UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-K









(Mark
      One)x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended December 31, 2009o
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from    to




Commission
File Number 0-26604




Allied
Security Innovations, Inc.


(Exact
name of Registrant as specified in its charter)




Delaware
              23-2770048(State
      of incorporation)
              (IRS
      Employer Identification
Number)




1709
      Route 34 South
                Farmingdale,
      New Jersey
              07727(Address
      of principal executive offices)
              (Zip
      Code)





Registrant's
telephone number, including area code:(732)
751-1115




Securities
registered pursuant to Section 12(b) of the Act: None


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




Indicate
by checkmark if registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.  Yes  o    No
x




Indicate
by checkmark if registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act.  Yes o
    No x




Indicate
by checkmark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.    Yes   x
     No o




Check
whether the registrant has submitted electronically and posted on its corporate
Website, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation   S-T during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files). Yes       No x




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the 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
Form 10-K.   o




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





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





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




The
issuer had revenues of $3,597,653for the
fiscal year ended December 31, 2009.





As of
April 7, 2010, 90,222,937shares of the
issuer's Common Stock were outstanding





The
aggregate market value of the voting Common Stock held by non-affiliates on June
30, 2009 (the last business day of our most recently completed second fiscal
quarter) was $331,165 using the closing price on June 30, 2009.







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.




2




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 12.75% of total revenue for
the twelve months ended December 31, 2009, which defines them as a major
customer.




3




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 14 full time employees and 2 part time employees, of whom 12
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 has one major
customer that purchased $458,841 or 12.8% of total sales, with $0 accounts
receivable balance at December 31, 2009.


4




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, 2009 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, 2009 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 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, maturing on May 16, 2011 and 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, 2009 the percentage of revenues that ASII
received from domestic customers has been approximately 82%.  Foreign
sales for 2009 were $645,778.




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 $88,801 and $94,946, respectively for the years ended December 31, 2009
and 2008 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.


5




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




None




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, 2009 there were
approximately 3,200 shareholders of record.




Common
      StockBid
      PriceLow
                        
                        
                        HighCalendar
      Year 2008First
      Quarter
                        
                        $
                        0.1250
                        
                        
                        $
                        0.3125Second
      Quarter
                        
                        $
                        0.1250
                        
                        
                        $
                        0.1875Third
      Quarter
                        
                        $
                        0.1250
                        
                        
                        $
                        0.1875Fourth
      Quarter
                        
                        $
                        0.1250
                        
                        
                        $
                        0.1875Calendar
      Year 2009First
      Quarter
                        
                        $
                        0.1250
                        
                        
                        $
                        0.1250Second
      Quarter
                        
                        $
                        0.1250
                        
                        
                        $
                        0.1250Third
      Quarter
                        
                        $
                        0.0890
                        
                        
                        $
                        0.0090Fourth
      Quarter
                        
                        $
                        0.0190
                        
                        
                        $
                        0.0008




6




As of
April 7, 2010, 90,222,937shares 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
February 2009, $3,700 of the convertible debentures issued in September 2001,
were converted into 143,126 shares of common stock.




During
May 2009, $2,700 of the convertible debentures issued in May 2008, were
converted into 30,000 shares of common stock.




During
June 2009, $1,800 of the convertible debentures issued in May 2008, were
converted into 20,000 shares of common stock.




During
July 2009 $5,998 of the convertible debentures issued in May 2008, were
converted into 838,599 shares of common stock.




During
August 2009 $9,855 of the convertible debentures issued in May 2008, were
converted into 1,651,726 shares of common stock.




During
September 2009 $6,973 of the convertible debentures issued in May 2008, were
converted into 2,101,956 shares of common stock.




During
October 2009 $6,571 of the convertible debentures issued in May 2008, were
converted into 3,763,607 shares of common stock




During
November 2009 $4,702 of the convertible debentures issued in May 2008, were
converted into 3,337,818 shares of common stock




During
December 2009 $4,728 of the convertible debentures issued in May 2008, were
converted into 8,170,663 shares of common stock




During
January 2008, $7,689 of the convertible debentures issued in September 2001,
were converted into 189,173 shares of common stock.




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




During
March 2008, $7,240 of the convertible debentures issued in September 2001, were
converted into 192,196 shares of common stock.




During
April 2008 $4,998 of the convertible debentures issued in September 2001, were
converted into 124,945 shares of common stock.




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




During
August 2008 $63,087 of the convertible debentures issued in September 2001, were
converted into 734,865 shares of common stock.




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




ITEM
6 Selected Financial Data




Not
applicable.


7




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.




8




Results
of Operations




Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008





Revenues
for the year ended December 31, 2009 of $3,597,653 a decrease $1,241,281 or
25.7% from the year ended December 31, 2008.     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 decrease revenue is attributed to the downturn in the
economy and Company’s cutting of expenses.





Revenue
from products sales for the year ended December 31, 2009 and 2008 were
$3,498,673 and $4,626,817, respectively, for a decrease of $1,128,144 or
24.4%.  Revenue from service sales for the year ended December 31,
2009 and 2008 were $98,980 and $212,117, respectively for a decrease of $113,137
or 53.3%.




