UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549




FORM
10-Q


(Mark
One)




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




For the
quarterly period ended December 31, 2009




or




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




For the
transition period from _____________ to ________________




Commission
File Number:  000-09751




STATMON
TECHNOLOGIES CORP.




(Exact
name of registrant as specified in its charter)




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





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


(Address
of principal executive offices) (Zip Code)




(847)
604-5366


(Registrant’s
telephone number, including area code)




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




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.


Yes  x  No  ̈




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


Yes  x    No
 ̈




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




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




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




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




Class
                
                Outstanding at January 31,
    2009Common
      Stock, $.01 par value
                
                24,945,807









FORM
10-Q


STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES


December
31, 2009




TABLE
OF CONTENTS




Page(s)PART
      1 – FINANCIAL INFORMATIONItem 1.  Financial Statements.Condensed Consolidated Balance Sheets at December 31, 2009
      (unaudited) and March 31, 2009
                                                              
                                                              3Condensed Consolidated Statements of Operations for the Three
      Months Ended December 31, 2009 and 2008 (unaudited)
                                                              
                                                              4Condensed Consolidated Statements of Operations for the Nine
      Months Ended December 31, 2009 and 2008 (unaudited)
                                                              
                                                              5Condensed Consolidated Statements of Stockholder’s
      Deficiency for the Nine Months Ended December 31, 2009
      (unaudited)
                                                              
                                                              6Condensed Consolidated Statements of Cash Flows for the
      Nine Months Ended December 31, 2009 and 2008
      (unaudited)
                                                              
                                                              7Notes to Condensed Consolidated Financial Statements
      (unaudited)
                                                              
                                                              9Item 2.  Management’s Discussion and Analysis of
      Financial Condition and Results of Operations.
                                                              
                                                              21Item 3.  Quantitative and Qualitative Disclosures
      About Market Risk.
                                                              
                                                              28Item 4T.  Controls and
      Procedures.
                                                              
                                                              28PART II – OTHER INFORMATIONItem 1.  Legal
    Proceedings.
                                                              
                                                              29Item 1A. Risk Factors
                                                              
                                                              29Item 2.  Unregistered Sales of Equity Securities and
      Use of Proceeds.
                                                              
                                                              29Item 3.  Defaults Upon Senior
      Securities.
                                                              
                                                              29Item 4.  Submission of Matters to a
      Vote of Security Holders.
                                                              
                                                              30Item 5.  Other
    Information.
                                                              
                                                              30Item 6.  Exhibits.
                                                              
                                                              31SIGNATURES
                                                              
                                                              32Exhibits
                                                              
                                                              33Certifications




2




Item 1.  Financial Statements.




STATMON TECHNOLOGIES CORP. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE
SHEETS




December
      31,
                                                            
                                                            
                                                            March
      31,2009
                                                            
                                                            
                                                            2009(unaudited)ASSETSCurrent
      Assets:Cash
                                                            
                                                            $
                                                            1,901
                                                            
                                                            
                                                            $
                                                            1,000Accounts
      receivable, net of allowance of $13,813 and $31,000,
      respectively
                                                            
                                                            
                                                            162,015
                                                            
                                                            
                                                            
                                                            171,924Inventories
                                                            
                                                            
                                                            36,117
                                                            
                                                            
                                                            
                                                            140,384Prepaid
      expense and other current assets
                                                            
                                                            
                                                            44,781
                                                            
                                                            
                                                            
                                                            17,214Total
      Current Assets
                                                            
                                                            
                                                            244,814
                                                            
                                                            
                                                            
                                                            330,522Property
      and equipment, net of accumulated depreciation of $195,225 and $150,517repectively
                                                            
                                                            
                                                            149,721
                                                            
                                                            
                                                            
                                                            194,429Deferred
      financing costs, net of accumulated amortization of $258,949 and $458,229
      repectively
                                                            
                                                            
                                                            63,697
                                                            
                                                            
                                                            
                                                            206,002Security
      deposits and other assets
                                                            
                                                            
                                                            50,959
                                                            
                                                            
                                                            
                                                            50,959Total
      Assets
                                                            
                                                            $
                                                            509,191
                                                            
                                                            
                                                            $
                                                            781,912LIABILITIES AND STOCKHOLDERS'
      DEFICIENCYCurrent
      Liabilities:Notes
      payable (including $450,000 and $200,000 due to a related party,
      respectively), net of debt discount of $19,333 and $0,
      respectively
                                                            
                                                            $
                                                            1,081,917
                                                            
                                                            
                                                            $
                                                            601,250Convertible
      notes payable, net of debt discount of $408,345 and $696,575,
      respectively
                                                            
                                                            
                                                            2,104,655
                                                            
                                                            
                                                            
                                                            803,425Accounts
      payable
                                                            
                                                            
                                                            1,354,444
                                                            
                                                            
                                                            
                                                            1,120,820Accrued
      expenses
                                                            
                                                            
                                                            213,578
                                                            
                                                            
                                                            
                                                            263,426Accrued
      compensation, taxes and interest
                                                            
                                                            
                                                            1,782,470
                                                            
                                                            
                                                            
                                                            1,209,735Interest
      payable (including $45,059 and $39,480 due to related party,
      respectively)
                                                            
                                                            
                                                            287,250
                                                            
                                                            
                                                            
                                                            235,165Deferred
      revenue
                                                            
                                                            
                                                            414,034
                                                            
                                                            
                                                            
                                                            387,281Derivative
      liability
                                                            
                                                            
                                                            3,761,000
                                                            
                                                            
                                                            
                                                            -Total
      Current Liabilities
                                                            
                                                            
                                                            10,999,348
                                                            
                                                            
                                                            
                                                            4,621,102Long-term
      Liabilities:Notes
      payable (including $0 and $250,000 due to related party), net of debt
      discount of $0 and $53,856, respectively
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            446,144Convertible
      notes payable, net of debt discount of $290,469 and $643,600,
      respectively
                                                            
                                                            
                                                            135,531
                                                            
                                                            
                                                            
                                                            394,401Total
      Liabilities
                                                            
                                                            
                                                            11,134,879
                                                            
                                                            
                                                            
                                                            5,461,647Commitments
      and ContingenciesStockholders'
      Deficiency:Preferred
      stock, $.01 par value, 10,000,000 shares authorized, none issued and
      outstanding
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            -Common
      stock, $.01 par value, 100,000,000 shares authorized,24,201,447
      and 23,807,474 issued and outstanding, respectively
                                                            
                                                            
                                                            242,014
                                                            
                                                            
                                                            
                                                            238,074Additional
      paid-in capital
                                                            
                                                            
                                                            16,450,281
                                                            
                                                            
                                                            
                                                            19,026,089Accumulated
      deficit
                                                            
                                                            
                                                            (27,317,983
                                                            )
                                                            
