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 December 31, 2008




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 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 February 1,
    2009Common
      Stock, $.01 par value
                
                23,815,808





FORM
10-Q


STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES


December
31, 2008




TABLE
OF CONTENTS




Page(s)PART
      1 – FINANCIAL INFORMATIONItem
      1.
                      Financial
      Statements.Condensed
      Consolidated Balance Sheets at December 31, 2008 (unaudited) and March 31,
      2008
                      3Condensed
      Consolidated Statements of Operations for the Three Months Ended December
      31, 2008 and 2007 (unaudited)
                      4Condensed
      Consolidated Statements of Operations for the Nine Months Ended December
      31, 2008 and 2007 (unaudited)
                      5Condensed
      Consolidated Statements of Cash Flows for the Nine Months Ended December
      31, 2008 and 2007 (unaudited)
                      6Notes
      to Condensed Consolidated Financial Statements (unaudited)
                      7Item
      2.
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation.
                      21Item
      3.
                      Quantitative
      and Qualitative Disclosures About Market Risk.
                      28Item 4.
                      Controls
      and Procedures.
                      28PART
      II – OTHER INFORMATIONItem
      1.
                      Legal
      Proceedings.
                      30Item
      2.
                      Unregistered
      Sales of Equity Securities and Use of Proceeds.
                      30Item
      3.
                      Defaults
      Upon Senior Securities.
                      30Item
      4.
                      Submission
      of Matters to a Vote of Security Holders.
                      31Item 5.
                      Other
      Information.
                      31Item 6.
                      Exhibits.
                      32SIGNATURES
                      33Exhibits
                      34Certifications


2


Item
1.  Financial Statements.




STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS




December
      31,
                        2008
                      
                      
                      March
      31,(unaudited)
                      
                      
                      2008ASSETSCurrent
      Assets:Cash
                      
                      $
                      1,345
                      
                      
                      $
                      73,076Accounts
      receivable
                      
                      
                      167,313
                      
                      
                      
                      394,735Inventories
                      
                      
                      182,167
                      
                      
                      
                      48,616Prepaid
      expense and other current assets
                      
                      
                      34,609
                      
                      
                      
                      159,614Total
      Current Assets
                      
                      
                      385,434
                      
                      
                      
                      676,041Property
      and equipment, net
                      
                      
                      209,465
                      
                      
                      
                      241,429Deferred
      financing costs, net
                      
                      
                      313,207
                      
                      
                      
                      222,363Security
      deposits and other assets
                      
                      
                      106,465
                      
                      
                      
                      128,640Total
      Assets
                      
                      $
                      1,014,571
                      
                      
                      $
                      1,268,473LIABILITIES AND STOCKHOLDERS'
      DEFICIENCYCurrent
      Liabilities:Notes
      payable (including $200,000 due to a related party), net of
      debt discount of $0 and $58,179, respectively
                      
                      $
                      601,250
                      
                      
                      $
                      593,821Accounts
      payable
                      
                      
                      1,013,701
                      
                      
                      
                      989,100Accrued
      expenses
                      
                      
                      489,983
                      
                      
                      
                      312,387Accrued
      compensation
                      
                      
                      676,092
                      
                      
                      
                      574,801Interest
      payable (including $25,466 and $7,083 due to related party,
      respectively)
                      
                      
                      210,826
                      
                      
                      
                      151,806Deferred
      revenue
                      
                      
                      244,813
                      
                      
                      
                      194,883Total
      Current Liabilities
                      
                      
                      3,236,665
                      
                      
                      
                      2,816,798Long-term
      Liabilities:Notes
      payable (including $250,000 due to related party), net of debt discount of
      $65,154 and $99,677, respectively
                      
                      
                      434,846
                      
                      
                      
                      400,323Convertible
      notes payable, net of debt discount of $1,648,216 and $1,446,576,
      respectively
                      
                      
                      889,784
                      
                      
                      
                      53,424Total
      Liabilities
                      
                      
                      4,561,295
                      
                      
                      
                      3,270,545Commitments
      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, 23,807,474 and
      23,579,533 issued and outstanding, respectively
                      
                      
                      238,075
                      
                      
                      
                      235,794Additional
      paid-in capital
                      
                      
                      18,894,029
                      
                      
                      
                      17,658,841Accumulated
      deficit
                      
                      
                      (22,678,828
                      )
                      
                      
                      (19,896,707
                      )Total
      Stockholders' Deficiency
                      
                      
                      (3,546,724
                      )
                      
                      
                      (2,002,072
                      )Total
      Liabilities and Stockholders' Deficiency
                      
                      $
                      1,014,571
                      
                      
                      $
                      1,268,473





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 December
      31,2008
                  
                  
                  2007Revenue
                  
                  $
                  444,933
                  
                  
                  $
                  730,960Cost
      of Sales
                  
                  
                  78,122
                  
                  
                  
                  142,687Gross
      Profit
                  
                  
                  366,811
                  
                  
                  
                  588,273Selling,
      General and Administrative Expenses
                  
                  
                  1,046,743
                  
                  
                  
                  1,086,742Operating
      Loss
                  
                  
                  (679,932
                  )
                  
                  
                  (498,469
                  )Other
      Expense:Interest
      (including $13,712 and $54,645 to related parties for 2008 and 2007
      periods, respectively)
                  
                  
                  161,049
                  
                  
                  
                  156,236Common
      stock and warrants issued in association with debt (including $0 and
      $303,411 to related parties for 2008 and 2007 periods,
      respectively)
                  
                  
                  4,500
                  
                  
                  
                  738,866Amortization
      of debt discount
                  
                  
                  328,477
                  
                  
                  
                  63,298Amortization
      of deferred financing costs
                  
                  
                  135,123
                  
                  
                  
                  174,115Total
      Other Expense
                  
                  
                  629,149
                  
                  
                  
                  1,132,515NET
      LOSS
                  
                  $
                  (1,309,081
                  )
                  
                  $
                  (1,630,984
                  )NET
      LOSS PER COMMON SHARE - Basic and Diluted
                  
                  $
                  (0.06
                  )
                  
                  $
                  (0.10
                  )Weighted
      Average Number of Common Shares Outstanding -Basic
      and Diluted
                  
                  
                  23,795,064
                  
                  
                  
                  15,979,524




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


4


STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)




For the Nine Months Ended December
      31,2008
                  
                  
                  2007Revenue
                  
                  $
                  2,496,291
                  
                  
                  $
                  2,372,190Cost
      of Sales
                  
                  
                  353,298
                  
                  
                  
                  383,393Gross
      Profit
                  
                  
                  2,142,993
                  
                  
                  
                  1,988,797Selling,
      General and Administrative Expenses
                  
                  
                  3,390,505
                  
                  
                  
                  3,432,255Operating
      Loss
                  
                  
                  (1,247,512
                  )
                  
                  
                  (1,443,458
                  )Other
      Expense:Interest
      (including $40,986 and $158,155 to related parties for 2008 and 2007
      periods, respectively)
                  
                  
                  251,792
                  
                  
                  
                  413,469Common
      stock and warrants issued in association with debt (including $0 and
      $1,155,054 to related parties for 2008 and 2007 periods,
      respectively)
                  
                  
                  25,425
                  
                  
                  
                  2,490,540Amortization
      of debt discount
                  
                  
                  889,623
                  
                  
                  
                  315,295Amortization
      of deferred financing costs
                  
                  
                  367,769
                  
                  
                  
                  495,511Total
      Other Expense
                  
                  
                  1,534,609
                  
                  
                  
                  3,714,815NET
      LOSS
                  
                  $
                  (2,782,121
                  )
                  
                  $
                  (5,158,273
                  )NET
      LOSS PER COMMON SHARE - Basic and Diluted
                  
                  $
                  (0.12
                  )
                  
                  $
                  (0.33
                  )Weighted
      Average Number of Common Shares Outstanding -Basic
      and Diluted
                  
                  
                  23,728,733
                  
                  
                  
                  15,618,282




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


5


STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)




For the Nine Months Ended December
      31,2008
                  
                  
                  2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                  
                  $
                  (2,782,121
                  )
                  
                  $
                  (5,158,273
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                  
                  
                  44,666
                  
                  
                  
                  7,806Common
      stock and warrants issued in association with debt
                  
                  
                  25,425
                  
                  
                  
                  2,490,540Common
      stock issued for interest
                  
                  
                  17,646
                  
                  
                  
                  -Amortization
      of debt discount
                  
                  
                  889,623
                  
                  
                  
                  315,295Amortization
      of deferred financing costs
                  
                  
                  367,768
                  
                  
                  
