U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.
20549


FORM
10-K




x ANNUAL REPORT PURSUANT
SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE




ACT OF
1934. For the fiscal year ended December 31, 2008.




 ̈ TRANSITION REPORT
PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES


EXCHANGE
ACT OF 1934. For the transition period from ____________ to




Commission
file number 0-26604




Allied
Security Innovations, Inc.


Formerly
Digital Descriptor Systems, Inc.





(Name of
registrant as specified in its charter)





Delaware
                  23-2770048(State
      or other jurisdiction of
                  (I.R.S.
      Employerincorporation
      or organization)
                  Identification
      No.)1709
      Route 34, Suite 2, Farmingdale, New Jersey
                  08750(Address
      of principal executive offices)
                  (Zip
      Code)




Registrant's
Telephone number, including area code: (732) 359-0260




Securities
registered under 12(b) of the Exchange Act: None




Securities
registered under Section 12(g) of the Act: Common Stock




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 if disclosure of delinquent filers pursuant to Item 405 Regulation
S-B is not contained herein, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form10-K.





·
            Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer or a smaller reporting
      company.


Large
      accelerated filer o
              Accelerated
      filer oNon-accelerated
      filer o
              Smaller
      reporting company x




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





The
issuer had revenues of $4,838,934for the
fiscal year ended December 31, 2008.




As of
February 17, 2009, 2,970,592,794 shares of the issuer's Common Stock were
outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE




None




Transitional
Small Business Disclosure Format Yes  ̈ No x







PART
I




ITEM
1.  Business




History




Allied
Security Innovations, Inc. ("ASSI," the "Company," "us," "we," or "our"), a
Delaware corporation incorporated in 1994, formerly known as Digital Descriptor
Systems, Inc.  which was the successor to Compu-Color, Inc., an Iowa
corporation. The operations of DDSI were started as a division of ASI Computer
Systems, Inc. of Waterloo, Iowa in 1986. Compu-Color, Inc. was formed in July
1989 and as of July 1, 1989 purchased the assets of the Compu-Color division of
ASI Computer Systems, Inc.




Our
Business




During
2005 the Company acquired CGM Security Solutions, Inc. as a wholly owned
subsidiary and changed its name to CGM Applied Security Technologies, Inc. In
conjunction with the acquisition the Company has changed its primary focus from
the law enforcement market to the security market in general as it believes that
the potential for revenue is much greater.




Description
of Business of CGM




CGM-AST
is a manufacturer and distributor of indicative and barrier security seals,
security tapes and related packaging security systems, protective security
products for palletized cargo, physical security systems for tractors, trailers
and containers as well as a number of highly specialized authentication
products.  Focused primarily on “deterrent technologies,” CGM-AST
designs and develops customized tamper evident devices which when integrated
into a security protocol; provide chain of custody and/or proof of tampering for
targeted assets.




The
primary factors behind the need for CGM-AST’s products are: (i) the escalation
of cargo theft and tampering, (ii) the need for enhanced cargo security because
of the fear of terrorism, (iii) damage control of freight and cargo, (iv) the
need for security products, (v) brand protection and authentication requirements
and (vi) governmental and regulatory requirements.




CGM-AST
products are certified by the Customs-Trade Partnership Against Terrorism
("C-TPAT"), a joint initiative between government and business designed to
protect the security of cargo entering the United States while improving the
flow of trade. C-TPAT requires importers to take steps to assess, evolve and
communicate new practices that ensure tighter security of cargo and enhanced
security throughout the entire supply chain. In return, their goods and
conveyances will receive expedited processing into the United
States.  Many of our products are also ISO 17712 compliant, which is a
standard for international shipping and container security.




It is
estimated that losses from cargo theft each year reach 30-50 billion dollars
globally and 12 billion dollars in the US, and that these numbers will continue
to rise. Figures taken from L.H. Gray entitled Facing the Growing Problem of
Loss and Theft.




Products




CGM-AST
has Trade Secret protection on its Secure T.R.A.C.®  tape,
Super Seals, Water Gum Tape, developed a Button Memory Seal and Sentry
Sensor®. It
also has distribution rights on all NAVATECH products and seals, and owns the
rights to the patented ToppClip® pallet security
device. In addition, CGM-AST provides authentication technology and products to
clients to act as brand protection elements to finished goods. This brand
protection technology can help manufacturers reduce the incidences of
"knock-offs" that are common in the garment and accessory businesses. CGM-AST’s
core products are: CGM-AST Tapes, Self-Wound Security Tape, Void Labels and Void
Tape for Bag Closure, SUPERSEALS(R), Custom Coated Products, CGM-AST Conductive
Inks and Membrane Switch Components, EMAPS(R), Locks, Sentry Sensor(R) and other
representative items.




SUPERSEAL(R)
and self-voiding carton sealing tape known as SECURE T.R.A.C.(R) show a
customized signature if attempts are made at removing them. If cut and resealed,
SUPERSEAL(R) further shows an "opened" legend on the seal's center surface. With
self-wound void tape, any attempt at resealing is negated by the surface coating
on the tape. An "opened" legend is also left on the tape if removed. Since the
products are manufactured in-house, CGM-AST controls all features and has the
ability to customize the products to the customer's needs. CGM-AST also offers
converted labels, seals, and money bags. CGM-AST manufactures a variety of
adhesives, graphics and die cut label configurations for companies whose logos
always appear on the tape or label for security purposes. No generic product can
be substituted for this product since no one makes an identical
product.




Uses for
this product and technology include such items as:




o
Aircraft and truck seals




o Fiber
and Steel drum seals







o Motor
Vehicle inspection seals




o
Pharmaceutical Packaging




o Box or
container closure seals




o Cash
bag components




o
Computer seals




o
Validation devices




o General
security products




o Law Enforcement
Agencies




Once
CGM-AST's products are applied to a particular surface, any attempt at removal
will leave a sign in the form of an indelible word or legend on the tape and a
removable or permanent legend on the enclosure. The EMAPS(R) or Electro-Magnetic
Asset Protection System reflects entry by sending an electronic signals if cut.
EMAPS(R) products function without the need to identify a cut visually. Both
products, the labels and the scanners, are unique and only manufactured by
CGM-AST.




Production
Process




The
CGM-AST manufacturing process can best be described as one of "converting".
CGM-AST takes highly processed materials, which are manufactured elsewhere, and
converts them into finished products.  The Staten Island production
facility has been designated as a secure facility for purposes of certain
clientele.




CGM-AST
purchases processed materials from 6 to 8 key suppliers, including DuPont,
Luminite Corp, Adhesive Research, Sun Chemical, Houghton Chemical and Video Jet.
For Video Jet, for OEM products, CGM-AST purchases from approximately 15
different companies. CGM-AST has an exclusive distribution relationship in
connection with some of these products, while for other products CGM-AST is one
of few or many resellers.




Markets
& Customers




The
primary factors behind the need for CGM-AST’s products are: (i) the escalation
of cargo theft and tampering, (ii) the need for enhanced cargo security because
of the fear of terrorism, (iii) damage control of freight and cargo, (iv) the
need for security products, (v) brand protection and authentication requirements
and (vi) governmental and regulatory requirements.




CGM-AST
products are certified by the Customs-Trade Partnership Against Terrorism
("C-TPAT"), a joint initiative between government and business designed to
protect the security of cargo entering the United States while improving the
flow of trade. C-TPAT requires importers to take steps to assess, evolve and
communicate new practices that ensure tighter security of cargo and enhanced
security throughout the entire supply chain. In return, their goods and
conveyances will receive expedited processing into the United
States.  Many of our products are also ISO 17712 compliant, which is a
standard for international shipping and container security.




Principal
Customers




CGM-AST’s
current client base includes over 2000 national and international companies,
including producers of high value items such as perfumes, computers, silicon
chips, jewelry, cash and negotiable documents. The market for tamper evidence
includes flavors, fragrances, foodstuffs and components. CGM-AST’s products are
used by U.S. Government agencies (e.g.: DOD, TSA, DHS, CBP) and Foreign National
Governments,  major airlines, pharmaceutical clients for packaging and
clinical trials and multiple suppliers of high end electronics. CGM-AST’s
products have also been recommended by major insurance companies.  All
elements of the supply chain, including growers, manufacturers, shippers and
retailers are among our clientele.




The
Company’s revenue from one customer accounted for 14% of total revenue for the
twelve months ended December 31, 2008, which defines them as a major
customer.




Sales




CGM-AST
has three direct salespeople, two independent representatives and 5 distributors
for domestic sales.  There are over 12 representative distributors for
sales abroad managed by an in-house Director for International Channel
Management. CGM-AST supplements its sales force with Internet advertising, trade
shows, and PR benefits including participation and Chairing of educational
programs and committees (e.g. the International Cargo Security Council (ICSC))
and a variety of legislators and key accounts targeted by an Executive level PR
campaign.







Competition




Several
other companies manufacture products that are similar to CGM-AST’s self-voiding
label stock. As far as we know those products are limited in scope and do not
adequately address the issues of “needs based tampering” by virtue of their
inability to withstand the normal means of breaching adhesive products. However,
new innovations and better sales/marketing by other companies with a
product-solutions market approach could affect our ability to market our
products.




As both a
manufacturer and converter, CGM-AST delivers finished goods to users in response
to clients’ needs. CGM-AST can modify its products through all phases of its
development to make it user friendly and compatible with the needs of its
desired application.




CMG-AST
has a unique platform of products, designed and customizable to address clients’
needs against individual threats. There are approximately 12 seal manufacturers
that offer seals and compete with each other over price. CGM-AST sells through a
"needs-based threat-specific" assessment and determines final product design on
the basis of functionality.




Industry
Trends




It is
estimated that losses from cargo theft each year reach 30-50 billion dollars
globally and 12 billion dollars in the US, and that these numbers will continue
to rise. Figures taken from L.H. Gray entitled Facing the Growing Problem of
Loss and Theft.




Employees




ASII
employs a total of 21 full time employees, of whom 16 are employed by
CGM.




ASII
develops, assembles, markets and installs computer systems which capture video,
digitally captured images and scanned images, digitize the image, link the
digitized images to text/data and store the image and text on a computer
database which allows for transmitting the image and text by computer or
telecommunication links to remote locations.




Imaging
technology enables computers to record, store and retrieve both textual
information and visual images. The common problem in imaging technology is how
to record, store, process and retrieve information and images within the same
system. ASII's software programs utilize technology to link the textual
information with the images so that customers can record and retrieve related
text and images. ASII originally developed the software to address the
information retrieval problems of tax assessors. ASII subsequently adapted the
software for use by law enforcement agencies and management of jail facilities.
ASII's software also addresses different information retrieval needs such as
reproducing line ups and producing housing badges (jails), bar coded wristbands
for identification which facilitates movement within jails and courts and
storing and retrieving hand written and computer generated document images
within arrest records. The marketplace for this technology has become more of a
commodity item than the specialized software it was in the past and the Company
has made a decision not to actively pursue this market in the future as the cost
of upgrading the software and competing in what we consider to be a very small
marketplace does not justify the investment that would be
necessary.  While we will still support and maintain the existing
customer base we will no longer actively solicit new customers.




ASII does
offer maintenance and support for their products.




Maintenance
and Support




ASII
offers its customers' ongoing maintenance and support plus updates of the
software, for an annual fee.




Marketing




Law
Enforcement Applications




ASII
markets its Law Enforcement products through vendors of compatible software
applications.




Customers




ASII
maintains a continuing relationship with its customers based upon support
services and periodic upgrades of the Compu-Capture(R) line and Compu-Sketch(R)
software. The major revenue-generating event is presently the support and
maintenance of our existing customer base.  ASII does not rely on any
particular customers or business partners for the majority of their
sales.







Business
Alliances




Our
business alliance relationships have changed over the years and we generate very
little of our revenue through our relationships with records management and jail
management vendors. Since these vendors have written the necessary integration
to use ASII imaging solutions, when a customer is looking to include an imaging
system in their program, the vendor will inform ASII of the customers need. ASII
is responsible for all marketing and sales efforts of our imaging solution. ASII
believes a very small portion of its revenue will come through these
relationships.  The imaging market has changed tremendously over the
past 10 years and is not in our opinion a viable avenue of growth for the
Company.




ASII
supplies to its business partners a SDK (software developers kit), which allows
them to link our software to their software.




Seek
Acquisitions and Alliances




ASII
management plans to execute an acquisition strategy. The make-up of the targeted
acquisitions must include products and markets which complement and expand its
present client base. Profitable, niche companies will be integrated into ASII's
growth through acquisition strategy. ASII plans to use funding derived from
external investors.




On March
1, 2005, ASII and CGM Applied Security Technologies, Inc. ("CGM-AST Sub"),
acquired substantially all of the assets of CGM  Security Solutions,
Inc., a Florida corporation ("CGM"), for (i) $1,500,000 in cash and (ii) a 2.86%
promissory note (the "Note") in the principal amount of $3,500,000, subject to
adjustment (the "Acquisition"). The assets of CGM-AST were acquired pursuant to
an Asset Purchase Agreement among ASII, CGM-AST Sub and CGM Security Solutions
dated as of February 25, 2005.