                                                            
                                                            (23,943,898
                                                            )Total
      Stockholders' Deficiency
                                                            
                                                            
                                                            (10,625,688
                                                            )
                                                            
                                                            
                                                            (4,679,735
                                                            )Total
      Liabilities and Stockholders' Deficiency
                                                            
                                                            $
                                                            509,191
                                                            
                                                            
                                                            $
                                                            781,912




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




3




STATMON TECHNOLOGIES CORP. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)




For
      the Three Months Ended December 31,2009
                    
                    
                    2008Revenue
                    
                    $
                    791,646
                    
                    
                    $
                    444,933Cost
      of Sales
                    
                    
                    61,863
                    
                    
                    
                    78,122Gross
      Profit
                    
                    
                    729,783
                    
                    
                    
                    366,811Selling,
      General and Administrative Expenses
                    
                    
                    871,963
                    
                    
                    
                    1,046,743Operating
      Loss
                    
                    
                    (142,180
                    )
                    
                    
                    (679,932
                    )Other
      Expense:Interest
      (including $13,750 and $13,712 to related parties for 2009 and 2008
      periods, respectively)
                    
                    
                    64,191
                    
                    
                    
                    161,049Common
      stock and warrants issued in association with debt
                    
                    
                    2,925
                    
                    
                    
                    4,500Amortization
      of debt discount
                    
                    
                    384,411
                    
                    
                    
                    328,477Amortization
      of deferred financing costs
                    
                    
                    40,331
                    
                    
                    
                    135,123Gain
      on change in fair value of derivatives
                    
                    
                    (281,000
                    )
                    
                    
                    -Total
      Other Expense
                    
                    
                    210,858
                    
                    
                    
                    629,149NET
      LOSS
                    
                    $
                    (353,038
                    )
                    
                    $
                    (1,309,081
                    )NET
      LOSS PER SHARE - Basic and Diluted
                    
                    $
                    (0.01
                    )
                    
                    $
                    (0.06
                    )Weighted
      Average Number of Common Shares Outstanding -Basic
      and Diluted
                    
                    
                    24,646,892
                    
                    
                    
                    23,795,064




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




4




STATMON TECHNOLOGIES CORP. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)




For
      the Nine Months Ended December 31,2009
                    
                    
                    2008Revenue
                    
                    $
                    1,963,370
                    
                    
                    $
                    2,496,291Cost
      of Sales
                    
                    
                    184,054
                    
                    
                    
                    353,298Gross
      Profit
                    
                    
                    1,779,316
                    
                    
                    
                    2,142,993Selling,
      General and Administrative Expenses
                    
                    
                    2,983,678
                    
                    
                    
                    3,390,505Operating
      Loss
                    
                    
                    (1,204,362
                    )
                    
                    
                    (1,247,512
                    )Other
      Expense:Interest
      (including $41,250 and $54,654 to related parties for 2009 and 2008
      periods, respectively)
                    
                    
                    161,495
                    
                    
                    
                    251,792Common
      stock and warrants issued in association with debt
                    
                    
                    6,799,300
                    
                    
                    
                    25,425Amortization
      of debt discount
                    
                    
                    1,121,629
                    
                    
                    
                    889,623Amortization
      of deferred financing costs
                    
                    
                    166,305
                    
                    
                    
                    367,769Gain
      on change in fair value of derivatives
                    
                    
                    (5,588,000
                    )
                    
                    
                    -Total
      Other Expense
                    
                    
                    2,660,729
                    
                    
                    
                    1,534,609NET
      LOSS
                    
                    $
                    (3,865,091
                    )
                    
                    $
                    (2,782,121
                    )NET
      LOSS PER SHARE - Basic and Diluted
                    
                    $
                    (0.16
                    )
                    
                    $
                    (0.12
                    )Weighted
      Average Number of Common Shares Outstanding -Basic
      and Diluted
                    
                    
                    24,321,988
                    
                    
                    
                    23,728,733




See
accompanying notes to condensed consolidated financial statements
(unaudited)




5


STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
DEFICIENCY
 (UNAUDITED)
  Additional
                                              
                                              
                                              
                                              
                                              
                                              TotalCommon
      Stock
                                              
                                              
                                              paid-in
                                              
                                              
                                              Accumulated
                                              
                                              
                                              Stockholders'Shares
                                              
                                              
                                              Amount
                                              
                                              
                                              capital
                                              
                                              
                                              deficit
                                              
                                              
                                              DeficiencyBalance,
      April 1, 2009
                                              
                                              
                                              23,807,474
                                              
                                              
                                              $
                                              238,074
                                              
                                              
                                              $
                                              19,026,089
                                              
                                              
                                              $
                                              (23,943,898
                                              )
                                              
                                              $
                                              (4,679,735
                                              )Cumulative
      effect of a change in accounting principle - reclassification of
      equity-linked financial instruments to derivative
    liabilities
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (2,600,261
                                              )
                                              
                                              
                                              491,006
                                              
                                              
                                              
                                              (2,109,255
                                              )Warrant
      Exercise
                                              
                                              
                                              160,000
                                              
                                              
                                              
                                              1,600
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              1,600Conversion
      of Convertible Debentures
                                              
                                              
                                              100,000
                                              
                                              
                                              
                                              1,000
                                              
                                              
                                              
                                              24,000
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              25,000Reclassification
      of derivative liability to equity
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              15,000
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              15,000Reclassification
      of equity to derivative liability
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (107,000
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (107,000
                                              )Stock-based
      compensation
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              34,000
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              34,000Issuance
      of debt related penalty warrants
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              10,800
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              10,800Issuance
      of warrants related to a settlement agreement
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              15,500
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              15,500Issuance
      of common stock for interest
                                              
                                              
                                              133,973
                                              
                                              
                                              
                                              1,340
                                              
                                              
                                              
                                              32,153
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              33,493Net
      Loss
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              (3,865,091
                                              )
                                              
                                              
                                              (3,865,091
                                              )Balance,
      December 31, 2009
                                              
                                              
                                              24,201,447
                                              
                                              
                                              $
                                              242,014
                                              
                                              
                                              $
                                              16,450,281
                                              
                                              
                                              $
                                              (27,317,983
                                              )
                                              
                                              $
                                              (10,625,688
                                              )
  See
accompanying notes to condensed consolidated financial statements
(unaudited)




6




STATMON TECHNOLOGIES CORP. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)




For
      the Nine Months Ended December 31,2009
                      
                      
                      2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                      
                      $
                      (3,865,091
                      )
                      
                      $
                      (2,782,121
                      )Adjustments
      to reconcile net loss to net cash used inoperating
      activities:Depreciation
                      
                      
                      44,708
                      
                      
                      