                  495,511Deferred
      rent expense
                  
                  
                  (28,940
                  )
                  
                  
                  -Non-cash
      stock based compensation charge
                  
                  
                  53,250
                  
                  
                  
                  550,200Changes
      in operating assets and liabilities:Accounts
      receivable
                  
                  
                  227,422
                  
                  
                  
                  158,899Inventories
                  
                  
                  (133,550
                  )
                  
                  
                  12,541Prepaid
      expense and other current assets
                  
                  
                  125,005
                  
                  
                  
                  (87,110
                  )Security
      deposits and other assets
                  
                  
                  22,175
                  
                  
                  
                  88,425Accounts
      payable
                  
                  
                  24,601
                  
                  
                  
                  327,866Accrued
      expenses
                  
                  
                  206,536
                  
                  
                  
                  (78,585
                  )Accrued
      compensation
                  
                  
                  101,291
                  
                  
                  
                  89,643Interest
      payable
                  
                  
                  59,020
                  
                  
                  
                  388,795Deferred
      revenue
                  
                  
                  49,930
                  
                  
                  
                  (26,501
                  )NET
      CASH USED IN OPERATING ACTIVITIES
                  
                  
                  (730,253
                  )
                  
                  
                  (424,948
                  )CASH
      FLOWS USED IN INVESTING ACTIVITIES:Purchase
      of property and equipment
                  
                  
                  (12,702
                  )
                  
                  
                  (6,964
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from notes payable
                  
                  
                  -
                  
                  
                  
                  572,000Proceeds
      from convertible notes payable
                  
                  
                  865,000
                  
                  
                  
                  -Repayment
      of notes payable
                  
                  
                  (50,750
                  )
                  
                  
                  -Deferred
      financing costs
                  
                  
                  (143,026
                  )
                  
                  
                  (139,629
                  )NET
      CASH PROVIDED BY FINANCING ACTIVITIES
                  
                  
                  671,224
                  
                  
                  
                  432,371NET
      (DECREASE)/INCREASE IN CASH
                  
                  
                  (71,731
                  )
                  
                  
                  459CASH,
      BEGINNING OF PERIOD
                  
                  
                  73,076
                  
                  
                  
                  87,058CASH,
      END OF PERIOD
                  
                  $
                  1,345
                  
                  
                  $
                  87,517SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for:Interest
                  
                  $
                  22,603
                  
                  
                  $
                  18,502Income
      Taxes
                  
                  $
                  -
                  
                  
                  $
                  -$
                  -NON-CASH
      INVESTING AND FINANCING ACTIVITIES:Issuance
      of warrants related to debt acquisition
                  
                  $
                  397,997
                  
                  
                  $
                  412,646Issuance
      of common stock related to debt acquisition
                  
                  $
                  -
                  
                  
                  $
                  511,730Issuance
      of common stock for note extensions
                  
                  $
                  -
                  
                  
                  $
                  245,736Issuance
      of warrants for note extensions
                  
                  $
                  -
                  
                  
                  $
                  203,034Issuance
      of common stock to financial advisors
                  
                  $
                  188,754
                  
                  
                  $
                  -Issuance
      of warrants to financial advisors
                  
                  $
                  95,332
                  
                  
                  $
                  -Issuance
      of warrants to placement agents
                  
                  $
                  31,500
                  
                  
                  $
                  73,298Beneficial
      conversion related to convertible debentures
                  
                  $
                  427,564
                  
                  
                  $
                  -Placement
      agent commission accrued and not yet paid
                  
                  $
                  -
                  
                  
                  $
                  20,000Capitalization
      of rent abatement
                  
                  $
                  34,960
                  
                  
                  $
                  14,726




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


6


1.
            BUSINESS DESCRIPTION,
      GOING CONCERN AND MANAGEMENT
PLANS




Company
Overview




Statmon
Technologies Corp. is a wireless and fiber infrastructure network management
solution provider. “Axess”, our proprietary software application, and our
supporting integration products are deployed in telecommunications, media
broadcast and navigation aid transmission infrastructures to optimize operations
and keep the networks on the air 24/7. A typical infrastructure network
comprises a network operations center (“NOC” or “Master Control”) and a network
of remote transmission sites incorporating a wide range of devices, facilities
management, power supply and environmental control systems.




The
Statmon Platform is designed to self heal or preempt transmission failure by
automating the integration of different devices and disparate technologies under
a single control system, or permit corrective action at the NOC or connected
location, including a wireless device such as a Blackberry. A tiered severity
level alarm system at every site, down to the individual device level, reports
back to the NOC permitting manual adjustment or corrective action by an
authorized operator, often eliminating the need to physically visit remote
sites.




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 while being managed from a single point of control or
“dashboard” style display or computer screen.  In real time, a
proactive alarm system reports to a NOC or designated wireless device for
appropriate attention or action. Adjusting the heating, ventilating and air
conditioning system (“HVAC”), checking 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. In addition, the
Statmon Platform will keep remote sites operating independently when part, or
all, of the entire network are down, automatically bringing the remote site back
on line when network operations are restored without loss of data.




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.




Going
Concern




The
accompanying unaudited condensed interim consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
Unites States of America ("GAAP") for interim financial statements information
and assume that the Company will continue as a going concern.  In the
opinion of management, such statements include all adjustments (consisting only
of normal recurring adjustments) necessary for the fair presentation of the
Company's financial position, results of operations and cash flows at the dates
and for the periods indicated.  Pursuant to the requirements of the
Securities and Exchange Commission (the "SEC") applicable to quarterly reports
on Form 10-Q, the accompanying unaudited condensed consolidated financial
statements do not include all the disclosures required by GAAP for annual
financial statements.  These unaudited interim condensed financial
statements should be read in conjunction with the consolidated financial
statements and related notes included in the Company's Form 10-KSB for the
year ended March 31, 2008, which was filed on July 14, 2008 and the Company's
other filings with the SEC.  Operating results for the three and nine
months ended December 31, 2008 are not necessarily indicative of the results
that may be expected for the fiscal year ending March 31, 2009.  The
Company has incurred net losses of approximately $22,679,000 since inception.
Additionally, the Company had a net working capital deficiency of approximately
$2,851,000 at December 31, 2008.  These conditions raise substantial
doubt about the Company’s ability to continue as a going concern.  The
accompanying condensed consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.




7




1.
            BUSINESS DESCRIPTION,
      GOING CONCERN AND MANAGEMENT PLANS,
  continued




Management
Plans




As more
fully described in the Notes below, the Company funded its business during each
of the nine months ended December 31, 2008 and 2007 from operations and through
the sale of Original Issue Discount Senior Secured Convertible Debentures and
units consisting of promissory notes, common stock and warrants to purchase
shares of common stock, resulting in net proceeds to the Company of $865,000 and
$572,000, respectively.




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 had expected its future operations to be cash flow positive,
the rapid impact of the deteriorating economy on our broadcast customers’
revenues, the added costs they continue to incur due to the delay of the High
Definition television switch over, delays in customers’ implementation
timelines, payment schedules and delivery roll outs directly impact short-term
cash flow expectations, causing the Company to increase its
borrowings.  The Company maintains that these delays are temporary and
do not represent project cancellations.  The Company and its sales
channel partners have developed a pipeline of qualified sales opportunities
primarily in the broadcast and cellular infrastructure markets and includes live
beta testing with a major wireless carrier in the Chicago market. The deployment
of the Statmon Platform can dramatically reduce operating costs for our
customers and therefore the revenues from such prospective sales pipelines are
expected to grow even in this difficult economic environment.




On March
5, 2008, the Company closed the first tranche of $1,500,000 principal amount of
a $3,000,000 Original Issue Discount Senior Secured Convertible Debenture
Offering (for an aggregate cash subscription amount of $2,500,000) with a
conversion price of $0.9824 per share and five-year warrants to purchase an
additional 3,053,746 shares of common stock at $1.20 per share. As of the date
of this report, the Company has issued an additional $1,038,000 principal amount
of the Debentures that netted $865,000 related to the second tranche of the
Debenture financing, the net proceeds were used to reduce certain obligations
and fund the expansion of the Company into the wireless cellular and related
vertical markets. There can be no guarantee that the Company will be successful
in selling the balance of the Debentures or 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.




