Edgar Filing: PATRON SYSTEMS INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB

(Mark One)

|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2005

|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______ to ________

COMMISSION FILE NUMBER 0-25675

PATRON SYSTEMS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

DELAWARE 74-3055158
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

5775 FLATIRON PARKWAY, SUITE 230 80301
BOULDER, CO
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(303) 541-1005
(ISSUER'S TELEPHONE NUMBER)

SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:

COMMON STOCK, $0.01 PAR VALUE PER SHARE
(TITLE OF CLASS)

Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. |_|

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 |_|

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |_|

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.) Yes |_| No |X|

The issuer's revenues for the fiscal year ended December 31, 2005 were $641,740.

At March 21, 2006, the aggregate market value of the voting stock held by
non-affiliates of the issuer was $3,635,438.

At March 21, 2006, the issuer had 61,648,360 shares of Common Stock, $0.01 par
value, issued and outstanding.

Transitional Small Business Disclosure Format (Check One) Yes |_| No |X|

PATRON SYSTEMS, INC.
INDEX TO FORM 10-KSB

PART I PAGE
Item 1. Description of Business ..................................................... 3
Item 2. Description of Property ..................................................... 10
Item 3. Legal Proceedings ........................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders ......................... 12

PART II
Item 5. Market for Common Equity and Related Stockholder Matters .................... 13
Item 6. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................... 14
Item 7. Financial Statements ........................................................ 29
Report of Independent, Registered, Certified Public Accounting Firm ......... 30

AUDITED FINANCIAL STATEMENTS
Consolidated Balance Sheet as of December 31, 2005........................... 31
Consolidated Statements of Operations for the years ended December 31, 2005
and 2004 .................................................................... 32
Consolidated Statements of Stockholders' Deficiency for the years ended
December 31, 2005 and 2004 .................................................. 33
Consolidated Statements of Cash Flows for the years ended December 31, 2005
and 2004 .................................................................... 34
Notes to Consolidated Financial Statements .................................. 35

Item 8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure .................................................................. 69
Item 8A. Controls and Procedures ..................................................... 69
Item 8B. Other Information ........................................................... 70

PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With
Section 16(a) of the Exchange Act ........................................... 70
Item 10. Executive Compensation ...................................................... 73
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ......................................................... 75
Item 12. Certain Relationships and Related Transactions .............................. 77
Item 13. Exhibits .................................................................... 77
Item 14. Principal Accountant Fees and Services ...................................... 78

PART I

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-KSB contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). We use words such as "believes", "intends",
"expects", "anticipates", "plans", "may", "will" and similar expressions to
identify forward-looking statements. Discussions containing forward-looking
statements may be found in the material set forth under "Business,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in other sections of the report. All forward-looking statements,
including, but not limited to, projections or estimates concerning our business,
including demand for our products and services, mix of revenue streams, ability
to control and/or reduce operating expenses, anticipated operating results, cost
savings, product development efforts, general outlook of our business and
industry, competitive position, and adequate liquidity to fund our operations
and meet our other cash requirements, are inherently uncertain as they are based
on our expectations and assumptions concerning future events. These
forward-looking statements are subject to numerous known and unknown risks and
uncertainties. You should not place undue reliance on these forward-looking
statements. Our actual results could differ materially from those anticipated in
the forward-looking statements for many reasons, including our ability to
attract customers for our products, our ability to effectively integrate our
acquired businesses, and all other risks described below in the section entitled
"Risk Factors" appearing in "Management's Discussion and Analysis of Financial
Condition and Risk of Operations" and elsewhere in this report. All
forward-looking statements in this document are made as of the date hereof,
based on information available to us as of the date hereof, and we assume no
obligation to update any forward-looking statement.

ITEM 1. DESCRIPTION OF BUSINESS

CORPORATE BACKGROUND

Patron Systems, Inc., a Delaware corporation ("Systems") was formed in April
2002 to provide comprehensive, end-to-end information security solutions to
global corporations and government institutions. Systems' business plan was to
acquire and operate high profit potential companies with technologies in
information and homeland security applications for businesses and government
institutions.

On October 11, 2002, Combined Professional Services, Inc. ("CPS"), Systems and
the stockholders of Systems consummated a share exchange ("Share Exchange")
pursuant to an Amended and Restated Share Exchange Agreement, whereby CPS issued
to each Systems stockholder, on a one-for-one basis and in exchange for all of
the outstanding shares of Systems' capital stock, an aggregate of 25,400,000
shares of its common stock. Upon the closing of the Share Exchange, the Systems
stockholders held approximately 85% of the outstanding capital stock of CPS, and
Systems became a wholly owned subsidiary of CPS. The former stockholders of
Systems became the majority owners of CPS following the completion of the Shares
Exchange. Accordingly, Systems was deemed to be the acquirer of CPS for
accounting purposes and the transaction was accounted for as a reverse merger
and recapitalization of Systems.

On November 22, 2002, CPS announced that it changed its name to Patron Holdings,
Inc. ("Holdings"), effective as of November 21, 2002, and that it would trade on
the OTC Bulletin Board under the symbol "PAHG."

On March 27, 2003, Holdings merged with and into Systems for the purpose of
changing its state of incorporation from Nevada to Delaware ("Redomestication
Merger"). Systems was the surviving corporation of the Redomestication Merger,
and its Second Amended and Restated Certificate of Incorporation, Amended and
Restated Bylaws and Board of Directors became the governing documents and
governing body, respectively, of the surviving corporation. The surviving
corporation is referred to herein as "we," "us," the "Company" or "Patron." In
connection with the Redomestication Merger, Patron filed with the SEC a
successor entity report on Form 8K-12g-3, whereby Patron succeeded to the
reporting obligations of Holdings under the Exchange Act.

Subsequent to the Redomestication Merger and prior to the acquisitions we
consummated on February 25, 2005 and March 30, 2005 (described below), we had
minimal business operations. As of September 25, 2003, all of our employees
except for our Chief Executive Officer had resigned. Upon the resignation of our
Chief Executive Officer on January 21, 2004, we had no employees and only one
Director, the non-executive Chairman of the Board.

In April of 2004, we failed to meet the reporting requirements under the
Exchange Act. As a result, we were de-listed from NASDAQ's Over-the-Counter
Bulletin Board quotation system. During 2005, we completed the filing of a Form
10-KSB covering the period from April 30, 2002 (inception) to December 31, 2004,
completed the filing of Forms 10-QSB for the periods ending March 31, 2005, June
30, 2005 and September 30, 2005 and filed a Form 8-K covering each of the
acquisitions completed on February 25, 2005 and March 30, 2005. We are current
with all SEC filings as of December 31, 2005. Since November 14, 2005 our
listing has been reinstated on NASDAQ's Over-the-Counter Bulletin Board
quotation system.

On February 25, 2005, we consummated the acquisitions of Complete Security
Solutions, Inc. and LucidLine, Inc. pursuant to the filings of Agreements and
Plans of Merger with the Secretaries of State of the States of Delaware and
Illinois, respectively. On February 28, 2005, we consummated a private placement
with accredited investors in the amount of $3.5 million. On March 30, 2005, we
consummated the acquisition of Entelagent Software Corp. pursuant to the filing
of an Agreement and Plan of Merger with the Secretary of State of the State of
California. We discuss these transactions in further detail in this report.

Our acquisitions have allowed us to offer a set of software applications
designed to solve a set of enterprise-level customer problems associated with
electronic message management, whether in the form of e-mail, eforms or instant
messaging. Our software and services solutions are designed to help our
customers create, manage and apply complex rule sets that support business
policies, enhance work flow processes, enforce regulatory compliance, and reduce
the time, cost and overhead of message management. Our suite of products
addresses e-mail policy management, e-mail retention policies, archiving and
electronic discovery ("eDiscovery"), proactive e-mail supervision, and the
protection of messages and their attachments in motion and at rest. Our eforms
solution enables customers to quickly and easily create forms, capture, share,
and manage data in an industry standard format.

PATRON'S BUSINESS PLAN

PATRON'S STRATEGY

Patron's strategic mission is to solve a set of enterprise-level customer
problems associated with electronic message management, whether in the form of
e-mail, eforms or instant messaging. Our software and services solutions are
designed to help our customers create, manage and apply complex rule sets that
support business policies, enhance work flow processes, enforce regulatory
compliance, and reduce the time, cost and overhead of message management. Our
suite of products addresses mailbox management, e-mail policy management, e-mail
retention policies, archiving and eDiscovery, proactive e-mail supervision, and
the protection of messages and their attachments in motion and at rest. Our
eforms solution enables customers to quickly and easily create forms, capture,
share, and manage data in an industry standard format.

We serve customers in highly regulated industries such as financial services,
legal, public safety and law enforcement, healthcare and pharmaceuticals. The
market demand for our offerings grows with each new breach of data security,
each new regulation enacted to protect information, and each civil or criminal
legal proceeding whose outcome hinges on the production of electronic
communications. Policy management of information security and regulatory
compliance has been called "Y2K without an end" and Patron Systems is committed
to serving this market for the duration.

We also offer a range of services to corporate and government entities utilizing
fiber optics and data replication technologies to provide secure robust off-site
data backup, recovery, restoration, and retrieval services coupled with
high-speed data communication turnkey solutions. Our secure and scalable
high-speed data communication solutions facilitate seamless instantaneous backup
of mission critical business data and enable immediate access to data and real
time restoration of critical business functionality in the event of a crisis or
disaster.

PATRON'S MARKETPLACE

E-mail is becoming the standard form of internal company and
business-to-business communications. AIIM International and Kahn Consulting
released a 2003 report revealing the ubiquitous nature of e-mail usage for
critical business communications. E-mail is being used to transmit and
collaborate on the most sensitive corporate and customer identifying
information. In 2003, ASIS International released a report discussing the impact
of proprietary

information loss or theft from within or outside the network. The participating
Fortune 1000 companies recorded the cost of intellectual property losses between
$53 and $59 billion in 2001. Although it is believed that the greatest perceived
threat is from outside the enterprise, as the Federal Bureau of Investigation
has noted, the simple fact is that approximately 70% of IT damage and theft
comes from inside an organization. Forty percent of reported incidents of known
or suspected losses involved the most business critical and regulated
information: customer data, strategic plans, financial data, and R & D.

Legislation such as the Sarbanes-Oxley Act, the Health Insurance Portability and
Accountability Act (HIPAA), Gramm-Leach-Bliley, the USA PATRIOT Act, the
California Security Breach Law, and the Securities and Exchange Commission rule
17a-4 is creating a regulatory imperative to force corporations and government
enterprises to adopt critical compliance measures in order to not run afoul of
the new regulatory requirements for information integrity and security. Current
legislation poses serious challenges to information security strategy and
experience tells us that future legislative actions will not reduce the
regulatory burden on corporate information security strategy, but rather will be
increasing that regulatory burden.

A March 2005 IDC research report noted that the global market for compliance
information management will grow at 22% a year through 2009.

The review of e-mail for compliance with corporate policies and the archival of
messages necessary to comply with the various regulations noted above is a
rapidly growing marketplace. An April 2005 Gartner study of the e-mail active
archiving marketplace noted that the market for e-mail archiving and message
management solutions is growing at 58% a year through 2009 with a market size of
$883 million in 2009.

Critical to the successful implementation of an e-mail archival system is the
ability to utilize the system's query and reporting tools to enable eDiscovery.
Corporations are utilizing archival and eDiscovery software applications to
reduce their litigation support costs. Law firms and litigation consultants are
utililzing archival and eDiscovery software to participate in the rapidly
growing market of electronic discovery of documents, e-mail, etc. in support of
lawsuits of all types. A study by EDDix LLC has indicated that the market for
eDiscovery is growing at 35% a year and is currently a $2 billion marketplace.

OUR BUSINESS MODEL

Our business strategy is to develop products and technologies that will enable
us to close gaps in the management of an organization's messaging environment.
We believe that the products we intend to develop, when used in conjunction with
products that already exist in the marketplace, will enable us to enhance the
design and operating effectiveness of existing messaging systems and enable
compliance with governance guidelines and standards, administrative policies and
codes of conduct and provide expedited support in litigation situations. We
believe that our value proposition is in our ability to design a comprehensive
messaging protection, supervision, archival and , discovery solution that
integrates our products with existing products.

As described above, we acquired in early 2005 certain businesses that have
developed software products and also provide various business and professional
services specifically designed and adapted to meet these goals. Such products
and services consist of unique electronic messaging surveillance, electronic
forms delivery and management and data backup, retrieval and restoration
technologies as well as the associated assessment, implementation, training and
operation tools, methodologies and materials. These products and services are
used in a variety of financial, healthcare, commercial and government entities.
A brief description of these acquired businesses and their areas of
specialization are as follows:

Entelagent Software Corp.: Entelagent Software Corp. ("Entelagent"),
through the PolicyBridge(TM) message management product suite,
provides flexible and scalable real-time content-aware e-mail
monitoring and post-event review of e-mail messages and their
attachments as well as infrastructure for knowledge management
of archived e-mail messages and attachments in all media.
Entelagent's e-mail content monitoring technology addresses
the need for comprehensive internal security measures to
safeguard company intellectual capital. Entelagent's content
management solutions work in compliance with regulatory and
legislative drivers including SEC and HIPAA mandates.

LucidLine, Inc.: LucidLine, Inc. ("LucidLine") is a provider of bundled
and branded high speed Internet access and synchronized remote
data back-up, retrieval, and restoration services.

Complete Security Solutions, Inc.: Prior to being acquired by us,
Complete Security Solutions, Inc. ("CSSI") consummated a
merger with IDK Enterprises, Inc. d.b.a. NETdelivery
("IDK/NETdelivery") pursuant to which CSSI acquired all of the
outstanding common stock of IDK/NETdelivery. We believe
IDK/NETdelivery was one of the first United States based
companies to create software that supported real-time secure
collection, delivery and sharing of field-based report
information for public safety agencies. Based on the latest
e-forms (electronic forms) technology, we believe
IDK/NETdelivery's FormStream(TM)messaging solutions give law
enforcement and other justice agencies secure, real-time
access to field reporting data for use inside a department or
in a multi-jurisdictional information sharing system. We
believe IDK/NETdelivery addresses the urgency of Homeland
Security initiatives by enforcing data transfer standards such
as Global Justice XML. We believe that this technology
provides a platform to facilitate real time data collection
and information sharing between disparate agencies in a timely
and accurate fashion.

With these products and services, and our expertise in information security, we
expect to generate revenue in the following two areas:

o PolicyBridge and FormStream software product licenses
(described below) that will be licensed on a perpetual right
to use or a finite term basis. Pricing will be based on the
number of users.

o Databackup and storage services provided by us, which
typically will consist of (i) an initial installation,
training and setup/delivery charge, (ii) a monthly fee for a
defined level of storage/services and (iii) potential
additional fees based on additional services and storage above
base monthly charge levels.

POLICYBRIDGE

PolicyBridge is an enterprise class "e-mail policy manager" which empowers
enterprises to:

o Ensure compliance with external government regulations

o Enforce internal administrative policies

o Enable corporate governance

o Expedite litigation support

o Eliminate reputation damage caused by the loss of nonpublic
customer or patient information

o Guard corporate trade secrets

The core of PolicyBridge is our "Policy Library" with its collection of
customizable policy templates to manage all aspects of e-mail archiving,
discovery, supervision, and protection. Currently in release 6.0, PolicyBridge
is packed with customer-driven features which have been incorporated as a result
of installations in a variety of industries.

PolicyBridge's basic capability provides message archive and discovery for
regulatory compliance and litigation assistance. Its powerful and feature rich
integrated archive query process drastically reduces the time and cost of
message retrieval for audit or legal discovery.

At a higher level PolicyBridge empowers managers to choose from a library of
e-mail policies that address a broad range of executive level concerns ranging
from protection of customer or patient private information and corporate
intellectual property, to employee conduct, to improper use of corporate
computer and network assets. PolicyBridge not only protects from risk of loss
and litigation but enables new, secure communication channels with customers and
partners.

Flexibility and speed of policy application are hallmarks of PolicyBridge. Our
policy library comes complete with purpose built policies which are constructed
using various attributes such as:

o Word, phrase, or pattern matching within the subject, body or
attachment

o Sender-receiver combinations such as user names, user group,
and domains

o Attachment type or size

PolicyBridge provides a range of "policy actions" that can be applied to e-mail
and attachments, including:

o BLOCK from leaving the enterprise, i.e. protection from loss
of intellectual property, company confidential information,
and trade secrets

o RETURN to the sender with pre-scripted message, i.e. a warning
or explanatory message allowing for the on-going security and
compliance training which is required by each of the
regulations that affect corporations

o QUARANTINE for administrative review

o ROUTE to administrator, supervisor or appropriate subject
matter expert; and

o SELECTIVELY WRAP in an electronic envelope that protects the
contents with encryption and rights management rules that
persist even after the recipient has accessed the e-mail.
Wrapping is perfect to protect intellectual property or
regulated content embedded in documents such as credit
applications, customer lists, registration documents, and
spreadsheets whether they are stored locally during creation,
in transit, or archived on a network server.

PolicyBridge provides a message archive and discovery agent for secure e-mail
storage and retrieval. It supports a wide range of storage device types and is
hierarchical storage manager independent. PolicyBridge provides a powerful and
feature rich integrated archive query process that drastically reduces the time
and cost of e-mail retrieval for audit or legal discovery.

FORMSTREAM

FormStream provides a complete solution for the collection, distribution,
management, and analysis of form-based public safety, government and corporate
information. Based on the latest eforms technology, XML and Global Justice XML,
a powerful routing capability, and an open-standards approach, our field
reporting and analysis tools allow an organization to easily create forms that
replicate their present ones, routes these forms to the appropriate people and
allow secure analysis of that information. FormStream gives law enforcement,
EMS, fire and other organizations real-time access to field reporting data for
use inside a department or in a multi-jurisdictional information sharing system.

FormStream provides a complete electronic forms solution that enables easy
filing of incident reports from vehicles using computers with wireless network
connectivity or in situations where network connections are not available. It
also offers a comprehensive secure e-mail solution to eliminate sensitive case
information leakage. It provides a secure "electronic case file" solution and a
high-availability and redundant solution for the storage and back up of public
safety data.

FormStream provides secure electronic form creation, movement, and management.
FormStream makes fillable electronic forms creation easy. Once created, forms
can be published to internal or external users. If forms are pre-populated with
FormStream registration information or external databases, organizations can
automatically capture form data and extract it into existing databases and
legacy systems. FormStream provides powerful functionality to further streamline
processes, such as attaching payments and routing forms.

FormStream integrates with a wide range of computer-aided dispatch and records
management systems that have been utilized in a number of large city and
metropolitan area law enforcement applications.

COMPETITION

We believe the products offered by our recently acquired subsidiaries will
enable us to provide a unique suite of software applications that will be
attractive to corporations and governmental enterprises increasingly confronted
with the need to establish functional business practices in compliance with
regulatory standards.