                      44,666Common
      stock and warrants issued in association with debt
                      
                      
                      6,799,300
                      
                      
                      
                      25,425Common
      stock  issued for interest
                      
                      
                      33,493
                      
                      
                      
                      17,646Provision
      for doubtful accounts
                      
                      
                      10,000
                      
                      
                      
                      -Gain
      on change in fair value of derivatives
                      
                      
                      (5,588,000
                      )
                      
                      
                      -Amortization
      of debt discount
                      
                      
                      1,121,629
                      
                      
                      
                      889,623Amortization
      of deferred financing costs
                      
                      
                      166,305
                      
                      
                      
                      367,768Deferred
      rent expense
                      
                      
                      (59,849
                      )
                      
                      
                      (28,940
                      )Non-cash
      stock based compensation charge
                      
                      
                      34,000
                      
                      
                      
                      53,250Changes
      in operating assets and liabilities:Accounts
      receivable
                      
                      
                      (91
                      )
                      
                      
                      227,422Inventories
                      
                      
                      104,267
                      
                      
                      
                      (133,550
                      )Prepaid
      expense and other current assets
                      
                      
                      (27,567
                      )
                      
                      
                      125,005Security
      deposits and other assets
                      
                      
                      -
                      
                      
                      
                      22,175Accounts
      payable
                      
                      
                      233,624
                      
                      
                      
                      24,601Accrued
      expenses
                      
                      
                      10,000
                      
                      
                      
                      206,536Accrued
      compensation
                      
                      
                      572,735
                      
                      
                      
                      101,291Interest
      payable
                      
                      
                      52,085
                      
                      
                      
                      59,020Deferred
      revenue
                      
                      
                      26,753
                      
                      
                      
                      49,930NET
      CASH USED IN OPERATING ACTIVITIES
                      
                      
                      (331,699
                      )
                      
                      
                      (730,253
                      )CASH
      FLOWS USED IN INVESTING ACTIVITIES:Purchase
      of property and equipment
                      
                      
                      -
                      
                      
                      
                      (12,702
                      )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from convertible notes payable
                      
                      
                      355,000
                      
                      
                      
                      865,000Proceeds
      from exercise of warrants
                      
                      
                      1,600
                      
                      
                      
                      -Repayment
      of notes payable
                      
                      
                      -
                      
                      
                      
                      (50,750
                      )Deferred
      financing costs
                      
                      
                      (24,000
                      )
                      
                      
                      (143,026
                      )NET
      CASH PROVIDED BY FINANCING ACTIVITIES
                      
                      
                      332,600
                      
                      
                      
                      671,224NET
      INCREASE (DECREASE) IN CASH
                      
                      
                      901
                      
                      
                      
                      (71,731
                      )CASH,
      BEGINNING OF PERIOD
                      
                      
                      1,000
                      
                      
                      
                      73,076CASH,
      END OF PERIOD
                      
                      $
                      1,901
                      
                      
                      $
                      1,345SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for:Interest
                      
                      $
                      49,297
                      
                      
                      $
                      22,603




See
accompanying notes to condensed consolidated financial statements
(unaudited)




7




STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)


(Unaudited)





For
      the Nine Months Ended
                                          December
      31,2009
                                        
                                        
                                        2008NON-CASH
      INVESTING AND FINANCING ACTIVITIES:Cumulative
      effect of change in accounting principal on accumulated
      deficit
                                        
                                        $
                                        491,006
                                        
                                        
                                        $
                                        -Cumulative
      effect of change in accounting principal on paid in
      capital
                                        
                                        $
                                        (2,600,261
                                        )
                                        
                                        $
                                        -Issuance
      of common stock for conversion of
    convertible debentures
                                        
                                        $
                                        25,000
                                        
                                        
                                        $
                                        -Reclassification
      of derivative liability to equity
                                        
                                        $
                                        15,000Reclassification
      of warrants to derivative liability
                                        
                                        $
                                        (107,000
                                        )Issuance
      of warrants related to debt acquisition
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        397,997Issuance
      of common stock and warrants to financial advisors
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        284,086Issuance
      of warrants to placement agents
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        31,500Beneficial
      conversion related to convertible debentures
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        427,564





See
accompanying notes to condensed consolidated financial statements
(unaudited)




8





STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


DECEMBER 31, 2009
AND 2008




1.
            BUSINESS DESCRIPTION,
      GOING CONCERN AND ACCOUNTING
POLICIES




Company
Overview




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




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




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




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




Basis
of Presentation




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




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




9




STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 DECEMBER 31, 2009
AND 2008


1.
              BUSINESS DESCRIPTION,
      GOING CONCERN AND ACCOUNTING POLICIES
  (CONTINUED)




These
financial statements should be read in conjunction with the audited financial
statements and the notes thereto of all the entities included in the Company’s
2009 Annual Report on Form 10-K filed with the Securities Exchange
Commission.




Going
Concern




The
accompanying unaudited condensed consolidated interim financial statements have
been prepared in accordance with accounting principles generally accepted in the
Unites States of America ("US GAAP") for interim financial statement
information.  The Company has incurred net losses of approximately $27.3
million since inception. Additionally, the Company had a net working capital
deficiency of approximately $10.8 million at December 31, 2009. These conditions
raise substantial doubt about the Company’s ability to continue as a going
concern. The accompanying unaudited condensed consolidated interim financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.




As more
fully described in the Notes below, the Company funded its operations during the
nine months ended December 31, 2009 by raising an additional $355,000 of
proceeds through the sale of Senior Secured Convertible Debentures.




Management
Plans




In order
to reduce debt and simultaneously maximize growth and expansion of operations,
the Company has required capital infusions to augment its total capital needs.
While the Company anticipates its future operations will be cash flow positive,
delays in customer’s implementation timelines, payment schedules and delivery
roll outs directly impact short-term cash flow expectations causing the Company
to increase its borrowings.  The Company and its sales channel
partners have developed a pipeline of qualified sales opportunities. The
revenues from such prospective sales pipelines are expected to grow as the
existing and new sales channel partner relationships develop.




During
the first nine months of Fiscal 2010, the Company has raised $355,000 of
proceeds related to the third tranche of Convertible Debentures, the net
proceeds were used to reduce certain obligations.




As of
December 31, 2009, the Company has $1,475,000 of Convertible Debentures due on
March 5, 2010 and $1,038,000 due before December 31, 2010.  Since the
Company’s stock price is presently higher than the $0.25 conversion price of the
Convertible Debentures, the Company expects these Convertible Debentures to be
converted into Common Stock before the Convertible Debentures become
due.  However, the Company is presently in discussions to obtain
necessary financing to satisfy the obligations if the Convertible Debentures are
presented for cash payment on their respective due dates.  As of
February 22, 2010, $250,000 of the Convertible Debentures due March 5, 2010 have
been converted into common stock.  The Company also has $601,250 in
unsecured notes payable that are in default and has
accrued payroll tax obligations of $1,782,000 including penalties and
interest.