Cost of
revenue for the year ended December 31, 2009 was $1,388,782, a decrease of
$575,790 or 29.3% from the prior year. Cost of revenue sold as a percentage of
revenue for the year ended December 31, 2009 was 38.6% of total revenues, versus
40.6% the year earlier.  The decrease cost of revenue was primarily
due to decrease in revenue.




Operating
expenses decreased $369,162 or 7.2% during the year ended December 31, 2009
versus the year ended December 31, 2008. This decrease was primarily
attributable to the aggressive cost savings implemented by
management.




General
and Administrative expenses for the year ended December 31, 2009 were $1,913,398
versus $2,278,188 for the prior year for a decrease of $364,790 or 16.0%. This
decrease was primarily attributable to controls on spending.





Sales and
Marketing expenses for the year ended December 31, 2009 were $666,702 versus
$719,927 for the prior year for a decrease of $53,225 or
7.4%.   This decrease was primarily attributable to aggressive
cost savings implemented by management.





Research
and development for the year ended December 31, 2009 was $88,801 compared to
$94,946 for the same period prior year for a decrease of $6,145 or
6.5%.  This decrease is attributable to controls on
spending.





The net
(loss) for ASII decreased 3.3% or $(179,736) for the year ended December 31,
2009 to a net (loss) of $(5,217,710) from a net (loss) of $(5,397,446) for the
year ended December 31, 2008.




Liquidity
and Capital Resources





Net cash
(used in) operating activities for the year ended December 31, 2009 and 2008 was
$(215,846) and $(158,969) respectively. The increase in net cash used by
operating activities in the year ended December 31, 2009 of $(56,877) was due in
part to the change in fair market value of the derivative
liability.





Net cash
used in investing activities was $(-0- ) and $(24,146) for the years ended
December 31, 2009 and 2008, respectively.  The decrease in cash used
in investing activities in the year ended December 31, 2009 of $(24,146) was due
to tighter controls for spending on new equipment.




Net cash
provided by financing activities was $55,000 and $10,000 for the years ended
December 31, 2009 and 2008, 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, 2009, ASII had assets of $718,563 compared to $3,471,662 on
December 31, 2008 a decrease of $2,753,099 and shareholder deficit of
$(38,344,582) on December 31, 2009 compared to shareholder deficit of
$(33,271,043) on December 31, 2008, an increase of $5,073,539. This increase in
shareholder deficit for the year ended December 31, 2009 resulted from the net
loss for the year ended December 31, 2009.




As of
December 31, 2009, ASII negative working capital was $(20,599,249), a change
from negative working capital of $(17,716,423) at December 31, 2008. The
increase in negative working capital was primarily a result of the restructuring
of debt and an increase in the fair market value of the derivative
liabilities.


9




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, 2008 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, 2009 and 2008. 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, 2008.  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.





Management
of the Company has evaluated, with the participation of the Chief Executive
Officer and Chief Financial Officer of the Company, the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or
15d-15(e) promulgated by the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end
of the period covered by this Annual Report on Form 10-K. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer of the
Company had concluded that the Company's disclosure controls and procedures as
of the period covered by this Annual Report on Form 10-K were not effective for
the following reasons:





a)           The
deficiency was identified as the Company's limited segregation of duties among
the Company's employees with respect to the Company's control activities. This
deficiency is the result of the Company's limited number of employees. This
deficiency may affect management's ability to determine if errors or
inappropriate actions have taken place. Management is required to apply its
judgment in evaluating the cost-benefit relationship of possible changes in our
disclosure controls and procedures.





b)           The
deficiency was identified in respect to the Company's Board of Directors. This
deficiency is the result of the Company's limited number of external board
members. This deficiency may give the impression to the investors that the board
is not independent from management. Management and the Board of Directors are
required to apply their judgment in evaluating the cost-benefit relationship of
possible changes in the organization of the Board of Directors.


10




Management’s
Report on Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f). Management conducted an evaluation of the effectiveness of
the Company's internal control over financial reporting as of December 31, 2009.
In making this assessment, management used the framework set forth in the report
entitled "Internal Control-Integrated Framework" issued by the Committee of
Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework
summarizes each of the components of a Company's internal control system,
including (i) the control environment, (ii) risk assessment, (iii) control
activities, (iv) information and communication, and (v) monitoring. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer of the
Company have concluded, as of the end of the fiscal year covered by this Annual
Report on Form 10-K, due to a lack of segregation of duties, that our internal
control over financial reporting has not been effective. However, at this time,
our resources and size prevent us from being able to employ sufficient resources
to enable us to have adequate segregation of duties within our internal control
system. The Company intends to remedy the material weakness by hiring additional
employees and reallocating duties, including responsibilities for financial
reporting, among the Company's employees as soon as the Company has the
financial resources to do so. Management is required to apply judgment in
evaluating the cost-benefit relationship of possible changes in our disclosure
controls and procedures.




11




Table of
Contents




This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management's report in this annual
report.





Changes
in Internal Controls.





Management
of the Company has evaluated, with the participation of the Chief Executive
Officer of the Company, any change in the Company's internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) that occurred during the fiscal year covered by this Annual Report
on Form 10-K. There was no change in the Company's internal control over
financial reporting identified in that evaluation that occurred during the
fiscal year covered by this Annual Report on Form 10-K that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting, other than what has been reported
above





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.


