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 June 30, 2009




or




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




For the
transition period from _____________ to ________________




Commission
File Number:  000-09751




STATMON
TECHNOLOGIES CORP.




(Exact
name of registrant as specified in its charter)




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





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


(Address
of principal executive offices) (Zip Code)





(847)
604-5366


(Registrant’s
telephone number, including area code)





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




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


Yes  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 July 31,
  2009Common
      Stock, $.01 par value
                    
                    23,938,651









FORM
10-Q


STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES


June
30, 2009




TABLE
OF CONTENTS




Page(s)PART
      1 – FINANCIAL INFORMATIONItem
      1.  Financial Statements.Condensed
      Consolidated Balance Sheets at June 30, 2009 (unaudited) and March 31,
      2009
                    3Condensed
      Consolidated Statements of Operations for the Three Months Ended June 30,
      2009 and 2008 (unaudited)
                    4Condensed
      Consolidated Statements of Cash Flows for the Three Months Ended June 30,
      2009 and 2008 (unaudited)
                    5Notes
      to Condensed Consolidated Financial Statements (unaudited)
                    7Item
      2.  Management’s Discussion and Analysis of Financial Condition
      and Results of Operations.
                    21Item
      3.  Quantitative and Qualitative Disclosures About Market
      Risk.
                    27Item
      4T.  Controls and Procedures.
                    27PART
      II – OTHER INFORMATIONItem
      1.  Legal Proceedings.
                    28Item
      1A. Risk Factors
                    28Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds.
                    28Item
      3.  Defaults Upon Senior Securities.
                    28Item
      4T.  Submission of Matters to a Vote of Security
      Holders.
                    29Item
      5.  Other Information.
                    29Item
      6.  Exhibits.
                    30SIGNATURES
                    31Exhibits
                    32Certifications




2




Item
1.  Financial Statements.




STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS




June 30, 2009
                                                  
                                                  
                                                  March 31,(unaudited)
                                                  
                                                  
                                                  2009ASSETSCurrent
      Assets:Cash
                                                  
                                                  $
                                                  1,201
                                                  
                                                  
                                                  $
                                                  1,000Accounts
      receivable, net
                                                  
                                                  
                                                  130,534
                                                  
                                                  
                                                  
                                                  171,924Inventories
                                                  
                                                  
                                                  98,857
                                                  
                                                  
                                                  
                                                  140,384Prepaid
      expense and other current assets
                                                  
                                                  
                                                  17,040
                                                  
                                                  
                                                  
                                                  17,214Total
      Current Assets
                                                  
                                                  
                                                  247,632
                                                  
                                                  
                                                  
                                                  330,522Property
      and equipment, net
                                                  
                                                  
                                                  179,436
                                                  
                                                  
                                                  
                                                  194,429Deferred
      financing costs, net
                                                  
                                                  
                                                  136,859
                                                  
                                                  
                                                  
                                                  206,002Security
      deposits and other assets
                                                  
                                                  
                                                  50,959
                                                  
                                                  
                                                  
                                                  50,959Total
      Assets
                                                  
                                                  $
                                                  614,886
                                                  
                                                  
                                                  $
                                                  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 $42,432 and $0,
      respectively
                                                  
                                                  $
                                                  1,058,818
                                                  
                                                  
                                                  $
                                                  601,250Convertible
      notes payable, net of debt discount of $1,198,640 and $696,575,
      respectively
                                                  
                                                  
                                                  949,360
                                                  
                                                  
                                                  
                                                  803,425Accounts
      payable
                                                  
                                                  
                                                  1,145,672
                                                  
                                                  
                                                  
                                                  1,120,820Accrued
      expenses
                                                  
                                                  
                                                  246,342
                                                  
                                                  
                                                  
                                                  263,426Accrued
      compensation
                                                  
                                                  
                                                  1,435,120
                                                  
                                                  
                                                  
                                                  1,209,735Interest
      payable (including $53,230 and $39,480 due to related party,
      respectively)
                                                  
                                                  
                                                  264,890
                                                  
                                                  
                                                  
                                                  235,165Deferred
      revenue
                                                  
                                                  
                                                  337,923
                                                  
                                                  
                                                  
                                                  387,281Total
      Current Liabilities
                                                  
                                                  
                                                  5,438,125
                                                  
                                                  
                                                  
                                                  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 $168,225 and $643,600,
      respectively
                                                  
                                                  
                                                  578,682
                                                  
                                                  
                                                  
                                                  394,401Derivative
      Liability
                                                  
                                                  
                                                  4,899,000
                                                  
                                                  
                                                  
                                                  -Total
      Liabilities
                                                  
                                                  
                                                  10,915,807
                                                  
                                                  
                                                  
                                                  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, 23,887,474 and
      23,807,474 issued and outstanding, respectively
                                                  
                                                  
                                                  238,874
                                                  
                                                  
                                                  
                                                  238,074Additional
      paid-in capital
                                                  
                                                  
                                                  16,480,053
                                                  
                                                  
                                                  
                                                  19,026,089Accumulated
      deficit
                                                  
                                                  
                                                  (27,019,848
                                                  )
                                                  
                                                  
                                                  (23,943,898
                                                  )Total
      Stockholders' Deficiency
                                                  
                                                  
                                                  (10,300,921
                                                  )
                                                  
                                                  
                                                  (4,679,735
                                                  )Total
      Liabilities and Stockholders' Deficiency
                                                  
                                                  $
                                                  614,886
                                                  
                                                  
                                                  $
                                                  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 June
      30,2009
                                  
                                  
                                  2008Revenue
                                  
                                  $
                                  530,692
                                  
                                  
                                  $
                                  935,475Cost
      of Sales
                                  
                                  
                                  61,804
                                  
                                  
                                  
                                  120,998Gross
      Profit
                                  
                                  
                                  468,888
                                  
                                  
                                  
                                  814,477Selling,
      General and Administrative Expenses
                                  
                                  
                                  1,042,026
                                  
                                  
                                  
                                  1,191,634Operating
      Loss
                                  
                                  
                                  (573,138
                                  )
                                  
                                  
                                  (377,157
                                  )Other
      (Income)Expense:Interest
      (including $13,750 and $50,728 to related parties for 2009 and 2008
      periods, respectively)
                                  
                                  
                                  52,814
                                  
                                  
                                  