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




10




STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 DECEMBER 31, 2009
AND 2008


1.
                BUSINESS DESCRIPTION,
      GOING CONCERN AND ACCOUNTING POLICIES
  (CONTINUED)


Revenue
Recognition




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





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





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




Subsequent
Events




Management
has evaluated subsequent events or transactions occurring through February 22,
2010, the date the financial statements were issued.  The Company is
not aware of any additional subsequent events which would require recognition or
disclosure in the condensed consolidated financial statements.




New
Accounting Pronouncements




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




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





11




STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 DECEMBER 31, 2009
AND 2008


1.
                BUSINESS DESCRIPTION,
      GOING CONCERN AND ACCOUNTING POLICIES
  (CONTINUED)




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




Recently
Adopted Accounting Pronouncements




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




12




STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 DECEMBER 31, 2009
AND 2008


1.
                BUSINESS DESCRIPTION,
      GOING CONCERN AND ACCOUNTING POLICIES
  (CONTINUED)




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




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




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




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




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




In
connection with the private placement, the investors also initially received
warrants (the “Warrants”) to purchase up to 2,583,474 shares of the Company’s
common stock, which terminate five years from the closing date (the “Termination
Date”) and initially had an exercise price of $1.20 per share. Based on the
terms of the agreement, the Warrants may also be exercised by means of a
cashless exercise.  On the Termination Date, the Warrant shall be
automatically exercised via cashless exercise. Based on the reduced exercise
price of the warrants issued in conjunction with Tranche III (See below), the
exercise price of the Warrants were reduced to $0.50 and by the terms of the
original agreement, the investors were issued an additional 7,568,526 warrants
to obtain the same warrant coverage as the Tranche III agreement.  The
additional warrants that were issued had a fair value of $3,289,000 and were
recorded as interest expense during the nine months ended December 31,
2009.


13




STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 DECEMBER 31, 2009
AND 2008


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




During
the nine months ended December 31, 2009, the Company issued and sold a portion
of the third tranche (“Tranche III”)of debentures in total principal amount of
$426,000, due two years from the issuance of the securities, under the same
debenture facility.   In connection with the private placement,
the investors also received warrants to purchase up to 1,704,000 shares of the
Company’s common stock, which terminate in five years and have an exercise price
of $0.50 per share. Based on the terms of the agreement, the Warrants may also
be exercised by means of a cashless exercise.




The
initial conversion price (“Initial Conversion Price”) of both Tranche I and
Tranche II of Debentures was $0.9824 per share.  The conversion price
of Tranche III was $0.25.  Based on the reduced conversion price of
the Debentures issued in conjunction with Tranche III, the conversion price of
the Debentures from Tranches I and II were reduced to $0.25 based on the terms
of the original agreement governing their issuance.  The modification
of the conversion feature resulted in an increase in the value of the instrument
of $2,647,000 and was recorded as interest expense during the nine months ended
December 31, 2009.




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




On
Tranche I and II, the gross redemption value of $2,538,000 were recorded net of
a discount of $2,526,000.  The debt discount consisted of $423,000 related
to the original issue discount, $1,815,000 related to the allocated fair value
of the warrants, $1,323,000 relates to the beneficial conversion feature of the
note mitigated by deemed interest of $1,035,000 due to the fact that the
proceeds in some of the issuances were less than the fair value issued in the
transaction.   The debt discount is charged to interest expense
ratably over the life of the loan. Amortization related to the debt discount on
Tranche I and II totaled $1,166,079 through March 31, 2009.  This
amortization as well as the deemed interest is recorded as part of the
cumulative adjustment in the accumulated deficit.   During the
nine months ended December 31, 2009, the Company amortized $951,575 of debt
discount related to Tranches I and II.




The gross
proceeds of $426,000 related to Tranche III were recorded net of a discount of
$426,000.  The debt discount consisted of $71,000 related to the
original issue discount, $636,000 related to the fair value of the warrants and
$556,000 related to the fair value of the conversion feature of the note
mitigated by $837,000 of deemed interest that was expensed
immediately.  During the nine months ended December 31, 2009, the
Company amortized $135,531 of debt discount related to Tranche III.




14




STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 DECEMBER 31, 2009
AND 2008


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




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




December 31,
                  
                  
                  Tranche III
                  
                  
                  March 31,
                  
                  
                  Tranche I &II2009
                  
                  
                  Inception
                  
                  
                  2009
                  
                  
                  InceptionConversion
      Feature:Risk-free
      interest rate
                  
                  
                  0.47
                  %
                  
                  
                  0.88%-1.26
                  %
                  
                  
                  0.83
                  %
                  
                  
                  2.0%
      -4.25
                  %Expected
      volatility
                  
                  
                  175.29
                  %
                  
                  
                  154.9%-167.2
                  %
                  
                  
                  155.02
                  %
                  
                  
                  106.7%-112.0
                  %Expected
      life (in years)
                  
                  
                  0.18-1.75
                  
                  
                  
                  2.0
                  
                  
                  
                  .93-1.50
                  
                  
                  
                  2.0Expected
      dividend yield
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Warrants:Risk-free
      interest rate
                  
                  
                  1.70
                  %
                  
                  
                  1.74%-2.75
                  %
                  
                  
                  1.65
                  %
                  
                  
                  0.50%-2.50
                  %Expected
      volatility
                  
                  
                  175.29
                  %
                  
                  
                  154.9%-167.2
                  %
                  
                  
                  155.02
                  %
                  
                  
                  105.1%-155.1
                  %Expected
      life (in years)
                  
                  
                  3.18-4.75
                  
                  
                  
                  5.00
                  
                  
                  
                  3.93-4.50
                  
                  
                  
                  5.00Expected
      dividend yield
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -




Under
additional provisions of the securities purchase agreements related to such
Debentures, the Company was required to meet certain revenue minimums in fiscal
year 2009 which were not met.  Based on not meeting the revenue
minimums, the Company was required to issue to each investor, on a pro-rata
basis, additional warrants (the “Additional Warrants”) to purchase up to, in the
aggregate, 676,800 shares of the Company’s common stock related to Tranches I
and II.  The Additional Warrants are in the same form as the Warrants
described above, have a term of exercise equal to five (5) years following their
issuance, and shall have an exercise price of $0.01 per share. During the nine
months ended December 31, 2009, The Company has issued 400,000 and 276,800
shares of penalty warrants to the debenture holders in Tranche I and Tranche II,
respectively related to this penalty.  The fair value of these
warrants is $124,743 based on a Black Scholes model and The Company recorded
this penalty during the year ended March 31, 2009 as that is the period when the
revenue shortfall occurred.  Tranche III has similar provisions to
receive up to 113,600 similar warrants based on the existing Tranche III
issuance if the Company fails to meet revenue minimums for the year ended March
31, 2010.