The
principal amount of the three year Note is subject to adjustment based upon the
average of (i) the gross revenues of CGM-AST Sub for the fiscal year ending
December 31, 2008 and (ii) an independent valuation of CGM-AST Sub based upon
the consolidated audited financial statements of the Company and CGM-AST Sub for
the fiscal years ended December 31, 2008 and 2007. In addition, the Company has
granted CGM-AST a secondary security interest in substantially all of its assets
and intellectual property.  If the Company is unable to fulfill its
obligations pursuant to the Asset Purchase Agreement and the Note, there is a
likelihood that CGM Security Solutions, Inc. can declare default and attempt to
take back the asset.




In
connection with the Acquisition, the Company entered into a letter agreement
with certain of its investors (the "Investors") which extended the maturity date
of debt instruments issued on November 30, 2004 until March 1, 2008, and amended
the conversion price of the debt that is held by the Investors to the lower of
(i) $0.0005 or (ii) 60% of the average of the three lowest intraday trading
prices for the Company's common stock during the 20 trading days before, but not
including, the conversion date. In addition, the exercise price of the warrants
held by the Investors was amended to $.001 per share.




On May
16, 2008 the Company came to an agreement to pay CGM Security Solutions, Inc.
and its owner Mr. Erik Hoffer Five Hundred Thousand Dollars ($500,000) and
signed a new note with him raising the purchase price by One Million Dollars
($1,000,000).The new note for Four Million Dollars is a three year note carrying
an annual interest rate of 7% of which the interest is due
quarterly.




Sales
by Geographic Area




During
the fiscal year ended December 31, 2008 the percentage of revenues that ASII
received from domestic customers has been approximately
81.4%.  Foreign sales for 2008 were $900,616.




Suppliers




ASII's
hardware is compatible with the IBM AS400 and other mainframe and mini computer
manufacturers. The peripheral equipment used in connection with ASII's system,
such as video equipment, can be provided with a wide range of manufacturers. As
a result ASII is not dependent on any particular supplier or raw
material.




Government
Regulation or Government Approval




Most law
enforcement agencies purchasing new or upgraded or expanded systems require that
the system meet the requirements of NCIC2000, ANSI-NIST standards and standards
issued by the National Crime Information Commission and by the FBI. All ASII
products and solutions were required to meet these requirements.




Research
and Development




ASII
spent $94,946 and $101,687, respectively for the years ended December 31, 2008
and 2007 on research and development. This amount includes amounts spent on
outside sources for assistance with Research and Development projects. None of
these costs have been borne directly by our customers.







Product
Liability Insurance




Although
ASII believes its products are safe, it may be subject to product liability
claims from persons injured through the use of ASII's marketed products or
services. ASII carries no direct product liability insurance, relying instead on
the coverage maintained by its distributors and manufacturing sources from which
it obtains product. There is no assurance that this insurance will adequately
cover any liability claims brought against ASII. There also can be no assurance
that ASII will be able to obtain its own liability insurance (should it seek to
do so) on economically feasible terms. ASII's failure to maintain its own
liability insurance could materially adversely affect its ability to sell its
products in the future. Although no product liability claims have been brought
against ASII to date, if there were any such claims brought against ASII, the
cost of defending against such claims and any damages paid by ASII in connection
with such claims could have a materially adverse impact upon ASII, including its
financial position, results of operations and cash flows.




Patents,
Trademarks and Licenses




ASII owns
the proprietary rights to the software used in the Compu-Capture(R) programs. In
addition, ASII owns the rights to the trademarks "Compu-Capture(R),"
"Compu-Color(R)" and "Compu-Scan(R)," all trademarks have been registered with
the United States Patent and Trademark Office.




ITEM
2. Properties




The
Company operates 1709 Route 34, Farmingdale, New Jersey.  CGM Applied
Security Technologies operates from two locations. The administrative offices
are located in Farmingdale, NJ and the production facility is located in Staten
Island, NY.




ITEM
3. Legal Proceedings




On
October 16, 2003, in the Court of Common Pleas of Bucks County, Pennsylvania, a
judgment was entered against the Company by its landlord, BT Lincoln L.P. for
breach of lease in the amount of $184,706. The liability, net of the security
deposit, is included in accrued expenses at December 31, 2008.




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




None.




PART
II




ITEM
5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities




ASII's
(formerly DDSI quoted under the symbol “DDSI”) common stock has been quoted on
the OTC Bulletin Board since July 7, 1997 and under the symbol "ASVN" since
February 2007.  As of November 4, 1999 ASII's shares traded on the
Pink sheets. ASII returned to trading on the OTC Bulletin Board effective
February 23, 2001, but as of June30, 2003 began trading on the Pink sheets.
Under the “ASVN” symbol, ASII returned to the OTC Bulletin Board in October
2007.  The following table sets forth, the high and low bid prices for
the common stock for the quarters indicated. As of February 1, 2008 there were
approximately 3,200 shareholders of record.







Common
      StockBid PriceLow
                                                                
                                                                
                                                                HighCalendar
      Year 2007First
      Quarter
                                                                
                                                                $
                                                                0.0001
                                                                
                                                                
                                                                $
                                                                0.0003Second
      Quarter
                                                                
                                                                $
                                                                0.0001
                                                                
                                                                
                                                                $
                                                                0.0002Third
      Quarter
                                                                
                                                                $
                                                                0.0001
                                                                
                                                                
                                                                $
                                                                0.0001Fourth
      Quarter
                                                                
                                                                $
                                                                0.0001
                                                                
                                                                
                                                                $
                                                                0.0001Calendar
      Year 2008First
      Quarter
                                                                
                                                                $
                                                                0.0001
                                                                
                                                                
                                                                $
                                                                0.0003Second
      Quarter
                                                                
                                                                $
                                                                0.0001
                                                                
                                                                
                                                                $
                                                                0.0002Third
      Quarter
                                                                
                                                                $
                                                                0.0001
                                                                
                                                                
                                                                $
                                                                0.0001Fourth
      Quarter
                                                                
                                                                $
                                                                0.0001
                                                                
                                                                
                                                                $
                                                                0.0001







As of
February 1, 2009, 2,970,592,794 shares of the issuer's Common Stock were
outstanding.




We have
never declared nor paid cash dividends and do not expect to pay dividends in the
foreseeable future.




Recent
Issuances of Unregistered Securities




During
January 2008, $7,689 of the convertible debentures issued in September 2001,
were converted into 189,172,841 shares of common stock.




During
February 2008, $7,051 of the convertible debentures issued in September 2001,
were converted into 191,495,075 shares of common stock.




During
March 2008, $7,240 of the convertible debentures issued in September 2001, were
converted into 192,195,659 shares of common stock.




During
April 2008 $4,998 of the convertible debentures issued in September 2001, were
converted into 124,944,600 shares of common stock.




During
July 2008 $40,618 of the convertible debentures issued in September 2001, were
converted into 477,260,118 shares of common stock.




During
August 2008 $63,087 of the convertible debentures issued in September 2001, were
converted into 734,864,676 shares of common stock.




During
September 2008 $34,115 of the convertible debentures issued in September 2001,
were converted into 379,060,000 shares of common stock.




During
February 2007, $331,449 of the convertible debentures issued in September 2001,
were converted into 1,906,000 shares of common stock.




During
March 2007, $10,674 of the convertible debentures issued in September 2001, were
converted into 2,859,000 shares of common stock.




During
March 2007, $15,041 of the convertible debentures issued in September 2001, were
converted into 5,807,791 shares of common stock




During
April 2007, $5,813 of the convertible debentures issued in September 2001, were
converted into 2,859,000 shares of common stock.




During
April 2007, $22,457 of the convertible debentures issued in September 2001, were
converted into 10,380,310 shares of common stock.







During
May 2007, $6,405 of the convertible debentures issued in September 2001 were
converted into 6,671,000 of common stock.




During
May 2007, $10,194 of the convertible debentures issued in September 2001 were
converted in 9,526,792 shares of common stock.




During
June 2007, $3,266 of the convertible debentures issued in September 2001 were
converted into 6,342,040 shares of common stock




During
June 2007, $3,143 of the convertible debentures issued in September 2001 were
converted into 4,820,455 shares of common stock




During
July 2007, $8,270 of the convertible debentures issued in September 2001 were
converted into 19,897,904 shares of common stock




During
July 2007, $915 of the convertible debentures issued in September 2001 were
converted into 2,024,112 shares of common stock.




During
August 2007, $5,838 of the convertible debentures issued in September 2001 were
converted into 35,809,160 shares of common stock.




During
August 2007, $1,510 of the convertible debentures issued in September 2001 were
converted into 12,178,436 shares of common stock.




During
September 2007, $3,347 of the convertible debentures issued in September 2001
were converted into 48,961,300 shares of common stock.




During
September 2007, $1,834 of the convertible debentures issued in September 2001
were converted into 16,420,079 shares of common stock.




During
October 2007, $4,325 of convertible debentures issued in September 2001 were
converted into 71,183,728 shares of common stock.




During
October 2007, $2,254 of convertible debentures issued in September 2001 were
converted into 29,662,740 shares of common stock.




During
November 2007, $7,489 of convertible debentures issued in September 2001 were
converted into 79,632,642 shares of common stock




During
November 2007, $3,406 of convertible debentures issued in September 2001 were
converted into 44,815,403 shares of common stock.




During
December 2007, $16,309 of convertible debentures issued in September 2001 were
converted into 208,996,160 shares of common stock




During
December 2007, $3,837 of convertible debentures issued in September 2001 were
converted into 41,707,820 shares of common stock.




ITEM
6 Selected Financial Data




Not
applicable.




ITEM
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations




Except
for historical matters contained herein, the matters discussed in this Form 10-K
are forward-looking and are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Investors are cautioned that
these forward-looking statements reflect numerous assumptions, especially as
regarding installation schedules and product mix, and involves risks and
uncertainties which may affect the Company’s business and prospects and cause
actual results to differ materially from these forward-looking statements,
including sufficient funds to finance working capital and other financing
requirements of the Company’s market acceptance of the Company’s products and
competition in the computer industry.




Critical
Accounting Policies




ASII's
critical accounting policies, including the assumptions and judgments underlying
them, are disclosed in the Notes to the Financial Statements. These policies
have been consistently applied in all material respects and address such matters
as revenue recognition and depreciation methods. The preparation of the
financial statements in conformity with generally accepted accounting principles
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 reported period. Actual results could differ
from those estimates.




ASII
derives revenue from the sale of hardware, software, post customer support
(PCS), and other related services. PCS includes telephone support, bug fixes,
and rights to upgrades on a when-and-if-available basis. Other related services
include basic consulting and training. Included with the hardware is software
that is not considered to be incidental. Revenue from transactions with
customers where the software component is not considered to be incidental is
allocated between the hardware and software components based on the relative
fair value of the respective components.







ASII also
derives revenue from the sale of software without a related hardware component.
Revenue allocable to software components is further allocated to the individual
deliverable elements of the software portion of the arrangement such as PCS and
other services. In arrangements that include rights to PCS for the software
and/or other services, the software component arrangement fee is allocated among
each deliverable based on the relative fair value of each of the deliverables
determined using vendor-specific objective evidence, which has been established
by the separate sales of these deliverables.




Plan
of Operations




The
short-term objective of ASII is the following:




o The
short-term objective of ASII is to increase the market penetration of the
product line of its CGM-AST subsidiary as the Company believes this is the area
where the greatest revenue growth exists.




o
Additionally, ASII plans to execute an acquisition strategy based upon fund
availability.




ASII's
long-term objective is as follows:




o To seek
additional products to sell into its basic business market.




ASII
believes that it will not reach profitability in the foreseeable future. Over
the next twelve months, management is of the opinion that sufficient working
capital will be obtained from operations and external financing to meet ASII's
liabilities and commitments as they become payable. ASII has in the past
successfully relied on private placements of common stock securities, bank debt,
loans from private investors and the exercise of common stock warrants in order
to sustain operations. If ASII is unable to obtain additional funding in the
future, it may be forced to curtail or terminate operations.




ASII is
doing the following in its effort to reach profitability:




o
Cut costs in areas that add the least value to ASII.




o
Concentrate on increasing the sales of the CGM product line.




o Derive
funds through investigating business alliances with other
companies.




o Acquire
and effectively add management support to profitable companies complementary to
its broadened target markets.




Results
of Operations




Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007





Revenues
for the year ended December 31, 2008 of $4,838,934 an increase $470,993 or 10.8%
from the year ended December 31, 2007.     ASII
generates its revenues through software licenses, hardware, post customer
support arrangements and other services. CGM-AST generates its revenue through
the manufacturer and distributor of indicative and barrier security seals,
security tapes and related packaging security systems, protective security
products for palletized cargo, physical security systems for tractors, trailers
and containers as well as a number of highly specialized authentication
products.  The increase revenue is attributed to the addition of two
salespersons for part of the year 2008.