The number of competitors for our FormStream and PolicyBridge products has risen
in the past few years and we expect the intensity of competition in the market
segments we intend to serve to continue to increase in the future as existing
competitors enhance and expand their product offerings and as new participants
enter these market segments. Many of our potential competitors have longer
operating histories, greater name recognition, large customer bases and
significantly greater financial, technical, sales, marketing and other
resources. In addition, some of our potential competitors currently combine
their products with other companies' e-mail messaging, networking and security
products. These potential competitors also often combine their sales and
marketing efforts. Such activities may result in reduced prices, lower gross and
operating margins and longer sales cycles for the products we and our recently
acquired subsidiaries currently offer and intend to offer. If any of our larger
potential competitors were to commit greater technical, sales, marketing and
other resources to the markets we intend to serve, or reduce prices for their
products over a sustained period of time, our ability to successfully sell the
products we intend to offer or increase revenue could be adversely affected.

PATRON'S SUBSIDIARIES

ENTELAGENT - We believe e-mail is the primary corporate communication vehicle
through which the vast majority of sensitive data is shared. Entelagent provides
flexible and scalable real-time content-aware monitoring and pre- and post-event
review of e-mail messages and their attachments as well as infrastructure for
knowledge management of archived e-mail messages and attachments in all media.

Entelagent's PolicyBridge e-mail content monitoring technology addresses the
need for comprehensive internal security measures to safeguard company
intellectual capital. Entelagent's PolicyBridge e-mail management solution works
in full compliance with regulatory and legislative drivers including SEC and
HIPAA mandates. Entelagent's enterprise-wide e-mail management solution empowers
organizations to reduce or eliminate costly risks, efficiently manage incidents,
and increase employee productivity. We believe the solution also provides Human
Resource departments the tools needed to reduce and eliminate potentially
significant and costly risks related to e-mail abuse through racist, sexist or
otherwise inappropriate e-mail.

Entelagent's clientele consist of banking and financial service organizations
including Goldman Sachs, JPMorgan Chase / BrownCo and Edward Jones, among
others.

We completed the acquisition of Entelagent on March 30, 2005.

LUCIDLINE - LucidLine is a provider of bundled and branded high speed Internet
access and synchronized remote data back-up, retrieval, and restoration
services.

LucidLine leverages fiber optics and data replication technologies to provide
secure robust off-site data backup, recovery, restoration, and retrieval
services coupled with high-speed data communication turnkey solutions.
LucidLine's secure and scalable high speed data communication solutions
facilitate seamless instantaneous backup of mission critical business data and
enable immediate access to data and real time restoration of critical business
functionality in the event of a crisis or disaster.

LucidLine has established a number of contractual relationships with financial
services, healthcare and commercial entities.

We completed the acquisition of LucidLine, Inc. on February 25, 2005.

CSSI - Prior to being acquired by us, Complete Security Solutions, Inc. ("CSSI")
consummated a merger with IDK/NETdelivery, a provider of information technology
products and services that help law enforcement agencies and the justice
community operate more efficiently. We believe IDK/NETdelivery was one of the
first companies in the United States to create software that supported real-time
secure collection, delivery and sharing of field-based report information for
public safety agencies.

Based on the latest electronic forms technology, IDK/NETdelivery's proven
FormStream solutions give law enforcement and other justice agencies real-time
access to field reporting data for use inside a department or in a
multi-jurisdictional information sharing system.

IDK/NETdelivery addresses the urgency of Homeland Security initiatives by
enforcing data transfer standards such as Justice XML, to facilitate real time
data collection and information sharing between disparate agencies in a timely
and accurate fashion. In an effort to promote the U.S. Department of Justice's
efforts to support and drive information sharing between criminal justice and
public safety entities, IDK/NETdelivery is working with the Syracuse Police
department and the National Law Enforcement and Corrections Technology Center
(NLECTC) to develop one of the first functional process automation solutions
based on the Global Justice XML standard.

Current clients include the City of Syracuse, NY; the Colorado Bureau of
Investigation; Douglas County Sheriffs Dept. (Colorado); the Colorado AMBER
Alert System; and the University of Colorado Police Dept., among others.

We completed the acquisition of CSSI on February 25, 2005.

PATRON'S TARGET ALLIANCE PARTNERSHIPS

In conjunction with the Company's efforts to grow the business and access new
markets, management will pursue alliances with companies possessing
complimentary technologies and strong relationships in target vertical markets.
In all cases, one of the key objectives of these relationships is to reduce
customer acquisition costs. Examples of potential relationships include the
following:

SYSTEM INTEGRATION COMPANIES: Patron's technologies (both FormStream and
PolicyBridge) can be integrated into broader solutions for public safety,
commercial and compliance markets. Organizations that integrate multiple
technologies may possess unique market access and domain knowledge about these
markets, increasing Patron's opportunities where such alliances are formed.

TECHNOLOGY HARDWARE COMPANIES: Patron's Active Message Management solutions
drive the need and use of certain hardware technologies, particularly data
storage solutions. It is management's belief that joint-marketing alliances into
vertical segments requiring e-mail management solutions (and large demands for
storage capacity) could open up new opportunities for Patron.

INDEPENDENT SOFTWARE VENDORS: There are a number of software companies providing
solutions that compliment both the FormStream and PolicyBridge message
management solutions. Provided the technologies are more complimentary than
competing, there is an opportunity to partner with third party software
companies to provide a more complete solution to potential customers. Such
alliances with other software vendors could take the form of an OEM
relationship, a joint-marketing initiative, or a hosted delivery model.

CONSULTING COMPANIES: There are many consulting organizations specializing in
practice areas important to Patron's solutions. These include compliance,
eDiscovery, litigation, human resources, regulation of broker/dealers, and
public safety/first-responder practice areas. Organizations delivering
consulting services in these areas market themselves as subject matter experts,
recommending both services and technology solutions that reduce the risk and
improve the productivity of their clients. Management believes that PolicyBridge
and FormStream can be presented as differentiated solutions where partners in
the consulting business deem appropriate. The result could be an effective
selling model, where Patron solutions are introduced by relevant, subject matter
experts.

SALES, MARKETING AND TECHNICAL SUPPORT

We market and sell our products and services through our direct sales force and
other resellers. Our sales force and our sales engineers and technical support
personnel provide ongoing interaction with current and future customers which
allows us to provide a high level of service and support and to strengthen
customer relationships. We utilize a variety of marketing strategies and
programs to support the Company's product and service offerings. These include
the enhancement of the Company's web-site, the development of whitepaper reports
on client success stories and critical issues related to the market focus for
our products, web-based seminars and webcasts, participation in major trade
shows and conferences, e-mail-based marketing campaigns, telemarketing programs
and industry and technology analyst briefings.

RESEARCH AND DEVELOPMENT

The Company's research and development efforts are focused on the maintenance,
enhancement and extension of our current FormStream and PolicyBridge products.
Due to our limited capital resources, we have not had the resources to address
more extensive research and development initiatives. We will continue to review
marketplace opportunities to acquire carefully selected companies that have
developed (or are developing) potentially high profit products in the area of
messaging management.

CUSTOMERS

During the year ended December 31, 2005, the Company's top five customers
accounted for 14%, 8%, 8%, 7% and 6% of consolidated net revenues.

EMPLOYEES

As of December 31, 2005, we employed a total of 28 full-time, principally
salaried, employees. Our employees are not covered by a collective bargaining
agreement. We believe we have a satisfactory relationship with our employees.

GEOGRAPHIC AREAS

We operate our business and sell our products and services to businesses in the
United States. Some of our U.S. based clients operate our software in locations
outside of the United States.

ITEM 2. DESCRIPTION OF PROPERTIES

As of December 31, 2005, we leased 4,876 square feet of office space in Boulder,
Colorado, 1,269 square feet of office space in Dallas, Texas and office space in
Palos Heights, Illinois. We believe that the facilities utilized by us are well
maintained, in good operating condition and adequate to meet our current and
foreseeable needs. We have no, and do not intend to make any, investments in
real estate, real estate mortgages or persons primarily engaged in real estate
activities.

ITEM 3. LEGAL PROCEEDINGS

SEC INVESTIGATION

Pursuant to Section 20(a) of the Securities Act and Section 21(a) of the
Securities Exchange Act, the staff of the SEC (the "Staff"), issued an order (IN
THE MATTER OF PATRON SYSTEMS, INC. - ORDER DIRECTING A PRIVATE INVESTIGATION AND
DESIGNATING OFFICERS TO TAKE TESTIMONY (C-03739-A, February 12, 2004)) (the
"Order") that a private investigation (the "SEC Investigation") be made to
determine whether certain actions of, among others, the Company, certain of its
officers and directors and others violated Section 5(a) and 5(c) of the
Securities Act and/or Section 10 and Rule 10b-5 promulgated under the Exchange
Act. Generally, the Order provides, among other things, that the Staff is
investigating (i) the legality of two (2) separate Registration Statements filed
by the Company on Form S-8, filed on December 20, 2002 and on April 2, 2003, as
amended on April 9, 2003 (collectively, the "Registration Statements"), covering
the resale of, in the aggregate, 4,375,000 shares of common stock issued to
various consultants of the Company, and (ii) whether in connection with the
purchase or sale of shares of common stock, certain officers and directors of
the Company and others (a) sold common stock in violation of Section 5 of the
Securities Act and/or, (b) made misrepresentations and/or omissions of material
facts and/or employed fraudulent devices in connection with such purchases
and/or sales relating to certain of the Company's press releases regarding,
among other items, proposed mergers and acquisitions that were never
consummated. If the SEC brings an action against the Company, it could result
in, among other items, a civil injunctive order or an administrative
cease-and-desist order being entered against the Company, in addition to the
imposition of a significant civil penalty. Moreover, the SEC Investigation
and/or a subsequent SEC action could affect adversely the Company's ability to
have its common stock become listed on a stock exchange and/or quoted on the
NASD Bulletin Board or NASDAQ, the Company being able to sell its securities
and/or have its securities registered with the SEC and/or in various states
and/or the Company's ability to implement its business plan. To date, the
Company's legal counsel representing the Company in such matters has indicated
that the SEC Investigation is ongoing and the Staff has not indicated whether it
will or will not recommend that the SEC bring an enforcement action against the
Company, its officers, directors and/or others.

EXISTING LITIGATION AGAINST THE COMPANY

dismissal order a finding that the settlement is reasonable, and a prohibition
against any claims by the Company or Mr. Yaw against Mr. Allin for contribution
or indemnification with respect to Sherleigh's claims. Mr. Allin received an
order from the court barring claims by the Company or Mr. Yaw against Mr. Allin
for contribution with respect to Sherleigh's claims. Currently, no trial or
continuing discovery schedule has been set by the Court with respect to the
Sherleigh's claims against Mr. Yaw and the Company. Settlement of the Sherleigh
claims is pending as part of the Creditor and Claimant Liabilities Restructuring
(Note 23).

On July 19, 2004, Mr. Patrick Allin ("ALLIN") made demand for payment under
certain demand notes ("ALLIN NOTES") issued on July 14, 2002 in the principal
amount of $75,000, October 1, 2002 in the principal amount of $50,000 and
October 11, 2002 in the principal amount of $21,000. The aggregate outstanding
amount on the Allin Notes as of that date, including principal and interest,
amounted to $175,163. Pursuant to the terms of the Allin Notes, if the Allin
Notes are not repaid within 24 hours of demand for payment, the Company will be
in default under the Allin Notes. On March 1, 2005, Mr. Allin filed a complaint
for payment of all principal and interest due under the Allin Notes

On June 6, 2005, the Company entered into a settlement of claims for sums due
under the Allin Notes and certain employment and indemnification related claims
brought by Allin against the Company. Pursuant to the Settlement Agreement and
Mutual Release dated June 2, 2005, among the Company, Allin and The Allin
Dynastic Trust, the Company agreed to (A) pay to Allin, in settlement of Allin's
claims, an aggregate payment of One Million One Hundred Fifty Thousand Dollars
($1,150,000), and (B) purchase from Mr. Allin and The Allin Dynastic Trust an
aggregate of four million (4,000,000) shares of the Company's Common Stock as
follows: (i) two million (2,000,000) shares (the "INITIAL SHARES") through the
issuance of promissory notes in the aggregate principal amount of One Million
Six Hundred Thousand Dollars ($1,600,000) and (ii) two million (2,000,000)
shares (the "REMAINDER SHARES") through a cash payment from the proceeds of a
follow-on-financing by the Company, at a price per share equal to the lesser of
(a) $.50 per share or (b) 90% of the issue price or conversion price, as the
case may be, of the security issued in a follow-on-financing, provided however
that in the event that 90% of the issue price or conversion price, as the case
may be, of the security issued in the follow-on-financing is less than $.50 per
share, Allin and/or The Allin Dynastic Trust may, at their option, refuse to
sell any or all of the Remainder Shares to the Company. The Settlement Agreement
and Mutual Release featured a provision to terminate on August 15, 2005, which
was extended to August 21, 2005, if the Company did not consummate a
follow-on-financing by such date. The Company did not consummate a
follow-on-financing by August 21, 2005, and the Settlement Agreement and Mutual
Release terminated by its terms. On January 1, 2006, each of Mr. Allin and the
Allin Dynastic Trust entered into a Stock Subscription Agreement and Mutual
Release with the Company which settled these claims as part of the Creditor and
Claimant Liabilities Restructuring (Note 23).

In December of 2004, Marie Graul, the Company's former Chief Financial Officer,
informed the Company of her intention to assert a claim against the Company for
sums allegedly owed under her employment agreement with the Company. On August
31, 2005, the Company and Ms. Graul entered into a Settlement Agreement and
Mutual Release whereby Ms. Graul agreed to release all claims against the
Company arising from any act or omission occurring on or prior to that date in
consideration of (i) the payment by the Company to Ms. Graul of an aggregate of
$176,458 no later than September 30, 2005, $1,458 of which was payable on
execution of the Settlement Agreement and Mutual Release, and (ii) the Company's
affirmation of the validity of options previously issued to Ms. Graul. The
Company also agreed to confess to a judgment against the Company in a court of
Ms. Graul's choosing in the event of the Company's breach of the Settlement
Agreement and Mutual Release. The Company did not make the payments required by
the Settlement Agreement and Mutual Release. Consequently, Ms. Graul obtained a
judgment against the Company for $176,853 in cash. Subsequent to December 31,
2005, the Company and Ms. Graul renegotiated the settlement agreement and mutual
release as described in Note 23.

In April of 2005, Richard L. Linting, a former President of the Company's
Professional Services Group, filed a complaint against the Company and Robert E.
Yaw, II, the Company's non-executive Chairman, in the Circuit Court of Cook
County, Illinois alleging breach of his purported employment contract and
seeking sums allegedly owed under the employment contract in the amount of
$1,321,809, plus court costs and fees. On August 22, 2005, the Company, Mr.
Linting and Mr. Yaw entered into a Settlement Agreement and Release whereby Mr.
Linting agreed to release all claims against the Company and Mr. Yaw existing as
of that date in consideration for (i) the payment by the Company to Mr. Linting
of $100,000 in cash, (ii) the issuance by the Company of an aggregate of 422,827
shares ("LINTING SHARES") of the Company's Common Stock (equivalent to $192,809
divided by $0.456) to be transferred to Mr. Linting in such numbers and at such
times as directed by Mr. Linting subsequent to the registration of the Linting
Shares, (iii) the Company's agreement to register the Linting Shares through the
filing of a registration statement on or before September 30, 2005, and (iv) the
Company's affirmation of the validity of options previously issued to Mr.
Linting and agreement to permit exercises of those options for 100,000 shares in

each calendar month over a period of 3 years. The Company and Mr. Linting also
agreed to the filing of a stipulation to dismiss Mr. Linting's suit with
prejudice and without costs with the court retaining jurisdiction to reinstate
the case and enforce the terms of the Settlement Agreement and Release in the
event the Company defaulted on its obligations under the Settlement Agreement
and Release, and to enter judgment, by motion, against the Company for the
balance due or appropriate relief. The Company did not make the $100,000 payment
required under the Settlement Agreement and Release and did not file a
registration statement to register the Linting Shares on or before September 30,
2005. Consequently, Mr. Linting obtained a judgment against the Company for
$100,452 in cash and 422,827 shares of the Company's Common Stock to be issued
to Mr. Linting at his determination upon registration thereof. On February 14,
2006, Mr. Linting entered into a Stock Subscription Agreement and Mutual Release
with the Company which settled these claims as part of the Creditor and Claimant
Liabilities Restructuring (Note 23).

On October 17, 2005, Paul Harary, Paris McKinzie, Maria Caporicci, LLB Ltd. and
DGC, Inc. filed a complaint against the Company in the Circuit Court of the
Fifteenth Judicial Circuit in and for Palm Beach County, Florida, alleging
breach of certain accommodation agreements between the plaintiffs and the
Company and seeking damages in an amount not less than $14,000,000, plus
interest and reasonable attorneys' fees and costs. On November 16, 2005, a
default was entered against the Company in this matter. On November 23, 2005,
plaintiffs filed a motion for default final judgment as to liability and motion
to set cause for jury trial as to damages. The Company, through counsel retained
in Florida, has filed a motion to set aside the clerk's default and to compel
arbitration, which motion was denied. The Company appealed the denial of the
motion and filed an additional motion seeking to stay the case pending the
appeal. On March 27, 2006, the Company entered into an agreement to release and
resolve all outstanding claims between the parties (Note 23).

On December 15, 2005, Patron became aware that Paris McKinzie, Maria Caporicci,
Douglas Zemsky, Paul Harary, DGC, Inc. and LLB, Ltd. had filed a complaint on or
about November 14, 2005, against the Company and other defendants in the United
States District Court, Southern District of Florida, alleging violations of
Section 10(b) of the Securities and Exchange Act of 1934, as amended, and Rule
10b-5 promulgated thereunder, and violations of Chapter 517 of Florida's
Securities and Investor Protection Act, and seeking damages in an amount to be
established at trial together with interest thereon, attorneys' fees and costs.
On December 13, 2005, plaintiffs filed a motion for default final judgment as to
liability and motion to set cause for jury trial as to damages. On December 16,
2005, a clerk's default was entered against the Company in this matter. The
Company maintains that it did not receive proper service of the plaintiffs'
complaint, and has retained counsel in Florida to respond to these proceedings.
The Company, through its Florida counsel, moved to set aside the clerk's default
on the basis that the Company was improperly served. Plaintiffs' filed a
response in opposition to the Company's motion to set aside the clerk's default.
On March 27, 2006, the Company entered into an agreement to release and resolve
all outstanding claims between the parties (Note 23).

On January 5, 2006, Mark P. Gertz, Trustee in bankruptcy for Arter & Hadden,
LLP, filed an Adversary Complaint for Recovery of Assets of the Estate in the
United States Bankruptcy Court Northern District of Ohio Eastern Division,
against the Company as successor in merger to Entelagent. Mr. Gertz seeks
$32,278.18 plus interest accruing at the statutory rate since July 15, 2003 for
services rendered by Arter & Hadden, LLP to Entelagent. The Company intends to
respond to this complaint within the time allotted by statute. The Company
intends to attempt to settle this claim as part of the Creditor and Claimant
Liabilities Restructuring (Note 23).

