Zerify, Inc. - Quarter Report: 2008 September (Form 10-Q)

10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the q Quarterly period ended: September 30, 2008


o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from _______ to _______

STRIKEFORCE TECHNOLOGIES, INC.

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

NEW JERSEY

(State or other jurisdiction of incorporation or organization)

333-122113

(Commission file number)

22-3827597

(I.R.S. Employer Identification No.)

1090 King Georges Post Road, Suite 108

Edison, NJ 08837

(Address of principal executive offices)

(732) 661-9641

(Issuer’s telephone number)

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

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

Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer o Smaller Reporting Company x

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of November 5, 2008, the issuer had 10,000,078 outstanding shares of Common Stock.

STRIKEFORCE TECHNOLOGIES, INC.

FORM 10-Q

September 30, 2008

INDEX


PART I-- FINANCIAL INFORMATION		Page(s)

Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition	33
Item 3	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Control and Procedures	45

PART II-- OTHER INFORMATION

Item 1	Legal Proceedings	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	47
Item 4.	Submission of Matters to a Vote of Security Holders	47
Item 5.	Other Information	47
Item 6.	Exhibits and Reports on Form 8-K	48

SIGNATURE		49

ITEM 1. FINANCIAL STATEMENTS

STRIKEFORCE TECHNOLOGIES, INC.

INDEX TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 AND 2007


Contents	Page(s)

Balance Sheets at September 30, 2008 (Unaudited) and December 31, 2007	4

Statements of Operations for the Three and Nine Months Ended September 30, 2008 and 2007 (Unaudited)	5

Statement of Stockholders’ Deficit for the Year Ended December 31, 2007 (Audited)	6

Statement of Stockholders’ Deficit for the Nine Months Ended September 30, 2008 (Unaudited)	7

Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007 (Unaudited)	8

STRIKEFORCE TECHNOLOGIES, INC.

Balance Sheets


ASSETS
		September 30,		December 31,
		2008		2007
		(Unaudited)
Current Assets:
Cash and cash equivalents	$	20,183	$	16,307
Restricted cash		367,819		-
Accounts receivable		44,091		32,960
Current portion of deferred royalties		326,808		326,808
Prepayments and other current assets		274		6,325
Total current assets		759,175		382,400

Property and equipment, net		13,064		16,963
Deferred royalties, net of current portion		1,202,092		1,424,563
Website development cost, net		2,462		4,688
Patents		4,329		4,329
Security deposit		8,684		8,684
Total Assets	$	1,989,806	$	1,841,627

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities:
Convertible secured notes payable	$	672,167	$	672,167
Derivative financial instruments		469,760		1,468,264
Current maturities of convertible notes payable, net of discount of $67,335 in 2008		1,267,454		800,000
Convertible notes payable - related parties		419,255		107,500
Notes payable		311,461		281,250
Notes payable - related parties		696,000		25,000
Capital leases payable		5,532		5,532
Accounts payable		915,603		961,552
Accrued expenses		1,642,340		1,187,762
Payroll taxes payable		53,481		53,375
Common stock to be issued		204,377		8,155
Due to factor		209,192		209,192
Due to employees		49,612		48,326
Total current liabilities		6,916,234		5,828,075

Convertible notes payable, less current maturities,
net of discount of $148,421 in 2007		-		636,579
Convertible notes payable - related parties, net of current portion		-		366,691
Notes payable, net of current portion		1,700,000		-
Notes payable - related parties, net of current portion		-		626,000
Total Liabilities		8,616,234		7,457,345

Commitments and contingencies

Stockholders' Deficit
Preferred stock at $0.10 par value; 10,000,000 shares authorized;
none issued or outstanding		-		-
Common stock at $0.0001 par value; 100,000,000 shares authorized;
9,999,999 shares issued and outstanding		1,000		1,000
Additional paid-in capital		10,950,840		10,759,732
Accumulated deficit		(17,578,268)		(16,376,450)
Total Stockholders' Deficit		(6,626,428)		(5,615,718)
Total Liabilities and Stockholders' Deficit	$	1,989,806	$	1,841,627

See accompanying notes to the financial statements

STRIKEFORCE TECHNOLOGIES, INC.

Statements of Operations

for the Three and Nine Months Ended September 30, 2008 and 2007


		For the three months				For the nine months
		ended September 30,				ended September 30,
		2008		2007		2008		2007

Revenues	$	96,009	$	70,364	$	211,254	$	623,696

Cost of sales		48,613		34,152		89,442		52,705

Gross profit		47,396		36,212		121,812		570,991

Operating expenses:
Selling, general and administrative expenses		377,604		800,571		1,292,274		1,903,057
Research and development		117,210		92,370		324,991		273,872
Total operating expenses		494,814		892,941		1,617,265		2,176,929

Loss from operations		(447,418)		(856,729)		(1,495,453)		(1,605,938)

Other (income) expense:
Interest income		(8,889)		-		(8,889)		-
Interest expense		2,404		2,953		293,788		12,090
Financing expense		360,285		124,344		657,220		471,258
Derivative instruments (income) expense, net		860		(711,698)		(998,504)		26,275
Forgiveness of debt		1,500		-		(237,250)		-
Total other (income) expense		356,160		(584,401)		(293,635)		509,623

Net loss	$	(803,578)	$	(272,328)	$	(1,201,818)	$	(2,115,561)

Net loss per common share - basic and diluted	$	(0.08)	$	(0.06)	$	(0.12)	$	(0.55)

Weighted average number of common shares outstanding - basic and diluted		9,999,999		4,808,109		9,999,999		3,829,343

See accompanying notes to the financial statements

STRIKEFORCE TECHNOLOGIES, INC.

Statement of Stockholders’ Deficit

for the Year Ended December 31, 2007


					Additional				Total
	Common Stock				Paid-in		Accumulated		Stockholders'
	Shares		Amount		Capital		Deficit		Deficit

Balance at December 31, 2006	2,884,449	$	288	$	9,086,449	$	(12,378,048)	$	(3,291,311)

Sale of shares of common stock including warrants	272,107		27		75,514		-		75,541

Issuance of shares of common stock for conversions of notes payable and accrued interest	5,436,570		544		760,770		-		761,314

Issuance of shares of common stock for consulting services	677,424		68		87,434		-		87,502

Issuance of shares of common stock for financing	729,449		73		160,181		-		160,254

Issuance of warrants in connection with convertible notes payable	-		-		153,192		-		153,192

Issuance of warrants in connection with consulting services	-		-		9,817		-		9,817

Employee stock option compensation	-		-		426,375		-		426,375

Net loss	-		-		-		(3,998,402)		(3,998,402)

Balance at December 31, 2007	9,999,999	$	1,000	$	10,759,732	$	(16,376,450)	$	(5,615,718)

See accompanying notes to the financial statements

STRIKEFORCE TECHNOLOGIES, INC.

Statement of Stockholders’ Deficit

for the Nine Months Ended September 30, 2008


					Additional				Total
	Common Stock				Paid-in		Accumulated		Stockholders'
	Shares		Amount		Capital		Deficit		Deficit

Balance at December 31, 2007	9,999,999	$	1,000	$	10,759,732	$	(16,376,450)	$	(5,615,718)

Issuance of warrants in connection with promissory notes payable	-		-		4,350		-		4,350

Employee stock option compensation	-		-		186,758		-		186,758

Net income	-		-		-		(1,201,818)		(1,201,818)

Balance at September 30, 2008	9,999,999	$	1,000	$	10,950,840	$	(17,578,268)	$	(6,626,428)

See accompanying notes to the financial statements

STRIKEFORCE TECHNOLOGIES, INC.

Statements of Cash Flows

for the Nine Months Ended September 30, 2008 and 2007


		2008		2007
Cash flows from operating activities:
Net loss	$	(1,201,818)	$	(2,115,561)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization		9,858		13,324
Forgiveness of debt		(237,250)		-
Discount on notes payable		170,000		-
Amortization of discount on convertible notes		81,085		173,343
Amortization of deferred royalties		222,471		200,034
Mark to market on derivative financial instruments		(998,504)		76,674
Employee stock option compensation		186,758		336,124
Issuance of common stock, options and warrants for consulting services		-		72,819
Issuance of common stock and warrants for financing expense		4,350		140,963
Changes in assets and liabilities affecting operations:
Accounts receivable		(11,131)		(268,014)
Prepaid expenses		6,051		(895)
Accounts payable		6,801		42,095
Accrued expenses		454,580		363,321
Payroll taxes payable		106		-
Common stock to be issued		196,222		-
Due to factor		-		172,450
Due to employees		1,286		(11,141)
Net cash used in operating activities		(1,109,135)		(804,464)

Cash flows from investing activities:
Purchases of property and equipment		(3,733)		(3,987)
Net cash used in investing activities		(3,733)		(3,987)

Cash flows from financing activities:
Proceeds from sale of common stock and warrants		-		70,541
Proceeds from convertible notes payable		-		714,108
Proceeds from notes payable		150,000		250,000
Proceeds from notes payable, net of discount of $170,000, in the form of restricted cash		1,530,000		-
Proceeds from notes payable - related parties		100,000		22,000
Payments of convertible notes payable - related parties		(54,937)		(181,250)
Payments of notes payable		(119,789)		(13,000)
Payments of convertible notes payable		(65,711)		-
Payments of notes payable - related parties		(55,000)		-
Principal payments on capital leases		-		(34,369)
Net cash provided by financing activities		1,484,563		828,030

Net increase in cash		371,695		19,579

Cash and cash equivalents at beginning of period		16,307		7,455

Cash and cash equivalents at end of period, including restricted cash	$	388,002	$	27,034

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	293,788	$	12,964
Income taxes	$		$	2,448

Non-cash investing and financing activities:
Conversion of convertible notes payable into common stock	$	-	$	508,726
Issuance of warrants for convertible notes	$	-	$	153,192
Issuance of warrants for promissory notes	$	4,350	$	-

See accompanying notes to the financial statements

STRIKEFORCE TECHNOLOGIES, INC.

NOTES TO THE FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 AND 2007

(UNAUDITED)

NOTE 1 - NATURE OF OPERATIONS

StrikeForce Technical Services Corporation was incorporated in August 2001 under the laws of the State of New Jersey. On September 3, 2004, the stockholders approved an amendment to the Certificate of Incorporation to change the name to StrikeForce Technologies, Inc. (“StrikeForce” or the “Company”). Prior to December 2002, the Company was a reseller of computer hardware, software products, and telecommunications equipment and services. In December 2002, the Company began to acquire the rights to intangible technology, which upon the consummation changed the direction of the Company’s business. The Company is a software development and services company. The Company owns the exclusive right to license and develop various identification protection software products that were developed to protect computer networks from unauthorized access and to protect network owners and users from identity theft. The Company has developed a suite of products based upon the licenses and the Company is seeking to commercially exploit the products in the areas of financial services, eCommerce, corporate, government and consumer sectors. The technology developed by the Company and used in the Company’s ProtectID® and GuardedID® products is the subject of two pending patent applications. The Company’s firewall product is no longer being developed and the provisional patent application was allowed to expire. A fourth patent application relating to the Company’s ProtectID® product was combined into the first ProtectID® pending patent application and the fourth application was allowed to lapse. The Company’s operations are based in Edison, New Jersey.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim period

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the rules and regulations of the United States Securities and Exchange Commission to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been included. These financial statements should be read in conjunction with the financial statements of the Company for the year ended December 31, 2007 and notes thereto contained in the Report on Form 10-KSB of the Company as filed with the United States Securities and Exchange Commission (“SEC”) on March 31, 2008. Interim results are not necessarily indicative of the results for the full year.

Reclassification

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported losses.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 reporting amounts of revenues and expenses during the reported period. Significant estimates include, but are not limited to, the estimated useful lives of property and equipment and website development costs. Actual results could differ from those estimates.

Cash equivalents

The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.

Accounts receivable

Trade accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts and sales returns. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on historical write-off experience, customer specific facts and economic conditions. Bad debt expense is included in general and administrative expenses.

Outstanding account balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company recorded bad debt expense of $0 and $221,600 for the nine months ended September 30, 2008 and 2007, respectively. There were no allowances for doubtful accounts at September 30, 2008 or 2007.

Property and equipment

Property and equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation of property and equipment is computed by the straight-line method (after taking into account their respective estimated residual values) over the assets estimated useful lives. Leasehold improvements, if any, are amortized on a straight-line basis over the lease period or the estimated useful life, whichever is shorter. Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in operations.

Leases

Lease agreements are evaluated to determine whether they are capital leases or operating leases in accordance with Statement of Financial Accounting Standards No. 13 “Accounting for Leases”, as amended (“SFAS No. 13”). When substantially all of the risks and benefits of property ownership have been transferred to the Company, as determined by the test criteria in SFAS No. 13, the lease then qualifies as a capital lease.

Capital lease assets are depreciated on an accelerated method, over the capital lease assets estimated useful lives consistent with the Company’s normal depreciation policy for tangible fixed assets, but generally not exceeding the lease term. Interest charges are expensed over the period of the lease in relation to the carrying value of the capital lease obligation.

Rent expense for operating leases, which may include free rent or fixed escalation amounts in addition to minimum lease payments, is recognized on a straight-line basis over the duration of each lease term.

Deferred royalties

Deferred royalties represent stock based compensation paid by the Company for certain licenses that have been capitalized. Such licenses are utilized in connection with the Company’s operations.

Website development cost

Website development cost is stated at cost less accumulated amortization. The cost of the website development is amortized on a straight-line basis over its estimated useful life of three years.

Patents

All costs incurred to the point when a patent application is to be filed are expensed as incurred as research and development cost. Patent application costs, generally legal costs, thereafter incurred are capitalized. Patents are amortized over the expected useful lives of the patents, which is generally 17 to 20 years for domestic patents and 5 to 20 years for foreign patents, once the patents are granted or are expensed if the patent application is rejected. The costs of defending and maintaining patents are expensed as incurred. As of September 30, 2008, the Company capitalized $4,329 in patent application costs as incurred with no amortization due to the fact that the patent applications are still pending.

Impairment of long-lived assets

Long-lived assets, which include property and equipment, deferred royalties, website development cost and patents are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable or the useful life is shorter than originally estimated.

The Company assesses the recoverability of its assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. If assets are determined to be recoverable, but the useful lives are shorter than originally estimated, the net book value of the assets is depreciated over the newly determined remaining useful lives. The Company determined that there was no impairment based on management’s evaluation at September 30, 2008 or 2007.

Fair value of financial instruments

The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts of financial assets and liabilities, such as cash, trade accounts receivable, prepayments, notes payable, capital leases payable, accounts payable, accrued expenses, payroll taxes payable, due to factor and due to employees, approximate their fair values because of the short maturity of these instruments and market rates of interest.

Discount on debt

The Company has allocated the proceeds received from convertible debt instruments between the underlying debt instruments and has recorded the conversion feature as a liability in accordance with Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”) and related interpretations. The conversion feature and certain other features that are considered embedded derivative instruments, such as a conversion reset provision, a penalty provision and redemption option, have been recorded at their fair value within the terms of SFAS No. 133 as its fair value can be separated from the convertible note and its conversion is independent of the underlying note value. The conversion liability is marked to market each reporting period with the resulting gains or losses shown on the Statement of Operations. The Company has also recorded the resulting discount on debt related to the warrants and conversion feature and is amortizing the discount using the effective interest rate method over the life of the debt instruments.

Derivatives

The Company accounts for derivatives in accordance with SFAS No. 133 and the related interpretations. SFAS No. 133, as amended, requires companies to recognize all derivative instruments as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value of a derivative instrument depends on: (i) whether the derivative has been designated and qualifies as part of a hedging relationship, and (ii) the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument based upon the exposure being hedged as either a fair value hedge, cash flow hedge or hedge of a net investment in a foreign operation. At September 30, 2008, the Company had not entered into any transactions which were considered hedges under SFAS No. 133.

Financial instruments

The Company evaluates its convertible debt, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under SFAS No. 133 and related interpretations including Emerging Issues Task Force (“EITF”) Issue No. 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock” (“EITF Issue No. 00-19”). The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the Statement of Operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.

In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification under SFAS No. 133 are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.

The fair value model utilized to value the various compound embedded derivatives in the secured convertible notes comprises multiple probability-weighted scenarios under various assumptions reflecting the economics of the secured convertible notes, such as the risk-free interest rate, expected Company stock price and volatility, likelihood of conversion and or redemption, and likelihood of default status and timely registration. At inception, the fair value of the single compound embedded derivative was bifurcated from the host debt contract and recorded as a derivative liability which resulted in a reduction of the initial notional carrying amount of the secured convertible notes (as unamortized discount which will be amortized over the term of the notes under the effective interest method).

