**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C.  20549




**FORM
      10-Q**


(Mark
      One)




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




For
      the
      quarterly period ended September 30, 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 ý





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


Yes  ̈ No ý




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




**Class**
            
            **Outstanding
                at November 12, 2008**Common
                Stock, $.01 par value
            
            23,790,806









**FORM
      10-Q**


**STATMON
        TECHNOLOGIES CORP. AND SUBSIDIARIES**
 **September
        30, 2008**
  **TABLE
        OF CONTENTS**
 Page(s)**PART
                    1 – FINANCIAL INFORMATION****Item
                    1. Financial Statements.**Condensed
                    Consolidated Balance Sheets at September 30, 2008 (unaudited)
                    and March
                    31, 2008
                
                3Condensed
                    Consolidated Statements of Operations for the Three Months Ended
                    September
                    30, 2008 and 2007 (unaudited)
                
                4Condensed
                    Consolidated Statements of Operations for the Six Months Ended
                    September
                    30, 2008 and 2007 (unaudited)
                
                5Condensed
                    Consolidated Statements of Cash Flows for the Six Months Ended
                    September
                    30, 2008 and 2007 (unaudited)
                
                6Notes
                    to Condensed Consolidated Financial Statements (unaudited)
                
                7**Item
                    2. Management’s Discussion and Analysis of Financial Condition and Results
                    of Operation.**
                
                20**Item
                    3. Quantitative and Qualitative Disclosures About Market
                    Risk.**
                
                27**Item
                    4. Controls and Procedures.**
                
                27**PART
                    II – OTHER INFORMATION****Item
                    1. Legal Proceedings.**
                
                28**Item
                    2. Unregistered Sales of Equity Securities and Use of
                    Proceeds.**
                
                28**Item
                    3. Defaults Upon Senior Securities.**
                
                28**Item
                    4. Submission of Matters to a Vote of Security
                    Holders.**
                
                29**Item
                    5. Other Information.**
                
                29**Item
                    6. Exhibits.**
                
                30SIGNATURES
                
                31Exhibits
                
                32Certifications
                
                33
  2
  **Item
        1. Financial Statements.**
  **STATMON
        TECHNOLOGIES CORP. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 **September 30,**
                    **2008**
                  
                  **March 31,****(unaudited)**
                  
                  **2008****ASSETS**Current
                      Assets:Cash
                  
                  $
                  113,456
                  
                  $
                  73,076Accounts
                      receivable
                  
                  
                  449,488
                  
                  
                  394,735Inventories
                  
                  
                  59,538
                  
                  
                  48,616Prepaid
                      expense and other current assets
                  
                  
                  40,191
                  
                  
                  159,614Total
                      Current Assets
                  
                  
                  662,673
                  
                  
                  676,041Property
                      and equipment, net
                  
                  
                  224,588
                  
                  
                  241,429Deferred
                      financing costs, net
                  
                  
                  412,913
                  
                  
                  222,363Security
                      deposits and other assets
                  
                  
                  106,465
                  
                  
                  128,640Total
                      Assets
                  
                  $
                  1,406,639
                  
                  $
                  1,268,473**LIABILITIES
                      AND STOCKHOLDERS' DEFICIENCY**Current
                      Liabilities:Notes
                      payable (including $200,000 due to a related party), net of
                      debt discount
                      of $2,040 and $58,179, respectively
                  
                  $
                  599,960
                  
                  $
                  593,821Accounts
                      payable
                  
                  
                  862,417
                  
                  
                  989,100Accrued
                      expenses
                  
                  
                  223,388
                  
                  
                  312,387Accrued
                      compensation
                  
                  
                  636,776
                  
                  
                  574,801Interest
                      payable (including $14,302 and $7,083 due to related party,
                      respectively)
                  
                  
                  185,443
                  
                  
                  151,806Deferred
                      revenue
                  
                  
                  178,023
                  
                  
                  194,883Total
                      Current Liabilities
                  
                  
                  2,686,007
                  
                  
                  2,816,798Long-term
                      Liabilities:Notes
                      payable (including $250,000 due to related party), net of debt
                      discount of
                      $76,704 and $99,677, respectively
                  
