Clean Energy Technologies, Inc. - Quarter Report: 2010 March (Form 10-Q)

UNITED STATES

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

	For the quarterly period ended March 31, 2010

or

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

For the transition period from to

Commission File Number: 333-125678

PROBE MANUFACTURING, INC.

(Exact name of registrant as specified in its charter)


Nevada	20-2675800
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

17475 Gillette Avenue, Irvine CA	92614
(Address of principal executive offices)	(Zip Code)

(949) 273-4990

(Registrant’s telephone number, including area code)

N/A

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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.

R Yes £ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). £ Yes £ No

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


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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

£ Yes R No

As of May 21, 2010, there were 184,638,320 shares of common stock of Probe Manufacturing, Inc. outstanding.

PROBE MAUFACTURING, INC.

(A Nevada Corporation)

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements		3

	Condensed Consolidated Balance Sheets as of March 31, 2010 (Unaudited) and December 31, 2009 (Unaudited)		4

	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2010 (Unaudited) and March 31, 2009 (Unaudited)		5

	Condensed Consolidated Statements of Equity for the Three Months Ended March 31, 2010 (Unaudited) and March 31, 2009 (Unaudited)		6

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 (Unaudited) and March 31, 2009 (Unaudited)		7

	Notes to Condensed Consolidated Financial Statements (Unaudited)		8


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		30

Item 3. Quantitative and Qualitative Disclosures About Market Risk		41

Item 4. Controls and Procedures		41

Item 4T. Controls and Procedures		41

PART II — OTHER INFORMATION

Item 1. Legal Proceedings		42

Item 1A. Risk Factors		42

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		42

Item 3. Defaults Upon Senior Securities		42

Item 4. [Removed and Reserved.]		42

Item 5. Other Information		43

Item 6. Exhibits		43

Signatures		44

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors:

Probe Manufacturing, Inc.

17475 Gillette Avenue

Irvine, CA 92614

We have reviewed the accompanying balance sheet of Probe Manufacturing, Inc. as of March 31, 2010, and the related statements of operations and cash flows for the three to nine month periods ended

March 31, 2010. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, conditions exist which raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of the uncertainty.

/S/W.T. Uniack

W.T. UNIACK & CO, CPA’s, P.C.

May 21, 2010

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PROBE MANUFACTURING, INC.

CONDENSED AND CONSOLIDATED BALANCE SHEETS

As of March 31, 2010 and December 31, 2009

(Unaudited)


		March 31,	December 31,
		2010	2009
Assets
Current Assets:
	Cash	$ -	$ -
	Accounts receivable - trade - net	179,395	100,381
	Inventory	442,705	402,867
	Deposits	15,877	22,627
	Total Current Assets	637,977	525,875

Property And Equipment - Net		125,965	103,084

	N/R Solar Acquisition corp.	21,800	25,000
	Goodwill	-	-
Total Assets		$ 785,742	$ 653,959

Liabilities And Stockholders' ( Deficit )
Current Liabilities:
	Bank overdraft	$ 27,726	$ 60,674
	Accounts payable - trade	266,182	187,948
	Customer Deposits	15,214	25,434
	Accrued Expenses	264,331	185,829
	Current Portion of Long Term Debt	15,180	15,180
	Total Current Liabilities	588,633	475,065
Long-Term Debt:
	Capital lease settlement obligations	253,460	260,961
	Notes Payable	20,000	20,000
	Less Current portion of Long Term Debt	(15,180)	(15,180)
	Net Long-Term Debt	258,280	265,781
Total Liabilities		846,913	740,846

Stockholders' ( Deficit )
	Common stock, $.001 par value; 200,000,000 shares authorized; 184,638,320 and 32,638,320 shares issued and outstanding respectively	184,638	184,638
	Additional paid-in capital	310,823	301,265
	Accumulated deficit	(556,632)	(572,790)
	Total Stockholders' ( Deficit )	(61,171)	(86,887)
Total Liabilities And Stockholders' Deficit		$ 785,742	$ 653,959

The accompanying notes are an integral part of these financial statements.

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PROBE MANUFACTURING, INC.

CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended March 31, 2010 and 2009

(Unaudited)


	2010	2009

Sales	$ 487,506	$ 887,928
Cost of Goods Sold	336,150	761,603
Gross Profit	151,356	126,325

General And Administrative	124,900	322,016
Share Based Compensation	9,558	2,058
Net Profit / (Loss) From Operations	16,898	(197,749)

Other Income / (Expenses) - Net	(91)	-
Interest Expense	(650)	(24,769)
Net Profit / (Loss) Before Income Taxes	16,157	(222,518)
Income Tax Expense	-	-
Net Profit / (Loss)	$ 16,157	$ (222,518)


Per Share Information:
Basic weighted average number
of common shares outstanding	184,638,320	32,638,320

Net Profit / (Loss) per common share	$ 0.0001	$ (0.0068)


Per Share Information:
Diluted, weighted average number
of common shares outstanding	199,989,511	32,638,320

Diluted, Net Profit / (Loss) per common share	$ 0.0001	$ (0.0068)

The accompanying notes are an integral part of these financial statements.

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PROBE MANUFACTURING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

For the Three Months Ended March 31, 2010 and 2009

(Unaudited)


	Common Stock .001 Par		Shares to be Issued
Description	Shares	Amount	Shares	Amount	Additional Paid in Capital	Accumulated Deficit	Stock holders' Deficit Totals
Balance 12/31/2009	184,638,320	184,638	-	-	301,266	(572,789)	(86,885)


Share based Option Amortization					2,057		2,057
							-
Stock Issued to be issued		-	750,000	7,500	-		7,500
Net Profit						16,157	16,157
							-
Balance 3/31/2010	184,638,320	$ 184,638	750,000	$ 7,500	$ 303,323	$ (556,632)	$ (61,171)


Balance 12/31/08	32,638,320	32,638	-	-	325,034	(600,289)	(242,617)

Share based Option Amortization					2,058		2,058

Net Loss						(222,518)	(222,518)

Balance 3/31/09	32,638,320	32,638	-	-	327,092	(822,807)	(463,077)

The accompanying notes are an integral part of these financial statements.

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PROBE MANUFACTURING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months March 31, 2010 and 2009

(Unaudited)


			2010	2009
Cash Flows from Operating Activities:
	Net Income / ( Loss )		$ 16,157	$ (222,518)
	Adjustments to reconcile net loss to net cash
		used in operating activities:
		Depreciation and amortization	7,713	15,324
		Share based compensation	9,558	2,058
		Stock issued for Services	-	-
		Changes in assets and liabilities:
		(Increase) decrease in accounts receivable	(79,014)	124,824
		(Increase) decrease in inventory	(39,838)	164,683
		(Increase) decrease in other assets	9,950	50,000
		(Decrease) increase in accounts payable	78,234	(270,897)
		(Decrease) increase in customer deposits	(10,220)	77,000
		(Decrease) increase in un-earned revenue	-	90,838
		Other (Decrease) increase in accrued expenses	78,502	55,694
Net Cash provided / (Used) In Operating Activities			71,042	87,006

Cash Flows from Investing Activities
	Disposal of Property and equipment		(30,594)	7,450
Cash Flows Used In Investing Activities			(30,594)	7,450

Cash Flows from Financing Activities
	Bank Overdraft / (Repayment)		(32,948)	(75,696)
	Payments on capital lease settlement obligations		(7,500)	(17,624)
	Proceeds / (Payments) on notes payable		-	3,887
Cash Flows Provided / (used) By Financing Activities			(40,448)	(89,433)

Net (Decrease) Increase in Cash and Cash Equivalents			-	5,023

Cash and Cash Equivalents at Beginning of Period			-	9,754

Cash and Cash Equivalents at End of Period			$ -	$ 14,777

Supplemental Information:
	Interest Paid		$ -	$ 5,724

The accompanying notes are an integral part of these financial statements.

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PROBE MANUFACTURING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The use of the words “we,” “us,” “our” or “the Company” refers to Probe Manufacturing, Inc. and its subsidiaries, except where the context otherwise requires.