Cost of
revenue for the year ended December 31, 2008 was $1,964,572, an increase of
$779,259 or 65.7% from the prior year. Cost of revenue sold as a percentage of
revenue for the year ended December 31, 2008 was 40.6% of total revenues, versus
27% the year earlier.  The increase cost of revenue was primarily due
to the extraordinary rise in fuel cost during 2008 which was passed on to us in
the form of higher prices and fuel surcharges and the write down of obsolete
inventory.




Operating
expenses increased $2,059,740 or 69.7% during the year ended December 31, 2008
versus the year ended December 31, 2007. This increase was primarily
attributable to the impairment of goodwill and an increase in sales and
commission expenses involved in hiring new salespersons.




General
and Administrative expenses for the year ended December 31, 2008 were $2,200,230
versus $2,312,089 for the prior year for a decrease of $111,859 or 5%. This
decrease was primarily attributable to controls on spending.





Sales and
Marketing expenses for the year ended December 31, 2008 were $719,927 versus
$541,587 for the prior year for an increase of $178,340 or
32.3%.   This increase was primarily attributable to the hiring
of two new salespersons, Company increasing its advertising budget, increase in
presence at trade events which in turn increased travel expenses, and
instituting a commission program for sales personal .





Research
and development for the year ended December 31, 2008 was $94,946 compared to
$101,687 for the same period prior year for a decrease of $6,741 or
6.6%.  This decrease is attributable to controls on
spending.







The net
(loss) for ASII decreased 67% or $10,868,098 for the year ended December 31,
2008 to $(5,397,446) from $(16,265,544) for the year ended December 31, 2007.
This was primarily due to the change in fair market value of the derivative
liability and there was impairment to goodwill in the amount of
$2,000,000.




Liquidity
and Capital Resources




Net cash
provided by (used in) operating activities for the year ended December 31, 2008
and 2007 was $(158,969) and $74,963 respectively. The increase in net cash used
by operating activities in the year ended December 31, 2008 of $(233,932) was
due in part to the net loss.





Net cash
used in investing activities was $(24,146) and $(73,054) for the years ended
December 31, 2008 and 2007, respectively.  The decrease in cash used
in investing activities in the year ended December 31, 2008 of $(48,908) was due
to tighter controls for spending on new equipment.




Net cash
provided by (used in) financing activities was $10,000 and $(8,000) for the
years ended December 31, 2008 and 2007, respectively.




ASII's
revenues have been insufficient to cover the cost of revenues and operating
expenses. Therefore, ASII has been dependent on private placements of its common
stock and issuance of convertible notes in order to sustain operations. In
addition, there can be no assurances that the proceeds from private or other
capital will continue to be available, or that revenues will increase to meet
ASII's cash needs, or that a sufficient amount of ASII's common stock or other
securities can or will be sold or that any common stock purchase
options/warrants will be exercised to fund the operating needs of
ASII.




Over the
next twelve months, management is of the opinion that sufficient working capital
will be obtained from operations and external financing to meet ASII's
liabilities and commitments as they become payable. ASII has in the past relied
on private placements of common stock securities, and loans from private
investors to sustain operations. However, if ASII is unable to obtain additional
funding in the future, it may be forced to curtail or terminate
operations.




At
December 31, 2008, ASII had assets of $3,471,662 compared to $5,995,957 on
December 31, 2007 a decrease of $2,524,295 and shareholder deficit
of  $(33,271,043) on December 31, 2008 compared to shareholder deficit
of $(28,213,749) on December 31, 2007, an increase of ($5,057,294). This
increase in shareholder deficit for the year ended December 31, 2008 resulted
from the net loss for the year ended December 31, 2008.




As of
December 31, 2008, ASII negative working capital was $(17,716,423), a change
from negative working capital of $(32,087,466) at December 31, 2007. The
decrease in negative working capital was primarily a result of the restructuring
of debt and a decrease in the fair market value of the derivative
liabilities.




Recent
Developments




On March
1, 2005, ASII and its wholly-owned subsidiary, CGM-AST acquired substantially
all of the assets of CGM Security Solutions, Inc., a Florida corporation
("CGM"), for (i) $1,500,000 in cash and (ii) a 2.86% promissory note (the
"Note") in the principal amount of $3,500,000, subject to adjustment (the
"Acquisition"). The assets of CGM were acquired pursuant to an Asset Purchase
Agreement among ASII, CGM-AST Sub and CGM Security Solutions dated as of
February 25, 2006.




The
principal amount of the three year Note is subject to adjustment based upon the
average of (i) the gross revenues of CGM-AST Sub for the fiscal year ended
December 31, 2007 and (ii) an independent valuation of CGM-AST based upon the
consolidated audited financial statements of the Company and CGM-AST for the
fiscal years ended December 31, 2008 and 2007. In addition, the Company has
granted CGM Security Solutions, Inc. a secondary security interest in
substantially all of its assets and intellectual property.  If the
Company is unable to fulfill its obligations pursuant to the Asset Purchase
Agreement and the Note, there is likelihood that CGM Security Solutions, Inc.
can declare default and attempt to take back the asset.




In
connection with the Acquisition, the Company entered into a letter agreement
with certain of its investors (the "Investors") which extended the maturity date
of debt instruments issued on November 30, 2004 until March 1, 2008, and amended
the conversion price of the debt that is held by the Investors to the lower of
(i) $0.0005 or (ii) 60% of the average of the three lowest intraday trading
prices for the Company's common stock during the 20 trading days before, but not
including, the conversion date. In addition, the exercise price of the warrants
held by the Investors was amended to $.001 per share.




On
December 19, 2006 a special meeting of the shareholders was held and at the
meeting the shareholders passed a resolution to change the name of the Company
from Digital Descriptor Systems, Inc. to Applied Security Innovations,
Inc.   The shareholders also passed a resolution to authorize a 1
for 500 reverse stock split.  Both of these events took place on
February 5, 2007.  In addition the 2006 Incentive Stock Option Plan
adopted by The Board of Directors on October 12, 2006 was approved by the
shareholders.








On
October 9, 2007 the Company’s stock began trading on the NASDAQ-over-the-counter
market. Previously, the Company’s common stock traded on Pink
Sheets.




ITEM
8. Financial Statements




The
report of the independent registered public accounting firm and financial
statements are set forth in this report.




ITEM
9.  Changes in and disagreements with Accountants on Accounting and
Financial Disclosure.





None





ITEM
9A. CONTROLS AND PROCEDURES





Evaluation of Disclosure
Controls and Procedures




Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”) is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by us in
the reports that we file under the Exchange Act is accumulated and communicated
to our management, including our principal executive and financial officers, as
appropriate to allow timely decisions regarding required
disclosure.




The
Company’s management, under the supervision and with the participation of the
Company's Chief Executive Officer and Chief Financial (and principal accounting)
Officer, carried out an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of October 31,
2008.  Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company’s disclosure controls and
procedures were effective as of the end of the period covered by this
report.




Management's Report on
Internal Control over Financial Reporting




A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, a public company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the
board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles (“GAAP”) including those policies and procedures
that: (i) pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the assets of
the company, (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with GAAP,
and that receipts and expenditures are being made only in accordance with
authorizations of management and directors of the company, and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company’s assets that could have a
material effect on the financial statements.




Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. Our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, has assessed the effectiveness of
our internal control over financial reporting as of December 31, 2008. In making
this assessment, our management used the criteria established in Internal Control—Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).




Based on
our assessment and the criteria discussed above, the Company has concluded that,
as of December 31, 2008, the Company’s internal control over financial reporting
was effective.




This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s independent registered public accounting firm pursuant to temporary
rules of the SEC that permit the Company to provide only management’s report in
this annual report.




Limitations
on Effectiveness of Controls and Procedures




Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
controls will prevent all errors and all fraud. 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. Further, the design
of a control system must reflect the fact that there are resource constraints
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include, but are not limited to, the realities that judgments in decision-making
can be faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be
detected.







Changes
in Internal Control over Financial Reporting




There
were no changes in our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Rule 13a-15 or
15d-15 under the Exchange Act that occurred during the quarter ended December
31, 2008 that have materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.





ITEM
9B. OTHER INFORMATION





None.




PART
III




ITEM 10. DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE




Set forth
below is certain information regarding our directors and executive officers. Our
Board of Directors is comprised of five directors. There are no family
relationships between any of our directors or executive officers. Each of our
directors is elected to serve until our next annual meeting of our stockholders
and until his successor is elected and qualified or until such director's
earlier death, removal or termination.





Name
                          
                          Age
                          
                          Position with CompanyAnthony
      Shupin
                          
                          53
                          
                          Director,
      Chief Executive Officer, PresidentMichael
      Pellegrino
                          
                          59
                          
                          Senior
      Vice President, CFO and DirectorRobert
      Gowell
                          
                          39
                          
                          DirectorVincent
      Moreno
                          
                          64
                          
                          Director




Anthony
Shupin became CEO and President of ASII in October 2003. In November of 2004, he
also assumed the position of Chairman of the Board of ASII.  His
affiliation with ASII began as a member of the Board of Directors in January
2002. His experience includes over 20 years of executive management, sales and
marketing management and project and program management with technology
computing, aerospace and professional services companies. Prior to ASII, Mr.
Shupin served in several capacities in the Technology and Management Consulting
field. He founded T Shupin and Associates, a management consulting firm focused
on assisting clients in the areas of Sales and Marketing, New Business Start-Up,
Operational Analysis and Business/Technology Synchronization. At Deloitte
Consulting, he directed activities as a Business Development Executive in the
Communications and Media practice. Mr. Shupin's background also includes a role
as Director of International Business Development at the world's first
commercial satellite aerospace Company.  A graduate of Colby College,
Waterville, Maine, Mr. Shupin has extended his education at Rutgers University,
Cook College in Geographic Information Systems and Remote Sensing
training.




Michael
Pellegrino became Senior Vice President and CFO in February 2006. He originally
joined ASII in 1995 as Vice President & Chief Financial Officer. In March
2002, he was appointed President, Chief Executive Officer and Chief Financial
Officer, Secretary and a Director of ASII. From 1984 to 1995, Mr. Pellegrino was
Vice President and CFO of Software Shop Systems, Inc. From 1979 to 1984, he was
a regional controller for Capital Cities/ABS and from 1972 to 1979 as Director
of Financial Systems for ADP. Mr. Pellegrino has a Bachelors degree in
accounting from MSU and a Masters in Finance from Rutgers
University.




Robert
Gowell has been a director of the Company since 2001. He was the Company's
Co-Chairman and Chief Executive Officer from January 2002 until June 2002. He is
a retired Deputy U.S. Marshal who has worked out of the New York and
Pennsylvania offices from 1991 to 2001. He earned his B.S. in Management and
Finance from the City University of New York. He is currently working on his MBA
at Kutztown University.




Vincent
Moreno has been a director of the Company since January
2002.   Mr. Moreno provides ASII with over 30 years of experience
from a technical and business environment, with the past 23 years at the
executive management level. Since 2002, Mr. Moreno has been doing consulting
work for various software development firms. From 1998- 2002, he was President
and General Manager of PayPlus Software, Inc., a provider of payroll software to
the Professional Employer Organization marketplace. He served as Vice President
of Operations at ASII from 1996 to 1998. From 1989 to 1995, he served as
President and CEO of Mainstem Corporation, a national provider of software
services.







Code
of Ethics




The
Company has not formally adopted a written code of ethics that governs all of
our officers, directors and finance and accounting employees. The draft code of
ethics is filed herewith as Exhibit 14.1.




Section
16 Beneficial Ownership Compliance.




Section
16(a) of the Securities Exchange Act of 1934 requires ASII's directors and
executive officers, and persons who own more than 10% of a registered class of
ASII's equity securities to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of ASII. Officers, directors and greater than 10%
shareholders are required by SEC regulations to furnish ASII with copies of all
Section 16(a) forms they file.




To ASII's
knowledge, based solely on its review of the copies of such reports furnished to
ASII and written representations that no other reports were required during the
fiscal year ended December 31, 2002, all Section 16(a) filing requirements
applicable to its officers, directors and greater than 10% beneficial owners
were complied with, except that the following individuals have filed their Form
3s late: Anthony Shupin, Vincent Moreno and Erik Hoffer and the following
individuals have filed their Form 4s late: Michael Pellegrino and Robert
Gowell.




ITEM
11. Executive Compensation




The
following table sets forth information concerning the total compensation that we
have paid or that has accrued on behalf of our Chief Executive Officer and other
executive officers with annual compensation exceeding $100,000 during fiscal
2008and 2007.