                  
                  423,296
                  
                  
                  400,323Convertible
                      notes payable, net of debt discount of $1,963,103 and $1,446,576,
                      respectively
                  
                  
                  574,897
                  
                  
                  53,424Total
                      Liabilities
                  
                  
                  3,684,200
                  
                  
                  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, 23,782,472
                      and
                      23,579,533 issued and outstanding, respectively
                  
                  
                  237,825
                  
                  
                  235,794Additional
                      paid-in capital
                  
                  
                  18,854,362
                  
                  
                  17,658,841Accumulated
                      deficit
                  
                  
                  (21,369,748
                  )
                  
                  (19,896,707
                  )Total
                      Stockholders' Deficiency
                  
                  
                  (2,277,561
                  )
                  
                  (2,002,072
                  )Total
                      Liabilities and Stockholders' Deficiency
                  
                  $
                  1,406,639
                  
                  $
                  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 September 30,2008
                
                2007Revenue
                
                $
                1,115,883
                
                $
                937,161Cost
                    of Sales
                
                
                154,180
                
                
                117,365Gross
                    Profit
                
                
                961,703
                
                
                819,796Selling,
                    General and Administrative Expenses
                
                
                1,152,128
                
                
                1,218,665Operating
                    Loss
                
                
                (190,425
                )
                
                (398,869
                )Other
                    Expense:Interest
                    (including $13,712 and $52,782 to related parties for 2008 and
                    2007
                    periods, respectively)
                
                
                34,184
                
                
                127,467Common
                    stock and warrants issued in association with debt (including
                    $0 and
                    $368,636 to related parties for 2008 and 2007 periods,
                    respectively)
                
                
                6,075
                
                
                812,883Amortization
                    of debt discount
                
                
                334,666
                
                
                102,133Amortization
                    of deferred financing costs
                
                
                191,756
                
                
                243,923Total
                    Other Expense
                
                
                566,681
                
                
                1,286,406NET
                    LOSS
                
                $
                (757,106
                )
                $
                (1,685,275
                )NET
                    LOSS PER COMMON SHARE - Basic and Diluted
                
                $
                (0.03
                )
                $
                (0.11
                )Weighted
                    Average Number of Common Shares Outstanding - Basic and
                    Diluted
                
                
                23,769,971
                
                
                15,601,212
 See
        accompanying notes to condensed consolidated financial statements
        (unaudited).
  4
  **STATMON
        TECHNOLOGIES CORP. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS**
 **(UNAUDITED)**
  For the Six Months Ended September 30,2008
                
                2007Revenue
                
                $
                2,051,358
                
                $
                1,641,230Cost
                    of Sales
                
                
                275,177
                
                
                240,706Gross
                    Profit
                
                
                1,776,181
                
                
                1,400,524Selling,
                    General and Administrative Expenses
                
                
                2,343,762
                
                
                2,345,513Operating
                    Loss
                
                
                (567,581
                )
                
                (944,989
                )Other
                    Expense:Interest
                    (including $27,274 and $103,510 to related parties for 2008 and
                    2007
                    periods, respectively)
                
                
                90,743
                
                
                257,233Common
                    stock and warrants issued in association with debt (including
                    $0 and
                    $851,643 to related parties for 2008 and 2007 periods,
                    respectively)
                
                
                20,925
                
                
                1,751,674Amortization
                    of debt discount
                
                
                561,146
                
                
                251,997Amortization
                    of deferred financing costs
                
                
                232,646
                
                
                321,396Total
                    Other Expense
                
                
                905,460
                
                
                2,582,300NET
                    LOSS
                
                $
                (1,473,041
                )
                $
                (3,527,289
                )NET
                    LOSS PER COMMON SHARE - Basic and Diluted
                
                $
                (0.06
                )
                $
                (0.23
                )Weighted
                    Average Number of Common Shares Outstanding - Basic and
                    Diluted
                
                
                23,695,204
                
                
                15,436,674
  See
        accompanying notes to condensed consolidated financial statements
        (unaudited).
  5
  **STATMON
        TECHNOLOGIES CORP. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(UNAUDITED)**
 For the Six Months Ended September 30,2008
                