The gross
amount of maturities under the Secured Senior Secured Original Issue Discount
Convertible Debentures (not netted to include the debt discount and assuming
that the debenture is not converted into common stock) is $3,038,000 and
$426,000 for the year ended December 31, 2010 and 2011,
respectively.


15




STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 DECEMBER 31, 2009
AND 2008




3.
              NOTES
      PAYABLE




Notes
payable consist of the following:




December 31, 2009(unaudited)
            
            
            March 31, 2009Notes
      Payable - Delis - related party
            
            [a]
            
            $
            200,000
            
            
            $
            200,000Notes
      Payable - various
            
            [b]
            
            
            401,250
            
            
            
            401,250Senior
      Subordinated Notes Payable - Thieme Consulting, Inc. - related
      party
            
            [c]
            
            
            250,000
            
            
            
            250,000Senior
      Subordinated Notes Payable, net of debt discount of $19,333 and $53,856,
      respectively
            
            [d]
            
            
            230,667
            
            
            
            196,144$
            1,081,917
            
            
            $
            1,047,394Less:
      Current Maturities
            
            
            
            
            1,081,917
            
            
            
            601,250Long-Term
      Notes Payable
            
            
            
            $
            -
            
            
            $
            446,144




[a]           On
April 27, 2007, the Company sold a unit consisting of (i) a $200,000 principal
amount secured promissory note bearing interest at 10% per annum and due 180
days from the date of issuance, (ii) 150,000 shares of common stock and (iii)
warrants to purchase 150,000 shares of common stock exercisable at a price of
$1.00 per share for a term of five years. This note matured on October 24, 2007.
Per the default terms of the note, since the Company did not repay the note by
the maturity date, it issued an additional 100,000 shares of common stock and
warrants to purchase 100,000 shares of its common stock at an exercise price of
$1.00 per share with a term of five years as consideration for a new note with a
maturity of October 24, 2008. The Company is negotiating a new note or
conversion to shares of common stock that would supersede such new note
agreement subject approval from the majority of the secured debenture holders.
There can be no assurance that it will be able to obtain a new note or approval
from the majority of the debenture holders.  This note is secured by a
second lien on all of the assets of the Company.




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




At
December 31, 2009, all of these notes are in default, plus interest of $241,376.
Upon default, most notes accrue interest at 15% per annum and provide for the
issuance of monthly warrants, exercisable at the same price as the original
warrants granted with the unit, as a penalty until the repayment of the notes in
full. The Company accrued $58,763 of interest and granted 67,500 penalty
warrants, valued at $10,800 related to such notes during the nine months ended
December 31, 2009. The Company continues to grant 7,500 penalty warrants per
month related to such notes in default until the notes are repaid.




[c] An
existing note in the amount of $250,000 has matured and on March 5, 2008, the
Company entered into a new promissory note with Thieme Consulting, Inc. for
$250,000.  This new note is subordinated to the Debentures described
in Note 2 above.  The new note has a maturity date of June 4, 2010 and
bears interest at 10% per annum.  In consideration for entering into
the new note and subordinating its first security position, the Company repaid
all of the accrued interest due on the October 2001 notes of $243,896. For the
nine months ended December 31, 2009, the Company accrued $18,750 of interest due
on this note.


16




STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 DECEMBER 31, 2009
AND 2008
 3.
                  NOTES PAYABLE
      (CONTINUED)


[d] An
existing note in the amount of $250,000 had matured and on March 5, 2008, the
Company entered into a new promissory note with a secured promissory note holder
for $250,000.  This new note is subordinated to the notes in Note 2
and [c] above. The new note has a maturity date of June 4, 2010 and bears
interest at 10% per annum.  In consideration for entering into the new
note, the Company converted all of the accrued interest due on the August 2004
note of $125,445 into shares of restricted common stock at $1.00 per share,
issued 703,871 shares of restricted common stock in exchange for 1,759,676
warrants and issued a new warrant to purchase 250,000 shares of common stock
exercisable for a five-year term at $1.20 per share, which warrant expires on
March 5, 2013.  For the nine months ended December 31, 2009, the
Company accrued $18,750 of interest due on this note.  On October 20,
2009, the Company issued 133,973 shares of common stock valued at $0.25 per
share in lieu of cash interest payments for $15,959 of accrued interest on the
note through October 20, 2009 as well as to prepay $17,534 for future interest
on the note through maturity.




4.
              COMMITMENTS AND
      CONTINGENCIES




[a]  Legal
Proceedings.  On May 17, 2007, an action was filed in Los
Angeles Superior Court for breach of contract and similar causes of action by
the Epstein Family Trust against the Company in relation to two outstanding
promissory notes issued by the Company totaling $75,000 ($25,000 and $50,000)
plus accrued interest. The Epstein Family Trust is seeking attorney’s fees and
costs in addition to the principal and interest.  These notes were
guaranteed by Mr. Geoffrey Talbot, the Company's CEO, for up to $25,000, and
therefore Mr. Talbot was joined in the legal action as a third-party
defendant.  The case number is BC 371 276. The parties have reached a
settlement agreement where the plaintiff has agreed to convert all principal and
interest into shares of common stock at a price of $1.00 per share effective
February 28, 2008 where the Company will pay legal fees of approximately $12,000
to plaintiff which is still outstanding. This obligation is recorded as accounts
payable at December 31, 2009.




On
December 18, 2008 Ira J. Gaines filed an action for breach of contract and
unjust enrichment against the Company in the Superior Court of the State of
Arizona, Maricopa County, case number CV2008-032043. The action is based on a
promissory note and seeks a principal balance of $145,200 plus additional
accrued interest, costs and attorneys' fees totaling $215,996. The settlement
called for two payments of $5,000 to be applied against accrued interest, first
on dismissal and second on November 1, 2009. The remainder of the debt was to be
paid in 24 equal payments of $12,183 beginning June 1, 2011. The Company is in
default of the payment plan because it has not made its November 1, 2009
payment. As provided for in the settlement agreement, the Company issued a
warrant to purchase 50,000 shares of the Company’s stock at $0.50 per share
valued at $15,000 based on a Black–Scholes model. This matter has been finalized
and the first payment made on May 18, 2009. This obligation is recorded as notes
payable and accrued interest at December 31, 2009.