1. Organization and Description of the Business.

Probe Manufacturing Industries, Inc. was incorporated on July 7, 1995. On April 21, 2005, we were re-domiciled from California to Nevada, and changed our name to Probe Manufacturing, Inc. Probe Manufacturing, Inc. (the “Company” or “Probe”) is a global provider of advanced electronics manufacturing services, or EMS, to original equipment manufacturers, or OEMs, primarily in the medical device, aerospace, industrial, instrumentation and alternative fuel segments. This includes end-to-end manufacturing solutions ranging from engineering to manufacturing of printed circuit board assembly, cable assembly, enclosures, complete system integration and testing, as well as global order fulfillment. In August 2008, we acquired the assets of Solar Masters, LLC, a distributer of solar powered products. Our headquarters are located in Lake Forest, California. Solar Masters is located in Fountain Valley, California.

On July 12, 2009, we agreed to convert a note receivable from Solar Masters in the amount of $89,156 into 8,000,000 shares of common stock in Solar Masters.

On July 13, 2009, we entered into a stock sale agreement with Solar Masters Acquisition Company, to sell its entire interest in its investment in Solar Masters, Inc. (a wholly owned subsidiary) for $35,000, consisting of a note receivable for $25,000 and the assumption of $10,000 in notes payable referenced above. This resulted in a loss on sale of investment of $190,464. Barrett Evans, Interim CEO and a member of our board of directors resigned on July 27, 2009 and took a position with Solar Masters as a consultant. Kambiz Mahdi was a member of the board of directors of Solar Masters and resigned on July 14, 2009.

On June 17, 2009, we entered into a stock purchase agreement with KB Development Group, LLC to sell 152,000,000 shares of our common stock for $120,000. Concurrently; we entered into settlement agreements with each of our note holders to settle the outstanding notes payable for $120,000 and the assumption of a $10,000 note by Solar Masters. Between July 13, 2009 and July 27, 2009 all of the notes were paid and settled, which resulted in a realized gain of $708,708 and a reduction in our notes payable of $840,203. Kambiz Mahdi, a member of our board of directors is the managing partner of KB Development Group, LLC.

On July 27, 2009, our board of directors appointed Kambiz Mahdi as Chief Executive officer.

Going Concern

The financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the normal course of business. Although; for the three months ended March 31, 2010, we had a net profit of $16,157 and a working capital surplus of $49,344, and we had shareholder deficit of $(61,171), our ability to operate as a going concern is still dependent upon our ability (1) to obtain sufficient debt and/or equity capital and/or (2) continue to generate positive cash flow from operations.

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Plan of Operations

We have seen a dramatic drop in revenue beginning in the fourth quarter of 2008 and continuing through March 31, 2010. We have made significant expense cuts as a direct result of this drop in revenue. In addition to the steps discussed below, we have initiated a major sales push in an attempt to gain new revenue; however no guarantees can be made as to whether or not we will be successful in winning the quoted business or if it will be able to keep its existing business.

Management is taking the following steps to address this situation: (a) to improve operational efficiencies by: (i) global expansion of our material sourcing and reducing our direct cost of materials (ii) by creating a strategic alliance with global suppliers in lower cost regions and outsourcing some of our end-to-end services (iii) by making a settlement with our note holders (iv) increase revenue by focusing on organic growth and acquisition of new domestic customers by offering both local and lower cost off shore end-to-end solutions (v) and investing into technology by becoming an incubator to technology innovators.

Our future success is likely dependent on our ability to attain additional capital to support growth and ultimately, upon its ability to reach profitability and then maintain that profitability. There can be no assurance that we will be successful in obtaining any such financing, or that it will be able to generate sufficient positive cash flow from operations. The successful outcome of these or any future activities cannot be determined at this time and there is no assurance that if achieved, we will have sufficient funds to execute its business plans. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable to continue as a going concern.

2. Basis of Presentation and Summary of Significant Accounting Policies.

Our accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, omit or condense certain footnotes and other information normally included in financial statements prepared in accordance with generally accepted accounting principles. It is suggested that these condensed financial statements should be read in conjunction with the Company's financial statements and notes thereto included in the Company's audited financial statements on Form 10-K for the fiscal year ended December 31, 2009, as filed with the United States Securities and Exchange Commission, or the SEC on April 15, 2009.

We follow United States Generally Accepted Accounting Principles, or GAAP. Certain of the principles involve selection among alternatives and choices of methods, which are described in the footnotes to our unaudited financial statements.

Cash and Cash Equivalents

We maintain the majority of its cash accounts at a commercial bank. The total cash balance is insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per commercial bank. For purposes of the statement of cash flows we consider all cash and highly liquid investments with initial maturities of one year or less to be cash equivalents.

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 revenue and expenses during the reporting period. Such estimates may be materially different from actual financial results. Significant estimates include the recoverability of long-lived assets, the collection of accounts receivable and valuation of inventory and reserves.

Accounts Receivable

We grant credit to its customers located within the United States of America; and do not require collateral. Our ability to collect receivables is affected by economic fluctuations in the geographic areas and industries served by us.

Reserves for un-collectable amounts are provided, based on past experience and a specific analysis of the accounts. Although we expect to collect amounts due, actual collections may differ from the estimated amounts. As of March 31, 2010, we had a reserve for potentially un-collectable accounts of $16,620. Five (5) customers accounted for approximately 79% of accounts receivable at March 31, 2010 and one customer accounted for 25% of the accounts receivable balance. Our trade accounts primarily represent unsecured receivables. Historically, our bad debt write-offs related to these trade accounts have been insignificant.

Inventory

Inventories are valued at the lower of weighted average cost or market value. Our industry experiences changes in technology, changes in market value and availability of raw materials, as well as changing customer demand. We make provisions for estimated excess and obsolete inventories based on regular audits and cycle counts of our on-hand inventory levels and forecasted customer demands and at times additional provisions are made. Any inventory write offs are charged to the reserve account. As of March 31, 2010, we had a reserve for potentially obsolete inventory of $350,000.

Property and Equipment

Property and equipment are stated at cost. Assets held under capital leases are recorded at lease inception at the lower of the present value of the minimum lease payments or the fair market value of the related assets. We follow the practice of capitalizing property and equipment purchased over $5,000. The cost of ordinary maintenance and repairs is charged to operations. Depreciation and amortization are computed on the straight-line method over the following estimated useful lives of the related assets:

Furniture and fixtures

3 to 7 years

Equipment

7 to 10 years

Leasehold improvements

2 years (life of the lease)

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Long –Lived Assets

Our management assesses the recoverability of its long-lived assets by determining whether the depreciation and amortization of long lived assets over their remaining lives can be recovered through projected undiscounted future cash flows. The amount of long-lived asset impairment if any, is measured based on fair value and is charged to operations in the period in which long-lived assets impairment is determined by management. There can be no assurance however, that market conditions will not change or demand for our services will continue, which could result in impairment of long-lived assets in the future.

Revenue Recognition

Revenue from product and services are recognized at the time goods are shipped or services are provided to the customer, with an appropriate provision for returns and allowances. Terms are generally FOB origination with the right of inspection and acceptance. We have not experienced a material amount of rejected or damaged product.

Fair Value of Financial Instruments

The carrying amount of accounts payable and accrued expenses are considered to be representative of their respective fair values because of the short-term nature of these financial instruments.

Other Comprehensive Income

We have no material components of other comprehensive income (loss) and accordingly, net loss is equal to comprehensive loss in all periods.

Net Profit / (Loss) per Common Share

Basic profit / (loss) per share is computed on the basis of the weighted average number of common shares outstanding. At March 31, 2010, we had outstanding common shares of 184,638,320 used in the calculation of basic earnings per share. Basic Weighted average common shares and equivalents at for the three months ended March 31, 2010, was 184,638,320. As of March 31, 2010, we had outstanding warrants to purchase 14,247,330 additional common shares and options to purchase 1,103,861 additional common shares, which may dilute future earnings per share. Fully diluted weighted average common shares and equivalents for the three months ended at March 31, 2010, was 199,989,511.

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Research and Development:

We are curtailing its research and development and focusing our business on its core business of electronics contract manufacturing.

Research and Development Costs incurred in association with the alternative fuels technology development (which include salaries and equipment) were expensed as incurred. We expensed $0 in R&D during the three months ended March 31, 2010.

Segment Information

Except as identified above in the research and development section, we operate our primary business of electronics contract manufacturing.