12




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, 2009, 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 2008.





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
                        
                        2009
                        
                        $
                        227,900
                        
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0President
      & CEO
                        
                        2008
                        
                        $
                        227,900
                        
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0Michael
      Pellegrino
                        
                        2009
                        
                        $
                        185,500
                        
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0Senior
      VP & CFO
                        
                        2008
                        
                        $
                        185,500
                        
                        
                        
                        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. On May 11, 2009 the Series A Preferred Stock was
cancelled and replaced with 10,000 shares each of newly created Series B
Preferred Stock.




Each
share of B Preferred is convertible into 200,000 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 B 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 B 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 May
11, 2009 the Company filed with the Secretary of State of Delaware a Certificate
of Designation of Preferences, Rights and Limitations of Series B 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




13




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,
2009. 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 23,176,249,shares of
common stock outstanding at December 31, 2009, together with securities
exercisable or convertible into shares of common stock within 60 days of
December 31, 2009 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, 2009 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.




14





Beneficial
      OwnershipName
      and Address
                                                
                                                
                                                
                                                of
      Common Stockof
      Beneficial Owner
                                                
                                                Title
                                                
                                                No.
      of Shares
                                                
                                                
                                                Percent
      of ClassAnthony
      R. Shupin
                                                
                                                Chairman,
      CEO and
                                                
                                                
                                                20
                                                (1)
                                                
                                                
                                                *1709
      Route 34 Suite 2
                                                
                                                PresidentFarmingdale,
      NJ 07727Michael
      Pellegrino
                                                
                                                Senior
      Vice President,
                                                
                                                
                                                20
                                                (1)
                                                
                                                
                                                *1709
      Route 34 Suite 2
                                                
                                                Chief
      Financial OfficerFarmingdale,
      NJ 07727
                                                
                                                &
      DirectorRobert
      Gowell
                                                
                                                Director
                                                
                                                
                                                1
                                                
                                                
                                                
                                                *1709
      Route 34 Suite 2Farmingdale,
      NJ 07727Vincent
      Moreno
                                                
                                                Director
                                                
                                                
                                                0
                                                
                                                
                                                
                                                *1709
      Route 34 Suite 2Farmingdale,
      NJ 07727All
      Officers  & Directors
                                                
                                                
                                                
                                                
                                                41
                                                
                                                
                                                
                                                *As
      a Group




·
            less
      than 1%




(1) This
does not include the 2,000,000 shares of common stock issuable
upon  conversion 10,000 shares of Series B Preferred  Stock
assigned.  The terms of the Series B Preferred Stock permit the
holders 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 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 2009 and 2008 were $122,647 and $138,052,
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 2009 and 2008 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.


15




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




16




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 12, 2010


17


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





18


Allied
Security Innovations, Inc. and Subsidiary


Table
of Contents





December
      31, 2009





Page(s)Reports
      of Independent Registered Public Accounting Firms
                20-21Audited
      Consolidated Financial Statements:Balance
      Sheets as of December 31, 2009 and 2008
                22Statements
      of Operations for the Years Ended December 31, 2009and December 31,
      2008
                23Statement
      of Stockholders' Deficit for the Years Ended December 31, 2009 and
      December 31,2008
                24Statements
      of Cash Flows for the Years Ended December 31, 2009and December 31,
      2008
                25-26Notes
      to Consolidated Financial Statements
                27-39





19


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board of
Directors and Stockholders


Allied
Security Innovations, Inc. and Subsidiary


1709
Route 34 South


Farmingdale,
New Jersey  07727





We have
audited the accompanying consolidated balance sheet of Allied Security
Innovations, Inc. and Subsidiary (the “Company”) as of December 31, 2009, and
the related consolidated statement of operations, changes in stockholders’
deficit and cash flows for the year ended December 31, 2009. 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 audit.  The consolidated financial statements
of Allied Security Innovations Inc. and Subsidiary as of December 31, 2008 and
for each of the two years in the period ended December 31, 2008 were audited by
other auditors who have ceased operations.  The auditors expressed an
unqualified opinion on those financials statements, dated April 13, 2009, and
included an explanatory paragraph relating to the existence of substantial doubt
about the Company’s ability to continue as a going concern.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit 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 audit 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 audit provides a
reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Allied Security Innovations, Inc.
and Subsidiary, as of December 31, 2009, and the results of its operations and
its cash flows for the year ended December 31, 2009 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 2 to the
consolidated financial statements, the Company did not generate sufficient cash
flows from revenues during the year ended December 31, 2009, to fund its
operations. Also at December 31, 2009, the Company had negative net working
capital of $20,599,248.  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 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.





/s/
Friedman LLP


Friedman
LLP


Marlton,
NJ  08053





April 14,
2010




20





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.





The
report is a copy of the previously issued report.


The
predecessor auditor has not reissued the report.