Revenue recognition

The Company’s revenues are derived principally from the sale and installation of its various identification protection software products and related hardware and services. The Company recognizes revenue when it is realized or realizable and earned less estimated future returns. The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement that the product has been shipped or the services have been rendered to the customer, the sales price is fixed or determinable, and collectability is reasonably assured. In addition to the aforementioned general policy, the following are the specific revenue recognition policies for each major category of revenue:

Hardware – Revenue from hardware sales is recognized when the product is shipped to the customer and there are either no unfulfilled Company obligations or any obligations that will not affect the customer's final acceptance of the arrangement. Any cost of these obligations is accrued when the corresponding revenue is recognized. For the nine months ended September 30, 2008 and 2007, total hardware revenues for products shipped or delivered were $21,852 and $8,333, representing 10.3% and 1.4% of total revenues, respectively. There were no revenues from fixed price long-term contracts.

Software, Services and Maintenance – Revenue from time and service contracts is recognized as the services are provided. Revenue from delivered elements of one-time charge licensed software is recognized at the inception of the license term, provided the Company has vendor-specific objective evidence of the fair value of each delivered element. Revenue is deferred for undelivered elements. The Company recognizes revenue from the sale of software licenses, when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed and determinable, and collection of the resulting receivable is reasonably assured. Delivery generally occurs when the product is delivered to a common carrier. The Company assesses collection based on a number of factors, including past transaction history with the customer and the creditworthiness of the customer. The Company does not request collateral from customers. If the Company determines that collection of a fee is not reasonably assured, the Company defers the fee and recognizes revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash. Revenue from monthly software licenses is recognized on a subscription basis. For the nine months ended September 30, 2008 and 2007, total software, services and maintenance revenues were $81,030 and $534,121 representing 38.4% and 85.6% of total revenues, respectively.

ASP Hosted Services – The Company offers an Application Service Provider hosted service whereby customer usage transactions are invoiced monthly on a cost per transaction basis. The service is sold via the execution of a Service Agreement between the Company and the customer. Initial set-up fees are recognized upon completion of service. For the nine months ended September 30, 2008 and 2007, total revenues for services provided were $108,372 and $81,242 representing 51.3% and 13.0% of total revenues, respectively.

Revenue from fixed price long-term service contracts is recognized over the contract term based on the percentage of services that are provided during the period compared with the total estimated services to be provided over the entire contract. Losses on fixed price contracts are recognized during the period in which the loss first becomes apparent. Revenue from maintenance is recognized over the contractual period or as the services are performed. Revenue in excess of billings on service contracts is recorded as unbilled receivables and is included in trade accounts receivable. Billings in excess of revenue that is recognized on service contracts are recorded as deferred income until the aforementioned revenue recognition criteria are met.

Stock based compensation

Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 (revised 2004) “Share-Based Payment” (“SFAS No. 123R”) using the modified prospective method. Under this method, compensation cost in the first quarter of 2006 includes the portion vesting in the period for (1) all share-based payments granted prior to, but not vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and (2) all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the revised provisions of SFAS No. 123R. The fair value of each option grant estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:


	September 30,	September 30,
	2008	2007
Risk-free interest rate	3.3% - 5.2%	3.1% - 5.2%
Dividend yield	0.00%	0.00%
Expected volatility	166% - 397%	166% - 390%
Expected option life	5 - 10 years	5 - 10 years

The expected life of the options has been determined using the simplified method as prescribed in SEC Staff Accounting Bulletin No. 107 (“SAB No. 107”). Results of prior periods do not reflect any restated amounts and the Company had no cumulative effect adjustment upon adoption of SFAS No. 123R under the modified prospective method. The Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. Additionally, the Company’s policy is to issue new shares of common stock to satisfy stock option exercises.

The adoption of SFAS No. 123R increased the Company’s reported operating loss and net loss by $105,161 and $336,124 for the nine months ended September 30, 2008 and 2007, respectively. The expense is classified as selling, general and administrative expense on the statement of operations.

The fair value of each option award is estimated on the date of grant using a Black-Scholes option-pricing valuation model. The ranges of assumptions for inputs shown in the table above for 2008 and 2007 are as follows:

The expected volatility is based on a combination of the historical volatility of the Company’s and comparable companies’ stock over the contractual life of the options.

The Company uses historical data to estimate employee termination behavior. The expected life of options granted is derived from SAB 107 and represents the period of time the options are expected to be outstanding.

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the contractual life of the option.

The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the contractual life of the option.

Software development costs

Statement of Financial Accounting Standards No. 86 “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed” (“SFAS No. 86”) requires capitalization of software development costs incurred subsequent to establishment of technological feasibility and prior to the availability of the product for general release to customers. Systematic amortization of capitalized costs begins when a product is available for general release to customers and is computed on a product-by-product basis at a rate not less than straight-line basis over the product’s remaining estimated economic life. To date, all costs have been accounted for as research and development costs and no software development cost has been capitalized. Total research and development costs for the nine months ended September 30, 2008 and 2007 were $324,991 and $273,872, respectively.

Income taxes

The Company follows Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes” (“SFAS No. 109”), which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that includes the enactment date.

Net loss per common share

Net loss per common share is computed pursuant to Statement of Financial Accounting Standards No. 128 “Earnings Per Share” (“SFAS No. 128”). Basic loss per share is computed by taking net loss divided by the weighted average number of common shares outstanding for the period. Diluted loss per share is computed by dividing net loss by the weighted average number of shares of common stock and potentially outstanding shares of common stock during each period to reflect the potential dilution that could occur from common shares issuable through stock options, warrants, and convertible debt, which excludes 1,000,685 shares of common stock to be issued, 1,427,297 shares of stock options, 1,161,577 shares of common stock issuable under warrants and 2,367,508 shares of common stock issuable under the conversion feature of the convertible notes payable for the nine months ended September 30, 2008, and 1,839,567 shares of stock options, 1,118,244 shares of common stock issuable under warrants and 3,532,416 shares of common stock issuable under the conversion feature of the convertible notes payable for the nine months ended September 30, 2007, respectively. These potential shares of common stock were not included as they were anti-dilutive.

Recently issued accounting pronouncements

On June 5, 2003, the United States Securities and Exchange Commission (“SEC”) adopted final rules under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), as amended by SEC Release No. 33-8934 on June 26, 2008. Commencing with its annual report for the fiscal year ending December 31, 2009, the Company will be required to include a report of management on its internal control over financial reporting. The internal control report must include a statement:

Of management’s responsibility for establishing and maintaining adequate internal control over its financial reporting;

Of management’s assessment of the effectiveness of its internal control over financial reporting as of year end; and

Of the framework used by management to evaluate the effectiveness of the Company’s internal control over financial reporting.

Furthermore, in the following fiscal year, it is required to file the auditor’s attestation report separately on the Company’s internal control over financial reporting on whether it believes that the Company has maintained, in all material respects, effective internal control over financial reporting.

In December 2007, the FASB issued FASB Statement No. 141 (Revised 2007) “Business Combinations” (“SFAS No. 141(R)”), which requires the Company to record fair value estimates of contingent consideration and certain other potential liabilities during the original purchase price allocation, expense acquisition costs as incurred and does not permit certain restructuring activities previously allowed under Emerging Issues Task Force Issue No. 95-3 to be recorded as a component of purchase accounting. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods presented. The Company will adopt this standard at the beginning of the Company’s year ending December 31, 2008 for all prospective business acquisitions. The Company has not determined the effect that the adoption of SFAS No. 141(R) will have on the financial results of the Company.

In December 2007, the FASB issued FASB Statement No. 160 “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51” (“SFAS No. 160”), which causes noncontrolling interests in subsidiaries to be included in the equity section of the balance sheet. SFAS No. 160 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods presented. The Company will adopt this standard at the beginning of the Company’s year ending December 31, 2008 for all prospective business acquisitions. The Company has not determined the effect that the adoption of SFAS No. 160 will have on the financial results of the Company.

In March 2008, the FASB issued FASB Statement No. 161 “Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133” (“SFAS No. 161”), which changes the disclosure requirements for derivative instruments and hedging activities. Pursuant to SFAS No.161, Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 with early application encouraged. SFAS No. 161 encourages but does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In years after initial adoption, this Statement requires comparative disclosures only for periods subsequent to initial adoption. The Company does not expect the adoption of SFAS No. 161 to have a material impact on the financial results of the Company.

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.

NOTE 3 - GOING CONCERN

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As reflected in the accompanying financial statements, the Company had an accumulated deficit of $17,578,268 and a working capital deficiency of $6,157,059 at September 30, 2008 and had a net loss and cash used in operations of $1,201,818 and $1,109,135 for the nine months ended September 30, 2008, respectively.

Currently, the Company is attempting to generate sufficient revenues and improve gross margins by implementing a revised sales strategy. In principle, the Company is redirecting its sales focus from direct sales to international channel sales, where the Company is primarily selling through a channel of Distributors, Value Added Resellers, Strategic Partners and Original Equipment Manufacturers. The revenues from this approach are more lucrative than selling direct, due to the increase in sales volume of GuardedID® and ProtectID® through the channel partners. This strategy, if successful, should increase the Company’s sales and revenues allowing us to mitigate future losses. In addition, management has raised funds through convertible debt instruments and the sale of equity in order to alleviate the working capital deficiency. Through the utilization of the capital markets, the Company is seeking to locate the additional funding necessary to continue to expand and enhance its growth; however, there can be no assurance that we will be able to increase revenues or raise additional capital. The Company is currently in negotiations with other investors, but the success of such negotiations cannot be assured.

The accompanying consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern. If we fail to generate positive cash flows or obtain additional financing when required, we may have to modify, delay or abandon some or all of our business and expansion plans.

NOTE 4 - DEFERRED ROYALTIES

On December 2, 2004, the Company issued NetLabs, as advance royalties, options to purchase 760,000 shares of the Company’s common stock at a price of $3.60 per share to vest as follows: 253,000 shares at issuance, 253,000 shares at September 11, 2005 and 254,000 shares at September 11, 2006 for the exclusive rights to the intellectual property related to the patents pending for its “Out-of-Band” technology and firewall solutions, while clarifying that NetLabs still retains ownership.

The fair values for these options are measured at the end of each reporting period and are fixed at each vesting date using the Black-Scholes Option Pricing Model.

Measurement is based upon the Black-Scholes Model using the following assumptions:


		December 31, 2005		December 31, 2006
Share price	$	0.90	$	0.12
Expected volatility		29.00%		152.00%

Risk-free interest rate		4.35%		4.96%

Expected life		5 years		5 years

As of September 30, 2008 the options to purchase 253,000 shares that vested at issuance are valued (as fixed) at $1,066,395, the options to purchase 253,000 shares that vested at September 11, 2005 are valued (as fixed) at $1,529,132, and the options to purchase the final 254,000 shares (which vested on September 11, 2006) are valued (as fixed) at $264,160. The deferred royalties are being amortized over the term of the original NetLabs Agreement of ten (10) years which will terminate on August 31, 2013. At September 30, 2008, the total value of the deferred royalties, net of accumulated amortization of $1,330,787, is $1,528,900. For the nine months ended September 30, 2008 and 2007, $222,471 and $200,034 of royalties were expensed, respectively.

The following table summarizes the annual amounts of deferred royalties that are amortized to general and administrative expenses over the next five (5) years and thereafter:


2008	$	104,337
2009		303,834
2010		303,834
2011		303,834
2012		303,834
2013 and beyond		209,227
Total deferred royalties	$	1,528,900
Less current portion		(326,808)
Deferred royalties, net of current portion	$	1,202,092

NOTE 5 - CONVERTIBLE NOTES PAYABLE

Convertible notes payable at September 30, 2008 and December 31, 2007 consisted of the following:


		September 30, 2008		December 31, 2007
(1) Convertible note bearing interest at 8% per, with a conversion price of $9.00 per share, extended three times through March 31, 2008. The Company issued 4,500 warrants with an exercise price of $2.00 per share and expiring January 26, 2009, relating to the first extension, and 10,000 restricted shares of the Company’s common stock at $0.50 per share, relating to the second extension. No consideration was given for the third extension. The fair value of the warrants was $4,878. For the nine months ended September 30, 2008 and 2007, the Company recorded $0 and $4,390, respectively, in financing expenses related to the issuance of the warrants. In April 2008, the Company assigned the note to the Company’s investor group and the note holder agreed to an amount of $12,500 as full settlement of the note. The settlement amount was paid to the note holder by the Company in April 2008 (see Note 14).	$	-	$	125,000

(2) Convertible note bearing interest at 8% per annum maturing on March 28, 2008, with a conversion price of $9.00 per share. As of September 30, 2008, the Company and the note holder are in discussions regarding a settlement of the note balance.		235,000		235,000

(3) Convertible non-interest bearing note with a public relations firm for services rendered, having a conversion price of $9.00 per share and maturing on June 30, 2006. In January 2007, the Company agreed to make periodic payments in order to repay the note in full by December 31, 2008.		7,000		15,000

(4) Convertible note bearing interest at 8% per annum maturing on June 20, 2008, with a conversion price of $9.00 per share. In June 2008 the note was extended to December 31, 2008.		10,000		10,000

(5) Convertible note bearing interest at 8% per annum maturing on July 7, 2008, with a conversion price of $9.00 per share. In May 2008 the note was extended to December 31, 2008.		15,000		15,000

(6) Convertible note bearing interest at 8% per annum maturing on July 11, 2008, with a conversion price of $9.00 per share. In July 2008 the note was extended to December 31, 2008.		15,000		15,000

(7) Convertible note bearing interest at 8% per annum maturing on July 27, 2008, with a conversion price of $9.00 per share. In June 2008 the note was extended to December 31, 2008.		10,000		10,000

(8) Convertible note bearing interest at 8% per annum maturing on July 27, 2008, with a conversion price of $9.00 per share. In May 2008 the note was extended to December 31, 2008.		100,000		100,000


(9) Convertible note bearing interest at 8% per annum maturing on March 15, 2008, with a conversion price of $9.00 per share. The Company issued 6,667 warrants with an exercise price of $5.50 per share and expiring March 15, 2008. The fair value of the warrants was $12,300. For the nine months ended September 30, 2008 and 2007, the Company recorded $1,025 and $4,613, respectively, in financing expense related to the issuance of these warrants. In July 2008, the Company, the note holder and the Company’s investor group have agreed upon a settlement whereby the debt shall be assigned to the investor group by the Company and the investor group shall repay the agreed upon settlement amount to the note holder, in installments, through February 2009. The investor group made payments of $10,000 in July 2008 and $5,000 in September 2008 (see Note 14).	85,000	100,000

(10) Convertible note bearing interest at 9% per annum maturing on June 9, 2009, with a conversion price of $1.40 per share. The Company issued 40,000 warrants with an exercise price of $2.50 per share and expiring June 9, 2011. The fair value of the warrants was $36,960. For the nine months ended September 30, 2008 and 2007, the Company recorded $9,240 and $9,240, respectively, in financing expense related to the issuance of these warrants.	200,000	200,000

(11) Convertible note bearing interest at 9% per annum maturing on September 29, 2009, with a conversion price of $0.80 per share. The Company issued 56,250 warrants with an exercise price of $1.60 per share and expiring September 23, 2011. The fair value of the warrants was $39,600. For the nine months ended September 30, 2008 and 2007, the Company recorded $9,900 and $9,900, respectively, in financing expense related to the issuance of these warrants.	150,000	150,000

(12) Six units, sold in February 2007 to six individuals; each unit consists of an 18% convertible note of $16,667 for a total of $100,000, maturing August 31, 2007, with a conversion price of $0.50 per share and 6,667 bonus shares of the Company’s common stock, per individual, valued at $0.3988, for a total of 40,000 shares of common stock. Six months of prorated interest of $8,729, was due at closing and paid to the note holders. The Company paid a placement agent fee of $10,000 and issued 8,000 shares of the Company’s common stock, at $0.3988, in March 2007. The Company also paid an escrow agent fee of $500 and a legal fee of $1,000. For the nine months ended September 30, 2008 and 2007, the Company expensed $0 and $19,142, respectively, of financing expenses related to the issuance of the shares. In November 2007 the notes were extended to April 30, 2008. Per the terms of the extensions, the Company repaid 20% of the note balances in November 2007. Of the remaining balances, 20% was due by January 31, 2008 and 60% plus accrued interest was due by April 30, 2008. The payments have been extended by the Company. In conjunction with the November extensions, the note holders shall receive an aggregate total of 20,000 shares of the Company’s common stock per month (“extension shares”) with a value based on the closing market price of the stock on the 18^th of each month. In November 2007, the Company issued 60,000 extension shares at $0.07 per share to the note holders for the months of September through November and 12,000 shares of common stock at $0.07 per share to the placement agent in relation to the extensions. In December 2007, the Company recorded 20,000 shares of common stock at $0.11 per share to the note holders and 4,000 shares of common stock to the placement agent as the December extension shares. In June 2008, the Company paid $9,768 against the six notes. For the months of January to September 2008, the Company recorded 20,000 shares of common stock per month, with the shares ranging from $0.15 to $0.29 per share, to the note holders and 4,000 shares of common stock per month to the placement agent as the January to September 2008 extension shares. All of the above issued Company shares have Rule 144 piggyback registration rights. For the nine months ended September 30, 2008 and 2007, the Company expensed $45,060 and $0, respectively, of financing expenses related to the shares recorded for the note extensions.	70,232	80,000