Share Based Compensation

The company has adopted the use of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS No. 123R) (now contained in FASB Codification Topic 718, Compensation-Stock Compensation), which supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and its related implementation guidance and eliminates the alternative to use Opinion 25’s intrinsic value method of accounting that was provided in Statement 123 as originally issued. This Statement requires an entity to measure the cost of employee services received in exchange for an award of an equity instruments, which includes grants of stock options and stock warrants, based on the fair value of the award, measured at the grant date, (with limited exceptions). Under this standard, the fair value of each award is estimated on the grant date, using an option-pricing model that meets certain requirements. We use the Black- Scholes option-pricing model to estimate the fair value of our equity awards, including stock options and warrants. The Black-Scholes model meets the requirements of SFAS No. 123R; however the fair values generated may not reflect their actual fair values, as it does not consider certain factors, such as vesting requirements, employee attrition and transferability limitations. The Black-Scholes model valuation is affected by our stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. We estimate the expected volatility and estimated life of our stock options at grant date based on historical volatility; however, due to the thinly traded nature of our stock, we have chosen to use an average of the annual volatility of like companies in our industry. For the “risk-free interest rate”, we use the Constant Maturity Treasury rate on 90 day government securities. The term is equal to the time until the option expires. The dividend yield is not applicable, as the company has not paid any dividends, nor do we anticipate paying them in the foreseeable future. The fair value of our restricted stock is based on the market value of our free trading common stock, on the grant date calculated using a 20 trading day average. At the time of grant, the share based-compensation expense is recognized in our financial statements based on awards that are ultimately expected to vest using historical employee attrition rates and the expense is reduced accordingly. It is also adjusted to account for the restricted and thinly traded nature of the shares. The expense is reviewed and adjusted in subsequent periods if actual attrition differs from those estimates.

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

We re-evaluate the assumptions used to value our share-based awards on a quarterly basis and if changes warrant different assumptions, the share-based compensation expense could vary significantly from the amount expensed in the past. We may be required to adjust any remaining share-based compensation expense, based on any additions, cancellations or adjustments to the share based awards. The expense is recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. For the three months ended, March 31, 2010 and 2009, we recognized $2,058 and $2,058 respectively, in share based expense, due to the issuance of our options and warrants. We also had $3,384 in non-vested expense to be recognized over the next year. We also recognized $7,500 in share based expense due to the issuance of 750,000 shares to key individuals.

Income Taxes

The Company accounts for income taxes under SFAS No. 109 (now contained in FASB Codification Topic 740-10-25, Accounting for Uncertainty in Income Taxes), which requires the asset and liability approach to accounting for income taxes. Under this method, deferred tax assets and liabilities are measured based on differences between financial reporting and tax bases of assets and liabilities measured using enacted tax rates and laws that are expected to be in effect when differences are expected to reverse. As of March 31, 2010, we had a net operating loss carry forward of $(556,633) and a deferred tax asset of $189,255 using the statutory rate of 34%. The deferred tax asset may be recognized in future periods, not to exceed 20 years. However, due to the uncertainty of tour ability to operate as a going concern, we have not booked any deferred tax asset as a result.

3. Inventory.

Inventories by major classification were comprised of the following at:


	March 31, 2010	December 31, 2009
Raw Material	$ 709,852	$ 678,492
Work in Process	75,370	71,161
Finished Goods	7,483	3,214
Total	792,705	752,867
Less Reserve for excess or obsolete inventory	(350,000)	(350,000)
Total Inventory	$ 442,705	$ 402,867

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

4. Property and Equipment

Property and equipment were comprised of the following at:


	March 31, 2010	December 31, 2009
Furniture and fixtures	$ 33,558	$ 33,558
Equipment	1,867,778	1,854,184
Leasehold improvements	36,686	19,686
Total	1,938,022	1,907,428
Accumulated Depreciation	1,812,057	1,804,344
Net Fixed Assets	$ 125,965	$ 103,084

5. Accrued Expenses


	March 31, 2010	December 30, 2009
Accrued Wages	$ 72,287	$ 26,681
Accrued Interest	1,300	650
Accrued Professional Fees	10,000	10,000
Accrued Other	79,459	45,214
Accrued Rent	78,432	80,432
Accrued CEO Compensation	-	-
Accrued Vacation	22,852	22,852
Total Accrued Expenses	$ 264,330	$ 185,829

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

6. Capital Lease Settlement Obligations

On July 9, 1997 and December 21, 1997, we entered into two lease agreements, with Crocker capital, which subsequently assigned the leases to The CIT Group. In September 2004, we had outstanding balances of $457,604 and $556,293 on the two leases and was unable to make the monthly lease payments. As a result, we entered into a forbearance agreement with The CIT Group, with monthly payments of $7,500 and an early payment schedule as follows:

The CIT Group would release us and its guarantors if one of the following payments were made, less the total of all monthly payments made to that date:

$375,000 if paid by October 25, 2004

$425,000 if paid by December 25, 2004

$500,000 if paid by June 25, 2005

$550,000 if paid by December 25, 2005

$600,000 if paid by June 25, 2006

$650,000 if paid by December 25, 2006

$700,000 if paid by June 25, 2007

On June 1, 2007 an amended forbearance agreement was entered into:

In consideration of CIT entering into this Addendum, Probe will pay CIT the sum of $7,500 on or before June 25, 2007, which was paid.

Recital B is amended to state that as of June 25, 2007 Probe’s payment obligation to CIT totals $457,500.

Section 2.3 of the Forbearance Agreement is amended to state that probe will pay CIT the amount of $457,500 in sixty-one (61) monthly installments of $7,500 each, commencing on July 25, 2007 and ending on July 25, 2012. If at any time Probe elects to pay in full the remaining balance, upon 30 day written notice, CIT will provide a payoff figure for the remaining balance using a present value rate of 7.0%.

We imputed interest at 7.00% over the term of the payments, which resulted in a present value of $384,025 and a gain of $324,330 which had an effect on Net profit per common share of $.031 and Diluted Net Profit per common share of $.022.

As of March 31, 2010 the outstanding balance was $ 253,460

Subsequently, On April 9, 2009 we entered into an agreement with CIT to settle the balance in full for $70,000, as a result we realized a gain of $183,460.

7. Notes Payable

Note Payable - dated March 10, 2006 – special use, line of credit in the amount of $90,000, unsecured, 12.00% interest paid in cash due May 10, 2007, payable to Ashford Capital, LLC. This note was converted to a term note payable, with an effective date of June 30, 2006, unsecured, 12.00% interest rate, with a 36 month amortization, payments of $1,997 and a balloon payment of $33,068 on April 15, 2008. On April 15, 2008 we were unable to meet the balloon payment and the note is in default. On July 21, 2009 this note was settled in full for $8,268 and recognized a gain of $22,221. As of March 31, 2010 the outstanding balance was zero.

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Note Payable – This Note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 20.00% (12.00% paid in cash and 8.00% paid in our common stock shares) per annum, payable to Ed Lassiter. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 12.00% interest rate, with a 36 month amortization, monthly payments of $ $4,650 and a balloon payment of $77,014 on April 15, 2008. On April 15, 2008 we were unable to meet the balloon payment and the note is in default. On July 20, 2009 this note was settled in full for $20,014 and recognized a gain of $53,788. As of March 31, 2010 the outstanding balance was zero.

Note Payable -- This Note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 20.00% (12.00% paid in cash and 8.00% paid in common stock in the Company) per annum, payable to William Duncan. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 12.00% interest rate, with a 36 month amortization, monthly payments of $1,661 and a balloon payment of $27,505 on April 15, 2008. On April 15, 2008, we were unable to meet the balloon payment and the note is in default. On July 13, 2009 this note was settled in full for $6,798 and recognized a gain of $18,270. As of March 31, 2010 the outstanding balance was zero.

Note Payable – This Note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 20.00% (12.00% paid in cash and 8.00% paid in our common stock shares) per annum, payable to Benner Exemption Trust. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 12.00% interest rate, with a 36 month amortization, payments of $4,650 and a balloon payment of $77,014 on April 15, 2008. On April 15, 2008 we were unable to meet the balloon payment and the note is in default. On July 13, 2009 this note was settled in full for $19,450 and recognized a gain of $52,270. As of March 31, 2010 the outstanding balance was zero.

Note Payable – This note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 20.00% (12.00% paid in cash and 8.00% paid in our common stock shares) per annum, payable to Ashford Capital, LLC. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 12.00% interest rate, with a 36 month amortization, monthly payments of $3,321 and a balloon payment of $55,010 on April 15, 2008. On April 15, 2008 we were unable to meet the balloon payment and the note is in default. On July 20, 2009 this note was settled in full for $14,133 and recognized a gain of $37,982. As of March 31, 2010 the outstanding balance was zero.