There can be no assurance that the Company will be successful in resolving any
of these claims. In the event that the Company is required to pay damages in
connection with any one or more of the claims asserted in these actions, such
payment could have a material adverse effect on the Company's business and
operations.

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

No matters were submitted for a vote by security holders during the year ended
December 31, 2005.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON STOCK

Our common stock is currently quoted on the Over-the-Counter Bulletin Board
("OTCBB") under the symbol "PTRS". From May 21, 2004 until November 14, 2005,
our common stock was quoted on the Pink Sheets (the "Pink Sheets") and prior to
May 21, 2004 we traded on the OTCBB. The following table lists the high and low
per share closing sales prices for the common stock as reported by the OTCBB or
Pink Sheets, as applicable, for the periods indicated:

HIGH LOW
2005: ----- -----
First Quarter.......................................... $1.16 $0.65
Second Quarter......................................... 0.83 0.50
Third Quarter.......................................... 0.68 0.14
Fourth Quarter......................................... 0.14 0.05

2004:
First Quarter.......................................... $1.30 $0.11
Second Quarter......................................... 1.46 0.37
Third Quarter.......................................... 1.16 0.69
Fourth Quarter......................................... 1.17 0.69

These quotations reflect inter-dealer prices, without retail markups, mark-downs
or commissions and may not necessarily represent actual transactions.

As of March 21, 2006 there were approximately 116 holders of record of the
common stock. However, we believe that the number of beneficial owners is in
excess of 500, because a large portion of the common stock is held of record
through brokerage firms in "street name."

DIVIDEND POLICY

Holders of our common stock are entitled to dividends when and if declared by
the board of directors out of funds legally available. We have not declared or
paid any dividends on our common stock since inception and do not anticipate the
declaration or payment of cash dividends in the foreseeable future. We intend to
retain earnings, if any, to finance the development and expansion of our
business. Future dividend policy will be subject to the discretion of the board
of directors and will be contingent upon future earnings, if any, our financial
condition, capital requirements, general business conditions and other factors.
Therefore, there can be no assurance that dividends of any kind will ever be
paid.

RECENT SALES OF UNREGISTERED SECURITIES

The following unregistered securities have been authorized to be issued by us
during the 3 months ended December 31, 2005:

TITLE AND AMOUNT OF SECURITIES NAME OF NAME OR CLASS OF
GRANTED/EXERCISE PRICE IF PRINCIPAL PERSONS WHO RECEIVED CONSIDERATION
DATE OF GRANT APPLICABLE UNDERWRITER SECURITIES RECEIVED
------------- ------------------------------ ----------- -------------------- -------------

October 2005 400,000/Common Stock None Richard Rozzi $ 0.00 (1)

----------
(1) Mr. Rozzi has entered into a consulting agreement with the Company to
provide financial public relations, financial communications and
investor relations consulting services. In compensation for these
services, the company agreed to issue the above noted shares.

The above unregistered securities were issued pursuant to an exemption from the
registration requirements of the Securities Act under Section 4(2) of the
Securities Act in a transaction not involving any public offering.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND
RELATED NOTES INCLUDED ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-KSB. THE
FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER SUBSTANTIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF SEVERAL FACTORS,
INCLUDING THE RISK FACTORS DISCUSSED BELOW.

OVERVIEW

From our inception through December 31, 2004, we were principally engaged in
developing our business plan, raising capital, identifying merger and
acquisition candidates and negotiating merger and acquisition transactions that
we closed during the first quarter of 2005. On February 25, 2005, we consummated
the acquisitions of Complete Security Solutions, Inc. ("CSSI") and LucidLine,
Inc. ("LucidLine") pursuant to the filings of Agreements and Plans of Merger
with the Secretaries of State of the States of Delaware and Illinois,
respectively. On February 28, 2005, we consummated a private placement with
accredited investors in the amount of $3.5 million. On March 30, 2005, we
consummated the acquisition of Entelagent Software Corp. ("Entelagent") pursuant
to the filing of an Agreement and Plan of Merger with the Secretary of State of
the State of California. From March 31, 2005 to December 31, 2005, we borrowed
$4,934,000 from a shareholder, Apex Investment Fund V, LP. During the year ended
December 31, 2005 we raised approximately $6,343,000 in additional gross funds.
Net proceeds from all of these transaction amounted to approximately
$10,649,000, which were used principally to fund operations and repay certain
liabilities. During the three months ended December 31, 2005, we raised
approximately $1,634,000 in additional gross funds in seven capital financing
transactions. We discuss these transactions in further detail in this report.

Our acquisitions have allowed us to develop a platform for trusted security
services and next generation integrated security products, which we intend to
deliver to global corporations and government institutions. We intend to work
with organizations to ensure that global enterprises implement information
security policies, procedures and products that result in "trusted" information
environments.

We currently offer software solutions that fit into overall corporate compliance
and data protection initiatives by automatically finding, archiving and applying
persistent protection to sensitive data - beyond authentication - whenever,
wherever and however sensitive data is shared, accessed and stored. Additionally
we offer software solutions that support real-time secure collection, delivery
and sharing of field-based report information. This software allows law
enforcement and public-safety agencies to have real-time access to field
reporting data for use inside a department or in a multi-jurisdictional
information sharing system.

We also offer a range of services to corporate and government entities utilizing
fiber optics and data replication technologies to provide secure robust off-site
data backup, recovery, restoration, and retrieval services coupled with
high-speed data communication turnkey solutions. Our secure and scalable
high-speed data communication solutions facilitate seamless instantaneous backup
of mission critical business data and enable immediate access to data and
real-time restoration of critical business functionality in the event of a
crisis or disaster.

CRITICAL ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Entelagent Software Corporation, Complete
Security Solutions, Inc., LucidLine, Inc. and PILEC Disbursement Company. All
significant inter-company transactions have been eliminated

DEVELOPMENT STAGE OPERATIONS

We were a development stage enterprise through December 31, 2004 as our
activities principally consisted of raising capital and screening potential
acquisition candidates in the information and homeland security segments. As
described in Note 4, we consummated acquisitions of three businesses that have
developed technologies, customer bases and are generating revenue. Accordingly,
we are no longer considered to be a development stage enterprise effective for
the year ended December 31, 2005.

CASH

The Company considers all highly liquid securities purchased with original
maturities of three months or less to be cash.

REVENUE RECOGNITION

The Company derives revenues from the following sources: (1) sales of computer
software, which includes new software licenses and software updates and product
support revenues and (2) services, which include internet access, back-up,
retrieval and restoration services and professional consulting services.

The Company applies the revenue recognition principles set forth under AICPA
Statement of Position ("SOP") 97-2 "Software Revenue Recognition" and Securities
and Exchange Commission Staff Accounting Bulletin ("SAB") 104 "Revenue
Recognition" with respect to all of its revenue. Accordingly, the Company
records revenue when (i) persuasive evidence of an arrangement exists, (ii)
delivery has occurred, (iii) the vendor's fee is fixed or determinable, and (iv)
collectability is probable.

The Company generates revenues through sales of software licenses and annual
support subscription agreements, which include access to technical support and
software updates (if and when available). Software license revenues are
generated from licensing the rights to use products directly to end-users and
through third party service providers.

Revenues from software license agreements are generally recognized upon delivery
of software to the customer. All of the Company's software sales are supported
by a written contract or other evidence of sale transaction such as a customer
purchase order. These forms of evidence clearly indicate the selling price to
the customer, shipping terms, payment terms (generally 30 days) and refund
policy, if any. The selling prices of these products are fixed at the time the
sale is consummated.

Revenue from post contract customer support arrangements or undelivered elements
are deferred and recognized at the time of delivery or over the period in which
the services are performed based on vendor specific objective evidence of fair
value for such undelivered elements. Vendor specific objective evidence is
typically based on the price charged when an element is sold separately or, if
an element is not sold separately, on the price established by an authorized
level of management, if it is probable that the price, once established, will
not change before market introduction. The Company uses the residual method
prescribed in SOP 98-9 to allocate revenues to delivered elements once it has
established vendor-specific evidence for such undelivered elements.

The Company provides its internet access and back-up, retrieval and restoration
services under contractual arrangements with terms ranging from 1 year to 5
years. These contracts are billed monthly, in advance, based on the
contractually stated rates. At the inception of a contract, the Company may
activate the customer's account for a contractual fee that it amortizes over the
term of the contract in accordance with Emerging Issues Task Force Issue
("EITF") 00-21 "Revenue Arrangements with Multiple Deliverables." The Company's
standard contracts are automatically renewable by the customer unless terminated
on 30 days written notice. Early termination of the contract generally results
in an early termination fee equal to the lesser of six months of service or the
remaining term of the contract.

Professional consulting services are billed based on the number of hours of
consultant services provided and the hourly billing rates. The Company
recognizes revenue under these arrangements as the service is performed.

Revenue from the resale of third-party hardware and software is recognized upon
delivery provided there are no further obligations to install or modify the
hardware or software. Revenue from the sales of hardware/software is recorded at
the gross amount of the sale when the contract satisfies the requirements of
EITF 99-19.

BUSINESS COMBINATIONS

In accordance with business combination accounting, we allocate the purchase
price of acquired companies to the tangible and intangible assets acquired,
liabilities assumed, as well as in-process research and development based on
their estimated fair values. We engaged a third-party appraisal firm to assist
management in determining the fair values of certain assets acquired and
liabilities assumed. Such a valuation requires management to make significant
estimates and assumptions, especially with respect to intangible assets.

Management makes estimates of fair value based upon assumptions believed to be
reasonable. These estimates are based on historical experience and information
obtained from the management of the acquired companies. Critical estimates in
valuing certain of the intangible assets include but are not limited to: future
expected cash flows from license sales, maintenance agreements, customer
contracts and acquired developed technologies; expected costs to develop the
in-process research and development into commercially viable products; the
acquired company's brand awareness and market position, as well as assumptions
about the period of time the acquired brand will continue to be used in the
combined company's product portfolio; and discount rates. These estimates are
inherently uncertain and unpredictable. Assumptions may be incomplete or
inaccurate, and unanticipated events and circumstances may occur which may
affect the accuracy or validity of such assumptions, estimates or actual
results.

ACCOUNTS RECEIVABLE

The Company adjusts its accounts receivable balances that it deems to be
uncollectible. 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 reviews its allowance for doubtful accounts on
a monthly basis and determines the allowance based on an analysis of its past
due accounts. All past due balances that are over 90 days 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.

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets (generally
three to five years). Maintenance and repairs are charged to expense as
incurred; cost of major additions and betterments are capitalized. When property
and equipment is sold or otherwise disposed of, the cost and related accumulated
depreciation are eliminated from the accounts and any resulting gains or losses
are reflected in the statement of operations in the period of disposal.

GOODWILL AND INTANGIBLE ASSETS

We account for Goodwill and Intangible Assets in accordance with SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." Under SFAS No. 142, goodwill and intangibles that are deemed to have
indefinite lives are no longer amortized but, instead, are to be reviewed at
least annually for impairment. Application of the goodwill impairment test
requires judgment, including the identification of reporting units, assigning
assets and liabilities to reporting units, assigning goodwill to reporting
units, and determining the fair value. Significant judgments required to
estimate the fair value of reporting units include estimating future cash flows,
determining appropriate discount rates and other assumptions. Changes in these
estimates and assumptions could materially affect the determination of fair
value and/or goodwill impairment for each reporting unit. We have recorded
goodwill in connection with the Company's acquisitions described in Note 4
amounting to $22,440,412. The Company's annual impairment review of goodwill has
identified that goodwill impairment charges totaling $12,929,696 are necessary
for the year ended December 31, 2005 (Note 5). Intangible assets continue to be
amortized over their estimated useful lives.

LONG LIVED ASSETS

The Company periodically reviews the carrying values of its long lived assets in
accordance with SFAS 144 "Long Lived Assets" when events or changes in
circumstances would indicate that it is more likely than not that their carrying
values may exceed their realizable value and records impairment charges when
necessary. The Company

has determined that an impairment charge of $1,705,455 is necessary for the year
ended December 31, 2005 (Note 9).

ACQUISITION COSTS

We have incurred certain expenses, principally legal fees, in connection with
acquisitions pending as of December 31, 2004 that were capitalized and deferred
pending the completion of each acquisition. Upon closing, such costs were
included in the purchase price of each respective target company and allocated
to the assets received and obligations assumed.

START UP COSTS

We expensed costs incurred in connection with our formation and related start up
activities and classified these costs as general and administrative expenses in
the accompanying financial statements.

USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS

In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenue and expenses during the reporting
period. The Company's significant estimates principally include the valuation of
its intangible assets and goodwill and accrued liability for the Company's
estimate of the fair value of preferred stock issued upon the settlement of an
accommodation agreement in March 2006 (Notes 16 and 23). Actual results could
differ from those estimates

INCOME TAXES

The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes ("SFAS No. 109"). SFAS No. 109
requires the recognition of deferred tax assets and liabilities for both the
expected impact of differences between the financial statements and tax basis of
assets and liabilities and for the expected future tax benefit to be derived
from tax loss and tax credit carry forwards. SFAS No. 109 additionally requires
the establishment of a valuation allowance to reflect the likelihood of
realization of deferred tax assets.

NET LOSS PER SHARE

Basic net loss per common share is computed by dividing net loss by the
weighted-average number of common shares outstanding during the period. Diluted
net loss per common share also includes common stock equivalents outstanding
during the period if dilutive. Diluted net loss per common share has been
computed by dividing net loss by the weighted-average number of common shares
outstanding without an assumed increase in common shares outstanding for common
stock equivalents; as such common stock equivalents are anti-dilutive.

As a result of the consummation of the Share Exchange described in Note 1, the
Company included 1,200,000 stock options with an exercise price of $.01 per
share that it issued to certain employees during 2002 in its calculation of
weighted-average number of common shares outstanding for all periods presented.

Net loss per common share excludes the following outstanding options, warrants
and convertible notes as their effect would be anti-dilutive:

December 31
-----------------------
2005 2004
---------- ----------
Options ......... 11,640,000 5,925,000
Warrants ........ 12,927,580 15,000
Convertible Notes 47,589,120 --
---------- ----------
72,156,700 5,940,000
========== ==========

USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts reported in the balance sheet for cash, accounts
receivable, accounts payable accrued expenses, advances from stockholders and
all note obligations classified as current liabilities approximate their fair
values based on the short-term maturity of these instruments. The carrying
amounts of the Company's convertible and subordinated note obligations, stock
repurchase obligation and common stock subject to put right approximate fair
value as such instruments feature contractual interest rates that are consistent
with current market rates of interest or have effective yields that are
consistent with instruments of similar risk, when taken together with any equity
instruments concurrently issued to holders.

STOCK OPTION PLANS

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

NON-EMPLOYEE STOCK BASED COMPENSATION

We record the cost of stock based compensation awards that we have issued to
non-employees for services at either the fair value of the services rendered or
the instruments issued in exchange for such services, whichever is more readily
determinable, using the measurement date guidelines enumerated in Emerging
Issues Task Force Issue ("EITF") 96-18, "Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
This interpretation of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," provides guidance for identifying a controlling interest
in a variable interest entity ("VIE") established by means other than voting
interest. FIN 46 also requires consolidation of a VIE by an enterprise that
holds such controlling interest. In December 2003, the FASB completed its
deliberations regarding the proposed modifications to FIN No. 46 and issued
Interpretation Number 46R, "Consolidation of Variable Interest Entities - an
Interpretation of ARB 51" ("FIN No. 46R"). The decisions reached included a
deferral of the effective date and provisions for additional scope exceptions
for certain types of variable interests. Application of FIN No. 46R is required
in financial statements of public entities that have interests in VIE's or
potential VIE's commonly referred to as special-purpose entities for periods
ending after December 15, 2003. Application by public issuers' entities is
required in all interim and annual financial statements for periods ending after
December 15, 2004. The adoption of this pronouncement did not have a material
effect on the Company's financial statements.

addresses all forms of share based payment ("SBP") awards including shares
issued under employee stock purchase plans, stock options, restricted stock and
stock appreciation rights. Under SFAS 123R, SBP awards result in a cost that
will be measured at fair value on the awards' grant date, based on the estimated
number of awards that are expected to vest and will result in a charge to
operations for stock-based compensation expense. The charge will be reflected in
the Company's Statements of Operations during periods in which such charges are
recorded, but will not affect its Balance Sheets or Statements or Cash Flows.
SFAS 123R is effective for public entities that file as small business
issuers--as of the beginning of the first reporting period of the fiscal year
that begins after December 15, 2005. The Company is currently in the process of
evaluating the effect that the adoption of this pronouncement will have on its
financial statements.

In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary
Assets" (SFAS 153). SFAS 153 amends APB Opinion No. 29 to eliminate the
exception for non-monetary exchanges of similar productive assets and replaces
it with a general exception for exchanges of non-monetary assets that do not
have commercial substance. A non-monetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly as a
result of the exchange. The provisions of SFAS 153 are effective for
non-monetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. Earlier application is permitted for non-monetary asset exchanges
occurring in fiscal periods beginning after December 16, 2004. The provisions of
this statement are intended be applied prospectively. The adoption of this
pronouncement is not expected to have a material effect on the Company's
financial statements.

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

None of these pronouncements had or are expected to have a material impact on
our financial position and results of operations.

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2005

For the year ended December 31, 2005, our consolidated revenues amounted to
$641,740 compared to $0 for the year ended December 31, 2004. The increase is
the result of business combinations that we consummated with CSSI and LucidLine
in February 2005 and Entelagent in March 2005.

Cost of Sales for the year ended December 31, 2005 amounted to $768,570 compared
to $0 for the year ended December 31, 2004. Cost of sales during the year ended
December 31, 2005 includes $396,670 associated with the amortization of
developed technology that we acquired from CSSI and Entelagent.

Operating expenses amounted to $26,947,484 for the year ended December 31, 2005
as compared to $4,610,101 for the year ended December 31, 2004, an increase in
operating expenses of $22,337,383. The increase in operating expenses includes
approximately $3,988,000 for salaries associated with an increase in the number
of employees from acquired businesses, goodwill impairment charge of
approximately $12,930,000, developed technology intangible impairment charge of
approximately $1,705,000, approximately $1,446,000 associated with losses
associated with settlement agreements, approximately $716,000 associated with
increased consulting expenses, approximately $425,000 for legal and professional
fees that we incurred principally in connection with bringing the Company into
compliance with its Securities and Exchange Commission reporting obligations,
approximately $101,000 for amortization of acquired intangible assets,
approximately $911,000 for increased general and administrative expenses
associated with the acquired businesses, approximately $366,000 associated with
a loss on a collateralized financing arrangement and a $370,000 expense
associated with the preparation of a homeland security operational requirements
assessment related to Will County, Illinois. These increases were partially
offset by an approximately $576,000 reduction in expense associated with the
stock based penalties under an accommodation agreement.