                                  56,559Common
      stock and warrants issued in association with debt (including $0 and
      $483,007 to related parties for 2009 and 2008 periods,
      respectively)
                                  
                                  
                                  6,746,475
                                  
                                  
                                  
                                  14,850Amortization
      of debt discount
                                  
                                  
                                  361,386
                                  
                                  
                                  
                                  226,480Amortization
      of deferred financing costs
                                  
                                  
                                  93,143
                                  
                                  
                                  
                                  40,890Gain
      on change in fair value of derivatives
                                  
                                  
                                  (4,260,000
                                  )
                                  
                                  
                                  -Total
      Other (Income) Expense
                                  
                                  
                                  2,993,818
                                  
                                  
                                  
                                  338,779NET
      LOSS
                                  
                                  $
                                  (3,566,956
                                  )
                                  
                                  $
                                  (715,936
                                  )NET
      LOSS PER SHARE - Basic and Diluted
                                  
                                  $
                                  (0.15
                                  )
                                  
                                  $
                                  (0.03
                                  )Weighted
      Average Number of Common Shares Outstanding -Basic
      and Diluted
                                  
                                  
                                  23,813,628
                                  
                                  
                                  
                                  23,618,775




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




4




STATMON
TECHNOLOGIES CORP. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)




For the three Months Ended June 30,2009
                                                              
                                                              
                                                              2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                                                              
                                                              $
                                                              (3,566,956
                                                              )
                                                              
                                                              $
                                                              (715,936
                                                              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                                                              
                                                              
                                                              14,993
                                                              
                                                              
                                                              
                                                              14,508Common
      stock and warrants issued in association with debt
                                                              
                                                              
                                                              6,746,475
                                                              
                                                              
                                                              
                                                              32,498Provision
      for doubtful accounts
                                                              
                                                              
                                                              10,000
                                                              
                                                              
                                                              
                                                              -Gain
      on change in fair value of derivatives
                                                              
                                                              
                                                              (4,260,000
                                                              )
                                                              
                                                              
                                                              -Amortization
      of debt discount
                                                              
                                                              
                                                              361,386
                                                              
                                                              
                                                              
                                                              226,480Amortization
      of deferred financing costs
                                                              
                                                              
                                                              93,143
                                                              
                                                              
                                                              
                                                              40,889Deferred
      rent expense
                                                              
                                                              
                                                              (17,086
                                                              )
                                                              
                                                              
                                                              (13,755
                                                              )Non-cash
      stock based compensation charge
                                                              
                                                              
                                                              34,000
                                                              
                                                              
                                                              
                                                              34,000Changes
      in operating assets and liabilities:Accounts
      receivable
                                                              
                                                              
                                                              31,390
                                                              
                                                              
                                                              
                                                              (87,309
                                                              )Inventories
                                                              
                                                              
                                                              41,527
                                                              
                                                              
                                                              
                                                              9,507Prepaid
      expense and other current assets
                                                              
                                                              
                                                              174
                                                              
                                                              
                                                              
                                                              133,764Security
      deposits and other assets
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              4,150Accounts
      payable
                                                              
                                                              
                                                              25,852
                                                              
                                                              
                                                              
                                                              (1,942
                                                              )Accrued
      expenses
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              (12,368
                                                              )Accrued
      compensation
                                                              
                                                              
                                                              225,385
                                                              
                                                              
                                                              
                                                              38,636Interest
      payable
                                                              
                                                              
                                                              28,726
                                                              
                                                              
                                                              
                                                              13,146Deferred
      revenue
                                                              
                                                              
                                                              (49,358
                                                              )
                                                              
                                                              
                                                              (20,682
                                                              )NET
      CASH USED IN OPERATING ACTIVITIES
                                                              
                                                              
                                                              (280,349
                                                              )
                                                              
                                                              
                                                              (304,414
                                                              )CASH
      FLOWS USED IN INVESTING ACTIVITIES:Purchase
      of property and equipment
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              (9,289
                                                              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from convertible notes payable
                                                              
                                                              
                                                              303,750
                                                              
                                                              
                                                              
                                                              540,000Proceeds
      from exercise of warrants
                                                              
                                                              
                                                              800Deferred
      financing costs
                                                              
                                                              
                                                              (24,000
                                                              )
                                                              
                                                              
                                                              (123,200
                                                              )NET
      CASH PROVIDED BY FINANCING ACTIVITIES
                                                              
                                                              
                                                              280,550
                                                              
                                                              
                                                              
                                                              416,800NET
      INCREASE IN CASH
                                                              
                                                              
                                                              201
                                                              
                                                              
                                                              
                                                              103,097CASH,
      BEGINNING OF PERIOD
                                                              
                                                              
                                                              1,000
                                                              
                                                              
                                                              
                                                              73,076CASH,
      END OF PERIOD
                                                              
                                                              $
                                                              1,201
                                                              
                                                              
                                                              $
                                                              176,173SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for:Interest
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              $
                                                              20,284NON-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 warrants related to debt acquisition
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              $
                                                              259,966Issuance
      of common stock to financial advisors
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              $
                                                              157,500Issuance
      of warrants to placement agents
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              $
                                                              31,500Beneficial
      conversion related to convertible debentures
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              $
                                                              280,034





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 accountingprinciple
      - reclassification of equity-linkedfinancial
      instruments to derivative liabilities
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (2,600,261
                                    )
                                    
                                    
                                    491,006
                                    
                                    
                                    
                                    (2,109,255
                                    )Warrant
      Exercise
                                    
                                    
                                    80,000
                                    
                                    
                                    
                                    800
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    800Stock-based
      compensation
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    34,000
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    34,000Issuance
      of debt related penalty warrants
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    4,725
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    4,725Issuance
      of warrants related to a settlement agreement
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    15,500
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    15,500Net
      Loss
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (3,566,956
                                    )
                                    
                                    
                                    (3,566,956
                                    )Balance,
      June 30, 2009
                                    
                                    
                                    23,887,474
                                    
                                    
                                    
                                    238,874
                                    
                                    
                                    
                                    16,480,053
                                    
                                    
                                    
                                    (27,019,848
                                    )
                                    
                                    
                                    (10,300,921
                                    )




See
accompanying notes to condensed consolidated financial statements
(unaudited)




6




NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)




1.
            BUSINESS DESCRIPTION,
      GOING CONCERN AND MANAGEMENT
PLANS




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 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
network operating center. A tiered severity level alarm system at every site,
down to the device level, reports back to the network operating center
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” application or platform, wide
scale network operations, regardless of disparate equipment brands or
incompatible technologies deployed at a network operating 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 operating 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.