Note Payable – This Note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 15.00% per annum, payable to Hoa Mai. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 12.00% interest rate, with a 36 month amortization, monthly payments of $1,661 and a balloon payment of $27,505 on April 15, 2008. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date. On July 13, 2009 this note was settled in full for $2,605 and recognized a gain of $7,002. As of March 31, 2010 the outstanding balance was $9,607.

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Related Party – Notes payable

Note Payable - dated March 10, 2006 – related party, special use, line of credit in the amount of $45,000, unsecured, 20.00% interest (10.00% paid in cash and 10% paid in our common stock shares), due May 10, 2007. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, 12.00% interest rate, with a 36 month amortization, monthly payments of $1,001 and a balloon payment of $16,588 on April 15, 2008. This note is payable to Kambiz Mahdi. On April 15, 2008 we were unable to meet the balloon payment and the note is in default. On July 27, 2009 this note was settled in full for $0 and recognized a gain of $14,227. As of March 31, 2010 the outstanding balance was zero.

Note Payable - dated March 10, 2006 – related party, special use, line of credit in the amount of $45,000, unsecured, 20.00% interest (10.00% paid in Cash and 10.00% paid in our common stock shares), due May 10, 2007. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, 12.00% interest rate, with a 36 month amortization, monthly payments of $1,001 and a balloon payment of $16,588 on April 15, 2008. This note is payable to Reza Zarif. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date. On July 27, 2009 this note was settled in full for $3,585 and recognized a gain of $9,636. As of March 31, 2010 the outstanding balance was zero.

Note Payable – related party, unsecured, 20.00% interest (10.00% paid in cash and 10.00% paid in our common stock shares due on May 10, 2007, Payable to Kambiz Mahdi. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 10.00% interest rate, with a 36 month amortization, monthly payments of $7,871 and a balloon payment of $130,366 on April 15, 2008. On April 15, 2008 we were unable to meet the balloon payment and the note is in default. On July 27, 2009 this note was settled in full for $0 and recognized a gain of $124,304. As of March 31, 2010 the outstanding balance was zero.

Note Payable – related party, unsecured, 20.00% interest (10.00% paid in cash and 10.00% paid in our common stock shares) due on May 10, 2007, Payable to Reza Zarif. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 12.00% interest rate, with a 36 month amortization, monthly payments of $7,871 and a balloon payment of $130,366 on April 15, 2008. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date. On July 27, 2009 this note was settled in full for $34,583 and recognized a gain of $92,941. As of March 31, 2010 the outstanding balance was zero.

Note Payable – related party. This note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 20.00% (12.00% paid in cash and 8.00% paid in our common stock shares) per annum, payable to Rufina Paniego. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, 12.00% interest rate, with a 36 month amortization, monthly payments of $2,491 and a balloon payment of $39,759 on April 15, 2008. As of June 30, 2008 the outstanding balance was $42,893. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date. On July 27, 2009 this note was settled in full for $10,563 and recognized a gain of $28,388. As of March 31, 2010 the outstanding balance was zero.

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Note Payable – related party. This note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 20.00% (12.00% paid in cash and 8.00% paid in our common stock shares) per annum, payable to eFund Capital Partners. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 12.00% interest rate, with a 36 month amortization, monthly payments of $4,982 and a balloon payment of $82,516 on April 15, 2008. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date. On July 27, 2009 this note was settled in full for $0 and recognized a gain of $81,879. As of March 31, 2010 the outstanding balance was zero.

Note Payable – related party. This is a term note payable, with an effective date of January 15, 2008, payable to Jeff Conrad, Esq. at a 12.00% interest rate, with a 30 month amortization and monthly payments of $1,162. As of June 30, 2009 the note was in default with outstanding balance of $27,796. On July 27, 2009 this note was settled in full for $0 and recognized a gain of $27,796. As of March 31, 2010 the outstanding balance was zero.

Other Long-Term Debt

1) We have reached a settlement with I-Source, a supplier, with monthly payments of $2,500. As of March 31, 2010 the outstanding balance was $11,925.

2) We currently owe the Internal Revenue Service $1,322 for past tax liabilities. We negotiated a settlement with the IRS and have entered into a payment plan with them in which we pay the IRS $3,000 per month. All payments to date are current. The balance is included in other long-term debt. The balance as of March 31, 2010 is $1,322. Subsequently this has been paid in full.

8. Commitments and Contingencies

Operating Rental Leases

On September 11, 2006 we entered into a sublease agreement for 10,000 sq ft. of manufacturing space which includes office space with Quantum Fuel System Technologies Worldwide, Inc. for $15,500 per month. On May 19, 2008 we entered into a new extension of the sublease agreement with an effective termination date of August 31, 2009. The facility is located at 25242 Arctic Ocean Drive, Lake Forest, CA 92630. On October 14, 2009 we entered into a 5 year lease with Bernard family trust, with a commencement date of December 31, 2009. The facility is approximately 19,701 square feet and located at 17475 Gillette, Irvine CA, 92614.


Year	Monthly Rent
1	7,880
2	9,850
3	10,835
4	11,820
5	12,805

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Litigation

The Company may be involved from time to time in various claims, lawsuits, and disputes with third parties, action involving allegations or discrimination or breach of contract actions incidental in the normal operations of the business. As of March 31, 2010, we believe that there are no claims or litigation pending.

9. Capital Stock Transactions

During the three months ended March 31, 2010, we do not issue any capital stock.

18 of 46

COMMON STOCK

Our Articles of Incorporation authorize us to issue 200,000,000 shares of common stock, par value $0.001 per share. As of March 31, 2010 there were 184,638,320 shares of common stock issued and outstanding, respectively. All outstanding shares of common stock are, and the common stock to be issued will be, fully paid and non-assessable. Each share of our common stock has identical rights and privileges in every respect. The holders of our common stock are entitled to vote upon all matters submitted to a vote of our shareholders and are entitled to one vote for each share of common stock held. There are no cumulative voting rights.

The holders of our common stock are entitled to share equally in dividends and other distributions that our Board of Directors may declare from time to time out of funds legally available for that purpose, if any, after the satisfaction of any prior rights and preferences of any outstanding preferred stock. If we liquidate, dissolve or wind up, the holders of shares of common stock will be entitled to share ratably in the distribution of all of our assets remaining available for distribution after satisfaction of all our liabilities and our obligations to holders of our outstanding preferred stock.

PREFERRED STOCK

Our Articles of Incorporation authorize us to issue 10,000,000 shares of preferred stock. We authorized 440 shares of Series A Convertible Preferred Stock and 20,000 shares of Series B Convertible Preferred Stock. On May 25, 2006 the Articles of Incorporation were amended authorizing 15,000 shares Series C Convertible Preferred Stock.

As of August 20, 2006 all preferred stock has been converted into Common stock and there are no outstanding Preferred shares as of September 30, 2008.

Preferred Series A

Previously, there were 440 shares of Convertible A Preferred Stock outstanding, with a stated value of $1,000. Each share is convertible into 0.1% percent of the shares of our common stock outstanding at the date of conversion, which shall convert upon election of the holder. The holders of series A Preferred stock have the right to vote with the holders of common stock on any matter to which the common stock holders are entitled to vote and they are entitled to vote number of shares of common stock into which the series A Preferred Stock is convertible. If we are liquidated, distribute our assets, dissolve or wind-up, the holders of Convertible A Preferred Stock shall receive the greater of (i) $2,500 per share of Convertible A Preferred Stock they hold at the time of such liquidation, or (ii) their pro rata share of the total value of our assets and funds to be distributed, assuming the Convertible A preferred stock is converted to common stock. On August 14, 2006 the holders converted 440 shares of the Preferred Series A for 4,544,188 shares of our common stock.

Preferred Series B

Previously there were 12,500 shares of Series B Convertible stock outstanding, with a stated value of $100. Each share of Series B Stock shall be converted into a number of shares of common stock that is equal to each share being divided by the average of the 3 lowest intraday bids in the twenty (20) days prior to conversion multiplied by 100 (1 divided by x, multiplied by 100), or 125 shares per Series B, whichever is greater. The minimum conversion price which Series B shareholders shall convert their Series B shares to common stock shall be $0.10.

