additional warrants that were issued had a fair value of $3,289,000 and were
recorded as interest expense during the six months months ended September 30,
2009.




13




2.
                SENIOR SECURED
      ORIGINAL ISSUE DISCOUNT CONVERTIBLE DEBENTURE AND DERIVATIVE LIABILITIES
      (C0NTINUED)


During
the six months ended September 30, 2009, the Company issued and sold a portion
of the third tranche (“Tranche III”)of debentures in total principal amount of
$426,000, 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 1,704,000 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.  The modification
of the conversion feature resulted in an increase in the value of the instrument
of $2,647,000 and was recorded as interest expense during 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.  We 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 were 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 mitigated 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. Amortization related to the debt discount on
Tranche I and II totaled $1,166,079 through March 31, 2009.  This
amortization as well as the deemed interest is recorded as part of the
cumulative adjustment in the accumulated deficit.   During the
six months ended September 30, 2009, the Company amortized $633,230 of debt
discount related to Tranches I and II.




The gross
proceeds of $426,000 related to Tranche III were recorded net of a discount of
$426,000.  The debt discount consisted of $71,000 related to the
original issue discount, $636,000 related to the fair value of the warrants and
$556,000 related to the fair value of the conversion feature of the note
mitigated by $837,000 of deemed interest that was expensed
immediately.  During the six months ended September 30, 2009, the
Company amortized $81,014 of debt discount related to Tranche III.




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




14




2.
                  SENIOR SECURED
      ORIGINAL ISSUE DISCOUNT CONVERTIBLE DEBENTURE AND DERIVATIVE LIABILITIES
      (C0NTINUED)


September
      30,
              
              
              Tranche
      III
              
              
              March
      31,
              
              
              Tranche
      I & II2009
              
              
              Inception
              
              
              2009
              
              
              InceptionConversion
      Feature:Risk-free
      interest rate
              
              
              0.40
              %
              
              
              0.88%-1.26
              %
              
              
              0.83
              %
              
              
              2.0%
      -4.25
              %Expected
      volatility
              
              
              173.79
              %
              
              
              154.9%-167.2
              %
              
              
              155.02
              %
              
              
              106.7%-112.0
              %Expected
      life (in years)
              
              
              0.43
      -2.00
              
              
              
              2.0
              
              
              
              .93-1.50
              
              
              
              2.0Expected
      dividend yield
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Warrants:Risk-free
      interest rate
              
              
              2.31
              %
              
              
              1.74%-2.75
              %
              
              
              1.65
              %
              
              
              0.50%-2.50
              %Expected
      volatility
              
              
              173.79
              %
              
              
              154.9%-167.2
              %
              
              
              155.02
              %
              
              
              105.1%-155.1
              %Expected
      life (in years)
              
              
              3.68-5.00
              
              
              
              5.00
              
              
              
              3.93-4.50
              
              
              
              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, 1,030,667 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 six
months ended September 30, 2009, The Company has issued 400,000 and 276,800
shares of 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.  Tranche III has similar provisions to
receive up to 113,600 similar warrants based on the existing Tranche III
issuance if the Company fails to meet revenue minimums for the year ended March
31, 2010.




The
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 $3,038,000 and
$426,000 for the year ended September 30, 2010 and 2011,
respectively.




15




3.
            NOTES
      PAYABLE




Notes
payable consist of the following:




September
      30, 2009(unaudited)
              
              
              March
      31, 2009Notes
      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
              
              
              [d
              ]discount
      of $30,882 and $53,856, respectively
              
              
              
              
              
              
              219,118
              
              
              
              196,144$
              1,070,368
              
              
              $
              1,047,394Less:
      Current Maturities
              
              
              
              
              
              
              1,070,368
              
              
              
              601,250Long-Term
      Notes Payable
              
              
              
              
              
              $
              —
              
              
              $
              446,144




[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.
Per the default terms of the note, since the Company did not repay the note by
the maturity date, it 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 a new note with a
maturity of October 24, 2008. The Company is negotiating a new note or
conversion to shares of common stock that would supersede such new note
agreement subject approval from the majority of the secured debenture holders.
There can be no assurance that it will be able to obtain a new note 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 principal amount of
these notes is $401,250 and represents eight notes with initial maturity dates
between November 19, 2002 and October 21, 2008.