Our consolidated loss from operations for the year ended December 31, 2005
amounted to $27,074,314 compared to a loss of $4,610,101 for the same period in
2004. Our loss increased as a result of the increases in our operating expenses
discussed above.

Interest expense during the year ended December 31, 2005 amounted to $17,682,201
as compared to $132,350 for the year ended December 31, 2004. The increase is
directly related to our issuances of notes and the increased borrowings that we
made to finance our acquisitions of CSSI, LucidLine and Entelagent and to fund
our working

capital needs. Non-cash interest relating to the amortization of deferred
financing costs, penalty warrants issued to bridge note and subordinated note
holders and the accretion of debt discounts during the year ended December 31,
2005 amounted to approximately $16,481,000 compared to $0 in same period in
2004. Amortization of deferred finance charges which have been classified as
interest expense was approximately $1,945,000 in the year ended December 31,
2005 compared to $0 in the same period in 2004. The intrinsic value of the
conversion feature on bridge notes and subordinated notes, which has been
classified as interest expense amounted to approximately $12,393,000 for the
year ended December 31, 2005 compared to $0 in the same period in 2004.
Accretion of debt discounts during the year ended December 31, 2005 were
approximately $2,143,000 compared to $0 in the same period in 2004. Interest
income, was $19,250 and $77,000 in the year ended December 31, 2005 and 2004,
respectively. Interest income represents the interest earned from loans that we
made to Entelagent prior to our acquisition of that business on March 30, 2005.
Other income also includes a gain associated with the change in the intrinsic
value of a common stock put right of $300,000 in the year ended December 31,
2005.

For the year ended December 31, 2005, the net loss was $44,446,151 or $(0.76)
per share on 58,465,686 weighted average shares outstanding compared to a net
loss of $4,665,451 or $(0.12) per share on 38,808,280 weighted average shares
outstanding for the year ended December 31, 2004.

Results of Operations for the year ended December 31, 2004

For the years ended December 31, 2004 and 2003, we generated revenue of $0 and
$0, respectively.

Operating expenses amounted to $4,610,101 for the year ended December 31, 2004
compared to $16,540,369 for the year ended December 31, 2003, a reduction in
operating expenses of $11,930,268. The reduction in operating expenses includes
a reduction of approximately $6,800,000 related to common stock issued to
non-employees for services, a reduction of approximately $2,200,000 associated
with a loss on a financing arrangement, a reduction of approximately $2,350,000
associated with the write-off of advances made to a prospective acquiree
business, a reduction of approximately $249,000 associated with costs of
acquisitions not consummated, a reduction of approximately $80,000 for charges
associated with a share exchange transaction, a reduction of approximately
$1,000,000 in general and administrative expenses, an increase of approximately
$328,000 associated with a stock-based penalty under an accommodation agreement,
and an increase of approximately $439,000 associated with the settlement
agreement with Mr. Allin.

For the year ended December 31, 2004, operating expenses included general and
administrative expenses in the aggregate amount of $1,923,752, a charge for the
fair value of 1,800,000 shares of common stock issuable as a penalty under a
certain registration rights obligation in the amount of $1,434,900, losses
associated with the settlement agreement with Mr. Allin in the amount of
$438,667, and the fair value of 840,000 shares of common stock issued to
non-employees for services in the amount of $767,567.

The most significant components of our general and administrative expenses
include salaries of $669,233, professional fees of $786,671 and reimbursable
expenses of $239,164. In September 2004, we entered into a Relationship
Management Agreement with Dr. Afi Hasan, one of the selling stockholders of
LucidLine, in the amount of $350,000. This amount was later reduced to $200,000
on June 6, 2005.

Interest expense for the year ended December 31, 2004 amounted to $132,350
compared to $132,596 for the year ended December 31, 2003. Interest income for
the year ended December 31, 2004 was $77,000 compared to $153,401 for the year
ended December 31, 2003.

For the year ended December 31, 2004, the net loss was $4,665,451 or $(0.12) per
share on 38,808,280 weighted average shares outstanding compared to a net loss
of $16,519,564 or $(0.44) per share on 37,143,785 weighted average shares
outstanding for the year ended December 31, 2003.

Liquidity and Capital Resources

We incurred a net loss of $44,446,151 for the year ended December 31, 2005,
which includes $35,210,652 of non-cash charges associated with: legal
settlements in the amount of $2,273,622; stock based penalties under an
accommodation agreements totaling $777,076; aggregate non-cash interest of
$16,489,300 for the intrinsic value of conversion options triggered upon the
default of notes, accretion of note discounts and amortization of deferred
financing costs; aggregate stock based compensation of $1,554,369 for the
amortization of deferred compensation under a stock based compensation
arrangement, stock-options issued to a non-employee, common stock issued in

lieu of cash for services and the intrinsic value of an employee stock option;
asset impairment charges of $14,635,151 recorded in connection with a reduction
in the carrying value of goodwill and acquired technology; a loss on a
collateralized financing arrangement of $366,193; a loss on an asset disposal of
$8,886; and depreciation and amortization of $560,126. The non-cash charges were
offset by non-cash gains of $228,900 associated with the settlement of a related
party consulting agreement payable $300,000 associated with a reduction of the
intrinsic value of a put right, $389,103 for, a gain on a legal settlement and
$19,250 of non-cash interest income. Including the amounts above, we used net
cash flows in our operating activities of $9,235,499 during the year ended
December 31, 2005. Our working capital deficiency at December 31, 2005 amounted
to $28,249,199 and we are continuing to experience shortages of working capital.
We are also involved in substantial litigation and are being investigated by the
Securities and Exchange Commission with respect to certain of our press releases
and our use of Form S-8 to register shares of common stock that we issued to
certain consultants in a prior period. We cannot provide any assurance that the
outcome of these matters will not have a material adverse affect on our ability
to sustain the business. These matters raise substantial doubt about our ability
to continue as a going concern.

We expect to continue incurring losses for the foreseeable future due to the
inherent uncertainty that is related to establishing the commercial feasibility
of technological products and developing a presence in new markets. The
Company's ability to successfully integrate the acquired businesses described in
Note 4 is critical to the realization of its business plan. We believe that we
have lost critical timing advantages in the execution of our business plan as a
result of having insufficient working capital The Company raised $11,277,000 of
gross proceeds ($10,649,000 net proceeds after the payment of certain
transaction expenses) in financing transactions during the year ended December
31, 2005. The Company used $9,235,499 of these proceeds to fund its operations
(which includes a $1,388,000 reserve account established to assist the Company
in the payment of liabilities assumed in business combinations), and a net of
$882,385 in investing activities, which principally includes the cash component
of purchase business combinations that the Company consummated (during February
and March of 2005), net of cash acquired in the business combinations and the
purchase of property and equipment. In addition, the Company repaid an aggregate
of $1,239,909 of certain obligations due to certain officer/stockholders,
$475,539 of which was a reduction of the funds held in the restricted cash
reserve account established in connection with the Entelagent Merger (Note 4).
Subsequent to December 31, 2005 the Company raised approximately $720,000 in
additional gross funds in a bridge note transaction ("2006 Bridge Notes" - Note
23). In addition, the Company raised $895,000 in a financing which will become
part of the Series A Preferred Stock and Warrants (Note 23). We are in the
process of trying to raise up to an additional $5,400,000 through a proposed
sale of our Series A Preferred Stock and Warrants. On March 27, 2006, the
Company closed on the sale of $4,820,500 of the Series A Preferred Stock and
Warrants.(Note 23). This amount includes the amounts noted for the 2006 Bridge
notes and the $895,000 financing noted above.

We are currently in the process of attempting to raise additional capital and
have taken certain steps to conserve our liquidity while we continue to
integrate the acquired businesses. Although we believe that we have access to
capital resources, we have not secured any commitments for additional financing
at this time nor can we provide any assurance that we will be successful in our
efforts to raise additional capital and/or successfully execute our business
plan. In an effort to secure additional financing, the Company has offered its
creditors and claimants a proposed agreement to issue preferred securities
convertible into common stock for amounts owed to the holders of the Company's
indebtedness (including lenders, past-due trade accounts, and employees,
consultants and other service providers with claims for fees, wages or expenses)
(see Note 23). Currently, creditors representing approximately 75% of the
Company's claims outstanding, which includes amounts settled under the
accommodation agreement, have indicated their acceptance of the Company's
proposal. The Company is currently unable to provide assurance that the
acceptance of such proposal will actually improve the Company's ability to fund
the further development of its business plan or improve its operations.

OFF-BALANCE SHEET ARRANGEMENTS

At December 31, 2005, we did not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance, variable interest or special purpose entities, which would
have been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes. As such, we are
not exposed to any financing, liquidity, market or credit risk that could arise
if we had engaged in such relationships.

RISK FACTORS

The risks noted below and elsewhere in this report and in other documents we
file with the SEC are risks and uncertainties that could cause our actual
results to differ materially from the results contemplated by the
forward-looking statements contained in this report and other public statements
we make.

RISKS RELATED TO OUR COMMON STOCK

THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.

We currently have a number of obligations that we are unable to meet without
generating additional revenues or raising additional capital. We are also
subject to substantial litigation and an investigation by the SEC described
elsewhere herein. If we cannot generate additional revenues or raise additional
capital in the near future, we may become insolvent. As of December 31, 2005,
our cash balance was $14 and we had a working capital deficit of $28,249,199.
This raises substantial doubt about our ability to continue as a going concern.
Historically, we have funded our capital requirements with debt and equity
financing. Our ability to obtain additional equity or debt financing depends on
a number of factors including our financial performance and the overall
conditions in our industry. If we are not able to raise additional financing or
if such financing is not available on acceptable terms, we may liquidate assets,
seek or be forced into bankruptcy, and/or continue operations but suffer
material harm to our operations and financial condition. These measures could
have a material adverse affect on our ability to continue as a going concern.

The Company is attempting to restructure any and all claims, liabilities,
demands, causes of action, costs, expenses, attorneys' fees, damages,
indemnities, and obligations of every kind and nature that certain creditors and
claimants may have with the Company pursuant to the Creditor and Claimant
Liabilities Restructuring described in Note 23. The Company's failure to
successfully complete the Creditor and Claimant Liabilities Restructuring could
adversely impact the Company's ability to raise additional financing, or could
force the Company to liquidate assets, or seek bankruptcy protection. There can
be no assurance that the Company will successfully complete the Creditor and
Claimant Liabilities Restructuring. Such a failure could materially adversely
affect the Company's ability to continue as a going concern.

INVESTORS MAY NOT BE ABLE TO ADEQUATELY EVALUATE OUR BUSINESS AND PROSPECTS DUE
TO OUR LIMITED OPERATING HISTORY, LACK OF REVENUES AND LACK OF PRODUCT
OFFERINGS.

We are at an early stage of executing our business plan and have no history of
offering information security capabilities. We were incorporated in Delaware in
2002. Significant business operations only began with the acquisitions completed
in February and March 2005. As a result of our limited history, it may be
difficult to plan operating expenses or forecast our revenues accurately. Our
assumptions about customer or network requirements may be wrong. The revenue and
income potential of these products is unproven, and the markets addressed by
these products are volatile. If such products are not successful, our actual
operating results could be below our expectations and the expectations of
investors and market analysts, which would likely cause the price of our common
stock to decline.

We generated no revenue from operations before December 31, 2004 and only
limited revenues in the year ended December 31, 2005. We have relied on
financing generated from our capital raising activities to fund the
implementation of our business plan. We have incurred operating and net losses
and negative cash flows from operations since our inception. As of December 31,
2005, we had an accumulated deficit of approximately $84.4 million. We may
continue to incur operating and net losses, due in part to implementing our
acquisitions strategy, engaging in financing activities and expansion of our
personnel and our business development capabilities. We will continue to seek
financing for the acquisition of other acquisition targets that we may identify
in the future. We continue to believe that we will secure financing in the near
future, but there can be no assurance of our success. If we are unable to obtain
the necessary funding, it will materially adversely affect our ability to
execute our business plan and to continue our operations.

In addition, we may not be able to achieve or maintain profitability, and, even
if we do achieve profitability, the level of any profitability cannot be
predicted and may vary significantly from quarter to quarter.

THERE CAN BE NO GUARANTY THAT A MARKET WILL DEVELOP FOR THE PRODUCTS WE INTEND
TO OFFER.

We currently have a limited offering of products. We intend to acquire products
through the acquisition of existing businesses. There is no guarantee, however,
that a market will develop for Internet security solutions of the type we intend
to offer. We cannot predict the size of the market for Internet security
solutions, the rate at which the market will grow, or whether our target
customers will accept our acquired products.

OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, WHICH MAY RESULT IN
VOLATILITY OR HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF OUR COMMON STOCK.

The market prices of the securities of technology-related companies have
historically been volatile and may continue to be volatile. Thus, the market
price of our common stock is likely to be subject to wide fluctuations. If our
revenues do not grow or grow more slowly than we anticipate, if operating or
capital expenditures exceed our expectations and cannot be reduced
appropriately, or if some other event adversely affects us, the market price of
our common stock could decline. Only a small public market currently exists for
our common stock and the number of shares eligible for sale in the public market
is currently very limited, but is expected to increase. Sales of substantial
shares in the future would depress the price of our common stock. In addition,
we currently do not receive any stock market research coverage by any recognized
stock market research or trading firm and our shares are not traded on any
national securities exchange. A larger and more active market for our common
stock may not develop.

Because of our limited operations history and lack of assets and revenues to
date, our common stock is believed to be currently trading on speculation that
we will be successful in implementing our acquisition and growth strategies.
There can be no assurance that such success will be achieved. The failure to
implement our acquisitions and growth strategies would likely adversely affect
the market price of our common stock. In addition, if the market for
technology-related stocks or the stock market in general experiences a continued
or greater loss in investor confidence or otherwise fails, the market price of
our common stock could decline for reasons unrelated to our business, results of
operations and financial condition. The market price of our common stock also
might decline in reaction to events that affect other companies in our industry
even if these events do not directly affect us. General political or economic
conditions, such as an outbreak of war, a recession or interest rate or currency
rate fluctuations, could also cause the market price of our common stock to
decline. Our common stock has experienced, and is likely to continue to
experience, these fluctuations in price, regardless of our performance.

WE ARE CURRENTLY SUBJECT TO AN SEC INVESTIGATION.

Pursuant to Section 20(a) of the Securities Act and Section 21(a) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the staff of
the SEC (the "Staff"), issued an order (In the Matter of Patron Systems, Inc. -
Order Directing a Private Investigation and Designating Officers to Take
Testimony (C-03739-A, February 12, 2004)) (the "Order") that a private
investigation (the "SEC Investigation") be made to determine whether certain of
our actions and certain of the actions of our officers and directors and others
(as described below) violated Section 5(a) and 5(c) of the Securities Act and/or
Section 10 and Rule 10b-5 promulgated under the Exchange Act. Generally, the
Order provides, among other things, that the Staff is investigating (i) the
legality of two (2) separate Registration Statements filed by us on Form S-8,
filed on December 20, 2002 and on April 2, 2003, as amended on April 9, 2003
(collectively, the "Registration Statements"), covering the resale of, in the
aggregate, 4,375,000 shares of common stock issued to various of our
consultants, and (ii) whether in connection with the purchase or sale of shares
of common stock, certain of our officers, directors and others (a) sold common
stock in violation of Section 5 of the Securities Act and/or, (b) made
misrepresentations and/or omissions of material facts and/or employed fraudulent
devices in connection with such purchases and/or sales relating to certain of
our press releases regarding, among other items, proposed mergers and
acquisitions that were never consummated. If the SEC brings an action against
us, it could result in, among other items, a civil injunctive order or an
administrative cease-and-desist order being entered against us, in addition to
the imposition of a significant civil penalty. Moreover, the SEC Investigation
and/or a subsequent SEC action could affect adversely our ability to have our
common stock listed on a stock exchange and/or quoted on the The OTC Bulletin
Board or NASDAQ, our ability to sell our securities and/or have our securities
registered with the SEC and/or in various states and/or our ability to implement
our business plan. To date, our legal counsel representing us in such matters
has indicated that the SEC Investigation is ongoing and the Staff has not
indicated whether it will or will not recommend that the SEC bring an
enforcement action against us, our officers, directors and/or others.

THE CONCENTRATION OF OUR CAPITAL STOCK OWNERSHIP WITH INSIDERS IS LIKELY TO
LIMIT THE ABILITY OF OTHER STOCKHOLDERS TO INFLUENCE CORPORATE MATTERS.

As of March 21, 2006, the executive officers, directors and entities affiliated
with any of them together beneficially owned approximately 18.2% of our
outstanding common stock. As a result, these stockholders may be able to
exercise control over matters requiring approval by our stockholders, including
the election of directors and approval of significant corporate transactions.
This concentration of ownership might also have the effect of delaying or
preventing a change in our control that might be viewed as beneficial by other
stockholders.

FUTURE SALES OF SHARES BY EXISTING STOCKHOLDERS COULD CAUSE OUR STOCK PRICE TO
DECLINE.

If our existing or future stockholders sell, or are perceived to sell,
substantial amounts of our common stock in the public market, the market price
of our common stock could decline. As of March 21, 2006, there were 61,648,360
shares of common stock outstanding, of which 11,241,734 shares were held by
directors, executive officers and other affiliates, the sale of which are
subject to volume limitations under Rule 144, various vesting agreements and our
quarterly and other "blackout" periods. Furthermore, shares subject to
outstanding options and warrants and shares reserved for future issuance under
our stock option plan will become eligible for sale in the public market to the
extent permitted by the provisions of various vesting agreements, the lock-up
agreements and Rule 144 under the Securities Act.

THE UNPREDICTABILITY OF AN ACQUIRED COMPANY'S QUARTERLY RESULTS MAY CAUSE THE
TRADING PRICE OF OUR COMMON STOCK TO DECLINE.

The quarterly revenues and operating results of companies we may acquire will
likely continue to vary in the future due to a number of factors, many of which
are outside of our control. Any of these factors could cause the price of our
common stock to decline. The primary factors that may affect future revenues and
future operating results include the following:

o the demand for our subsidiaries' current product offerings and
our future products;

o the length of sales cycles;

o the timing of recognizing revenues;

o new product introductions by us or our competitors;

o changes in our pricing policies or the pricing policies of our
competitors;

o variations in sales channels, product costs or mix of products
sold;

o our ability to develop, introduce and ship in a timely manner
new products and product enhancements that meet customer
requirements;

o our ability to obtain sufficient supplies of sole or limited
source components for our products;

o variations in the prices of the components we purchase;

o our ability to attain and maintain production volumes and
quality levels for our products at reasonable prices at our
third-party manufacturers;

o our ability to manage our customer base and credit risk and to
collect our accounts receivable;

o and the financial strength of our value-added resellers and
distributors.