(13) Convertible note executed in March 2007 bearing interest at 18% per annum maturing on January 31, 2008, with a conversion price of $0.25 per share, which has been extended three times through January 31, 2008. The Company also issued 15,000 restricted shares of common stock, valued at $0.39 per share. The Company issued 15,000 shares of restricted common stock and the note holder converted interest of $3,513.70 into 15,971 shares of common stock both at $0.22 per share relating to the first extension. The Company issued 15,000 shares of restricted common stock and the note holder converted interest of $3,402.74 into 16,204 shares of common stock both at $0.21 per share relating to the second extension. The Company recorded 5,000 shares of restricted common stock and recorded the note holder’s converted interest of $3,402.74 into 15,467 shares of common stock both at $0.22 per share relating to the third extension. All of the Company’s shares of common stock issued in connection with the convertible notes and the extensions have Rule 144 piggyback registration rights. For the nine months ended September 30, 2008 and 2007, the Company expensed $0 and $9,150, respectively, in financing expenses related to the issuance of the shares for the note and extensions. In March 2008, the Company assigned the note to the Company’s investor group and the note holder agreed to an amount of $15,000 as full settlement of the note. The settlement amount was paid to the note holder by the investor group in March 2008 (see Note 14).	-	75,000

(14) One unit, sold in April 2007, consisting of an 18% convertible note payable of $25,000, maturing October 24, 2007, with a conversion price of $0.50 per share and 12,000 bonus shares of the Company’s common stock, at $0.19 per share. Six months of prorated interest of $2,250, due at closing was paid to the note holder. The Company paid a placement agent fee of $3,209 and issued 2,400 shares of the Company’s common stock, at $0.19, in May 2007 and an escrow agent fee of $660. For the nine months ended September 30, 2008 and 2007, the Company expensed $0 and $2,736 of financing expenses related to the issuance of the shares. In November 2007 the note was extended to April 30, 2008. Per the terms of the extension, the Company repaid 20% of the note balance in November 2007. Of the remaining note balance, 20% was due by January 31, 2008 and 60% plus accrued interest was due by April 30, 2008. The payments have been extended by the Company. In conjunction with the November extension, the note holder shall receive 5,000 restricted shares of the Company’s common stock per month (“extension shares”) with a value based on the closing market price of the stock on the 18^th of each month. In November 2007, the Company issued 5,000 shares of common stock at $0.07 per share to the note holder and 1,000 shares of common stock at $0.07 per share to the placement agent for the November 2007 extension. In December 2007, the Company recorded 5,000 shares of common stock at $0.11 per share to the note holder and 1,000 shares of common stock to the placement agent as the December extension shares. In June 2008, the Company paid $2,443 against the note. For the months of January to September 2008, the Company recorded 5,000 shares of common stock per month, with the shares ranging from $0.15 to $0.29 per share, to the note holders and 1,000 shares of common stock per month to the placement agent as the January to September 2008 extension shares. All of the above issued Company shares have Rule 144 piggyback registration rights. For the nine months ended September 30, 2008 and 2007, the Company expensed $11,040 and $0, respectively, of financing expenses related to the shares to be issued for the note extension.	17,557	20,000

(15) Convertible note executed in May 2007 bearing interest at 9% per annum maturing on May 1, 2009, with a conversion price of $0.35 per share. The Company issued 57,143 warrants with an exercise price of $0.70 per share and an expiration date of May 1, 2009. The fair value of the warrants issued was $10,114. For the nine months ended September 30, 2008 and 2007, the Company recorded $3,793 and $2,107, respectively, in financing expense related to the issuance of these warrants.	100,000	100,000

(16) Convertible note for $15,000 executed in June 2007 bearing interest at 9% per annum maturing on June 21, 2009, with a conversion price of $0.15 per share. The Company issued 120,000 warrants with an exercise price of $0.30 per share and an expiration date of June 21, 2009. The fair value of the warrants issued was $17,880. For the nine months ended September 30, 2008 and 2007, the Company recorded $6,705 and $2,980, respectively, in financing expense related to the issuance of these warrants. In February 2008, the Company assigned the note to the Company’s investor group and the note holder agreed to an amount of $3,000 as full settlement of the note. The settlement amount was paid to the note holder by the investor group in February 2008 (see Note 14).	-	15,000


(17) Convertible notes executed in June 2007 bearing interest at 8% per annum maturing on June 29, 2009, with a conversion price of $0.20 per share. The Company issued 100,000 warrants with an exercise price of $0.40 per share and an expiration date of June 29, 2009. The fair value of the warrants was $21,800. For the nine months ended September 30, 2008 and 2007, the Company recorded $8,175 and $3,633, respectively, in financing expense related to the issuance of these warrants.		100,000		100,000

(18) Convertible note executed in July 2007 bearing interest at 8% per annum maturing on July 2, 2009, with a conversion price of $0.20 per share. The Company issued 100,000 warrants with an exercise price of $0.40 per share and an expiration date of July 2, 2009. The fair value of the warrants issued was $29,800. For the nine months ended September 30, 2008 and 2007, the Company recorded $11,175 and $3,725, respectively, in financing expense related to the issuance of these warrants.		100,000		100,000

(19) Convertible notes executed in August 2007 bearing interest at 9% per annum maturing on August 9, 2009, with a conversion price of $0.25 per share. The Company issued 96,000 warrants with an exercise price of $0.40 per share and an expiration date of August 9, 2010. The fair value of the warrants was $23,040. For the nine months ended September 30, 2008 and 2007, the Company recorded $5,760 and $1,280, respectively, in financing expense related to the issuance of these warrants.		120,000		120,000
		1,334,789		1,585,000
Less current maturities		(1,334,789)		(800,000)
	$	-	$	85,000

The Black-Scholes Option Pricing Model was used to calculate the fair value of all the above mentioned warrants.

Interest expense for the convertible notes payable for the nine months ended September 30, 2008 and 2007 was $97,313 and $91,541, respectively.

NOTE 6 - CONVERTIBLE NOTES PAYABLE – RELATED PARTIES

Convertible notes payable – related parties at September 30, 2008 and December 31, 2007 consisted of the following:


		September 30, 2008		December 31, 2007
(1) Convertible note executed in November 2003 with the VP of Technology bearing interest at the prime rate plus 2% per annum with an extended maturity date of September 30, 2008, and a conversion price of $10.00 per share. The Company issued 500 warrants with an exercise price of $10.00 per share expiring November 10, 2013. The fair value of the warrants issued was $2,038. In April 2007, the interest calculation was amended from simple to compound effective April 1, 2007.	$	50,000	$	50,000

(2) Convertible note executed in January 2004 with the VP of Technology bearing interest at the prime rate plus 4% per annum with an extended maturity date of September 30, 2008, and a conversion price of $10.00 per share. In April 2007, the interest calculation was amended from simple to compound effective April 1, 2007.		7,500		7,500

(3) Convertible notes executed in February, June, September 2004 and August 2005 with the CEO bearing interest at an amended rate of 8% per annum with an extended maturity date of February 28, 2009, and a conversion price of $10.00 per share. The Company issued 1,800 warrants with an exercise price of $10.00 per share and expiration dates of February 4, 2014, September 7, 2014 and August 16, 2015. The fair value of the warrants issued was $3,387. In April 2007, the interest calculation was amended from simple to compound effective April 1, 2007.		230,000		230,000

(4) Convertible notes executed in August, and September 2005 with a Software Developer bearing interest at 8% per annum with an extended maturity date of February 28, 2009, and a conversion price of $10.00 per share. The Company issued 150 warrants with an exercise price of $10.00 per share and expiration dates of August 26, 2015 and September 29, 2015. The fair value of the warrants issued was $372. In April 2007, the interest calculation was amended from simple to compound effective April 1, 2007.		15,000		15,000


(5) Convertible note executed in August 2005 with the President bearing interest at 8% per annum with an extended maturity date of December 31, 2007, and a conversion price of $10.00 per share. The Company issued 500 warrants with an exercise price of $10.00 per share and an expiration date of August 26, 2015. The fair value of the warrants issued was $1,230. In April 2007, the interest calculation was amended from simple to compound effective April 1, 2007. The note was repaid in full in February 2008.		-		50,000

(6) Convertible note executed in September 2005 with a relative of the Chief Financial Officer bearing interest at 8% per annum with an extended maturity date of February 28, 2009, and a conversion price of $10.00 per share. The Company issued 50 warrants with an exercise price of $10.00 per share and an expiration date of December 7, 2015. The fair value of the warrants issued was $127. In April 2007, the interest calculation was amended from simple to compound effective April 1, 2007.		5,000		5,000

(7) Convertible note executed in December 2005 with a Software Developer bearing interest at 8% per annum with an extended maturity date of February 28, 2009, and a conversion price of $10.00 per share. The Company issued 100 warrants with an exercise price of $10.00 per share and an expiration date of December 6, 2015. The fair value of the warrants issued was $427. In April 2007, the interest calculation was amended from simple to compound effective April 1, 2007.		10,000		10,000

(8) Convertible notes executed in December 2005 and January 2006 with the Office Manager bearing interest at 8% per annum with an extended maturity date of February 28, 2009, and a conversion price of $10.00 per share. The Company issued 800 warrants with an exercise price of $10.00 per share and expiration dates of December 28, 2015 and January 9, 2016. The fair value of the warrants issued was $3,145. In April 2007, the interest calculation was amended from simple to compound effective April 1, 2007.
		58,755		63,691
(9) Convertible notes executed in January and February 2006 with the CEO bearing interest at an amended rate of 8% per annum with an extended maturity date of February 28, 2009, and a conversion price of $10.00 per share. The Company issued 380 warrants with an exercise price of $10.00 per share and expiration dates of January 18, 2016 and February 28, 2016. The fair value of the warrants issued was $415. In April 2007, the interest calculation was amended from simple to compound effective April 1, 2007.		38,000		38,000

(10) Convertible note executed in March 2006 with a Software Developer bearing interest at 8% per annum with an extended maturity date of February 28, 2009, and a conversion price of $7.50 per share. The Company issued 50 warrants with an exercise price of $10.00 per share and an expiration date of March 6, 2016. The fair value of the warrants issued was $45. In April 2007, the interest calculation was amended from simple to compound effective April 1, 2007.		5,000		5,000
		419,255		474,191
Less current maturities		(419,255)		(107,500)
	$	-	$	366,691

The Black-Scholes Option Pricing Model was used to calculate the fair value of all the above mentioned warrants.

At September 30, 2008 and 2007, accrued interest due for the convertible notes – related parties was $112,166 and $75,644, respectively, and is included in accrued expenses in the accompanying balance sheet. Interest expense for convertible notes payable – related parties for the nine months ended September 30, 2008 and 2007 was $26,145 and $29,896, respectively.

NOTE 7 - NOTES PAYABLE

Notes payable at September 30, 2008 and December 31, 2007 consisted of the following:


		September 30, 2008		December 31, 2007
(1) One unit consisting of a $100,000 promissory note and 20,000 shares of the Company’s common stock, at $1.40, sold in May 2006. The note bears interest at 9% per annum and matured on August 28, 2006. Because the note was not fully repaid within a twenty (20) day grace period after the maturity date, the remaining outstanding principal and accrued and unpaid interest was convertible into shares of common stock of the Company at the sole option of the holder, at a conversion price equal to the lesser of (a) $2.20 or (b) ninety percent (90%) of the lowest VWAP, as defined, of the common stock during the thirty (30) trading days immediately preceding the date of conversion as quoted by Bloomberg, LP. The Company paid a placement agent fee of $7,000 relating to the promissory note. In January 2008, the Company executed a Forbearance Agreement with YA Global, the note holder, whereby YA Global has agreed to forbear from exercising its rights under the secured convertible debentures through February 27, 2008. The terms of the Forbearance Agreement also include a reduction in the YA Global Fixed Conversion Price to $0.065. In February 2008, the Forbearance Agreement was further extended to May 15, 2008. In May 2008, the Company executed a Forbearance Agreement with YA Global, the note holder, whereby YA Global has agreed to forbear from exercising its rights under the secured convertible debentures through October 15, 2008. The Company is pursuing an extension.	$	100,000	$	100,000

(2) Six units sold in July 2006 to six individuals, each unit consisting of a 12% promissory note of $25,000, maturing January 10, 2007 and 25,000 bonus shares of the Company’s common stock, at $0.85, for a total of $150,000 and 150,000 shares of common stock. Six months interest of $9,000, due at closing was paid to the note holders. The Company paid a placement agent fee of $15,000 and issued 15,000 shares of the Company’s common stock, at $0.85, in August 2006, paid an escrow agent fee of $3,000, a due diligence fee of $7,500 and issued 5,000 shares of the Company’s common stock, at $0.85, to the placement agent in July 2006. In January 2007, the Company extended the maturity date of five of the promissory notes, totaling $100,000, to March 10, 2007 and increased the interest rate of the promissory notes to 20% per annum. The remaining promissory note in the amount of $50,000 was paid in full in February 2007. In March, May, July and August 2007, the Company paid $81,250 against the five remaining notes. For the months of February through November 2007, the Company issued 46,250 extension shares of the Company’s common stock to the note holders who had open balances in each of those months and 4,625 extension shares to the placement agent, with the shares ranging from $0.10 to $0.435. For the month of December 2007, the Company recorded 1,875 extension shares of the Company’s common stock to the two remaining note holders who had open balances and 188 extension shares to the placement agent, at $0.11 per share. In June 2008, the Company paid $2,289 against the two remaining notes. For the months of January through September 2008, the Company recorded 15,959 extension shares of the Company’s common stock to the two remaining note holders who had open balances and 1,5,96 extension shares to the placement agent, with the shares ranging from $0.15 to $0.29. For the months of May through July 2007, the Company issued a total of 45,000 penalty shares of the Company’s common stock, ranging from $0.22 to $0.30, to all of the note holders per the terms of the notes and 3,000 penalty shares, ranging from $0.22 to $0.30, to the placement agent. All of the above issued shares have Rule 144 piggyback registration rights. For the nine months ended September 30, 2008 and 2007, the Company expensed $3,609 and $14,739, respectively, of financing expenses related to the shares issued and to be issued for the note extensions and penalties.		16,461		18,750

(3) Promissory note executed in June 2007, bearing interest at 9% per annum, maturing on December 14, 2007. The Company issued 10,000 warrants with an exercise price of $0.50 per share with an expiration date of June 14, 2012. The fair value of the warrants issued was $1,800. For the nine months ended September 30, 2008 and 2007, the Company recorded $0 and $1,200, respectively, in financing expense related to the issuance of these warrants. In December 2007, the Company repaid $5,000 of the principal to the note holder and the note was extended to January 31, 2008. As of September 30, 2008, the Company is pursuing a settlement agreement with the note holder.		45,000		45,000


(4) Promissory note for $15,000 executed in November 2007, bearing interest at 8% per annum, maturing on May 21, 2008 with a financial consultant for services to be rendered per the terms of an agreement executed in November 2007. In March 2008, the agreement was terminated and the note was cancelled.	-	15,000

(5) Promissory note for $52,500 executed in December 2007, bearing interest at 12% per annum, maturing on September 6, 2008. The Company issued 55,000 restricted shares of common stock, at $0.10 per share. The note was repaid in full in March 2008.	-	52,500

(6) Promissory note for $50,000 executed in December 2007, bearing interest at 8% per annum, maturing on December 31, 2008. The Company released the 200,000 pledge shares that were being held in escrow relating to two other notes executed with the same individual. The note was repaid in full in March 2008.	-	50,000

(7) Promissory note executed in January 2008, bearing interest at 8% per annum, maturing on September 30, 2008. The Company recorded 1,000,000 non-dilutable restricted shares common stock, valued at $0.0092 per share, with Rule 144 piggyback registration rights. For the nine months ended September 30, 2008 and 2007, the Company expensed $9,200 and $0, respectively, of financing expenses related to the shares to be issued. In September 2008 the note was extended to December 31, 2008.	100,000	-

(8) Promissory note executed in January 2008, bearing interest at 18% per annum, maturing on July 31, 2008. The Company issued 15,000 warrants with an exercise price of $0.25 per share with an expiration date of January 31, 2013. The fair value of the warrants issued was $4,350. For the nine months ended September 30, 2008 and 2007, the Company recorded $4,350 and $0, respectively, in financing expense related to the issuance of these warrants. In July 2008 the note was extended to December 31, 2008.	50,000	-