                2007CASH
                    FLOWS FROM OPERATING ACTIVITIES:Net
                    loss
                
                $
                (1,473,041
                )
                $
                (3,527,289
                )Adjustments
                    to reconcile net loss to net cash used in operating
                    activities:Depreciation
                
                
                29,543
                
                
                5,119Common
                    stock and warrants issued in association with debt
                
                
                20,925
                
                
                1,751,674Common
                    stock issued for interest
                
                
                17,646
                
                
                -Amortization
                    of debt discount
                
                
                561,146
                
                
                251,997Amortization
                    of deferred financing costs
                
                
                232,646
                
                
                321,396Deferred
                    rent expense
                
                
                (28,940
                )
                
                -Non-cash
                    stock based compensation charge
                
                
                53,250
                
                
                326,400Changes
                    in operating assets and liabilities:Accounts
                    receivable
                
                
                (54,753
                )
                
                (158,185
                )Inventories
                
                
                (10,922
                )
                
                10,810Prepaid
                    expense and other current assets
                
                
                119,423
                
                
                23,270Security
                    deposits and other assets
                
                
                22,175
                
                
                (8,475
                )Accounts
                    payable
                
                
                (126,683
                )
                
                242,777Accrued
                    expenses
                
                
                (60,059
                )
                
                54,352Accrued
                    compensation
                
                
                61,975
                
                
                62,657Interest
                    payable
                
                
                33,637
                
                
                256,157Deferred
                    revenue
                
                
                (16,860
                )
                
                (6,507
                )NET
                    CASH USED IN OPERATING ACTIVITIES
                
                
                (618,892
                )
                
                (393,847
                )CASH
                    FLOWS USED IN INVESTING ACTIVITIES:Purchase
                    of property and equipment
                
                
                (12,702
                )
                
                -CASH
                    FLOWS FROM FINANCING ACTIVITIES:Proceeds
                    from notes payable
                
                
                -
                
                
                397,000Proceeds
                    from convertible notes payable
                
                
                865,000
                
                
                -Repayment
                    of notes payable
                
                
                (50,000
                )
                
                -Deferred
                    financing costs
                
                
                (143,026
                )
                
                (55,583
                )NET
                    CASH PROVIDED BY FINANCING ACTIVITIES
                
                
                671,974
                
                
                341,417NET
                    INCREASE/(DECREASE) IN CASH
                
                
                40,380
                
                
                (52,430
                )CASH,
                    BEGINNING OF PERIOD
                
                
                73,076
                
                
                87,058CASH,
                    END OF PERIOD
                
                $
                113,456
                
                $
                34,628SUPPLEMENTAL
                    DISCLOSURE OF CASH FLOW INFORMATION:Cash
                    paid for:Interest
                
                $
                20,284
                
                $
                8,548Income
                    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
                
                $
                -
                
                $
                178,200Issuance
                    of warrants for note extensions
                
                $
                -
                
                $
                151,200Issuance
                    of common stock to financial advisors
                
                $
                180,004
                
                $
                -Issuance
                    of warrants to financial advisors
                
                $
                68,666
                
                $
                -Issuance
                    of warrants to placement agents
                
                $
                31,500
                
                $
                18,200Beneficial
                    conversion related to convertible debentures
                
                $
                427,564
                
                $
                -Placement
                    agent commission accrued and not yet paid
                
                $
                -
                
                $
                20,000Capitalization
                    of rent abatement
                
                $
                -
                
                $
                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 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 visit the remote site..
  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 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 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 six months ended September 30, 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 $21,370,000
        since
        inception. Additionally, the Company had a net working capital deficiency
        of
        approximately $2,023,000 at September 30, 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 six months ended September 30, 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
        $397,000, 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 anticipates its future operations will be cash flow positive,
        the deteriorating economy, 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
        and
        its sales channel partners have developed a pipeline of qualified sales
        opportunities primarily in the long-term infrastructure market. The revenues
        from such prospective sales pipelines are expected to grow as the existing
        and
        new sales channel partner relationships develop.
  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 will be used to reduce certain obligations
        and fund the expansion of the Company into several new 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
                  $718,000 and $637,000 for the six months ended September 30, 2008
                  and
                  2007, respectively. Research and development expenditures were
                  approximately $361,000 and $329,000 for the three months ended
                  September
                  30, 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 8,725,647 and 10,850,778 shares of common
                  stock
                  as of September 30, 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, collectibility
        is
        probable and vendor specific objective evidence exists to allocate the total
        fee
        to elements of the arrangements. The Company's software license agreement
        entitles licensees limited rights for upgrades and enhancements for the version
        they have licensed.
 