2.
            CERTAIN SIGNIFICANT
      ACCOUNTING POLICIES




a.
            Basis
      of Consolidation.  The condensed consolidated 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.




b.
            Accounting
      Estimates.  The preparation of financial statements in
      conformity with US GAAP requires management to make certain estimates and
      assumptions that affect the reported amounts of assets and liabilities,
      and disclosure of contingent assets and liabilities at the date of the
      financial statements and the reported amounts of revenues and expenses
      during the reporting period.  Actual results could differ from
      those estimates.




c.
            Property
      and Equipment.  Property and equipment are stated at
      cost. The cost of property and equipment is depreciated on a straight-line
      basis over the estimated useful lives of the related assets. Leasehold
      improvements are amortized over the lesser of the term of the related
      lease or the estimated useful lives of the assets. Maintenance and repairs
      are charged to operations when incurred. Betterments and renewals are
      capitalized. When property and equipment are sold or otherwise disposed
      of, the asset account and related accumulated depreciation account are
      relieved, and any gain or loss is included in
  operations.


8





2.
            CERTAIN SIGNIFICANT
      ACCOUNTING POLICIES
(continued)




The
useful lives of property and equipment for the purposes of computing
depreciation are:





Computer
      Equipment
              5 -
      7 yearsSoftware
              5
      yearsOffice
      Equipment
              5
      yearsLeasehold
      improvements
              Lesser
      of the life of the lease or the estimated useful life of the related
      asset.







d.
            Research
      and Development.  Research and development expenditures
      are charged to operations as incurred. Research and development
      expenditures were approximately $1,086,000 and $963,000 for the nine
      months ended December 31, 2008 and 2007, respectively.  Research
      and development expenditures were approximately $368,000 and $326,000 for
      the three months ended December 31, 2008 and 2007,
      respectively.




e.
            Inventories.  Inventories
      are priced at the lower of cost (first-in, first-out) or market and
      consist primarily of finished goods.  Raw materials and Work In
      Process are deemed immaterial.




f.
            Net
      Loss Per Share.  Basic net loss per share is computed
      using the weighted average number of shares of outstanding common
      stock.For
      all periods presented, diluted net loss per share was the same as basic
      net loss per share since the inclusion of the convertible notes and
      warrants would have been anti-dilutive.  Securities that could
      potentially dilute basic earnings per share (“EPS”) in the future and that
      were not included in the computation of diluted EPS because to do so would
      have been anti-dilutive for the periods presented, consist of convertible
      notes and warrants to purchase 8,828,646 and 11,608,744 shares of common
      stock as of December 31, 2008 and 2007,
  respectively.




g.
            Revenue
      Recognition.  The Statement of Position (“SOP”) 97-2,
      “Software Revenue Recognition”, issued by the American Institute of
      Certified Public Accountants ("AICPA") and SOP 98-9, “Modification of SOP
      97-2, Software Revenue Recognition, with Respect to Certain Transactions,”
      applies to all entities that earn revenue from licensing, selling, or
      otherwise marketing computer software. Management believes our current
      revenue recognition policies and practices are consistent with SOP
      97-2.





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





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





Deferred
revenue represents revenue billed for products and or/services not yet shipped
or rendered.




h.
            Stock-Based
      Compensation.  The Company reports stock based
      compensation under Statements of Financial Accounting Standards ("SFAS")
      No. 123R ("123R") "Share Based Payment." SFAS 123R requires all
      share-based payments to employees, including grants of employee stock
      options, to be recognized in the financial statements based on their fair
      values.




9




2.
            CERTAIN SIGNIFICANT
      ACCOUNTING POLICIES
(continued)




The
Company accounts for equity instruments issued to non-employees in accordance
with the provisions of SFAS 123R and the Emerging Issues Task Force ("EITF")
Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or In Conjunction with Selling, Goods or Services"
("EITF 96-18") which require that such equity instruments are recorded at their
fair value on the measurement date, which is typically the date the services are
performed.




The
Black-Scholes option valuation model is used to estimate the fair value of the
options or their equivalent granted. The model includes subjective input
assumptions that can materially affect the fair value estimates. The model was
developed for use in estimating the fair value of traded options or warrants
that have no vesting restrictions and that are fully transferable. The expected
volatility is estimated based on the most recent historical period of time equal
to the weighted average life of the options granted. Principal assumptions used
in applying the Black-Scholes model along with the results from the model were
as follows:




Nine Months EndedDecember
      31,
                        
                        
                        December
      31,2008
                        
                        
                        2007Assumptions:Risk-free
      interest rate
                        
                        
                        0.50
      to 2.25
                        %
                        
                        
                        4.50
      to 5.28
                        %Expected
      life, in years
                        
                        
                        3.0
      to 5.0
                        
                        
                        
                        3.0
      to 5.0Expected
      volatility
                        
                        105
      to 151
                        %
                        
                        107
      to 111
                        %





During
the nine months ended December 31, 2008 and 2007, the Company granted 100,000
and 740,000 warrants to employees and consultants for services provided.
Accordingly the Company incurred a charge for stock based compensation of
$53,250 and $550,200, respectively.




A summary
of the status of the Company’s nonvested warrants as of December 31, 2008 is
presented below:




WeightedAverageGrant
      DateNonvested Warrants
                                              
                                              Warrants
                                              
                                              Fair ValueNonvested
      at April 1, 2008
                                              
                                              25,000
                                              
                                              $
                                              0.80Granted
                                              
                                              100,000
                                              
                                              $
                                              0.68Vested
                                              
                                              (75,000)
                                              
                                              $
                                              0.72Expired
                                              
                                              —
                                              
                                              $
                                              —Nonvested
      at December 31, 2008
                                              
                                              50,000
                                              
                                              $
                                              0.68


10




2.
            CERTAIN SIGNIFICANT
      ACCOUNTING POLICIES
(continued)




i.
            New
      Accounting Pronouncements.




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”).  SFAS 159
provides companies with an option to report selected financial assets and
liabilities at fair value.  The objective of SFAS 159 is to reduce
both complexity in accounting for financial instruments and the volatility in
earnings caused by measuring related assets and liabilities differently.
Generally accepted accounting principles have required different measurement
attributes for different assets and liabilities that can create artificial
volatility in earnings.  SFAS 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities.




SFAS 159
does not eliminate disclosure requirements included in other accounting
standards, including requirements for disclosures about fair value measurements
included in SFAS 157 and SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments.” SFAS 159 is effective for the Company as of the
beginning of fiscal year 2009. The adoption of this pronouncement did not have
an impact on its consolidated financial position, results of operations, or cash
flows.




In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141R, “Business
Combinations” (“SFAS 141”), which replaces SFAS No. 141, “Business
Combinations.” SFAS 141R establishes principles and requirements for determining
how an enterprise recognizes and measures the fair value of certain assets and
liabilities acquired in a business combination, including noncontrolling
interests, contingent consideration, and certain acquired contingencies.
SFAS141R also requires acquisition-related transaction expense and restructuring
costs be expensed as incurred rather than capitalized as a component of the
business combination. SFAS 141R will be applicable prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period on or after December 15, 2008.  SFAS
141R would have an impact on accounting for any businesses acquired after the
effective date of this pronouncement.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS 160”).  SFAS 160 requires
all entities to report minority interests in subsidiaries as equity in the
consolidated financial statements, and requires that transactions between
entities and noncontrolling interests be treated as equity. SFAS 160 is
effective for the Company as of the beginning of fiscal 2010.  The
Company is evaluating the impact of this pronouncement on the Company’s
consolidated financial position, results of operations and cash
flows.




In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161
“Disclosure about Derivative Instruments and Hedging Activities – an amendment
of FASB Statement No. 133” (“SFAS 161”).  SFAS 161 changes the
disclosure requirements for derivative instruments and hedging
activities.  Entities are required to provide enhanced disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under SFAS No. 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance and
cash flows.  The guidance in SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged.  This Statement
encourages, but does not require, comparative disclosures for earlier periods at
initial adoption.  The Company is evaluating the impact of this
pronouncement on the Company’s consolidated financial position, results of
operations and cash flows.


11


2.
            CERTAIN SIGNIFICANT
      ACCOUNTING POLICIES
(continued)




In April
2008, the FASB issued FASB Staff Position 142-3, “Determination of the Useful
Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”). The intent of FSP
142-3 is to improve the consistency between the useful life of a recognized
intangible assets under FAS 142 and the period of expected cash flows used to
measure the fair value of the asset under FAS 141R and other U.S. generally
accepted accounting principles. FSP 142-3 is effective for the Company’s interim
and annual financial statements beginning in fiscal 2009 and early adoption is
prohibited. It does not expect the adoption of FSP 142-3 will have a material
impact on the Company’s consolidated financial position, results of operations
and cash flows.