At
September 30, 2009, all of these notes are in default, plus interest of
$227,142. 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 $39,175 of interest and granted 45,000
penalty warrants, valued at $7,875 related to such notes during the six months
ended September 30, 2009. The Company continues 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 has 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.  The new note has a maturity date of June
4, 2010 and bears interest at 10% per annum.  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. For the six months ended September 30, 2009, the Company accrued
$12,500 of interest due on this note.




16




3.
              NOTES PAYABLE
      (CONTINUED)


[d] An
existing note in the amount of $250,000 had matured and on March 5, 2008, the
Company entered into a new promissory note with a secured promissory note holder
for $250,000.  This new note is subordinated to the notes in Note 2
and [c] above. The new note has a maturity date of June 4, 2010 and bears
interest at 10% per annum.  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 warrant expires on
March 5, 2013.  For the six months ended September 30, 2009, the
Company accrued $12,500 of interest due on this note.




4.
            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 676,800 and 0
shares exercisable at $0.01 per share at September 30, 2009 and 2008,
respectively.





Securities
that could potentially dilute basic earnings per share (“EPS”), that were
outstanding at September 30, 2009 and 2008 were not included in the computation
of diluted EPS because to do so would have been anti-dilutive for that
period.  As of September 30, 2009, The Company has 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.  As of September 30, 2008, the Company had outstanding
warrants to purchase 6,142,173 shares of common stock and outstanding
convertible debentures that could have been converted into 2,583,474 shares of
common stock.




5.
            COMMITMENTS AND
      CONTINGENCIES




[a]  Legal
Proceedings.  On May 17, 2007, an action was filed in Los
Angeles Superior Court for breach of contract and similar causes of action by
the Epstein Family Trust against the Company in relation to two outstanding
promissory notes issued by the Company totaling $75,000 ($25,000 and $50,000)
plus accrued interest. The Epstein Family Trust is seeking attorney’s fees and
costs in addition to the principal and interest.  These notes were
guaranteed by Mr. Geoffrey Talbot, the Company's CEO, for up to $25,000, and
therefore Mr. Talbot was joined in the legal action as a third-party
defendant.  The case number is BC 371 276. The parties have reached a
settlement agreement where the plaintiff has agreed to convert all principal and
interest into shares of common stock at a price of $1.00 per share effective
February 28, 2008 where the Company will pay legal fees of approximately $12,000
to plaintiff which is still outstanding.  The settlement documentation
is currently being reviewed and will be finalized shortly. This obligation is
recorded as accounts payable at September 30, 2009




On
December 18, 2008 Ira J. Gaines filed an action for breach of contract and
unjust enrichment against the Company in the Superior Court of the State of
Arizona, Maricopa County, case number CV2008-032043. The action is based on a
promissory note and seeks a principal balance of $145,200 plus additional
accrued interest, costs and attorneys' fees totaling $215,996. The settlement
called for two payments of $5,000 to be applied against accrued interest, first
on dismissal and second on November 1, 2009. The remainder of the debt was to be
paid in 24 equal payments of $12,183 beginning June 1, 2011. The Company is in
default of the payment plan because it has not made its November 1, 2009
payment. As provided for in the settlement agreement, the Company issued a
warrant to purchase 50,000 shares of the Company’s stock at $0.50 per share
valued at $15,000 based on a Black–Scholes model. This matter has been finalized
and the first payment made on May 18, 2009. This obligation is recorded as notes
payable and accrued interest at September 30, 2009.




17




5.
              COMMITMENTS AND
      CONTINGENCIES (CONTINUED)


[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.




[c]  Payroll
Taxes The Company has accrued approximately $475,000 as accrued
compensation which was calculated as the difference between their gross and net
compensation for the period less payment for tax obligations. The Company plans
to pay this accrued compensation of approximately $475,000 to the Chief
Executive Officer and Chief Technology Officer to satisfy the tax obligations
related to the income reported as it becomes due.




Such
payroll tax reporting classification is subject to audit by the Internal Revenue
Service and other state and local taxing authorities, which, upon review, could
determine that such individuals’ compensation should have been reported on the
basis that such individuals are employees.  Accordingly, depending on
such potential audit, the Company may be subject to additional payroll related
liabilities the amount of which, if any, is not determinable at this
time.