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


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


Marlton,
NJ  08053





April 13,
2009


21




ALLIED
SECURITY INNOVATIONS, INC. AND SUBSIDIARY
 CONSOLIDATED
BALANCE SHEETS
 DECEMBER
31, 2009 AND 2008
 
 2009
                            
                            
                            2008ASSETSCurrent
      Assets:Cash
                            
                            $
                            52,667
                            
                            
                            $
                            213,513Accounts
      receivable, net
                            
                            
                            292,453
                            
                            
                            
                            537,223Inventory
                            
                            
                            117,621
                            
                            
                            
                            238,123Other
      Current Assets
                            
                            
                            3,375
                            
                            
                            
                            9,346Total
      Current Assets
                            
                            
                            466,116
                            
                            
                            
                            998,205Property
      and equipment, net
                            
                            
                            209,485
                            
                            
                            
                            267,594Other
      Assets:Deposits
                            
                            
                            9,421
                            
                            
                            
                            12,896Goodwill
                            
                            
                            -
                            
                            
                            
                            2,054,998Intangible
      assets, net
                            
                            
                            33,541
                            
                            
                            
                            137,969Total
      Assets
                            
                            $
                            718,563
                            
                            
                            $
                            3,471,662LIABILITIES AND STOCKHOLDERS'
      DEFICITCurrent
      Liabilities:Accounts
      payable
                            
                            $
                            319,651
                            
                            
                            $
                            142,865Accrued
      expenses
                            
                            
                            160,312
                            
                            
                            
                            339,079Accrued
      payroll expenses
                            
                            
                            61,748
                            
                            
                            
                            114,923Accrued
      interest
                            
                            
                            1,552,590
                            
                            
                            
                            711,684Deferred
      income
                            
                            
                            52,182
                            
                            
                            
                            10,098Convertible
      debentures current portion
                            
                            
                            25,279
                            
                            
                            
                            39,078Note
      payable
                            
                            
                            5,000
                            
                            
                            
                            -Derivative
      liabilities
                            
                            
                            18,888,603
                            
                            
                            
                            17,356,901Total
      Current Liabilities
                            
                            
                            21,065,365
                            
                            
                            
                            18,714,628Note
      payable
                            
                            
                            4,000,000
                            
                            
                            
                            4,000,000Convertible
      debentures, net of current portion
                            
                            
                            13,997,780
                            
                            
                            
                            14,028,077Total
      Liabilities
                            
                            
                            39,063,145
                            
                            
                            
                            36,742,705Stockholders'
      deficit:Preferred
      stock, $.001 par value; 1,000,000 shares authorized, 20,000 issued and
      outstanding
                            
                            
                            -
                            
                            
                            
                            -Common
      stock, par value $.001; authorized 9,999,000,000 shares; 23,176,249 and
      2,970,593 issued and outstanding at December 31, 209 and 2008,
      respectively.
                            
                            
                            23,176
                            
                            
                            
                            2,971Additional
      paid-in capital
                            
                            
                            20,007,629
                            
                            
                            
                            19,883,663Accumulated
      deficit
                            
                            
                            (58,375,387
                            )
                            
                            
                            (53,157,677
                            )Total
      Stockholders' Deficit
                            
                            
                            (38,344,582
                            )
                            
                            
                            (33,271,043
                            )Total
      Liabilities and Stockholders' Deficit
                            
                            $
                            718,563
                            
                            
                            $
                            3,471,662
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  22
 
 ALLIED
SECURITY INNOVATIONS, INC. AND SUBSIDIARY
 CONSOLIDATED  STATEMENTS
OF OPERATIONS
 FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 2009
                  
                  
                  2008INCOMEProduct
      sales
                  
                  $
                  3,498,673
                  
                  
                  $
                  4,626,817Service
      sales
                  
                  
                  98,980
                  
                  
                  
                  212,117Total
      sales
                  
                  
                  3,597,653
                  
                  
                  
                  4,838,934Cost
      of revenue
                  
                  
                  1,388,782
                  
                  
                  
                  1,964,572Gross
      Profit
                  
                  
                  2,208,871
                  
                  
                  
                  2,874,362OPERATING
      EXPENSESGeneral
      and administrative
                  
                  
                  1,913,398
                  
                  
                  
                  2,278,188Sales
      and marketing
                  
                  
                  666,702
                  
                  
                  
                  719,927Research
                  
                  
                  88,801
                  
                  
                  
                  94,946Impairment
      of goodwill
                  
                  
                  2,054,998
                  
                  
                  
                  2,000,000Total
      Operating Expenses
                  
                  
                  4,723,899
                  
                  
                  
                  5,093,061LOSS
      BEFORE OTHER INCOME (EXPENSE)
                  
                  
                  (2,515,028
                  )
                  
                  
                  (2,218,699
                  )OTHER
      INCOME (EXPENSE)Loss
      on extinguishment of debt
                  
                  
                  -
                  
                  
                  
                  (7,237,883
                  )Interest
                  
                  
                  (1,130,976
                  )
                  
                  
                  (1,203,589
                  )Beneficial
      interest on debt conversions
                  
                  
                  (73,760
                  )
                  
                  
                  (170,673
                  )Amortization
      of debt discount
                  
                  
                  (16,245
                  )
                  
                  
                  (91,346
                  )Change
      in fair market value of derivative liability
                  
                  
                  (1,481,701
                  )
                  
                  
                  5,541,459Other
      income and expenses
                  
                  
                  -
                  
                  
                  