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Exchange of Preferred Series B to Preferred Series C

On May 25, 2006 the Board of Directors approved the exchange of Series B Convertible Preferred Stock for Series C No-Par, Convertible Preferred Stock for its Series B stockholders. After the exchange took place Series B Convertible Preferred Stock was cancelled. The Series C Convertible Preferred Stock carries the same rights as Series B Convertible Preferred Stock except that Series C Convertible Preferred Stock can be redeemed by us. At any time, we may, in its sole discretion, redeem some or all of the outstanding shares of Series C Stock at a “Redemption Price” equal to the greater of $120.00 per share for the first year from the date of this certificate and after which the redemption price shall increase by twelve percent (12%) per year until all outstanding shares of Series C have been redeemed. To redeem Series C Stock, we, at least five (5) days prior to the date on which it desires to redeem such stock (the “Redemption Date”), shall send the applicable holder of Series C Stock a notice of the redemption provided, however, that failure to give such notice or any defect therein or in the mailing thereof shall not affect the validity of the proceedings for the redemption of any shares of Series C Stock. Such notice shall state: (i) the redemption date; (ii) the redemption price; and (iii) the number of shares of Series C Stock to be redeemed. Furthermore, the holders of Series C Convertible Preferred Stock shall receive one A Warrant and one B Warrant for every Ten (10) shares of common stock received from converting a share of our Series C Convertible Preferred stock. This series A and B Warrants are pursuant to the terms and conditions of our Series A and B warrant agreement as amended.

Preferred Series C

Previously there were 14,040 shares of Convertible C Preferred Stock outstanding. Originally as filed on May 25, 2006 each share of Series C Stock shall be converted into a number of shares of Common Stock that is equal to each share being divided by the average of the 3 lowest intraday bids in the twenty (20) days prior to conversion or $0.10, whichever is greater, multiplied by 100 (1 divided by x, multiplied by 100), or 125 shares per Series C, whichever is greater. However, on August 07, 2006 the terms of Series C were amended as follows: Each share of Series C stock shall be converted into a number of shares of Common Stock that is equal to each share divided $0.267 multiplied by 100 (1 divided by $0.267, multiplied by 100).

On August 14, 2006 the holders of Preferred Series C elected to convert their shares into common stock. As a result 14,040 shares of Preferred Series C were converted into 5,265,000 shares of common stock.

Our Board of Directors has the authority to issue additional shares of preferred stock in one or more series, and fix for each series, the designation of and number of shares to be included in each such series. Our Board of Directors is also authorized to set the powers, privileges, preferences, and relative participating, optional or other rights, if any, of the shares of each such series and the qualifications, limitations or restrictions of the shares of each such series.

Unless our Board of Directors provides otherwise, the shares of all series of preferred stock will rank on parity with respect to the payment of dividends and to the distribution of assets upon liquidation. Any issuance by us of shares of our preferred stock may have the effect of delaying, deferring or preventing a change of our control or an unsolicited acquisition proposal. The issuance of preferred stock also could decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of common stock.

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Warrants

Series A - Common Stock Warrants

We currently have 1,192,875 Series A Warrants issued and outstanding. Each warrant gives the holder the right to purchase 5 shares of common stock (5,964,375 total shares) at $.33 per share. The Series A Warrants expire on November 15, 2010.

Series B - Common Stock Warrants

We currently have 1,192,875 Series B Warrants issued and outstanding. Each warrant gives the holder the right to purchase 5 shares of common stock (5,964,375 total shares) at $.50 per share. The Series B Warrants will expire on May 15, 2011.

Series C – Common Stock Warrants

We currently have 600,000 Series C Warrants issued and outstanding. Each warrant gives the holder the right to purchase 1 shares of common stock (600,000 total shares) at $.267 per share. The Series C Warrants expire on November 5, 2010.

Series D – Common Stock warrants

We currently have 1,718,580 Series D Warrants issued and outstanding. Each warrant gives the holder the right to purchase 1 share of common stock (1,718,580 total shares) at $.133 per share. The Series D Warrants expire on November 5, 2012.

Warrants Activity for the Period and Summary of Outstanding Warrants

On April 2, 2008, the following notes were converted and series D warrants were issued:

Note Payable – This Note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 15.00% per annum, payable to Hoa Mai. This note was converted to a term note payable, with an effective date of September 30, 2006, un-secured, at 12.00% interest rate, with a 36 month amortization, monthly payments of $1,661 and a balloon payment of $27,505 on April 15, 2008. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date.. On July 13, 2009 this note was settled in full for $2,605 and recognized a gain of $7,002. As of March 31, 2010, the note had outstanding balance of zero.

Note Payable - dated March 10, 2006 – related party, special use, line of credit in the amount of $45,000, unsecured, 20.00% interest (10.00% paid in cash and 10.00% paid in our common stock shares), due May 10, 2007. This note was converted to a term note payable, with an effective date of September 30, 2006, un-secured, 12.00% interest rate, with a 36 month amortization, monthly payments of $1,001 and a balloon payment of $16,588 on April 15, 2008. This note is payable to Reza Zarif. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date. On July 27, 2009 this note was settled in full for $3,585 and recognized a gain of $9,636. As of March 31, 2010, the note had outstanding balance of zero.

21 of 46

PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Note Payable – related party. This note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 20.00% (12.00% paid in cash and 8.00% paid in our common stock shares) per annum, payable to Rufina Paniego. This note was converted to a term note payable, with an effective date of September 30, 2006, un-secured, 12.00% interest rate, with a 36 month amortization, monthly payments of $2,491 and a balloon payment of $39,759 on April 15, 2008. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date. On July 27, 2009

this note was settled in full for $10,563 and recognized a gain of $28,388. As of March 31, 2010, the note had outstanding balance of zero.

Note Payable – related party. This note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 20.00% (12.00% paid in cash and 8.00% paid in our common stock shares) per annum, payable to eFund Capital Partners. This note was converted to a term note payable, with an effective date of September 30, 2006, un-secured, at 12.00% interest rate, with a 36 month amortization, monthly payments of $4,982 and a balloon payment of $82,516 on April 15, 2008.. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date.. On July 27, 2009 this note was settled in full for $0 and recognized a gain of $81,879. As of March 31, 2010, the note had outstanding balance of zero.

Note Payable – related party, unsecured, 20.00% interest (10.00% paid in cash and 10.00% paid in our company stock shares) due on May 10, 2007, Payable to Reza Zarif. This note was converted to a term note payable, with an effective date of September 30, 2006, un-secured, at 12.00% interest rate, with a 36 month amortization, monthly payments of $7,871 and a balloon payment of $130,366 on April 15, 2008. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date. On July 27, 2009 this note was settled in full for $34,583 and recognized a gain of $92,941. As of March 31, 2010, the note had outstanding balance of zero.

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

A summary of warrant activity for the periods is as follows:


		Warrants - Common Share Equivalents	Weighted Average Exercise price	Warrants exercisable - Common Share Equivalents	Weighted Average Exercise price
Outstanding December 31, 2003		-		-
	Granted	5,118,750	0.42	5,118,750	0.42
	Exercised	-		-
Outstanding December 31, 2004		5,118,750	0.42	5,118,750	0.42
	Granted	2,145,000	0.42	2,145,000	0.42
	Exercised	-		-
Outstanding December 31, 2005		7,263,750	0.42	7,263,750	0.42
	Granted	5,265,000	0.42	5,265,000	0.42
	Exercised	-		-
Outstanding December 31, 2006		12,528,750	0.42	12,528,750	0.42
	Granted	1,275,000	0.13	1,275,000	0.13
	Exercised	-		-
Outstanding December 31, 2007		13,803,750	0.38	13,803,750	0.38
	Granted	443,580	0.13	443,580	0.13
	Exercised	-		-
Outstanding December 31, 2008		14,247,330	0.38	14,247,330	0.38
	Granted	-	-	-	-
	Exercised	-	-	-
Outstanding December 31, 2009		14,247,330	0.38	14,247,330	0.38
	Granted	-	-	-	-
	Exercised	-	-	-
Outstanding March 31, 2010		14,247,330	0.38	14,247,330	0.38

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Note: The weighted average exercise price has been adjusted retroactively due to price decreases in the warrant strike prices.