The
Company is delinquent in the payment and filing of its payroll tax liabilities
with the Internal Revenue Service.  As of September 30, 2009, unpaid
payroll taxes total approximately $499,000 and related penalties and interest
approximated $257,000 computed through September 30, 2009.  These
liabilities have been recorded as accrued payroll and selling, general and
administrative expenses at September 30, 2009. The Company expects to pay and
file these delinquent payroll tax liabilities as soon as
possible.  The final amount due will be subject to negotiations with
the Internal Revenue Service.




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:




•
            
            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.




18




6.
              FAIR VALUE
      MEASUREMENTS (CONTINUED)


•
            
            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, 2009 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, 2009Conversion
      Features
            
            $
            —
            
            
            $
            —
            
            
            $
            1,442,000
            
            
            $
            1,442,000Warrant
      liability
            
            $
            —
            
            
            $
            —
            
            
            $
            2,600,000
            
            
            $
            2,600,000$
            —
            
            
            $
            —
            
            
            $
            4,042,000
            
            
            $
            4,042,000




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 quarter ended
September 30, 2009




Conversion
              
              
              WarrantFeature
              
              
              Liability
              
              
              TotalBalance
      April, 1, 2009
              
              $
              904,000
              
              
              $
              1,225,000
              
              
              $
              2,129,000Total
      realized/unrealized (gains) or lossesIncluded
      in other income (expense)
              
              
              (2,650,000
              )
              
              
              (2,657,000
              )
              
              
              (5,307,000
              )Included
      in stockholder's equityPurchases,
      issuances or settlements
              
              
              3,188,000
              
              
              
              4,032,000
              
              
              
              7,220,000Transfers
      in and /or out of Level 3Balance
      September 30, 2009
              
              $
              1,442,000
              
              
              $
              2,600,000
              
              
              $
              4,042,000




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.




19




7.
              CUSTOMER
      CONCENTRATION




The
Company sold a substantial portion of its product and services to two customers
during the six months ended September 30, 2009 and 2008. Sales to these
customers were approximately 63% and 20% of total sales, respectively for the
six months ended September 30, 2009 and 68% and 0% of total sales, respectively
for the six months ended September 30, 2008.  Sales to these customers
was approximately 55% and 36% of total sales, respectively for the three months
ended September 30, 2009 and 73% and 0% of total sales, respectively for the
three months ended September 30, 2008.




Accounts
receivable balance for these two customers was approximately $92,000 and $0 at
September 30, 2009 and $99,000 and $0 at September 30, 2008,
respectively.




8.
              RESEARCH AND
      DEVELOPMENT




Research
and development expenditures are charged to operations as incurred. Research and
development expenditures were approximately $655,000 and $718,000 for the six
months ended September 30, 2009 and 2008, respectively. Research and development
expenditures were approximately $309,000 and $361,000 for the three months ended
September 30, 2009 and 2008, respectively.






9.
                SUBSEQUENT
      EVENT




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 a note as well as to prepay $17,534 for future interest on the note
through maturity in June 2010.




20




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




This
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934.  The words “believe,” “expect,” “anticipate,” “intend,”
“estimate,” “may,” “should,” “could,” “will,” “plan,” “future,” “continue,” and
other expressions that are predictions of or indicate future events and trends
and that do not relate to historical matters identify forward-looking
statements.  These forward-looking statements are based largely on our
expectations or forecasts of future events, can be affected by inaccurate
assumptions, and are subject to various business risks and known and unknown
uncertainties, a number of which are beyond our control.  Therefore,
actual results could differ materially from the forward-looking statements
contained in this document, and readers are cautioned not to place undue
reliance on such forward-looking statements.  We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.  A wide
variety of factors could cause or contribute to such differences and could
adversely impact revenues, profitability, cash flows and capital
needs.  There can be no assurance that the forward-looking statements
contained in this document will, in fact, transpire or prove to be
accurate.