[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




STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 DECEMBER 31, 2009
AND 2008
 
 4.
                  COMMITMENTS AND
      CONTINGENCIES
(CONTINUED)


[c]  Payroll
Taxes The
Company considers its Chief Executive Officer and its Chief Technology Officer
to be consultants of the Company rather than employees, as a result of the
Company’s non compliance with the terms of their original employment
agreements.  If the Chief Executive Officer and the Chief Technology
Officer were classified as employees, the Company would be required to withhold
and remit payroll taxes to the respective taxing
authorities.




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




The




In
addition, the Company is delinquent in filing certain of its payroll returns
(including the remittance of taxes) totaling approximately $585,000 and related
penalties and interest approximated $257,000 (for other employees), computed
through December 31, 2009.  The
Company plans to file these tax returns before March 31, 2010 and expects to
have these outstanding amounts paid or have an agreement in place to pay these
amounts by June 30, 2010.  However,
should such returns not be filed and/or payments not remitted, the Company will
be subject to additional interest and penalties by the taxing
authorities.




5.
              FAIR VALUE
      MEASUREMENTS




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




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




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




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




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





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


18




STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 DECEMBER 31, 2009
AND 2008
 5.
                  FAIR VALUE
      MEASUREMENTS
(CONTINUED)


Liabilities measured at fair value on a
recurring basis at December 31, 2009 are as follows:





Quoted Prices in
                      Active Markets for
                      Identical Liabilities
                      (Level 1)
                    
                    
                    Significant
                      Other
                      Observable
                      Inputs
                      (Level 2)
                    
                    
                    Significant
                      Unobservable
                      Inputs
                      (Level 3)
                    
                    
                    Balance at
                      December 31, 2009Conversion
      Features
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    1,168,000
                    
                    
                    $
                    1,168,000Warrant
      liability
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    2,593,000
                    
                    
                    $
                    2,593,000$
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    3,761,000
                    
                    
                    $
                    3,761,000




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




The
following table provides a summary of the changes in fair value, including net
transfers in and/or out, of all financial assets measured at fair value on a
recurring basis using significant unobservable inputs during the quarter ended
December 31, 2009




Conversion
            
            
            WarrantFeature
            
            
            Liability
            
            
            TotalBalance
      April, 1, 2009
            
            $
            904,000
            
            
            $
            1,225,000
            
            
            $
            2,129,000Total
      realized/unrealized (gains) or lossesIncluded
      in other income (expense)
            
            
            (2,924,000
            )
            
            
            (2,664,000
            )
            
            
            (5,588,000
            )Included
      in stockholder's equityPurchases,
      issuances or settlements
            
            
            3,188,000
            
            
            
            4,032,000
            
            
            
            7,220,000Transfers
      in and /or out of Level 3Balance
      December 31, 2009
            
            $
            1,168,000
            
            
            $
            2,593,000
            
            
            $
            3,761,000




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




6.
              NET LOSS PER
      SHARE




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





The
Company’s computation of weighted average per share includes 676,800 and 0
shares exercisable at $0.01 per share at December 31, 2009 and 2008,
respectively.


19




STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 DECEMBER 31, 2009
AND 2008


6.
                NET LOSS PER SHARE
      (CONTINUED)




Securities
that could potentially dilute basic earnings per share (“EPS”), that were
outstanding at December 31, 2009 and 2008 were not included in the computation
of diluted EPS because to do so would have been anti-dilutive for that
period.  As of December 31, 2009, The Company has outstanding warrants
that can be exercised into 14,778,698 shares of common stock and outstanding
convertible debentures that can converted into 11,756,000 shares of common
stock.  As of December 31, 2008, the Company had outstanding warrants
to purchase8,828,646
shares of common stock and outstanding convertible debentures that could have
been converted into 2,583,474 shares of common stock.




7.
            CUSTOMER
      CONCENTRATION




The
Company sold a substantial portion of its product and services to three
customers during the nine months ended December 31, 2009 and 2008. Sales to
these customers were approximately 54%, 14% and 12% of total sales, respectively
for the nine months ended December 31, 2009 and 64%, 0% and 0% of total sales,
respectively for the nine months ended December 31, 2008.  Sales to
these customers was approximately 40%, 34% and 0% of total sales, respectively
for the three months ended December 31, 2009 and 47%, 0% and 0% of total sales,
respectively for the three months ended December 31, 2008.




Accounts
receivable balance for these three customers was approximately $112,000, $0 and
$0, respectively at December 31, 2009 and none of the customers had a balance at
December 31, 2008, respectively.




8.
              RESEARCH AND
      DEVELOPMENT




Research
and development expenditures are charged to operations as incurred. Research and
development expenditures were approximately $953,000 and $1,086,000 for the nine
months ended December 31, 2009 and 2008, respectively. Research and development
expenditures were approximately $287,000 and $368,000 for the three months ended
December 31, 2009 and 2008, respectively.




9.
              SUBSEQUENT
      EVENTS




From
January 1, 2010 through February 22, 2010, the Company issued 1,000,000 shares
of common stock related to the conversion of $250,000 of debentures that are due
in March 2010 and issued 144,000 shares of common stock related to the
conversion of $36,000 of debentures that are due in June 2011.




In
January 2010, the Company, the Company issued and sold debentures in a total
principal amount of $66,000, due two years from the date of closing to
accredited investors in a private placement pursuant to a securities purchase
agreement.  The debentures are part of Tranche III financing (See Note
2).  The Company received net proceeds of $55,000.


20




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




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




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


21


Recent Developments for the
Company




Statmon
Technologies Corp. is a wireless and fiber infrastructure network management
solution provider. “Axess”, our proprietary flagship software application, and
our supporting integration products are deployed in telecommunications, media
broadcast, building management and navigation aid transmission networks to
optimize operations and ensure they remain healthy and fully operational 24/7. A
typical infrastructure network comprises a network operations center or master
control plus a network of remote transmission sites that incorporate a wide
range of communication devices, building, facilities management and
environmental control systems.




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




The
optimization of network performance and the preemption of failure eliminates or
minimizes network or individual site malfunction or downtime. Transmission
downtime typically has a mission critical or direct financial impact on the
customers’ top line revenue generation, operating profit and customer
satisfaction.  Investment payback periods relative to the purchase
cost of the Statmon Platform compared to the operators loss of revenue or costs
of being “off the air” typically make the return of investment very
attractive.  Advertisers do not pay for commercials that do not go to
air and cell phone users cannot make calls or download video when a base station
or cell site is off the air. Geographically, the Statmon Platform streamlines
the network engineering and remote site field trips and maintenance process,
reducing operating and outsourcing costs and facilitating the reallocation of
resources.  The Statmon Platform can dramatically facilitate the green
policies being implemented by all levels of corporate and government
entities.   Architecturally designed as a universal “Manager of
Technologies” application or platform, wide scale network operations, regardless
of disparate equipment brands or incompatible technologies deployed at a network
operations center or remote site, can automatically interact with each other
while being managed from a single point of control or “dashboard” style computer
screen.  In real time, a proactive alarm system reports to a network
operations center or designated wireless device for appropriate attention or
action. Adjusting the HVAC, the health of the uninterrupted power supply and
diesel generator and the level of the fuel tank, as well as disaster recovery,
emergency power management, and redundancy are all proactive management
capabilities of the Statmon Platform. The Statmon Platform will keep remote
sites operating even when part or all of the entire network are down,
automatically bringing the remote back on line when network operations are
restored.