In May
2008, the FASB issued FASB Statement No. 162, “The Hierarchy of Generally
Accepted Accounting Principles” (“FAS 162”). FAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with accounting principles generally accepted in the
United States of America. FAS 162 will be effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles.” It does not expect the adoption of FAS 162 to
have a material impact on the Company’s consolidated financial position, results
of operations and cash flows.




In June
2008, the FASB ratified Emerging Issue Task Force (“EITF”) 07-5, “Determining
Whether an Instrument (or an Embedded Feature) is indexed to an Entity’s Own
Stock” (“EITF 07-5”).  EITF 07-5 provides framework for determining
whether an instrument is indexed to an entity’s own stock.  EITF 07-5
is effective for fiscal years beginning after December 15, 2008.  The
Company is currently evaluating the impact of the adoption of EITF 07-5 on its
financial position and results of operations.




j.
            Reclassifications.  Certain
      accounts in the Company’s prior year’s consolidated financial statements
      have been reclassified for comparative purposes to conform to the
      presentation of the current year’s financial statements. These
      reclassifications have no effect on previously reported operating results
      and financial condition of the
Company.




3.
            PROPERTY AND
      EQUIPMENT




Property
and equipment consist of the following:







As
      ofDecember
      31, 2008(unaudited)
                                        
                                        
                                        March
      31, 2008Computer
      Equipment
                                        
                                        $
                                        80,911
                                        
                                        
                                        $
                                        75,865Software
                                        
                                        
                                        14,915
                                        
                                        
                                        
                                        13,008Office
      Equipment
                                        
                                        
                                        39,210
                                        
                                        
                                        
                                        33,462Leasehold
      Improvements
                                        
                                        
                                        209,910
                                        
                                        
                                        
                                        209,910344,946
                                        
                                        
                                        
                                        332,245Less:
      accumulated depreciation
                                        
                                        
                                        135,481
                                        
                                        
                                        
                                        90,816$
                                        209,465
                                        
                                        
                                        $
                                        241,429




Depreciation
of property and equipment was $15,122 and $2,687 for the three months ended
December 31, 2008 and 2007, respectively, and $44,666 and $7,806 for the nine
months ended December 31, 2008 and 2007, respectively.


12


4.
            DEFERRED FINANCING
      COSTS




The
deferred financing costs consist of costs incurred in connection with the
issuance of the Company’s outstanding debt as follows:




As ofDecember
      31, 2008(unaudited)
                
                
                March 31, 2008Deferred
      financing costs
                
                $
                694,230
                
                
                $
                235,618Less:
      accumlated amortization
                
                
                (381,023
                )
                
                
                (13,255
                )Deferred
      financing costs, net
                
                $
                313,207
                
                
                $
                222,363





Deferred
financing costs include commissions paid and the value of equity issued to
placement agents, the value of common stock and warrants issued to extend notes
payable and the value of equity issued and fees paid to consultants for
financing related services. These costs are capitalized as deferred financing
costs and amortized over the term of the related debt. If any or all of the
related debt is converted or repaid prior to its maturity date, a pro-rata share
of the related deferred financing costs are written off and recorded as
amortization expense in the period of the conversion or repayment in the
consolidated statement of operations. During the nine months ended December 31,
2008, the Company capitalized $458,612 of deferred financing costs related to
the Original Issue Discount Senior Secured Convertible Debenture (see Note 6)
and financial related services. For the three months ended December 31, 2008 and
2007, amortization of deferred financing costs was $135,123 and $174,115,
respectively. For the nine months ended December 31, 2008 and 2007, amortization
of deferred financing costs was $367,769 and $495,511,
respectively.




5.
            SENIOR SECURED
      ORIGINAL ISSUE DISCOUNT CONVERTIBLE
  DEBENTURE




On March
5, 2008 (the “First Tranche Closing Date”), Statmon Technologies Corp. (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 $3,000,000 of Original Issue Discount Senior Secured Convertible
Debentures (representing an aggregate cash subscription amount of up to
$2,500,000).  The Debentures have an effective interest rate of
approximately 10% per annum. Any additional tranches must close within
forty-five (45) days of the First Tranche Closing Date unless extended in
writing by the parties which deadline has been extended to September 30,
2008. Although the deadline has passed, the Company may be able to get
a waiver for the remaining portion of the unfunded amount of the
debenture. After deducting the expenses of the private placement, including
prepaid interest, the Company received net proceeds of approximately $1,190,000
from the closing of the first tranche.




As of
December 31, 2008, the Company had issued an additional $1,038,000 principal
amount of the Debentures and received net proceeds of $865,000 related to the
second tranche of the private placement per the same terms as the first tranche
as described herein.




In
connection with the private placement, the first tranche investors also received
warrants (the “Warrants”) to purchase up to 1,526,874 shares of the Company’s
common stock, which Warrants terminate on March 5, 2013 (the “Termination Date”)
and as of December 31, 2008, the second tranche investors also received warrants
to purchase up to 1,056,600 shares of the Company’s common stock each with a
term of five years and an exercise price of $1.20 per share. If at any time
after the earlier of (i) the one year anniversary of the date of the Purchase
Agreement and (ii) the completion of the then-applicable holding period required
by Rule 144, there is no effective registration statement registering, or no
current prospectus available for, the resale of the Warrant shares by the holder
at the point at which the holder desires to exercise the Warrant, then the
Warrants may also be exercised at such time by means of a cashless
exercise.


13


5.
            SENIOR SECURED
      ORIGINAL DISCOUNT CONVERTIBLE DEBENTURE
  (continued)




On the
Termination Date, the Warrants shall be automatically exercised via cashless
exercise. If the Company issues additional warrants at a price that is less than
the exercise price of the Warrants, then the exercise price of the Warrants will
be reduced to such price.




In
connection with the private placement, the Company issued to the investors an
additional investment right (the “AIRs”) for 270 days from the issuance of each
debenture, $1,500,000 of which have expired.  Pursuant to the AIRs,
each investor has the right to purchase up to an additional principal amount of
Debentures equal to such investor's principal amount of the Debentures and
Warrants pursuant to the Purchase Agreement, along with additional Warrants to
purchase up to a number of shares of the Company’s common stock equal to 100% of
the shares issuable upon conversion of the additional Debentures so purchased by
the investor.




The
initial conversion price (“Conversion Price”) of the Debentures is $0.9824 per
share.  If the Company issues additional common stock at a price that
is less than the Conversion Price, or common stock equivalents with an exercise
or conversion price less than the then Conversion Price, then the Conversion
Price will be reduced to such price. The Debentures are secured by a first lien
on all of the assets of the Company.




The
Company accounted for the Debentures under accounting guidance provided by
Emerging Issues Task Force ("EITF") No 98-5 "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios" and EITF 00-27 "Application of Issue No. 98-5 to Certain
Convertible Instruments".




The gross
proceeds related to the first tranche of the private placement of $1,500,000
were recorded net of a discount of $1,500,000.  The debt discount consisted
of $250,000 related to the original issue discount and $576,000 related to the
allocated fair value of the warrants and the remaining $674,000 relates to the
beneficial conversion feature of the note.  The debt discount is charged to
interest expense ratably over the life of the loan.  During the nine
months ended December 31, 2008, the Company amortized $565,068 of debt discount
related to the first tranche of the private placement. The gross proceeds
related to the second tranche of the private placement, as of December 31, 2008,
of $1,038,000 were recorded net of a discount of $998,561.  The debt
discount consisted of $173,000 related to the original issue discount and
$397,997 related to the allocated fair value of the warrants and $427,564
relates to the beneficial conversion feature of the note.  During the nine
months ended December 31, 2008, the Company amortized $231,852 of debt discount
related to the second tranche of the private placement. The debt discount will
be charged to interest expense ratably over the life of the loan.




In the
event that the Company fails to satisfy the Corporate Milestone, as defined in
the Purchase Agreement, on or before the date the Company is required to file
its Form 10-K for the period ending March 31, 2009 (the “March 2009 10-K”), then
the Company shall issue each investor, on a pro-rata basis, additional warrants
(the “Additional Warrants”) to purchase up to, in the aggregate, 500,000 shares
of the Company’s common stock.  The Additional Warrants shall be in
the same form as the Warrants described above, shall have a term of exercise
equal to five (5) years following their issuance, and shall have an exercise
price of $0.01 per share. For purposes of determining whether or not the Company
has satisfied the Corporate Milestone, the Company and the Purchasers shall rely
on information in the Company’s filings with the Commission.  In the
event the Company fails to file the March 2009 10-K on or before the last date
such form is required to be filed with financial and other information for the
applicable periods evidencing satisfaction of the Corporate Milestone, the
Company shall irrevocably be deemed to have failed to achieve the Corporate
Milestone.  The Company has accrued $126,900 as of December 31, 2008
in anticipation of not meeting the Corporate Milestone.