Factors
that could cause or contribute to our actual results differing materially from
those discussed herein or for our stock price to be adversely affected include,
but are not limited to:  (i) our limited operating history; (ii) our history of net losses and inability to achieve or
maintain profitability; (iii) our auditors’ expression of a substantial doubt
about our ability to continue as a going concern; (iv) Concentration of Our
Business in One Customer; (v) our need for additional capital and the
uncertainty of obtaining it; (vi) substantially all of our assets are pledged to
secure our indebtedness; (vii) the possibility of undetected errors or failures
in our software; (viii) the risk of products liability claims; (ix) industry
resistance to change; (x) fluctuations in our quarterly operating results; (xi)
failure to manage growth; (xii) dependence on Microsoft Windows platform; (xiii)
our ability to keep pace with rapidly changing technologies; (xiv) our ability
to compete effectively; (xv) difficulties in integrating businesses, products
and technologies that we may acquire; (xvi) loss of key personnel; (xvii)
enactment of new laws or changes in government regulations could adversely
affect our business; (xviii) our products could infringe on the intellectual
property rights of others; (xix) our inability to obtain patent and copyright
protection for our technology or misappropriation of our software and
intellectual property; (xx) our failure to successfully introduce new products;
(xxi) obsolescence of our technologies; (xxii) our ability to attract customers
who will embrace our new products and technologies; (xxiii) our stock price is
likely to be highly volatile; (xxiv) our common stock is considered a penny
stock and is considered to be a high-risk investment and subject to restrictions
on marketability; (xxv) the risk that the Company may be ineligible for
quotation by a NASD member due to the Company having been late on two filings
with the SEC, (xxvi)control by certain stockholders; and (xxvii) our increasing
dependence on a single customer.  For a more detailed description of
these and other cautionary factors that may affect our future results, please
refer to our Report on Form 10-K for the fiscal year ended March 31, 2009 filed
with the SEC.




Recent Developments for the
Company




Statmon
Technologies Corp. 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, building management and navigation aid transmission networks to
optimize operations and ensure they remain healthy and fully operational 24/7. A
typical infrastructure network comprises a network operations center or master
control plus a network of remote transmission sites that incorporate a wide
range of communication devices, building, 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 umbrella control system and permit manual corrective
action at the network operations center or from any connected computer including
a wireless device such as a laptop or Blackberry. A tiered severity level alarm
system at every site, down to the device level, reports back to the network
operations center logging automated adjustments or permitting manual adjustment
or corrective action without a field technician having to physically travel
to  the network operations center facility or remote
site.  Any authorized operator can drill down through the Axess
software screens to observe exactly what is taking place with an individual
device or system at a remote site and make further adjustments as
required.




21




The
optimization of network performance and the preemption of failure eliminates or
minimizes network or individual site malfunction or downtime. Transmission
downtime typically has a mission critical or direct financial impact on the
customers’ top line revenue generation, operating profit and customer
satisfaction.  Investment payback periods relative to the purchase
cost of the Statmon Platform compared to the operators loss of revenue or costs
of being “off the air” typically make the return of investment very
attractive.  Advertisers do not pay for commercials that do not go to
air and cell phone users cannot make calls or download video when a base station
or cell site is off the air. Geographically, the Statmon Platform streamlines
the network engineering and remote site field trips and maintenance process,
reducing operating and outsourcing costs and facilitating the reallocation of
resources.  The Statmon Platform 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 network
operations center 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 network
operations center or designated wireless device for appropriate attention or
action. Adjusting the HVAC, the health of the uninterrupted power supply 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.




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.  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 traffic increase, wireless broadband and
convergence of digital media delivery and additional data services for the
wireless and IPTV fiber markets. Cable systems are offering telecommunication
and 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. Statmon’s unique radio
frequency background and know how 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 switch off 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 stations 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.




22




We
successfully entered the telecom wireless infrastructure vertical market via a
contract with the Qualcomm wholly owned subsidiary, FLO TV to deploy our Axess
software and related integration products for the control and monitoring of
their national mobile TV network rollout. This is the largest transmission
network of its type in the world based on the Qualcomm developed “FLO” encoding
and compression technology for multiple channels of live TV and multimedia
content directly to cell phone and mobile wireless devices.




At this
point, FLO TV is providing the “FLO” mobile TV and multimedia platform (the “FLO
Platform”) directly to the Verizon and AT&T cellular subscriber base. From
the FLO TV network operations center in San Diego, our Platform controls and
manages all the remote sites throughout the USA to optimize the FLO Platform
transmission performance and Verizon’s and AT&T’s mobile TV customer
satisfaction. We anticipate that the FLO mobile TV platform will be adopted by
additional wireless operators around the world, although we can offer no
assurance in this regard.