The
marketing and distribution of our products are primarily facilitated by
value-added resellers, sales channel strategic partners and original equipment
manufacturer 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.




Going
Concern




The
accompanying unaudited condensed interim consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
Unites States of America ("US GAAP") for interim financial statement information
and assume that the Company will continue as a going concern. The Company has
incurred net losses of approximately $27.0 million since inception.
Additionally, the Company had a net working capital deficiency of approximately
$5.2 million at June 30, 2009. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. The accompanying
condensed consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.




As more
fully described in the Notes below, the Company funded its operations during the
three months ended June 30, 2009 by raising an additional $303,750 net proceeds
through the sale of Original Issue Discount Senior Secured Convertible Debenture
and related warrants with a lower conversion price, but substantially similar
terms and conditions as the initial tranche of OID notes issued in March 2008
with greater warrant coverage and a lower conversion rate.




7




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




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 quarter of Fiscal 2010, the Company has closed $303,750 of net
proceeds related to the third tranche of the OID note financing, the net
proceeds will be used to reduce certain obligations and fund the expansion of
the Company into several new vertical markets. There can be no guarantee that
the Company will be successful in obtaining the aforementioned operating
results, financing or refinancing, converting and/or extending its notes
payable. If not successful, the Company would seek to negotiate other terms for
the issuance of debt, and/or pursue bridge financing, negotiate with suppliers
for a reduction of debt through issuance of stock, and seek to raise equity
through the sale of its common stock. At this time, management cannot assess the
likelihood of achieving these objectives. If the Company is unable to achieve
these objectives, it may be forced to cease business operations, sell assets
and/or seek protection under applicable bankruptcy laws.




2.
            CERTAIN SIGNIFICANT
      ACCOUNTING POLICIES




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


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.




These
financial statements should be read in conjunction with the audited consolidated
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.





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




8




2.
              CERTAIN SIGNIFICANT
      ACCOUNTING POLICIES,
continued




c.
            Allowance for Doubtful
      Accounts - The Company recognizes an allowance for doubtful
      accounts to ensure accounts receivable are not overstated due to
      uncollectibility. Reserves are maintained for all customers based on a
      variety of factors, including the length of time the receivables are past
      due, significant one-time events and historical experience. An additional
      reserve for individual accounts is recorded when the Company becomes aware
      of a customer’s inability to meet its financial obligation, such as in the
      case of bankruptcy filings or deterioration in the customer’s operating
      results or financial position. If circumstances related to customers
      change, estimates of the recoverability of receivables would be further
      adjusted. As of June 30, 2009 and March 31, 2009,  the allowance
      for doubtful accounts was $41,000 and $31,000,
    respectively.





d.
            Property and
      Equipment-
      Property and equipment are stated at cost. The cost of property and
      equipment is depreciated on a straight-line basis over the estimated
      useful lives of the related assets.





Leasehold
improvements are amortized over the lesser of the term of the related lease or
the estimated useful lives of the assets. Maintenance and repairs are charged to
operations when incurred.





Betterments
and renewals are capitalized. When property and equipment are sold or otherwise
disposed of, the asset account and related accumulated depreciation account are
relieved, and any gain or loss is included in operations.





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





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





e.
            Research and
      Development- Research and
      development expenditures are charged to operations as
      incurred.  Research and development expenditures were
      approximately $355,000 and $357,000 for the quarters ended June 30, 2009
      and 2008, respectively.





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





g.
            Net Loss Per
      Share- Basic
      and diluted net loss per share information is presented under the
      requirements of SFAS No. 128,Earnings per Share
      (SFAS 128). Basic net loss per share is computed by dividing the net loss
      applicable to common shareholders 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.




9


2.
                CERTAIN SIGNIFICANT
      ACCOUNTING POLICIES,
continued


For the
quarter ended June 30, 2009 and 2008, diluted net loss per share was the same as
basic net loss per share since the inclusion of the convertible notes and
warrants would have been anti-dilutive.  Securities that could
potentially dilute basic earnings per share (EPS), that were outstanding at June
30, 2009 and 2008, that were not included in the computation of diluted EPS
because to do so would have been anti-dilutive for the periods presented,
consist of the following:





June
      30,2009
                                
                                
                                2008Warrants
      to purchase common stock
                                
                                
                                15,305,198
                                
                                
                                
                                5,813,794Convertible
      notes payable
                                
                                
                                11,610,000
                                
                                
                                
                                2,174,874Total
                                
                                
                                26,915,198
                                
                                
                                
                                7,988,668


h.
              Fair Value of
      Financial Instruments- The carrying amounts reported in the
      condensed consolidated balance sheet for cash, receivables, accounts
      payable and accrued expenses approximate fair value based on the
      short-term maturities of these instruments.  The carrying
      amounts of the Company’s notes payable and convertible notes approximate
      fair value based on the prevailing market interest rates for similar
      instruments.





The
warrant and derivative liabilities are calculated using the Black Scholes
pricing model using the Company’s closing stock price on the date of the
valuation as the Company stock price, the contractual exercise price is used as
the exercise price, the Company’s expected volatility and the risk free interest
rate matched to the expected life of the instrument. The Company does not
anticipate paying dividends during the term of the warrants and time until
expiration of the conversion feature. The Company uses historical data to
estimate volatility assumptions used in the valuation model. The expected term
of instruments granted is derived from an analysis that represents the period of
time that instruments granted are expected to be outstanding. The risk-free rate
for periods within the contractual life of the warrant is based on the U.S.
Treasury yield curve in effect at the time of grant.





i.
                Impairment of
      Long-Lived Assets- The Company
      reviews long-lived assets and certain identifiable assets on a quarterly
      basis for impairment whenever circumstances and situations change such
      that there is an indication that the carrying amounts may not be
      recovered. As of June 30, 2009 and March 31, 2009, the Company does not
      believe that any impairment has
occurred.





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




10





2.
                CERTAIN SIGNIFICANT
      ACCOUNTING POLICIES,
continued


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





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





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





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




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




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




During
the three months ended June 30, 2009, the Company granted no warrants or options
to employees nor consultants.  During the three months ended June 30,
2008, the Company granted 125,000 warrants to employees and consultants for
services provided. The Company incurred a charge for stock based compensation of
$34,000 for the quarter ended June 30, 2009 and 2008.