During
the nine months ended December 31, 2008, the Company granted warrants to
purchase 45,000 shares of common stock exercisable at $1.20 per share for a term
of five years, valued at $31,500, to a placement agent related to the first
tranche of the above financing.


14


6.
            NOTES
      PAYABLE




Notes
payable consist of the following:




As
      ofDecember
      31, 2008(unaudited)
                                  
                                  
                                  March
      31, 2008Current:Notes
      Payable - Delis - related party
                                  
                                  
                                  [a]
                                  
                                  
                                  $
                                  200,000
                                  
                                  
                                  $
                                  200,000Notes
      Payable - various
                                  
                                  
                                  [b]
                                  
                                  
                                  
                                  401,250
                                  
                                  
                                  
                                  452,000$
                                  601,250
                                  
                                  
                                  $
                                  652,000Less:
      Debt Discount
                                  
                                  
                                  
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (58,179
                                  )Total
      Current Notes Payable
                                  
                                  
                                  
                                  
                                  
                                  $
                                  601,250
                                  
                                  
                                  $
                                  593,821Long-term:Senior
      Subordinated Notes Payable - Thieme Consulting, Inc. - related
      party
                                  
                                  
                                  [c]
                                  
                                  
                                  
                                  250,000
                                  
                                  
                                  
                                  250,000Senior
      Subordinated Notes Payable
                                  
                                  
                                  [d]
                                  
                                  
                                  
                                  250,000
                                  
                                  
                                  
                                  250,000$
                                  500,000
                                  
                                  
                                  $
                                  500,000Less:
      Debt Discount
                                  
                                  
                                  
                                  
                                  
                                  
                                  (65,154
                                  )
                                  
                                  
                                  (99,677
                                  )Total
      Long-term Notes Payable
                                  
                                  
                                  
                                  
                                  
                                  $
                                  434,846
                                  
                                  
                                  $
                                  400,323




[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, if the Company does not repay the note by the
maturity date, it will issue an additional 100,000 shares of common stock and
warrants to purchase 100,000 shares of its common stock at an exercise price of
$1.00 per share with a term of five years as consideration for an extension of
the due date of the note to October 24, 2008. The Company is negotiating
an  extension or conversion to shares of common stock that would
supersede such extension agreement subject approval from the majority of the
secured debenture holders. There can be no assurance that it will be able to
obtain such an extension or approval from the majority of the debenture
holders.  This note is secured by a second lien on all of the assets
of the Company.  The Company accrued $22,356 and paid $22,603 of
interest related to this note during the nine months ended December 31,
2008.




[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 which are all in default as
of the date of this filing.




At
December 31, 2008, $185,360 of interest has accrued on these notes in default.
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 $58,308 of interest and granted 67,500 penalty
warrants, valued at $25,425 related to such notes during the nine months ended
December 31, 2008. 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 5 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
nine months ended December 31, 2008, the Company accrued $18,630 of interest due
on this note.


15




6.
            NOTES PAYABLE
      (continued)




[d] 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 a secured promissory note holder
for $250,000.  This new note is subordinated to the notes in Note 5
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 (as more fully described below), 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.  At April 30, 2008, the
Company issued 22,917 shares of restricted common stock in lieu of cash interest
payments for 11 months of interest due on the note through February 28,
2009.




7.
            EQUITY
      TRANSACTIONS




[a]
Common Stock




During
the three months ended June 30, 2008, the Company issued 22,917 shares of
restricted common stock valued at $12,146 in lieu of cash interest payments
related to a Senior Subordinate Notes Payable. In addition, the Company issued
5,000 shares of restricted common stock valued at $5,500 associated with a
short-term bridge loan that was repaid in the period from proceeds of the second
tranche of the private placement. Additionally, the Company issued 150,000
shares of restricted common stock valued at $157,500 to two entities for
investor relations and financial advisor services.




During
the three months ended September 30, 2008, the Company issued 25,002 shares of
restricted common stock valued at $22,502 associated with consulting agreements
for investor relations and financial advisor services.




During
the three months ended December 31, 2008, the Company issued 25,002 shares of
restricted common stock valued at $8,751 associated with consulting agreements
for investor relations and financial advisor services.




[b]
Stock Options and Warrants




During
the three months ended June 30, 2008, the Company granted 659,610 warrants to
note holders valued at $259,966 related to new debt in the period and 45,000
warrants valued at $31,500 as commission to placement agents related to the
first tranche of the private placement of the Debentures. In addition, the
Company issued 50,000 warrants to a new employee valued at $34,000 and 22,500
warrants valued at $14,850 as penalty warrants for notes in default.  The
weighted average exercise price of the warrants granted during the period was
$1.19 per share.  These warrants are immediately exercisable for three
to five year terms from their respective dates of issuance.




During
the three months ended September 30, 2008, the Company granted 396,990 warrants
to note holders valued at $138,031 related to new debt in the period. In
addition, the Company issued 25,000 warrants to an employee valued at $19,250,
22,500 warrants valued at $6,075 as penalty warrants for notes in default and
99,999 warrants valued at $68,666 to two entities for investor relations and
financial advisor services.  The weighted average exercise price of the
warrants granted during the period was $1.18 per share.  These
warrants are immediately exercisable for three to five year terms from their
respective dates of issuance.


16


7.
            EQUITY TRANSACTIONS
      (continued)





During
the three months ended December 31, 2008, the Company granted 22,500 warrants
valued at $4,500 as penalty warrants for notes in default and 99,999 warrants
valued at $26,666 to two entities for investor relations and financial advisor
services.  The weighted average exercise price of the warrants granted
during the period was $1.16 per share.  These warrants are immediately
exercisable for three to five year terms from their respective dates of
issuance.





Net Loss Per
Share





Securities
that could potentially dilute basic earnings per share (EPS) in the future that
were not included in the computation of diluted EPS because to do so would have
been anti-dilutive for the periods presented, consist of the
following:




As ofDecember
      31. 2008(unaudited)
                      
                      
                      March 31, 2008Warrants
      to purchase common stock
                      
                      
                      6,245,172
                      
                      
                      
                      5,044,574Convertible
      notes payable
                      
                      
                      2,583,474
                      
                      
                      
                      1,526,874Total
                      
                      
                      8,828,646
                      
                      
                      
                      6,571,448




8.
            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 conditional 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 provided the Company
      completes the proposed Convertible Debenture and warrant financing in a
      timely manner. 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 and where the Company will pay
      legal fees of approximately $12,000 to plaintiff.  The
      settlement documentation is currently being reviewed and will be finalized
      shortly.




On
December 20, 2007, a complaint was filed in the United States District Court for
the District of Colorado alleging additional commissions are due to a third
party introducer. The plaintiff demanded payment of additional commission of
$143,000 for the period ended September 30, 2007 and additional commissions
through December 31, 2007. The Company has settled the matter and as of June 30,
2008 accrued a payment due on or before July 7, 2008 of $89,683 as final
settlement of all past and future amounts due to said party.  As of
the date of this filing, all amounts related to this settlement have been paid
and the matter has been dismissed.




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 $215,996.04. The Company
has retained Arizona counsel to defend the case and believes the claims to be
without merit.  The Company’s investigation of the claims is
ongoing.  The Company plans to vigorously defend against the claim and
pursue all available defenses.


17


8.       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]
            Financial
      Services - On June 15, 2008, the Company entered into a consulting
      agreement with a New York based firm for investor relation
      services.  Under this Agreement, the Company will pay $5,000 per
      month and has agreed to issue 100,000 shares of common stock, of which
      50,000 shares vested on June 15, 2008 and 4,167 shares will vest and be
      issued each month for the next twelve months.  In addition, the
      Company has agreed to issue (i) a warrant (the “First Warrant”) to
      purchase 200,000 shares of common stock at an exercise price of $1.20 per
      share with a term of five years which vest in equal amounts over the next
      twleve months at 16,667 per month and (ii) a warrant (the “Second
      Warrant”) to purchase 200,000 shares of common stock at an exercise price
      of $1.50 per share with a term of five years which vest at the one year
      anniversary of this agreement. If the Company’s stock price is trading at
      $2.50 per share or higher for a period of thirty consecutive trading days,
      there is an accelerated vesting provision to the Second Warrants such that
      half of the shares subject to the Second Warrant, a total of 100,000
      shares, shall then vest in six months and the balance of 100,000 shares
      shall then vest at nine months form the date of the consulting
      agreement.  This consulting agreement is cancellable by either
      party by giving thirty days written notice to the other
    party.