(9) Thirty-seven units, sold in January 2008 per the terms of a term sheet executed with an investor group in January 2008 (see Note 14), with each unit consisting of a 10% promissory note of $25,000, maturing three years from the execution date and with a 10% discount rate, and 62,000 non-dilutable (for one year) restricted shares of the Company’s common stock, at market price. The Company expensed the discount rate of $92,500, related to the units sold, as financing expense. The Company recorded 2,294,000 shares of restricted common stock, with the shares ranging from $0.023 to $0.025, related to the units sold. For the nine months ended September 30, 2008 and 2007, the Company expensed $53,010 and $0, respectively, of financing expenses related to the shares to be issued.	925,000	-

(10) Seventeen units, sold in February 2008 per the terms of a term sheet executed with an investor group in January 2008 (see Note 14), with each unit consisting of a 10% promissory note of $25,000, maturing three years from the execution date and with a 10% discount rate, and 62,000 non-dilutable (for one year) restricted shares of the Company’s common stock, at market price. The Company expensed the discount rate of $42,500, related to the units sold, as financing expense. The Company recorded 1,054,000 shares of restricted common stock, with the shares ranging from $0.028 to $0.038, related to the units sold. For the nine months ended September 30, 2008 and 2007, the Company expensed $31,124 and $0, respectively, of financing expenses related to the shares to be issued.	425,000	-

(11) Four units, sold in March 2008 per the terms of a term sheet executed with an investor group in January 2008 (see Note 14), with each unit consisting of a 10% promissory note of $25,000, maturing three years from the execution date and with a 10% discount rate, and 62,000 non-dilutable (for one year) restricted shares of the Company’s common stock, at market price. The Company expensed the discount rate of $10,000, related to the units sold, as financing expense. The Company recorded 248,000 shares of restricted common stock, with the shares valued at $0.025, related to the units sold. For the nine months ended September 30, 2008 and 2007, the Company expensed $6,200 and $0, respectively, of financing expenses related to the shares to be issued.	100,000	-


(12) One unit, sold in April 2008 per the terms of a term sheet executed with an investor group in January 2008 (see Note 14), with each unit consisting of a 10% promissory note of $25,000, maturing three years from the execution date and with a 10% discount rate, and 62,000 non-dilutable (for one year) restricted shares of the Company’s common stock, at market price. The Company expensed the discount rate of $2,500, related to the unit sold, as financing expense. The Company recorded 62,000 shares of restricted common stock, with the shares valued at $0.017 for 3,100 shares and $0.018 for 3,100 shares, respectively, related to the unit sold. For the nine months ended September 30, 2008 and 2007, the Company expensed $1,085 and $0, respectively, of financing expenses related to the shares to be issued.		25,000		-

(13) One unit, sold in July 2008 per the terms of a term sheet executed with an investor group in January 2008 and amended in May 2008 (see Note 14), with each unit consisting of a 10% promissory note of $25,000, maturing three years from the execution date and with a 10% discount rate, and 82,000 non-dilutable (for one year) restricted shares of the Company’s common stock, at market price. The Company expensed the discount rate of $2,500, related to the unit sold, as financing expense. The Company recorded 82,000 shares of restricted common stock, with the shares valued at $0.023, related to the units sold. For the nine months ended September 30, 2008 and 2007, the Company expensed $1,886 and $0, respectively, of financing expenses related to the shares to be issued.		25,000		-

(14) Six units, sold in August 2008 per the terms of a term sheet executed with an investor group in January 2008 and amended in May 2008 (see Note 14), with each unit consisting of a 10% promissory note of $25,000, maturing three years from the execution date and with a 10% discount rate, and 82,000 non-dilutable (for one year) restricted shares of the Company’s common stock, at market price. The Company expensed the discount rate of $15,000, related to the units sold, as financing expense. The Company recorded 492,000 shares of restricted common stock, with the shares valued at $0.011 for 164,000 shares and $0.019 for 328,000 shares, related to the units sold. For the nine months ended September 30, 2008 and 2007, the Company expensed $8,036 and $0, respectively, of financing expenses related to the shares to be issued.		150,000		-

(15) Two units, sold in September 2008 per the terms of a term sheet executed with an investor group in January 2008 and amended in May 2008 (see Note 14), with each unit consisting of a 10% promissory note of $25,000, maturing three years from the execution date and with a 10% discount rate, and 82,000 non-dilutable (for one year) restricted shares of the Company’s common stock, at market price. The Company expensed the discount rate of $5,000, related to the unit sold, as financing expense. The Company recorded 164,000 shares of restricted common stock, with the shares valued at $0.017, related to the units sold. For the nine months ended September 30, 2008 and 2007, the Company expensed $2,788 and $0, respectively, of financing expenses related to the shares to be issued.		50,000		-
		2,011,461		281,250
Less current maturities		(311,461)		(281,250)
	$	1,700,000	$	-

The Black-Scholes Option Pricing Model was used to calculate the fair value of all the above mentioned warrants.

Interest expense for notes payable for the nine months ended September 30, 2008 and 2007 was $126,861 and $23,155, respectively.

NOTE 8 - NOTES PAYABLE – RELATED PARTIES

Notes payable – related parties at September 30, 2008 and December 31, 2007 consisted of the following:


		September 30, 2008		December 31, 2007
(1) Promissory notes executed in March 2004 with the CEO bearing interest at an amended rate of 8% per annum with an extended maturity date of February 28, 2009.	$	105,000	$	105,000

(2) Promissory note executed in November 2004 with the CEO bearing interest at an amended rate of 8% per annum with an extended maturity date of February 28, 2009.		84,000		84,000

(3) Promissory notes executed in January 2006 with the President, non-interest bearing, with an extended maturity date of December 31, 2007. The note was repaid in full in February 2008.		-		10,000

(4) Promissory notes executed in February and April 2006 with the CEO bearing interest at 8% per annum with an extended maturity date of February 28, 2009.		315,000		315,000

(5) Promissory notes executed in February and March 2006 with the President bearing interest at 8% per annum with an extended maturity date of December 31, 2007. The notes were repaid in full in February 2008.		-		15,000

(6) Promissory note executed in May 2006 with the CEO bearing interest at 9% per annum with an extended maturity date of February 28, 2009. The Company issued 20,000 warrants with an exercise price of $1.30 per share and an expiration date of May 25, 2011. The fair value of the warrants issued was $24,300.		100,000		100,000

(7) Promissory note executed in February 2007 with the CEO bearing interest at 8% per annum with an extended maturity date of February 28, 2009. The Company issued 8,800 warrants with an exercise price of $0.50 per share and an expiration date of February 21, 2012. The fair value of the warrants issued was $3,758. For the nine months ended September 30, 2008 and 2007, the Company recorded $0 and $3,758, respectively, in financing expense related to the issuance of these warrants.		22,000		22,000

(8) Promissory notes executed in February 2008 with the President bearing interest at 8% per annum with a maturity date of February 28, 2009.		70,000		-
		696,000		651,000
Less current maturities		(696,000)		(25,000)
	$	-	$	626,000

The Black-Scholes Option Pricing Model was used to calculate the fair value of all the above mentioned warrants.

Interest expense for notes payable - related parties for the nine months ended September 30, 2008 and 2007 was $42,164 and $39,103, respectively.

NOTE 9 - CONVERTIBLE SECURED NOTES PAYABLE

Convertible secured notes payable consisted of the following at September 30, 2008 and December 31, 2007:


		September 30, 2008		December 31, 2007
YA Global (formerly Cornell)	$	427,447	$	427,447
Highgate House Funds, Ltd.		244,720		244,720

Total convertible secured notes payable	$	672,167	$	672,167

On April 27, 2005, the Company entered into an amended and restated 8% secured convertible debenture with YA Global Investments, LP, formerly Cornell Capital Partners, LP, (“Amended YA Global Debenture”) in the amount of $1,024,876, which terminated the two $500,000 debentures entered into with YA Global in December 2004 and January 2005. The new debenture entitles YA Global, at its option, to convert, the debenture, plus accrued interest, into shares of the Company’s common stock at a price per share equal to the lesser of (i) the greater of $2.50 or an amount equal to 120% of the initial bid price or (ii) an amount equal to 80% of the lowest Volume Weighted Average Price, as defined, of the Company’s common stock for the last five trading days immediately preceding the conversion date. If not converted, the entire principal amount and all accrued interest shall be due on the second year anniversary of the debenture. The Company, at its option, may redeem, with fifteen days advance written notice, a portion or all the outstanding convertible debentures. The redemption shall be 110% of the amount redeemed plus accrued interest remaining for the first six months of the executed debenture and after that time the redemption is 120% of the amount redeemed plus accrued interest remaining. The conversion feature and the Company’s optional early redemption right have been bundled together as a single compound embedded derivative liability, and fair valued using a layered probability-weighted cash flow approach.

On April 27, 2005, the Company entered into a Securities Purchase Agreement (“SPA”) with Highgate House Funds, Ltd. (“Highgate”) pursuant to which the Company received $750,000 in exchange for two 7% secured convertible debentures amounting to $750,000 that mature in two (2) years, and the issuance of 15,000 shares of the Company’s common stock. The first debenture funding occurred upon the signing of the SPA and the second debenture funding occurred upon the filing of the registration statement. The Company has agreed to reserve for issuance of 200,000 shares of the Company’s common stock, which may be adjusted as agreed upon by the parties, to be issued to the debenture holder upon conversion of accrued interest and liquidated damages and additional shares of common stock required to be issued to the debenture holder in accordance with the SPA. Additionally, in accordance with the SPA, the Company is required to maintain in escrow and register with the SEC five times the number of shares of common stock that would be needed to satisfy the full conversion of all such convertible debentures outstanding and to issue additional shares as needed if the number of shares in escrow becomes less than that required. Further, following a notice of conversion, the investors may sell escrowed shares in the registered distribution before they are actually delivered, but, the investors will not engage in short sales. The terms of the secured debentures contain a limitation that precludes conversion when the amount of shares already owned by YA Global and Highgate, plus the amount of shares still outstanding to be converted, would exceed 4.99%. The limitation may be waived by YA Global upon 61 days advance written notification to the Company. In addition, on the third anniversary of the issuance date of the YA Global debenture and second anniversary of the issuance dates of the Highgate debentures, any outstanding principal or interest owed on the secured debentures will be converted into stock without any applicable limitation on the number of shares that may be converted.

The aforementioned debentures bear interest at a rate of 7% per annum, compounded monthly, and expire 2 years after the date of issuance. The debentures are convertible into shares of common stock at a conversion price equal to the lesser of (i) 120% of the average closing bid price for the 5 trading days immediately preceding the closing date; or (ii) 80% of the lowest closing bid price for the 5 trading days immediately preceding the date of conversion. In addition, the Company has the right to redeem the debentures, at any time prior to its maturity, upon 3 business day’s prior written notice to the holder. The redemption price is equal to 120% of the face amount redeemed plus accrued interest. In the event that the Company redeems the debentures within 180 days after the date of issuance, the redemption price shall be 110% of the face amount redeemed plus accrued interest. The conversion feature and the Company’s optional early redemption right have been bundled together as a single compound embedded derivative liability, and fair valued using a layered probability-weighted cash flow approach.

In July 2006, the Company agreed to an anti-dilution adjustment with YA Global and Highgate whereby the conversion price of the secured convertible debentures was reduced to a fixed per share price equal to the lower of $0.85 or 80% of the lowest closing bid price during the five days preceding the conversion date.

The SPA contains certain negative covenants concerning assets, ownership, management and debt. The Company has paid $75,000 for structuring fees and expenses and $5,000 for commitment fees related to this SPA.

In August 2007, the Company was notified by YA Global of its legal name change to YA Global Investments, LP.

Interest expense for convertible secured notes payable for the nine months ended September 30, 2008 and 2007 was $38,592 and $66,326, respectively.

In January 2008, the Company executed a Forbearance Agreement with YA Global whereby YA Global and Highgate have agreed to forbear from exercising their rights under the secured convertible debentures through February 27, 2008. The terms of the Forbearance Agreement record the amount due to YA Global and Highgate by the Company to be $1,214,093, which includes principal, interest and the redemption premium. The terms also include a reduction in the YA Global and Highgate Fixed Conversion Price to $0.065. In connection with this Agreement, the Company issued to YA Global 500,000 contingency warrants with an exercise price of $0.15 per share. The warrants are exercisable for a period of five (5) years from date of issuance. The warrants are held in escrow and will only be released to YA Global if the total amount due by the Company is not paid to YA Global by February 29, 2008.

In February 2008, the Forbearance Agreement was amended and extended to May 15, 2008, including the terms of the contingency warrants. Per the terms of the amendment, YA Global and Highgate shall receive an additional 105 days of interest for a total amount of $28,328.84 additional interest. The additional interest plus a security deposit of $171,671.16 were paid to YA Global and Highgate per the terms of a debt assignment agreement executed with an investor group in February 2008, for a total amount paid to YA Global of $200,000. The security deposit will be applied to the amount due YA Global and Highgate if the remaining balance due is paid in full by May 15, 2008. Otherwise, the security deposit will be applied to YA Global as liquidated damages.

In May 2008, the Company executed a Forbearance Agreement with YA Global that supersedes the January 2008 agreement and February 2008 amendment, whereby YA Global and Highgate have agreed to forbear from exercising their rights under the secured convertible debentures through October 15, 2008. Per the terms of the May 2008 Forbearance Agreement, the Company agreed to use its best efforts to make available sufficient authorized shares of its common stock to effect conversion of the entire amount outstanding, to YA Global and Highgate, by October 15, 2008. The terms of the contingency warrants became applicable to the terms of the May 2008 Forbearance Agreement. Additionally, per the terms of the agreement, the Company’s investor group paid $75,000 to YA Global in May 2008 which is further broken down as:

$17,268 (additional prepaid interest to YA Global from May 15, 2008 to October 15, 2008)

$7,181 (additional prepaid interest to Highgate from May 15, 2008 to October 15, 2008)

$27,840 (accrued interest due on the Highgate debenture dated April 26, 2005)

$22,711 (non-refundable extension payment that will be applied to the redemption amount if the remaining balance is paid in full by October 15, 2008)

The payment of the accrued interest of $27,840 for the Highgate April 26, 2005 debenture reduced the total amount of our indebtedness to YA Global and Highgate to $1,186,253 as agreed to in the May 2008 Forbearance Agreement.

The Company is in discussions with YA Global regarding an extension to the May 2008 Forbearance Agreement, which was in effect until October 15, 2008. The Company and YA Global are negotiating an extension which would extend and amend the Forbearance Agreement to the end of the second quarter of 2009, but a final agreement has not yet been completed.

Conversions to Common Stock

For the nine months ended September 30, 2008, YA Global had no conversions.

For the nine months ended September 30, 2007, YA Global converted $407,500 of the April 27, 2005 debenture into 2,703,749 shares of the Company’s common stock, pursuant to the terms of the Securities Purchase Agreement. The conversion price ranged from $0.096 to $0.34 per share.

For the nine months ended September 30, 2008, Highgate had no conversions.

For the nine months ended September 30, 2007, Highgate converted $20,279.64 of the May 6, 2005 debenture into 59,046 shares of the Company’s common stock, pursuant to the terms of the Securities Purchase Agreement. The conversion price was $0.34 per share.

NOTE 10 - FINANCIAL INSTRUMENTS

The secured convertible notes payable are hybrid instruments which contain an embedded derivative feature which would individually warrant separate accounting as a derivative instrument under SFAS No. 133. The embedded derivative feature has been bifurcated from the debt host contract, referred to as the "Compound Embedded Derivative Liability". The embedded derivative feature includes the conversion feature within the note and an early redemption option. The value of the embedded derivative liability was bifurcated from the debt host contract and recorded as a derivative liability, which resulted in a reduction of the initial carrying amount (as unamortized discount) of the notes. The unamortized discount is amortized to interest expense using the effective interest method over the life of the notes, or 12 months.