A summary
of the status of the Company’s nonvested warrants as of June 30, 2009, and
changes during the three month period then ended is presented
below:




11


2.
                CERTAIN SIGNIFICANT
      ACCOUNTING POLICIES,
continued


WeightedAverageGrant DateNonvested
      Warrants
                                  
                                  Warrants
                                  
                                  
                                  Fair ValueNonvested
      at April 1, 2009
                                  
                                  
                                  50,000
                                  
                                  
                                  $
                                  0.68Granted
                                  
                                  
                                  —
                                  
                                  
                                  $
                                  —Vested
                                  
                                  
                                  (50,000
                                  )
                                  
                                  $
                                  0.68Expired
                                  
                                  
                                  —
                                  
                                  
                                  $
                                  —Nonvested
      at June 30, 2009
                                  
                                  
                                  —
                                  
                                  
                                  $
                                  —





l.
            Change
      in Accounting Principle– On April 1, 2009, the
      Company adopted Emerging Issues Task Force Issue No. 07-05 Determining Whether an
      Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock(EITF 07-05).  EITF 07-05 provides that an entity should
      use a two-step approach to evaluate whether an equity-linked financial
      instrument (or embedded feature) is indexed to its own stock, including
      evaluating the instrument’s contingent exercise and settlement
      provisions.  The adoption of EITF 07-05 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 EITF.  The fair
      value of the derivative liability as of April 1, 2009 was approximately
      2,109,000 and was recorded as a cumulative adjustment to our Additional
      Paid In Capital and Accumulated Deficit.  See Note 5 for
      additional explanation.




m.
              New
      Accounting Pronouncements–
      In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS
      165”), which establishes general standards of accounting  for
      and disclosure of events that occur after the balance sheet date but
      before financial statements are issued or are available to be
      issued. SFAS 165 is effective for both interim and annual
      financial periods ending after June 15, 2009. The
      adoption of SFAS 165 did not have a material impact on the Company’s
      consolidated Financial condition or results of
      operations.




In June
2009, the FASB issued SFAS No. 166, (“SFAS 166”), “Accounting for Transfers of
Financial Assets — an amendment of FASB Statement No. 140”. SFAS 166 requires
additional disclosures concerning a transferor’s continuing involvement with
transferred financial assets. SFAS 166 eliminates the concept of a “qualifying
special-purpose entity” and changes the requirements for derecognizing financial
assets. SFAS 166 is effective for fiscal years beginning after November 15,
2009. The Company is currently evaluating the impact that the adoption of SFAS
No. 166 will have on its consolidated financial statements.




In
June 2009, the FASB issued SFAS No. 167, “Amendments to FASB
Interpretation (“FIN”) 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. 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. SFAS
No. 167 will require a reporting entity to provide additional disclosures
about its involvement with variable interest entities and any significant
changes in risk exposure due to that involvement. A reporting entity will be
required to disclose how its involvement with a variable interest entity affects
the reporting entity’s financial statements. SFAS No. 167 is effective for
fiscal years beginning after November 15, 2009, and interim periods within
those fiscal years. Management is currently evaluating the requirements of SFAS
No. 167 and has not yet determined the impact on the Company’s consolidated
financial statements.




12




2.
                  CERTAIN SIGNIFICANT
      ACCOUNTING POLICIES,
continued


In July
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles” (“SFAS 168”).
SFAS 168 will become the single source of authoritative nongovernmental U.S.
generally accepted accounting principles (“GAAP”), superseding existing FASB,
American Institute of Certified Public Accountants (“AICPA”), Emerging Issues
Task Force (“EITF”), and related accounting literature. SFAS 168 reorganizes the
thousands of GAAP pronouncements into roughly 90 accounting topics and displays
them using a consistent structure. Also included is relevant Securities and
Exchange Commission guidance organized using the same topical structure in
separate sections. SFAS 168 will be effective for financial statements issued
for reporting periods that end after September 15, 2009. The adoption of SFAS
168 is not expected to have a material impact on the Company’s consolidated
financial statements.




n.
            Subsequent
      Events-Management
      has evaluated subsequent events or transactions occurring through August
      18, 2009, the date the financial statements were issued. The Company is
      not aware of any subsequent events which would require recognition or
      disclosure in the condensed consolidated financial
      statements.




3.
            PROPERTY AND
      EQUIPMENT




Property
and equipment consist of the following:




As ofJune
      30, 2009(unaudited)
                    
                    
                    March 31, 2009Computer
      Equipment
                    
                    $
                    80,911
                    
                    
                    $
                    80,911Software
                    
                    
                    14,915
                    
                    
                    
                    14,915Office
      Equipment
                    
                    
                    39,210
                    
                    
                    
                    39,210Leasehold
      Improvements
                    
                    
                    209,910
                    
                    
                    
                    209,910344,946
                    
                    
                    
                    344,946Less:
      accumulated depreciation
                    
                    
                    165,510
                    
                    
                    
                    150,517$
                    179,436
                    
                    
                    $
                    194,429




Depreciation
of property and equipment was $14,993 and $14,508 for the three months ended
June 30, 2009 and 2008, respectively.




4.
            DEFERRED FINANCING
      COSTS




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




13




4.
              DEFERRED FINANCING
      COSTS, continued


As ofJune
      30, 2009(unaudited)
                                  
                                  
                                  March 31, 2009Deferred
      financing costs
                                  
                                  $
                                  688,231
                                  
                                  
                                  $
                                  664,231Less:
      accumlated amortization
                                  
                                  
                                  (551,372
                                  )
                                  
                                  
                                  (458,229
                                  )Deferred
      financing costs, net
                                  
                                  $
                                  136,859
                                  
                                  
                                  $
                                  206,002




Deferred
financing costs include commissions paid and the value of equity issued to
placement agents, the value of common stock and warrants issued to extend notes
payable, legal fees associated with new debt and the value of equity issued and
fees paid to consultants for financing related services. These costs are
capitalized as deferred financing costs and amortized over the term of the
related debt. If any or all of the related debt is converted or repaid prior to
its maturity date, a pro-rata share of the related deferred financing costs are
written off and recorded as amortization expense in the period of the conversion
or repayment in the consolidated statement of operations. During the three
months ended June 30, 2009, the Company capitalized $24,000 of deferred
financing costs related to the Tranche III issuance (see Note 5) During the
three months ended June 30, 2008, the Company capitalized $312,200 of deferred
financing costs related to the Tranche I issuance of Original Issue Discount
Senior Secured Convertible Debentures (see Note 5). For the three months ended
June 30, 2009 and 2008, amortization of deferred financing costs was $93,143 and
$40,890, respectively.