                  (16,715
                  )Total
      Other Income (Expense)
                  
                  
                  (2,702,682
                  )
                  
                  
                  (3,178,747
                  )NET
      LOSS APPLICABLE TO COMMON SHARES
                  
                  $
                  (5,217,710
                  )
                  
                  $
                  (5,397,446
                  )NET
      LOSS PER BASIC AND DILUTED SHARES
                  
                  $
                  (0.00
                  )
                  
                  $
                  (0.00
                  )Weighted
      average shares of common stock outstanding, basic and
    diluted
                  
                  
                  6,422,710
                  
                  
                  
                  1,877,405
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  23
  ALLIED
SECURITY INNOVATIONS, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENT OF STOCKHOLDERS' DEFICIT
 FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 TotalCommon
      Stock
                              
                              
                              Additional
      Paid
                              
                              
                              Accumulated
                              
                              
                              Stockholders'Shares
                              
                              
                              Amount
                              
                              
                              in
      Capital
                              
                              
                              Deficit
                              
                              
                              DeficitBalance
      at December 31, 2007
                              
                              
                              681,600
                              
                              
                              $
                              682
                              
                              
                              $
                              19,545,800
                              
                              
                              $
                              (47,760,231
                              )
                              
                              $
                              (28,213,749
                              )Common
      stock issued in conversion ofconvertible
      debentures
                              
                              
                              2,288,993
                              
                              
                              
                              2,289
                              
                              
                              
                              167,190
                              
                              
                              
                              -
                              
                              
                              
                              169,479Beneficial
      interest on debt conversions
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              170,673
                              
                              
                              
                              -
                              
                              
                              
                              170,673-Net
      loss
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (5,397,446
                              )
                              
                              
                              (5,397,446
                              )Balance
      at December 31, 2008
                              
                              
                              2,970,593
                              
                              
                              $
                              2,971
                              
                              
                              $
                              19,883,663
                              
                              
                              $
                              (53,157,677
                              )
                              
                              $
                              (33,271,043
                              )Common
      stock issued in conversion ofconvertible
      debentures after stock split
                              
                              
                              20,205,656
                              
                              
                              
                              20,205
                              
                              
                              
                              50,206
                              
                              
                              
                              -
                              
                              
                              
                              70,411Beneficial
      interest on debt conversions
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              73,760
                              
                              
                              
                              -
                              
                              
                              
                              73,760-Net
      loss
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (5,217,710
                              )
                              
                              
                              (5,217,710
                              )Balance
      at December 31, 2009
                              
                              
                              23,176,249
                              
                              
                              $
                              23,176
                              
                              
                              $
                              20,007,629
                              
                              
                              $
                              (58,375,387
                              )
                              
                              $
                              (38,344,582
                              )
  24
  ALLIED
SECURITY INNOVATIONS, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 2009
                  
                  
                  2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      Loss
                  
                  $
                  (5,217,710
                  )
                  
                  $
                  (5,397,446
                  )Adjustments
      to reconcile net loss to net cash (used in) operating
      activities:Depreciation
      and amortization
                  
                  
                  73,277
                  
                  
                  
                  77,958Amortization
      of debt discount
                  
                  
                  16,245
                  
                  
                  
                  91,346Beneficial
      interest on debt conversions
                  
                  
                  73,760
                  
                  
                  
                  170,673Loss
      on debt extinguishment
                  
                  
                  -
                  
                  
                  
                  7,237,883Change
      in fair value of derivative liability
                  
                  
                  1,481,701
                  
                  
                  
                  (5,541,459
                  )Impairment
      of intangible
                  
                  
                  89,260
                  
                  
                  
                  -Impairment
      of goodwill
                  
                  
                  2,054,998
                  
                  
                  
                  2,000,000Bad
      debt expense
                  
                  
                  (9,879
                  )
                  
                  
                  59,444Changes
      in operating assets and liabilities:Accounts
      receivable
                  
                  
                  254,649
                  
                  
                  
                  (190,012
                  )Inventory
                  
                  
                  120,502
                  
                  
                  
                  427,312Prepaid
      expenses and other assets
                  
                  
                  9,445
                  
                  
                  
                  625Accounts
      payable and accrued expenses
                  
                  
                  795,822
                  
                  
                  
                  955,186Deferred
      income
                  
                  
                  42,084
                  
                  
                  
                  (50,479
                  )Total
      Adjustments
                  
                  
                  5,001,864
                  
                  
                  
                  5,238,477Net
      Cash (Used in) Operating Activities
                  
                  
                  (215,846
                  )
                  
                  
                  (158,969
                  )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of equipment
                  
                  
                  -
                  
                  
                  
                  (24,146
                  )Net
      Cash Used in Investing Activities
                  
                  
                  -
                  
                  
                  
                  (24,146
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Due
      to Officer
                  
                  
                  5,000
                  
                  
                  
                  -Proceeds
      from convertible debentures
                  
                  
                  50,000
                  
                  
                  
                  510,000Payment
      on note payable
                  
                  
                  -
                  
                  
                  
                  (500,000
                  )Net
      Cash Provided by Financing Activities
                  
                  
                  55,000
                  
                  
                  
                  10,000NET
      DECREASE IN CASH
                  
                  
                  (160,846
                  )
                  