The secured convertible debentures issued to YA Global and Highgate have been accounted for in accordance with SFAS No. 133 and EITF 00-19. The Company has identified the above instruments having derivatives that require evaluation and accounting under the relevant guidance applicable to financial derivatives. These compound embedded derivatives have been bifurcated from their respective host debt contracts and accounted for as derivative liabilities in accordance with EITF 00-19. When multiple derivatives exist within convertible notes, they have been bundled together as a single hybrid compound instrument in accordance with SFAS No. 133 Derivatives Implementation Group Implementation Issue No. B-15, “Embedded Derivatives: Separate Accounting for Multiple Derivative Features Embedded in a Single Hybrid Instrument”. The compound embedded derivatives within the secured convertible notes have been recorded at fair value at the date of issuance; and are marked-to-market each reporting period with changes in fair value recorded to the Company’s statement of operations as “Derivative instrument expense, net”. The Company has utilized a third party valuation consultant to fair value the compound embedded derivatives using a layered discounted probability-weighted cash flow approach. The fair value of the derivative liabilities are subject to the changes in the trading value of the Company’s common stock, as well as other factors. As a result, the Company’s financial statements may fluctuate from quarter-to-quarter based on factors, such as the price of the Company’s stock at the balance sheet date and the amount of shares converted by note holders. Consequently, the financial position and results of operations may vary from quarter-to-quarter based on conditions other than operating revenues and expenses.

NOTE 11 - STOCKHOLDERS’ DEFICIT

Common Stock

On August 8, 2008, the shareholders of the Company authorized a 1 for 10 reverse stock split. All share and per share data in the financial statements and related notes have been restated to give retroactive effect to the reverse stock split.

Issuance of Stock for Services

In August 2005, the Company entered into a retainer agreement with an attorney, whereas the attorney will act as in house counsel for the Company with respect to all general corporate matters. The agreement is at will and required a payment of 1,000 shares of common stock, valued at $9.00 per share, due upon execution. The certificate for the 1,000 shares of common stock was issued in October 2005. Commencing on September 1, 2005, the fee structure also includes a monthly cash fee of $1,000 and the monthly issuance of 250 shares of common stock, valued at market. For the nine months ended September 30, 2008, the Company recorded 2,250 shares of common stock, valued at $485, all of which has been expensed as legal fees, related to the agreement.

In December 2007, the Company executed a consulting agreement with a financial advisor whereby the consultant will provide introduction of potential investors to the Company. As compensation for the services, the consultant shall receive a monthly fee in the amount of $5,000. The agreement can be terminated by either party by providing the other party with thirty days advance written notice. The consultant received 500,000 shares of the Company’s common stock, valued at $0.065 per share. The shares are restricted and have piggyback registration rights upon the next registration statement filed by the Company.

Issuance of Stock for Financing

In January 2008, the Company recorded 100,000 shares of common stock, valued at $0.092 per share, issuable to an individual as consideration for a promissory note executed in January 2008 (see Note 7). The shares have Rule 144 piggyback registration rights. For the nine months ended September 30, 2008, the Company expensed $9,200 of financing expenses related to the shares.

In accordance with a term sheet executed with an investment firm in January 2008, the Company sold 59 units to twenty-two investors. In January 2008, the Company recorded 2,294,000 shares of common stock, valued at $0.023 to $0.025 per share, issuable to twelve investors per the terms of the agreement. In February 2008, the Company recorded 1,054,000 shares of common stock, valued at $0.028 to $0.038 per share, issuable to seven investors per the terms of the agreement. In March 2008, the Company recorded 248,000 shares of common stock, valued at $0.025 per share, issuable to one investor per the terms of the agreement. In April 2008, the Company recorded 62,000 shares of common stock, valued at $0.017 to $0.018 per share, issuable to two investors per the terms of the agreement. In May 2008, in accordance with an amendment to the term sheet the Company signed with the investor firm, the Company recorded 1,180,000 shares of the Company’s common stock, valued at $0.02 per share, to reflect the retroactive increase in the shares to be issued to the investors who purchased units as of the date of the amendment. The increase recorded was 20,000 shares for each unit sold (see Note 14). In July 2008, the Company recorded 82,000 shares of common stock, valued at $0.023 per share, issuable to one investor per the terms of the agreement. In August 2008, the Company recorded 492,000 shares of common stock, valued at $0.011 to $0.019 per share, issuable to two investors per the terms of the agreement. In September 2008, the Company recorded 164,000 shares of common stock, valued at $0.017 per share, issuable to one investor per the terms of the agreement. All of the shares recorded relating to the term sheet are non-dilutable and have Rule 144 piggyback registration rights. For the nine months ended September 30, 2008, the Company expensed $127,739 of financing expenses related to the shares.

Warrants

At September 30, 2008, the Company issued warrants related to its convertible notes payable. The warrants entitle the note holders to purchase the Company’s common stock at: 6,667 warrants with an exercise price of $5.50 per share, 40,000 warrants with an exercise price of $2.50 per share, 4,500 warrants with an exercise price of $2.00 per share, 56,250 warrants with an exercise price of $1.60 per share, 57,143 warrants with an exercise price of $0.70 per share, 446,000 warrants with an exercise price of $0.40 per share and 120,000 warrants with an exercise price of $0.30 per share. 383,810 warrants have a two year exercise term, 100,500 warrants have a three year exercise term and 246,250 warrants have a five year exercise term.

At September 30, 2008, the Company issued warrants related to its convertible notes payable – related parties. The warrants entitle the note holders to purchase the Company’s common stock at $10.00 per share and have an exercise term of ten years. At September 30, 2008, 3,100 warrants will expire in the year 2013, 1,650 warrants expire in the year 2014, 2,170 warrants in the year 2015 and 1,130 warrants in the year 2016.

At September 30, 2008, the Company issued warrants related to its notes payable. The warrants entitle the note holder to purchase the Company’s common stock at $0.25 per share for 15,000 warrants and $0.50 per share for 10,000 warrants with an exercise term of five years.

At September 30, 2008, the Company issued warrants related to its notes payable – related parties. The warrants entitle the note holder to purchase the Company’s common stock at $0.50 per share for 8,800 warrants and $1.30 per share for a 20,000 warrants with an exercise term of five years.

NOTE 12 - STOCK BASED COMPENSATION

In September 2004, the stockholders approved the Equity Incentive Plan for its employees (“Incentive Plan”), effective April 1, 2004. Of the total authorized for issuance at September 30, 2008, 8,572,703 shares were available for future issuance.

2004 Equity Incentive Plan

The number of shares authorized for issuance under the Incentive Plan was increased to 1,000,000 in September 2006, 1,500,000 in March 2007, 2,000,000 in June 2007 and 10,000,000 in December 2007, by unanimous consent of the Board of Directors. In August 2008, the Company repurchased, at no cost, employee stock options totaling 1,111,791 shares of common stock from twelve employees as a result of a voluntary tender by the employees. The exercise price of the cancelled options ranged from $0.15 per share to $10.00 per share.

Option shares totaling 142,500 vest equally over a three year period beginning one-year from the date of grant, option shares totaling 200,000 vest in one-third increments of six months each over an eighteen month period from the date of grant and option shares totaling 1,084,797 vest over a one-year period from the date of grant.

The table below summarizes the Company’s Incentive Plan stock option activity through September 30, 2008:


	Number of Option Shares		Exercise Price Range Per Share		Weighted Average Exercise Price	Weighted Average Remaining (in years)		Aggregate Intrinsic Value (in thousands)

Balance, December 31, 2005	183,000	$	10.00	$	10.000		$	---
Granted	451,455	$	0.70 - $ 1.00	$	0.920		$	---
Balance, December 31, 2006	634,455	$	0.70 - $ 1.00	$	3.540		$	---
Granted	1,904,633	$	0.08 - $ 5.00	$	0.221		$	---
Balance,								---
December 31, 2007	2,539,088	$	0.08 - $ 10.00	$	1.050		$	---
Cancelled	1,111,791	$	0.15 - $ 10.00	$	1.823		$	---
Balance, September 30, 2008	1,427,297	$	0.08 - $ 10.00	$	0.448		$	---
Vested and Exercisable, September 30, 2008	1,275,184			$	0.448		$	---

As of September 30, 2008, an aggregate of 1,427,297 options were outstanding under the incentive plan. The exercise price for 37,500 options is $10.00, for 105,000 options is $1.00, for 9,231 is $0.375, for 15,705 is $0.24, for 16,388 options is $0.23, for 325,577 options is $0.20, for 171,131 options is $0.17, for 259,743 options is $0.15 and 487,022 options is $0.08. As of September 30, 2007, an aggregate of 1,839,567 options were outstanding under the incentive plan. The exercise price for 183,000 options was $10.00, for 10,000 options was $5.00, for 277,500 options was $1.00, for 34,810 options was $0.99, for 40,543 options was $0.85, for 49,231 options was $0.70, for 49,372 options was $0.698, for 202,308 was $0.50, for 55,812 was $0.45, for 91,898 was $0.375, for 78,526 was $0.24, for 155,184 options was $0.23, for 164,808 options was $0.20, for 186,832 options was $0.17 and for 259,743 options was $0.15. At September 30, 2008, there were 1,275,184 vested incentive plan stock options outstanding of which 446,436 options are exercisable at $0.08, 259,743 options are exercisable at $0.15, 171,131 options are exercisable at $0.17, 240,161 options are exercisable at $0.20, 16,388 options are exercisable at $0.23, 15,705 options are exercisable at $0.24, 9,231 options are exercisable at $0.375, 78,750 options are exercisable at $1.00 and 37,639 options are exercisable at $10.00.

As of September 30, 2008, there was $33,900 of total unrecognized compensation cost related to unvested share-based compensation arrangements that is expected to be recognized over a weighted-average period of 12 months.

The following table summarizes information concerning outstanding and exercisable Incentive Plan options as of September 30, 2008:


	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding	Average Remaining Contractual Life (in years)		Weighted-Average Exercise Price	Number Exercisable		Weighted-Average Exercise Price
$10.000	37,500	7.00	$	10.000	37,639	$	10.000
$1.000	105,000	9.00		1.000	78,750		1.000
$0.080 - $0.375	1,284,797	10.00		0.143	1,158,795		0.143

	1,427,297	8.67	$	0.448	1,275,184	$	0.448

Non-Incentive Plan Stock Option Grants

Since December 31, 2005, the Company has outstanding an aggregate of 761,889 non-plan, non-qualified options for non-employees with 760,000 exercisable at $3.60 and 1,889 exercisable at $9.00 yielding a weighted average exercise price of $3.613 and no outstanding incentive options outside of the Plan.

NOTE 13 - OTHER (INCOME) EXPENSE

Other (income) expense consisted of the following at September 30, 2008 and 2007:


		September 30, 2008		September 30, 2007
Interest income	$	(8,889)	$	-
Interest expense		293,788		12,090
Financing expense		657,220		471,258
Derivative instruments (income) expense, net		(998,504)		26,275
Forgiveness of debt (*)		(237,250)		-
Total other (income) expense	$	(293,635)	$	509,623

(*) For the nine months ended September 30, 2008 and 2007, the Company recorded forgiveness of debt from settlements with certain note holders and trade vendors in the amount of $238,750 and $0, respectively.

NOTE 14 - COMMITMENTS AND CONTINGENCIES

Payroll Taxes

As of September 30, 2008, the Company owes $53,481 of payroll taxes, of which approximately $45,000 are delinquent from the year ended December 31, 2003. The Company has also recorded $32,462 of related estimated penalties and interest on the delinquent payroll taxes. Although the Company has not entered into any formal repayment agreements with the respective tax authorities, management plans to make payment as funds become available.

Service Agreement

In December 2007, the Company executed a service agreement with an ASP hosting service provider to serve as a data center and co-location services provider for the Company’s ASP clients. As compensation for the services, the hosting service shall receive a monthly fee in the amount of $999. The Company paid a set-up fee of $350 upon signing the agreement. The term of the agreement is for one year with automatic one year renewal terms. As of February 2008, all of the Company’s ASP hosted clients were migrated to the new service.

Lease Agreement

In January 2008, the Company executed a lease renewal agreement with its landlord. The term of the renewal is from February 1, 2008 through January 31, 2013. Per the terms of the renewal, the Company shall pay a monthly base rent of $6,356 with no rent payments due for the months of February 2008, February 2009 and February 2010. In September 2008, the Company commenced discussions with the landlord to reduce the rent by 50%, effective September 2008, for a period of six months.

Consulting Agreements

In January 2008, the Company executed a representation letter with an attorney whereby the attorney shall serve as general counsel to the Company. As compensation for the services, the attorney shall receive a monthly fee in the amount of $3,500, commencing in February 2008. The agreement can be terminated by either party by providing the other party with thirty days advance written notice.

In February 2008, the Company executed a representation letter with an attorney whereby the attorney shall serve as patent attorney to the Company. As compensation for the services, the attorney shall invoice the Company on an hourly basis. The Company paid a retainer of $5,000 to the attorney which was applied to the Company’s first invoice. The agreement can be terminated by the Company at any time by providing the attorney with written notice.

Investor Group

In January 2008, the Company executed a term sheet with an investor group whereby the group will assist the Company on an ongoing best efforts basis in order for the Company to obtain financing of up to $2,500,000 in the form of up to 100 units, each unit containing a $25,000 promissory note and 62,000 non-dilutable (for one year), restricted shares of the Company’s common stock. The promissory notes shall have a three year term, bearing interest at 10% per annum, with a 10% discount rate. All funds received as a result of the sale of the units shall be held in an escrow account that shall be managed by the investor group’s assigned representative. Upon repayment of the Company’s open secured notes and receipt of a release of indebtedness from YA Global and Highgate, the intellectual property of the Company will be pledged to the note holders in the investor group until such time that the unsecured notes and accrued interest of the investor group are repaid in full. In January 2008, the Company sold 37 units to the investor group for a total of $925,000 in promissory notes with a discount of $92,500. The Company shall issue 2,294,000 shares of common stock in relation to the units sold. In February 2008, the Company sold 17 units to the investor group for a total of $425,000 in promissory notes with a discount of $42,500. The Company shall issue 1,054,000 shares of common stock in relation to the units sold. In March 2008, the Company sold 4 units to the investor group for a total of $100,000 in promissory notes with a discount of $10,000. The Company shall issue 248,000 shares of common stock in relation to the units sold. In April 2008, the Company sold 1 unit to the investor group for a total of $25,000 in promissory notes with a discount of $2,500. The Company shall issue 62,000 shares of common stock in relation to the unit sold. The investor group advanced funds totaling $50,000 in February 2008, $280,000 in March 2008, $74,070 in April 2008, $80,000 in May 2008, $95,000 in June 2008 and $125,000 in July 2008, respectively, to the Company. The funds being held in escrow are classified as restricted cash on the balance sheets. In May 2008, the Company executed an amendment to the term sheet whereby the number of restricted and non-dilutable shares of the Company’s common stock to be issued per unit sold was increased from 62,000 shares to 82,000 shares. The increase was applied retroactively to those investors who purchased units as of the date of the amendment. In accordance with the amendment, the Company recorded 1,180,000 shares of the Company’s common stock, valued at $0.02 per share, and computed as 20,000 shares multiplied by 59 units to reflect the retroactive increase in the shares to be issued to the investors who purchased units as of the date of the amendment (see Note 14). In July 2008, the Company sold 1 unit to the investor group for a total of $25,000 in promissory notes with a discount of $2,500. The Company shall issue 82,000 shares of common stock in relation to the unit sold. In August 2008, the Company sold 6 units to the investor group for a total of $150,000 in promissory notes with a discount of $15,000. The Company shall issue 492,000 shares of common stock in relation to the units sold. In September 2008, the Company sold 2 units to the investor group for a total of $50,000 in promissory notes with a discount of $5,000. The Company shall issue 164,000 shares of common stock in relation to the units sold.

In February 2008, the Company executed a Debt Assignment and Security Designation Agreement with the investor group whereby the Company has assigned the debt owed as convertible secured notes payable to YA Global and Highgate to the investor group. The investor group paid a total of $200,000 to YA Global and Highgate in February 2008 for additional interest and the security deposit owed in relation to the extended and amended forbearance agreement the Company and YA Global executed in February 2008 and $75,000 in May 2008 for additional interest, partial accrued interest and an extension fee owed in relation to the new forbearance agreement the Company and YA Global executed in May 2008 (see Note 9).

In February 2008, the Company executed an Assignment and Settlement Agreement with a trade vendor whereby the Company has assigned the debt owed to the vendor, in the amount of $48,750, to the investor group. Per the terms of the Settlement Agreement, the Company remitted $12,500 to the vendor as full settlement of its indebtedness to the vendor.

In February 2008, the Company assigned a convertible promissory note in the amount of $15,000 to the investor group and the note holder agreed to an amount of $3,000 as full settlement of the note. The settlement amount was paid to the note holder by the investor group in February 2008 (see Note 5).

In March 2008, the Company assigned a convertible promissory note in the amount of $75,000 to the investor group and the note holder agreed to an amount of $15,000 as full settlement of the note. The settlement amount was paid to the note holder by the investor group in March 2008 (see Note 5).

In April 2008, the Company assigned a convertible promissory note in the amount of $125,000 to the investor group and the note holder agreed to an amount of $12,500 as full settlement of the note. The settlement amount was paid to the note holder by the Company in April 2008 (see Note 5).