5.
            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 month 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 was recorded as interest
expense during the three months ended June 30, 2009.




14




5.
              SENIOR SECURED
      ORIGINAL ISSUE DEBT DISCOUNT,
  continued


During
the three months ended June 30, 2009, the Company issued and sold a portion of
the third tranche (“Tranche III”)of debentures in total principal amount of
$364,500, 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 1,458,000 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.




In
connection with the private placement, the Company issued to the investors in
both Tranche I and Tranche II an additional investment right (the “AIRs”).
Pursuant to the AIRs, each investor will have the right to purchase, for 270
days from the issuance of the debenture, up to an additional principal amount of
Debentures equal to such investor's principal amount of the Debentures and
Warrants pursuant to the Purchase Agreement, along with additional Warrants to
purchase up to a number of shares of the Company’s common stock equal to 100% of
the shares issuable upon conversion of the additional Debentures so purchased by
the investor. The AIRs from both Tranche one and two have expired
unexercised.




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 the 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 three months ended June 30,
2009.




The
Company adopted the provisions of EITF 07-05 Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity’s Own Stock(EITF 07-05) on
April 1, 2009 and the warrants and convertible features on the debentures, which
were previously classified as equity, are now classified as a derivative
liability and is recorded at fair value. We used a Black-Scholes pricing
model to determine the value of the warrants and conversion features. The model
uses sourced inputs such as interest rates, stock price and volatility, the
selection of which requires management judgment. SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities(SFAS 133) 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 quarter ended June 30, 2009, the Company amortized $314,885
of debt discount related to Tranches I and II.




The gross
proceeds of $364,500 related to Tranche III were recorded net of a discount of
$364,500. The debt discount consisted of $60,750 related to the original issue
discount, $582,000 related to the fair value of the warrants and $512,000
related to the fair value of the conversion feature of the note mitigated by
$790,250 of deemed interest that was expensed immediately. During the quarter
ended June 30, 2009, the Company amortized $35,077 of debt discount related to
Tranche III.




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




15




5.
                SENIOR SECURED
      ORIGINAL ISSUE DEBT DISCOUNT,
  continued




June
      30,
                      
                      
                      Tranche
      III
                      
                      
                      March
      31,
                      
                      
                      Tranche
      I & II2009
                      
                      
                      Inception
                      
                      
                      2009
                      
                      
                      InceptionConversion
      Feature:Risk-free
      interest rate
                      
                      
                      1.10
                      %
                      
                      
                      0.88%-1.26
                      %
                      
                      
                      0.83
                      %
                      
                      
                      2.0%
      -4.25
                      %Expected
      volatility
                      
                      
                      167.73
                      %
                      
                      
                      154.9%-167.2
                      %
                      
                      
                      155.02
                      %
                      
                      
                      106.7%-112.0
                      %Expected
      life (in years)
                      
                      
                      .68-1.96
                      
                      
                      
                      2.0
                      
                      
                      
                      .93-1.50
                      
                      
                      
                      2.0Expected
      dividend yield
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Warrants:Risk-free
      interest rate
                      
                      
                      2.54
                      %
                      
                      
                      1.74%-2.75
                      %
                      
                      
                      1.65
                      %
                      
                      
                      0.50%-2.50
                      %Expected
      volatility
                      
                      
                      167.73
                      %
                      
                      
                      154.9%-167.2
                      %
                      
                      
                      155.02
                      %
                      
                      
                      105.1%-155.1
                      %Expected
      life (in years)
                      
                      
                      3.93-4.96
                      
                      
                      
                      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,
630,667 shares of the Company’s common stock related to Tranches I and II. The
Additional Warrants are in the same form as the Warrants described above, have a
term of exercise equal to five (5) years following their issuance, and shall
have an exercise price of $0.01 per share. On July 15, 2009, The Company has
issued 400,000 shares of penalty warrants to the debenture holders in Tranche I
related to this penalty. The fair value of these warrants is $80,000 based on a
Black Scholes model. The Company also expects to issue 230,667 penalty warrants
to the debenture holders in Tranche II in anticipation of not meeting the
revenue minimums in the tranche two purchase agreement. The Company has recorded
the expected Black Scholes fair value of $44,743 in relation to the expected
issuance of Tranche II penalty warrants. The Company recorded this penalty
during the year ended March 31, 2009 as that is the period when the revenue
shortfall occurred. Existing issuances on the Tranche III Facility have similar
provisions to purchase up to 146,000 similar warrants if the Company fails to
meet revenue minimums for the year ended March 31, 2010.




6.
            NOTES
      PAYABLE




Notes
payable consist of the following:




June
      30, 2009(unaudited)
                                  
                                  
                                  March
      31, 2009Notes
      Payable - Delis - related party
                                  
                                  
                                  [a]
                                  
                                  
                                  $
                                  200,000
                                  
                                  
                                  $
                                  200,000Notes
      Payable - various
                                  
                                  
                                  [b]
                                  
                                  
                                  
                                  401,250
                                  
                                  
                                  
                                  401,250Senior
      Subordinated Notes Payable - Thieme Consulting, Inc. - related
      party
                                  
                                  
                                  [c]
                                  
                                  
                                  
                                  250,000
                                  
                                  
                                  
                                  250,000Senior
      Subordinated Notes Payable, net of debt discount of $42,432 and
      $53,856, respectively
                                  
                                  
                                  [d]
                                  
                                  
                                  
                                  207,568
                                  
                                  
                                  
                                  196,144$
                                  1,058,818
                                  
                                  
                                  $
                                  1,047,394Less:
      Current Maturities
                                  
                                  
                                  
                                  
                                  
                                  
                                  1,058,818
                                  
                                  
                                  
                                  601,250Long-Term
      Notes Payable
                                  
                                  
                                  
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  446,144


16




6.
              NOTES PAYABLE,
      continued


[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 an
extension of the due date of the note to October 24, 2008. The Company is
negotiating an extension or conversion to shares of common stock that would
supersede such extension agreement subject approval from the majority of the
secured debenture holders. There can be no assurance that it will be able to
obtain such an extension or approval from the majority of the debenture holders.
This note is secured by a second lien on all of the assets of the Company.