Our operating expenses are largely based on anticipated revenues and a high
percentage of our expenses are, and will continue to be, fixed in the short
term. As a result, lower than anticipated revenues for any reason could cause
significant variations in our operating results from quarter to quarter and,
because of our rapidly growing operating expenses, could result in substantial
operating losses.

OUR COMMON STOCK IS SUBJECT TO THE SEC'S PENNY STOCK RULES. THEREFORE,
BROKER-DEALERS MAY EXPERIENCE DIFFICULTY IN COMPLETING CUSTOMER TRANSACTIONS AND
TRADING ACTIVITY IN OUR SECURITIES MAY BE ADVERSELY AFFECTED.

If at any time a company has net tangible assets of $5,000,000 or less and the
common stock has a market price per share of less than $5.00, transactions in
the common stock may be subject to the "penny stock" rules promulgated under the
Exchange Act. Under these rules, broker-dealers who recommend such securities to
persons other than institutional accredited investors must:

o make a special written suitability determination for the
purchaser;

o receive the purchaser's written agreement to a transaction
prior to sale;

o provide the purchaser with risk disclosure documents which
identify certain risks associated with investing in "penny
stocks" and which describe the market for these "penny stocks"
as well as a purchaser's legal remedies; and

o obtain a signed and dated acknowledgment from the purchaser
demonstrating that the purchaser has actually received the
required risk disclosure document before a transaction in a
"penny stock" can be completed.

If our common stock becomes subject to these rules, broker-dealers may find it
difficult to effectuate customer transactions and trading activity in our
securities may be adversely affected. As a result, the market price of our
securities may be depressed, and stockholders may find it more difficult to sell
their shares of our common stock.

RISKS RELATED TO OUR BUSINESS

WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE ACQUIRED BUSINESSES.

Our business plan is dependent upon the acquisition and integration of companies
that have previously operated independently. To date we have experienced delays
in implementing our business plan as a result of limited capital resources,
which has had a material adverse affect on our business. Further delays in the
process of integrating could cause an interruption of, or loss of momentum in,
the activities of our business and the loss of key personnel. The diversion of
management's attention and any delays or difficulties encountered in connection
with our integration of acquired operations could have an adverse effect on our
business, results of operations, financial condition or prospects.

WE CURRENTLY DO NOT HAVE SUFFICIENT REVENUES TO SUPPORT OUR BUSINESS ACTIVITIES
AND IF OPERATING LOSSES CONTINUE, WILL BE REQUIRED TO OBTAIN ADDITIONAL CAPITAL
THROUGH FINANCINGS WHICH WE MAY NOT BE ABLE TO SECURE.

To achieve our intended growth, we will require substantial additional capital.
We have encountered difficulty and delays in raising capital to date and the
market environment for development stage companies, like ours, remains
particularly challenging. There can be no assurance that funds will be available
when needed or on acceptable terms. Technology companies in general have
experienced difficulty in recent years in accessing capital. Our inability to
obtain additional financing may require us to delay, scale back or eliminate
certain of our growth plans which could have a material and adverse effect on
our business, financial condition or results of operations or could cause us to
cease operations. Even if we are able to obtain additional financing, such
financing could be structured as equity financing that would dilute the
ownership percentage of any investor in our securities.

DOWNTURNS IN THE INTERNET INFRASTRUCTURE, NETWORK SECURITY AND RELATED MARKETS
MAY DECREASE OUR REVENUES AND MARGINS.

The market for our current products and other products we intend to offer
depends on economic conditions affecting the broader Internet infrastructure,
network security and related markets. Downturns in these markets may cause
enterprises and carriers to delay or cancel security projects, reduce their
overall or security-specific information technology budgets or reduce or cancel
orders for our current products and other products we intend to offer. In this
environment, customers such as distributors, value-added resellers and carriers
may experience financial difficulty, cease operations and fail to budget or
reduce budgets for the purchase of our current products or other products we
intend to offer. This, in turn, may lead to longer sales cycles, delays in
purchase decisions, payment and collection, and may also result in price
pressures, causing us to realize lower revenues, gross margins and operating
margins. In addition, general economic uncertainty caused by potential
hostilities involving the United States, terrorist activities, the decline in
specific markets such as the service provider market in the United States, and
the general decline in capital spending in the information technology sector
make it difficult to predict changes in the purchase and network requirements of
our potential customers and the markets we intend to serve. We believe that, in
light of these events, some businesses may curtail or eliminate capital spending
on information technology. A decline in capital spending in the markets we
intend to serve may adversely affect our future revenues, gross margins and
operating margins and make it necessary for us to gain significant market share
from our future competitors in order to achieve our financial goals and achieve
profitability.

COMPETITION MAY DECREASE OUR PROJECTED REVENUES, MARKET SHARE AND MARGINS.

The market for network security products is highly competitive, and we expect
competition to intensify in the future. Competitors may gain market share and
introduce new competitive products for the same markets and customers we intend
to serve with our products. These products may have better performance, lower
prices and broader acceptance than the products we currently offer or intend to
offer.

Many of our potential competitors have longer operating histories, greater name
recognition, large customer bases and significantly greater financial,
technical, sales, marketing and other resources than we have. In addition, some
of our potential competitors currently combine their products with other
companies' networking and security products. These potential competitors also
often combine their sales and marketing efforts. Such activities may result in
reduced prices, lower gross and operating margins and longer sales cycles for
the products we currently offer and intend to offer. If any of our larger
potential competitors were to commit greater technical, sales, marketing and
other resources to the markets we intend to serve, or reduce prices for their
products over a sustained period of time, our ability to successfully sell the
products we intend to offer, increase revenue or meet our or market analysts
expectations could be adversely affected.

FAILURE TO ADDRESS EVOLVING STANDARDS IN THE NETWORK SECURITY INDUSTRY AND
SUCCESSFULLY DEVELOP AND INTRODUCE NEW PRODUCTS OR PRODUCT ENHANCEMENTS WOULD
CAUSE OUR REVENUES TO DECLINE.

The market for network security products is characterized by rapid technological
change, frequent new product introductions, changes in customer requirements and
evolving industry standards. We expect to introduce our products and
enhancements to existing products to address current and evolving customer
requirements and broader networking trends and vulnerabilities. We also expect
to develop products with strategic partners and incorporate third-party advanced
security capabilities into our intended product offerings. Some of these
products and enhancements may require us to develop new hardware architectures
that involve complex and time consuming processes. In developing and introducing
our intended product offerings, we have made, and will continue to make,
assumptions with respect to which features, security standards and performance
criteria will be required by our potential customers. If we implement features,
security standards and performance criteria that are different from those
required by our potential customers, market acceptance of our intended product
offerings may be significantly reduced or delayed, which would harm our ability
to penetrate existing or new markets.

Furthermore, we may not be able to develop new products or product enhancements
in a timely manner, or at all. Any failure to develop or introduce these new
products and product enhancements might cause our existing products to be less
competitive, may adversely affect our ability to sell solutions to address large
customer deployments and, as a consequence, our revenues may be adversely
affected. In addition, the introduction of products embodying new technologies
could render existing products we intend to offer obsolete, which would have a
direct, adverse effect on our market share and revenues. Any failure of our
future products or product enhancements to achieve market acceptance could cause
our revenues to decline and our operating results to be below our expectations
and the expectations of investors and market analysts, which would likely cause
the price of our common stock to decline.

WE HAVE EXPERIENCED ISSUES WITH OUR FINANCIAL SYSTEMS, CONTROLS AND OPERATIONS
THAT COULD HARM OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Our ability to sell our intended product offerings and implement our business
plan successfully in a volatile and growing market requires effective management
and financial systems and a system of financial processes and controls. Through
the quarter ended December 31, 2005, our Chief Executive Officer and Acting
Chief Financial Officer evaluated the effectiveness of our disclosure controls
and procedures in accordance with Exchange Act Rules 13a-15 or 15d-15 and
identified material weakness in our internal controls. These material weaknesses
affected our ability to timely file our reports with the SEC and communicate
critical information to management that was needed to make business decisions.
Although we have taken steps to correct these previous deficiencies and are
currently in compliance with the SEC's reporting requirements, we have limited
capital resources and are still at risk for the loss of key personnel in our
finance department. The loss of key personnel in our finance department, or any
other conditions that could disrupt our operations in this area, could have a
material adverse affect on our ability to communicate critical information to
management and our investors, raise capital and/or maintain compliance with our
SEC reporting obligations. These circumstances, if they arise, could have a
material adverse affect on our business.

We have limited management resources to date and are still establishing our
management and financial systems. Growth, to the extent it occurs, is likely to
place a considerable strain on our management resources, systems, processes and
controls. To address these issues, we will need to continue to improve our
financial and managerial controls, reporting systems and procedures, and will
need to continue to expand, train and manage our work force worldwide. If we are
unable to maintain an adequate level of financial processes and controls, we may
not be able to accurately report our financial performance on a timely basis and
our business and stock price would be harmed.

IF OUR FUTURE PRODUCTS DO NOT INTEROPERATE WITH OUR END CUSTOMERS' NETWORKS,
INSTALLATIONS WOULD BE DELAYED OR CANCELLED, WHICH COULD SIGNIFICANTLY REDUCE
OUR ANTICIPATED REVENUES.

Future products will be designed to interface with our end customers' existing
networks, each of which have different specifications and utilize multiple
protocol standards. Many end customers' networks contain multiple generations of
products that have been added over time as these networks have grown and
evolved. Our future products must interoperate with all of the products within
these networks as well as with future products that might be added to these
networks in order to meet end customers' requirements. If we find errors in the
existing software used in our end customers' networks, we may elect to modify
our software to fix or overcome these errors so that our products will
interoperate and scale with their existing software and hardware. If our future
products do not interoperate with those within our end customers' networks,
installations could be delayed or orders for our products could be cancelled,
which could significantly reduce our anticipated revenues.

AS A PUBLIC COMPANY, WE MAY INCUR INCREASED COSTS AS A RESULT OF RECENTLY
ENACTED AND PROPOSED CHANGES IN LAWS AND REGULATIONS RELATING TO CORPORATE
GOVERNANCE MATTERS AND PUBLIC DISCLOSURE.

Recently enacted and proposed changes in the laws and regulations affecting
public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and
rules adopted or proposed by the SEC will result in increased costs for us as we
evaluate the implications of these laws, regulations and standards and respond
to their requirements. These laws and regulations could make it more difficult
or more costly for us to obtain certain types of insurance, including director
and officer liability insurance, and we may be forced to accept reduced policy
limits and coverage or incur substantially higher costs to obtain the same or
similar coverage. The impact of these events could also make it more difficult
for us to attract and retain qualified persons to serve on our board of
directors, board committees or as executive officers. We cannot estimate the
amount or timing of additional costs we may incur as a result of these laws and
regulations.

WE DEPEND ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET, AND IF WE ARE UNABLE TO HIRE ADDITIONAL PERSONNEL OR RETAIN
EXISTING PERSONNEL, OUR ABILITY TO EXECUTE OUR BUSINESS STRATEGY WOULD BE
IMPAIRED.

Our future success depends upon the continued services of our executive
officers. The loss of the services of any of our key employees, the inability to
attract or retain qualified personnel in the future, or delays in hiring
required personnel, could delay the development and introduction of, and
negatively impact our ability to sell, our intended product offerings.

WE MIGHT HAVE TO DEFEND LAWSUITS OR PAY DAMAGES IN CONNECTION WITH ANY ALLEGED
OR ACTUAL FAILURE OF OUR PRODUCTS AND SERVICES.

Because our intended product offerings and services provide and monitor network
security and may protect valuable information, we could face claims for product
liability, tort or breach of warranty. Anyone who circumvents our security
measures could misappropriate the confidential information or other property of
end customers using our products, or interrupt their operations. If that
happens, affected end customers or others may sue us. Defending a lawsuit,
regardless of its merit, could be costly and could divert management attention.
Our business liability insurance coverage may be inadequate or future coverage
may be unavailable on acceptable terms or at all.

WE COULD BECOME SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS
THAT COULD BE COSTLY AND RESULT IN THE LOSS OF SIGNIFICANT RIGHTS.

In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. We may become a party
to litigation in the future to protect our intellectual property or as a result
of an alleged infringement of another party's intellectual property. Claims for
alleged infringement and any resulting lawsuit, if successful, could subject us
to significant liability for damages and invalidation of our proprietary rights.
These lawsuits, regardless of their success, would likely be time-consuming and
expensive to resolve and would divert management time and attention. Any
potential intellectual property litigation could also force us to do one or more
of the following:

o stop or delay selling, incorporating or using products that
use the challenged intellectual property; and/or

o obtain from the owner of the infringed intellectual property
right a license to sell or use the relevant technology, which
license might not be available on reasonable terms or at all;
or redesign the products that use that technology.

If we are forced to take any of these actions, our business might be seriously
harmed. Our insurance may not cover potential claims of this type or may not be
adequate to indemnify us for all liability that could be imposed.

THE INABILITY TO OBTAIN ANY THIRD-PARTY LICENSE REQUIRED TO DEVELOP NEW PRODUCTS
AND PRODUCT ENHANCEMENTS COULD REQUIRE US TO OBTAIN SUBSTITUTE TECHNOLOGY OF
LOWER QUALITY OR PERFORMANCE STANDARDS OR AT GREATER COST, WHICH COULD SERIOUSLY
HARM OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

From time to time, we may be required to license technology from third parties
to develop new products or product enhancements. Third-party licenses may not be
available to us on commercially reasonable terms or at all. The inability to
obtain any third-party license required to develop new products or product
enhancements could require us to obtain substitute technology of lower quality
or performance standards or at greater cost, which could seriously harm our
business, financial condition and results of operations.

GOVERNMENTAL REGULATIONS AFFECTING THE IMPORT OR EXPORT OF PRODUCTS COULD
NEGATIVELY AFFECT OUR REVENUES.

Governmental regulation of imports or exports or failure to obtain required
export approval of our encryption technologies could harm our international and
domestic sales. The United States and various foreign governments have imposed
controls, export license requirements and restrictions on the import or export
of some technologies, especially encryption technology. In addition, from time
to time, governmental agencies have proposed additional regulation of encryption
technology, such as requiring the escrow and governmental recovery of private
encryption keys.

In particular, in light of recent terrorist activity, governments could enact
additional regulation or restrictions on the use, import or export of encryption
technology. Additional regulation of encryption technology could delay or
prevent the acceptance and use of encryption products and public networks for
secure communications. This might decrease demand for our intended product
offerings and services. In addition, some foreign competitors are subject to
less stringent controls on exporting their encryption technologies. As a result,
they may be able to compete more effectively than we can in the domestic and
international network security market.

MANAGEMENT COULD INVEST OR SPEND OUR CASH OR CASH EQUIVALENTS AND INVESTMENTS IN
WAYS THAT MIGHT NOT ENHANCE OUR RESULTS OF OPERATIONS OR MARKET SHARE.

We have made no specific allocations of our cash or cash equivalents and
investments. Consequently, management will retain a significant amount of
discretion over the application of our cash or cash equivalents and investments
and could spend the proceeds in ways that do not improve our operating results
or increase our market share. In addition, these proceeds may not be invested to
yield a favorable rate of return.

ITEM 7. FINANCIAL STATEMENTS

PATRON SYSTEMS, INC.
DECEMBER 31, 2005

CONTENTS

Report of Independent Registered Public Accounting Firm ................... 30
FINANCIAL STATEMENTS
Consolidated Balance Sheet as of December 31, 2005 ........................ 31
Consolidated Statements of Operations for the years
ended December 31, 2005 and 2004 ........................................ 32
Consolidated Statements of Stockholders' Deficiency
for the years ended December 31, 2005 and 2004........................... 33
Consolidated Statements of Cash Flows for the years
ended December 31, 2005 and 2004 ........................................ 34
Notes to Consolidated Financial Statements ................................ 35

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee of the
Board of Directors and Shareholders
of Patron Systems, Inc.

We have audited the accompanying consolidated balance sheet of Patron Systems.
Inc. and Subsidiaries (the "Company") as of December 31, 2005, and the related
consolidated statements of operations, stockholders' deficiency and cash flows
for each of the two years in the period ended December 31, 2005. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Patron Systems.
Inc., as of December 31, 2005, and the consolidated results of its operations
and its cash flows for each of the two years in the period ended December 31,
2005 in conformity with accounting principles generally accepted in the United
States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred net losses since its inception,
has a working capital deficiency and is involved in numerous litigation matters.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

/s/ Marcum & Kliegman LLP
-------------------------
Marcum & Kliegman LLP

New York, New York
March 27, 2006

PATRON SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET

DECEMBER 31,
2005
-----------
ASSETS
Current Assets:
Cash ....................................................... $ 14
Restricted cash ............................................ 511,691
Accounts receivable, net ................................... 240,534
Other current assets ....................................... 153,001
------------
Total current assets .................................... 905,240

Property and equipment, net ................................... 169,925
Intangible assets, net ........................................ 1,232,757
Goodwill ...................................................... 9,510,716
------------
Total assets ............................................ $ 11,818,638
============

LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities
Accounts payable ........................................... $ 1,644,772
Accrued payroll and related expenses ....................... 1,405,586
Accrued interest ........................................... 1,402,354
Consulting agreement payable ............................... 100,000
Demand notes payable ....................................... 1,056,056
Bridge notes payable ....................................... 11,256,091
Acquisition notes payable .................................. 4,500,000
Notes payable (to creditors of acquired business,
including $2,101,357 to related parties) ................ 2,602,913
Expense reimbursements due to officers and stockholders .... 172,328
Notes payable to officers and stockholders ................. 235,712
Other current liabilities .................................. 1,006,506
Amounts due under settlement with former officer ........... 1,130,022
Deferred revenue ........................................... 332,081
Accrued registration penalty ............................... 81,928
Accrued settlement under accommodation agreements .......... 2,228,090
------------
Total current liabilities ............................... 29,154,439

Note payable - stock repurchase obligation due
to former officer .......................................... 1,738,667
------------
Total liabilities ....................................... 30,893,106
------------

Common stock subject to put right (2,000,000 shares) .......... 1,000,000
------------

Commitments and Contingencies

Stockholders' Deficiency
Preferred stock, par value $0.01 per share, 75,000,000
shares authorized, none issued and outstanding .......... --
Common stock, par value $0.01 per share, 150,000,000
shares authorized, 59,348,360 shares issued and
outstanding as of December 31, 2005 (net of 2,000,000
shares subject to put right) ............................ 4,049,143
Additional paid-in capital ................................. 61,571,916
Common stock repurchase obligation ......................... (1,300,000)
Deferred compensation ...................................... (7,500)
Accumulated deficit ........................................ (84,388,027)
------------
Total stockholders' deficiency .......................... (20,074,468)
------------
Total liabilities and stockholders' deficiency .......... $ 11,818,638
============

See notes to condensed consolidated financial statements.