Long
      Term CompensationAnnual
      Compensation
                                        
                                        
                                        Awards
                                        
                                        
                                        PayoutsOther
                                        
                                        
                                        
                                        
                                        
                                        SecuritiesName
      and
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        Annual
                                        
                                        
                                        Restricted
                                        
                                        
                                        Underlying
                                        
                                        
                                        
                                        
                                        
                                        OtherPrincipal
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        Compen-
                                        
                                        
                                        Stock
                                        
                                        
                                        Options/
                                        
                                        
                                        LTIP
                                        
                                        
                                        Compen-Position
                                        
                                        Year
                                        
                                        Salary
                                        
                                        
                                        Bonus
                                        
                                        
                                        sation($)
                                        
                                        
                                        Award($)
                                        
                                        
                                        Sar
      (#)
                                        
                                        
                                        Payouts($)
                                        
                                        
                                        sation
      ($)Anthony
      Shupin
                                        
                                        2008
                                        
                                        $
                                        227,900
                                        
                                        
                                        
                                        0
                                        
                                        
                                        
                                        0
                                        
                                        
                                        
                                        0
                                        
                                        
                                        
                                        0
                                        
                                        
                                        
                                        0
                                        
                                        
                                        
                                        0President
      & CEO
                                        
                                        2007
                                        
                                        $
                                        215,000
                                        
                                        
                                        
                                        0
                                        
                                        
                                        
                                        0
                                        
                                        
                                        
                                        0
                                        
                                        
                                        
                                        0
                                        
                                        
                                        
                                        0
                                        
                                        
                                        
                                        0Michael
      J
                                        
                                        2008
                                        
                                        $
                                        185,500
                                        
                                        
                                        
                                        0
                                        
                                        
                                        
                                        0
                                        
                                        
                                        
                                        0
                                        
                                        
                                        
                                        0
                                        
                                        
                                        
                                        0
                                        
                                        
                                        
                                        00Pellegrino*
                                        
                                        2007
                                        
                                        $
                                        174,022
                                        
                                        
                                        
                                        0
                                        
                                        
                                        
                                        0
                                        
                                        
                                        
                                        0
                                        
                                        
                                        
                                        0
                                        
                                        
                                        
                                        0
                                        
                                        
                                        
                                        0




Appointment
of Principal Officers; Compensatory Arrangements of Certain
Officers.




Effective
November 13, 2006 the Company granted to each of Anthony Shupin, its President
and Chief Executive Officer and Michael Pellegrino, its Chief Financial Officer,
10,000 shares of newly created Series A Preferred Stock ("A Preferred") as
recognition for services.




The
shares will vest in five equal monthly installments and will be issued at the
discretion of Mr. Shupin and Mr. Pellegrino.  The shares have not been
issued as of December 31, 2008.  Each share of A Preferred is
convertible into 240,000 shares of common stock of the Company starting three
years from the date of issuance, provided that the closing bid price of the
Company's common stock is then $2.00 per share. The shares of A Preferred may be
voted with the Company's common stock on an as converted basis on any matters
that the common stock is entitled to vote on as a class.




Unconverted
shares of A Preferred will automatically cease to exist, and all rights
associated therewith will be terminated upon the earlier of (i) that person's
termination of employment with the Company for any reason, or (ii) five years
from the date of issuance.




On
November 13, 2006, the Company filed with the Secretary of State of Delaware a
Certificate of Designation of Preferences, Rights and Limitations of Series A
Preferred Stock.




Options/SAR
Grants in Last Fiscal Year





Number
      of
                  
                  
                  % of
      TotalSecurities
                  
                  
                  Options/SARSUnderlying
                  
                  
                  Granted
      toOptions/SARS
                  
                  
                  Employees
      in
                  
                  
                  Exercise
      or BaseName
                  
                  Granted
                  
                  
                  Fiscal
      Year
                  
                  
                  Price
      ($/Sh)
                  
                  
                  Expiration
      DateMichael
      J. Pellegrino, CFO
                  
                  
                  0
                  
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  
                  N/AAnthony
      Shupin, President & CEO
                  
                  
                  0
                  
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  
                  N/A









Aggregated
Option/SAR Exercises




None
exercised.




Employment
Agreements




Anthony
R. Shupin, Chairman, President and Chief Executive Officer. Mr. Shupin was
re-appointed as Chairman, President and Chief Executive Officer effective
February, 2005. On February 25, 2005, ASII entered into a five-year employment
agreement with Mr. Shupin, which entitled him to a base salary of $227,900 per
year, which may at the Board of Directors discretion adjust his base salary (but
not below $227,900 per year). Mr. Shupin is also entitled to participate in the
Annual Management Bonus Plan. As a participant in the Annual Management Bonus
Plan, Mr. Shupin will be eligible to receive bonuses, based on performance, in
any amount from 10% to 200% of the Base Salary. In addition, Mr. Shupin shall
participate in the Management Equity Incentive Plan. As a participant in the
Management Equity Plan, Mr. Shupin will be eligible to receive options, which
vest over a period of time from the date of the option's issue, to purchase
common shares of ASII. The Company may grant Mr. Shupin, following the first
anniversary of the date hereof and at the sole discretion of the Board of
Directors, options to purchase common shares of the Company (subject to the
vesting and the satisfaction of the other terms and conditions of such options).
Mr. Shupin will be entitled to 25 vacations days per year at such times as may
be mutually agreed with the Board of Directors. ASII will provide Mr. Shupin a
monthly car allowance of One Thousand Dollars ($1,000) along with related car
expenses.




Michael
J. Pellegrino, Senior Vice President and Chief Financial Officer. Mr. Pellegrino
was appointed as Senior Vice President and Chief Financial Officer effective
February 25, 2005. On February 25, 2005, ASII entered into a five-year
employment agreement with Mr. Pellegrino, which entitled him to a base salary of
$185,500 per year which may at the Board of Directors discretion adjust his base
salary (but not below $185,500 per year). Mr. Pellegrino is also entitled to
participate in the Annual Management Bonus Plan. As a participant in the Annual
Management Bonus Plan, Mr. Pellegrino will be eligible to receive bonuses, based
on performance, in any amount from 10% to 200% of the Base Salary. In addition,
Mr. Pellegrino shall participate in the Management Equity Incentive Plan. As a
participant in the Management Equity Incentive Plan, Mr. Pellegrino will be
eligible to receive options, which vest over a period of time from the date of
the option's issue, to purchase common shares of ASII. ASII may also grant to
the Employee, following the first anniversary of the date of the Agreement and
at the sole discretion of the Board of Directors, options to purchase common
shares of the Company (subject to the vesting and the satisfaction of the other
terms and conditions of such options). Mr. Pellegrino will be entitled to 25
vacation days per year at such times as may be mutually agreed with the Board of
Directors. ASII shall also furnish Mr. Pellegrino with monthly car allowance of
One Thousand Dollars ($1,000) and related car expenses.




Employee
and Director Stock Option Plans




ASII
adopted the 2006 Stock Incentive Plan, (the "Plan") in order to attract and
retain qualified personnel. This plan was adopted by the Board of Directors on
October 12, 2006 and approved by the shareholders on December 19, 2006. The
Board of Directors has initially reserved 2,500,000 shares of Common Stock for
issuance under the 2006 Incentive Plan.  Under the Plan, options may
be granted which are intended to qualify as Incentive Stock Options, (ISO’s)
under Section 422 of the Internal Revenue Code of 1986 (the “Code”) or which are
not (Non-ISO’s) intended to qualify as Incentive Stock Options there
under.




The 2006
Incentive Plan and the right of participants to make purchases there under are
intended to qualify as an “employee stock purchase plan” under Section 423 of
the internal Revenue Code of  1986, as amended (the
“Code”).  The 2006 Incentive Plan is not a qualified deferred
compensation plan under Sections 401(a) of the Internal Revenue Code and is not
subject to the provisions of the Employee Retirement Income Security Act of 1974
(”ERISA”).




The
number of shares reversed for issuance under the 2006 Incentive Plan accounts
for the 1 for 500 reverse stock split.




Compensation
of Directors




Outside
Directors receive compensation of $500 for each meeting attended for their
services as members of the Board of Directors. Directors will receive
reimbursement for expenses in attending directors meetings where
applicable.




ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS




The
following table lists stock ownership of our common stock as of December 31,
2008. The information includes beneficial ownership by (i) holders of more than
5% of our common stock, (ii) each of our current directors and executive
officers and (iii) all of our directors and executive officers as a group. The
information is determined in accordance with Rule 13d-3 promulgated under the
Exchange Act based upon information furnished by the persons listed or contained
in filings made by them with the Commission. Except as noted below, to our
knowledge, each person named in the table has sole voting and investment power
with respect to all shares of our common stock beneficially owned by
them.




Percentage
of beneficial ownership is based upon 2,970,592,794 shares of common stock
outstanding at December 31, 2008, together with securities exercisable or
convertible into shares of common stock within 60 days of December 31, 2008 for
each stockholder. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock that are
currently exercisable or exercisable within 60 days of December 31, 2008 are
deemed to be beneficially owned by the person holding such securities for the
purpose of computing the percentage of ownership of such person, but are not
treated as outstanding for the purpose of computing the percentage ownership of
any other person.










Beneficial
      OwnershipName
      and Address
                      
                      
                      
                      of
      Common Stockof Beneficial Owner
                      
                      Title
                      
                      No. of Shares
                      
                      
                      Percent of ClassAnthony
      R. Shupin
                      
                      Chairman,
      CEO and
                      
                      
                      19,800,000
                      (1)*1709
      Route 34 Suite 2
                      
                      PresidentFarmingdale,
      NJ 07727Michael
      Pellegrino
                      
                      Senior
      Vice President,
                      
                      
                      19,800,000
                      (1)*1709
      Route 34 Suite 2
                      
                      Chief
      Financial OfficerFarmingdale,
      NJ 07727
                      
                      &
      DirectorRobert
      Gowell
                      
                      Director
                      
                      
                      96,300
                      
                      
                      *1709
      Route 34 Suite 2Farmingdale,
      NJ 07727Vincent
      Moreno
                      
                      Director
                      
                      
                      0
                      
                      
                      
                      *1709
      Route 34 Suite 2Farmingdale,
      NJ 07727All
      Officers  & DirectorsAs
      a Group
                      
                      
                      
                      
                      30,096,300
                      
                      
                      
                      *




·
            less
      than 1%




(1)
Includes 480,000  shares of common stock issuable
upon  conversion of 10,000 shares of Series A Preferred Stock. The
terms of the Series A Preferred Stock permit the holder thereof to vote on all
matters voted on by holders of the common stock on an as converted
basis




There are
no arrangements known to ASII that at a later date may result in a change in
control of ASII.




ITEM
13. Certain Relationships and Related Transaction




None




ITEM
14. Principal Accountant Fees and Services




Audit
Fees. The aggregate fees billed by Bagell, Joseph, Levine & Company, L.L.C.
our independent registered public accounting firm, for professional services
rendered for the audit of the Company's annual financial statements for the last
two fiscal years and for the reviews of the financial statements included in the
Company's Quarterly reports during the last two fiscal years 2008 and 2007 were
$138,052 and $111,475, respectively.




Audit-Related
Fees. The Company did not engage its principal accountants to provide assurance
or related services during the last two fiscal years.




Tax Fees.
The aggregate fees billed by the Company's principal accountants for tax
compliance, tax advice and tax planning services rendered to the Company during
the last two fiscal years 2008 and 2007 were $7,000 and $7,000,
respectively.




All Other
Fees. The Company did not engage its principal accountants to render services to
the Company during the last two fiscal years, other than as reported
above.




Part
IV




ITEM
15. Exhibits





31.1
              Certification
      by Chief Executive Officer pursuant to Sarbanes-Oxley Section
      30231.2
              Certification
      by Chief Financial Officer pursuant to Sarbanes-Oxley Section
      30232.1
              Certification
      by Chief Executive Officer pursuant to 18 U.S.C. Section
    135032.2
              Certification
      by Chief Financial Officer pursuant to 18 U.S.C. Section
    1350









Signatures




In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.





Allied Security Innovations
      Inc.By:
                        /s/ Anthony ShupinAnthony
      Shupin, Chairman, President, andChief
      Executive OfficerDated:
      April 13,
2009







In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.




Signature
Title Date





By:
                        /s/ Anthony Shupin
                        
                        Chairman,
      President, and Chief,Anthony
      Shupin
                        
                        Executive
      OfficerBy:
                        /s/ Michael Pellegrino
                        
                        Senior
      Vice President and ChiefMichael
      Pellegrino
                        
                        Financial
      Officer, DirectorBy:
                        /s/ Vincent Moreno
                        
                        DirectorVincent
      MorenoBy:
                        
                        
                        DirectorRobert
      Gowell










Allied
Security Innovations, Inc. and Subsidiary


Formerly
Digital Descriptor Systems, Inc.


Table
of Contents




December
31, 2008





Page(s)Report
      of Independent Registered Public Accounting Firm
                2Audited
      Consolidated Financial Statements:Balance
      Sheets as of December 31, 2008 and 2007
                3Statements
      of Operations for the Years Ended December 31, 2008 and December 31,
      2007
                4Statement
      of Stockholders' Deficit for the Years Ended December 31, 2008 and
      December 31,2007
                5Statements
      of Cash Flows for the Years Ended December 31, 2008 and December 31,
      2007
                6-7Notes
      to Consolidated Financial Statements
                8-17


1




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




Board of
Directors and Stockholders


Allied
Security Innovations, Inc. and Subsidiary


Formerly
Digital Descriptor Systems, Inc.


