**SECURITIES
      AND EXCHANGE COMMISSION**





**Washington,
      D.C.  20549**








**FORM
      10-QSB**





**x   QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF**


**THE
      SECURITIES EXCHANGE ACT OF 1934**





**For
      Quarterly Period Ended September 30, 2005**





**or**





**o    TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF**


**THE
      SECURITIES EXCHANGE ACT OF 1934**





**For
      the transition period from         
      to**





Commission
      File No. 000-09751





**STATMON
      TECHNOLOGIES CORP.******


(Exact
      name of small business issuer as specified in its charter)








**Nevada**
              
              **83-0242652**(State
                  or other jurisdiction of incorporation or organization)
              
              (I.R.S.
                  Employer Identification No.)**345
                  North Maple Drive, Suite 120, Beverly Hills, CA
                  90210**(Address
                  of principal executive offices)
  Registrant’s
                  phone number, including area code**(310)
                  288-4580**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 o





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




**Class**
            
            **Outstanding
                at November 11, 2005**Common
                Stock, $.01 par value
            
            13,262,757





Transitional
      Small Business Disclosure Format (Check one):  YES o   NO x









**FORM
      10-QSB**


**STATMON
      TECHNOLOGIES CORP.**


**September
      30, 2005**





**TABLE
      OF CONTENTS**





Page(s)Part
                I -Financial
                InformationItem
                1. Financial Statements (unaudited):Condensed
                Consolidated Balance Sheet at September 30, 2005
            3Condensed
                Consolidated Statements of Operations for the Three Months Ended
                September
                30, 2005 and 2004
            4Condensed
                Consolidated Statements of Operations for the Six Months Ended September
                30, 2005 and 2004
            5Condensed
                Consolidated Statements of Cash Flows for the Six Months Ended September
                30, 2005 and 2004
            6Notes
                to Condensed Consolidated Financial Statements
            7Item
                2. Management’s Discussion and Analysis of Financial Condition
              and
                Results of Operations
            13Item
                3. Controls and Procedures
            18Part
                II -Other
                InformationItem
                1. Legal Proceedings
            19Item
                2. Changes in Securities and Use of Proceeds
            19Item
                3. Defaults Upon Senior Securities
            19Item
                6. Exhibits and Reports on Form 8-K
            20Signatures
            21Exhibits
            22





2




**ITEM
      I — FINANCIAL STATEMENTS**


**STATMON
      TECHNOLOGIES CORP. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEET**


**SEPTEMBER
      30, 2005**


**(UNAUDITED)**




**September
                      30, 2005****ASSETS**Current
                      Assets:Cash
                  
                  
                  
                  $
                  101,797Accounts
                      receivable
                  
                  
                  
                  
                  155,389Inventories
                  
                  
                  
                  
                  64,869Prepaid
                      expense and other current assets
                  
                  
                  
                  
                  8,666Total
                      Current Assets
                  
                  
                  
                  
                  330,721Property
                      and Equipment, net
                  
                  
                  
                  
                  22,527Deferred
                      Financing Costs
                  
                  
                  
                  
                  108,265Other
                      Assets
                  
                  
                  
                  
                  11,315Total
                      Assets
                  
                  
                  
                  $
                  472,828**LIABILITIES
                      AND STOCKHOLDERS' DEFICIENCY**Current
                      Liabilities:Notes
                      payable (including $280,000 due to related parties), net of
                      debtdiscount
                      of $349,090
                  
                  
                  
                  $
                  2,536,610Accounts
                      payable
                  
                  
                  
                  
                  352,730Accrued
                      expenses
                  
                  
                  
                  
                  267,419Accrued
                      compensation
                  
                  
                  
                  
                  264,223Interest
                      payable (including $150,058 due to related parties)
                  
                  
                  
                  
                  548,109Deferred
                      revenue
                  
                  
                  
                  
                  19,640Total
                      Liabilities
                  
                  
                  
                  
                  3,988,731Commitments
                      and ContingenciesStockholders'
                      Deficiency:Preferred
                      stock, $.01 par value, 10,000,000 shares authorized, none
                      issuedand
                      outstanding
                  
                  
                  
                  
                  —Common
                      stock, $.01 par value, 100,000,000 shares authorized,13,212,757
                      issued and outstanding
                  
                  
                  
                  
                  132,128Additional
                      paid-in capital
                  
                  
                  
                  
                  4,565,264Accumulated
                      deficit
                  
                  
                  
                  
                  (8,213,295
                  )Total
                      Stockholders' Deficiency
                  
                  
                  
                  
                  (3,515,903
                  )Total
                      Liabilities and Stockholders' Deficiency
                  
                  
                  
                  $
                  472,828


See
      notes
      to condensed consolidated financial statements.




3




**STATMON
      TECHNOLOGIES CORP. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(UNAUDITED)**




For
                  the Three Months Ended September 30,2005
              
              2004Revenues
              
              $
              310,983
              
              $
              182,570Cost
                  of Sales
              
              
              122,703
              
              
              58,597Gross
                  Profit
              
              
              188,280
              
              
              123,973Selling,
                  General and Administrative Expenses
              
              
              632,318
              
              
              492,728Operating
                  Loss
              
              
              (444,038
              )
              
              (368,755
              )Other
                  Expense:Interest
                  expense
              
              
              90,338
              
              
              57,246Common
                  stock and warrants issued in association with debt
              
              
              133,552
              
              
              173,380Amortization
                  of debt discount
              
              
              123,916
              
              
              139,780Amortization
                  of deferred financing costs
              
              
              35,127
              
              
              21,810Total
                  Other Expense
              
              
              382,933
              
              
              392,216NET
                  LOSS
              
              $
              (826,971
              )
              $
              (760,971
              )NET
                  LOSS PER COMMON SHARE - Basic and Diluted
              
              $
              (0.06
              )
              $
              (0.06
              )Weighted
                  Average Number of Common Shares Outstanding -Basic
                  and Diluted
              
              
              12,975,007
              
              
              11,929,781





See
      notes
      to condensed consolidated financial statements.