 The
        Company requires its software product sales to be supported by a written
        contract or other evidence of a sale transaction, which generally consists
        of a
        customer purchase order or on-line authorization. These forms of evidence
        clearly indicate the selling price to the customer, shipping terms, payment
        terms (generally 30 days) and refund policy, if any. The selling prices of
        these
        products are fixed at the time the sale is consummated.
 
 Deferred
        revenue represents revenue billed 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:
  Six
                  Months EndedSeptember 30,
              
              September 30,2008
              
              2007Assumptions:Risk-free
                  interest rate
              
              
              2.00
                  to 2.25
              %
              
              4.71
                  to 5.28
              %Expected
                  life, in years
              
              
              3.0
                  to 5.0
              
              
              3.0
                  to 5.0Expected
                  volatility
              
              
              105
                  to 113
              %
              
              108
                  to 111
              %
  During
        the six months ended September 30, 2008 and 2007, the Company granted 100,000
        and 445,000 warrants to employees and consultants for services provided.
        Accordingly the Company incurred a charge for stock based compensation of
        $53,250 and $326,400, respectively.
  A
        summary
        of the status of the Company’s nonvested warrants as of September 30, 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 September 30, 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 finan cial 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.
  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
                    ofSeptember 30, 2008
                  (unaudited)
                
                March 31, 2008Computer
                    Equipment
                
                $
                80,911
                
                $
                75,865Software
                
                
                14,915
                
                
                13,008Office
                    Equipment
                
                
                39,211
                
                
                33,462Leasehold
                    Improvements
                
                
                209,910
                
                
                209,910344,947
                
                
                332,245Less:
                    accumulated depreciation
                
                
                120,359
                
                
                90,816**$**
                224,588
                
                $
                241,429
 Depreciation
        of property and equipment was $15,034 and $2,542 for the three months ended
        September 30, 2008 and 2007, respectively, and $29,543 and $5,119 for the
        six
        months ended September 30, 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 ofSeptember 30, 2008
                  (unaudited)
                
                March 31, 2008Deferred
                    financing costs
                
                $
                658,814
                
                $
                235,618Less:
                    accumlated amortization
                
                
                (245,901
                )
                
                (13,255
                )Deferred
                    financing costs, net
                
                $
                412,913
                
                $
                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, legal fees associated with new debt 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 six
        months
        ended September 30, 2008, the Company capitalized $423,196 of deferred financing
        costs related to the Original Issue Discount Senior Secured Convertible
        Debenture (see Note 6). For the three months ended September 30, 2008 and 2007,
        amortization of deferred financing costs was $191,756 and $243,923,
        respectively. For the six months ended September 30, 2008 and 2007, amortization
        of deferred financing costs was $232,646 and $321,396,
        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. 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
        September 30, 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.
  13
  **5.**
              **SENIOR
                  SECURED ORIGINAL DISCOUNT CONVERTIBLE DEBENTURE
                  (continued)**
  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 September 30, 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.
        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”). Pursuant to the AIRs, each investor
        will have 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 six months
        ended
        September 30, 2008, the Company amortized $376,027 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 September 30, 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 six months ended September 30,
        2008, the Company amortized $106,006 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.
  14
  **5.**
              **SENIOR
                  SECURED ORIGINAL ISSUE DISCOUNT CONVERTIBLE DEBENTURE
                  (continued)**
  During
        the six months ended September 30, 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.
  **6.**
              **NOTES
                  PAYABLE**
  Notes
        payable consist of the following:
 As ofSeptember 30, 2008
                  (unaudited)
                
                March 31, 2008Current:Notes
                    Payable - Delis - related party
                
                
                [a
                ]
                $
                200,000
                
                $
                200,000Notes
                    Payable - various
                
                
                [b
                ]
                
                402,000
                
                
                452,000$
                602,000
                
                $
                652,000Less:
                    Debt Discount
                
                
                
                
                