1709
Route 34 South


Farmingdale,
New Jersey  07727





We have
audited the accompanying consolidated balance sheets of Allied Security
Innovations, Inc. and Subsidiary (the “Company”) as of December 31, 2008 and
2007, and the related consolidated statements of operations, changes in
stockholders’ deficit and cash flows for each of the years in the two-year
period ended December 31, 2008. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Allied Security
Innovations, Inc., as of December 31, 2008 and 2007, and the results of its
operations and its cash flows for each of the years in the two-year period ended
December 31, 2008 in conformity with accounting principles generally accepted in
the United States of America.





The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 15 to the
consolidated financial statements, the Company did not generate sufficient cash
flows from revenues during the year ended December 31, 2008, to fund its
operations. Also at December 31, 2008, the Company had negative net working
capital of $17,716,423.  These matters raise substantial doubt about
the Company’s ability to continue as a going concern. Management’s plan in
regard to these matters is also described in Note 15. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.




/s/
BAGELL, JOSEPHS, LEVINE & COMPANY, L.L.C.


Bagell,
Josephs, Levine & Company, L.L.C.


Marlton,
NJ  08053





April 13,
2009


2




ALLIED
SECURITY INNOVATIONS, INC. AND SUBSIDIARY
 FORMERLY
DIGITAL DESCRIPTOR SYSTEMS, INC.
 CONSOLIDATED
BALANCE SHEETS
 DECEMBER
31, 2008 AND 2007
 
 2008
                                                  
                                                  
                                                  2007ASSETSCurrent
      Assets:Cash
      and cash equivalents
                                                  
                                                  $
                                                  213,513
                                                  
                                                  
                                                  $
                                                  386,628Accounts
      receivable, net of allowance
                                                  
                                                  
                                                  537,223
                                                  
                                                  
                                                  
                                                  406,655Inventory
                                                  
                                                  
                                                  238,123
                                                  
                                                  
                                                  
                                                  665,435Other
      Current Assets
                                                  
                                                  
                                                  9,346
                                                  
                                                  
                                                  
                                                  8,241Total
      Current Assets
                                                  
                                                  
                                                  998,205
                                                  
                                                  
                                                  
                                                  1,466,959Property
      and equipment, net ofaccumulated
depreciation
                                                  
                                                  
                                                  267,594
                                                  
                                                  
                                                  
                                                  306,237Other
      Assets:Deposits
                                                  
                                                  
                                                  12,896
                                                  
                                                  
                                                  
                                                  14,626Goodwill
                                                  
                                                  
                                                  2,054,998
                                                  
                                                  
                                                  
                                                  4,054,998Intangible
      assets, net ofaccumulated amortization
                                                  
                                                  
                                                  137,969
                                                  
                                                  
                                                  
                                                  153,137Total
      Other Assets
                                                  
                                                  
                                                  2,205,863
                                                  
                                                  
                                                  
                                                  4,222,761Total
      Assets
                                                  
                                                  $
                                                  3,471,662
                                                  
                                                  
                                                  $
                                                  5,995,957LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      Liabilities:Accounts
      payable
                                                  
                                                  $
                                                  142,865
                                                  
                                                  
                                                  $
                                                  133,113Accrued
      expenses
                                                  
                                                  
                                                  339,079
                                                  
                                                  
                                                  
                                                  297,934Accrued
      payroll expenses
                                                  
                                                  
                                                  114,923
                                                  
                                                  
                                                  
                                                  93,856Accrued
      interest
                                                  
                                                  
                                                  711,684
                                                  
                                                  
                                                  
                                                  1,447,753Deferred
      income
                                                  
                                                  
                                                  10,098
                                                  
                                                  
                                                  
                                                  60,577Convertible
      debentures current portion
                                                  
                                                  
                                                  39,078
                                                  
                                                  
                                                  
                                                  5,122,832Note
      payable
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  3,500,000Derivative
      liabilities
                                                  
                                                  
                                                  17,356,901
                                                  
                                                  
                                                  
                                                  22,898,360Total
      Current Liabilities
                                                  
                                                  
                                                  18,714,628
                                                  
                                                  
                                                  
                                                  33,554,425Note
      payable
                                                  
                                                  
                                                  4,000,000
                                                  
                                                  
                                                  
                                                  -Convertible
      debentures, net of current portion
                                                  
                                                  
                                                  14,028,077
                                                  
                                                  
                                                  
                                                  655,281Total
      Liabilities
                                                  
                                                  
                                                  36,742,705
                                                  
                                                  
                                                  
                                                  34,209,706Stockholders'
      deficit:Preferred
      stock, $.001 par value; 1,000,000 sharesauthorized, -0- issued and
      outstanding
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Common
      stock, par value $.001; authorized 9,999,000,000 shares;2,970,592,794 and 681,599,825 issued and outstanding at December
      31, 2008 and 2007, respectively.
                                                  
                                                  
                                                  2,970,593
                                                  
                                                  
                                                  
                                                  681,600Additional
      paid-in capital
                                                  
                                                  
                                                  16,916,041
                                                  
                                                  
                                                  
                                                  18,864,882Accumulated
      deficit
                                                  
                                                  
                                                  (53,157,677
                                                  )
                                                  
                                                  
                                                  (47,760,231
                                                  )Total
      Stockholders' Deficit
                                                  
                                                  
                                                  (33,271,043
                                                  )
                                                  
                                                  
                                                  (28,213,749
                                                  )Total
      Liabilities and Stockholders' Deficit
                                                  
                                                  $
                                                  3,471,662
                                                  
                                                  
                                                  $
                                                  5,995,957
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  3
 
 ALLIED
SECURITY INNOVATIONS, INC. AND SUBSIDIARY
 FORMERLY
DIGITAL DESCRIPTOR SYSTEMS, INC.
 CONSOLIDATED  STATEMENTS
OF OPERATIONS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
 
 2008
                      
                      
                      2007INCOMENet
      sales
                      
                      $
                      4,838,934
                      
                      
                      $
                      4,367,941Cost
      of revenue
                      
                      
                      1,964,572
                      
                      
                      
                      1,185,313Gross
      Profit
                      
                      
                      2,874,362
                      
                      
                      
                      3,182,628OPERATING
      EXPENSESGeneral
      and administrative
                      
                      
                      2,200,230
                      
                      
                      
                      2,312,089Sales
      and marketing
                      
                      
                      719,927
                      
                      
                      
                      541,587Research
                      
                      
                      94,946
                      
                      
                      
                      101,687Impairment
      of goodwill
                      
                      
                      2,000,000
                      
                      
                      
                      -Total
      Operating Expenses
                      
                      
                      5,015,103
                      
                      
                      
                      2,955,363INCOME
      (LOSS) BEFORE OTHER INCOME (EXPENSE)
                      
                      
                      (2,140,741
                      )
                      
                      
                      227,265OTHER
      INCOME (EXPENSE)Loss
      on extinguishment of debt
                      
                      
                      (7,237,883
                      )
                      
                      
                      -Interest
                      
                      
                      (1,203,589
                      )
                      
                      
                      (1,121,707
                      )Interest
      on conversions
                      
                      
                      (170,673
                      )
                      
                      
                      -Amortization
      of debt discount
                      
                      
                      (91,346
                      )
                      
                      
                      (135,840
                      )Change
      in fair market value of derivative liability
                      
                      
                      5,541,459
                      
                      
                      
                      (15,133,122
                      )Depreciation
      and amortization
                      
                      
                      (77,958
                      )
                      
                      
                      (102,140
                      )Other
      income and expenses
                      
                      
                      (16,715
                      )
                      
                      
                      -Total
      Other (Expense)
                      
                      
                      (3,256,705
                      )
                      
                      
                      (16,492,809
                      )LOSS
      BEFORE PROVISION FOR INCOME TAXES
                      
                      
                      (5,397,446
                      )
                      
                      
                      (16,265,544
                      )`Provision
      for income taxes
                      
                      
                      -
                      
                      
                      
                      -NET
      LOSS APPLICABLE TO COMMON SHARES
                      
                      $
                      (5,397,446
                      )
                      
                      $
                      (16,265,544
                      )NET
      LOSS PER BASIC AND DILUTED SHARES
                      
                      $
                      (0.00
                      )
                      
                      $
                      (0.00
                      )Weighted
      average shares of common stock outstanding, basic and
    diluted
                      
                      
                      1,877,405,183
                      
                      
                      
                      147,082,908
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  4
 
 ALLIED
SECURITY INNOVATIONS, INC. AND SUBSIDIARY
 FORMERLY
DIGITAL DESCRIPTOR SYSTEMS, INC.
 CONSOLIDATED
STATEMENT OF STOCKHOLDERS' DEFICIT
 FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
 
 TotalCommon
      Stock
                              
                              
                              Additional
      Paid
                              
                              
                              Accumulated
                              
                              
                              Stockholders'Shares
                              
                              
                              Amount
                              
                              
                              in
      Capital
                              
                              
                              Deficit
                              
                              
                              DeficitBalance
      at December 31, 2006
                              
                              
                              19,137,612
                              
                              
                              $
                              19,138
                              
                              
                              $
                              18,696,266
                              
                              
                              $
                              (31,494,687
                              )
                              
                              $
                              (12,779,283
                              )Common
      stock issued in conversion ofconvertible
      debentures
                              
                              
                              662,462,213
                              
                              
                              
                              662,462
                              
                              
                              
                              (520,120
                              )
                              
                              
                              -
                              
                              
                              
                              142,342Debt
      Discount in conjunction with issuanceof convertible
      debentures
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              243,246
                              
                              
                              
                              -
                              
                              
                              
                              243,246Beneficial
      interest in conjunction withissuance of convertible
      debentures
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              445,490
                              
                              
                              
                              -
                              
                              
                              
                              445,490Net
      loss
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (16,265,544
                              )
                              
                              
                              (16,265,544
                              )Balance
      at December 31, 2007
                              
                              
                              681,599,825
                              
                              
                              
                              681,600
                              
                              
                              
                              18,864,882
                              
                              
                              
                              (47,760,231
                              )
                              
                              
                              (28,213,749
                              )Common stock issued
      in conversion of convertible
      debentures
                              
                              
                              2,288,992,969
                              
                              
                              
                              2,288,993
                              
                              
                              
                              (2,119,514
                              )
                              
                              
                              -
                              
                              
                              
                              169,479Beneficial
      interest in conjunction withissuance of convertible
      debentures
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              170,673
                              
                              
                              
                              -
                              
                              
                              
                              170,673-Net
      loss
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (5,397,446
                              )
                              
                              
                              (5,397,446
                              )Balance
      at December 31, 2008
                              
                              
                              2,970,592,794
                              
                              
                              $
                              2,970,593
                              
                              
                              $
                              16,916,041
                              
                              
                              $
                              (53,157,677
                              )
                              
                              $
                              (33,271,043
                              )
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  5
 
 ALLIED
SECURITY INNOVATIONS, INC. AND SUBSIDIARY
 FORMERLY
DIGITAL DESCRIPTOR SYSTEMS, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
 
 2008
                    
                    
                    2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      Loss
                    
                    $
                    (5,397,446
                    )
                    
                    $
                    (16,265,544
                    )Adjustments
      to reconcile net loss to net cashprovided
      by (used in) operating activities:Depreciation
      and amortization
                    
                    
                    77,958
                    
                    
                    
                    102,140Gain
      on sale of equipment
                    
                    
                    -
                    
                    
                    
                    (2,200
                    )Amortization
      of debt discount
                    
                    
                    91,346
                    
                    
                    
                    135,840Beneficial
      interest
                    
                    
                    170,673
                    
                    
                    
                    445,490Loss
      on debt extinguishment
                    
                    
                    7,237,883
                    
                    
                    
                    -Change
      in fair value of derivative liability
                    
                    
                    (5,541,459
                    )
                    
                    
                    15,133,122Impairment
      of goodwill
                    
                    
                    2,000,000
                    
                    
                    
                    -Bad
      debt expense
                    
                    
                    59,444
                    
                    
                    
                    76,333Changes
      in operating assets and liabilities:Accounts
      receivable
                    
                    
                    (190,012
                    )
                    
                    
                    76,163Inventory
                    
                    
                    427,312
                    
                    
                    
                    (127,070
                    )Prepaid
      expenses and other assets
                    
                    
                    (1,105
                    )
                    
                    
                    (21,137
                    )Deposits
                    
                    
                    1,730
                    
                    
                    
                    -Accounts
      payable
                    
                    
                    9,752
                    
                    
                    
                    17,553Accrued
      expenses
                    
                    
                    62,211
                    
                    
                    
                    3,046Accrued
      interest
                    
                    
                    883,223
                    
                    
                    
                    575,045Deferred
      income
                    
                    
                    (50,479
                    )
                    
                    
                    (73,818
                    )Total
      Adjustments
                    
                    
                    5,238,477
                    
                    
                    
                    16,340,507Net
      Cash Provided by (Used in) Operating Activities
                    
                    
                    (158,969
                    )
                    
                    
                    74,963CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of equipment
                    
                    
                    (24,146
                    )
                    