Under our
agreement with FLO TV we are licensing our Axess software and supplying
interface components for the FLO TV San Diego Network Operation Center and the
national rollout of wireless transmission sites.  Under such
agreement, Qualcomm and/or FLO TV periodically issue purchase orders to
us.  From September 7, 2006 to March 31, 2009, Qualcomm and/or FLO TV
has jointly purchased $6,696,769 from us and we have received purchase orders
for an additional $185,000 of product for delivery in the third quarter of
fiscal 2010.  The FLO agreement is dated September 7, 2006 and
specifies no minimum or maximum number of purchase orders and is for an initial
term of three years with extensions predicated on the annual support agreements
remaining current.  The number of FLO TV sites is expected to increase
to as many as 1,200 remote as the network expands. We also provide support and
maintenance to MediaFLO renewable on an annual basis.




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, 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.




23




Our
significant clients presently and in the past include Qualcomm - FLO TV; General
Electric – NBC Universal & Telemundo Television Networks; CBS Corporation
Television and Radio Networks; The Walt Disney Company - ABC Television and
Radio Networks; Cox Communications; Belo Corp. Television; Australian Government
owned Air Services of Australia (the Australian equivalent to the FAA); Tribune
Company Television; and Univision Communications Television and Radio Network.
Some of our current sales channel and integration partners include InfraCell,
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, 2009 and 2008




Results
From Operations




Revenues-
Revenues were $641,032 and $1,115,883 for the three months ended September 30,
2009 and 2008, respectively. The decrease in revenues of approximately
$475,000 is primarily due to decreased revenues associated with FLO TV due to
the timing of the national rollout of their high-powered wireless transmission
sites.




Cost of
Sales - Cost of sales were $60,388 and $154,180 for the three months
ended September 30, 2009 and 2008, respectively. Overall gross profit
percentage increased to 91% in the three months ended September 30, 2009
compared to 86% in the comparable prior year period due to an increase, as a
percentage of sales, in support services during the quarter.




Selling, General
and Administrative Expenses - Selling, general and administrative
expenses were $1,069,689 and $1,152,128 for the three months ended September 30,
2009 and 2008, respectively, a decrease of approximately $82,000.  The
decrease in selling, general and administrative expenses is primarily attributed
to a decrease in payroll costs based on headcount reductions.




Other
(Income)Expense - Other (Income)Expense was ($543,947) and $566,681 for
the three months ended September 30, 2009 and 2008, respectively.  The
approximately $1,111,000 change can be attributed to the adoption of new
accounting rules in the first quarter of 2009 in which we’re required to value
the fair value of warrants and conversion features for certain outstanding
equity instruments and record the change in fair value in Other
(Income)/Expense.




We
recorded a gain on a change in the fair value of derivatives of
$1,047,000.  This gain is primarily due to the fact that our stock
price decreased during 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, 2009, the Company recorded net income of $54,902 compared to a net
loss of $757,106 for the same period the previous year.  However, we
are not yet profitable based on the operations of the Company and the net income
for the quarter is due to the gain based on the change in the fair value of
certain outstanding warrants and conversion features.  If this gain
was not required to be recorded, our net loss for the quarter would have been
approximately $992,000.




24




For the Six Months Ended
September 30, 2009 and 2008




Results
From Operations




Revenues-
Revenues were $1,171,724 and $2,051,358 for the six months ended September 30,
2009 and 2008, respectively. The decrease in revenues of approximately
$880,000 is primarily due to decreased revenues associated with FLO TV due to
the timing of the national rollout of their high-powered wireless transmission
sites.




Cost of
Sales - Cost of sales were $122,192 and $257,177 for the six months ended
September 30, 2009 and 2008, respectively. Overall gross profit percentage
increased to 90% in the six months ended September 30, 2009 compared to 87% in
the comparable prior year period due to an increase, as a percentage of sales,
in support services during the period.




Selling, General
and Administrative Expenses - Selling, general and administrative
expenses were $2,111,716 and $2,343,762 for the six months ended September 30,
2009 and 2008, respectively, a decrease of approximately $232,000.  The
decrease in selling, general and administrative expenses is primarily attributed
to a decrease in marketing expenses due to having a smaller presence at the
National Association of Broadcasters (“NAB”) trade show in 2009 and decrease in
payroll costs based on headcount reductions.