                (2,040
                )
                
                (58,179
                )Total
                    Current Notes Payable
                
                
                
                
                $
                599,960
                
                $
                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
                
                
                
                
                
                (76,704
                )
                
                (99,677
                )Total
                    Long-term Notes Payable
                
                
                
                
                $
                423,296
                
                $
                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
        a
        short-term extension that would supersede such extension agreement and intends
        to repay the note from the net proceeds from the Debenture offering. There
        can
        be no assurance that it will be able to obtain such an extension. This note
        is
        secured by a second lien on all of the assets of the Company. The Company
        accrued and paid $14,877 of interest related to this note for the six months
        ended September 30, 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
        $402,000 and represents eight notes which are all in default as of the date
        of
        this filing.
  At
        September 30, 2008, $277,000 principal amount of these notes is in default,
        plus
        interest of $168,900, with the remaining $125,000 principal amount of these
        notes not yet due. 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 $54,424 of interest and granted 45,000
        penalty warrants, valued at $20,925 related to such notes during the six
        months
        ended September 30, 2008. The Company continues to grant 7,500 penalty warrants
        per month related to such notes in default until the notes are
        repaid.
  15
  **6.**
              **NOTES
                  PAYABLE (continued)**
  [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 six months ended September
        30,
        2008, the Company accrued $12,397 of interest due on this note.
  [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.
  **[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)**
 