                    
                    (75,254
                    )Proceeds
      of sale of equipment
                    
                    
                    -
                    
                    
                    
                    2,200Net
      Cash Used in Investing Activities
                    
                    
                    (24,146
                    )
                    
                    
                    (73,054
                    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from convertible debentures
                    
                    
                    510,000
                    
                    
                    
                    -Payment
      on note payable
                    
                    
                    (500,000
                    )
                    
                    
                    (8,000
                    )Net
      Cash Provided by (Used in) Financing Activities
                    
                    
                    10,000
                    
                    
                    
                    (8,000
                    )NET
      DECREASE IN CASH
                    
                    
                    (173,115
                    )
                    
                    
                    (6,091
                    )CASH
      AT BEGINNNING OF YEAR
                    
                    
                    386,628
                    
                    
                    
                    392,719CASH
      AT END OF YEAR
                    
                    $
                    213,513
                    
                    
                    $
                    386,628
  The
accompanying notes are an integral part of the consolidated financial
statements.
  6
 
 ALLIED
SECURITY INNOVATIONS, INC. AND SUBSIDIARY
 FORMERLY
DIGITAL DESCRIPTOR SYSTEMS, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007 (CONTINUED)
 
 2008
                                        
                                        
                                        2007Supplemental
      Disclosure of Cash Flow Information:Cash
      Paid For:Interest
      Expense
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Income
      Taxes
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Supplemental
      Disclosure of Non-Cash Investingand Financing
      Activities:Common
      stock issued in conversion ofconvertible
      debentures
                                        
                                        $
                                        2,288,993
                                        
                                        
                                        $
                                        51,172Beneficial
      interest in conjunction withissuance of convertible
      debentures
                                        
                                        $
                                        170,673
                                        
                                        
                                        $
                                        445,490Common
      stock issued in conversion ofaccrued
      interest
                                        
                                        $
                                        4,682
                                        
                                        
                                        $
                                        19,735Supplemental
      Schedule of May 16, 2008 Debt Refinancing:Convertible
      debentures at December 31, 2008
                                        
                                        $
                                        14,165,899Convertible
      debentures satisfied May 16, 2008
                                        
                                        
                                        (5,832,483
                                        )Loss
      on extinguishment
                                        
                                        
                                        (7,237,883
                                        )Accrued
      interest capitalized to debt
                                        
                                        
                                        (1,595,533
                                        )Cash
      payment of convertible debentures at settlement
                                        
                                        $
                                        (500,000
                                        )
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
  7




Allied
Security Innovations, Inc. and Subsidiary


Formerly
Digital Descriptor Systems, Inc.


Notes
to the Consolidated Financial Statements


For
the Years Ended December 31, 2008 and December 31, 2007




Note
1 - Description of Business


On
October 9, 2007 the company’s stock began trading on the OTCBB market.
Previously, the Company’s common stock traded on Pink Sheets.





Allied
Security Innovations, Inc., incorporated in Delaware in 1994, develops,
assembles and markets computer installations consisting of hardware and
software, which capture video and scanned images, link the digitized images to
test and store the images and text on a computer database and transmit this
information to remote locations. The principal product of the Company is the
Compu-Capture ® Law Enforcement Program, which is marketed to law enforcement
agencies and prison facilities. Substantially all of the Company's revenues are
derived from governmental agencies in the United States.





CGM-Applied
Security Technology, Inc. (CGM) is a manufacturer and distributor of indicative
and barrier security seals, security tapes and related packaging security
systems, protective security products for palletized cargo, physical security
systems for tractors, trailers and containers as well as a number of highly
specialized authentication products.





On
December 19, 2006 a special meeting of the shareholders was held and at the
meeting the shareholders passed a resolution to change the name of the company
from Digital Descriptor Systems, Inc. (“ASII”) to Allied Security Innovations,
Inc. The shareholders also passed a resolution to authorize a 1 for 500 reverse
stock split. Both of these actions were completed on February 5, 2007. In
addition the 2006 Incentive Stock Option Plan adopted by The Board of Directors
on October 12, 2006 was approved by the shareholders.  On October 9,
2007 the company stock began trading on the OTCBB market.  Previously,
the Company’s common stock traded on Pink Sheets.





On July
1, 2007 the offices of Allied Security Innovations, Inc. and the Somerset office
of CGM Applied Security Technologies, Inc., the Company’s wholly owned
subsidiary, were combined into a new office located in Farmingdale, NJ in a
6,000 square foot combination warehouse /office space.  The reason for
this was cost savings and improved operational efficiencies.




Note
2 - Summary of Significant Accounting Policies





Significant
accounting policies followed by the Company in the preparation of the
accompanying consolidated financial statements are summarized
below:





Use
of Estimates


The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles 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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reported period. Actual results could differ from those
estimates.





Revenue
Recognition


The
Company derives revenue from the sale of hardware, software, post customer
support, and other related services. Post customer support includes telephone
support, virus fixes, and rights to upgrades. Other related services include
basic training. CGM derives its revenue from the sale of its tapes, labels and
other security devices.





The
Company recognizes revenue upon delivery of the product to the end-user, when
the fee is determinable and collectability is probable. Revenue allocable to
post customer support is recognized on a straight-line basis over the period
which the service is to be provided.


8




Deferred
Income


Revenue
allocable to post customer support is recognized on a straight-line basis over
the period which the service is to be provided. Revenue collected for future
services is recorded as deferred income. Deferred revenue for the years ended
December 31, 2008 and 2007 was $10,098 and $60,577
respectively.  Revenue allocable to other services is recognized as
the services are provided.  The CGM-AST subsidiary recognizes it
revenue upon shipment of the product to the customer.




Software
Development Costs


All costs
incurred in the research and development of new software products and costs
incurred prior to the establishment of a technologically feasible product are
expensed as incurred. Research and development of software costs were $94,946
and $101,687, respectively, for the years ended December 31, 2008 and
2007.





Cash
and Cash Equivalents


For the
purpose of the statement of cash flows, cash and cash equivalents include time
deposits, certificates of deposits, restricted cash, and all highly liquid debt
instruments with original maturities or three months or less.





Accounts
Receivable


Accounts
receivable are uncollateralized customer obligations due under normal trade
terms requiring payment within 30 days from the invoice date. No interest is
charged on any past due accounts. Accounts receivable are stated at the amount
billed to the customer. Accounts receivable, net of allowance was $537,223 and
$406,655 at December 31, 2008 and 2007.





The
carrying amount of accounts receivable is reduced by a valuation allowance that
reflects management's best estimate of the amount that will not be collected.
Management reviews all accounts receivable balances that exceed 90 days from
invoice date and based on assessment of current creditworthiness, estimates the
portion, if any that will not be collected. The allowance for doubtful accounts
is $148,506 and $89,062 at December 31, 2008 and 2007.





Fixed
Assets


Fixed
assets are stated at cost.  Depreciation is computed primarily using
the straight-line method over the estimated useful life of the
assets.





Machinery and equipment
              7
      yearsFurniture
      and fixtures
              7
      yearsComputers
              3
      yearsLeasehold
      improvements
              39
      years




9




Income
Taxes


The
Company provides for income taxes under the liability method. Deferred income
taxes reflect the net tax effects of temporary differences between carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Such differences result from differences
in the timing of recognition by the Company of net operating loss carry
forwards, certain expenses, and differences in the depreciable lives and
depreciation methods for certain assets.





Accounting
for Stock Options


The
Company determines stock-based compensation expense under Financial Accounting
Standards Board issued Statement No. 123R (SFAS 123R), "Accounting for
Stock-Based Compensation."




Net
Loss Per Common Share


Basic
loss per share is calculated by dividing the net loss by the weighted average
common shares outstanding for the period. Diluted loss per share is calculated
by dividing the net loss by the weighted average common shares outstanding of
the period plus the dilutive effect of common stock equivalents. Common stock
equivalents were not included in the computation of diluted earnings per share
when the Company reported a loss because to do so would be antidilutive for the
years presented.





Concentration
of Credit Risk


Financial
instruments which potentially subject the Company to a concentration of credit
risk principally consist of cash and accounts receivable. Concentration of
credit risk, with respect to accounts receivable, is limited due to the
Company's credit evaluation process. The Company does not require collateral
from its customers. The Company sells its principal products to end users and
distributors principally in the United States.





The
Company maintains cash and cash equivalents in various financial institutions
that, in the aggregate, exceed the limit insured by the Federal Deposit
Insurance Corporation (FDIC). The FDIC insures cash deposits up to $250,000 per
bank. Any amounts over $250,000 represent an uninsured risk to the
Company.





Principles
of Consolidation and Basis of Presentation


The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiary CGM.  All inter-company accounts
have been eliminated.




Inventory


Inventories
consist principally of inks, adhesives, film and finished goods held in the
Company’s warehouse. Inventory is stated at the lower of cost or market,
utilizing the first-in, first-out method. The cost of finished goods includes
the cost of raw materials, packaging supplies, direct and indirect labor and
other indirect manufacturing costs. On a quarterly basis, management reviews
inventory for unsalable or obsolete inventory. Obsolete or unsalable inventory
write-offs have been immaterial to the financial statements.




Advertising


The
Company’s policy is to expense the costs of advertising as incurred. The Company
had $109,485 and $32,324 for the years ended December 31, 2008 and 2007
respectively.





Fair
Value of Financial Instruments


The
carrying amount reported in the consolidated balance sheet for cash and cash
equivalents, accounts payable and accrued expenses approximates fair value
because of the immediate or short-term maturity of these financial instruments.
The carrying amount reported for the convertible debentures and notes
payable approximates fair value because, in general, the interest on the
underlying instruments fluctuates with market rates.




Goodwill
and Other Intangible Assets


In June
2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 142
“Goodwill and Other Intangible Assets”. This statement addresses financial
accounting and reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, “Intangible Assets.” It addresses how intangible
assets that are acquired individually or with a group of other assets (but not
those acquired in a business combination) should be accounted for in financial
statements upon their acquisition. This Statement also addresses how goodwill
and other intangible assets should be accounted for after they have been
initially recognized in the financial statements.   Goodwill was
acquired upon the purchase of its wholly-owned subsidiary of CGM totaling
$4,054,998 (see footnote 11).




In
addition, the Company has acquired licenses, which are included as other
intangible assets. The licenses are being amortized over a period of 15 years
based on the expected benefits to be consumed or otherwise used up. Goodwill and
other intangible assets are tested annually for impairment in the fourth
quarter, and are tested for impairment more frequently if events and
circumstances indicate that the asset might be impaired. An impairment loss is
recognized to the extent that the carrying amount exceeds the asset’s fair
value. The Company assesses the recoverability of its goodwill and other
intangible assets by comparing the projected undiscounted net cash flows
associated with the related asset, over their remaining lives, in comparison to
their respective carrying amounts. Impairment, if any, is based on the excess of
the carrying amount over the fair value of those assets.


10





In
December of 2008 the company decreased the value of goodwill from $4,054,998 to
$2,054,998.




Derivative
Instruments


The Company has an outstanding
convertible debt instrument that contains free-standing and embedded derivative
features. The Company accounts for these derivatives in accordance with SFAS No.
133,“Accounting for
Derivative Instruments and Hedging Activities,”and EITF Issue No. 00-19,“Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock.”In
accordance with the provisions of SFAS No. 133 and EITF Issue No. 00-19, the
embedded derivatives are required to be bifurcated from the debt instrument and
recorded as a liability at fair value on the consolidated balance sheet. Changes
in the fair value of the derivatives are recorded at each reporting period and
recordedin change in fair
market value of derivative liability, a separate component of the other income
(expense). As of December 31, 2008, the fair value of derivatives was
$17,356,901, a decrease of $5,541,459 from December 31, 2007. The
Company had a net gain on all derivatives of $5,541,459 for the year ended
December 31, 2008.




Earnings
(Loss) Per Share of Common Stock


Historical net income
(loss) per common share is computed using the weighted average number of common
shares outstanding. Diluted earnings per share (EPS) include additional dilution
from common stock equivalents, such as stock issuable pursuant to the exercise
of stock options and warrants. Common stock equivalents were not included in the
computation of diluted earnings per share at December 31, 2008 and 2007 when the
Company reported a loss because to do so would be anti-dilutive for years
presented. The Company has incurred losses since inception as a result of
funding its research and development, including the development of its
intellectual property portfolio, which is key to its core
products.




The following is a reconciliation of the
computation for basic and diluted EPS:




December 31,
                          2008
                        
                        
                        December 31,
                          2007Net Loss
                        
                        $
                        (5,397,446
                        )
                        
                        $
                        (16,265,544
                        )Weighted-average common shares
      outstanding (Basic)
                        
                        
                        1,877,405,183
                        
                        
                        
                        147,082,908Weighted-average common stock
      Equivalents:Stock
    options
                        
                        
                        -
                        
                        
                        
                        -Warrants
                        
                        
                        -
                        
                        
                        
                        -Weighted-average common shares
      outstanding (Diluted)
                        
                        
                        1,887,405,183
                        
                        
                        
                        147,082,908





Limitations


Fair value estimates are made at a
specific point in time, based on relevant market information and information
about the financial statement. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.