4





**STATMON
      TECHNOLOGIES CORP. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(UNAUDITED)**




For
                  the Six Months Ended September 30,2005
              
              2004Revenues
              
              $
              726,111
              
              $
              808,820Cost
                  of Sales
              
              
              252,014
              
              
              184,157Gross
                  Profit
              
              
              474,097
              
              
              624,663Selling,
                  General and Administrative Expenses
              
              
              1,277,473
              
              
              923,817Operating
                  Loss
              
              
              (803,376
              )
              
              (299,154
              )Other
                  Expense:Interest
                  expense
              
              
              169,405
              
              
              107,578Common
                  stock and warrants issued in association with debt
              
              
              321,075
              
              
              355,359Amortization
                  of debt discount
              
              
              206,903
              
              
              449,473Amortization
                  of deferred financing costs
              
              
              42,627
              
              
              69,183Total
                  Other Expense
              
              
              740,010
              
              
              981,593NET
                  LOSS
              
              $
              (1,543,386
              )
              $
              (1,280,747
              )NET
                  LOSS PER COMMON SHARE - Basic and Diluted
              
              $
              (0.12
              )
              $
              (0.11
              )Weighted
                  Average Number of Common Shares Outstanding -Basic
                  and Diluted
              
              
              12,775,447
              
              
              11,845,366




See
      notes
      to condensed consolidated financial statements.




5




**STATMON
      TECHNOLOGIES CORP. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(UNAUDITED)**




For
                  the Six Months Ended September 30,2005
              
              2004CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  loss
              
              $
              (1,543,386
              )
              $
              (1,280,747
              )Adjustments
                  to reconcile net loss to net cashused
                  in operating activities:Depreciation
                  and amortization
              
              
              9,564
              
              
              5,458Common
                  stock and warrants issued in association with debt
              
              
              321,075
              
              
              355,359Amortization
                  of debt discount
              
              
              206,903
              
              
              449,473Amortization
                  of deferred financing costs
              
              
              42,627
              
              
              69,183Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (24,206
              )
              
              680,308Inventories
              
              
              3,653
              
              
              (57,502
              )Prepaid
                  expense and other current assets
              
              
              (3,558
              )
              
              116,813Other
                  assets
              
              
              (4,000
              )
              
              —Accounts
                  payable
              
              
              (52,698
              )
              
              (222,402
              )Accrued
                  expenses
              
              
              139,492
              
              
              (30,787
              )Accrued
                  compensation
              
              
              86,737
              
              
              (115,129
              )Interest
                  payable
              
              
              168,200
              
              
              96,481Deferred
                  revenue
              
              
              (24,831
              )
              
              (135,319
              )NET
                  CASH USED IN OPERATING ACTIVITIES
              
              
              (674,428
              )
              
              (68,811
              )CASH
                  FLOWS USED IN INVESTING ACTIVITIES:Purchase
                  of property and equipment
              
              
              (1,184
              )
              
              (4,321
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES*:*Proceeds
                  from notes payable
              
              
              693,700
              
              
              270,000Repayment
                  of notes payable
              
              
              —
              
              
              (195,000
              )Deferred
                  financing costs
              
              
              (108,265
              )
              
              —NET
                  CASH PROVIDED BY FINANCING ACTIVITIES
              
              
              585,435
              
              
              75,000NET
                  (DECREASE)/INCREASE IN CASH
              
              
              (90,177
              )
              
              1,868CASH,
                  BEGINNING OF PERIOD
              
              
              191,974
              
              
              92,527CASH,
                  END OF PERIOD
              
              $
              101,797
              
              $
              94,395SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATION:Cash
                  paid for:Interest
              
              $
              668
              
              $
              23,498Income
                  taxes
              
              $
              —
              
              $
              —











See
      notes
      to condensed consolidated financial statements.








6




STATMON
        TECHNOLOGIES CORP. AND SUBSIDIARIES
 NOTES TO
        CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


1. BUSINESS
        DESCRIPTION, GOING CONCERN AND MANAGEMENT PLANS





**Company
      Overview**




Statmon
      Technologies Corp. (the “Company”) develops, markets and licenses monitoring and
      remote control software and integration products. The Company’s products are
      designed to manage hybrid networks, remote sites and control any kind of device,
      regardless of equipment brand or technology. The capabilities include a single
      “dash board style screen” used to connect, automate and optimize networked
      operations and remote sites. The Company’s proprietary flagship product is the
      "Axess" software application platform. The Company’s hardware products are
      designed to integrate the Axess platform into varying types of control
      situations. The Company’s products have application across different industries
      where there is a need for monitoring, remote control and automation in real
      time. The distribution of the Company’s products is primarily facilitated by
      third party sales channels, strategic OEM collaborations and partnerships and
      the Company’s direct sales force.




The
      accompanying unaudited condensed consolidated financial statements have been
      prepared in accordance with accounting principles generally accepted in the
      Unites States of America ("US GAAP") for interim financial information. In
      the
      opinion of management, the accompanying unaudited financial statements contain
      all adjustments, consisting only of those of a normal recurring nature,
      necessary to make the Company's financial position, results of operations and
      cash flows not misleading at the dates and for the periods indicated. These
      financial statements should be read in conjunction with the financial statements
      and notes related thereto included in the Annual Report on Form 10-KSB for
      the
      year ended March 31, 2005. The results for three and six months ended September
      30, 2005 are not necessarily indicative of the results to be expected for the
      full fiscal year.




**Going
      Concern**




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. The
      Company has incurred net losses of approximately $8,213,000 since inception,
      a
      substantial portion of which relates to the amortization of debt discount and
      other debt related charges.




Additionally,
      the Company had a net working capital deficiency of approximately $3,658,000
      at
      September 30, 2005. The Company has limited capital resources and requires
      additional funding in order to sustain its operations, accomplish its growth
      objectives and market its planned products and services. There is no assurance
      that the Company can reverse its operating losses, or that it can raise
      additional capital to allow it to maintain operations or expand its planned
      operations. 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 be necessary
      should the Company be unable to continue as a going concern.




**Management
      Plans**




The
      Company expects that the growth and expansion of operations will require capital
      infusions to repay short-term debt and fund the Company’s working capital needs.
      The Company is seeking to raise sufficient capital through a private placement
      of its equity or long-term debt securities in the 2005 calendar year. The
      Company has entered into a letter of intent with a placement agent to sell
      a
      minimum of $5 million and a maximum of $8.0 million of units consisting of
      convertible preferred stock and warrants to purchase common stock. Management
      expects that at least the minimum offering, which is conducted on a best efforts
      basis, will be made to institutions and accredited investors before December
      31,
      2005.






7




STATMON
          TECHNOLOGIES CORP. AND SUBSIDIARIES
 NOTES TO
          CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)




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




There
      can
      be no assurances that the Company will be successful in obtaining the
      aforementioned financing or refinancing and/or extension of its notes payable.
      If it is 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, the Company may be forced to cease its business operations,
      sell its assets and/or seek further protection under applicable bankruptcy
      laws.




2. CERTAIN
        SIGNIFICANT ACCOUNTING POLICIES





*a.*
            Basis
                of Consolidation-
                The consolidated financial statements include the accounts of the
                Company's wholly-owned subsidiary, Statmon-eBI Solutions, LLC. All
                inter-company accounts and transactions have been eliminated in
                consolidation.