PATRON SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED
DECEMBER 31,
----------------------------
2005 2004
------------ ------------
(Development
Stage)

Revenue ........................................ $ 641,740 $ --
------------ ------------
Cost of Sales
Cost of products/services ................... 371,900 --
Amortization of technology .................. 396,670 --
------------ ------------
Total cost of sales ...................... 768,570 --
------------ ------------
Gross loss .................................. (126,830) --
------------ ------------
Operating Expenses
Salaries and related expenses ............... 4,656,814 669,233
Consulting expense .......................... 1,483,933 767,567
Professional fees ........................... 1,196,781 771,381
General and administrative .................. 1,331,633 483,138
Depreciation and amortization ............... 163,456 --
Registration penalties ...................... 859,004 1,434,900
Assessment fee .............................. 370,000 --
Loss on collateralized financing arrangement 366,193 --
Goodwill impairment charge .................. 12,929,696
Acquired technology impairment charge ....... 1,705,455
Charges associated with share exchange
transaction .............................. -- 45,215
Losses associated with legal settlements,
net ...................................... 1,884,519 438,667
------------ ------------
Total operating expenses ................. 26,947,484 4,610,101

Loss from operations ........................... (27,074,314) (4,610,101)

Other Income (Expense)
Interest income ............................. 19,250 77,000
Change in intrinsic value of common
stock put right ............................. 300,000 --
Loss on sale of property and equipment ...... (8,886) --
Interest expense ............................ (17,682,201) (132,350)
------------ ------------

Total Other Expense ............................ (17,371,837) (55,350)
------------ ------------

Loss before income taxes ....................... (44,446,151) (4,665,451)
Income taxes ................................ -- --
------------ ------------

Net loss ....................................... $(44,446,151) $ (4,665,451)
============ ============

Net Loss Per Share - Basic and Diluted ......... $ (0.76) $ (0.12)
============ ============

Weighted Average Number of Shares
Outstanding - Basic and diluted ............. 58,465,686 38,808,280
============ ============

See notes to condensed consolidated financial statements.

PATRON SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED
STATEMENT OF STOCKHOLDERS' DEFICIENCY FOR THE
YEARS ENDED DECEMBER 31, 2005 AND 2004

ADDITIONAL
SHARES OF PAR VALUE PAID IN REPURCHASE
COMMON STOCK COMMON STOCK CAPITAL OBLIGATION
------------ ------------ ------------ ------------

BALANCE, JANUARY 1, 2004 .................. 38,401,388 1,477,514 29,003,259 --
Common stock to be repurchased under
Allin Settlement Agreement ............. (2,000,000) (20,000) (980,000) (1,300,000)
Issuance of common stock for services
at March 24, 2004 for $0.42 per share .. 500,000 5,000 205,000 --
Issuance of common stock in private
placement transaction on May 21, 2004
at $0.279 per share .................... 714,824 7,148 192,852 --
Issuance of common stock for services
at June 4, 2004 for $0.699 per share ... 500,000 349,500 -- --
Issuance of common stock for services
at August 4, 2005 for $1.199 per share . 500,000 599,500 -- --
Common stock issued in lieu of cash for
services on September 10, 2004 for
$0.789 per share ....................... 100,000 78,900 -- --
Common stock issued in lieu of cash for
services on September 13, 2004 for
$0.25 per share ........................ 240,000 2,400 57,600 --
Issuance of common stock in private
placement transaction on December 14,
2004 for $1.00 per share ............... 500,000 5,000 495,000 --
Common stock issued for conversion of
convertible notes on December 28,
2004 for $0.77 per share ............... 201,648 156,600 -- --
Common stock issued under Accommodation
Agreement penalty at end-of-month
fair values beginning January 31, 2004 . 1,800,000 1,434,900 -- --
Stock options issued in lieu of cash
for services on December 31, 2004
with a fair value of $0.63 per share ... -- -- 945,000 --
Amortization of Deferred stock-based
compensation ........................... -- -- -- --
Net Income ................................ -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2004................. $ 41,457,860 $ 4,096,462 $ 29,918,711 $ (1,300,000)
Common stock issued in purchase business
combinations
Complete Security Solutions, Inc. ... 7,500,000 75,000 6,300,000 --
LucidLine, Inc. ..................... 4,400,000 44,000 3,696,000 --
Entelagent Software Corporation ..... 3,000,000 30,000 2,520,000 --
Amortization of deferred stock-based
compensation ........................... -- -- -- --
Issuance of warrants to Bridge Note I
Investors .............................. -- -- 1,043,860 --
Issuance of warrants issued as purchase
consideration .......................... -- -- 1,912,500 --
Issuance of warrants to transaction
advisors ............................... -- -- 255,000 --
Issuance of warrants to placement agent
- Interim Bridge Financing I ........... -- -- 297,500 --
Common stock under accommodation
agreement as a penalty ................. 1,800,000 777,076 -- --
Common stock issued under collateralized
financing arrangement .................. 890,500 8,905 397,300 --
Common stock issued in lieu of cash ....... -- (939,000) 939,000 --
Common stock issued on consulting agreement 400,000 35,600 -- --
Recission of common stock under
consulting agreement ................... (100,000) (78,900) -- --
Issuance of warrants to Bridge Note II
investors .............................. -- -- 532,723 --
Issuance of warrants to placement agent
- Interim Bridge Financing II .......... -- -- 80,867 --
Issuance of warrants in connection with
bridge loan extension .................. -- -- 946,924 --
Issuance of stock options to Chief
Executive Officer ...................... -- -- 30,000 --
Issuance of warrants to Bridge Note
III investors .......................... -- -- 587,595 --
Reduction of intrinsic value of put right . -- -- (300,000) --
Conversion option penalty incurred upon
default of Bridge Financing I .......... -- -- 3,500,000 --
Conversion option penalty incurred upon
default of Subordinated Notes .......... -- -- 4,500,000 --
Conversion option penalty incurred upon
default of Bridge Financing II ......... -- -- 2,543,000 --
Conversion option penalty incurred upon
default of Bridge Financing III ........ -- -- 1,850,000 --
Issuance of options to non-employee ....... -- -- 20,936 --
Net Loss .................................. -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2005 ................ 59,348,360 $ 4,049,143 $ 61,571,916 $ (1,300,000)
============ ============ ============ ============

COMMON STOCK
DEFERRED ACCUMULATED
COMPENSATION DEFICIT TOTAL
------------ ------------ ------------

BALANCE, JANUARY 1, 2004 .................. -- (35,276,425) (4,795,652)
Common stock to be repurchased under
Allin Settlement Agreement ............. -- -- (2,300,000)
Issuance of common stock for services
at March 24, 2004 for $0.42 per share .. (210,000) -- --
Issuance of common stock in private
placement transaction on May 21, 2004
at $0.279 per share .................... -- -- 200,000
Issuance of common stock for services
at June 4, 2004 for $0.699 per share ... (349,500) -- --
Issuance of common stock for services
at August 4, 2005 for $1.199 per share . (599,500) -- --
Common stock issued in lieu of cash for
services on September 10, 2004 for
$0.789 per share ....................... -- -- 78,900
Common stock issued in lieu of cash for
services on September 13, 2004 for
$0.25 per share ........................ -- -- 60,000
Issuance of common stock in private
placement transaction on December 14,
2004 for $1.00 per share ............... -- -- 500,000
Common stock issued for conversion of
convertible notes on December 28,
2004 for $0.77 per share ............... -- -- 156,600
Common stock issued under Accommodation
Agreement penalty at end-of-month
fair values beginning January 31, 2004 . -- -- 1,434,900
Stock options issued in lieu of cash
for services on December 31, 2004
with a fair value of $0.63 per share ... (945,000) -- --
Amortization of Deferred stock-based
compensation ........................... 628,667 -- 628,667
Net Income ................................ -- (4,665,451) (4,665,451)
------------ ------------ ------------
BALANCE, DECEMBER 31, 2004................. $ (1,475,333) $(39,941,876) (8,702,036)
Common stock issued in purchase business
combinations
Complete Security Solutions, Inc. ... -- -- 6,375,000
LucidLine, Inc. ..................... -- -- 3,740,000
Entelagent Software Corporation ..... -- -- 2,550,000
Amortization of deferred stock-based
compensation ........................... 1,467,833 -- 1,467,833
Issuance of warrants to Bridge Note I
Investors .............................. -- -- 1,043,860
Issuance of warrants issued as purchase
consideration .......................... -- -- 1,912,500
Issuance of warrants to transaction
advisors ............................... -- -- 255,000
Issuance of warrants to placement agent
- Interim Bridge Financing I ........... -- -- 297,500
Common stock under accommodation
agreement as a penalty ................. -- -- 777,076
Common stock issued under collateralized
financing arrangement .................. -- -- 406,205
Common stock issued in lieu of cash ....... -- -- --
Common stock issued on consulting agreement -- -- 35,600
Recission of common stock under
consulting agreement ................... -- -- (78,900)
Issuance of warrants to Bridge Note II
investors .............................. -- -- 532,723
Issuance of warrants to placement agent
- Interim Bridge Financing II .......... -- -- 80,867
Issuance of warrants in connection with
bridge loan extension .................. -- -- 946,924
Issuance of stock options to Chief
Executive Officer ...................... -- -- 30,000
Issuance of warrants to Bridge Note
III investors .......................... -- -- 587,595
Reduction of intrinsic value of put right . -- -- (300,000)
Conversion option penalty incurred upon
default of Bridge Financing I .......... -- -- 3,500,000
Conversion option penalty incurred upon
default of Subordinated Notes .......... -- -- 4,500,000
Conversion option penalty incurred upon
default of Bridge Financing II ......... -- -- 2,543,000
Conversion option penalty incurred upon
default of Bridge Financing III ........ -- -- 1,850,000
Issuance of options to non-employee ....... -- -- 20,936
Net Loss .................................. -- (44,446,151) (44,446,151)
------------ ------------ ------------
BALANCE, DECEMBER 31, 2005 ................ $ (7,500) $(84,388,027) $(20,074,468)
============ ============ ============

See notes to condensed consolidated financial statements.

PATRON SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED
DECEMBER 31,
----------------------------
2005 2004
------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .......................................................... $(44,446,151) $ (4,665,451)
------------ ------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ................................ 560,126 --
Amortization of deferred compensation ........................ 1,467,833 --
Common stock issued in lieu of cash for services ............. 35,600 767,567
Stock options issued to non-employees ........................ 20,936 --
Stock options issued to chief executive officer .............. 30,000 --
Accretion related to warrants issued with bridge notes ....... 2,143,269 --
Amortization of deferred financing costs ..................... 1,953,031 --
Penalty warrants issued to bridge note holders ............... 12,393,000 --
Stock based penalty under accomodation agreement ............. 777,076 1,434,900
Goodwill impairment charge ................................... 12,929,696 --
Acquired technology impairment charge ........................ 1,705,455
Losses associated with legal settlements ..................... 2,273,622 438,667
Gain on legal settlement ..................................... (389,103) --
Loss on collateralized financing arrangement ................. 366,193 --
Loss on sale of property and equipment ....................... 8,886 --
Reduction in intrinsic value of put right .................... (300,000) --
Gain on settlement of consulting agreement payable ........... (228,900) --
Non-cash interest income ..................................... (19,250) (77,000)
Changes in operating assets and liabilities:
Restricted cash ........................................... (511,691) --
Prepaid expenses .......................................... 51,487 (6,310)
Accounts receivable ....................................... (104,889) --
Other current assets ...................................... (60,412) --
Accounts payable .......................................... (149,002) 186,525
Accrued interest .......................................... 414,676 132,350
Deferred revenue .......................................... 132,330 --
Expense reimbursements due to officers and shareholders ... (94,062) --
Accrued payroll and payroll related expenses .............. (732,814) 107,153
Amounts due under settlement with former officer .......... 165,298 --
Other current liabilities ................................. 356,773 --
Consulting agreements payable ............................. (50,000) 300,000
Accrued registration penalty .............................. 81,928 --
Other accrued expenses .................................... (16,440) --
------------ ------------
Total adjustments ............................................ 35,210,652 3,283,852
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES .............................. (9,235,499) (1,381,599)
------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Advances to prospective acquiree businesses ..................... -- (24,500)
Cash payments in purchase business combinations ................. (857,633) --
Cash acquired in purchase business combinations ................. 416,397 --
Acquisition of intellectual property ............................ (334,387) --
Proceeds from sale of property and equipment .................... 1,500 --
Purchase of fixed assets ........................................ (108,262) --
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES .............................. (882,385) (24,500)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Expenses (repaid to) officers and stockholders .................. (250,694) 17,349
Advances from stockholders ...................................... -- 58,694
Advances from prospective acquiree business ..................... -- 653,000
Deferred financing costs ........................................ (627,739) --
Repayments of amounts due under settlement with former officer .. (200,000) --
Proceeds from issuance of bridge notes .......................... 11,277,000 --
Proceeds from issuance of common stock .......................... -- 700,000
Repayments of advances from shareholders ........................ (126,570) --
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES .......................... 10,071,997 1,429,043
------------ ------------
NET (DECREASE) INCREASE IN CASH .................................... (45,887) 22,944
CASH, beginning of period .......................................... 45,901 22,957
------------ ------------
CASH, end of period ................................................ $ 14 $ 45,901
------------ ------------
Supplemental Disclosures of Cash Flow Information:
Issuance of note under stock repurchase obligation .............. $ -- $ 1,300,000
Obligation to repurchase 2,000,000 shares of common stock subject
to put right .................................................... -- 1,000,000
Cash paid during the period for:
Interest ........................................................ 527,715 --
Supplemental non-cash investing and finanical activity:
Acquisition of businesses:
Current tangible assets acquired ................................ 328,411
Non-current tangible assets acquired ............................ 2,809,689
Current liabilities assumed with acquisitions ................... (8,457,986)
Non-current liabilities assumed with acquisitions ............... (447,790)
Intangible assets acquired ...................................... 3,101,000
Goodwill recognized on purchase business combinations ........... 22,440,412
Non-cash consideration .......................................... (19,332,500)
Cash acquired in purchase business combinations ................. 416,397
------------
Cash paid to acquire businesses ................................. 857,633
------------

See notes to condensed consolidated financial statements.

PATRON SYSTEMS, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005

NOTE 1 - THE COMPANY

ORGANIZATION AND DESCRIPTION OF BUSINESS

Patron Systems, Inc. is a Delaware corporation formed in April 2002 to provide
comprehensive, end-to-end information security solutions to global corporations
and government institutions.

DEVELOPMENT STAGE OPERATIONS

The Company was a development stage enterprise until December 31, 2004, with a
limited history of operations and with no revenues generated from its inception
through December 31, 2004. During the period from its inception until December
31, 2004, the Company's principal business activities consisted of raising
capital and identifying potential merger and acquisition candidates that have
developed high potential technologies with applications in information security
and homeland defense. The Company acquired three operating businesses during the
year ended December 31, 2005 (Note 4). Accordingly, the Company is no longer
considered to be a development stage enterprise effective for the year ended
December 31, 2005.

NOTE 2 - LIQUIDITY AND FINANCIAL CONDITION

The Company incurred a net loss of $44,446,151 for the year ended December 31,
2005, which includes $35,210,652 of non-cash charges associated with: legal
settlements in the amount of $2,273,622; stock based penalties under an
accommodation agreements totaling $777,076; aggregate non-cash interest of
$16,489,300 for the intrinsic value of conversion options triggered upon the
default of notes, accretion of note discounts and amortization of deferred
financing costs; aggregate stock based compensation of $1,554,369 for the
amortization of deferred compensation under a stock based compensation
arrangement, stock-options issued to a non-employee, common stock issued in lieu
of cash for services and the intrinsic value of an employee stock option; asset
impairment charges of $14,635,151 recorded in connection with a reduction in the
carrying value of goodwill and acquired technology; a loss on a collateralized
financing arrangement of $366,193; a loss on an asset disposal of $8,886; and
depreciation and amortization of $560,126. The non-cash charges were offset by
non-cash gains of $228,900 associated with the settlement of a related party
consulting agreement payable, $300,000 associated with a reduction of the
intrinsic value of a put right, $389,103 for, a gain on a legal settlement and
$19,250 of non-cash interest income. Including the amounts above, the Company
used net cash flows in its operating activities of $9,235,499 during the year
ended December 31, 2005. The Company's working capital deficiency at December
31, 2005 amounted to $28,249,199 and the Company is continuing to experience
shortages of working capital. The Company is also involved in substantial
litigation and is being investigated by the Securities and Exchange Commission
with respect to certain of its press releases and its use of Form S-8 to
register shares of common stock that the Company issued to certain consultants
in a prior period. The Company cannot provide any assurance that the outcome of
these matters will not have a material adverse affect on its ability to sustain
the business. These matters raise substantial doubt about the Company's ability
to continue as a going concern.

The Company expects to continue incurring losses for the foreseeable future due
to the inherent uncertainty that is related to establishing the commercial
feasibility of technological products and developing a presence in new markets.
The Company's ability to successfully integrate the acquired businesses
described in Note 4 is critical to the realization of its business plan. To
date, the Company believes that it has lost critical timing advantages in the
execution of its business plan as a result of having insufficient working
capital (Note 5). The Company raised $11,277,000 of gross proceeds ($10,649,261
net proceeds after the payment of certain transaction expenses) in financing
transactions during the year ended December 31, 2005. The Company used
$9,235,499 of these proceeds to fund its operations (which includes a $1,388,000
reserve account established to assist the Company in the payment of liabilities
assumed in business combinations), and a net of $882,385 in investing
activities, which principally includes the cash component of purchase business
combinations that the Company consummated (during February and March of 2005),
net of cash acquired in the business combinations and the purchase of property
and equipment. In addition, the Company repaid an aggregate of $1,239,909 of
certain obligations due to certain officer/stockholders, $475,539 of which was a
reduction of the funds held in the restricted cash reserve account established
in connection with the Entelagent Merger (Note 4). Subsequent to December 31,
2005 the Company raised approximately $720,000 (approximately $540,000 net of
transaction expenses) in additional gross funds in a

bridge note transaction ("2006 Bridge Notes" - Note 23). In addition, the
Company raised $895,000 in a financing which will become part of the Series A
Preferred Stock and Warrants (Note 23). The Company is attempting to raise up to
an additional $5,400,000 through a proposed sale of its Series A Preferred Stock
and Warrants. On March 27, 2006, the Company closed on $4,820,500 of the Series
A Preferred Stock and Warrants (Note 23). This amount includes the amounts noted
for the 2006 Bridge notes and the $895,000 financing noted above.

On September 23, 2005 the Company communicated a proposal, which it revised in
November 2005, offering its creditors and claimants (including lenders, past-due
trade accounts, employees, consultants and other service providers with claims
for fees, wages, expenses, etc.) a proposed agreement to participate in an
exchange of their claims and/or amounts of indebtedness owed for common stock
(Note 21). The Company cannot provide any assurance that the acceptance of this
proposal or completion of this exchange offer, if completed, will actually
improve its ability to fund the further development of its business plan or
improve its operations.

As described in Note 23, the Company revised its offer in January 2006 to issue
preferred stock, as opposed to common stock, in exchange for such claims.
Subsequent to December 31, 2005, creditors and claimants representing
approximately 75% of aggregate claims have indicated their acceptance of the
Company's proposal.