Reclassifications


Certain amounts for the years ended
December 31, 2007 have been reclassified to conform to the presentation of the
December 31, 2008 amounts. The reclassifications had no effect on net loss or
stockholders’ deficit for the years ended December 31, 2008 and
2007.





Note
3 - Impact of Recent Accounting Pronouncements





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (SFAS No. 162). SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting principles used in the
preparation of financial statements.  SFAS No. 162 is effective 60
days following the SEC’s approval of the Public Company Accounting Oversight
Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity
with Generally Accepted Accounting Principles.”  The implementation of
this standard will not have a material impact on Consolidated Financial
Statements.





In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities: an amendment of FASB Statement No. 133"
("SFAS No. 161"). SFAS No. 161 changes the disclosure requirements for
derivative instruments and hedging activities. The Company is reviewing the
provisions of SFAS No. 161, which is effective the first quarter of fiscal
2009, and currently does not anticipate that this new accounting standard will
have a significant impact on the consolidated Financial
Statements.


11





In
February 2008, FASB Staff Position ("FSP") FAS No. 157-2, "Effective
Date of FASB Statement No. 157" ("FSP No. 157-2") was issued. FSP
No. 157-2 defers the effective date of SFAS No. 157 to fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years, for all nonfinancial assets and liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). Examples of items within the scope of FSP
No. 157-2 are nonfinancial assets and nonfinancial liabilities initially
measured at fair value in a business combination (but not measured at fair value
in subsequent periods), and long-lived assets, such as property, plant and
equipment and intangible assets measured at fair value for an impairment
assessment under SFAS No. 144.





The
partial adoption of SFAS No. 157 on January 1, 2008 with respect to
financial assets and financial liabilities recognized or disclosed at fair value
in the financial statements on a recurring basis did not have a material impact
on the Company's financial statements. See Note 6 for the fair value
measurement disclosures for these assets and liabilities. The Company is in the
process of analyzing the potential impact of SFAS No. 157 relating to its
planned January 1, 2009 adoption of the remainder of the
standard.




On
January 1, 2008 (the first day of fiscal 2008), the Company adopted SFAS
No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities, Including an amendment of FASB Statement No. 115" ("SFAS
No. 159"). SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value, which are not
otherwise currently required to be measured at fair value. Under SFAS
No. 159, the decision to measure items at fair value is made at specified
election dates on an instrument-by-instrument basis and is irrevocable. Entities
electing the fair value option are required to recognize changes in fair value
in earnings and to expense upfront costs and fees associated with the item for
which the fair value option is elected. The new standard did not impact the
Company's Consolidated Financial Statements as the Company did not elect the
fair value option for any instruments existing as of the adoption date. However,
the Company will evaluate the fair value measurement election with respect to
financial instruments the Company enters into in the future.





In December 2007, the FASB issued SFAS
No. 141R,“Business
Combinations”and SFAS
No. 160,“Non controlling
Interests in Consolidated Financial Statements - an amendment to ARB
No. 51.”SFAS Nos.
141R and 160 require most identifiable assets, liabilities, non controlling
interests, and goodwill acquired in a business combination to be recorded at
“full fair value” and require non controlling interests (previously referred to
as minority interests) to be reported as a component of equity, which changes
the accounting for transactions with non controlling interest holders. Both
statements are effective for periods beginning on or after December 15,
2008, and early adoption is prohibited. Accordingly, SFAS No. 141R will be
applied by the Company to business combinations occurring on or after
January 1, 2009. SFAS No. 160 will be applied prospectively to all non
controlling interests, including any that arose before the effective date. The
adoption of SFAS No. 160 is not expected to have any impact on the
Company’s consolidated financial statements.





Note
4 – Intangible Assets





Intangible
assets consist of the following at December 31, 2008 and 2007:





2008
                        
                        
                        2007Licenses
                        
                        $
                        222,076
                        
                        
                        $
                        222,076Accumulated
      amortization
                        
                        
                        84,108
                        
                        
                        
                        68,939Total
                        
                        $
                        137,968
                        
                        
                        $
                        153,137





Licenses
are being amortized over its estimated useful life of 15
years.  Amortization expense for the years ended December 31, 2008 and
2007 was $15,169 respectively.




The following is a listing of the
estimated amortization expense for the next five years:





Year
ended December 31,




2009
                    
                    $
                    15,1692010
                    
                    
                    15,1692011
                    
                    
                    15,1692012
                    
                    
                    15,1692013
                    
                    
                    15,169





Based on
the results of its most recent annual impairment tests, the Company determined
that no impairment of the licenses existed as of December 31, 2008 or 2007.
However, future impairment tests could result in a charge to
earnings


12





Note
5- Property and Equipment





Fixed
assets consist of the following at December 31, 2008 and 2007:





2008
                          
                          
                          2007Furniture
      and Fixtures
                          
                          $
                          75,613
                          
                          
                          $
                          71,367Leasehold
      Improvements
                          
                          
                          159,607
                          
                          
                          
                          159,607Computers
                          
                          
                          219,301
                          
                          
                          
                          209,179Machinery
      and Equipment
                          
                          
                          762,987
                          
                          
                          
                          753,2091,217,508
                          
                          
                          
                          1,193,362Less:
      Accumulated depreciation
                          
                          
                          (949,914
                          )
                          
                          
                          (887,125
                          )Net
                          
                          $
                          267,594
                          
                          
                          $
                          306,237





Depreciation
expense for the years ended December 31, 2008 and 2007 was $62,789 and $86,972,
respectively.





Note
6 - Convertible Debentures





Based on
the guidance in SFAS133 and EITF00-19, the Company concluded that the conversion
features of its convertible debentures were required to be accounted for as
derivatives. The imbedded derivative feature was bi-furcated and the fair market
value was determined using a convertible bond valuation model. The derivative
instruments are recorded at fair market value with changes in value recognized
during the period of change.





On May
16, 2008 convertible debentures in the net amount of $5,832,483 were
satisfied.





On May
16, 2008, the Company issued sixteen convertible notes for an aggregate amount
of $14,165,899. The debentures are collateralized by substantially all of the
Company's assets. The debentures accrue interest at the rate of 6% per
annum.





The
holders have the right to convert the  principal amount plus accrued
interest into shares of the Company's common stock. The conversion price in
effect on any Conversion Date shall be an amount equal to 26% of the mean
average price of the common stock for the ten trading days prior to notice of
conversion.





We
recorded a derivative liability related to this convertible debenture. The
initial fair market value of the conversion option in the amount of $10,000 was
recorded as a debt discount and was expensed in 2008.  The fair market
value of the conversion feature is also shown as a derivative liability on the
Company’s balance sheet and is being adjusted to fair market value each
reporting period with the change being reported as “other income and expenses”
in the statement of income.





The
expected payment of principal over the life of the note assuming no principal is
converted is as follows:





Year
                      
                      Principal Payment2009
                      
                      $
                      -0-2010
                      
                      
                      -0-2011
                      
                      $
                      14,165,899





Note
7 – Derivative Liability





In
accordance with SFAS 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES" and EITF 00-19, "ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS
INDEXED TO, AND POTENTIALLY SETTLED IN, A COMPANY'S OWN STOCK", the conversion
feature associated with the Secured Convertible Debentures represents embedded
derivatives. As such, the Company had recognized embedded derivatives as a
liability in the accompanying consolidated balance sheet, and it was measured at
its estimated fair value of $17,356,901 and $22,898,360 as of December 31, 2008
and 2007, respectively. The estimated fair value of the embedded derivative has
been calculated based on a Black-Scholes pricing model using the following
assumptions:


2008
                  
                  
                  2007Fair
      market value of stock
                  
                  $
                  0.0001
                  
                  
                  $
                  0.0003Exercise
      price
                  
                  $
                  0.00007
                  
                  
                  $
                  0.00005Dividend
      yield
                  
                  
                  0.00
                  %
                  
                  
                  0.00
                  %Risk
      free interest rate
                  
                  
                  1.07
                  %
                  
                  
                  4.20
                  %Expected
      volatility
                  
                  
                  478.0
                  %
                  
                  
                  150.
                  %Expected
      life
                  
                  2.5
      Years
                  
                  
                  0.00
      to 6.25 Years




13




Note
8 - Income Taxes




At
December 31, 2008 and 2007, the Company had federal net operating loss carry
forwards of approximately $11,900,000 and $14,000,000, respectively to offset
future federal taxable income expiring in various years through 2028. The
Company also has state net operating loss carry forwards in various states,
which approximate the federal amount to offset future state taxable income
expiring in various years, generally 7 to 10 years following the year the loss
was incurred.




The
timing and extent in which the Company can utilize future tax deductions in any
year may be limited by provisions of the Internal Revenue Code regarding changes
in ownership of corporations due to certain ownership changes of the
Company.




The
differences between income tax provisions in the financial statements and the
tax expense (benefit) computed at the U.S. Federal Statutory rate are as
follows:





Year Ended December 31,2008
                            
                            
                            2007Tax
      provision at the U. S. Federal Statutory rate
                            
                            
                            34
                            %
                            
                            
                            34
                            %Valuation
      allowance
                            
                            
                            (34
                            )%
                            
                            
                            (34
                            )%Effective
      tax rates
                            
                            
                            —
                            %
                            
                            
                            —
                            %




The tax
effects of temporary differences that give rise to significant portions of
deferred tax assets at December 31, 2008 and December 31, 2007
follows:





2008
                                    
                                    
                                    2007Deferred
      tax assetNet
      approximate operating loss carry forward
                                    
                                    $
                                    4,165,000
                                    
                                    
                                    $
                                    4,900,000Bad
      debt reserves
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Deferred
      tax assets
                                    
                                    
                                    4,165,000
                                    
                                    
                                    
                                    4,900,000Valuation
      allowance
                                    
                                    
                                    (4,165,000
                                    )
                                    
                                    
                                    (4,900,000
                                    )Net
      deferred tax asset
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    —





Note
9 - Commitments and Contingencies





Operating
Lease





CGM-AST
leases one facilities in Staten Island, New York under non-cancelable lease
agreements that end in December 2008.  Company still occupies the
space on a month to month basis.





On June
1, 2007 the offices of Allied Security Innovations, Inc. and the Somerset office
of CGM-AST Applied Security Technologies, Inc. were combined into a new office
located in Farmingdale, NJ in a 6,000 square foot combination warehouse /office
space.  The reason for this was cost savings and improved operational
efficiencies. The lease is a 5 year lease ending May 12, 2012 with a 5 year
renewal option. The company is required to pay utilities, insurance and other
costs relating to the lease facility. The following is a schedule by years of
future minimum rental payments required under operating leases that have initial
or remaining non-cancelable lease terms in excess of one year as of December 31,
2008 :





Per Year2009
                    
                    $
                    56,8242010
                    
                    
                    58,5292011
                    
                    
                    60,2852012
                    
                    
                    30,588


14





Employment
Agreements





Anthony
R. Shupin, Chairman, President and Chief Executive Officer. Mr. Shupin was
re-appointed as Chairman, President and Chief Executive Officer effective
February, 2005. On February 25, 2005, ASII entered into a five-year employment
agreement with Mr. Shupin, which entitled him to a base salary of $227,900 per
year.  The Board of Directors may adjust his base salary at their
discretion but it may not be adjusted below $215,000 per year. Mr. Shupin is
also entitled to participate in the Annual Management Bonus Plan. As a
participant in the Annual Management Bonus Plan, Mr. Shupin will be eligible to
receive bonuses, based on performance, in any amount from 10% to 200% of the
Base Salary. In addition, Mr. Shupin shall participate in the Management Equity
Incentive Plan. As a participant in the the Management Equity Incentive Plan,
Mr. Shupin will be eligible to receive options, which vest over a period of time
from the date of the option's issue, to purchase common shares of ASII. The
Company may grant Mr. Shupin, following the first anniversary of the date hereof
and at the sole discretion of the Board of Directors, options to purchase common
shares of the Company (subject to the vesting and the satisfaction of the other
terms and conditions of such options). Mr. Shupin will be entitled to 25
vacations days per year at such times as may be mutually agreed with the Board
of Directors. ASII will provide Mr. Shupin a monthly car allowance of One
Thousand Dollars ($1,000) along with related car expenses.




Michael
J. Pellegrino, Senior Vice President and Chief Financial Officer. Mr. Pellegrino
was appointed as Senior Vice President and Chief Financial Officer effective
February 25, 2005. On February 25, 2005, ASII entered into a five-year
employment agreement with Mr. Pellegrino, which entitled him to a base salary of
$185,500 per year. The Board of Directors may adjust his base salary at their
discretion but it may not be adjusted below $175,000 per year.  Mr.
Pellegrino is also entitled to participate in the Annual Management Bonus Plan.
As a participant in the Annual Management Bonus Plan, Mr. Pellegrino will be
eligible to receive bonuses, based on performance, in any amount from 10% to
200% of the Base Salary. In addition, Mr. Pellegrino shall participate in the
Management Equity Incentive Plan.   As a participant in the
Management Equity Incentive Plan, Mr. Pellegrino will be eligible to receive
options, which vest over a period of time from the date of the option's issue,
to purchase common shares of ASII. ASII may also grant to the Employee,
following the first anniversary of the date of the Agreement and at the sole
discretion of the Board of Directors, options to purchase common shares of the
Company (subject to the vesting and the satisfaction of the other terms and
conditions of such options). Mr. Pellegrino will be entitled to 25 vacation days
per year at such times as may be mutually agreed with the Board of Directors.
ASII shall also furnish Mr. Pellegrino with monthly car allowance of One
Thousand Dollars ($1,000) and related car expenses.