*b.*
            Use
                of 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.





*c.*
            Research
                and Development-
                Research and development expenditures are charged to operations as
                incurred. Research and development expenditures were approximately
                $134,000 and $111,000 for the three months ended September 30, 2005
                and
                2004, respectively, and $282,000 and $178,000 for the six months
                ended
                September 30, 2005 and 2004,
                respectively.





***d.***
            Inventories-
                Inventories are priced at the lower of cost (first-in, first-out)
                or
                market and consists primarily of finished goods. Raw materials and
                WIP are
                deemed immaterial.




***e.***
            Net
                Loss Per Share-Basic
                net loss per share is computed using the weighted average number
                of shares
                of outstanding common stock***.***For
                all periods presented, diluted net loss per share was the same as
                basic
                net loss per share since the inclusion of the warrants would have
                been
                anti-dilutive. Securities that could potentially dilute basic earnings
                per
                share (“EPS”) in the future and that were not included in the computation
                of diluted EPS because to do so would have been anti-dilutive for
                the
                periods presented, consist of warrants to purchase 5,995,647 and
                3,393,795
                shares of common stock as of September 30, 2005 and 2004,
                respectively.





*f.*
            Revenue
                Recognition-
                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 its current revenue recognition policies and
                practices
                are consistent with SOP 97-2.





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





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








8




STATMON
          TECHNOLOGIES CORP. AND SUBSIDIARIES
 NOTES TO
          CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


2.  CERTAIN
      SIGNIFICANT ACCOUNTING POLICIES, continued





*g.*
            Stock-Based
                Compensation-As
                permitted under Statement of Financial Accounting Standards ("SFAS")
                No.
                148, "Accounting for Stock-Based Compensation - Transition and
                Disclosure", which amended SFAS No. 123 "Accounting for Stock-Based
                Compensation," the Company has elected to continue to follow the
                intrinsic
                value method in accounting for its stock-based employee compensation
                arrangements as defined by Accounting Principles Board Opinion ("APB")
                No.
                25, "Accounting for Stock Issued to Employees", and related
                interpretations including Financial Accounting Standards Board ("FASB")
                Interpretation No. 44, "Accounting for Certain Transactions Involving
                Stock Compensation", an interpretation of APB No.
                25.





For
      three
      and six months ended September 30, 2005 and 2004, the Company did not issue
      any
      options to its employees.







*h.*
            New
                Accounting Pronouncements-In
                June 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
                Corrections - a replacement of APB Opinion No. 20 and FASB No. 3”, which
                establishes new standards on accounting for changes in accounting
                principles. Pursuant to the new rules, all such changes must be accounted
                for by retrospective application to the financial statements of prior
                periods unless it is impracticable to do so. SFAS No. 154 completely
                replaces Accounting Principles Bulletin No. 20 and SFAS No. 3, though
                it
                carries forward the guidance in those pronouncements with respect
                to
                accounting for changes in estimates, changes in the reporting entity,
                and
                the correction of errors. The requirements in SFAS No. 154 are effective
                for accounting changes made in fiscal years beginning after December
                15,
                2005. Management does not expect that SFAS No. 154 will have a material
                effect on the Company’s consolidated financial
                statements.





In
      December 2004, the FASB issued SFAS No. 123 (revised 2004), "Shared-Based
      Payment." SFAS 123(R) addresses the accounting for share-based payment
      transactions in which an enterprise receives employee services in exchange
      for
      (a) equity instruments of the enterprise or (b) liabilities that are based
      on
      the fair value of the enterprise's equity instruments or that may be settled
      by
      the issuance of such equity instruments. SFAS 123(R) requires an entity to
      recognize the grant-date fair-value of stock options and other equity-based
      compensation issued to employees in the income statement. The revised statement
      generally requires that an entity account for those transactions using the
      fair-value-based method, and eliminates the intrinsic value method of accounting
      in APB 25, which was permitted under SFAS No. 123, as originally issued.





The
      revised statement requires entities to disclose information about the nature
      of
      the share-based payment transactions and the effects of those transactions
      on
      the financial statements. SFAS No. 123(R) is effective for small business
      issuers for the first interim or annual reporting period that begins after
      December 15, 2005, with early adoption encouraged. The Company is currently
      evaluating the impact that this statement will have on its financial condition
      or results of operations.





In
      November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of
      ARB No. 43, Chapter 4.” SFAS No. 151 requires certain abnormal expenditures to
      be recognized as expenses in the current period. It also requires that the
      amount of fixed production overhead allocated to inventory be based on the
      normal capacity of the production facilities. The standard is effective for
      inventory costs incurred during fiscal years beginning after June 15, 2005.
      Management does not expect that SFAS No. 151 will have a material effect on
      the
      Company’s consolidated financial statements.




9




STATMON
          TECHNOLOGIES CORP. AND SUBSIDIARIES
 NOTES TO
          CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


2.  CERTAIN
      SIGNIFICANT ACCOUNTING POLICIES, continued





In
      October 2004, the FASB ratified the consensus reached in Emerging
      Issues Task Force ("EITF") Issue No. 04-8, “The Effect of Contingently
      Convertible Debt on Diluted Earnings
      Per Share .”
      The
      EITF states that contingently convertible instruments, such as contingently
      convertible debt, contingently convertible preferred stock, and other such
      securities should be included in diluted earnings per share (if dilutive)
      regardless of whether the market price trigger has been met. The consensus
      became effective for reporting periods ending after December 15, 2004. 
      The
      adoption of this pronouncement did not have a material effect
      on the
      Company's financial statements.




3. NOTES
        PAYABLE





During
      the three months ended June 30, 2005, the Company issued Units to investors
      consisting of (i) $250,000 principal amount promissory notes bearing interest
      at
      10% per annum and due 365 days from the date of issuance, (ii) 250,000 shares
      of
      the Company’s common stock, and (iii) three-year warrants to purchase 250,000
      shares of common stock at $1.50 per share. These notes have maturity dates
      between April 29, 2006 and June 16, 2006.





During
      the three months ended September 30, 2005, the Company issued the following
      Units to investors which consisted of:




·
            (i)
                $10,000 principal amount promissory note bearing interest at 10%
                per annum
                and due 365 days from the date of issuance, (ii) 10,000 shares of
                the
                Company’s common stock, and (iii) three-year warrants to purchase 10,000
                shares of common stock at $1.50 per share.




·
            (i)
                $100,000 principal amount promissory notes bearing interest at 10%
                per
                annum and due 365 days from the date of issuance, (ii) 200,000 shares
                of
                the Company’s common stock, and (iii) three-year warrants to purchase
                200,000 shares of common stock at $1.50 per share.