	Warrants Outstanding			Warrants Exercisable
Range of Warrant Exercise Price	Warrants - Common Share Equivalents	Weighted Average Exercise price	Weighted Average Remaining Contractual life	Warrants - Common Share Equivalents	Weighted Average Exercise price
0.33	5,964,375	$0.33	0.62	5,964,375	$0.33
0.50	5,964,375	$0.50	1.13	5,964,375	$0.50
0.27	600,000	$0.27	1.1	600,000	$0.27
0.13	1,275,000	$0.13	2.85	1,275,000	$0.13
0.13	443,580	$0.13	2.85	443,580	$0.13
Total	14,247,330			14,247,330

STOCK OPTIONS

On February 8, 2007 pursuant to our 2006 Qualified Incentive Option Plan which was adopted by our Board of Directors granted Company employees an incentive stock option to purchase up to 652,766 shares of our common stock. These options were granted at $.173 cents, the fair market value of the Company at the time of the grant. These options expire on February 8, 2017. As of March 31, 2010 we had a reduction in the outstanding stock options of 403,779 as a result of employee termination and forfeiture of the options. As of March 31, 2010 there were 212,735outstanding options under this plan.

On February 8, 200, we granted stock options to its key employees, to purchase up to 750,000 shares of our common stock, which was approved by our Board of Directors. These options were granted at $.173 cents, the fair market value of the Company at the time of the grant. These options expire on February 8, 2017. As a result, we recognized share-based compensation expense in the amount of $5,313 for the year ended December 31, 2007, $2,657 for the year ended December 31, 2008,$2,657 for the year ended December 31, 2009 and $664 for the three months ended March 31, 2010, with a balance to be expensed over the next year of $1,993. As of March 31, 2010 the balance of the outstanding options under this plan is 600,000.

On February 28, 2008 our granted stock options to a key employee, to purchase up to 300,000 shares of our common stock, which was approved by our Board of Directors. These options were granted at $.033 cents, the fair market value of the Company at the time of the grant. These options expire on February 8, 2017. As a result, we recognized share-based compensation expense in the amount of $5,576 for the year ended December 31, 2009 and $1,394 for the three months ended March 31, 2010, with a balance to be expensed over the next quarter of $1,392.

Stock to be issued under option and warrant plans

Any shares issued under the existing option or warrant plans will come from the company’s authorized but un-issued, un-registered shares.

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

10. Related Party Transactions

Note Payable - dated March 10, 2006 – related party, special use, line of credit in the amount of $45,000, unsecured, 20.00% interest (10.00% paid in Cash and 10.00% paid in our common stock shares), due May 10, 2007. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, 12.00% interest rate, with a 36 month amortization, monthly payments of $1,001 and a balloon payment of $16,588 on April 15, 2008. This note is payable to Reza Zarif. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date. As of September 30, 2008 the note was in default. On July 27, 2009 this note was settled in full for $3,585 and recognized a gain of $9,636. As of March 31, 2010 the outstanding balance was zero.

Note Payable – related party. This note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 20.00% (12.00% paid in cash and 8.00% paid in our common stock shares) per annum, payable to Rufina Paniego. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, 12.00% interest rate, with a 36 month amortization, monthly payments of $2,491 and a balloon payment of $39,759 on April 15, 2008. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date. On July 27, 2009 this note was settled in full for $10,563 and recognized a gain of $28,388. As of March 31, 2010 the outstanding balance was zero.

25 of 46

PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Note Payable – related party. This note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 20.00% (12.00% paid in cash and 8% paid in our common stock shares) per annum, payable to eFund Capital Partners. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 12.00% interest rate, with a 36 month amortization, monthly payments of $4,982 and a balloon payment of $82,516 on April 15, 2008. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date. On July 27, 2009 this note was settled in full for $0 and recognized a gain of $81,879. As of March 31, 2010 the outstanding balance was zero.

On June 17, 2009, we entered into a stock purchase agreement with KB Development group to sell 152,000,000 shares of our common stock for $120,000. Concurrently we entered into Settlement agreements with each of our note holders to settle the outstanding notes payable for $120,000 and the assumption of a $10,000 note by Solar Masters. Subsequently; between July 13, 2009 and July 27, 2009 all of the notes were paid and settled, which resulted in a realized gain of $710,203 and a reduction in our notes payable of $840,203. Kambiz Mahdi, a member of our board of directors and chief executive officer is the managing partner of KB Development Group, LLC.

On July 12, 2009, we agreed to convert a note receivable from Solar Masters in the amount of $89,156 into 8,000,000 shares of common stock in Solar Masters.

On July 13, 2009, we entered into a stock sale agreement with Solar Masters Acquisition Company, to sell its entire interest in its investment in Solar Masters, Inc. (a wholly owned subsidiary) for $35,000, consisting of a Note Receivable for $25,000 and the assumption of $10,000 in notes payable referenced above. This resulted in a loss on sale of investment of $190,464. Barrett Evans a member of our board of directors on March 31, 2010, subsequently resigned on July 27, 2009 and took a position with Solar Masters as a consultant. Kambiz Mahdi was a member of the board of directors of Solar Masters as of March 31, 2010, subsequently resigned on July 14, 2009.

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

12. Acquisition of Solar Masters

On August 13, 2008, we entered a definitive agreement for the sale and purchase of business assets of Solar Masters Company. The purchase price of the assets was: $2,719.65 in cash payable to Solar Masters, LLC. plus 250,000 shares of Probe common stock valued at $.40 each = $100,000.00, for a total of $102,719.65. Solar Masters, inc. was formed and is our wholly owned subsidiary. The assets of Solar Masters included $10,125 of inventory, $25,000 in deposits paid by the previous owner on the container of product the web site, the rights to the name Solar Masters and the customer base. The allocation to the purchase price was as follows:


Inventory		10,125.00
Deposit on Container		25,000.00
Goodwill		67,594.65

On July 13, 2009 we entered into a stock sale agreement with Solar Masters Acquisition Company, to sell its entire interest in its investment in Solar Masters, Inc. (a wholly owned subsidiary) for $35,000, consisting of a Note Receivable for $25,000 and the assumption of $10,000 in notes payable referenced above. This resulted in a loss on sale of investment of $190,464.

13. Subsequent Events

Settlement with CIT

Subsequently, On April 9, 2009 we entered into an agreement with CIT to settle the balance in full for $70,000, as a result we realized a gain of $183,460.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

Overview

Probe Manufacturing, Inc. was founded in 1995. Probe is a high quality global provider of electronics manufacturing services (EMS). We provide a range of engineering, manufacturing and integrated supply chain services to companies who design and market electronic products, original equipment manufacturers (OEM). Currently, our revenue is generated from sales of our services primarily to customers in the medical device, aerospace, alternative fuel and industrial products manufacturers. Probe's EMS offerings include new product introduction, collaborative design, materials management, product manufacturing, product testing and product warranty repair, and end-of-life support. Because our core business is a service company, we’re impacted by our customer’s ability to appropriately predict market demand for their products. While we work with our customers to understand their demand needs, we are removed from the actual end-market served by our customers. Consequently determining future trends and estimates of activity can be very difficult.

On August 13, 2008 the issuer entered a definitive agreement for the sale and purchase of business assets of Solar Masters. Solar Masters is a wholly-owned subsidiary of Probe. Solar Masters is an importer and distributor of solar powered products. The purchase price of the assets was: $2,719.65 in cash payable to Solar Masters, LLC. plus 250,000 shares of Probe common stock valued at $.40 each which equals to $100,000.00, for a total of $102719.65. Solar Masters, inc. was formed and is our wholly owned subsidiary. The assets of Solar Masters included $10,500 of inventory, the web site the rights to the name Solar Masters and the customer base. The allocation to the purchase price was $10,500.00 in inventory and $92,219.65 in goodwill under Solar Masters, Inc.

The main product line of Solar Masters consists of various solar powered barricade lights. Solar Masters also offers a solar powered battery charger, solar powered outdoor lighting and a solar powered flashlight. It is the intent of Solar Masters to grow the product line as it sees demand for various other products. Solar Masters recently made its first sale of solar panels.

On July 13, 2009 we entered into a stock sale agreement with Solar Masters Acquisition Company, to sell its entire interest in its investment in Solar Masters, Inc. (a wholly owned subsidiary) for $35,000, consisting of a Note Receivable for $25,000 and the assumption of $10,000 (see Note 13). This resulted in a loss on sale of investment of $190,464.

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Selected Financial Data

The following selected historical financial information of Probe Manufacturing, Inc. has been derived from the historical results and are not necessarily indicative of future results. The following table is qualified by reference to and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data.”