On June
15, 2008, the Company entered into a twelve month non-exclusive financial
advisor agreement with a NASD member firm (the “NASD Firm”).  Some of
the services to be provided in connection with this agreement include, but are
not limited to, the performance of financial advisory services to assist the
Company in developing, studying and evaluating a financial plan, strategic and
financial alternatives, and merger and acquisition proposals, in addition to
assisting the Company in preparing offering documents and presentation
materials.  The NASD Firm agrees to use its best efforts to coordinate
the introduction of the Company to one of more individuals, firms or other
entities that may have an interest in pursuing some form of business combination
with the Company and in analyzing, negotiating and affecting such a Business
Combination.




In
consideration for the NASD Firm’s services, the Company has agreed to issue
150,000 shares of common stock and warrants to purchase 400,000 shares of common
stock.  Of the 150,000 restricted shares, 100,000 of such restricted
shares will be issued upon execution of this Agreement and 4,167 restricted
shares will be issued per month for twelve months. Of the 400,000 shares that
can be purchased pursuant to the warrants, 200,000 of such shares will have an
exercise price of $1.20 (“the $1.20 warrants”) and will vest at 16,666 shares
per month over a twelve month period and of the remaining 200,000 shares subject
to such warrants will have an exercise price of $1.50 per share (“the $1.50
warrants”) and will vest on the one-year anniversary of this agreement. If the
Company’s stock price is trading at $2.50 per share or higher for a period of
thirty consecutive trading days and the Company’s stock trades an average of
20,000 shares per day during such thirty day trading period, there is an
accelerated vesting provision such that half of the $1.50 warrants, a total of
100,000 shares shall then vest at nine months from the date of this agreement.
The Warrants shall have a term of five years.  After twelve months
from the effective date of this agreement, unless there is a current
registration statement covering the underlying shares, the Warrants shall have a
cashless exercise provision in the form and substance acceptable to the NASD
Firm.




During
the nine months ended December 31, 2008, the Company issued 200,004 shares of
restricted shares of common stock and warrants to purchase 199,998 shares of
common stock at an exercise price of $1.20 per share, per the terms of the
contracts described above.


18


8.       
COMMITMENTS AND
CONTINGENCIES (continued)




[d]
            Other.The Company
      has reported to the IRS the taxable income of the Chief Executive Officer
      and Chief Technology Officer to date using forms 1099 and 1096. Since
      2001, the Company has accrued approximately $676,000 as accrued
      compensation that was calculated as the difference between their gross and
      net compensation for the period. The Company plans to pay this accrued
      compensation of approximately $676,000 to the Chief Executive Officer and
      Chief Technology Officer to satisfy the tax obligations related to the
      income reported. 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.




9.
            MAJOR CUSTOMERS,
      FOREIGN REVENUE AND CONCENTRATION OF CREDIT
  RISK




[a]  
Major
Customers




During
the three months ended December 31, 2008, three customers comprised
approximately 47%, 13% and 10% of the Company’s sales.  During the
three months ended December 31, 2007, two customers comprised 68% and 11% of the
Company’s sales.




During
the nine months ended December 31, 2008, one customer comprised approximately
64% of the Company’s sales.  During the nine months ended December 31,
2007, one customer comprised 59% of the Company’s sales.




[b] 
 Foreign
Revenue




The
Company generated approximately $54,000 and $136,000 of revenue from the sale of
its products and services to foreign customers during the nine months ended
December 31, 2008 and 2007, respectively.




[c]  
Concentration
of Credit Risk




The
Company maintains cash balances in one financial institution.  As of
October 3, 2008, the balances are insured by the Federal Deposit Insurance
Corporation up to $250,000 per institution.  From time to time, the
Company's balances may exceed these limits.  The Company believes it
is not exposed to any significant credit risk for its cash
balances.




10.
              SUBSEQUENT
      EVENTS




During
January 2009, the Company granted 8,334 shares of restricted common stock and
issued five-year warrants to purchase 33,333 shares of common stock at $1.20 per
share to two financial consultants for investor relations and advisory services
per the terms of their respective contracts.





On
January 7, 2009, the Company borrowed $110,000 from one of its secured debenture
holders due on February 5, 2009 bearing interest at the rate of 17.9%
annually.  The Company received net proceeds of $85,000 after payment
of fees and expenses related to this short-term bridge loan.  The loan
has been personally guaranteed by Geoffrey Talbot, Statmon CEO. The Company has
received a default notice from the lender as the note was not repaid on the due
date. The company intends to repay this obligation from internally generated
cash flow or borrowings.


19


10.
            SUBSEQUENT EVENTS
      (continued)





On
January 1, 2009, Kevin Harris resigned as our chief operating officer. Mr.
Harris's resignation was not as the result of a disagreement with Statmon
Technologies Corp. on any matter relating to its operations, policies or
practices. Mr. Harris will continue to provide consulting services to us upon
terms and conditions agreed upon by Mr. Harris and the Company through February
15, 2009. Mr. Harris will be paid $12,000 for financial consulting services in
relation to the filing of the Company's fourth quarter disclosure documents and
related activities, payable semi-monthly through February 15, 2009. Beginning
February 16, 2009, Mr. Harris will receive $3,000 per month to assist as needed
until the Company has retained a chief financial officer. In addition, Mr.
Harris' medical and dental coverage will continue through February 28, 2009 as
well as the payment of incidentals. Mr. Harris' warrants with the Company have
been amended to include a favored nation clause.


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;
(xviv) 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)
control by certain stockholders; and (xxvi) 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-KSB for the fiscal year ended March 31, 2008 filed with the
SEC.




Recent Developments for the
Company




Overview




Statmon
Technologies Corp. is a wireless and fiber infrastructure network management
solution provider. “Axess”, its proprietary software application, and supporting
integration products are deployed in telecommunications, media broadcast and
navigation aid transmission networks to optimize operations and ensure the
entire network remains healthy and on the air 24/7. A typical infrastructure
network comprises a network operations center (“NOC” or “Master Control”) and a
network of remote transmission sites that incorporate a wide range of
communications equipment, devices, facilities management and environmental
control systems.


21


The
Statmon Platform is designed to self heal or preempt transmission failure by
automating the integration of different devices and disparate technologies under
a single umbrella control system and permit manual corrective action at the NOC
or from any connected computer, including a wireless device such as a
Blackberry. A tiered severity level alarm system at every site, down to the
device level, reports back to the NOC logging automated adjustments or
permitting manual adjustment or corrective action without a field technician
having to physically travel to remote sites.  Any authorized operator
can drill down through the Axess software screens and observe what has or is
taking place with an individual device or system at a remote site and make
further manual adjustments as required.




The
optimization of network performance and the preemption of failure eliminates or
minimizes network or individual site downtime or substandard service.
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 operator’s loss of revenue
or costs of being “off the air” typically make the return of investment (“ROI”)
highly 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 thus help
facilitate the “Go Green” policies being implemented by all levels of corporate
and government entities.   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 display or 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 without loss of data.




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 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 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 the deployment of Statmon’s
proprietary “Accurate” Local People Meter monitoring platform which interfaces
with directly with Nielsen. Statmon believes that its unique radio frequency
(“RF”) background and know how in the mainstream media broadcast industry places
it in a strategic position to provide high end solutions for the enhanced
telecommunications networks increasingly offering video and enriched multimedia
content.




The
marketing and distribution of the Company’s products is primarily facilitated by
third party sales channel partners, value added resellers (“VAR”), black label
and original equipment manufacturer (“OEM”) 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.  The Company has 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 high definition television (“HD
TV”), cable and satellite delivery systems realign their operating and business
models including offering additional digital channels that individually focus on
HD programming, continuous news coverage and weather reporting, sports and
special interest coverage. Leading 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 (HD Radio) 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


In 2006,
we entered the telecom wireless infrastructure vertical market via a contract
with the Qualcomm wholly owned subsidiary, MediaFLO USA (“MediaFLO”), 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.




MediaFLO
provides the “FLO” mobile TV and multimedia platform (the “FLO Platform”)
directly to the Verizon and AT&T cellular subscriber base across the
country. From the MediaFLO NOC in San Diego, the Statmon Platform controls and
manages all the remote sites throughout the USA, optimizing the FLO Platform
transmission performance and Verizon’s and AT&T’s mobile TV customer
satisfaction. We anticipate that the MediaFLO mobile TV platform will be adopted
by the automotive industry and additional wireless operators around the world,
although we can offer no assurance in this regard.