·
            (i)
                $16,700 principal amount promissory notes bearing interest at 10%
                per
                annum and due 365 days from the date of issuance, (ii) 16,700 shares
                of
                the Company’s common stock, and (iii) three-year warrants to purchase
                16,700 shares of common stock at $1.50 per share.




·
            (i)
                $110,000 principal amount promissory note bearing interest at 20%
                per
                annum and due 365 days from the date of issuance, (ii) 100,000 shares
                of
                the Company’s common stock, and (iii) three-year warrants to purchase
                110,000 shares of common stock at $1.25 per share.




·
            (i)
                $100,000 principal amount promissory note bearing interest at 10%
                per
                annum and due 365 days from the date of issuance, (ii) 100,000 shares
                of
                the Company’s common stock, and (iii) three-year warrants to purchase
                100,000 shares of common stock at $1.50 per share.




·
            (i)
                $100,000 principal amount promissory note bearing interest at 10%
                per
                annum and due 30 days from the date of issuance, (ii) 50,000 shares
                of the
                Company’s common stock, and (iii) three-year warrants to purchase 50,000
                shares of common stock at $1.50 per share.




·
            A
                $7,000 non-interest bearing loan from an investor due 60 days from
                the
                date of receipt of the funds.





These
      notes have maturity dates between October 30, 2005 and August 31, 2006.





In
      total,
      at September 30, 2005, $1,717,000 principal amount of the $2,878,700 principal
      amount of promissory notes are in default and $548,109 of interest has accrued
      on all outstanding notes as of such date.





The
      Company continues to be in default on $250,000 of Senior Notes during the six
      months ended September 30, 2005. The Senior Notes accrue interest at a penalty
      rate of 15% per annum. Under the penalty provisions of the loan agreements,
      the
      Company continues to issue 25,000 shares of Common Stock per month until full
      repayment of the Senior Notes. The accrued interest on the Senior Notes at
      September 30, 2005 is $140,404.




10




STATMON
          TECHNOLOGIES CORP. AND SUBSIDIARIES
 NOTES TO
          CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


3.  NOTES
      PAYABLE, continued





According
      to the penalty provisions of the loan agreements, the Company issued three-year
      penalty warrants to purchase 614,955 shares of common stock at $1.00 per share
      during the six months ended September 30, 2005 associated with unsecured notes
      in default.





During
      November 2005, the Company issued a Unit to an investor consisting of (i)
      $25,000 principal amount promissory notes bearing interest at 10% per annum
      and
      due 365 days from the date of issuance, (ii) 25,000 shares of the Company’s
      Common Stock, and (iii) three-year warrants to purchase 25,000 shares of Common
      Stock at $1.50 per share.





4. EQUITY
        TRANSACTIONS





During
      the three months ended September 30, 2005, the Company amended and restated
      its
      Articles of Incorporation to increase the number of shares of Common Stock,
      par
      value of $0.01 per share, authorized from 25,000,000 to 100,000,000 and to
      increase the number of shares of Preferred Stock, par value of $0.01 per share,
      authorized from 5,000,000 to 10,000,000.





[a]
      Common Stock




During
      the three months ended June 30, 2005, the Company issued 75,000 shares of Common
      Stock valued at $62,000 associated with secured Senior notes that are in
      default. Additionally, the Company issued 250,000 shares of Common Stock valued
      at $89,900 related to new debt in the same period.




During
      the three months ended September 30, 2005, the Company issued 75,000 shares
      of
      Common Stock valued at $44,000 associated with secured Senior notes that are
      in
      default. Additionally, the Company issued 376,700 shares of Common Stock valued
      at $108,983 related to new debt in the same period.




In
      October 2005, the Company issued 25,000 shares of Common Stock in connection
      with secured Senior Notes that are in default and in November 2005 issued 25,000
      shares of Common Stock in association with new debt.





[b]
      Stock
      Options and Warrants




During
      the three months ended June 30, 2005, the Company granted 556,155 warrants
      to
      note holders, of which 250,000 warrants were valued at $55,448 related to new
      debt in the period and 306,155 warrants were valued at $125,524 related to
      notes
      in default.  The weighted average exercise price of the warrants granted
      during the period was $1.22. The vesting period on these warrants is immediate
      and the exercise period is for three years from the date of the respective
      issuance.





During
      the three months ended September 30, 2005, the Company granted 870,500 warrants
      to note holders, of which 486,700 warrants were valued at $80,506 related to
      new
      debt in the period, 308,800 warrants were valued at $89,552 related to notes
      in
      default and 75,000 warrants were valued at $21,750 related to commissions due
      to
      a placement agent for the sale of Units.  Additionally, during the three
      months ended September 30, 2005, warrants to purchase 55,000 shares of Common
      Stock at $1.00 per share expired. The weighted average exercise price of the
      warrants granted during the period was $1.29. The vesting period on these
      warrants is immediate and the exercise period is for three years from the date
      of their respective dates of issuance.





The
      Company granted three-year warrants to purchase 25,000 shares of Common Stock
      at
      $1.50 per share during November 2005.




11




STATMON
          TECHNOLOGIES CORP. AND SUBSIDIARIES
 NOTES TO
          CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


5. COMMITMENTS
        AND CONTINGENCIES




a.
            Legal
                Proceedings




On
      June
      16, 2005 the Company filed an action in the Superior Court of the State of
      California, County of Los Angeles, Central District against Application Science
      and Technology LLC, Chad Kalebic, Michael Hurst, Anthony Briede and others
      (the
“Defendants”). The Company initiated the litigation after ongoing and
      reoccurring feedback from the marketplace that the Defendants were actively
      interfering with the Company’s business relationships and violating contractual
      agreements despite formal warnings to cease and desist. The case includes
      allegations of: Unfair Competition; Violations of California Business Code,
      Sections 17.200 ET SEQ and 17.000 ET SEQ; Intentional Interference with
      Plaintiffs Business Relationships, Negligent Interference with Plaintiff’s
      Business Relationships; Slander and Injunction. The Company has retained
      litigation counsel on a 1/3 contingency basis of the net benefit to the Company.
      The Company will advance and pay the costs and expenses of the litigation.
      The
      Company expects to prevail in the proceedings; however, there can be no
      assurances in this regard and in the event of an adverse decision, the Company
      may be liable for costs, expenses and/or attorney’s fees of the Defendants. A
      settlement conference has been agreed to by the parties and ordered by the
      Court. The settlement conference is scheduled for December 9, 2005.





b.
            Other




The
      Company is in the process of filing certain delinquent Federal, State and Local
      compensation related filings, which may subject the Company to additional
      payroll related liabilities, the amount of which cannot be determined at this
      time. Management of the Company has indicated that such delinquent filings
      are
      expected to be completed no later than the end of the Company’s third fiscal
      quarter.