22


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




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




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




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




Under our
agreement with FLO TV we are licensing our Axess software and supplying
interface components for the FLO TV San Diego Network Operation Center and the
national rollout of wireless transmission sites.  Under such
agreement, Qualcomm and/or FLO TV periodically issue purchase orders to
us.  From September 7, 2006 to December 31, 2009, Qualcomm and/or FLO
TV has jointly purchased $7,069,969 from us.  The FLO agreement is
dated September 7, 2006 and specifies no minimum or maximum number of purchase
orders and is for an initial term of three years with extensions predicated on
the annual support agreements remaining current.  The number of FLO TV
sites is expected to increase to as many as 1,200 remote as the network expands.
We also provide support and maintenance to FLO TV renewable on an annual
basis.


23


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




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




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




Our
significant clients in the present and in the past include Qualcomm - FLO TV;
General Electric – NBC Universal & Telemundo Television Networks; CBS
Corporation Television and Radio Networks; The Walt Disney Company - ABC
Television and Radio Networks; Turner Broadcast Systems; 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 Sealevel Systems, InfraCell,
Harris Broadcast, Pixelmetrix, Nautel Navigation, BTS Ireland and Sound
Broadcast Services, Ltd.




Off-Balance
Sheet Arrangements




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




For the Three Months Ended
December 31, 2009 and 2008




Results
From Operations




Revenues-
Revenues were $791,646 and $444,933 for the three months ended December 31, 2009
and 2008, respectively. The increase in revenues of approximately $347,000
is primarily due to increased revenues associated with FLO TV due to the timing
of the staggered national rollout of their high-powered wireless transmission
sites.  Revenues to FLO TV were 40% and 47% for the three months ended
December 31, 2009 and 2008, respectively




Cost of
Sales - Cost of sales were $61,863 and $78,122 for the three months ended
December 31, 2009 and 2008, respectively. Overall gross profit percentage
increased to 92% in the three months ended December 31, 2009 compared to 82% in
the comparable prior year period due to an increase, as a percentage of sales,
in software sales and support services during the quarter.


24


Selling, General
and Administrative Expenses - Selling, general and administrative
expenses were $871,963 and $1,046,743 for the three months ended December 31,
2009 and 2008, respectively, a decrease of approximately $175,000.  The
decrease in selling, general and administrative expenses is attributed to a
decrease in payroll costs of approximately $130,000 which is primarily based on
headcount reductions.




Other
Expense - Other Expense was $210,858 and $629,149 for the three months
ended December 31, 2009 and 2008, respectively.  The approximately
$418,000 decrease can be attributed to the adoption of new accounting rules in
the first quarter of 2009 in which we’re required to value the fair value of
warrants and conversion features for certain outstanding equity instruments and
recognize the change in fair value.




We
recorded a gain on a change in the fair value of derivatives of
$281,000.  This gain is primarily due to the fact that our stock price
decreased during the three months ended December 31, 2009 which made our
outstanding warrants and conversion features less valuable.




Net Loss -
As a result of the above, for the three months ended December 31, 2009, the
Company recorded a net loss of $353,038 compared to a net loss of $1,309,081 for
the same period the previous year.




For the Nine Months Ended
December 31, 2009 and 2008




Results
From Operations




Revenues-
Revenues were $1,963,370 and $2,496,291 for the nine months ended December 31,
2009 and 2008, respectively. The decrease in revenues of approximately
$533,000 is primarily due to decreased revenues associated with FLO TV due to
the timing of the staggered national rollout of their high-powered wireless
transmission sites and the delay of the analog to HD TV
switchover.  Revenues to FLO TV were 54% and 64% for the nine months
ended December 31, 2009 and 2008, respectively




Cost of
Sales - Cost of sales were $184,054 and $353,298 for the nine months
ended December 31, 2009 and 2008, respectively. Overall gross profit
percentage increased to 91% in the nine months ended December 31, 2009 compared
to 86% in the comparable prior year period due to an increase, as a percentage
of sales, in software sales and support services during the period.




Selling, General
and Administrative Expenses - Selling, general and administrative
expenses were $2,983,678 and $3,390,505 for the nine months ended December 31,
2009 and 2008, respectively, a decrease of approximately $407,000.  The
decrease in selling, general and administrative expenses is primarily attributed
to an approximately $175,000 decrease in marketing expenses due to having a
smaller presence at the National Association of Broadcasters (“NAB”) trade show
in 2009 and an approximately $270,000 decrease in payroll costs based on
headcount reductions.


25




Other
Expense - Other Expense was $2,660,729 and $1,534,609 for the nine months
ended December 31, 2009 and 2008, respectively.  The approximately
$1,126,000 increase can be attributed to $5,936,000 in expense due to the
issuance of additional warrants and a reduction in the conversion price of the
notes held by our Tranche I and II debenture holders.  Based on the
terms of the debentures, the conversion price of the debentures and the amount
and exercise price of their warrants would be reduced if the Company issued any
new stock or debt at terms more beneficial than their terms.  When we
issued our Tranche III debentures in the first quarter of 2010 with a lower
conversion price and warrant exercise price, we had to reprice the Tranche I and
II instruments.  This expense was mitigated by adoption of new
accounting rules in the first quarter of 2009 in which we’re required to value
the fair value of warrants and conversion features for certain outstanding
equity instruments and record the change in fair value in Other
Expense.  We recorded a gain on a change in the fair value of
derivatives of $5,588,000.  This gain is primarily due to the fact
that our stock price decreased during the nine months ended December 31, 2009
which made our outstanding warrants and conversion features less
valuable.




Net Loss -
As a result of the above, for the nine months ended December 31, 2009, the
Company recorded a net loss of $3,865,091 compared to a net loss of $2,782,121
for the same period the previous year.




Liquidity
and Capital Resources




Cash
balances totaled $1,901 as of December 31, 2009 compared to $1,345 at December
31, 2008.





Net cash
used in operating activities was $331,699 and $730,253 for the nine months ended
December 31, 2009 and 2008, respectively.  The use of cash in 2009 and
2008 is the primarily the result of funding the net operating loss of $3,865,091
(which included non-cash expenses of $2,561,586) and $2,782,121 (which included
non-cash expenses of $1,369,438) for the nine  months ended December
31, 2009 and 2008, respectively.