Note
10 - Stock Option and Other Plans





Effective
November 13, 2006, Allied Security Innovations, Inc. ("ASII") granted to each of
Anthony Shupin, its President and Chief Executive Officer and Michael
Pellegrino, its Chief Financial Officer, 10,000 shares of newly created Series A
Preferred Stock ("A Preferred") as recognition for services.




The
shares will vest in five equal monthly installments and will be issued at the
discretion of Mr. Shupin and Mr. Pellegrino.  These share have not
been issued as of December 31, 2008.   Each share of A Preferred
is convertible into 480 shares of common stock of the Company starting three
years from the date of issuance, provided that the closing bid price of the
Company's common stock is then $2.00 per share. The shares of A Preferred may be
voted with the Company's common stock on an as converted basis on any matters
that the common stock is entitled to vote on as a class.




Unconverted
shares of A Preferred will automatically cease to exist, and all rights
associated therewith will be terminated upon the earlier of (i) that person's
termination of employment with the Company for any reason, or (ii) five years
from the date of issuance.




On
November 13, 2006, the Company filed with the Secretary of State of Delaware a
Certificate of Designation of Preferences, Rights and Limitations of Series A
Preferred Stock.





The
Company maintains the 1994 Restated Stock Option Plan (the 1994 Plan) pursuant
to which the Company reserved 5,000,000 shares of common stock. The options
granted have a term of ten years and are issued at or above the fair market
value of the underlying shares on the grant date. The Company also maintains the
1996 Director Option Plan (the Director Plan) pursuant to which the Company
reserved 200,000 shares of common stock. Options granted under the Director Plan
are issued at or above the fair market value of the underlying shares on the
grant date. A portion of the first option vests at the six-month anniversary of
the date of the grant and continues over a four-year period. Subsequent options
vest on the first anniversary of the grant date. The options expire ten years
from the date of the grant or 90 days after termination of employment, whichever
comes first.





The
following is a summary of option activity under all plans:





1994 Plan
                                              
                                              1996 Director
                                                Plan
                                              
                                              Nonqualified
                                              
                                              Total
                                                Number of
                                                Options
                                              
                                              Weighted
                                                Average
                                                Exercise
                                                PriceOutstanding
      at December 31, 2007
                                              
                                              
                                              33,000
                                              
                                              —
                                              
                                              
                                              —
                                              
                                              33,000
                                              
                                              $
                                              .10 - $.365Outstanding
      at December 31, 2008
                                              
                                              
                                              33,000
                                              
                                              
                                              
                                              
                                              
                                              
                                              33,000
                                              
                                              $
                                              .10-.365


15





Note
11 - Contingency





There
were two holders of convertible notes dated December 31, 2001 who could
potentially seek damages from the Company. Should they seek these damages, the
Company could incur an additional expense of $71,668. Management feels however,
that the likelihood that the other holders will seek the damages is remote, and
therefore, no provision for this expense has been made in the accompanying
consolidated financial statements.





On
October 16, 2003, a judgment was entered against the Company by its landlord, BT
Lincoln L.P. for breach of lease in the amount of $184,706.





Note
12 – Acquisitions and Note Payable





On March
1, 2005, the Company acquired substantially all of the assets of CGM Security
Solutions, Inc., a Florida corporation ("CGM"), for (i) $1,500,000 in cash and
(ii) a 2.86% promissory note (the "Note") in the principal amount of $3,500,000,
subject to adjustment (the "Acquisition"). The assets of CGM Security Solutions,
Inc. were acquired pursuant to an Asset Purchase Agreement among the Company and
CGM Security Solutions, Inc. dated as of February 25, 2005. In connection with
the acquisition, the Company and CGM-AST each entered into an employment
agreement with Erik Hoffer (the "Employment Agreement"). CGM Security Solutions,
Inc is a manufacturer and distributor of barrier security seals, security tapes
and related packaging security systems, protective security products for
palletized cargo, physical security systems for tractors, trailers and
containers.





The
principal amount of the three year Note is subject to adjustment based upon the
average of (i) the gross revenues of CGM-AST for the fiscal year ending December
31, 2008 and (ii) an independent valuation of CGM-AST Sub based upon the audited
consolidated financial statements of the Company and CGM-AST Sub for the fiscal
years ending December 31, 2007 and 2008. In addition, the Company has granted
CGM-AST a secondary security interest in substantially all of its assets and
intellectual property.  If the Company is unable to fulfill its
obligations pursuant to the Asset Purchase Agreement and the Note, there is a
likelihood that CGM Security Solutions, Inc. can declare default and attempt to
take back the asset.





In
connection with the Acquisition, the Company entered into a letter agreement
with certain of its investors (the "Investors") which extended the maturity date
of debt instruments issued on November 30, 2004 until September 1, 2008, and
amended the conversion price of the debt that is held by the Investors to the
lower of (i) $0.0005 or (ii) 40% of the average of the three lowest intraday
trading prices for the Company's common stock during the 20 trading days before,
but not including, the conversion date. In addition, the exercise price of the
warrants held by the Investors was amended to $.001 per
share.





Whereas
the Company did not have sufficient funds to satisfy this obligation and was not
able to raise the required payment when due the Company came to an agreement to
pay CGM Security Solutions, Inc. and its owner Mr. Erik Hoffer Five Hundred
Thousand Dollars ($500,000) and signed a new note with him raising the purchase
price by One Million Dollars ($1,000,000).  The new note for Four
Million Dollars is a three year note due on May 15, 2011 carrying an annual
interest rate of 7% of which the interest is due quarterly.





Note
13 – Loss on extinguishment of debt





The
Statements of Operations reports a loss on extinguishment of debt in the amount
of $7,237,883.  This amount is represented by the
following:





Convertible
      debentures as of May 15, 2008
                                      
                                      $
                                      5,832,481Accrued
      interest as of May 15, 2008
                                      
                                      
                                      1,585,5337,418,014Convertible
      debt balance after refinancing
                                      
                                      
                                      13,655,897Convertible
      debt balance after refinancing Hoffer*
                                      
                                      
                                      1,000,00014,655,897Total
      Loss on Extinguishment of Debt
                                      
                                      $
                                      (7,237,883
                                      )




*In order
to determine the accounting for the modification of the terms of the Amended
Asset Purchase Agreement and Amended 7% Secured Convertible Promissory Note
(increase in both the principal and interest), the Company had to consider if
the creditor has granted any concessions to the debtor. In this case, the
modifications to the Hoffer debt has resulted in an increase in interest rate,
which went from 2.68% to 7% and an increase in principal from $3.5 mill to $4.5
mill, therefore, under the guidance set forth in EITF 02-04 Determining whether a debtor’s
modification or exchange of debt instrument is within the Scope of FAS
15, there is no concessions granted to the debtor. By default this
modification of debt does not result in a troubled debt transaction, and it
falls out of the scope of FAS 15 –Accounting by Debtor’s and Creditors
for troubled debt restructuring. This test ruled out the debt being
troubled debt transaction, therefore we follow the guidance promulgated by EITF
96-19, Debtor’s Accounting for
Modification or Exchange of Debt Instrument


16




EITF
96-19 Debtor’s Accounting for
Modification or Exchange of Debt Instrumentsprovides that by modifying
the terms of the agreement, one can achieve the same economic effect as
extinguishments; therefore, the debt modification transaction should be
accounted and recorded as if it was extinguishments. The EITF also discusses
“substantially” modified and how to account for fees paid or received by a
debtor and costs incurred by a debtor with third party as past of an exchange or
modification.




From the debtor's perspective, an
exchange of debt instruments between or a modification of a debt instrument by a
debtor and a creditor in a non-troubled debt situation is deemed to have been
accomplished with debt instruments that are substantially differentif any of the following three conditions
are met:





1.  The
present value of the cash flows under the terms of the new debt instrument is at
least 10 percent different from the present value of the remaining cash flows
under the terms of the original instrument.





2. A
modification or an exchange that affects the terms of an embedded conversion
option, from which the change in the fair value of the embedded conversion
option (calculated as the difference between the fair value of the embedded
conversion option immediately before and after the modification or exchange) is
at least 10 percent of the carrying amount of the original debt instrument
immediately prior to the modification or exchange.





3. A
modification or an exchange of debt instruments that adds a substantive
conversion option or eliminates a conversion option that was substantive at the
date of the modification or exchange.





Conclusion: We have
considered the accounting guidance aforementioned, and have determined that the
present value of the cash flows do exceeded 10%, therefore, the modification is
substantial. Since this modification is substantial, the new debt instrument is
recorded at fair value (the interest rate of 7% on this note is several basis
points greater then LIBOR, therefore the face amount of the note is deemed to
approximate its fair value) and the amount should be used to determine the debt
extinguishments gain or loss to be recognized and the new effective rate of the
new instrument. However, due to the economics of the transaction, we believe
that the increase in the loan was more of an “inducement” or penalty; therefore
we will record the loss to “Interest Expense”.





Note
14 -Fair Value Measurements




On
January 1, 2008, the Company adopted SFAS No. 157 “Fair Value
Measurements” (“SFAS 157”). SFAS 157 defines fair value, provides a consistent
framework for measuring fair value under Generally Accepted Accounting
Principles and expands fair value financial statement disclosure requirements.
SFAS 157’s valuation techniques are based on observable and unobservable inputs.
Observable inputs reflect readily obtainable data from independent sources,
while unobservable inputs reflect our market assumptions. SFAS 157 classifies
these inputs into the following hierarchy:




Level 1
Inputs– Quoted prices for identical instruments in active markets.




Level 2
Inputs– Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and
model-derived valuations whose inputs are observable or whose significant value
drivers are observable.




Level 3
Inputs– Instruments with primarily unobservable value drivers.




The
following table represents the fair value hierarchy for those financial assets
and liabilities measured at fair value on a recurring basis as of December 31,
2008.




Fair
Value Measurements on a Recurring Basis as of December 31, 2008




Assets
                                      
                                      Level I
                                      
                                      
                                      Level II
                                      
                                      
                                      Level III
                                      
                                      
                                      TotalAssets
                                      
                                      $
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -Total
      Assets
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -Liabilities
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      31,424,056
                                      
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      31,424,056Total
      Liabilities
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      31,424,056
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      31,424,056





Note
15 - Going Concern




The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. The Company
has sustained operating losses and has accumulated large deficits for the year
ended December 31, 2008. These factors raise substantial doubt about its ability
to continue as a going concern.




Management
has formulated and is in the process of implementing its business plan intended
to develop steady revenues and income, as well as reducing expenses in the areas
of operations. This plan includes the following management
objectives:




·   
Soliciting new customers in the U.S.


·   
Expanding sales in the international market


·   
Expanding sales through E-commerce


·    Adding
new distributors both in the U.S and internationally


·    The
introduction of new products into the market


·   
Seeking out possible merger candidates




Presently,
the Company cannot ascertain the eventual success of management’s plan with any
degree of certainty. Each objective is contingent upon a number of factors and
the Company does not represent that any or all of these objectives will
occur.  The accompanying consolidated financial statements do not
include any adjustments that might result from the eventual outcome of the risks
and uncertainties described above.





Note
16 - Subsequent Event





During
January 2009, the Company issued 5 convertible notes for an aggregate amount of
$50,000. The debentures are collateralized by substantially all of the Company's
assets. The debentures accrue interest at the rate of 6% per annum with terms of
three years.





The
holders have the right to convert the principal amount plus accrued interest
into shares of the Company's common stock. The conversion price in effect on any
Conversion Date shall be an amount equal to 25% of the mean average price of the
common stock for the ten trading days prior to notice of
conversion.





We will
record a derivative liability related to this convertible debenture. The fair
market value of the conversion feature will be shown as a derivative liability
on the Company’s balance sheet and will be adjusted to fair market value each
reporting period with the change being reported as “other income and expenses”
in the statement of income.


17





No.31.1
            
            Certification
      of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K,
      as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.31.2
            
            Certification
      of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K,
      as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.32.1
            
            Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes- Oxley Act of 2002







SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) 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.




ALLIED SECURITY INNOVATIONS,
      INC.
                    (Registrant)Date:
      April 13, 2009
                  By:
                  /s/
      ANTHONY SHUPINAnthony
      Shupin(President,
      Chief Executive Officer)
                    (Chairman)




Date:
      April 13, 2009
              By:
              /s/
      MICHAEL J. PELLEGRINOMichael
      J. PellegrinoSenior
      Vice President & CFO
                (Principal
      Financial and Accounting
Officer)