Other
(Income)Expense - Other (Income)Expense was $2,449,871 and $905,460 for
the six months ended September 30, 2009 and 2008, respectively.  The
approximately $1,554,000 increase can be attributed to $5,936,000 in expense due
to the issuance of additional warrants and a reduction in the conversion price
of the notes held by our Tranche I and II debenture holders.  Based on
the terms of the debentures, the conversion price of the debentures and the
amount and exercise price of their warrants would be reduced if the Company
issued any new stock or debt at terms more beneficial than their
terms.  When we issued our Tranche III debentures in the first quarter
of 2010 with a lower conversion price and warrant exercise price, we had to
reprice the Tranche I and II instruments.  This expense was mitigated
by adoption of new accounting rules in the first quarter of 2009 in which we’re
required to value the fair value of warrants and conversion features for certain
outstanding equity instruments and record the change in fair value in Other
(Income)/Expense.  We recorded a gain on a change in the fair value of
derivatives of $5,307,000.  This gain is primarily due to the fact
that our stock price decreased during 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 three months ended
September 30, 2009, the Company recorded a net loss of $3,512,055 compared to a
net loss of $1,473,041 for the same period the previous year.




Liquidity
and Capital Resources




Cash
balances totaled $1,201 as of September 30, 2009 compared to $113,456 at
September 30, 2008.





Net cash
used in operating activities was $332,399 and $618,892 for the six months ended
September 30, 2009 and 2008, respectively.  The use of cash in 2009
and 2008 is the primarily the result of funding the net operating loss of
$3,512,055 (which included non-cash expenses of $2,385,854) and $1,473,041
(which included non-cash expenses of $886,216) for the six months ended
September 30, 2009 and 2008, respectively.




25





Net cash
used in investing activities was $0 and $12,702 and for the six months ended
September 30, 2009 and 2008, respectively.  The primary use of cash in
2008 related to computer and equipment purchases.





Net cash
provided by financing activities was $332,600 and $671,974 for the six months
ended September 30, 2009 and 2008, respectively.  Net cash provided by
financing activities in fiscal 2009 was the result of net proceeds of $355,000
related to the issuance of $426,000 principal amount of Debentures related to
the Tranche III of the Company’s private placement of such
Debentures.  Net cash provided by financing activities in the six
months ended September 30, 2008 was the result of proceeds from issuance of
$865,000 from the issuance of $1,038,000 principal amount of Debentures in
Tranche II of the Company’s private placement of such
Debentures.  Financing costs of $24,000 and $143,026 were incurred
related to raise of capital for the three months ended September 30, 2009 and
2008, respectively.





As of
September 30, 2009, the Company had a working capital deficiency of
approximately $10.3 Million including short-term notes payable, convertible
notes payable and accrued interest of approximately $2,938,000, net of
applicable debt discount of approximately $971,000.  We also have
long-term convertible debentures of approximately $295,000, net of an applicable
debt discount of approximately $131,000.





In order
to continue its operations beyond September 2010, the Company will need to
increase revenue and profit margins, repay or obtain extensions on its existing
short-term debt and possibly 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. 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 seek further protection under applicable bankruptcy
laws.




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 $27.0 million since inception.
Additionally, the Company had a net working capital deficiency of approximately
$10.3 million at September 30, 2009. 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.  These conditions raise substantial doubt
about the Company’s ability to continue as a going concern.  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, 2009, that
included an explanatory paragraph describing the conditions that 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.




26




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 4T. 
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 procedures were 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 is a material
weakness with respect to its internal control over financial reporting as
defined in Rule 13a-15(e).




The
material weakness identified by management relates to the lack of sufficient
accounting resources.  Historically, We have only had one full-time
employee in our accounting department (Chief Operating Officer) to perform
routine record keeping and his resignation in January 2009 has caused many key
controls to be performed by, or at the direction of our CEO and
CFO.  Consequently, our financial reporting function is
limited.  In order to correct this material weakness, the Company has
hired outside consultants to assist with financial statement preparation and
reporting needs of the Company and plans on hiring additional internal full-time
accounting personnel in the fourth calendar quarter of 2009 and intends to
assist 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 as the Company continues to
expand.