6. MAJOR
        CUSTOMERS AND CONCENTRATION OF CREDIT RISK




a.
            Major
                Customers




During
      the three months ended September 30, 2005, two customers comprised 26% and
      18%
      of the Company’s sales. The accounts receivable balances for these customers at
      September 30, 2005 were $53,023 and $26,534, respectively. During the three
      months ended September 30, 2004, three customers comprised 45%, 18% and 12%
      of
      the Company’s sales, respectively.




During
      the six months ended September 30, 2005, four customers comprised 22%, 16%,
      11%
      and 11% of the Company’s sales. The accounts receivable balances for these
      customers at September 30, 2005 were $53,023, $1,055, $26,534 and $1,365,
      respectively. During the six months ended September 30, 2004, two customers
      comprised 56% and 29% of the Company’s sales, respectively.




b.
            Concentration
                of Credit Risk




The
      Company maintains cash balances in one financial institution. The balances
      are
      insured by the Federal Deposit Insurance Corporation up to $100,000 per
      institution. From time to time, the Company's balances may exceed these limits.
      The Company believes it is not exposed to any significant credit risk for its
      cash balances.




12




**ITEM
      2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      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) our need for additional capital and the
      uncertainty of obtaining it; (v) our ability to refinance or renegotiate
      short-term promissory notes that have come due or are coming due; (vi) our
      failure to timely make certain regulatory filings; (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 which 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; and (xxv)
      control by certain stockholders. For a more detailed description of these and
      other cautionary factors that may affect our future results, please refer to
      our
      Report on Form 10-KSB for the fiscal year ended March 31, 2005 filed with the
      Securities and Exchange Commission.





**Recent
      Developments for the Company**





**Overview**





We
      develop, market and license a remote control, monitoring and facilities
      management platform designed for application across universal vertical markets.
      Customers use our proprietary products to connect and manage multiple site
      operations in real time by integrating disparate software systems with diverse
      numbers of analog and digital devices. Multiple sites can automatically interact
      with each other and report up stream to a single dashboard style application
      software with customized screens and drill-down control capabilities all
      assessable from any Internet or network connection. Additional features of
      the
      platform include automatic bi-directional control and response, root cause
      analysis, data aggregation and alarm notification. The platform proactively
      automates and optimizes mission critical devices and integrates facilities
      management operations. The Company’s proprietary software product is the "Axess"
      application. Axess interfaces with the "EIF", "UIF" and "UVM" hardware
      integration products. The Company has provided specialized systems integration
      services to a variety of customers through our wholly-owned subsidiary, Statmon
      - eBI Solutions LLC (“SeBI”) until September 30, 2005. The SeBI integration
      activity has been temporarily suspended while this activity is revaluated in
      line with the launch of the US Energy Joint Venture and Interscan/Nautel
      Navigation new vertical market sales channels. It is most likely that
      specialized integration services will only be offered to new vertical market
      customers where there is a direct value add to the Company’s and our partner’s
      solutions and products.




13




Our
      significant clients include General Electric - NBC/Telemundo Network, Viacom
      -
      CBS, Disney - ABC TV & Radio Networks, “Harris Broadcast”, a division of
      Harris Corp. (NYSE symbol - HRS), Lin Television and Sinclair Broadcast. Harris
      Broadcast are a worldwide OEM distributor of our products in the radio and
      television markets. The existing Harris Broadcast OEM agreement continues to
      be
      on a non-exclusive basis and expires on February 25, 2006. Discussions are
      taking place regarding a new non-exclusive reseller agreement with Harris
      Broadcast, although no assurance can be offered as to the outcome of such
      discussions. On November 3, 2005, we entered into a formal OEM distribution
      agreement with the Singapore based Pixelmetrix Corporation Pte Ltd.
      (‘Pixelmetrix”), a leading digital test and measurement technology company
      focused on the broadcast and telecommunications industries. The Company’s Axess
      application empowers the Pixelmetrix branded “Consolidator Plus” management and
      test measurement solution for digital television. The first Consolidator Plus
      installations using Axess are scheduled in November 2005 for several European
      television networks. On November 1, 2005 the Company entered into an OEM
      agreement with Sound Broadcast Services, the United Kingdom based manufacturer
      of the Eddystone brand of digital and analog radio transmitters (“SBS”).




The
      sales
      pipeline from the US Energy Systems Corp. joint venture, focused on the
      telecommunications, DC Power/stored energy and infrastructure markets, is
      building; however, the Company believes that the lack of adequate working
      capital has protracted certain opportunities where there are concerns about
      its
      financial strength. Beta testing with governmental, telecommunications and
      infrastructure clients is proceeding and we have identified opportunities in
      the
      battery monitoring/facilities management market including local, state and
      federal government, military, oil refining, petrochemical and energy
      infrastructure operations.




We
      are
      well positioned to expand beyond our traditional broadcast industry activities
      into the identified new vertical markets, including power and energy management,
      telecom, wireless, homeland security, environmental compliance and
      infrastructure management. The current versions of our proprietary application
      software and integration technologies are industry and market universal. We
      believe that the architectural design and functionality development curve of
      our
      products specifically address the needs and emerging demand for economical
      pre-packaged solutions facilitating improved operating efficiencies through
      device convergence, network automation and powerful remote control and
      monitoring capabilities in real time. We are in the process of identifying
      qualified strategic partners and distributors who already have established
      customer installation bases where our products can readily be employed as a
      middleware and/or provide stand alone end-to-end solutions.





**For
      the Quarter Ended September 30, 2005 and 2004**





**Results
      From Operations**





***Revenues*** -
      Revenues were $310,983 and $182,570 for the three months ended September 30,
      2005 and 2004, respectively.  Revenues consisted of $144,983 of product
      revenues and $166,000 of integration services revenues for the three months
      ended September 30, 2005. Revenues consisted of $49,923 of product revenues
      and $132,647 of integration services revenues for the three months ended
      September 30, 2004.  The increase in product revenues of approximately
      $95,000 is due to the ramping up of our direct sales activities to third-party
      customers, which began in the first part of 2005 as a result of the weak
      broadcast sales from our broadcast industry partner, Harris Broadcast, as the
      Company realigned its relationship on a non-exclusive basis. Harris Broadcast
      implemented an internal restructuring which impacted its inventory levels and
      product purchases from the Company. In the current quarter, approximately
      $50,000 in increased sales can be attributed to purchases of our hardware
      integration products by Harris Broadcast as it has exhausted its inventory
      of
      the Company’s hardware products during the quarter. The Statmon distribution
      agreement with Harris Broadcast reverted to a non-exclusive basis on July 18,
      2004, when it failed to make the minimum purchases as required under its OEM
      agreement with the Company. Such agreement expires on February 24, 2006 and
      the
      Company is currently negotiating a reseller agreement with the goal to replace
      the existing OEM agreement before or upon its expiration. Harris Broadcast
      indicates that it remains highly committed to the long-term success of the
      Statmon-owned Axess software application and suite of hardware integration
      products. While the Company continues to have confidence in the future of this
      relationship, it is positioning itself to return to previous levels of revenue
      in the broadcast industry independent of the Harris Broadcast relationship.
      The
      increase in integration services revenues of approximately $33,000 is due to
      the
      timing of several large projects in the current year.