                  
                  (173,115
                  )CASH
      AT BEGINNNING OF YEAR
                  
                  
                  213,513
                  
                  
                  
                  386,628CASH
      AT END OF YEAR
                  
                  $
                  52,667
                  
                  
                  $
                  213,513
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
  25
 
 ALLIED
SECURITY INNOVATIONS, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008 (CONTINUED)
 
 2009
                        
                        
                        2008Supplemental
      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 of convertible debentures and accrued
      interest
                        
                        
                        70,411
                        
                        
                        $
                        169,479Beneficial
      interest on debt conversions
                        
                        $
                        73,760
                        
                        
                        $
                        170,673
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
  26




Allied
Security Innovations, Inc. and Subsidiary


Notes
to the Consolidated Financial Statements


For
the Years Ended December 31, 2009 and December 31, 2008





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 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.  Revenue is recognized when products are
shipped or services are rendered, evidence of a contract exists, the price is
fixed or reasonably determinable, and collectability is reasonably assured.





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.


27





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, 2009 and 2008 was $52,182 and $10,098
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 $88,801
and $94,946, respectively, for the years ended December 31, 2009 and
2008.





Cash
and Cash Equivalents


The
Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. The Company had no
cash equivalents at December 31, 2009 and 2008. The Company maintains cash
balances at financial institutions that are insured by the Federal Deposit
Insurance Corporation (“FDIC”) up to federally insured limits. At times balances
may exceed FDIC insured limits. The Company has not experienced any losses in
such accounts.





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.





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 $138,627 and $148,506 at December 31, 2009 and 2008.





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


28





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 has adopted FASB ASC 718-10, “Accounting for Stock-Based Compensation”,
which establishes financial accounting and reporting standards for stock-based
employee compensation plans.  This pronouncement also applies to
transactions in which an entity issues its equity instruments to acquire goods
or services from non-employees. Those transactions must be accounted for based
on the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.  For stock
options, fair value is determined using an option-pricing model that takes into
account the stock price at the grant date, the exercise price, the expected life
of the option, the volatility of the underlying stock and the expected dividends
on it, and the risk-free interest rate over the expected life of the
option.




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. 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.  ASII
has one major customer that purchased $458,841 or 12.8% of total
sales.  The accounts receivable at December 31, 2009 for this customer
was $0.





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 $105,746 and $109,485 for the years ended December 31, 2009 and 2008
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 ASC 350 “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.




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.


29





In
December of 2008 the Company decreased the value of goodwill from $4,054,998 to
$2,054,998 and in December 2009 the Company decreased the value of the goodwill
to $0.




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 ASC 815, “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 ASC 815 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 recorded in change in fair market value of derivative liability, a
separate component of the other income (expense).




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, 2009 and 2008 when the
Company reported a loss because to do so would be anti-dilutive for years
presented.




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




December 31,2009
                  
                  
                  December 31,2008Net
      (Loss)
                  
                  $
                  (5,217,710
                  )
                  
                  $
                  (5,397,446
                  )Weighted-average
      common shares outstanding (Basic)
                  
                  
                  6,422,710
                  
                  
                  
                  1,877,405Weighted-average
      common stock Equivalents:Stock
      options
                  
                  
                  -
                  
                  
                  
                  -Warrants
                  
                  
                  -
                  
                  
                  
                  -Weighted-average
      common shares outstanding (Diluted)
                  
                  
                  6,422,710
                  
                  
                  
                  1,877,405




Options
and warrants outstanding to purchase stock were not included in the computation
of diluted EPS in 2009 and 2008 because inclusion would have been anti-dilutive.
There were no options and warrants available at December 31, 2009 and
2008.





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, 2009. 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.


30





Subsequent
Events


In May
2009, the FASB issued FASB ASC 855-10, Subsequent Events, which establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before the financial statements are issued or are
available to be issued. The Company adopted FASB ASC 855-10 effective
April 1, 2009 and has evaluated subsequent events after the balance sheet
date of December 31, 2009 through the date the financial statements were
issued.





Note
3 - Impact of Recent Accounting Pronouncements




In
June 2009, the FASB issued ASC 105, Generally Accepted Accounting
Principles. This section designates the FASB Accounting Standards Codification
(FASC) as the source of authoritative U.S. GAAP. ASC 105 is effective for
interim or fiscal periods ending after September 15, 2009. We have used the
new guidelines and numbering system prescribed by the FASC when referring to
GAAP in our fiscal quarter ending September 30, 2009. The adoption of ASC
105 did not have a material impact on our financial position, results of
operation or cash flows.





In
June 2009, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 168, The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles (“SFAS 168”). SFAS 168 will become the single source of authoritative
nongovernmental U.S. generally accepted accounting principles (“GAAP”),
superseding existing FASB, American Institute of Certified Public Accountants
(“AICPA”), Emerging Issues Task Force (“EITF”), and related accounting
literature. SFAS 168 reorganizes the thousands of GAAP pronouncements into
roughly 90 accounting topics and displays them using a consistent structure.
Also included is relevant Securities and Exchange Commission guidance organized
using the same topical structure in separate sections. SFAS 168 will be
effective for financial statements issued for reporting periods that end after
September 15, 2009. All future references to authoritative accounting
literature in our financial statements issued for reporting periods that end
after September 15, 2009 will be referenced in accordance with SFAS
168.