 **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 ofSeptember 30, 2008
                  (unaudited)
                
                March 31, 2008Warrants
                    to purchase common stock
                
                
                6,142,173
                
                
                5,044,574Convertible
                    notes payable
                
                
                2,583,474
                
                
                1,526,874Total
                
                
                8,725,647
                
                
                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 Company has reached an
                  agreement
                  in principle in regard to settlement with the Plaintiff where the
                  Company
                  will pay legal fees of approximately $12,000. The settlement documentation
                  is currently being prepared which includes mutual releases.
  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.
  [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.  17
  **8.**
              **COMMITMENTS
                  AND CONTINGENCIES
                  (continued)**
  [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 six months ended September 30, 2008, the Company issued 175,002 shares
        of
        restricted shares of common stock and warrants to purchase 99,999 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 $620,000 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 $620,000 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 September 30, 2008, four customers comprised
        approximately 73%, 7%, 7% and 6% of the Company’s sales. The accounts receivable
        balance for these customers at September 30, 2008 was $99,000, $39,486, $77,898
        and $60,978 respectively. During the three months ended September 30, 2007,
        two
        customers comprised 56% and 14% of the Company’s sales.
  During
        the six months ended September 30, 2008, two customers comprised approximately
        68% and 8% of the Company’s sales. The accounts receivable balance for these
        customers at September 30, 2008 was $99,000 and $39,486 respectively. During
        the
        six months ended September 30, 2007, one customer comprised 54% of the Company’s
        sales.
  [b]
              **Foreign
                  Revenue**
  The
        Company generated approximately $38,000 and $107,000 of revenue from the
        sale of
        its products and services to foreign customers during the six months ended
        September 30, 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
        October 2008, 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.
  19
  **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.
  20
  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.
  21
  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 November 3, 2008, Qualcomm and/or MediaFLO had jointly issued us
        purchase orders totaling $5,728,987. As of September 30, 2008 we have delivered
        $5,525,587 of the products pursuant to these purchase orders and anticipate
        delivering the balance of outstanding purchase orders during the three months
        ended December 31, 2008. 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 recession is expected to slow down the implementation of certain
        infrastructure projects, however, we expect the capital expenditure portions
        to
        continue as planned. As such, we believe the wireless and infrastructure
        markets
        will experience sustained growth over the next ten to twenty years as the
        carriers and infrastructure service providers compete to provide superior
        and
        additional wide-ranging services, including enriched video and high quality
        content to mobile devices, wireless broadband and other related mobile data
        delivery services. 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.
  22
  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 September 30, 2008 and 2007**
  **Results
        From Operations**
  ***Revenues*** -
        Revenues were $1,115,883 and $937,161 for the three months ended September
        30,
        2008 and 2007, respectively. The increase in revenues of approximately
        $179,000 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 300+ high-powered wireless transmission sites and San Diego Network
        Operation Center, offset by a decrease in revenue generated from foreign
        customers.
  ***Cost
        of Sales*** - Cost
        of sales were $154,180 and $117,365 for the three months ended September 30,
        2008 and 2007, respectively. Overall gross profit percentage of 86%
        remained within 1% of the comparable prior year period.
  ***Selling,
        General and Administrative Expenses*** -
        Selling, general and administrative expenses were $1,152,128 and $1,218,665
        for
        the three months ended September 30, 2008 and 2007, respectively, a decrease
        of
        approximately $67,000.  The decrease in selling, general and administrative
        expenses is primarily attributed to a decrease in the amount and value of
        stock
        based compensation granted during the current period.
  ***Other
        Expense*** - Other
        Expense was $566,681 and $1,286,406 for the three months ended September
        30,
        2008 and 2007, respectively. The decrease of approximately $720,000 can be
        attributed to a decrease in common stock and warrants issued in association
        with
        debt of approximately $807,000 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 $52,000 related to new debt, a
        decrease in interest expense of approximately $93,000 related to a decreased
        amount of debt in default, offset by an increase in the amortization of debt
        discount of approximately $232,000 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 three months ended September 30, 2008, the Company
        recorded a net loss of $757,106, compared to a net loss of $1,685,275 for
        the
        same period the previous year.
  23
  **For
        the Six Months Ended September 30, 2008 and 2007**
  **Results
        From Operations**
  ***Revenues*** -
        Revenues were $2,051,358 and $1,641,230 for the six months ended September
        30,
        2008 and 2007, respectively. The increase in revenues of approximately
        $410,000 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 300+ high-powered wireless transmission sites and San Diego Network
        Operation Center, offset by a decrease in revenue generated from foreign
        customers.
  ***Cost
        of Sales*** - Cost
        of sales were $275,177 and $240,706 for the three months ended September
        30,
        2008 and 2007, respectively. Overall gross profit percentage increased to
        87% as compared to 85% 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 $2,343,762 and $2,345,513
        for
        the six months ended September 30, 2008 and 2007, respectively, a decrease
        of
        less than $2,000.
  ***Other
        Expense*** - Other
        Expense was $905,460 and $2,582,300 for the six months ended September 30,
        2008
        and 2007, respectively. The decrease of approximately $1,677,000 can be
        attributed to a decrease in common stock and warrants issued in association
        with
        debt of approximately $1,731,000 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 $89,000 related to new debt,
        a
        decrease in interest expense of approximately $166,000 related to a decreased
        amount of debt in default, offset by an increase in the amortization of debt
        discount of approximately $309,000 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 six months ended September 30, 2008, the Company
        recorded a net loss of $1,473,041, compared to a net loss of $3,527,289 for
        the
        same period the previous year.
  **Liquidity
        and Capital Resources**
  Cash
        balances totaled $113,456 as of September 30, 2008 compared to $34,628 at
        September 30, 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 September 30, 2008, the Company
        had $602,000 of short-term notes principal amount, of which $577,000 remains
        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.
 
 Net
        cash
        used in operating activities was $618,892 and $393,847 for the six months
        ended
        September 30, 2008 and 2007, respectively. The use of cash in 2008 is the
        result
        of a net loss of approximately $1,473,000, partially offset by non-cash charges
        related to (i) depreciation of $29,543; (ii) common stock and warrants issued
        in
        association with debt of $20,925; (iii) common stock issued for interest
        of
        $17,646; (iv) amortization of debt discount of $561,146; (v) amortization
        of
        deferred financing costs of $232,646; (vi) an increase of $28,940 related
        to
        deferred rent expense; (vii) non-cash stock based compensation of $53,250;
        and a
        net decrease in operating assets and liabilities of approximately $32,000.
        The
        cash used in 2007 is the result of a net loss of approximately $3,527,000,
        partially offset by non-cash charges of approximately $2,657,000 and a net
        change in operating assets and liabilities of approximately $477,000.
  24
 
 Net
        cash
        used in investing activities was $12,702 and $0 for the six months ended
        September 30, 2008 and 2007, respectively. The primary use of cash in 2008
        related to computer and equipment purchases.
 