Probe Manufacturing, Inc.
Consolidated Statement of Operations
for the three months ended March 31,


	Un-Audited	Un-Audited
	2010	2009

Sales	$ 487,506	$ 887,928
Cost of Goods Sold	336,150	761,603
Gross Profit	151,356	126,325

General And Administrative	124,900	322,016
Share Based Compensation	9,558	2,058
Stock Issued for Services	-	-
Research and Development	-	-
Net Profit / (Loss) From Operations	16,898	(197,749)

Other Income / (Expenses) - Net	(91)	-
Interest Expense	(650)	(24,769)
Net Profit / (Loss) Before Income Taxes	16,157	(222,518)
Income Tax Expense	-	-
Net Profit / (Loss)	$ 16,157	$ (222,518)


PROBE MANUFACTURING, INC.
Condensed consolidated Balance sheet
as of
	Un-Audited
	March 31,	December 31,
	2010	2009

Working Capital	$ 49,344	$ 50,810
Total Assets	785,742	653,959
Long term Debt	258,280	265,781
Stockholder Equity	$ (61,171)	$ (86,887)

Plan of Operations

Our future success is likely dependent on its ability to attain additional capital to support growth and ultimately, upon its ability to reach profitability and then maintain that profitability. There can be no assurance that we will be successful in obtaining any such financing, or that it will be able to generate sufficient positive cash flow from operations. The successful outcome of these or any future activities cannot be determined at this time and there is no assurance that if achieved, we will have sufficient funds to execute its business plans. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable to continue as a going concern.

On June 17, 2009, we entered into a stock purchase agreement with KB Development Group, LLC. to sell 152,000,000 shares of our common stock for $120,000. Concurrently; we entered into Settlement agreements with each of our note holders to settle the outstanding notes payable for $120,000 and the assumption of a $10,000 note by Solar Masters. Subsequently; between July 13, 2009 and July 27, 2009 all of the notes were paid and settled, which resulted in a realized gain of $708,708 and a reduction in our notes payable of $840,203.

On July 13, 2009, we entered into a stock sale agreement with Solar Masters Acquisition Company, to sell its entire interest in Solar Masters, Inc. (a wholly owned subsidiary) for $35,000, consisting of a Note Receivable for $25,000 and the assumption of $10,000 in notes payable referenced above. This resulted in a loss on sale of investment of $190,464.

Summary of Results:

For the three month period ended March 31, 2010, we had a net profit of $16,157 compared to net loss of $222,518 for the same period in 2009.

For the three month period March 31, 2010, our revenue was $487,506 compared to $887,928 for the same period in 2009, mainly due to the loss of 3 major customers and reduced orders from existing accounts.

For the three month period ended March 31, 2010, our cost of goods sold was 68% compared to 86% for the same period in 2009, mainly due to the decrease in direct labor as a percent of the sales.

For the three month period ended March 31, 2010, our gross margin was 31% compared to 14% for the same period in 2009.

For the three month ended March 31, 2010, our SG&A cost was 26% compared to 36% for the same period in 2009.

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For the three months ended March 31, 2010, we had a net profit of $16,157 and as of March 31, 2010, we had a working capital surplus of $49,344


Key performance indicators for the three months ended March 31:

	2010	2009
Inventory Turns	3.22	5.59
Days Sales in Backlog	184	81
Days Receivables Outstanding	26	73
Days Payables Outstanding	61	65

Inventory turns: are calculated as the ratio of cost of material compared to the average inventory for the three months ended March 31, 2010. For the three months ended March 31, 2010, our inventory turns were 3.22 compared to 5.59 for the same period in 2009.

Days sales in backlog is calculated based on our back log divided by average daily sales during that period. For the three months period ended March 31, 2010, Days Sales in Backlog was 184 days compared to 81 days for the same period in 2009.

Days receivables outstanding is calculated as the ratio of average accounts receivable during that period compared to average daily sales for the same period, this has worsened as a result of our customers stretching out payments and the economy in general. For the three months period ended March 31, 2010, days receivables outstanding was 26 days compared to 73 days for the same period in 2009.

Days payable outstanding is calculated as the ratio of average accounts payable during that period compared to average daily sales for the same period. For the three months period ended March 31, 2010, days payable outstanding was 11 days compared to 65 days for the same period in 2009.

Critical Accounting Policies and basis of presentation

We follow United States Generally Accepted Accounting Principles. Certain of the principles involve selection among alternatives and choices of methods, which are described in the footnotes to our unaudited financial statements.

Cash and Cash Equivalents

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Estimates

Accounts Receivable

Inventory

Property and Equipment

Furniture and fixtures

3 to 7 years

Equipment

7 to 10 years

Leasehold improvements

2 years (life of the lease)

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Long –Lived Assets

Revenue Recognition

Fair Value of Financial Instruments

The carrying amount of accounts payable and accrued expenses are considered to be representative of their respective fair values because of the short-term nature of these financial instruments.

Other Comprehensive Income

We have no material components of other comprehensive income (loss) and accordingly, net loss is equal to comprehensive loss in all periods.

Net Profit / (Loss) per Common Share

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Research and Development:

We are curtailing its research and development and focusing our business on its core business of electronics contract manufacturing.

Segment Information

Except as identified above in the research and development section, we operate our primary business of electronics contract manufacturing.

Share Based Compensation

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Income Taxes

Result of operations:

The following table summarizes certain items in the statements of operations as a percentage of net sales. The financial information and discussion below should be read in conjunction with the accompanying financial statements and notes thereto.


Probe Manufacturing, Inc.
Consolidated Statement of Operations
for the three months ended March 31,
Percentage Based

	Un-Audited	Un-Audited
	2010	2009

Sales	100.00%	100.00%
Cost of Goods Sold	68.95%	85.77%
Gross Profit	31.05%	14.23%

General And Administrative	25.62%	36.27%
Share Based Compensation	1.96%	0.23%
Stock Issued for Services	0.00%	0.00%
Research and Development	0.00%	0.00%
Net Profit / (Loss) From Operations	3.47%	-22.27%

Other Income / (Expenses) - Net	-0.02%	0.00%
Interest Expense	-0.13%	-2.79%
Net Profit / (Loss) Before Income Taxes	3.31%	-25.06%
Income Tax Expense	0.00%	0.00%
Net Profit / (Loss)	3.31%	-25.06%

Net Sales

For the three month period ended March 31, 2010, our revenue was $487,506 compared to $887,928 for the same period in 2009. The decrease in revenue was mainly due to the loss of 3 major customers and reduced orders from existing accounts.

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Major Customers

Our top 5 customers accounted for approximately 68% of our net sales for the three month period ended March 31, 2010, compared to 91%, for the same period in 2009. We believe that our ability to grow our core business depends on increasing sales to existing customers, and on successfully attracting new customers. Customer contracts can be canceled and volume levels can be changed or delayed based on our customer’s performance and the end users’ markets which we have no control over. The timely replacement of delayed, canceled or reduced orders with new business cannot be ensured. In addition, we cannot assume that any of our current customers will continue to utilize our services. Consequently, our results of operations may be materially adversely affected.

Gross Profit

For the three month period ended March 31, 2010, our gross profits were 31% from 14% in the same period in 2009. This was caused primarily due to the fixed portions of our direct labor (in 2009) in relation to the severe drop in sales This was addressed in the remainder of 2009 and the 1^st quarter of 2010. Our gross profits could vary from period to period and is affected by a number of factors, including product mix, production efficiencies, component availability and costs, pricing, competition, customer requirements and unanticipated restructuring or inventory charges and potential scrap.

Selling, General and Administrative (SG&A) Expenses

For the three month period ended March 31, 2010, our SG&A expense was 26% compared to 36% for the same period in 2009. This was an intended adjustment to align the expenses to the decrease in revenue

Net Income/ (Loss) from operations

For the three months ended March 31, 2010, our net income from operations was 3.4% compared to a net loss of (22%) for the same period in 2009.

For the three month period ended March 31, 2010, our interest expense was ($650) compared to ($24,769) for the same period in 2009, this was to due to the settlement agreements referenced in Note 12.