Net cash
used in investing activities was $0 and $12,702 and for the nine months ended
December 31, 2009 and 2008, respectively.  The primary use of cash in
2008 related to computer and equipment purchases.





Net cash
provided by financing activities was $332,600 and $671,224 for the nine months
ended December 31, 2009 and 2008, respectively.  Net cash provided by
financing activities in fiscal 2009 was the result of net proceeds of $355,000
related to the issuance of $426,000 principal amount of Debentures related to
the Tranche III of the Company’s private placement of such
Debentures.  Net cash provided by financing activities in the nine
months ended December 31, 2008 was the result of proceeds from issuance of
$865,000 from the issuance of $1,038,000 principal amount of Debentures in
Tranche II of the Company’s private placement of such
Debentures.  Financing costs of $24,000 and $143,026 were incurred
related to the raising of capital for the nine months ended December 31, 2009
and 2008, respectively.





As of
December 31, 2009, the Company had a working capital deficiency of approximately
$10.8 Million including short-term notes payable, convertible notes payable and
accrued interest of approximately $3,474,000, net of applicable debt discount of
approximately $428,000.  We also have long-term convertible debentures
of approximately $135,000, net of an applicable debt discount of approximately
$290,000.  In
addition, the Company is delinquent in filing certain of its payroll returns
(including the remittance of taxes) totaling approximately $585,000 and related
penalties and interest of approximately $257,000 and also has accrued $942,000
as additional compensation (including penalties and interest) on behalf of the
Chief Executive Officer and the Chief Technology officer related to their
classification as consultants of the Company.





In order
to continue its operations through and beyond December 2010, the Company will
need to increase revenue, 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 or be
able to file payroll tax returns and pay amounts due. If it is not
successful, the Company would seek to negotiate other terms for the issuance of
debt, pursue bridge financing, negotiate with suppliers for a reduction of debt
through issuance of stock, and/or seek to raise equity through the sale of its
common stock. At this time management cannot assess the likelihood of achieving
these objectives. If the Company is unable to achieve these objectives, the
Company may be forced to cease its business operations, sell its assets and/or
seek further protection under applicable bankruptcy laws.


26


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





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




Going
Concern




The
Company has incurred net losses of approximately $27.3 million since inception.
Additionally, the Company had a net working capital deficiency of approximately
$10.8 million at December 31, 2009. These conditions raise substantial doubt
about the Company’s ability to continue as a going concern. The accompanying
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. Primarily as a result of its recurring losses and
its lack of liquidity, the Company has received a report from its independent
registered public accountants, included with its annual report on Form 10-K for
the year ended March 31, 2009, that included an explanatory paragraph describing
the conditions that raise substantial doubt about the Company’s ability to
continue as a going concern.  The accompanying financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.




Inflation
and Seasonality




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


27


Item 3 – Quantitative and
Qualitative Disclosures About Market Risk.




(Not
Applicable)




Item 4T.  Controls and
Procedures.




Evaluation and Disclosure
Controls and Procedures




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




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




The
material weakness identified by management relates to the lack of sufficient
accounting resources.  Historically, We have only had one full-time
employee in our accounting department (Chief Operating Officer) to perform
routine record keeping and his resignation in January 2009 has caused many key
controls to be performed by, or at the direction of our CEO and
CFO.  Consequently, our financial reporting function is
limited.  In order to correct this material weakness, the Company has
hired outside consultants to assist with financial statement preparation and
reporting needs of the Company and intends to assist internal accounting
personnel with consultants as needed to ensure that management will have
adequate resources in order to attain complete reporting of financial
information in a timely manner and provide a further level of segregation of
financial responsibilities as the Company continues to expand.




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




Changes in Internal Controls
Over Financial Reporting




There
were no changes to the internal controls during the quarter ended December 31,
2009 that have materially affected or that are reasonably likely to materially
affect the internal controls over financial reporting.


28


PART II - OTHER INFORMATION




Item 1.
                Legal
      Proceedings




On
May 17, 2007, an action was filed in Los Angeles Superior Court for breach of
contract and similar causes of action by the Epstein Family Trust against the
Company in relation to two outstanding promissory notes issued by the Company
totaling $75,000 ($25,000 and $50,000) plus accrued interest. The Epstein Family
Trust is seeking attorney’s fees and costs in addition to the principal and
interest.  These notes were guaranteed by Mr. Geoffrey Talbot, the
Company's CEO, for up to $25,000, and therefore Mr. Talbot was joined in the
legal action as a third-party defendant.  The case number is BC 371
276. The parties have reached a settlement agreement where the plaintiff has
agreed to convert all principal and interest into shares of common stock at a
price of $1.00 per share effective February 28, 2008 where the Company will pay
legal fees of approximately $12,000 to plaintiff which is still
outstanding.  . This obligation is recorded as accounts payable at
December 31, 2009




On
December 18, 2008 Ira J. Gaines filed an action for breach of contract and
unjust enrichment against the Company in the Superior Court of the State of
Arizona, Maricopa County, case number CV2008-032043. The action is based on a
promissory note and seeks a principal balance of $145,200 plus additional
accrued interest, costs and attorneys' fees totaling $215,996. The settlement
called for two payments of $5,000 to be applied against accrued interest, first
on dismissal and second on November 1, 2009. The remainder of the debt was to be
paid in 24 equal payments of $12,183 beginning June 1, 2011. The Company is in
default of the payment plan because it has not made its November 1, 2009
payment. As provided for in the settlement agreement, the Company issued a
warrant to purchase 50,000 shares of the Company’s stock at $0.50 per share
valued at $15,000 based on a Black–Scholes model. This matter has been finalized
and the first payment made on May 18, 2009. This obligation is recorded as notes
payable and accrued interest at December 31, 2009.




Item 1A. Risk Factors




Not
Applicable




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




Between
April 1 and December 31, 2009, the Company sold Debentures to investors as
follows:





•
            The
      Company issued an additional $426,000 principal amount of the Debentures
      and received net proceeds of $355,000 related to Tranche III of the
      private placement of such Debentures. In connection with the Debentures,
      the Company issued five-year warrants to purchase 1,704,000 shares of
      common stock at $0.50 per share. The Debentures are convertible into
      common stock at $0.25 per share.




Item 3.
              Defaults
      Upon Senior Securities.





At
December 31, 2009, $601,250 principal amount of short-term promissory notes are
in default and $241,376 of interest had accrued on all outstanding short-term
promissory notes as of such date.


29




Item 4.
              Submission
      of Matters to a Vote of Security
Holders.
  Not
Applicable
  Item 5.
                Other
      Information.
  Not
Applicable
  30
 Item 6.
              Exhibits





(a)
            Exhibits


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


31




SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




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


32


EXHIBIT INDEX





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


33