In April 2008, the Company executed an Assignment Agreement with the investor group whereby the Company has transferred ownership of a March 2008 receivable, in the amount of $22,520, to the investor group.

In July 2008, the Company and a note holder agreed upon a settlement whereby a convertible promissory note in the amount of $100,000 shall be assigned to the investor group by the Company and the investor group shall repay the agreed upon settlement amount to the note holder, in installments, through February 2009. The investor group made payments of $10,000 in July 2008 and $5,000 in September 2008 to the note holder (see Note 5).

In September 2008, the Company executed an Assignment and Settlement Agreement with a trade vendor whereby the Company has assigned the debt owed to the vendor, in the amount of $21,400, to the investor group. Per the terms of the Settlement Agreement, the investor group remitted $5,000 to the vendor as full settlement of its indebtedness to the vendor.

Due to Factor

In March 2007, the Company entered into a sale and subordination agreement with a factoring firm whereby the Company sold its rights to two invoices, from February 2007 and March 2007, totaling $470,200 to the factor. Upon signing the agreement and providing the required disclosures, the factor remitted 65%, or $144,440, of the February 2007 invoice and a certain percentage of $53,010 of the March 2007 invoice to the Company. The Company paid a $500 credit review fee to the factor relating to the agreement. Per the terms of the agreement, once the Company’s client remits the invoice amount to the factor, the factor deducts a discount fee from the remaining balance of the factored invoices and forwards the net proceeds to the Company. The discount fee is computed as a percentage of the face amount of the invoice as follows: 2.25% fee for invoices paid within 30 days of the down payment date with an additional 1.125% for each 15 day period thereafter. In September 2007, the February 2007 factored invoice was deemed uncollectible and was written off as bad debt expense. In December 2007, the March 2007 factored invoice was deemed uncollectible and was written off as bad debt expense. In February 2008, the Company and the factor have agreed to a total settlement amount of $75,000 to be paid by the Company to the factor in September 2008 unless both parties mutually agree to extend the due date. In September 2008, the Company and the factor reached a verbal agreement to extend the due date to December 31, 2008. As of September 30, 2008, the balance due to the factor by the Company was $209,192 including interest.

NOTE 15 - ANNUAL MEETING OF SHAREHOLDERS

The Company’s annual meeting of shareholders was held on August 8, 2008. At the annual meeting, the Company's shareholders voted upon the following matters:

(1) The election of five members to the Company's Board of Directors to hold office until the Company's next Annual Meeting of Stockholders in 2009 or until each Director’s successor is duly elected and qualified; and

(2) The ratification of the appointment of Li & Company, PC, as the Company's independent certified public accountants; and

(3) The enactment of a one for ten reverse stock split (1:10), to be effective as of the filing of an amendment to the Company's Articles of Incorporation with the New Jersey Secretary of State and upon the receipt of regulatory approval.

Per the results recorded on the Report of Inspector of Election, Mark L. Kay, Robert Denn, Mark Corrao, Ramarao Pemmaraju and George Waller were elected as the Company’s Board of Directors; Li & Company, PC was ratified as the Company’s independent certified public accountants; and a one for ten reverse stock split (1:10) was approved. On September 30, 2008, the New Jersey Secretary of State approved the Company’s Restated Certificate of Incorporation. On October 31, 2008, the Company received regulatory approval for the effectuation of the one for ten reverse stock split (1:10) at the open of business on November 3, 2008 at which time the Company’s new ticker symbol will be SFOR.

NOTE 16 - CONCENTRATION OF CREDIT RISK

(i) Customers and Credit Concentrations

Five (5) customers accounted for 30.0%, 19.2%, 15.3%, 9.5% and 8.5% of net sales for the nine months ended September 30, 2008 and two (2) customers accounted for 51.4% and 26.3% of the total accounts receivable as of September 30, 2008, respectively. Three (3) customers accounted for 75.4%, 7.9% and 4.0% of net sales for the nine months ended September 30, 2007 and three (3) different customers accounted for 86.6%, 7.0% and 5.0% of the total accounts receivable as of September 30, 2007, respectively.

NOTE 17 - SUBSEQUENT EVENTS

Lease Agreement

In October 2008, the Company executed a lease termination agreement for certain office equipment. The Company and the leasing company executed a new one-year lease effective November 2008 for the equipment. Per the terms of the new lease, the Company shall make twelve monthly payments of $93.95 plus tax including a $1 purchase option upon lease termination.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

Forward-Looking Statements

The information in this quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a “safe harbor" for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward looking statements. Forward-looking statements reflect management's current expectations and are inherently uncertain. Our actual results may differ significantly from management's expectations. Important factors that could cause actual results to differ materially from our expectations are disclosed in this quarterly report as well as in our annual report on Form 10-KSB for the year ended December 31, 2007 as filed with the United States Securities and Exchange Commission (“SEC”) on March 31, 2008.

The following discussion and analysis should be read in conjunction with the financial statements of StrikeForce Technologies, Inc., included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

Background

StrikeForce Technologies, Inc. (hereinafter referred to as “we”, “us”, “our”, “SFT”, “StrikeForce” and “the Company”) is a software development and services company that offers a suite of integrated computer network security products using proprietary technology. We were organized in August 2001 under New Jersey law as Strike Force Technical Services, Inc. We initially conducted operations as an integrator and reseller of computer hardware and telecommunications equipment and services. In December 2002, and formally memorialized by an agreement in September 2003, we acquired certain intellectual property rights and patent pending technology from NetLabs.com including the rights to further develop and sell their principal technology and certain officers of NetLabs.com joined StrikeForce as officers and directors of our Company. We subsequently changed our name to StrikeForce Technologies, Inc., under which we had conducted our business since August 2001. Our strategy is to develop and exploit our suite of network security products for customers in the corporate, financial, government, insurance, e-commerce and consumer sectors. We plan to grow our business primarily through this channel and also from internally generated sales, rather than by acquisitions. We have no subsidiaries and we conduct our operations from our corporate office in Edison, New Jersey.

The Company owns the exclusive right to license and develop various identification protection software products to protect computer networks from unauthorized access and to protect network owners and users from identity theft. The Company has developed a suite of products partly based upon the exclusive license and the Company is seeking to commercially exploit the products in the areas of financial services, e-commerce, corporate, government and consumer sectors. We are a development stage business and have had nominal revenues since our formation. On August 3, 2005 the Company’s registration statement on Form SB-2 was declared effective by the Securities and Exchange Commission and on December 14, 2005 the Company received its clearance for quotation on the Over-The-Counter Bulletin Board. On November 2 2006, the Company filed a Post-Effective Amendment to its Form SB-2 Registration Statement with the SEC. The SEC declared the Company’s Post-effective Amendment effective on November 8, 2006.

We began our operations in 2001 as a reseller and integrator of computer hardware and iris biometric technology. We derived the majority of our revenues as an integrator from the time we started our operations through the first half of 2003. In December 2002, upon the acquisition of the licensing rights to certain intellectual property and patent pending technology from NetLabs.com, we shifted the focus of our business to developing and marketing our own suite of security products. Based upon the acquired licensing rights and additional research and development, the Company has now developed various identification protection software products to protect computer networks from unauthorized access and to protect network owners and users from identity theft. The Company is seeking to commercially exploit the products in the areas of financial services, e-commerce, corporate, government, insurance and consumer sectors. We have had increasing nominal revenues since our formation. We have maintained our relationship with Panasonic and LG as a reseller, primarily for the resale of biometric identification equipment, such as iris scanners, that can be used with our software products. We generated nominal revenues from our activities as a reseller during 2007 and 2006.

We completed the development of our ProtectID® platform at the end of June 2006 and we completed the core development of our keyboard encryption and anti-keylogger product, GuardedID®, in December 2006, which is currently being sold and distributed. We seek to locate customers in a variety of ways. These include contracts primarily with value added resellers and distributors (both inside the United States and globally), direct sales calls initiated by our internal staff, exhibitions at security and technology trade shows, through the media, consulting agreements and through our own and agent relationships. Our sales generate revenue either as an Original Equipment Manufacturer (OEM) model, through a Hosting/License agreement, bundled with other company’s products or through direct purchase by customers. We price our products for hosted consumer transactions based on the number of transactions in which our software products are utilized. We also price our products for business applications based on the number of users. These pricing models provide the Company with one-time, monthly, quarterly and yearly recurring revenues. We are also generating revenues from annual maintenance contracts, renewal fees and project an increase in revenues based upon the execution of various agreements that we have recently closed and are being implemented.

We generated all of our 2008 and 2007 revenues of $211,254 and $623,696, respectively from the sales of our security products. $485,274 of our 2007 revenues were deemed uncollectible and were charged off in the third and fourth quarters of 2007. We market our products to financial service firms, e-commerce companies, government agencies and the enterprise market in general and with virtual private networks, as well as technology service companies that service all the above markets. We seek such sales through our own direct efforts and primarily through distributors, resellers and third party agents. We are also seeking to license the technology as original equipment with computer hardware and software manufacturers. We are engaged in production installations and pilot projects with various distributors, resellers and direct customers, as well as having reached additional reseller agreements with strategic vendors globally. Our GuardedID® product is also being sold directly to consumers, primarily through the Internet as well as distributors, resellers, third party agents and potential Original Equipment Manufacturer ("OEM") agreements by bundling GuardedID® with their products, which could provide a value-add to their own products and offerings.

We have incurred substantial losses since our inception. We believe that our products provide a cost-effective and technologically competitive solution to address the problems of network security and identity theft in general. There can be no assurance, however, that our products will continue to gain acceptance in the commercial marketplace or that one of our competitors will not introduce technically superior products. The products that we offer to customers are discussed in Item 1, Description of Business, in our Annual Report on Form 10-KSB filed on March 31, 2008.

We operate primarily as a software development company, providing security software products and services, to be sold to enterprises, Internet consumer businesses and consumers, both directly and through sales channels comprised of distributors, resellers, agents and OEM relationships, globally. We are focusing primarily on developing sales through “channel” relationships in which our products are offered by other manufacturers, distributors, value-added resellers and agents, globally. We also sell our suite of security products directly from our Edison, NJ office, which also augments our channel partner relationships. It is our strategy that these “channel” relationships will provide the greater percentage of our revenues ongoing. Examples of the channel relationships that we are pursuing include our attempts to establish OEM relationships with other security technology and software providers that would integrate or bundle the enhanced security capabilities of ProtectID® and or GuardedID® into their own product lines. These would include providers of networking software and manufacturers of computer and telecommunications hardware and software that provide managed services, as well as all markets interested in increasing the value of their products and packages, such as financial services software, anti-virus and identity theft product companies.

Our primary target markets include financial services such as banks, insurance companies and savings institutions, e-commerce based services companies, telecommunications and cellular carriers, technology software companies, government agencies and consumers. For the near term, we are narrowly focusing our concentration on short sales-cycle customers and strategic problem areas, such as where compliance with government regulations are key, stolen passwords used to acquire private information illegally, as well as remote users for medium to large size companies. Because we anticipate growing market demand, we are developing a sizeable global reseller and distribution channel as a strategy to generate, manage and fulfill demand for our products across market segments, minimizing the requirement for an increase in our staff. We intend to minimize the concentration on our initial direct sales efforts in the future as our distribution and reseller channels develop globally.

We intend to generate revenue through fees for ProtectID® and ValidateID™, based on consumer volumes of usage in the e-commerce and financial services markets, one time per person fees in the enterprise markets, set-up and recurring transaction fees when the product is hosted, yearly maintenance fees and other one-time fees. GuardedID® pricing is for an annual license and we discount for volume purchases. GuardedID® pricing models, especially when bundling through OEM contracts, include monthly and quarterly recurring revenues. We also provide our clients a choice of operating our software internally by licensing or through our hosting service. GuardedID® requires a download on each and every computer it protects, whether for employees or consumers.

Use of Estimates

Management's Discussion and Analysis of Financial Condition is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. When preparing our financial statements, we 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 reporting amounts of revenues and expenses during the reported period. Significant estimates include, but are not limited to, the estimated useful lives of property and equipment and website development costs. Actual results could differ from those estimates.

Results of Operations

THREE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2007

Revenues for the three months ended September 30, 2008 were $96,009 compared to $70,364 for the three months ended September 30, 2007, an increase of $25,645 or 36.5%. The increase in revenues was primarily due to the sales of our newly developed GuardedID® keyboard encryption and anti-keylogger technology, service fees and the renewal of several software maintenance plans related to the sales of our software.

Revenues generated consisted of hardware and software sales, services and maintenance sales, revenue from sign on fees and recurring transaction revenues. Hardware sales for the three months ended September 30, 2008 were $20,434 compared to $0 for the three months ended September 30, 2007, an increase of $20,434. The increase in hardware revenues was primarily due to the increase in the Company’s sales of our one-time-password token key-fobs. Software, services and maintenance sales for the three months ended September 30, 2008 were $20,910 compared to $33,515 for the three months ended September 30, 2007, a decrease of $12,605. The decrease in software, services and maintenance revenues was primarily due to the renewal of several maintenance plans related to our software sales in 2007. Sign on fees for access to our hosted service provider to utilize our ASP transaction model amounted to $0 for the three months ended September 30, 2008 compared to $2,000 for the three months ended September 30, 2007, a decrease of $2,000. The decrease was due to the reduction in signing up new e-commerce clients. Transaction revenues from the ASP hosting model were $54,665 for the three months ended September 30, 2008 and $34,849 for the three months ended September 30, 2007, an increase of $19,816. The increase was caused by an increased number of transactions being processed through the ASP hosting facility.

Cost of revenues for the three months ended September 30, 2008 was $48,613 compared to $34,152 for the three months ended September 30, 2007, an increase of $14,461, or 42.3%. The increase was primarily due to the increase in processing fees incurred as a result of the transactions relating to our ASP hosting service.

Gross profit for the three months ended September 30, 2008 was $47,396 compared to $36,212 for the three months ended September 30, 2007, an increase of $11,184, or 30.1%. The increase in gross profit was primarily due to the sales of our newly developed GuardedID® keyboard encryption and anti-keylogger technology, service fees and the renewal of several software maintenance plans related to the sales of our software. Gross profit as a percentage of sales decreased to 49.4% from 51.5% due to the increase in processing fees incurred as a result of the increase in the volume of transactions relating to our ASP hosting service.

Research and development expenses for the three months ended September 30, 2008 were $117,210 compared to $92,370 for the three months ended September 30, 2007, an increase of $24,840, or 26.9%. The increase is primarily attributable to the increase in resources relating to Version 2.0 of our GuardedID® keyboard encryption & anti-keylogger technology, which is now in beta testing. The salaries, benefits and overhead costs of personnel conducting research and development of our software products comprise research and development expenses.

Selling, general and administrative expenses for the three months ended September 30, 2008 were $377,604 compared to $800,571 for the three months ended September 30, 2007, a decrease of $422,967 or 52.8%. The net decrease was due primarily to decreases in our promotional, marketing and professional fees which occurred in the three months ended September 30, 2008. Selling, general and administrative expenses consist primarily of salaries, benefits and overhead costs for executive and administrative personnel, insurance, fees for professional services, including consulting, legal, and accounting fees, travel costs, non-cash stock compensation expense for the issuance of stock to non-employees and other general corporate expenses.

Other (income) expense for the three months ended September 30, 2008 was $356,160 as compared to ($584,401) for the three months ended September 30, 2007, representing an increase of $940,561, or 161%. The increase was primarily due to the net mark to market changes in the fair value of derivative financial instruments relating to the convertible secured promissory notes.

Derivative instruments (income) expense represents the change in the fair value of the net derivative liability at period end, using a layered discounted probability-weighted cash flow approach. Interest expense derivatives represent the amortization of discount on the initial valuation of the derivatives, or the amortization of the change after any modification of debt. The change represents the amortization for both of the YA Global Investments, LP (“YA Global”), formerly Cornell Capital Partners, LP, and Highgate House Funds, Ltd (“Highgate”) debentures.

Our net loss for the three months ended September 30, 2008 was $803,578 compared to a net loss of $272,328 for the three months ended September 30, 2007, an increase of $531,250, or 195%. The increase in our net loss was primarily due to the net mark to market changes in the fair value of derivative financial instruments relating to the convertible secured promissory notes.

NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2007

Revenues for the nine months ended September 30, 2008 were $211,254 compared to $623,696 for the nine months ended September 30, 2007, a decrease of $412,442 or 66.1%. The decrease in revenues was primarily due to the amount of a one-time sale of our newly developed GuardedID® keyboard encryption and anti-keylogger technology that occurred in the first quarter of 2007. Of the total sales for the nine months ended September 30, 2007, $485,274 (of the revenues) were deemed uncollectible and were charged off in the third and fourth quarters of 2007.