In
May 2009, the FASB issued ASC 855, Subsequent Events. This standard
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date, but before financial statements are issued
or available to be issued. Specifically, this standard codifies in authoritative
GAAP standards the subsequent event guidance that was previously located in
auditing standards. ASC 855 is effective for fiscal years and interim periods
ended after June 15, 2009 and is applied prospectively. We adopted ASC 855 in
our fiscal quarter ended June 30, 2009. The adoption of SFAS 165 did not
have a material impact on our financial position, results of operation or cash
flows.





In
May 2009, the FASB issued Statement of Financial Accounting Standards
No. 165, Subsequent Events (“SFAS 165”). SFAS 165 establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. SFAS 165 applies prospectively to both interim and annual
financial periods ending after June 15, 2009. The adoption of SFAS 165 did
not result in any material change to our policies.




In
April 2009, the FASB issued FSP No. 107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments (“FSP 107-1”). FSP 107-1
amends FASB Statement No. 107, Disclosures about Fair Value of Financial
Instruments, and Accounting Principles Board Opinion No. 28, Interim
Financial Reporting, to require disclosures about fair value of financial
instruments for interim periods of publicly traded companies as well as in
annual financial statements. FSP 107-1 is effective for interim reporting
periods ending after June 15, 2009. The adoption of FSP 107-1 had no
material effect on our disclosures in our financial statements.




From time
to time, new accounting pronouncements are issued by the FASB or other standards
setting bodies that we adopt as of the specified effective date. Unless
otherwise discussed in these financial statements and notes or in our financial
statements and notes included in our Annual Report on Form 10-K for the year
ended December 31, 2009, we believe the impact of any other recently issued
standards that are not yet effective are either not applicable to us at this
time or will not have a material impact on our consolidated financial statements
upon adoption.





Note
4 – Intangible Assets





Intangible
assets consist of the following at December 31, 2009 and 2008:





2009
                  
                  
                  2008Licenses
                  
                  $
                  87,076
                  
                  
                  $
                  222,076Accumulated
      amortization
                  
                  
                  53,535
                  
                  
                  
                  84,108Total
                  
                  $
                  33,541
                  
                  
                  $
                  137,968




31




Licenses
are being amortized over its estimated useful life of 15
years.  Amortization expense for the years ended December 31, 2009 and
2008 was $15,167 and $15,169 respectively.  The Licenses are amortized
using the straight-line method over the useful life of 15 years.





Based on
the results of its most recent annual impairment tests, the Company determined
that there would be no future value on the Brake Lock
License.  Therefore, management authorized the impairment of that
asset for a net affect of $89, 260.  There was no impairment
determined for the other licenses that exist. However, future impairment tests
could result in a charge to earnings.





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





Year
ended December 31,


2010
                  
                  $
                  6,1682011
                  
                  
                  6,1682012
                  
                  
                  6,1682013
                  
                  
                  6,1682014
                  
                  
                  6,168





Note
5- Property and Equipment





Property
and Equipment consist of the following at December 31, 2009 and
2008:





2009
                  
                  
                  2008Furniture
      and Fixtures
                  
                  $
                  75,613
                  
                  
                  $
                  75,613Leasehold
      Improvements
                  
                  
                  159,607
                  
                  
                  
                  159,607Computers
                  
                  
                  219,301
                  
                  
                  
                  219,301Machinery
      and Equipment
                  
                  
                  762,987
                  
                  
                  
                  762,9871,217,508
                  
                  
                  
                  1,217,508Less:
      Accumulated depreciation
                  
                  
                  (1,008,023
                  )
                  
                  
                  (949,914
                  )Net
                  
                  $
                  209,485
                  
                  
                  $
                  267,594





Depreciation
expense for the years ended December 31, 2009 and 2008 was $58,109 and $62,789,
respectively.





Note
6 - Convertible Debentures





Based on
the guidance ASC 815, the Company concluded that the conversion features of its
convertible debentures were required to be accounted for as derivatives. The
imbedded conversion 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 fair
market value of the conversion feature is 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 operations.





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





Year
                  
                  Principal Payment2010
                  
                  $
                  25,2792011
                  
                  
                  13,997,780




32




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.





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





Note
7 – Derivative Liability





In
accordance with ASC 815and EITF 00-19,  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 $18,888,603 and $17,356,901 as of December 31, 2009
and 2008, respectively. The estimated fair value of the embedded derivative has
been calculated based on a Black-Scholes pricing model using the following
assumptions:





2009
                
                
                2008Fair
      market value of stock
                
                $
                0.0012
                
                
                $
                0.0001Exercise
      price
                
                $
                0.0003 to 0
      .0009
                
                
                $
                0.00007Dividend
      yield
                
                
                0.00
                %
                
                
                0.00
                %Risk
      free interest rate
                
                0.81 % to 2.03%
                
                
                
                1.07
                %Expected
      volatility
                
                254%
      to 356%
                
                
                