Under our
agreement with MediaFLO, we are licensing our Axess software and supplying
interface components for the MediaFLO San Diego Network Operation Center and the
national rollout of wireless transmission sites.  Under such
agreement, Qualcomm and/or MediaFLO periodically issues purchase orders to
us.  From September 7, 2006 to January 31, 2009, Qualcomm and/or
MediaFLO had jointly issued us purchase orders totaling
$5,817,619.  As of December 31, 2008 we have delivered $5,730,619 of
the products pursuant to these purchase orders and anticipate delivering the
balance of outstanding purchase orders during the three months ended March 31,
2009.  The MediaFLO agreement is dated September 7, 2006 and specifies
no minimum or maximum number of purchase orders and is for a term of three
years.  The number of MediaFLO sites is expected to increase as the
network expands. We also provide support and maintenance to MediaFLO renewable
on an annual basis.




Given
sufficient capital and other resources, we plan to pursue expansion into
additional vertical markets including the wireless telecommunications (cell
phone), mobile TV, IPTV over fiber networks, microwave telecommunications,
multimedia, internet gaming, electricity grid and emergency power management,
government infrastructure management, homeland security, military
communications, and surveillance.  We believe that there are business
development opportunities in any 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 competitive application in the wireless, landline and
fiber segments of the telecommunications industries providing network
management, alarm monitoring and remote site control, transmission 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 and government infrastructure cost
containment.




The
impact of the current economic conditions is expected to slow down the
implementation of our customers infrastructure projects, however, we expect the
capital expenditure portions to continue on a slower than originally expected
pace. In addition, we expect certain projects to move forward ahead of schedule
as some operators reduce overheads and implement the Statmon Platform to more
fully automate and centralize unmanned operations. As such, we believe the
wireless and infrastructure markets will experience sustained growth both in the
short term as well as 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. We believe that our background in the mainstream broadcast
transmission industry at the highest TV and radio network levels plus our
two-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 and remote site management
and control.


23


Our
significant clients include Qualcomm - MediaFLO USA; 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 Technology Associates
International (“TAIC”), 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
December 31, 2008 and 2007




Results
From Operations




Revenues-
Revenues were $444,933 and $730,960 for the three months ended December 31, 2008
and 2007, respectively. The decrease in revenues of approximately $286,000
is primarily due to decreased revenues associated with the fulfillment of the
purchase orders received from MediaFLO related to the national rollout of
MediaFLO's recently expanded 1,000+ high-powered wireless transmission sites and
San Diego Network Operation Center.  Generally, the Company has
experienced reduced sales due to the current condition of the global
economy.




Cost of
Sales - Cost of sales were $78,122 and $142,687 for the three months
ended December 31, 2008 and 2007, respectively. Overall gross profit
percentage of 82% remained within 2% of the comparable prior year
period.




Selling, General
and Administrative Expenses - Selling, general and administrative
expenses were $1,046,743 and $1,086,742 for the three months ended December 31,
2008 and 2007, respectively, a decrease of approximately $40,000.  The
decrease in selling, general and administrative expenses is primarily attributed
to decreased spending on marketing and travel and entertainment
expenses.




Other
Expense - Other Expense was $629,149 and $1,132,515 for the three months
ended December 31, 2008 and 2007, respectively.  The decrease of
approximately $500,000 can be attributed to a decrease in common stock and
warrants issued in association with debt of approximately $734,000 related to
the issuance of a decreased number of penalty warrants and penalty shares
associated with delinquent notes due to the exchange of debt for equity in
February 2008, described in the Company’s Form 10-KSB for the fiscal year ended
March 31, 2008, a decrease in amortization of deferred financing costs of
approximately $39,000 related to new debt, offset by an increase in interest
expense of approximately $5,000 primarily related to the accrual for the one
time penalty issuance of warrants related to the Corporate Milestone provisions
of the Company’s Original Issue Discount Senior Secured Convertible Debentures
and a decreased amount of debt in default and an increase in the amortization of
debt discount of approximately $265,000 due to an increase in the amount of new
long-term debt during the most recent periods.


24


Net
Income/(Loss) - As a result of the above, for the three months ended
December 31, 2008, the Company recorded a net loss of $1,309,081, compared to a
net loss of $1,630,984 for the same period the previous year.




For the Nine Months Ended
December 31, 2008 and 2007




Results
From Operations




Revenues-
Revenues were $2,496,291 and $2,372,190 for the nine months ended December 31,
2008 and 2007, respectively. The increase in revenues of approximately
$124,000 is primarily due to increased revenues associated with the fulfillment
of the purchase orders received from MediaFLO related to the national rollout of
MediaFLO's 1,000+ high-powered wireless transmission sites and San Diego Network
Operation Center, offset by a decrease in revenue generated from foreign
customers and an overall downturn in sales during the three months ended
December 31, 2008 due to the condition of the global economy.




Cost of
Sales - Cost of sales were $353,298 and $383,393 for the nine months
ended December 31, 2008 and 2007, respectively. Overall gross profit
percentage increased to 86% as compared to 84% in the comparable prior year
period.   The increase is primarily related to an increase in
hardware costs associated with the sale of the Company’s products offset by a
decrease in third party sales commissions.




Selling, General
and Administrative Expenses - Selling, general and administrative
expenses were $3,390,505 and $3,432,255 for the nine months ended December 31,
2008 and 2007, respectively, a decrease of less than $42,000 primarily
attributed to lower spending for marketing and travel related
expenses.




Other
Expense - Other Expense was $1,534,609 and $3,714,815 for the nine months
ended December 31, 2008 and 2007, respectively.  The decrease of
approximately $2,180,000 can be attributed to a decrease in common stock and
warrants issued in association with debt of approximately $2,465,000 related to
the issuance of a decreased number of penalty warrants and penalty shares
associated with delinquent notes due to the exchange of debt for equity in
February 2008, described in the Company’s Form 10-KSB for the fiscal year ended
March 31, 2008, a decrease in amortization of deferred financing costs of
approximately $128,000 related to new debt, a decrease in interest expense of
approximately $162,000 related to a decreased amount of debt in default, offset
by an increase in the amortization of debt discount of approximately $574,000
due to an increase in the amount of new long-term debt during the most recent
periods.




Net
Income/(Loss) - As a result of the above, for the nine months ended
December 31, 2008, the Company recorded a net loss of $2,782,121, compared to a
net loss of $5,158,273 for the same period the previous year.




Liquidity
and Capital Resources




Cash
balances totaled $1,345 as of December 31, 2008 compared to $87,517 at December
31, 2007.





The
Company has financed its cash requirements primarily through operations,
short-term and long-term borrowings. From September 2000 to March 31, 2008, the
Company issued units primarily consisting of a promissory note, a share of
common stock and a warrant to purchase a share of common stock to various
lenders totaling approximately $6,500,000.  At December 31, 2008, the
Company had $601,250 of short-term notes principal amount in default, $500,000
principal amount of long-term debt and $2,538,000 of long-term Original Issue
Discount Senior Secured Convertible Debentures (the “Debentures”)
outstanding.


25


Net cash
used in operating activities was $730,253 and $424,948 for the nine months ended
December 31, 2008 and 2007, respectively.  The use of cash in 2008 is
the result of a net loss of approximately $2,782,000, partially offset by
non-cash charges related to (i) depreciation of $44,666; (ii) common stock and
warrants issued in association with debt of $25,425; (iii) common stock issued
for interest of $17,646; (iv) amortization of debt discount of $889,623; (v)
amortization of deferred financing costs of $367,768; (vi) an increase of
$28,940 related to deferred rent expense; (vii) non-cash stock based
compensation of $53,250; and a net increase in operating assets and liabilities
of approximately $682,000. The cash used in 2007 is the result of a net loss of
approximately $5,158,000, partially offset by non-cash charges of approximately
$3,859,000 and a net change in operating assets and liabilities of approximately
$874,000.





Net cash
used in investing activities was $12,702 and $6,964 for the nine months ended
December 31, 2008 and 2007, respectively.  The primary use of cash in
2008 related to computer and equipment purchases.