[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
$452,000 and represents eight notes with initial maturity dates between November
19, 2002 and October 21, 2008.




At June
30, 2009, all of these notes are in default, plus interest of $221,642. 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 $19,587 of interest and granted 22,500 penalty
warrants, valued at $4,725 related to such notes during the three months ended
June 30, 2009. The Company continues to grant 7,500 penalty warrants per month
related to such notes in default until the notes are repaid.




[c] An
existing note in the amount of $250,000 has matured and on March 5, 2008, the
Company entered into a new promissory note with Thieme Consulting, Inc. for
$250,000. This new note is subordinated to the Debentures described in Note 5
above. The new note has a maturity date of June 4, 2010 and bears interest at
10% per annum. In consideration for entering into the new note and subordinating
its first security position, the Company repaid all of the accrued interest due
on the October 2001 notes of $243,896. For the three months ended June 30, 2009,
the Company accrued $6,250 of interest due on this note.




[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 5 and [c]
above. The new note has a maturity date of June 4, 2010 and bears interest at
10% per annum. In consideration for entering into the new note, the Company
converted all of the accrued interest due on the August 2004 note of $125,445
into shares of restricted common stock at $1.00 per share, issued 703,871 shares
of restricted common stock in exchange for 1,759,676 warrants (as more fully
described below), and issued a new warrant to purchase 250,000 shares of common
stock exercisable for a five-year term at $1.20 per share, which warrant expires
on March 5, 2013. For the three months ended June 30, 2009, the Company accrued
$6,250 of interest due on this note.




7.
            COMMITMENTS AND
      CONTINGENCIES


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


17


10.
                COMMITMENTS AND
      CONTINGENCIES,
continued
 On
      December 20, 2007, a complaint was filed in the United States District
      Court for the District of Colorado alleging additional commissions are due
      to a third party introducer. The plaintiff demanded payment of additional
      commission of $143,000 for the period ended September 30, 2007 and
      additional commissions through December 31, 2007. The Company has settled
      the matter and as of June 30, 2008 accrued a payment due on or before July
      7, 2008 of $89,683 as final settlement of all past and future amounts due
      to said party.  On July 1, 2008 all amounts related to this
      settlement have been paid and the matter has been
      dismissed
  On
      December 18, 2008,  Ira J. Gaines filed an action for breach of
      contract and unjust enrichment against the Company in the Superior Court
      of the State of Arizona, Maricopa County, case number CV2008-032043. The
      action is based demanding payment on a promissory note in default and was
      seeking immediate payment of 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, 2009. The Company is in default of the payment plan. 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 $15,500 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 June 30, 2009. This obligation is recorded
      as notes payable and accrued interest at June 30,
    2009
  [b]
              Product Liability
      Insurance - The manufacture and sale of our products involve the
      risk of product liability claims.  We do not carry product
      liability insurance.  A successful claim brought against us
      could require us to pay substantial damages and result in harm to our
      business reputation, remove our products from the market or otherwise
      adversely affect our business and
operations.
  [c]
              Other - The
      Company has reported to the IRS the taxable income of the Chief Executive
      Officer and Chief Technology Officer to date using forms 1099 and 1096.
      Since 2001, the Company has accrued approximately $770,000 as accrued
      compensation which was calculated as the difference between their gross
      and net compensation for the period. The Company plans to pay this accrued
      compensation of approximately $770,000 to the Chief Executive Officer and
      Chief Technology Officer to satisfy the tax obligations related to the
      income reported. This obligation is recorded as Accrued Compensation at
      March 31, 2009
  Such
payroll tax reporting classification is subject to audit by the Internal Revenue
Service and other state and local taxing authorities, which, upon review, could
determine that such individuals’ compensation should have been reported on the
basis that such individuals are employees.  Accordingly, depending on
such potential audit, the Company may be subject to additional payroll related
liabilities the amount of which, if any, is not determinable at this
time.
 The
Company is delinquent in the payment of its payroll tax liabilities with the
Internal Revenue Service.  As of March 31, 2009, unpaid payroll taxes
total approximately $468,000 and related penalties and interest approximated
$134,000 computed through March 31, 2009.  These liabilities have been
recorded as accrued compensation and selling, general and administrative
expenses at March 31, 2009. The Company expects to pay these delinquent payroll
tax liabilities as soon as possible.  The final amount due will be
subject to negotiations with the Internal Revenue Service.
 
 On
November 16, 2005, the Securities and Exchange Commission approved a change to
NASD rule 6530 providing that if an issuer with securities quoted by a NASD
member on the OTC board quoted by a NASD member on the OTC bulletin board is
cited for delinquent filing of its periodic reports under the exchange act of
1934 with the Securities and Exchange Commission three times in a 24 month
period or is removed from such quotation for failure to timely make such filings
three times in a 24 month period then the securities of such issuer will be
ineligible for quotation by a NASD member on the OTC bulletin
board.  If an issuer becomes ineligible to be so quoted, such issuer
would not become eligible for quotation on the OTC bulletin board until it has
filed such periodic reports for one year in a timely manner.
  The
Company has been late in one of its periodic filings with the SEC during 2009,
of which the December 31, 2008 10-Q was filed late.  Accordingly, the
Company may be ineligible for quotation by a NASD member if it is delinquent two
more times in its periodic filings with the SEC during the applicable 24-month
period.  The Company is currently late on its filing of this
10-K.  The Company has requested a hearing with the NASD to see if the
Company can continue to be listed as a NASD member.  If the Company is
not successful at the hearing, the Company will be listed on the “pink
sheets.”




18




8.
            FAIR VALUE
      MEASUREMENTS




On April
1, 2008, the Company adopted SFAS No. 157, Fair Value Measurement (SFAS 157).
This statement provides a single definition of fair value, a framework for
measuring fair value, and expanded disclosures concerning fair value. The
Statement 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.




SFAS 157
establishes the following hierarchy used in fair value measurements and expands
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.