Subsequent to December 31, 2005 the Company raised $720,000 of gross proceeds
(approximately $540,000 net of transaction expenses) in a bridge note
transaction (Note 23),. The terms of the bridge note transaction provided for
the automatic exchange of these notes for Series A Preferred Stock and Warrants
upon the completion of a private placement transaction. On March 27, 2006, the
Company issued $4,820,500 of its Series A Preferred Stock and Warrants in a
private placement transaction, which includes $720,000 related to the automatic
exchange of the bridge notes (Note 23).

The Company is currently in the process of attempting to raise additional
capital and has taken certain steps to conserve its liquidity while it continues
to integrate the acquired businesses. Although the Company believes that it has
access to capital resources, it has not secured any commitments for additional
financing at this time nor can the Company provide any assurance that it will be
successful in its efforts to raise additional capital and/or successfully
execute its business plan.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

DEVELOPMENT STAGE OPERATIONS

CASH

The Company considers all highly liquid securities purchased with original
maturities of three months or less to be cash.

REVENUE RECOGNITION

persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii)
the vendor's fee is fixed or determinable, and (iv) collectability is probable.

BUSINESS COMBINATIONS

ACCOUNTS RECEIVABLE

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.

PROPERTY AND EQUIPMENT

GOODWILL AND INTANGIBLE ASSETS

LONG LIVED ASSETS

USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS

In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenue and expenses during the reporting
period. The Company's significant estimates principally include the valuation of
its intangible assets and goodwill and accrued liability for the Company's
estimate of the fair value of preferred stock issued upon the settlement of the
accommodation agreements in March 2006 (Notes 16 and 23). Actual results could
differ from those estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

STOCK OPTION PLANS

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

The following table summarizes the proforma operating results of the Company,
had compensation expense for stock options granted to employees been determined
in accordance with the fair market value based method prescribed by SFAS No.
123. The Company has presented the following disclosures in accordance with SFAS
No. 148.

Year ended December 31,
------------- ------------
2005 2004
------------- ------------
Net Loss, as reported ...................... $(44,446,151) $ (4,665,451)
(+) Stock-based compensation cost
reflected in the financial statements ... 22,500 --
(-) Stock-based employee compensation
expense under the fair value method ..... (440,753) (1,143,611)
------------- ------------
Proforma Net Loss .......................... $(44,864,404) $ (5,809,062)
============= ============
Net Loss per Share-
Basic and Diluted, as reported .......... $ (0.76) $ (0.12)
============= ============
Basic and Diluted, proforma ............. $ (0.77) $ (0.15)
============= ============

NON-EMPLOYEE STOCK BASED COMPENSATION

The cost of stock based compensation awards issued to non-employees for services
are recorded at either the fair value of the services rendered or the
instruments issued in exchange for such services, whichever is more readily
determinable, using the measurement date guidelines enumerated in EITF 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services."

COMMON STOCK PURCHASE WARRANTS

The Company accounts for the issuance of common stock purchase warrants issued
with registration rights in accordance with the provisions of EITF 00-19
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock."

Based on the provisions of EITF 00-19, the Company classifies as equity any
contracts that (i) require physical settlement or net-share settlement or (ii)
gives the company a choice of net-cash settlement or settlement in its own
shares (physical settlement or net-share settlement). The Company classifies as
assets or liabilities any contracts that (i) require net-cash settlement
(including a requirement to net cash settle the contract if an event occurs and
if that event is outside the control of the company) or (ii) give the
counterparty a choice of net-cash settlement or settlement in shares (physical
settlement or net-share settlement).

INCOME TAXES

NET LOSS PER SHARE

Net loss per common share excludes the following outstanding options, warrants
and convertible notes as their effect would be anti-dilutive:

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
This interpretation of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," provides guidance for identifying a controlling interest
in a variable interest entity ("VIE") established by means other than voting
interest. FIN 46 also requires consolidation of a VIE by an enterprise that
holds such controlling interest. In December 2003, the FASB completed its
deliberations regarding the proposed modifications to FIN No. 46 and issued
Interpretation Number 46R, "Consolidation of Variable Interest Entities - an
Interpretation of ARB 51" ("FIN No. 46R"). The decisions reached included a
deferral of the effective date and provisions for additional scope exceptions
for certain types of variable interests. Application of FIN No. 46R is required
in financial statements of public entities that have interests in VIE's or
potential VIE's commonly referred to as special-purpose entities for periods
ending after December 15, 2003. Application by public issuers' entities is
required in all interim and annual financial statements for periods ending after
December 15, 2004. The adoption of this pronouncement did not have material
effect on the Company's financial statements.

In December 2004, the FASB issued SFAS No. 123R "Share Based Payment" (SFAS
123R). This statement is a revision of SFAS Statement No. 123, "Accounting for
Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and its related implementation guidance. SFAS 123R
addresses all forms of share based payment ("SBP") awards including shares
issued under employee stock purchase plans, stock options, restricted stock and
stock appreciation rights. Under SFAS 123R, SBP awards result in a cost that
will be measured at fair value on the awards' grant date, based on the estimated
number of awards that are expected to vest and will result in a charge to
operations for stock-based compensation expense. The charge will be reflected in
the Company's Statements of Operations during periods in which such charges are
recorded, but will not affect its Balance Sheets or Statements or Cash Flows.
SFAS 123R is effective for public entities that file as small business
issuers--as of the beginning of the first reporting period of the fiscal year
that begins after December 15, 2005. The Company is currently in the process of
evaluating the effect that the adoption of this pronouncement will have on its
financial statements.

In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 154, "Accounting Changes and Error
Corrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3" ("SFAS
154"). This Statement replaces APB Opinion No. 20, Accounting Changes, and FASB
Statement No. 3, Reporting Accounting Changes in Interim Financial Statements,
and changes the requirements for the accounting for and reporting of a change in
accounting principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed.

APB Opinion No. 20 previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of the change
the cumulative effect of changing to the new accounting principle. This
Statement requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. When it is impracticable to determine the period-specific effects of an
accounting change on one or more individual prior periods presented, this
Statement requires that the new accounting principle be applied to the balances
of assets and liabilities as of the beginning of the earliest period for which
retrospective application is practicable and that a corresponding adjustment be
made to the opening balance of retained earnings (or other appropriate
components of equity or net assets in the statement of financial position) for
that period rather than being reported in an income statement. When it is
impracticable to determine the cumulative effect of applying a change in
accounting principle to all prior periods, this Statement requires that the new
accounting principle be applied as if it were adopted prospectively from the
earliest date practicable. This Statement shall be effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. The Company does not believe that the adoption of SFAS 154 will have a
significant effect on its financial statements.

On June 29, 2005, the EITF ratified Issue No. 05-2, "The Meaning of
`Conventional Convertible Debt Instrument' in EITF Issue No. 00-19, `Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock.'" EITF Issue 05-2 provides guidance on determining whether
a convertible debt instrument is "conventional" for the purpose of determining
when an issuer is required to bifurcate a conversion option that is embedded in
convertible debt in accordance with SFAS 133. Issue No. 05-2 is effective for
new instruments entered into and instruments modified in reporting periods
beginning after June 29, 2005. The adoption of this pronouncement did not have a
material effect on the Company's financial statements.

In September 2005, Issue No. 05-4, "The Effect of a Liquidated Damages Clause on
a Freestanding Financial Instrument Subject to EITF Issue No. 00-19, `Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock.'" EITF 05-4 provides guidance to issuers as to how to
account for registration rights agreements that require an issuer to use its
"best efforts" to file a registration statement for the resale of equity
instruments and have it declared effective by the end of a specified grace
period and, if applicable, maintain the effectiveness of the registration
statement for a period of time or pay a liquidated damage penalty to the
investor. The Company is currently in the process of evaluating the effect that
the adoption of this pronouncement may have on its financial statements.

In September 2005, the FASB ratified the Emerging Issues Task Force's ("EITF")
Issue No. 05-7, "Accounting for Modifications to Conversion Options Embedded in
Debt Instruments and Related Issues," which addresses whether a modification to
a conversion option that changes its fair value affects the recognition of
interest expense for the associated debt instrument after the modification and
whether a borrower should recognize a beneficial conversion feature, not a debt
extinguishment if a debt modification increases the intrinsic value of the debt
(for example, the modification reduces the conversion price of the debt). This
issue is effective for future modifications of debt instruments beginning in the
first interim or annual reporting period beginning after December 15, 2005. The
Company is currently in the process of evaluating the effect that the adoption
of this pronouncement may have on its financial statements.

In September 2005, the FASB also ratified the EITF's Issue No. 05-8, "Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature,"
which discusses whether the issuance of convertible debt with a beneficial
conversion feature results in a basis difference arising from the intrinsic
value of the beneficial conversion feature on the commitment date (which is
recorded in the shareholder's equity for book purposes, but as a liability for
income tax purposes), and, if so, whether that basis difference is a temporary
difference under FASB Statement No. 109, "Accounting for Income Taxes." This
Issue should be applied by retrospective application pursuant to Statement 154
to all instruments with a beneficial conversion feature accounted for under
Issue 00-27 included in financial statements for reporting periods beginning
after December 15, 2005. The Company is currently in the process of evaluating
the effect that the adoption of this pronouncement may have on its financial
statements.

Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies that do not require adoption until a future date
are not expected to have a material impact on the consolidated financial
statements upon adoption.

NOTE 4 - BUSINESS COMBINATIONS

MERGER WITH COMPLETE SECURITY SOLUTIONS, INC.

On February 25, 2005, pursuant to the filing of an Agreement and Plan of Merger,
the Company's merger with Complete Security Solutions, Inc. ("CSSI") became
effective. The merger was consummated pursuant to a definitive Supplemental
Agreement and the Agreement and Plan of Merger, entered into as of February 24,
2005, each among the Company, CSSI Acquisition Co. I, Inc., a wholly-owned
subsidiary of the Company and CSSI. Pursuant to the terms of the Supplemental
Agreement and Agreement and Plan of Merger with CSSI, CSSI Acquisition Co. I,
Inc. merged with and into CSSI, with CSSI surviving the merger as a wholly-owned
subsidiary of the Company.

CSSI sells computer software that supports real-time secure collection, delivery
and sharing of field-based report information for public safety agencies. The
Company believes that CSSI's electronic forms technology provides law
enforcement and other justice agencies with secure, real-time access to field
reporting data for use inside a department or in a multi-jurisdictional
information sharing system. The Company acquired CSSI because it believes that
such technologies fit within its strategic plan of building a business that
addresses the urgency of homeland and information security initiatives.

In connection with the CSSI merger, the Company issued 7,500,000 shares of
common stock in exchange for the outstanding shares of the common stock of CSSI,
and subordinated promissory notes in the aggregate principal amount of
$4,500,000 (the "Subordinated Notes") and warrants to purchase 2,250,000 shares
of common stock ("Purchase Warrants") in exchange for the outstanding shares of
the preferred stock of CSSI. The Purchase Warrants have a term of 5 years and an
exercise price of $0.70 per share. The Subordinated Notes and Purchase Warrants
were issued to Apex Investment Fund V, L.P. ("Apex"), The Northwestern Mutual
Life Insurance Company ("Northwestern"), and Advanced Equities Venture Partners
I, L.P ("Advanced Equities").

The Subordinated Notes issued to the holders of the outstanding preferred stock
of CSSI have an initial term of 120 days (due on June 25, 2005), with the
Company's option to extend the term for an additional 60 days to August 24,
2005. The Subordinated Notes are interest free and automatically convert into
the securities offered by the Company at the first closing of a subsequent
financing for the Company, for such number of offered securities as could be
purchased for the principal amount being converted.

The Company did not redeem the Subordinated Notes on August 24, 2005 and, as a
result, the notes became automatically convertible into 3.84 shares of common
stock for each $1 of principal then outstanding in accordance with the original
note agreement. Accordingly, the Company recorded a charge of $4,500,000 based
upon the intrinsic value of this conversion option measured at the original
issuance date of the note. The Company has agreed to file with the SEC, a
registration statement for the resale of the restricted shares of the Company's
common stock issuable upon exercise of the conversion option that would be
issued in this transaction, on a best efforts basis.

The Company has agreed to register the resale of the 7,500,000 shares of common
stock issued to the holders of the outstanding common stock of CSSI and the
2,250,000 shares of common stock issuable upon the exercise of the warrants
issued to the holders of the outstanding preferred stock of CSSI at such time as
the Company next files a registration statement with the Securities and Exchange
Commission ("SEC") on a best efforts basis.

MERGER WITH LUCIDLINE, INC.

On February 25, 2005, pursuant to the filing of an Agreement and Plan of Merger,
the Company's merger with LucidLine, Inc. ("LucidLine") became effective. The
merger was consummated pursuant to a definitive Supplemental Agreement and the
Agreement and Plan of Merger entered into as of February 24, 2005, each among
the Company, LL Acquisition I Corp., a wholly-owned subsidiary of the Company
and LucidLine. Pursuant to the terms of the Supplemental Agreement and Agreement
and Plan of Merger with LucidLine, LL Acquisition I Corp. merged with and into
LucidLine, with LucidLine surviving the merger as a wholly-owned subsidiary of
the Company.

LucidLine provides high-speed Internet access, synchronized remote back-up,
retrieval, and restoration services to small and mid-size businesses. The
Company acquired LucidLine because it believes that LucidLine's information
protection technologies fit within its strategic plan of building a business
that addresses the urgency of homeland and information security initiatives.

In connection with the LucidLine merger, the Company issued 4,400,000 shares of
common stock and $200,000 of cash, in exchange for all of the outstanding shares
of LucidLine's common stock. The Company has agreed to register the resale of
the shares of common stock issued to the holders of the outstanding common stock
of LucidLine at such time as the Company next files a registration statement
with the SEC on a best efforts basis.

MERGER WITH ENTELAGENT SOFTWARE CORP.

On November 24, 2002, the Company, ESC Acquisition, Inc., a California
corporation and wholly-owned subsidiary of Patron ("Entelagent Mergerco"), and
Entelagent Software Corp., a California corporation ("Entelagent"), entered into
an Agreement and Plan of Merger, (the "Entelagent Merger Agreement") whereby
Entelagent Mergerco would be merged with and into Entelagent with Entelagent
surviving as a wholly-owned subsidiary of the Company (the "Entelagent Merger").
The Company, Entelagent Mergerco and Entelagent also concurrently entered into a
Supplemental Agreement (the "Entelagent Supplemental Agreement").

On February 24, 2005, the Company entered into a definitive Amended and Restated
Supplemental Agreement pursuant to which Entelagent Mergerco would merge with
and into Entelagent, with Entelagent surviving the merger as a wholly-owned
subsidiary of the Company. On March 30, 2005, pursuant to the filing of an
Amended and Restated Agreement and Plan of Merger, the Company's merger with
Entelagent became effective. The Amended and Restated Agreement and Plan of
Merger amended and restated the Entelagent Merger Agreement.

Entelagent provides flexible and scalable real-time content-aware e-mail
monitoring and post-event review of e-mail messages and their attachments as
well as infrastructure for knowledge management of archived e-mail messages and
attachments in all media. Entelagent's e-mail content monitoring technology
addresses the need for comprehensive internal security measures to safeguard
company intellectual capital. The Company acquired Entelagent because it
believes that Entelagent's information surveillance and protection technologies
fit within its strategic plan of building a business that addresses the urgency
of homeland and information security initiatives.

In connection with the Entelagent Merger, the Company issued 3,000,000 shares of
the Company's common stock in exchange for all of the outstanding shares of the
capital stock of Entelagent. The Company has agreed to register

the resale of the 3,000,000 shares of common stock issued to the holders of the
outstanding capital stock of Entelagent at such time as the Company next files a
registration statement with the SEC on a best efforts basis. In addition,
pursuant to the terms of the Amended and Restated Supplemental Agreement, the
Company also agreed to (i) issue to certain officers, directors, stockholders
and creditors of Entelagent, in consideration of amounts owed by Entelagent to
such parties, promissory notes in the aggregate principal amount of $2,640,000,
with interest payable thereon at a rate of 8% per annum and maturing one year
after the completion of the merger and (ii) pay and satisfy $1,388,000 in
outstanding liabilities of Entelagent. The Company placed $1,388,000 of the
proceeds it received from the Interim Bridge Financing I financing transaction
completed on February 28, 2005 in a reserve account established to assist the
Company in the payment of such liabilities. The non-disbursed funds as of
December 31, 2005 are presented as restricted cash in the accompanying balance
sheet.

Subsequent to the date of the acquisition, the Company modified its purchase
price allocation for the finalization of amounts owed by approximately $37,000
and thereby reduced the aggregate balance of the notes issued in connection with
the consummation of the Entelagent Merger to $2,602,912.

BUSINESS COMBINATION ACCOUNTING

The Company accounted for its acquisitions of CSSI, LucidLine and Entelagent
using the purchase method of accounting prescribed under SFAS 141 "Business
Combinations." Under the purchase method, the acquiring enterprise records any
purchase consideration issued to the sellers of the acquired business at their
fair values. The aggregate of the fair value of the purchase consideration plus
any direct transaction expenses incurred by the acquiring enterprise is
allocated to the assets acquired (including any separately identifiable
intangibles) and liabilities assumed based on their fair values at the date of
acquisition. The excess of cost of the acquired entities over the fair values of
identifiable assets acquired and liabilities assumed was recorded as goodwill.
The results of operations for each of the acquired companies following the dates
of each business combination is included in the Company consolidated results of
operations for the year ended December 31, 2005.

The Company evaluated each of the aforementioned transactions to identify the
acquiring entity as required under SFAS 141 for business combinations effected
through an exchange of equity interests. Based on such evaluation the Company
determined that it was the acquiring entity in each transaction (and
cumulatively for all transactions) as (1) the larger portion of the relative
voting rights in the Company after each combination was retained by its
previously existing stockholders, (2) the previously existing stockholders,
through their retention of a majority of voting rights, retained the ability to
elect or appoint a voting majority of the governing body of the combined entity,
and (3) under the terms of the exchange of equity securities, the Company paid a
premium over the market value of the equity securities of the other combining
entities.

The following table provides a breakdown of the purchase price including the
fair value of purchase consideration issued to the sellers of the acquired
business and direct transaction expenses incurred by the Company in connection
with consummating these transactions:

CSSI LucidLine Entelagent Total
----------------------- ----------- ----------- ----------- -----------
Cash .................. $ -- $ 200,000 $ -- $ 200,000
Common Stock .......... 6,375,000 3,740,000 2,550,000 12,665,000
Subordinated promissory
notes................ 4,500,000 -- -- 4,500,000
Common stock warrants . 1,912,500 -- -- 1,912,500
Transaction expenses .. 398,128 154,611 359,894 912,633
Total Purchase Price $13,185,628 $ 4,094,611 $ 2,909,894 $20,190,133

The fair value of common stock issued to the sellers as purchase consideration
was determined in accordance with the provisions of EITF 99-12 "Determination of
the Measurement Date for the Market Price of Acquirer Securities Issued in a
Purchase Business Combination." The fair value of subordinated notes issued to
the sellers as purchase consideration is considered to be equal to their
principal amounts due to the short-term maturity of those instruments. The
Company calculated the fair value of common stock purchase warrants issued to
the sellers as purchase consideration using the Black-Scholes option-pricing
model.