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,
2009 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
      ProceedingsOn
      May 17, 2007, an action was filed in Los Angeles Superior Court for breach
      of contract and similar causes of action by the Epstein Family Trust
      against the Company in relation to two outstanding promissory notes issued
      by the Company totaling $75,000 ($25,000 and $50,000) plus accrued
      interest. The Epstein Family Trust is seeking attorney’s fees and costs in
      addition to the principal and interest.  These notes were
      guaranteed by Mr. Geoffrey Talbot, the Company's CEO, for up to $25,000,
      and therefore Mr. Talbot was joined in the legal action as a third-party
      defendant.  The case number is BC 371 276. The parties have
      reached a settlement agreement where the plaintiff has agreed to convert
      all principal and interest into shares of common stock at a price of $1.00
      per share effective February 28, 2008 where the Company will pay legal
      fees of approximately $12,000 to plaintiff which is still
      outstanding.  The settlement documentation is currently being
      reviewed and will be finalized shortly. This obligation is recorded as
      accounts payable at September 30, 2009
              
              On
      December 18, 2008 Ira J. Gaines filed an action for breach of contract and
      unjust enrichment against the Company in the Superior Court of the State
      of Arizona, Maricopa County, case number CV2008-032043. The action is
      based on a promissory note and seeks a principal balance of $145,200 plus
      additional accrued interest, costs and attorneys' fees totaling $215,996.
      The settlement called for two payments of $5,000 to be applied against
      accrued interest, first on dismissal and second on November 1, 2009. The
      remainder of the debt was too paid in 24 equal payments of $12,183
      beginning June 1, 2011. The Company is in default of the payment plan
      because it has not made its November 1, 2009 payment. As provided for in
      the settlement agreement, the Company issued a warrant to purchase 50,000
      shares of the Company’s stock at $0.50 per share valued at $15,000 based
      on a Black–Scholes model. This matter has been finalized and the first
      payment made on May 18, 2009. This obligation is recorded as notes payable
      and accrued interest at September 30, 2009.
              
              Item
      1A. Risk Factors
              
              Not
      ApplicableItem 2.
            
            Unregistered
      Sales of Equity Securities and Use of ProceedsBetween
      April 1 and September 30, 2009, the Company sold Debentures to investors
      as follows:
              
              •         The
      Company issued an additional $426,000 principal amount of the Debentures
      and received net proceeds of $355,000 related to Tranche III of the
      private placement of such Debentures. In connection with the Debentures,
      the Company issued five-year warrants to purchase 1,704,000 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.At
      September 30, 2009, $601,250 principal amount of short-term promissory
      notes are in default and $239,214 of interest had accrued on all
      outstanding short-term promissory notes as of such date.




29




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




Not
Applicable




Item 5. Other
Information.




Not
Applicable
  30




Item
      6. Exhibits(a)
            
            
            Exhibits31.1
            Certificate
      of Geoffrey P. Talbot, Chief Executive Officer, pursuant to Section 302 of
      the Sarbanes Oxley Act of 2002.31.2
            Certificate
      of Geoffrey P. Talbot, Chief Financial Officer, pursuant to Section 302 of
      the Sarbanes Oxley Act of 2002.32.1
            Certificate
      of Geoffrey P. Talbot, Chief Executive Officer, pursuant to Section 906 of
      the Sarbanes Oxley Act of 2002.32.2
            Certificate
      of Geoffrey P. Talbot, Chief Financial Officer, pursuant to Section 906 of
      the Sarbanes Oxley Act of 2002




31




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 23, 2009
            /s/ Geoffrey P. TalbotName:  Geoffrey
      P. TalbotTitle: 
      Chief Financial Officer





32





EXHIBIT INDEX





Exhibit
            
            Description31.1
            
            Certificate
      of Geoffrey P. Talbot, Chief Executive Officer, pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.31.2
            
            Certificate
      of Geoffrey P. Talbot, Chief Financial Officer, pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.32.1
            
            Certificate
      of Geoffrey P. Talbot, Chief Executive Officer, pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002.32.2
            
            Certificate
      of Geoffrey P. Talbot, Chief Financial Officer, pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.





33