Revenues generated consisted of hardware and software sales, services and maintenance sales, revenue from sign on fees and recurring transaction revenues. Hardware sales for the nine months ended September 30, 2008 were $21,852 compared to $8,333 for the nine months ended September 30, 2007, an increase of $13,519. The increase in hardware revenues was primarily due to the increase in the Company’s sales of our one-time-password token key-fobs. Software, services and maintenance sales for the nine months ended September 30, 2008 were $81,030 compared to $534,121 for the nine months ended September 30, 2007, a decrease of $453,091. The decrease in software, services and maintenance revenues was primarily due to the amount of a one-time sale of our newly developed GuardedID® keyboard encryption and anti-keylogger technology that occurred in the first quarter of 2007 and was subsequently written off. Sign on fees for access to our hosted service provider to utilize our ASP transaction model amounted to $6,250 for the nine months ended September 30, 2008 compared to $2,000 for the nine months ended September 30, 2007, an increase of $4,250. The increase was due to the increase in signing up new e-commerce clients. Transaction revenues from the ASP hosting model were $102,122 for the nine months ended September 30, 2008 and $79,242 for the nine months ended September 30, 2007, an increase of $22,880. The increase was caused by an increased number of transactions being processed through the ASP hosting facility.

Cost of revenues for the nine months ended September 30, 2008 was $89,442 compared to $52,705 for the nine months ended September 30, 2007, an increase of $36,737, or 69.7%. The increase was primarily due to the processing fees incurred as a result of the increase in transactions relating to our ASP hosting service.

Gross profit for the nine months ended September 30, 2008 was $121,812 compared to $570,991 for the nine months ended September 30, 2007, a decrease of $449,179, or 78.7%. The decrease in gross profit was primarily due to the amount of a one-time sale of our newly developed GuardedID® keyboard encryption and anti-keylogger technology that occurred in the first quarter of 2007 and was subsequently written off. Gross profit as a percentage of sales decreased to 57.7% from 91.6% due an increased number of transactions being processed through the ASP hosting facility due to the addition of new e-commerce clients which result in a lower profit margin than our other products and services.

Research and development expenses for the nine months ended September 30, 2008 were $324,991 compared to $273,872 for the nine months ended September 30, 2007, an increase of $51,119, or 18.7%. The increase is primarily attributable to the increase in resources relating to the Version 2.0 of our GuardedID® keyboard encryption and anti-keylogger technology, which is now in beta testing. The salaries, benefits and overhead costs of personnel conducting research and development of our software products comprise research and development expenses.

Selling, general and administrative expenses for the nine months ended September 30, 2008 were $1,292,274 compared to $1,903,057 for the nine months ended September 30, 2007, a decrease of $610,783 or 32.1%. The net decrease was due primarily to decreases in our promotional, marketing and professional fees which occurred in the nine months ended September 30, 2008. Selling, general and administrative expenses consist primarily of salaries, benefits and overhead costs for executive and administrative personnel, insurance, fees for professional services, including consulting, legal, and accounting fees, travel costs, non-cash stock compensation expense for the issuance of stock to non-employees and other general corporate expenses.

Other (income) expense for the nine months ended September 30, 2008 was ($293,635) as compared to $509,623 for the nine months ended September 30, 2007, representing a decrease in other expense of $803,258, or 158%. The decrease was primarily due to the forgiveness of certain debt and to net mark to market changes of ($998,504) in the fair value of derivative financial instruments relating to the convertible secured promissory notes.

Our net loss for the nine months ended September 30, 2008 was $1,201,818 compared to a net loss of $2,115,561 for the nine months ended September 30, 2007, a decrease of $913,743, or 43.2%. The decrease in our net loss was primarily due to the forgiveness of certain debt and to net mark to market changes in the fair value of derivative financial instruments relating to the convertible secured promissory notes.

Liquidity and Capital Resources

Our total current assets at September 30, 2008 were $759,175, including $20,183 in cash and $367,819 in restricted cash. Additionally, we had a stockholders’ deficiency in the amount of $6,626,428 at September 30, 2008. The increase in the deficiency is a result of the Company’s overall net losses and funding through an increased debt position from convertible debentures and promissory notes rather than the sale of stock. We have historically incurred losses and have financed our operations through loans, principally from affiliated parties such as our directors, and from the proceeds of debt and equity financing. The liabilities include a computed liability for the fair value of derivatives of $469,760, which will only be realized on the conversion of the derivatives, or settlement of the debentures.

We financed our operations during the nine months ended September 30, 2008 primarily through debt and equity financing, with minimal sources of cash resulting from recurring revenues from our security products and services and maintenance sales. We expect that we will rely, at least in the near future, on debt and equity financings, although such sources are not assured. If such sources are available, there is also no assurance that such financing can be obtained at terms that would be acceptable to the Company. Inherently, as time progresses and corporate exposure in the market grows, we hope to attain additional revenue from the sales of our security products and services. Until this is accomplished, we will continue to attempt to secure additional financing through both the public and private market sectors to meet our ongoing commitments of capital expenditures.

At September 30, 2008, $427,447 in aggregate principal amount of the YA Global debentures was issued and outstanding.

At September 30, 2008, $244,720 in aggregate principal amount of the Highgate debentures remained outstanding.

In January 2008, the Company executed a Forbearance Agreement with YA Global whereby YA Global and Highgate agreed to forbear from exercising their rights under the secured convertible debentures through February 27, 2008. The terms of the Forbearance Agreement record the amount due to YA Global and Highgate by the Company to be $1,214,093, which includes principal, interest and the redemption premium. The terms also include a reduction in the YA Global and Highgate Fixed Conversion Price to $0.065. In connection with this Agreement, the Company issued to YA Global 500,000 contingency warrants with an exercise price of $0.15 per share. The warrants are exercisable for a period of five (5) years from date of issuance. The warrants are held in escrow and will only be released to YA Global if the total amount due by the Company is not paid to YA Global by February 29, 2008. The total amount of our indebtedness to YA Global and Highgate in the amount of $1,214,093, as agreed to in the Forbearance Agreement, is further broken down as:

$427,447 (YA Global secured convertible debenture)

$204,775 (YA Global accrued and unpaid interest on debenture)

$85,489 (YA Global 20% redemption premium)

$244,720 (Highgate secured convertible debenture)

$86,937 (Highgate accrued and unpaid interest on debentures)

$48,944 (Highgate 20% redemption premium)

$100,000 (YA Global promissory note dated May 1, 2006)

$15,781 (YA Global accrued and unpaid interest on note)

In February 2008, the Forbearance Agreement was amended and extended to May 15, 2008, including the terms of the contingency warrants. Per the terms of the amendment, YA Global and Highgate shall receive an additional 105 days of interest for a total amount of $28,328.84 additional interest. The additional interest plus a security deposit of $171,671.16 were paid to YA Global and Highgate per the terms of a debt assignment agreement executed with the StrikeForce Investor Group (“SIG”) in February 2008, for a total amount paid to YA Global of $200,000. The security deposit will be applied to the amount due YA Global and Highgate if the remaining balance is paid in full by May 15, 2008. Otherwise, the security deposit will be applied to YA Global as liquidated damages.

In May 2008, the Company executed a Forbearance Agreement with YA Global that supersedes the January 2008 agreement and February 2008 amendment, whereby YA Global and Highgate have agreed to forbear from exercising their rights under the secured convertible debentures through October 15, 2008. Per the terms of the May 2008 Forbearance Agreement, the Company agreed to use its best efforts to make available sufficient authorized shares of its common stock to effect conversion of the entire amount outstanding, to YA Global and Highgate, by October 15, 2008. The terms of the contingency warrants became applicable to the terms of the May 2008 Forbearance Agreement. Additionally, per the terms of the agreement, the SIG paid $75,000 to YA Global in May 2008 which is further broken down as:

$17,268 (additional prepaid interest to YA Global from May 15, 2008 to October 15, 2008)

$7,181 (additional prepaid interest to Highgate from May 15, 2008 to October 15, 2008)

$27,840 (accrued interest due on the Highgate debenture dated April 26, 2005)

$22,711 (non-refundable extension payment that will be applied to the redemption amount if the remaining balance is paid in full by October 15, 2008)

During the nine months ended September 30, 2008, the Company repaid a total of $35,211 of unsecured convertible notes to nine unrelated parties. In accordance with the terms of seven of the convertible notes the Company is recording restricted common shares as bonus extension shares on a monthly basis to the note holders. Additionally, during the nine months ended September 30, 2008, the Company reached settlement agreements and assigned to the SIG a total of $215,000 of unsecured notes with three unrelated parties.

During the nine months ended September 30, 2008, the Company repaid a total of $54,936 of unsecured convertible notes to two related parties.

The Company issued unsecured notes during the nine months ended September 30, 2008 in an aggregate total of $150,000 to one unrelated party and an aggregate total of $1,700,000 to twenty-six unrelated parties per the term sheet executed with the SIG in January 2008 and amended in May 2008. Upon repayment of the Company’s open secured notes and receipt of a release of indebtedness from YA Global and Highgate, the intellectual property of the Company will be pledged to the twenty-six unrelated parties in the SIG until such time that the unsecured notes and accrued interest of the SIG are repaid in full. Additionally, during the nine months ended September 30, 2008, the Company repaid a total of $104,789 of unsecured notes to four unrelated parties. In accordance with the terms of six of the notes the Company is recording restricted common shares as bonus extension shares on a monthly basis to the two remaining note holders. Additionally, during the nine months ended September 30, 2008, the Company terminated a consulting agreement with a financial advisor thereby canceling the unsecured note in the amount of $15,000 issued to the advisor for services to be rendered.

The Company issued unsecured notes during the nine months ended September 30, 2008 in an aggregate total of $100,000 to two related parties. Additionally, during the nine months ended September 30, 2008, the Company repaid a total of $55,000 of unsecured notes to two related parties.

Summary of Funded Debt

As of September 30, 2008 the Company’s open unsecured promissory note balance was $2,011,461, listed as follows:

$100,000 to YA Global (this note by its terms became convertible into shares of common stock as of September 17, 2006 at the lesser of $2.20 per share or 90% of VWAP thirty day average prior to the date of conversion) – current portion

$16,461 to two unrelated individuals through investment firm placement – current portion

$150,000 to an unrelated individual – current portion

$45,000 to an unrelated individual – current portion

$1,700,000 to twenty unrelated individuals through term sheet with the SIG

As of September 30, 2008 the Company’s open unsecured related party promissory note balances were $696,000, listed as follows:

$626,000 to our CEO – current portion

$70,000 to our President – current portion

As of September 30, 2008 the Company’s open convertible secured note balances were $672,167, listed as follows:

$427,447 to YA Global (04/05 amended secured debenture) – current portion

$244,720 to Highgate (05/05 secured debenture) – current portion

As of September 30, 2008 the Company’s open convertible note balances were $1,267,454, net of discount on convertible notes of $67,335, listed as follows:

$235,000 to an unrelated company (03/05 unsecured debenture) - current portion

$7,000 to an unrelated company (06/05 unsecured debenture) – current portion

$10,000 to an unrelated individual (06/05 unsecured debenture) - current portion

$140,000 to four unrelated individuals (07/05 unsecured debentures) - current portion

$85,000 to an unrelated individual (03/06 unsecured debenture) - current portion

$200,000 to an unrelated individual (06/06 unsecured debenture) – current portion

$150,000 to an unrelated individual (09/06 unsecured debenture) – current portion

$70,232 to six unrelated individuals (02/07 unsecured debentures) - current portion

$17,557 to an unrelated individual (04/07 unsecured debenture) – current portion

$100,000 to an unrelated individual (05/07 unsecured debenture) – current portion

$100,000 to an unrelated individual (06/07 unsecured debentures) – current portion

$100,000 to an unrelated individual (07/07 unsecured debenture) – current portion

$120,000 to four unrelated individuals (08/07 unsecured debentures) – current portion

As of September 30, 2008 the Company’s open convertible note balances - related parties were $419,255, listed as follows:

$268,000 to our CEO – current portion

$57,500 to our VP of Technical Services – current portion

$30,000 to a relative of our CTO & one of our Software Developers – current portion

$5,000 to a relative of our CFO – current portion

$58,755 to our Office Manager – current portion

Based on present revenues and expenses, we are unable to generate sufficient funds internally to sustain our current operations. We must raise additional capital or other borrowing sources to continue our operations. It is management’s plan to seek additional funding through the sale of equity and the issuance of certain debt instruments, including promissory and convertible notes. If we issue additional shares of common stock, the value of shares of existing stockholders is likely to be diluted.

However, the terms of the convertible secured debentures issued to certain of the existing stockholders require that we obtain the consent of such stockholders prior to our entering into subsequent financing arrangements. No assurance can be given that we will be able to obtain additional financing, that we will be able to obtain additional financing on terms that are favorable to us or that the holders of the secured debentures will provide their consent to permit us to enter into subsequent financing arrangements.

Our future revenues and profits, if any, will primarily depend upon our ability to secure sales of our suite of network security and anti-malware products. We do not presently generate significant revenue from the sales of our products. Although management believes that our products are competitive for customers seeking a high level of network security, we cannot forecast with any reasonable certainty whether our products will gain acceptance in the marketplace and if so by when.

Except for the limitations imposed upon us respective to the convertible secured debentures of YA Global and Highgate, there are no trends, material or known, which will restrict either short term or long-term liquidity.

Off-Balance Sheet Arrangements

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.

Going Concern

We are assuming that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have recorded a net loss of $1,201,818 for the nine months ended September 30, 2008, compared to a net loss of $2,115,561 for the nine months ended September 30, 2007. At September 30, 2008, the Company's accumulated deficit was $17,578,268, its working capital deficiency was $6,157,059 and approximately 77% of its assets consist of deferred royalties. Additionally, for the nine months ended September 30, 2008, we had negative cash flows from operating activities of $1,109,135. Since our inception, we have incurred losses, had an accumulated deficit, and have experienced negative cash flows from operations. The expansion and development of our business may require additional capital. These conditions raise substantial doubt about our ability to continue as a going concern.

We have issued three-year and two-year secured debentures in 2004 and 2005 that are convertible into shares of our common stock to YA Global and Highgate, respectively. Under the terms of the secured debentures, we are restricted in our ability to issue additional securities as long as any portion of the principal or interest on the secured debentures remains outstanding.

Critical Accounting Policies

In accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), we record certain assets at the lower of cost or fair market value. In determining the fair value of certain of our assets, we must make judgments, estimates and assumptions regarding circumstances or trends that could affect the value of theses assets, such as economic conditions. Those judgments, estimates and assumptions are based on information available to us at that time. Many of those conditions, trends and circumstances are outside our control and if changes were to occur in the events, trends or other circumstances on which our judgments or estimates were based, we may be required under U.S. GAAP to adjust those estimates that are affected by those changes. Changes in such estimates may require that we reduce the carrying value of the affected assets on our balance sheet (which are commonly referred to as “write downs” of the assets involved).

It is our practice to establish reserves or allowances to record adjustments or “write-downs” in the carrying value of assets, such as accounts receivable. Such write-downs are recorded as charges to income or increases in the expense in our Statement of Operations in the periods when such reserves or allowances are established or increased. As a result, our judgments, estimates and assumptions about future events can and will affect not only the amounts at which we record such assets on our balance sheet but also our results of operations.

In making our estimates and assumptions, we follow U.S. GAAP applicable to our business and those that we believe will enable us to make fair and consistent estimates of the fair value of assets and establish adequate reserves or allowances. Set forth below is a summary of the accounting policies that we believe are material to an understanding of our financial condition and results of operations.

Discount on Debt

Derivative Financial Instruments

We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks.

The derivatives (convertible debentures) issued on December 20, 2004 and January 18, 2005 (amended April 27, 2005) and on April 27, 2005 and May 6, 2005 have been accounted for in accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”) and the related interpretations. SFAS No. 133, as amended and the Financial Accounting Standards Board Emerging Issues Task Force Issue “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF No. 00-19”).

The Company has identified the YA Global and Highgate debentures have compound embedded derivatives. These compound embedded derivatives have been bifurcated from their respective host debt contracts and accounted for as derivative liabilities in accordance with EITF 00-19. When multiple derivatives exist within the Convertible Notes, they have been bundled together as a single hybrid compound instrument in accordance with SFAS No. 133 Derivatives Implementation Group Implementation Issue No. B-15, Embedded Derivatives: Separate Accounting for Multiple Derivative Features Embedded in a Single Hybrid Instrument”.

The compound embedded derivatives within the Convertible Notes have been recorded at fair value at the date of issuance; and are marked-to-market each reporting period with changes in fair value recorded to the Company’s Statement of Operations as “Net change in fair value of derivative liabilities”. The Company has utilized a third party valuation consultant to fair value the embedded derivatives using layered discounted probability-weighted cash flow approach. We have developed a financial model to value the compound embedded derivatives analyzing the conversion features, redemption options and penalty provisions. Additionally, our model has been developed to incorporate management’s assessment of the various potential outcomes relating to the specific features and provisions contained in the convertible debt instruments.