Net cash
provided by financing activities was $671,224 and $432,371 for the nine months
ended December 31, 2008 and 2007, respectively.  Net cash provided by
financing activities in fiscal 2008 was the result of net proceeds of $865,000
related to the issuance of $1,038,000 principal amount of Debentures related to
the second tranche of the Company’s private placement of such
Debentures.  Financing costs of $143,026 were incurred related to the
raise of capital for the Company. Net cash provided by financing activities in
the nine months ended December 31, 2007 was the result of proceeds from issuance
of $572,000 of units consisting of promissory notes of various terms bearing
interest generally at 10% per annum, a share of the Company’s common stock and
generally a three or five-year warrant to purchase shares at an exercise price
from $1.00 to $1.50 per share.  Additional financing costs of $139,629
were incurred related to the ongoing efforts to raise capital for the
Company.





Between
April 1 and December 31, 2008, the Company received $865,000 of net proceeds
related to the issuance of $1,038,000 principal amount of Debentures as part of
the second tranche of its private placement of Debentures and issuance of
five-year warrants to purchase an additional 1,056,600 shares of common stock at
$1.20 per share. The Debentures are convertible into common stock at $0.9824 per
share. The first tranche of $1,500,000 principal amount of the Debentures closed
on March 5, 2008.  The Company anticipates closing a third tranche of
the financing prior to March 31, 2009, although no assurance can be offered in
this regard.





As of
December 31, 2008, the Company had a working capital deficiency of approximately
$2,851,000 including short-term notes payable and accrued interest of
approximately $812,000 and long-term notes payable and accrued interest totaling
approximately $1,325,000, net of applicable debt discount of approximately
$1,713,000.





In order
to continue its operations beyond April 2009, the Company will need to increase
revenue and profit margins, decrease operating costs, repay or obtain extensions
on its existing short-term debt and raise additional working capital through the
sale of debt or equity securities in addition to the completion of its placement
of Debentures.





There can
be no assurance that the Company will be able to raise the capital it requires
in this time frame or at all or that it will be able to raise the capital on
terms acceptable to it. In addition, there can be no assurances that the Company
will be successful in obtaining extensions of its notes, if required. 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.


26


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





The
accompanying unaudited condensed consolidated 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 $22,679,000 since inception, a
substantial portion of which relates to the amortization of debt discount, the
value of common stock and warrants issued in association with debt and other
debt related charges.  As indicated above, the Company has a working
capital deficiency of approximately $2,851,000, and 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-KSB for the year
ended March 31, 2008, 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 unaudited condensed consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.




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 our capital resources.




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.




Smaller
reporting company is not required to provide any information in response to Item
305 of Regulation S-K.




Item
4.  Controls and Procedures.




Evaluation and Disclosure
Controls and Procedures




The
Company, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the design and operation of the
Company's "disclosure controls and procedures," as such term is defined in Rules
13a-15e promulgated under the Exchange Act as of this report.  Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
has concluded that the disclosure controls and procedures are designed to
provide reasonable assurance and that the  disclosure controls and
procedures were effective as of the end of the period covered by this report to
provide reasonable assurance that material information required to be disclosed
by the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms.




Based
upon its evaluation, our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, has concluded there is a
significant deficiency with respect to its internal control over financial
reporting as defined in Rule 13a-15(e). Those rules define internal control over
financial reporting as a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.




The
weakness identified by management relates to the lack of sufficient accounting
resources.  We have only one full-time employee in our accounting
department (Chief Operating Officer) to perform routine record
keeping.  Consequently, our financial reporting function is
limited.  Management believes this weakness is considered a
significant deficiency and does not rise to the level of a material weakness due
to the compensating supervisory controls as discussed below.




As of the
end of the period covered by this report and to address the identified weakness,
the Chief Executive Officer will routinely assist the Chief Operating Officer in
reviewing the financial results for the period, review and approve significant
transactions, review budget and actual operating results, and review the
financial statements and disclosures thereon for completeness.  The
Chief Executive Officer operates in a supervisory capacity to help compensate
for the limited accounting personnel.  This added level of supervision
helps ensure the financial statements and disclosures are accurate and
complete.  This additional assistance was considered in concluding
that our weakness in internal control is a significant
deficiency.  This added level of supervision helps ensure the
financial statements and disclosures are accurate and complete.




In order
to correct this deficiency, the Company plans on hiring additional in-house
full-time accounting personnel or will consider hiring an outside consultant, as
needed, to ensure that management will have adequate resources in order to
attain complete reporting of financial information on 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.


28


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 as of this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer has
concluded that the Company's disclosure controls and procedures were effective
as of the end of the period covered by this report to provide reasonable
assurance that material information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms.




Management
is aware that there is a lack of segregation of duties at the Company due to the
small number of employees dealing with general administrative and financial
matters. This constitutes a significant deficiency in financial reporting.
However, at this time, management has decided that considering the employees
involved and the control procedures in place, the risks associated with such
lack of segregation of duties are insignificant and the potential benefits of
adding additional employees to clearly segregate duties do not justify the
expenses associated with such increases. Management will periodically reevaluate
this situation. If the volume of the business increases and sufficient capital
is secured, it is the Company's intention to further increase staffing to
mitigate the current lack of segregation of duties within the general,
administrative and financial functions.




Changes in Internal
Controls




Management
has evaluated the effectiveness of the disclosure controls and procedures as of
December 31, 2008. Based on such evaluation, management has concluded that the
disclosure controls and procedures were effective for their intended purpose
described above. There were no changes to the internal controls during the
quarter ended December 31, 2008 that have materially affected or that are
reasonably likely to affect the internal controls.




Limitations on the
Effectiveness of Controls




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.


29


PART
II - OTHER INFORMATION




Item 1.
            Legal
      Proceedings




[a]
              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 conditional 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 provided the Company completes the proposed
      Convertible Debenture and warrant financing in a timely manner. 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 and where the Company will pay legal fees of
      approximately $12,000 to plaintiff.  The settlement
      documentation is currently being reviewed and will be finalized
      shortly.




[b]
              On
      December 20, 2007, a complaint was filed in the United States District
      Court for the District of Colorado alleging additional commissions are due
      to a third party introducer. The plaintiff demanded payment of additional
      commission of $143,000 for the period ended September 30, 2007 and
      additional commissions through December 31, 2007. The Company has settled
      the matter and as of June 30, 2008 accrued a payment due on or before July
      7, 2008 of $89,683 as final settlement of all past and future amounts due
      to said party.  As of the date of this filing, all amounts
      related to this settlement have been paid and the matter has been
      dismissed.




[c]
            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
      $215,996.04. The Company has retained Arizona counsel to defend the case
      and believes the claims to be without merit.  The Company’s
      investigation of the claims is ongoing.  The Company plans to
      vigorously defend against the claim and pursue all available
      defenses.




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




Between
April 1 and December 31, 2008, the Company sold Units to investors as
follows:





•
            The
      Company issued a $100,000 principal amount promissory note bearing no
      interest and due 7 days from the date of issuance as a short-term bridge
      loan to be repaid from the net proceeds of the $540,000 second tranche of
      the private placement of Debentures. The Company issued 5,000 shares of
      restricted common stock related to this note. This note was repaid in full
      on June 25, 2008.




•
            The
      Company issued an additional $1,038,000 principal amount of the Debentures
      and received net proceeds of $865,000 related to the second tranche of the
      private placement of such Debentures. In connection with the Debentures,
      the Company issued five-year warrants to purchase 1,056,600 shares of
      common stock at $1.20 per share. The Debentures are convertible into
      common stock at $0.9824 per share.





Item
      3.
            Defaults
      Upon Senior Securities.





At
December 31, 2008, $601,250 principal amount of short-term promissory notes are
in default and $190,072 of interest had accrued on all outstanding short-term
promissory notes as of such date.





The
Company continues to be in default on:





·
            A
      $132,000 promissory note issued in August 2005, accruing 25% penalty
      interest per annum with a total of $74,607 of interest accrued at December
      31, 2008;




·
            A
      $200,000 promissory note issued in April 2007, accruing 15% penalty
      interest per annum since October 25, 2007 with a total of $4,712 of
      interest accrued and unpaid at December 31,
  2008.


30




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




(Not
      Applicable)




Item 5.
            Other
      Information.




(Not
      Applicable)




31





Item
      6.
                                Exhibits(a)
                                Exhibits31.1
                                Certificate
      of  pursuant to Rule 13a-14(a) under the Securities and Exchange
      Act of 1934, as amended.31.2
                                Certificate
      of  pursuant to Rule 13a-14(a) under the Securities and Exchange
      Act of 1934, as amended.32.1
                                Certificate
      of  pursuant to Rule 13a-14(b) under the Securities and Exchange
      Act of 1934, as amended.32.2
                                Certificate
      of  pursuant to Rule 13a-14(b) under the Securities and Exchange
      Act of 1934, as
amended.


32




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


33


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.


34