 Net
        cash
        provided by financing activities was $671,974 and $341,417 for the six months
        ended September 30, 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 six months
        ended
        September 30, 2007 was the result of proceeds from issuance of $397,000 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 $55,583 were incurred related to
        the
        ongoing efforts to raise capital for the Company.
  Between
        April 1 and September 30, 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 the remaining portion of
        the
        second tranche prior to December 31, 2008, although no assurance can be offered
        in this regard.
 
 As
        of
        September 30, 2008, the Company had a working capital deficiency of
        approximately $2,023,000 including short-term notes payable and accrued interest
        of approximately $785,000, net of applicable debt discount of approximately
        $2,000 and long-term notes payable and accrued interest totaling approximately
        $998,000, net of applicable debt discount of approximately $2,040,000.
 
 In
        order
        to continue its operations beyond September 2009, the Company will need to
        increase revenue and profit margins, repay or obtain extensions on its existing
        short-term debt and possibly raise additional working capital through the
        sale
        of debt or equity securities in addition to the completion of its placement
        of
        Debentures.
 
 There
        can
        be no assurance that the Company will be able to raise the capital it requires
        in this time frame or at all or that it will be able to raise the capital
        on
        terms acceptable to it. In addition, there can be no assurances that the
        Company
        will be successful in obtaining extensions of its notes, if required. If
        it is
        not successful, the Company would seek to negotiate other terms for the issuance
        of debt, pursue bridge financing, negotiate with suppliers for a reduction
        of
        debt through issuance of stock, and/or seek to raise equity through the sale
        of
        its common stock. At this time management cannot assess the likelihood of
        achieving these objectives. If the Company is unable to achieve these
        objectives, the Company may be forced to cease its business operations, sell
        its
        assets and/or seek further protection under applicable bankruptcy
        laws.
  Except
        as
        provided above, the Company has no present commitment that is likely to result
        in its liquidity increasing or decreasing in any material way. In addition,
        except as noted above, the Company knows of no trend, additional demand,
        event
        or uncertainty that will result in, or that is reasonably likely to result
        in,
        the Company’s liquidity increasing or decreasing in any material way. The
        Company has no material commitments for capital expenditures. The Company
        knows
        of no material trends, favorable or unfavorable, in its capital
        resources.
  25
 
 The
        accompanying financial statements have been prepared in accordance with
        accounting principles generally accepted in the United States of America
        and
        assume that the Company will continue as a going concern.
  **Going
        Concern**
  The
        Company has incurred net losses of approximately $21,370,000 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 $2,023,000, 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 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.
  26
  **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 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 Over Financial Reporting**
  Management
        has evaluated the effectiveness of the disclosure controls and procedures
        as of
        September 30, 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 over financial
        reporting during the quarter ended September 30, 2008 that have materially
        affected or that are reasonably likely to affect the internal controls over
        financial reporting.
  **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.
  27
  **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 Company has reached an
                  agreement
                  in principle in regard to settlement with the Plaintiff where the
                  Company
                  will pay legal fees of approximately $12,000. The settlement documentation
                  is currently being prepared which includes mutual releases.
                [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.**Item
                  2.**
              
              **Unregistered
                  Sales of Equity Securities and Use of Proceeds**Between
                  April 1 and September 30, 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
                  September 30, 2008, $477,000 principal amount of the $602,000 principal
                  amount of short-term promissory notes are in default and $170,922
                  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 $66,380 of interest accrued
                  at
                  September 30, 2008;
                ·A
                  $200,000 promissory note issued in April 2007, accruing 15% penalty
                  interest per annum since October 25, 2007. All interest has been
                  paid in
                  full at September 30, 2008.
  28
  **Item 4.**  **Submission
        of Matters to a Vote of Security Holders.**
  **(Not
        Applicable)**
  **Item 5.**  **Other
        Information.**
  **(Not
        Applicable)**
 29
  **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.
  30
  **SIGNATURES**
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
 Date:
                    November 14, 2008
                /s/ 
                    Geoffrey
                    P. TalbotName:
                    Geoffrey P. TalbotTitle: 
                    Chief Financial Officer
  31
 
 **EXHIBIT
        INDEX**
 
 **Exhibit**
              
              **Description**31.1
              
              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.
  32