Liabilities
measured at fair value on a recurring basis at June 30, 2009 are as
follows:




Quoted
      Prices in
                            Active
      Markets for
                            Identical Liabilities
                            (Level
      1)
                          
                          
                          Significant
                            Other
                            Observable
                            Inputs
                            (Level
      2)
                          
                          
                          Significant
                            Unobservable
                            Inputs
                            (Level 3)
                          
                          
                          Balance
      at
                            June
      30, 2009Conversion
      Features
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          1,932,000
                          
                          
                          $
                          1,932,000Warrant
      liability
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          2,967,000
                          
                          
                          $
                          2,967,000$
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          4,899,000
                          
                          
                          $
                          4,899,000






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
June 30, 2009




19


8.
              FAIR VALUE
      MEASUREMENTS,
continued




Conversion
                    
                    
                    WarrantFeature
                    
                    
                    Liability
                    
                    
                    TotalBalance
      April, 1, 2009, adoption of EITF 07-05
                    
                    $
                    904,000
                    
                    
                    $
                    1,225,000
                    
                    
                    $
                    2,129,000Total
      realized/unrealized (gains) or lossesIncluded
      in other income (expense)
                    
                    
                    (2,131,000
                    )
                    
                    
                    (2,129,000
                    )
                    
                    
                    (4,260,000
                    )Included
      in stockholder's equity
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Purchases,
      issuances or settlements
                    
                    
                    3,159,000
                    
                    
                    
                    3,871,000
                    
                    
                    
                    7,030,000Transfers
      in and /or out of Level 3
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Balance
      June 30, 2009
                    
                    $
                    1,932,000
                    
                    
                    $
                    2,967,000
                    
                    
                    $
                    4,899,000




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




[a]
            Major
      Customers




The
Company sold a substantial portion of its product and services to one customer
during the three months ended June 30, 2009 and 2008. Sales to this customer
were approximately 73% and 61% of total sales, respectively. Accounts receivable
balance for this customer was approximately $58,000 and $153,000 at June 30,
2009 and 2008, respectively.




[b]
            Foreign
      Revenue




The
Company generated approximately $83,000 of revenue from the sale of its products
and services to foreign customers during the three months ended June 30, 2008.
There were no foreign sales for the three months ended June 30,
2009.




10.
            SUBSEQUENT
      EVENTS




Under
provisions of the Tranche I and II securities purchase agreements, 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, 630,667 shares
of the Company’s common stock related to Tranche 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. On July 15, 2009, The Company has issued
400,000 shares of penalty warrants to the debenture holders in Tranche I
related to this penalty. The fair value of these warrants is $80,000 based on a
Black Scholes model. The Company also expects to issue 230,667 penalty warrants
to the debenture holders in Tranche II in anticipation of not meeting the
revenue minimums in the Tranche II purchase agreement. Tranche III has
similar provisions to purchase up to 146,000 similar warrants if the Company
fails to meet revenue minimums for the year ended March 31, 2010.








20




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




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




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




Recent Developments for the
Company




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


21


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.




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




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


22




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




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




Under our
agreement with FLO TV we are licensing our Axess software and supplying
interface components for the FLO TV San Diego Network Operation Center and the
national rollout of wireless transmission sites. Under such agreement, Qualcomm
and/or FLO TV periodically issue purchase orders to us. From September 7, 2006
to March 31, 2009, Qualcomm and/or FLO TV has jointly purchased $6,000,019 from
us. Between April 1, 2009 and July 31, 2009 sales under this contract were
$390,600, and we have received purchase orders for an additional $243,000 of
product for delivery in the month of August 2009 of which $180,000 has been
delivered to date. Statmon products for the FLO TV build plan through May 2010
is currently at $828,000.The FLO agreement is dated September 7, 2006 and
specifies no minimum or maximum number of purchase orders and is for an initial
term of three years with extensions predicated on the annual support agreements
remaining current. The number of FLO TV sites is expected to increase to as many
as 1,200 remote as the network expands. We also provide support and maintenance
to MediaFLO renewable on an annual basis.




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




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




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


23




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




Off-Balance
Sheet Arrangements




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




For the Three Months Ended
June 30, 2009 and 2008




Results
From Operations




Revenues-
Revenues were $530,692 and $935,475 for the three months ended June 30, 2009 and
2008, respectively. The decrease in revenues of approximately $405,000 is
primarily due to decreased revenues associated with non-MediaFLO
customers.




Cost of
Sales - Cost of sales were $61,804 and $120,998 for the three months
ended June 30, 2009 and 2008, respectively. Overall gross profit percentage
increased to 88% in the three months ended June 30, 2009 compared to 87% in the
comparable prior year period due to a similar sales mix of our product and
service offerings during the year.




Selling, General
and Administrative Expenses - Selling, general and administrative
expenses were $1,042,026 and $1,191,634 for the three months ended June 30, 2009
and 2008, respectively, a decrease of approximately $150,000. The decrease in
selling, general and administrative expenses is primarily attributed to a
decrease in marketing costs related to having a greater presence at the annual
National Association of Broadcasters (“NAB”) trade show in April 2008 than in
April 2009.




Other
(Income)Expense - Other (Income)Expense was $2,993,818 and $338,779 for
the three months ended June 30, 2009 and 2008, respectively. The approximately
$2,665,000 change can be attributed to the adoption of EITF 07-05 in the first
quarter of 2009 as well as the issuance of additional warrant and conversion
rights to our Tranche I and II debenture holders based on exercise price reset
provisions in the debenture agreements.




Based on
the adoption of EITF 07-05, We recorded a gain on a change in the fair value of
derivatives liability of $4,260,000. This gain was mainly due to the fact that
our stock price decreased during the three months ended June 30, 2009 which made
our outstanding warrants and conversion features less valuable.




The
Tranche III issuance in the three months ended June 30, 2009 had greater warrant
coverage and a lower conversion price for the debenture. The Tranche I and II
debenture holders were given the same warrant coverage and conversion price as
the Tranche III holders and to recognize the transaction, we recorded interest
expense of $5,936,000 to reflect the change in fair value of the warrant and
conversion derivative liabilities before and after the exercise price reset
provision.




24




Net
Income/(Loss) - As a result of the above, for the three months ended June
30, 2009, the Company recorded a net loss of $3,566,956 compared to a net loss
of $715,936 for the same period the previous year.




Liquidity
and Capital Resources




Cash
balances totaled $1,201 as of June 30, 2009 compared to $176,173 at June 30,
2008.