                478.0
                %Expected
      life
                
                1
      to 2 Years
                
                
                2.5
      Years




Note
8 - Income Taxes




At
December 31, 2009 and 2008, the Company had federal net operating loss carry
forwards of approximately $18,800,000 and $11,900,000, respectively to offset
future federal taxable income expiring in various years through 2029. 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 31,2009
                          
                          
                          2008Federal
      Income Tax Rate
                          
                          
                          (34.0
                          )%
                          
                          
                          (34.0
                          )%State
      Income Tax, Net of Federal Benefit
                          
                          
                          (5.94
                          )%
                          
                          
                          (5.94
                          )%Effective
      Income Tax Rate
                          
                          
                          (39.94
                          )%
                          
                          
                          (39.94
                          )%Effect
      on valuation allowance
                          
                          
                          (39.94
                          )%
                          
                          
                          (39.94
                          )%Effective
      Income Tax Rate
                          
                          
                          0.0
                          %
                          
                          
                          0.0
                          %







The tax
effects of temporary differences that give rise to significant portions of
deferred tax assets at December 31, 2009 and December 31, 2008 follows:





2009
                    
                    
                    2008Deferred
      tax assetNet
      approximate operating loss carry forward
                    
                    $
                    6,588,000
                    
                    
                    $
                    4,165,000Bad
      debt reserves
                    
                    
                    —
                    
                    
                    
                    —Deferred
      tax assets
                    
                    
                    6,588,000
                    
                    
                    $
                    4,165,000Valuation
      allowance
                    
                    
                    (6,588,000
                    )
                    
                    
                    (4,165,000
                    )Net
      deferred tax asset
                    
                    $
                    —
                    
                    
                    $
                    —


33





Note
9 - Commitments and Contingencies





Operating
Lease





CGM-AST
leases one facility 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, 2009:





Per Year2010
                    
                    $
                    58,5292011
                    
                    
                    60,2852012
                    
                    
                    30,588Thereafter
                    
                    
                    -0-Total
      Minimum Payrment required
                    
                    $
                    149,402





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 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. On May 11, 2009 the Series A Preferred Stock was
cancelled and replaced with 10,000 shares each of newly created Series B
Preferred Stock.




Each
share of B Preferred is convertible into 200,000 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 B 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.


34




Unconverted
shares of B 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 May
11, 2009 the Company filed with the Secretary of State of Delaware a Certificate
of Designation of Preferences, Rights and Limitations of Series B 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
                    ExercisePriceOutstanding
      at December 31, 2008
                  
                  
                  0
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  00
                  
                  
                  
                  0Outstanding
      at December 31, 2009
                  
                  
                  0
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  0
                  
                  
                  
                  0


35


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.





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, 2009 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


36





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
different if 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 ASC 820 “Fair Value Measurements”. ASC
820 defines fair value, provides a consistent framework for measuring fair value
under Generally Accepted Accounting Principles and expands fair value financial
statement disclosure requirements. ASC 820’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. ASC 820 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,
2009.




Fair
Value Measurements on a Recurring Basis as of December 31, 2009




Assets
                  
                  Level I
                  
                  
                  Level II
                  
                  
                  Level III
                  
                  
                  TotalAssets
                  
                  $
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Total
      Assets
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Liabilities
                  
                  
                  -
                  
                  
                  $
                  36,916,662
                  
                  
                  
                  -
                  
                  
                  $
                  36,916,662Total
      Liabilities
                  
                  $
                  -
                  
                  
                  $
                  36,916,662
                  
                  
                  $
                  -
                  
                  
                  $
                  36,916,662


37





Note
15 - Subsequent Event





On March 2, 2010 the Company signed a six month
promissory note in the amount  of Seventy Thousand Dollars ($70,000)
which carries and interest rate of 12% and is due in 5 monthly installments
of  $7,000 with a balloon payment in the sixth month of
$38,242.





On March
2, 2010, the Company entered into a rescission agreement (the “Rescission
Agreement”) with each of AJW Partners, LLC, AJW Master Fund, Ltd., New
Millennium Capital Partners II, LLC and AJW Offshore, Ltd. as holders (the
“Holders”) of the Company’s Callable Secured Convertible Notes (the “New
Notes”).  Under the terms of the Rescission Agreement, the parties
agreed to rescind a recapitalization agreement dated May 16, 2008 among the
Company and the Holders (the “Recapitalization Agreement”). Under the
Recapitalization Agreement, certain convertible debt securities previously held
by the Holders (the “Old Notes”) were exchanged for the New Notes.





Under the
Rescission Agreement, the New Notes are deemed void as if they were never issued
by the Company to the Holders and the Old Notes were returned to the Holders as
if they had never been exchanged for the New Notes pursuant to the
Recapitalization Agreement.  As a result of the rescission, the
Company is able to reduce its long term liabilities by approximately
$8,000,000.





The
Company considered all subsequent events through April 12, 2010, the date the
financial statements were available to be issued.


38





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


39


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 14, 2010
                        By:
                        /s/
      ANTHONY SHUPINAnthony
      Shupin(President,
      Chief Executive Officer)(Chairman)Date:
      April 14, 2010
                        By:
                        /s/
      MICHAEL J. PELLEGRINOMichael
      J. PellegrinoSenior
      Vice President & CFO(Principal
      Financial and Accounting
Officer)


40