***Cost
      of Sales*** - Cost
      of sales were $122,703 and $58,597 for the three months ended September 30,
      2005
      and 2004, respectively. Cost of sales consisted of $49,663 related to product
      revenues and $73,040 related to integration services revenues for the three
      months ended September 30, 2005. Cost of sales consisted of $232 related to
      product revenues and $58,365 related to integration services revenues for the
      three months ended September 30, 2004.  Overall gross profit percentage
      decreased to 61% in the three months ended September 30, 2005 compared to 68%
      in
      the comparable prior year period. The decrease in overall gross profit
      percentage is attributable to an increase in integration services revenues
      and
      an increase in product sales of hardware integration devices to Harris
      Broadcast. The gross profit percentage for systems integration is approximately
      56% as compared to the gross profit percentage for product sales of
      approximately 66% for the three months ended September 30, 2005. The shift
      in
      the overall mix of revenues and an increase in the sales of hardware integration
      products have caused an overall decrease in the gross profit percentage of
      approximately 7% from the prior year period.





14




***Selling,
      General and Administrative Expenses*** -
      Selling, general and administrative expenses were $632,318 and $492,728 for
      the
      three months ended September 30, 2005 and 2004, respectively, an increase of
      approximately $140,000.  The increase in selling, general and
      administrative expenses is principally attributed to an increase in tradeshow
      expenses and sales related expenses of approximately $25,000, an increase in
      research and development expenses related our new EIF-32+ product and our
      development activities focused on vertical market penetration of $25,000 and
      an
      increase in salary expenses related to the executive employment contracts and
      the addition of three employees.





***Other
      Expense*** - Other
      Expense was $382,933 and $392,216 for the three months ended September 30,
      2005
      and 2004, respectively. The decrease of approximately $10,000 can be attributed
      to a decrease in amortization of debt discount of approximately $16,000 due
      to a
      decrease in the relative amount of new debt during the current and most recent
      prior period, a decrease in common stock and warrants issued in association
      with
      debt of approximately $40,000 related to the issuance of penalty warrants
      associated with delinquent notes due to a decrease in the stock price as
      compared to the prior year period, offset by an increase in amortization of
      deferred financing costs of approximately $13,000 related to such new debt
      and
      an increase in interest expense of approximately $33,000 related to increased
      outstanding debt in the period.





***Net
      Loss*** - As a
      result of the above, for the three months ended September 30, 2005 the Company
      recorded a net loss of $826,971, compared to a net loss of $760,971 for the
      same
      period the previous year.





**For
      the Six Months Ended September 30, 2005 and 2004**





**Results
      From Operations**





***Revenues*** -
      Revenues were $726,111 and $808,820 for the six months ended September 30,
      2005
      and 2004, respectively.  Revenues consisted of $335,674 of product revenues
      and $390,437 of integration services revenues for the six months ended September
      30, 2005. Revenues consisted of $505,405 of product revenues and $303,415
      of integration services revenues for the six months ended September 30,
      2004.  The decrease in product revenues of approximately $170,000 is
      due to
      the weak broadcast sales from our broadcast industry partner, Harris Broadcast,
      as the Company realigned its relationship on a non-exclusive basis, offset
      by
      the ramping up of our direct sales activities to third-party customers, which
      began in the first part of 2005. Harris Broadcast implemented an internal
      restructuring which impacted its inventory levels and product purchases from
      the
      Company. The Statmon distribution agreement with Harris Broadcast reverted
      to a
      non-exclusive basis on July 18, 2004, when it failed to make the minimum
      purchases as required under its OEM agreement with the Company. Such agreement
      expires on February 24, 2006 and the Company is currently negotiating a reseller
      agreement with the goal to replace the existing OEM agreement. Harris Broadcast
      indicates that it remains committed to the long-term success of the
      Statmon-owned Axess software application and suite of hardware integration
      products. While the Company continues to have confidence in the future of this
      relationship, it is positioning itself to return to previous levels of revenue
      in the broadcast industry independent of the Harris Broadcast relationship.
      The
      increase in integration services revenues of approximately $87,000 is due to
      the
      timing of several large projects in the current year.




***Cost
      of Sales*** - Cost
      of sales were $252,014 and $184,157 for the six months ended September 30,
      2005
      and 2004, respectively. Cost of sales consisted of $80,222 related to product
      revenues and $171,792 related to integration services revenues for the six
      months ended September 30, 2005. Cost of sales consisted of $50,969 related
      to
      product revenues and $133,188 related to integration services revenues for
      the
      six months ended September 30, 2004.  Overall gross profit percentage
      decreased to 65% in the six months ended September 30, 2005 compared to 77%
      in
      the comparable prior year period. The decrease in overall gross profit
      percentage is attributable to an increase in integration services revenues
      and
      an increase in product sales of hardware integration devices to Harris
      Broadcast. The gross profit percentage for systems integration is approximately
      56% as compared to the gross profit percentage for product sales of
      approximately 76% for the six months ended September 30, 2005. The shift in
      the
      overall mix of revenues and an increase in the sales of hardware integration
      products have caused an overall decrease in the gross profit percentage of
      approximately 12% from the prior year period.





15




***Selling,
      General and Administrative Expenses*** -
      Selling, general and administrative expenses were $1,277,473 and $923,817 for
      the six months ended September 30, 2005 and 2004, respectively, an increase
      of
      approximately $350,000.  The increase in selling, general and
      administrative expenses is principally attributed to an increase in sales and
      marketing expenses of approximately $75,000, an increase in research and
      development expense related to our new EIF-32+ product and development
      activities focused on vertical market penetration of approximately $100,000
      and
      an increase in personnel expenses related to the executive employment contracts
      and the addition of four employees.