Net cash
used in operating activities was $280,349 and $304,414 for the three months
ended June 30, 2009 and 2008, respectively. The use of cash in 2009 and 2008 is
the primarily the result of funding the net operating loss of $573,138 and
$377,157 for the three months ended June 30, 2009 and 2008,
respectively.





Net cash
used in investing activities was $0 and $9,289 and for the three months ended
June 30, 2009 and 2008, respectively. The primary use of cash in 2008 related to
computer and equipment purchases.





Net cash
provided by financing activities was $280,550 and $416,800 for the three months
ended June 30, 2009 and 2008, respectively. Net cash provided by financing
activities in fiscal 2009 was the result of net proceeds of $303,750 related to
the issuance of $364,500 principal amount of Debentures related to the Tranche
III of the Company’s private placement of such Debentures. Financing costs of
$24,000 were incurred related to the raise of the capital for the Company. Net
cash provided by financing activities in the three months ended June 30, 2008
was the result of proceeds from issuance of $540,000 from the issuance of
$648,000 principal amount of Debentures in Tranche II of the Company’s private
placement of such Debentures.  Financing costs of $24,000 and $123,200 were
incurred related to raise of capital for the three months ended June 30, 2009
and 2008, respectively.





As of
June 30, 2009, the Company had a working capital deficiency of approximately
$5,191,000 including short-term notes payable, convertible notes payable and
accrued interest of approximately $2,585,000, net of applicable debt discount of
approximately $1,241,000.  We also have long-term convertible
debentures of approximately $578,000, net of an applicable debt discount of
approximately $168,000.





In order
to continue its operations beyond June 2010, the Company will need to increase
revenue and profit margins, repay or obtain extensions on its existing
short-term debt and possibly raise additional working capital through the sale
of debt or equity securities in addition to the completion of its placement of
Debentures.





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




25


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




Going
Concern




The
Company has incurred net losses of approximately $27.0 million since inception.
Additionally, the Company had a net working capital deficiency of approximately
$5.2 million at June 30, 2009. These conditions raise substantial doubt about
the Company’s ability to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. 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 condensed consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.




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




Inflation
and Seasonality




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


26


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 material weaknesses identified by management relating to the
lack of sufficient accounting resources.




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




The
material weaknesses identified by management relates to the lack of sufficient
accounting resources, the lack of documentation of the performance of key
controls and document retention. 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 direcion of our CEO and
CFO.  Consequently, our financial reporting function is
limited.  In order to correct the material weaknesses, the Company has
hired outside consultants to assist with financial statement preparation and
reporting needs of the Company and plans on hiring additional internal full-time
accounting personnel in the third calendar quarter of 2009 and intends to assist
internal accounting personnel with consultants as needed to ensure that
management will have  adequate resources in order to attain complete
reporting of financial information in a timely manner and provide a further
level of segregation of financial responsibilities as the Company continues to
expand.




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




Changes in Internal Controls
Over Financial Reporting




There
were no changes to the internal controls during the quarter ended June 30, 2009
that have materially affected or that are reasonably likely to materially affect
the internal controls over financial reporting.


27


PART
II - OTHER INFORMATION




Item 1.
            Legal
      Proceedings


[a]
                Legal
      Proceedings - On May 17, 2007, an action was filed in Los
      Angeles Superior Court for breach of contract and similar causes of action
      by the Epstein Family Trust against the Company in relation to two
      outstanding promissory notes issued by the Company totaling $75,000
      ($25,000 and $50,000) plus accrued interest. The Epstein Family Trust is
      seeking attorney’s fees and costs in addition to the principal and
      interest.  These notes were guaranteed by Mr. Geoffrey Talbot,
      the Company's CEO, for up to $25,000, and therefore Mr. Talbot was joined
      in the legal action as a third-party defendant.  The case number
      is BC 371 276. The parties have reached a conditional settlement agreement
      where the plaintiff has agreed to convert all principal and interest into
      shares of common stock at a price of $1.00 per share provided the Company
      completes the proposed Convertible Debenture and warrant financing in a
      timely manner. The parties have reached a settlement agreement where the
      plaintiff has agreed to convert all principal and interest into shares of
      common stock at a price of $1.00 per share and where the Company will pay
      legal fees of approximately $12,000 to plaintiff.  The
      settlement documentation is currently being reviewed and will be finalized
      shortly. This obligation is recorded as Accounts Payable at June 30,
      2009
 [b]
                      On
      December 20, 2007, a complaint was filed in the United States District
      Court for the District of Colorado alleging additional commissions are due
      to a third party introducer. The plaintiff demanded payment of additional
      commission of $143,000 for the period ended September 30, 2007 and
      additional commissions through December 31, 2007. The Company has settled
      the matter and as of June 30, 2008 accrued a payment due on or before July
      7, 2008 of $89,683 as final settlement of all past and future amounts due
      to said party.  On July 1, 2008 all amounts related to this
      settlement have been paid and the matter has been
      dismissed


[c]
              On
      December 18, 2008,  Ira J. Gaines filed an action for breach of
      contract and unjust enrichment against the Company in the Superior Court
      of the State of Arizona, Maricopa County, case number CV2008-032043. The
      action is based demanding payment on a promissory note in default and was
      seeking immediate payment of 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, 2009. The Company is in default of the payment plan. 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 $15,500 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 June 30,
  2009.


Item 1A. Risk
Factors




Not
Applicable




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


Between
April 1 and June 30, 2009, the Company sold Units to investors as
follows:




·
            The
      Company issued an additional $364,500 principal amount of the Debentures
      and received net proceeds of $303,750 related to the third tranche of the
      private placement of such Debentures. In connection with the Debentures,
      the Company issued five-year warrants to purchase 1,440,000 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 June
30, 2009, $601,250 principal amount of short-term promissory notes are in
default and $236,009 of interest had accrued on all outstanding short-term
promissory notes as of such date.




28




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




(Not
      Applicable)




Item 5.
            Other
      Information.




(Not
      Applicable)




29




Item
      6.
                    Exhibits(a)
                    Exhibits31.1
                    Certificate
      of 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


30




SIGNATURES




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




Date:
      August 19, 2009
                  /s/Geoffrey P. Talbot/s/Name:  Geoffrey
      P. TalbotTitle:  Chief Financial
Officer




31





EXHIBIT
INDEX





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




32