The six primary events that can occur which will affect the value of the compound embedded derivatives are (a) payments made in cash, (b) payments made with stock, (c) the holder converts the note(s), (d) the company redeems the note(s), (e) the company fails to register the common shares related to the convertible debt and (f) the company defaults on the note (s).

The primary factors driving the economic value of the embedded derivatives are the same as the Black-Scholes factors, except that they are incorporated intrinsically into the binomial calculations for this purpose. Those factors are stock price, stock volatility, trading volume, outstanding shares issued, beneficial shares owned by the holder, interest rate, whether or not a timely registration has been obtained, change in control, event of default, and the likelihood of obtaining alternative financing. We assigned probabilities to each of these potential scenarios over the initial term, and at each quarter, the remaining term of the underlying financial instrument. The financial model generates a quarterly cash flow over the remaining life of the underlying debentures and assigns a risk-weighted probability to the resultant cash flow. We then assigned a discounted weighted average cash flow over the potential scenarios which were compared to the discounted cash flow of the debentures without the subject embedded derivatives. The result is a value for the compound embedded derivatives at the point of issue and at subsequent quarters.

The fair value of the derivative liabilities are subject to the changes in the trading value of the Company’s common stock, as well as other factors. As a result, the Company’s financial statements may fluctuate from quarter-to-quarter based on factors, such as the price of the Company’s stock at the balance sheet date and the amount of shares converted by YA Global and Highgate. Consequently, our financial position and results of operations may vary from quarter-to-quarter based on conditions other than our operating revenues and expenses.

Software Development Costs

Statement of Financial Accounting Standards No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed” (“SFAS No. 86”) requires capitalization of software development costs incurred subsequent to establishment of technological feasibility and prior to the availability of the product for general release to customers. Systematic amortization of capitalized costs begins when a product is available for general release to customers and is computed on a product-by-product basis at a rate not less than straight-line basis over the product’s remaining estimated economic life. To date, all costs have been accounted for as research and development costs and no software development cost has been capitalized.

Management will evaluate the net realizable value of software costs capitalized by comparing estimated future gross revenues reduced by the estimated future costs of completing, disposing of and maintaining the software. These costs also include the costs of performing maintenance and customer support required by us.

Revenue Recognition

We recognize revenue from the sales of software licenses when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed and determinable and collection of the resulting receivable is reasonably assured. Delivery generally occurs when the product is delivered to a common carrier.

We assess collection based on a number of factors, including past transaction history with the customer and the creditworthiness of the customer. We do not request collateral from our customers. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon the receipt of cash.

For technology arrangements with multiple obligations (for example, undelivered software, maintenance and support), we allocate revenue to each component of the arrangement using the residual value method based on the fair value or the fixed agreement of the undelivered elements. Accordingly, we defer technology revenue in the amount equivalent to the fair value or the fixed agreement of the undelivered elements.

We recognize revenue for maintenance services ratably over the contract term. Our training and consulting services are billed at hourly rates and we generally recognize revenue as these services are performed. However, upon execution of a contract, we determine whether any services included within the arrangement require us to perform significant work either to alter the underlying software or to build additional complex interfaces so that the software performs as the customer requests. If these services are included as part of an arrangement, we recognize the fee using the percentage of completion method. We determine the percentage of completion based on our estimate of costs incurred to date compared with the total costs budgeted to complete the project.

Impairment of Long-lived Assets

Stock Based Transactions

We have concluded various transactions where we paid the consideration in shares of our common stock and/or warrants or options to purchase shares of our common stock. These transactions include:


-	Acquiring the services of various professionals who provided us with a range of corporate consultancy services, including developing business and financial models, financial advisory services, strategic planning, development of business plans, investor presentations and advice and assistance with investment funding;


-	Retaining the services of our Advisory Board to promote the business of the Company;


-	Settlement of our indebtedness; and


-	Providing incentives to attract, retain and motivate employees who are important to our success.

When our stock is used, the transactions are valued using the price of the shares on the date they are issued or if the value of the asset or service being acquired is available and is believed to fairly represent its market value, the transaction is valued using the value of the asset or service being provided.

When options or warrants to purchase our stock are used in transactions with third parties or our employees, the transaction is valued using the Black-Scholes valuation method. The Black-Scholes valuation method is widely used and accepted as providing the fair market value of an option or warrant to purchase stock at a fixed price for a specified period of time. Black-Scholes uses five (5) variables to establish market value of stock options or warrants:

- strike price (the price to be paid for a share of our stock);

- price of our stock on the day options or warrants are granted;

- number of days that the options or warrants can be exercised before they expire;

- trading volatility of our stock; and

- annual interest rate on the day the option or warrant is granted.

The determination of expected volatility requires management to make an estimate and the actual volatility may vary significantly from that estimate. Accordingly, the determination of the resulting expense is based on a management estimate.

Recently Issued Accounting Pronouncements

Of management’s responsibility for establishing and maintaining adequate internal control over its financial reporting;

Of management’s assessment of the effectiveness of its internal control over financial reporting as of year end; and

Of the framework used by management to evaluate the effectiveness of the Company’s internal control over financial reporting.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to certain market risks, including changes in interest rates and currency exchange rates. The Company does not undertake any specific actions to limit those exposures.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Disclosure controls and procedures are the controls and other procedures that we designed to ensure that we record, process, summarize and report in a timely manner the information we must disclose in reports that we file with or submit to the Securities and Exchange Commission under the Exchange Act. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

ITEM 4A(T). MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company in accordance with as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the (i) effectiveness and efficiency of operations, (ii) reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and (iii) compliance with applicable laws and regulations. Our internal controls framework is based on the criteria set forth in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management’s assessment of the effectiveness of the small business issuer’s internal control over financial reporting is as of the year ended December 31, 2007. We believe that internal control over financial reporting is effective. We have not identified any, current material weaknesses considering the nature and extent of our current operations and any risks or errors in financial reporting under current operations.

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

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.

There was no change in our internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2008, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is not currently a party to, nor is any of its property currently the subject of, any material legal proceeding. None of the Company’s directors, officers or affiliates is involved in a proceeding adverse to the Company’s business or has a material interest adverse to the Company’s business.

In January 2008, a money judgment in the amount of sixty nine thousand nine hundred fifty two dollars, for past due payables, in favor of Lewis PR, a California corporation, against the Company was entered into the Superior Court of California, County of San Diego. In February 2008, a settlement agreement was reached between the parties whereby Lewis PR will receive a payment of thirteen thousand dollars by September 2008 as full settlement of the debt. A payment of $6,500 was made in October 2008. The Company is pursuing a revised settlement agreement with the debtor.

In February 2008, summonses were filed in the Superior Court of the State of New Jersey against the Company and its CEO demanding payment on a promissory note in the amount of forty five thousand dollars. In October 2008, a money judgment in the amount of forty nine thousand two hundred sixty three dollars, for a past due note, in favor of the note holder, against the Company was entered into the Superior Court of New Jersey, County of Middlesex. The Company is pursuing a settlement agreement with the note holder.

In April 2008, a summons was filed in the Superior Court of the State of New Jersey against the Company demanding payment on a convertible promissory note in the amount of one hundred thousand dollars. The Company and the note holder have agreed upon a settlement whereby the debt shall be assigned to the SIG by the Company and the SIG shall repay the agreed upon settlement amount to the note holder, in installments, through February 2009. The SIG made payments of $10,000 in July 2008 and $5,000 in September 2008 to the note holder.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In July 2008, the Company recorded 1,646 shares of the Company’s common stock at $0.22 per share to the two remaining note holders relating to promissory notes executed in July 2006, as bonus extension shares. In connection with the shares, the Company recorded 165 shares of the Company’s common stock at $0.22 per share to the placement agent.

In July 2008, the Company recorded 20,000 shares of the Company’s common stock at $0.22 per share to the six note holders relating to convertible promissory notes executed in February 2007, as bonus extension shares. In connection with the shares, the Company recorded 4,000 shares of the Company’s common stock at $0.22 per share to the placement agent.

In July 2008, the Company recorded 5,000 shares of the Company’s common stock at $0.22 per share to a note holder relating to a convertible promissory note executed in April 2007, as bonus extension shares. In connection with the shares, the Company recorded 1,000 shares of the Company’s common stock at $0.22 per share to the placement agent.

In July 2008, the Company sold 1 unit, per the terms of a term sheet executed with the SIG in January 2008 and amended in May 2008, with each unit consisting of a 10% promissory note of $25,000, maturing three years from the execution date and with a 10% discount rate, and 82,000 non-dilutable (for one year) restricted shares of the Company’s common stock. The Company recorded 82,000 restricted shares of common stock, at $0.023 per share.

In August 2008, the Company recorded 1,646 shares of the Company’s common stock at $0.19 per share to the two remaining note holders relating to promissory notes executed in July 2006, as bonus extension shares. In connection with the shares, the Company recorded 165 shares of the Company’s common stock at $0.19 per share to the placement agent.

In August 2008, the Company recorded 20,000 shares of the Company’s common stock at $0.19 per share to the six note holders relating to convertible promissory notes executed in February 2007, as bonus extension shares. In connection with the shares, the Company recorded 4,000 shares of the Company’s common stock at $0.19 per share to the placement agent.

In August 2008, the Company recorded 5,000 shares of the Company’s common stock at $0.19 per share to a note holder relating to a convertible promissory note executed in April 2007, as bonus extension shares. In connection with the shares, the Company recorded 1,000 shares of the Company’s common stock at $0.19 per share to the placement agent.

In August 2008, the Company sold 6 units, per the terms of a term sheet executed with the SIG in January 2008 and amended in May 2008, with each unit consisting of a 10% promissory note of $25,000, maturing three years from the execution date and with a 10% discount rate, and 82,000 non-dilutable (for one year) restricted shares of the Company’s common stock. The Company recorded 164,000 restricted shares of common stock, at $0.011 per share, and 328,000 restricted shares of common stock, at $0.019 per share.

In August 2008, the Company repurchased, at no cost, employee stock options totaling 1,111,791 shares of common stock from twelve employees as a result of a voluntary tender by the employees. The options were issued in accordance with the Company’s 2004 Equity Incentive Plan. The exercise price of the cancelled options ranged from $0.15 per share to $10.00 per share.

In September 2008, the Company recorded 1,646 shares of the Company’s common stock at $0.18 per share to the two remaining note holders relating to promissory notes executed in July 2006, as bonus extension shares. In connection with the shares, the Company recorded 165 shares of the Company’s common stock at $0.18 per share to the placement agent.

In September 2008, the Company recorded 20,000 shares of the Company’s common stock at $0.18 per share to the six note holders relating to convertible promissory notes executed in February 2007, as bonus extension shares. In connection with the shares, the Company recorded 4,000 shares of the Company’s common stock at $0.18 per share to the placement agent.

In September 2008, the Company recorded 5,000 shares of the Company’s common stock at $0.18 per share to a note holder relating to a convertible promissory note executed in April 2007, as bonus extension shares. In connection with the shares, the Company recorded 1,000 shares of the Company’s common stock at $0.18 per share to the placement agent.

In September 2008, the Company sold 2 units, per the terms of a term sheet executed with the SIG in January 2008 and amended in May 2008, with each unit consisting of a 10% promissory note of $25,000, maturing three years from the execution date and with a 10% discount rate, and 82,000 non-dilutable (for one year) restricted shares of the Company’s common stock. The Company recorded 164,000 restricted shares of common stock, at $0.017 per share.

In September 2008, the Company recorded 750 shares of its common stock, valued at $0.13 per share for 250 shares and $0.20 per share for 500 shares , and issuable to a law firm as compensation for general counsel legal services rendered.

All of the above offerings and sales were deemed to be exempt under Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company’s annual meeting of shareholders was held on August 8, 2008. At the annual meeting, the Company's shareholders voted upon the following matters:

(1)

The election of five members to the Company's Board of Directors to hold office until the Company's next Annual Meeting of Stockholders in 2009 or until each Director’s successor is duly elected and qualified; and

(2)

The ratification of the appointment of Li & Company, PC, as the Company's independent certified public accountants; and

(3)

The enactment of a one for ten reverse stock split (1:10), to be effective as of the filing of an amendment to the Company's Articles of Incorporation with the New Jersey Secretary of State and upon the receipt of regulatory approval.

All share and per share data in the Form 10-Q, financial statements and related notes have been restated to give retroactive effect to the reverse stock split.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS


Exhibit Number	Description
3.1	Amended and Restated Certificate of Incorporation of StrikeForce Technologies, Inc.(1)
3.2	By-laws of StrikeForce Technologies, Inc. (1)
10.1	2004 Stock Option Plan. (1)
10.2	Securities Purchase Agreement dated December 20, 2004, by and among StrikeForce Technologies, Inc. and Cornell Capital Partners, LP. (1)
10.3	Secured Convertible Debenture with Cornell Capital Partners, LP. (1)
10.4	Investor Registration Rights Agreement dated December 20, 2004, by and between StrikeForce Technologies, Inc. and Cornell Capital Partners, LP in connection with the Securities Purchase Agreement.(2)
10.5	Escrow Agreement, dated December 20, 2004, by and between StrikeForce Technologies, Inc. and Cornell Capital Partners, LP in connection with the Securities Purchase Agreement. (2)
10.6	Security Agreement dated December 20, 2004, by and between StrikeForce Technologies, Inc. and Cornell Capital Partners, LP in connection with the Securities Purchase Agreement. (1)
10.7	Secured Convertible Debenture with Cornell Capital Partners, LP dated January 18, 2005. (1)
10.8	Royalty Agreement with NetLabs.com, Inc. and Amendments. (1)
10.9	Employment Agreement dated as of May 20, 2003, by and between StrikeForce Technologies, Inc. and Mark L. Kay. (1)
10.10	Amended and Restated Secured Convertible Debenture with Cornell Capital Partners, LP dated April 27, 2005. (1)
10.11	Amendment and Consent dated as of April 27, 2005, by and between StrikeForce Technologies, Inc. and Cornell Capital Partners, LP. (1)
10.12	Securities Purchase Agreement dated as of April 27, 2005 by and between StrikeForce Technologies, Inc. and Highgate House Funds, Ltd. (1)
10.13	Investor Registration Rights Agreement dated as of April 27, 2005 by and between StrikeForce Technologies, Inc. and Highgate House Funds, Ltd. (2)
10.14	Secured Convertible Debenture with Highgate House Funds, Ltd. dated April 27, 2005. (2)
10.15	Escrow Agreement dated as of April 27, 2005 by and between StrikeForce Technologies, Inc., Highgate House Funds, Ltd. and Gottbetter & Partners, LLP. (1)
10.16	Escrow Shares Escrow Agreement dated as of April 27, 2005 by and between StrikeForce Technologies, Inc., Highgate House Funds, Ltd. and Gottbetter & Partners, LLP. (1)
10.17	Security Agreement dated as of April 27, 2005 by and between StrikeForce Technologies, Inc. and Highgate House Funds, Ltd. (1)
10.18	Network Service Agreement with Panasonic Management Information Technology Service Company dated August 1, 2003 (and amendment). (1)
10.19	Client Non-Disclosure Agreement. (1)
10.20	Employee Non-Disclosure Agreement. (1)
10.21	Secured Convertible Debenture with Highgate House Funds, Ltd. dated May 6, 2005. (2)
10.22	Termination Agreement with Cornell Capital Partners, LP dated February 19, 2005. (1)
10.23	Securities Purchase Agreement with WestPark Capital, Inc. (4)
10.24	Form of Promissory Note with WestPark Capital, Inc. (4)
10.25	Investor Registration Rights Agreement with WestPark Capital, Inc. (4)
31.1	Certification by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, promulgated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3)
31.2	Certification by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, promulgated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3)
32.1	Certification by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, promulgated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3)
32.2	Certification by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, promulgated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3)

(1)

Filed as an exhibit to the Registrant’s Form SB-2 dated as of May 11, 2005 and incorporated herein by reference.

(2)

Filed as an exhibit to the Registrant’s Amendment No. 1 to Form SB-2 dated as of June 27, 2005 and incorporated herein by reference.

(3)

Filed herewith.

(4)

Filed as an exhibit to the Registrant’s Form 8-K dated August 1, 2006 and incorporated herein by reference.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

STRIKEFORCE TECHNOLOGIES, INC.





Dated: November 13, 2008	By: /s/ Mark L. Kay
	Mark L. Kay
	Chief Executive Officer




Dated: November 13, 2008	By: /s/ Mark Joseph Corrao
	Mark Joseph Corrao
	Chief Financial Officer and Principal Accounting Officer