***Other
      Expense*** - Other
      Expense was $740,010 and $981,593 for the six months ended September 30, 2005
      and 2004, respectively. The decrease of approximately $241,000 can be attributed
      to a decrease in amortization of debt discount of approximately $242,000 due
      to
      a decrease in the relative amount of new debt during the current and most recent
      prior period, a decrease in common stock and warrants issued in association
      with
      debt of approximately $34,000 related to the issuance of penalty warrants
      associated with delinquent notes due to a decrease in the stock price as
      compared to the prior year period and a decrease in amortization of deferred
      financing costs of approximately $27,000 related to such new debt, offset by
      an
      increase in interest expense of approximately $62,000 related to increased
      outstanding debt in the period.





***Net
      Loss*** - As a
      result of the above, for the six months ended September 30, 2005 the Company
      recorded a net loss of $1,543,386, compared to a net loss of $1,280,748 for
      the
      same period in the previous year.





**Liquidity
      and Capital Resources**




The
      Company has financed its cash requirements primarily through operations and
      short-term borrowings. During the six months ended September 30, 2005, the
      Company issued Units to investors which consisted of (i) $686,700 principal
      amount promissory notes bearing interest of either 10% or 20% per annum, of
      which $100,000 is due 30 days from the date of issuance with the balance due
      365
      days from the date of issuance, (ii) 726,700 shares of the Company’s common
      stock, and (iii) three-year warrants to purchase 736,700 shares of Common Stock,
      of which 110,000 were exercisable at $1.25 per share and the remainder at $1.50
      per share. Additionally, the Company received a $7,000 non-interest bearing
      loan
      from an investor due 60 days from the date of receipt of the funds.




The
      Company continues to be in default on $250,000 of Senior Notes during the six
      months ended September 30, 2005. The Senior Notes accrue interest at a penalty
      rate of 15% per annum. Under the penalty provisions of the loan agreements,
      the
      Company continues to issue 25,000 shares of Common Stock per month until full
      repayment of the Senior Notes. The accrued interest on the Senior Notes at
      September 30, 2005 is $140,404. Additionally, according to the penalty
      provisions of the loan agreements, the Company issued three-year penalty
      warrants to purchase 614,955 shares of common stock at $1.00 per share during
      the six months ended September 30, 2005 associated with unsecured notes in
      default.




Net
      cash
      used in operating activities was $674,428 and $68,811 for the six months ended
      September 30, 2005 and 2004, respectively.  The use of cash in 2005
      is the
      result of a net loss of approximately $1,543,000, partially offset by non-cash
      charges of approximately $580,000 and a net change in operating assets and
      liabilities of approximately $180,000. The cash used in operating activities
      in
      2004 is the result of a net loss of approximately $1,280,000, partially offset
      by non-cash charges of approximately $879,000 and a net change in operating
      assets and liabilities of approximately $332,000.





Cash
      used
      in investing activities was $1,184 and $4,321 for the six months ended September
      30, 2005 and 2004, respectively.





Cash
      provided by financing activities was $585,435 and $75,000 for the six months
      ended September 30, 2005 and 2004, respectively. Borrowings in the six
      months ended September 30, 2005 were $693,700 as compared to $270,000 for the
      same period last year. These borrowings were offset by repayments of $0 and
      $195,000 for the 2005 and 2004 periods, respectively and an increase in
      financing costs incurred in the period of $108,265. The increase in borrowings
      can be directly attributed to the realignment of the broadcast sales channel
      with the Company’s broadcast industry partner, Harris, on a non-exclusive basis.





16




During
      November 2005, the Company sold a Unit composed of (i) $25,000 principal amount
      of promissory notes bearing interest at 10% per annum and due 365 days from
      the
      date of issuance, (ii) 25,000 shares of common stock and (iii) warrants to
      purchase 25,000 shares of common stock exercisable at a price of $1.50 per
      share
      for a term of three years.




As
      of
      September 30, 2005, the Company had a working capital deficiency of
      approximately $3,658,000, including notes payable and accrued interest totaling
      approximately $3,084,000, net of applicable debt discount of $349,090. The
      Company has no long-term debt.




In
      order
      to continue its operations beyond March 2006, the Company will need to attain
      its revenue and profit margin goals, repay or obtain extensions on its existing
      debt and raise additional working capital through a private placement of equity
      or debt. The Company has commenced a private placement through a placement
      agent
      to sell a minimum of $5.0 million and a maximum of $8.0 million of units
      consisting of convertible Preferred Stock and warrants to purchase Common Stock.
      This private placement is being made to institutions and accredited investors
      on
      a best efforts basis during the third and fourth quarters of fiscal 2006. The
      Company intends to use the proceeds of this or any other offering to repay
      short-term debt, fund new vertical markets and provide working capital. If
      the
      Company raises additional funds through the issuance of equity securities,
      the
      percentage ownership of its current stockholders would be reduced. In addition,
      these equity securities might have rights, preferences or privileges senior
      to
      the outstanding Common Stock.




The
      Company has incurred net losses of approximately $8,200,000 since inception,
      a
      substantial portion of which relates to the amortization of debt discount and
      other debt related charges. As indicated above, the Company has a working
      capital deficiency of approximately $3,658,000, and these conditions raise
      substantial doubt about the Company’s ability to continue as a going concern.
      Primarily as a result of its recurring losses and its lack of liquidity, the
      Company has received a report from its independent auditors, included with
      its
      annual report on Form 10-KSB for the year ended March 31, 2005, that includes
      an
      explanatory paragraph describing their uncertainty as to our 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.





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




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




**Inflation
      and Seasonality**





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





17




**ITEM
      3 - CONTROLS AND PROCEDURES**





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





Management
      is aware that there is a lack of segregation of duties at the Company due to
      the
      small number of employees dealing with general administrative and financial
      matters. This constitutes a significant deficiency in the financial reporting.
      However, at this time management has decided that considering the employees
      involved and the control procedures in place, the risks associated with such
      lack of segregation are insignificant and the potential benefits of adding
      additional employees to clearly segregate duties do not justify the expenses
      associated with such increases. The Company did hire an additional person to
      enhance its accounting staff during the six months ended September 30, 2005.
      Management will periodically reevaluate this situation. If the volume of the
      business increases and sufficient capital is secured, it is the Company's
      intention to further increase staffing to mitigate the current lack of
      segregation of duties within the general administrative and financial functions.





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.