Liquidity and Capital Resources:


PROBE MANUFACTURING, INC.
Condensed Statements of Cash Flows
for the three months ended March 31,


	Un-audited	Un-audited
	2009	2008
Net Cash provided / (Used) In Operating Activities	$ 71,042	$ 87,006
Cash Flows Used In Investing Activities	(30,594)	7,450
Cash Flows Provided / (used) By Financing Activities	(40,448)	(89,433)
Net (Decrease) Increase in Cash and Cash Equivalents	$ -	$ 5,023

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Capital Requirements for long-term Obligations


Capital Requirements for long-term Obligations	2010	2011	2012
Capital Lease Settlement Obligations	77,609	83,220	51,296
Total	$ 77,609	$ 83,220	$ 51,296

On July 9, 1997 and December 21, 1997, we entered into two lease agreements, with Crocker capital, which subsequently assigned the leases to The CIT Group. In September 2004 the Company had outstanding balances of $457,604 and $556,293 on the two leases and was unable to make the monthly lease payments. As a result, the Company entered into a forbearance agreement with The CIT Group, with monthly payments of $7,500 and an early payment schedule as follows:

On July 9, 1997 and December 21, 1997, we entered into two lease agreements, with Crocker capital, which subsequently assigned the leases to The CIT Group. In September 2004, we had outstanding balances of $457,604 and $556,293 on the two leases and were unable to make the monthly lease payments. As a result, we entered into a forbearance agreement with The CIT Group, with monthly payments of $7,500 and an early payment schedule as follows:

The CIT Group would release us and its guarantors if one of the following payments were made, less the total of all monthly payments made to that date:

$375,000 if paid by October 25, 2004

$425,000 if paid by December 25, 2004

$500,000 if paid by June 25, 2005

$550,000 if paid by December 25, 2005

$600,000 if paid by June 25, 2006

$650,000 if paid by December 25, 2006

$700,000 if paid by June 25, 2007

On June 1, 2007, an amended forbearance agreement was entered into:

In consideration of CIT entering into this Addendum, Probe will pay CIT the sum of $7,500 on or before June 25, 2007, which was paid.

Recital B is amended to state that as of June 25, 2007 Probe’s payment obligation to CIT totals $457,500.

We imputed interest at 7.00% over the term of the payments, which resulted in a present value of $384,025 and a gain of $324,330 which had an effect on Net profit per common share of $0.031 and Diluted Net Profit per common share of $0.022.

As of March 31, 2010 the outstanding balance was $260,960.

As of June 30, 2009, we had outstanding note balances totaling 690,708, all of which were in default. On June 17, we entered into a stock purchase agreement with KB Development group to sell 152,000,000 shares of our common stock for $120,000. Concurrently we entered into Settlement agreements with each of our note holders to settle the outstanding notes payable for $120,000 and the assumption of a $10,000 note by Solar Masters. Subsequently; between July 13, 2009 and July 27, 2009 all of the notes were paid and settled, which resulted in a realized gain of $708,708 and a reduction in our notes payable of $840,203.

Unaudited - Subsequently, On April 9, 2009 we entered into an agreement with CIT to settle the balance in full for $70,000, as a result we realized a gain of $183,460.

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Off-balance Sheet Arrangement

We currently have no off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosure about Market Risk.

Not applicable to smaller reporting companies.

Item 4. Controls and Procedures.

Not Applicable.

Item 4T. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms and that such information is accumulated and communicated to us, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs.

As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of March 31, 2010 was conducted under the supervision and with the participation of our chief executive officer and our chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures, as of March 31, 2010, were effective for the purposes stated above.

(b) Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II--OTHER INFORMATION

Item 1.

Legal Proceedings

We may be involved from time to time in various claims, lawsuits, and disputes with third parties, action involving allegations or discrimination or breach of contract actions incidental in the normal operations of the business. As of March 31, 2010, we believe that there are no claims or litigation pending.

Item 1A. Risk Factors.

There are no material changes from the risk factors previously disclosed in our 2009 Annual Report on Form 10-K, as filed with the United States Securities and Exchange Commission on April 15, 2010, except as disclosed below.

RISKS ABOUT OUR BUSINESS

IF WE CANNOT OBTAIN ADDITIONAL FINANCING AND/OR REDUCE OUR OPERATING COSTS SUFFICIENTLY, AND THE EFFECT OF OTHER UNKNOW ADVERSE FACTORS COULD THREATEN OUR EXISTENCE AS A GOING CONCERN. THEREFORE. WE MAY HAVE TO CURTAIL OPERATIONS AND MAY ULTIMATELY CEASE TO EXIST. THEREFORE,

The financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the normal course of business. Although; for the nine months ended March 31, 2010, we had a net profit of $132,877 and a working capital surplus of $35,549 and we had shareholder surplus of $16,434, our ability to operate as a going concern is still dependent upon its ability (1) to obtain sufficient debt and/or equity capital and/or (2) continue to generate positive cash flow from operations.

WE HAVE AN ACCUMULATED DEFICIT AND MAY INCUR ADDITIONAL LOSSES; THEREFORE WE MAY NOT BE ABLE TO OBTAIN THE ADDITIONAL FINANCING NEEDED FOR WORKING CAPITAL, CAPITAL EXPENDITURES AND TO MEET OUR DEBT SERVICE OBLIGATIONS.

As of March 31, 2010, we had current liabilities of $500,697. Our debt could limit our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, or other purposes in the future, as needed; to plan for, or react to, changes in technology and in our business and competition; and to react in the event of an economic downturn.

We may not be able to meet our debt service obligations. If we are unable to generate sufficient cash flow or obtain funds for required payments, or if we fail to comply with covenants in our revolving lines of credit, we will be in default.

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

None.

Item 3.

Defaults upon Senior Securities

None.

Item 4.

[Removed and Reserved.]

Item 5.

Other Information

None.

Item 6. Exhibits

The exhibit listed on the Exhibit Index (following the signatures section of this Quarterly Report on Form 10-Q are included, or incorporated by reference, in this Quarterly Report on Form 10-Q.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

Signature

Title

Date

/s/ Kambiz Mahdi

Chief Executive Officer

May 21, 2010

_______________________

Kambiz Mahdi

/s/ John Bennett

Chief Financial Officer

May 21, 2010

_______________________

John Bennett

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EXHIBIT INDEX

Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit Index immediately precedes the exhibits.

The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the period ended September 30, 3009 (are numbered in accordance with Item 601 of Regulation S-K).

EXHIBIT

NUMBER DESCRIPTION

3.1 Articles of Incorporation (included as exhibit 3.1 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).

3.2 Bylaws (included as exhibit 3.2 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).

4.1 Certificate of Designation for Series A Convertible Preferred Stock, dated May 20, 2004 (included as exhibit 4.1 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).

4.2 Certificate of Designation for Series B Convertible Preferred Stock dated December 31, 2004 (included as exhibit 4.2 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).

4.3 Sample Series A Warrant Purchase Agreement (included as exhibit 4.3 to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).

4.4 Sample Series B Warrant Purchase Agreement (included as exhibit 4.4 to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).

4.5 Sample Amended Series A Warrant Purchase Agreement (included as exhibit 4.5 to the Form SB-2/A filed on November 25, 2005 and incorporated herein by reference).

4.6 Sample Amended Series B Warrant Purchase Agreement (included as exhibit 4.6 to the Form SB-2/A filed on November 25, 2005 and incorporated herein by reference).

4.7. Certificate of Designation of Series C Convertible Preferred Stock dated May 25, 2006 (included as exhibit 4.1 to the Form 8-K filed on June 14, 2006 and incorporated herein by reference).

4.8 Amended Certificate of Designation of Series C Convertible Preferred Stock dated May 25, 2006 (included as exhibit 4.1 to the Form 8-K filed on August 14, 2006 and incorporated herein by reference).

4.9 Sample Amended Series A Warrant Purchase Agreement (included as exhibit 10.1 to the Form 8-k filed on November 15, 2006 and incorporated herein by reference).

4.10 Sample Amended Series B Warrant Purchase Agreement (included as exhibit 10.2 to the Form 8-k filed on November 15, 2006 and incorporated herein by reference).

4.11 Amended Series A Warrant Purchase Agreement (included as exhibit 4.1 to Form 8-K filed on November 10, 2008 and incorporated herein by reference).

4.12 Amended Series B Warrant Purchase Agreement (included as exhibit 4.2 to Form 8-K filed on November 10, 2008 and incorporated herein by reference).

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31.1* Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2* Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1** Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2** Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*Filed herewith.

**Furnished herewith.

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