18


**PART
        II -
        OTHER INFORMATION**


ITEM
          1.LEGAL
          PROCEEDINGS
 
 On
          June
          16, 2005 the Company filed an action in the Superior Court of the State
          of
          California, County of Los Angeles, Central District against Application
          Science
          and Technology LLC, Chad Kalebic, Michael Hurst, Anthony Briede and others
          (the
“Defendants”). The Company initiated the litigation after ongoing and
          reoccurring feedback from the marketplace that the Defendants were actively
          interfering with the Company’s business relationships and violating contractual
          agreements despite formal warnings to cease and desist. The case includes
          allegations of: Unfair Competition; Violations of California Business Code,
          Sections 17.200 ET SEQ and 17.000 ET SEQ; Intentional Interference with
          Plaintiffs Business Relationships, Negligent Interference with Plaintiff’s
          Business Relationships; Slander and Injunction. The Company has retained
          litigation counsel on a 1/3 contingency basis of the net benefit to the
          Company.
          The Company will advance and pay the costs and expenses of the litigation.
          The
          Company expects to prevail in the proceedings; however, there can be no
          assurances in this regard and in the event of an adverse decision, the
          Company
          may be liable for costs, expenses and/or attorney’s fees of the Defendants. A
          settlement conference has been agreed to by the parties and ordered by
          the
          Court. The settlement conference is scheduled for December 9, 2005.
 
 **ITEM
          2.CHANGES IN
          SECURITIES AND USE OF PROCEEDS**
 
 During
          the three months ended September 30, 2005, the Company issued the following
          Units to investors which consisted of:
  ·
                (i)
                    $10,000 principal amount promissory note bearing interest at
                    10% per annum
                    and due 365 days from the date of issuance, (ii) 10,000 shares
                    of the
                    Company’s common stock, and (iii) three-year warrants to purchase 10,000
                    shares of common stock at $1.50 per share.
  ·
                (i)
                    $100,000 principal amount promissory notes bearing interest at
                    10% per
                    annum and due 365 days from the date of issuance, (ii) 200,000
                    shares of
                    the Company’s common stock, and (iii) three-year warrants to purchase
                    200,000 shares of common stock at $1.50 per share.
  ·
                (i)
                    $16,700 principal amount promissory notes bearing interest at
                    10% per
                    annum and due 365 days from the date of issuance, (ii) 16,700
                    shares of
                    the Company’s common stock, and (iii) three-year warrants to purchase
                    16,700 shares of common stock at $1.50 per share.
  ·
                (i)
                    $110,000 principal amount promissory note bearing interest at
                    20% per
                    annum and due 365 days from the date of issuance, (ii) 100,000
                    shares of
                    the Company’s common stock, and (iii) three-year warrants to purchase
                    110,000 shares of common stock at $1.25 per share.
  ·
                (i)
                    $100,000 principal amount promissory note bearing interest at
                    10% per
                    annum and due 365 days from the date of issuance, (ii) 100,000
                    shares of
                    the Company’s common stock, and (iii) three-year warrants to purchase
                    100,000 shares of common stock at $1.50 per share.
  ·
                (i)
                    $100,000 principal amount promissory note bearing interest at
                    10% per
                    annum and due 30 days from the date of issuance, (ii) 50,000
                    shares of the
                    Company’s common stock, and (iii) three-year warrants to purchase 50,000
                    shares of common stock at $1.50 per share.
  ·
                A
                    $7,000 non-interest bearing loan from an investor due 60 days
                    from the
                    date of receipt of the funds.
  **ITEM
          3.****DEFAULTS
          UPON SENIOR SECURITIES**
 
 The
          Company continued to be in default on $250,000 of Senior Notes during the
          three
          months ended September 30, 2005. The Senior Notes accrue interest at a
          penalty
          rate of 15% per annum. Under the penalty provisions of the loan agreements,
          the
          Company continues to issue 25,000
          shares of common stock per month until full repayment of the Senior Notes.
          The
          accrued interest on the Senior Notes at September 30, 2005 is
          $140,404.
 
 The
          Company also continues to be in default on a $50,000 principal amount promissory
          note issued in June 2002, a $50,000 principal amount promissory note issued
          in
          September 2003, a $100,000 principal amount promissory note issued in November
          2003, a $60,000 principal amount promissory note issued in January 2004,
          a
          $100,000 principal amount promissory note issued in March 2004, a $250,000
          promissory note issued in August 2004 and has recently defaulted on a $100,000
          promissory note issued in October 2004. The Notes continue to accrue interest
          at
          15% per annum and 2,500 penalty warrants per month continue to be granted
          on the
          first $50,000 note since January 10, 2003, 2,500 penalty warrants per month
          continue to be granted on the second $50,000 note since April 19, 2004,
          20,000
          penalty warrants per month continue to be granted on the first $100,000
          note
          since May 22, 2004, 3,000 penalty warrants per month continue to be granted
          on
          the $60,000 note since August 2, 2004, 5,000 penalty warrants per month
          continue
          to be granted on the second $100,000 note since October 14, 2004, 12,500
          penalty
          warrants per month continue to be granted on the $250,000 note since March
          23,
          2005 and 10,000 penalty warrants per month have begun to be granted on
          the third
          $100,000 note since November 8, 2005. The accrued interest on these Notes
          at
          September 30, 2005 is $142,092.
 
 In
          total,
          at September 30, 2005, $1,717,000 principal amount of the $2,878,700 principal
          amount of promissory notes are in default and $548,109 of interest had
          accrued on all outstanding notes as of such date.
  
 19




**ITEM
        6.****EXHIBITS
        AND REPORTS ON FORM 8-K**
  (a)
              
              Exhibits31.1
              
              Certificate of pursuant to Rule 13a-14(a)
                under the Securities and Exchange Act of 1934, as amended.31.2
              
              Certificate of pursuant to Rule 13a-14(a)
                under the Securities and Exchange Act of 1934, as amended.32.1
              
              Certificate of pursuant to Rule 13a-14(b)
                under the Securities and Exchange Act of 1934, as amended.32.2
              
              Certificate of pursuant to Rule 13a-14(b)
                under the Securities and Exchange Act of 1934, as amended.(b)
              
              The Company filed no reports on Form
                8-K
                during the quarterly period ended September 30,
                2005.


20




**SIGNATURES**
 
 In
        accordance with the requirements of the Exchange Act, the registrant has
        caused
        this report to be signed on its behalf by the undersigned, thereunto duly
        authorized.
   Date: November
                14, 2005
              By:
              /s/Geoffrey P. Talbot
                Chief Financial Officer


21




**EXHIBIT
        INDEX**
  **Exhibit**
              
              **Description**31.1
              
              Certificate
                  of Geoffrey P. Talbot, Chief Executive Officer, pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002.31.2
              
              Certificate
                  of Geoffrey P. Talbot, Chief Financial Officer, pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002.32.1
              
              Certificate
                  of Geoffrey P. Talbot, Chief Executive Officer, pursuant to
                  Section 906 of the Sarbanes-Oxley Act of 2002.32.2
              
              Certificate
                  of Geoffrey P. Talbot, Chief Financial Officer, pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002.
   22