Transaction expenses, which include legal fees and transaction advisory services
directly related to the acquisitions amount to $912,633. Such fees include
$657,633 paid in cash and $255,000 for the fair value of 300,000 common stock
purchase warrants issued to Laidlaw & Company UK Ltd. ("Laidlaw") in its
capacity as a transaction advisor.

PURCHASE PRICE ALLOCATION

Under business combination accounting, the total purchase price was allocated to
CSSI's and LucidLine's net tangible and identifiable intangible assets based on
their estimated fair values as of February 25, 2005. The total purchase price
allocation for Entelagent's net tangible and identifiable intangible assets was
based on their estimated fair values as of March 30, 2005. The allocation of the
purchase price for these three acquisitions is set forth below. The excess of
the purchase price over the net tangible and identifiable intangible assets was
recorded as goodwill.

The Company assumed $476,594 of payroll and sales tax liabilities in its
acquisition of Entelagent that were in arrears at the date the transaction was
consummated (Note 15). These liabilities have been estimated at their fair value
in the purchase price allocation. The settlement of these amounts is in
negotiation and could change, as the outcome of any proposed settlement is
unknown at the date of filing.

CSSI LucidLine Entelagent Total
----------------------------------- ------------ ------------ ------------ ------------

Fair value of tangible assets:
Cash ........................... $ 399,636 $ 9,563 $ 7,198 $ 416,397
Accounts receivable ............ 27,791 22,936 84,918 135,645
Employee receivables ........... 111,773 2,000 27,500 141,273
Other current assets ........... 45,177 326 5,990 51,493
----------------------------------- ------------ ------------ ------------ ------------
Total current assets ........ 584,377 34,825 125,606 744,808
Property and Equipment ............ 62,000 61,000 12,000 135,000
Other assets ...................... -- -- -- --

Advances to prospective affiliates 2,674,689 -- -- 2,674,689
----------------------------------- ------------ ------------ ------------ ------------
Total tangible assets ............. 3,321,066 95,825 137,606 3,554,497
Liabilities assumed:
Accounts payable ............... (128,854) (32,473) (345,769) (507,096)
Advances from prospective
affiliate ................... -- (829,032) (2,363,359) (3,192,391)
Accrued expenses and other
current liabilities ......... (404,168) -- (4,354,331) (4,758,499)
----------------------------------- ------------ ------------ ------------ ------------
Total current liabilities ... (533,022) (861,505) (7,063,459) (8,457,986)
Long term liabilities ............. -- (102,460) (345,330) (447,790)
----------------------------------- ------------ ------------ ------------ ------------
Total liabilities assumed ... (533,022) (963,965) (7,408,789) (8,905,776)
----------------------------------- ------------ ------------ ------------ ------------
Net tangible assets acquired ...... 2,788,044 (868,140) (7,271,183) (5,351,279)
Value of excess allocated to:
Developed technology ........... 670,000 -- 1,900,000 2,570,000
Customer relationships ......... 180,000 -- -- 180,000
Trademarks and tradenames ...... 55,000 -- 106,000 161,000
In-process research and
development ................. 190,000 -- -- 190,000
Goodwill ....................... 9,302,584 4,962,751 8,175,077 22,440,412
----------------------------------- ------------ ------------ ------------ ------------
Purchase Price .................... $ 13,185,628 $ 4,094,611 $ 2,909,894 $ 20,190,133
============ ============ ============ ============

The purchase price allocation was based upon a valuation study performed by an
independent outside appraisal firm. The Company, in formulating the allocation,
considered its intention for future use of the acquired assets, analyses of the
historical financial performance of each of the acquired businesses and
estimates of future performance of each acquired businesses' products and
services. The Company made certain adjustments during the year ended December
31, 2005 to its original purchase price allocation as a result of (a) having
negotiated settlements of certain liabilities that it assumed in its business
combination with Entelagent, (b) having completed the audits of the acquired
businesses and (c) the reevaluation of the carrying amounts of certain accounts
receivable balances recorded in purchase accounting. These changes resulted in a
net increase of $6,660 to the Company's original

determination of goodwill. In addition, the Company reduced both other current
assets and current liabilities by $27,500 to offset a prepayment of a liability
that occurred prior to the acquisition.

PROFORMA FINANCIAL INFORMATION

The unaudited financial information in the table below summarizes the combined
results of operations of the Company and CSSI, LucidLine and Entelagent, on a
proforma basis, as if the companies had been combined as of the beginning of
each of the periods presented.

The unaudited proforma financial information for the year ended December 31,
2005 combines the historical results for Patron for the year ended December 31,
2005 and the historical results for CSSI and LucidLine for the period from
January 1, 2005 to February 24, 2005 and the historical results for Entelagent
for the period from January 1, 2005 to March 30, 2005. The unaudited proforma
financial results for the year ended December 31, 2004 combines the historical
results for Patron for this period with the historical results for CSSI,
Entelagent and LucidLine for the year ended December 31, 2004.

2005 2004
----------------------------------------------- ------------ ------------
Total revenues ................................ $ 800,710 $ 1,822,197
Net loss ...................................... (46,152,799) (12,390,906)
Weighted average shares outstanding on a
proforma basis .............................. 61,022,946 53,708,280
Proforma net loss per share, basic and diluted $ (0.76) $ (0.23)

The proforma financial information is presented for informational purposes only
and is not indicative of the results of operations that would have been achieved
if the acquisitions of these three companies had taken place at the beginning of
each of the periods presented

NOTE 5 - IMPAIRMENT OF GOODWILL

The Company recorded $22,440,412 of goodwill in connection with its acquisitions
of CSSI, Lucidline and Entelagant (Note 4). The amount of goodwill that the
Company recorded in connection with these acquisitions was determined by
comparing the aggregate amounts of the respective purchase prices plus related
transaction costs to the fair values of the net tangible and identifiable
intangible assets acquired for each of the businesses described in Note 4.

The Company performed its annual impairment test of goodwill at its designated
valuation date of December 31, 2005 in accordance with SFAS 142. As a result of
these tests, the Company determined that the recoverable amount of goodwill with
respect to its business amounted to $9,510,716. Accordingly, the Company
recorded a goodwill impairment charge in the amount of $12,929,696 for the year
ended December 31, 2005. The valuation was performed by an outside specialist
using a weighted average discounted cash flows modeling approach.

The Company recorded the aforementioned charge during the quarter ended December
31, 2005 after key management re-evaluated the Company's available resources and
the strategic direction of the business. As a result of having made this
evaluation, management determined that the Company's entry into the market for
homeland security information systems solutions was not feasible given its
limited capital resources. Accordingly, management determined that, it would be
necessary to curtail certain of the businesses activities and principally pursue
opportunities for sales of its software products in commercial applications. The
Company also believes that the delays it experienced in executing its business
plan enabled its competitors to gain market share. The Company attributes such
delays to the fact that it had limited capital and human resources during 2005,
which it principally used to bring the Company into compliance with its SEC
reporting obligations. The Company cannot provide any assurance as to when, if
ever, it will gain the market share it had originally expected to at the time it
completed its acquisitions of CSSI, Entelagent, and Lucidline or that it will be
successful in its efforts to pursue opportunities for commercial sales of its
products.

Based on these factors, the Company revised its forecasts of future sales to
give effect to certain external factors which include (i) changes in market
conditions and increasing competition that occurred with the passage of time,
and (ii) its decision to no longer pursue opportunities for homeland security
information systems solutions. In addition, the Company's limited capital
resources have had a material adverse affect on its ability to sustain the level
of growth it had originally assumed at the time it formulated its business plan

NOTE 6 - OTHER CURRENT ASSETS

Other current assets consist of the following:

December 31, 2005
-----------------
Employee receivables.................. $ 52,029
Prepaid expenses...................... 78,100
Deposits.............................. 22,872
-----------------
Other current assets................ $ 153,001
=================

Note 7 - Property and Equipment

December 31, 2005
-----------------
Computers............................ $ 168,210
Furniture and Fixtures............... 53,562
Leasehold improvements............... 4,490
-----------------
sub-total........................ 226,262
less: accumulated depreciation....... (56,337)
-----------------
Property and equipment, net...... $ 169,925
=================

Depreciation expense amounted to $56,337 for the year ended December 31, 2005.
The Company did not employ property and equipment during the year ended December
31, 2004 and therefore did not incur any depreciation expense in that year.

NOTE 8 - DEFERRED FINANCING COSTS

Deferred financing costs at December 31, 2005, include the following:

Interim Bridge Financing
--------------------------------------------------------
Bridge I Bridge II Bridge III Total
----------- ----------- ----------- -----------

Cash fees paid to agent and investor to originate loans $ 316,579 $ 305,160 $ 6,000 $ 627,739
Fair value of warrants issued to:
Placement agent .................................... 297,500 80,867 -- 378,367
Investors upon the extension of due dates .......... 822,500 65,338 59,087 946,925
----------- ----------- ----------- -----------
1,436,579 451,365 65,087 1,953,031
Accumulated amortization .............................. (1,436,579) (451,365) (65,087) (1,953,031)
----------- ----------- ----------- -----------
Deferred financing costs, net ......................... $ -- $ -- $ -- $ --
=========== =========== =========== ===========

The Company incurred $316,579 of cash fees and $297,500 of non-cash fees
representing the fair value of 350,000 common stock purchase warrants issued to
Laidlaw in its capacity as the placement agent in the $3,500,000 Interim Bridge
Financing I (Note 11) completed in February 2005. Fees incurred in connection
with the Interim Bridge I Financing were fully amortized during the year ended
December 31, 2005.

On June 28, 2005, the Company elected to extend the due date of the Interim
Bridge Financing I notes in exchange for 1,750,000 additional common stock
purchase warrants (the "Bridge I Extension Warrants") that were issued to the
investors in this transaction. The aggregate fair value of the warrants, which
amounted to $822,500 was recorded as a deferred financing cost and was fully
amortized over the 60-day extension period, which ended on August 27, 2005.

The Company incurred cash fees of $305,160 and non-cash fees of $80,867
representing the fair value of 152,580 common stock purchase warrants issued to
Laidlaw & Company (UK) Ltd. in its capacity as the placement agent in the
$2,543,000 Interim Bridge Financing II (Note 11). These deferred financing costs
were fully amortized during the year ended December 31, 2005.

Beginning on October 4, 2005, the Company elected to extend the due date of the
Interim Bridge Financing II notes in exchange for 1,271,500 additional common
stock purchase warrants (the "Bridge II Extension Warrants") that were issued to
investors in this transaction. The aggregate fair value of the warrants, which
amounted to $65,338 was recorded as a deferred financing cost and was fully
amortized over the 60-day extension period, which ended on December 2, 2005.

The Company paid $6,000 to Advanced Equities on July 29, 2005 with respect to
transaction services performed in connection with the Interim Bridge Financing
III (Note 11) completed in September 2005. The fees were fully amortized over
the term of the note to November 25, 2005.

Beginning on October 29, 2005, the Company elected to extend the due date of the
Interim Bridge Financing III notes in exchange for 1,200,000 additional common
stock purchase warrants (the "Bridge III Extension Warrants") that were issued
to investors in this transaction. The aggregate fair value of the warrants,
which amounted to $59,087, was recorded as deferred financing cost. This
deferred financing cost was fully amortized as of December 31, 2005.

The fair value of all of the aforementioned warrants was determined using the
Black-Scholes option-pricing model. Amortization of deferred financing costs
amounted to $1,953,031 for the year ended December 31, 2005 and is included as a
component of interest expense in the accompanying statement of operations.

NOTE 9 - INTANGIBLE ASSETS

During the quarter ended December 31, 2005, the Company recorded a $1,705,455
charge for the impairment of the developed technology assets acquired in the
CSSI and Entelagent acquisitions. After reevaluating the resources available to
the Company and the strategic direction of the business, management has
developed revised business plans and financial projections. The Company believes
that the delays it has experienced in implementing its business plan may have
resulted in the potential impairment of the developed technology assets and that
an impairment analysis should be performed. In performing the analysis for
recoverability, the Company estimated the future cash flows expected to result
from these software products. Since the estimated discounted cash flows were
less than the carrying value of the related assets, it was concluded that an
impairment loss should be recognized. In accordance with SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets," the impairment
charge was determined by comparing the estimated fair value of the related
assets to their carrying value. The write down established a new cost basis for
the impaired assets.

The components of intangible assets as of December 31, 2005 are set forth in the
following table:

IMPAIRMENT OF
DEVELOPED NET BOOK ESTIMATED
FAIR VALUE ACCUMULATED TECHNOLOGY VALUE AT USEFUL
AND ADDITIONS AMORTIZATION INTANGIBLE 12/31/05 LIFE
------------------------- ------------- ------------ ------------ ----------- ---------

Developed technology .... $ 2,570,000 $ 396,670 $(1,705,455) $ 467,875 5 years
Customer relationships .. 180,000 37,500 -- 142,500 4 years
Trademarks and tradenames 161,000 31,335 -- 129,665 4 years
In-process research and
development ............. 524,387 31,670 -- 492,717 5 years
------------- ------------ ------------ -----------
$ 3,435,387 $ 497,175 $(1,705,455) $ 1,232,757
============= ============ =========== ===========

The Company classifies amortization of developed technology as a component of
cost of sales. Amortization expense amounted to $497,175 for the year ended
December 31, 2005.

AMORTIZATION OF INTANGIBLE ASSETS

The amortization of intangible assets will result in the following additional
expense by year:

INTANGIBLE
YEARS ENDED DECEMBER 31: AMORTIZATION
------------------------ -----------------
2006 267,007
2007 300,215
2008 300,215
2009 231,380
2010 100,731
2011 33,209
-----------------
$1,232,757
=================

NOTE 10 - DEMAND NOTES PAYABLE

The Company borrowed an aggregate amount of $695,000 from four unrelated
parties. These notes are payable on demand and bear interest at the rate of 10%
per annum. Interest expense on these notes amounted to $69,500, $69,500 and
$58,062 for years ended December 31, 2005, 2004 and 2003, respectively.

Other demand notes at December 31, 2005 total $361,056 and include a note
payable to Lok Technology in the amount of $312,556 which is secured by
Entelagent's accounts receivable and bears interest at 15% per annum. Interest
on these other demand notes amounted to $53,737 for the year ended December 31,
2005.

NOTE 11 - BRIDGE NOTES PAYABLE

INTERIM BRIDGE FINANCING I

On February 28, 2005, the Company completed a $3,500,000 financing (the "Interim
Bridge Financing I") through the issuance of 10% Senior Convertible Promissory
Notes (the "Bridge I Notes") and warrants to purchase 1,750,000 shares of the
Company's common stock ("Bridge I Warrants") (Note 18). The warrants have a term
of 5 years and an exercise price of $0.70 per share. Prior to final maturity,
the Bridge I Notes may be converted into securities that would be issuable at
the first closing of a subsequent financing by the Company, for such number of
offered securities that could be purchased for the principal amount being
converted. The Bridge I Notes had an initial term of 120 days (due on June 28,
2005) with interest at a contractual rate of 10% per annum and featured an
option for the Company to extend the term for an additional 60 days to August
27, 2005.

In accordance with APB 14, the Company allocated $2,456,140 of the proceeds to
the Bridge I Notes and $1,043,860 of proceeds to the Bridge I Warrants based on
the relative fair values of these financial instruments. The difference between
the carrying amount of the Bridge I Notes and their contractual redemption
amount was accreted as interest expense to June 28, 2005, their earliest date of
redemption. Accretion of the aforementioned discount amounted to $1,043,860 for
the year ended December 31, 2005 and is included as a component of interest
expense in the accompanying statement of operations.

On June 28, 2005, the Company elected to extend the contractual maturity date of
the Bridge I Notes for an additional 60 days to August 27, 2005, which caused
the contractual interest rate to increase to 12% per annum. In addition, the
Company was required to issue the 1,750,000 additional warrants (the "Bridge I
Extension Warrants") (Note 18) to purchase such number of shares of common stock
equal to 1/2 of a share for each $1.00 of principal amount outstanding. The
Bridge I Extension Warrants have a term of 5 years and an exercise price of
$0.70 per share. The Bridge I Extension Warrants are included in Deferred
Financing Costs at their fair value, which amounts to $822,500.

The Company did not redeem the Bridge I Notes on August 27, 2005 and, as a
result, the notes became automatically convertible into 3.84 shares of common
stock for each $1 of principal then outstanding in accordance with the original
note agreement. Accordingly, the Company recorded a charge of $3,500,000 based
upon the intrinsic value of this conversion option which was measured at the
original issuance date of the note in accordance with EITF 00-27. The Company
has agreed to file with the SEC, a registration statement for the resale of the
restricted shares of the Company's common stock issuable upon exercise of the
conversion option that would be issued in this transaction, on a best efforts
basis.

Contractual interest expense on the Bridge I Notes amounted to $326,164 for the
year ended December 31, 2005 and is included as a component of interest expense
in the accompanying statement of operations

The Company sold these securities to thirty-three accredited investors
introduced by Laidlaw, the placement agent in the Interim Bridge Financing I. As
described in Note 8, the Company incurred $614,079 of fees in connection with
this transaction including $297,500 for the fair value of warrants to purchase
up to 350,000 shares of the Company's common stock (the "Placement Agent
Warrants") at an exercise price of $0.70 per share.

INTERIM BRIDGE FINANCING II

On June 6, 2005, the Company completed a $2,543,000 financing (the "Interim
Bridge Financing II") through the issuance of (i) 10% Junior Convertible
Promissory Notes (the "Bridge II Notes") and (ii) warrants to purchase 1,271,500
shares of common stock (the "Bridge II Warrants") (Note 18). The warrants have a
term of 5 years and an exercise price of $0.60 per share. Prior to maturity, the
Junior Convertible Promissory Notes may be converted into the securities offered
by the Company at the first closing of a subsequent financing for the Company,
for such number of offered securities as could be purchased for the principal
amount being converted.

In accordance with APB 14, the Company allocated $2,010,277 of the proceeds to
the Bridge II Notes and $532,723 of proceeds to the Bridge II Warrants based on
the relative fair values of these financial instruments. The difference between
the carrying amount of the Bridge II Notes and their contractual redemption
amount is being accreted as interest expense to October 3, 2005, their earliest
date of redemption. Accretion of the aforementioned discount amounted to
$532,723 for the year ended December 31, 2005 and is included as a component of
interest expense in the accompanying statement of operations.

On October 4, 2005, the Company elected to extend the contractual maturity date
of the Bridge II Notes for an additional 60 days to December 2, 2005, which
caused the contractual interest rate to increase to 12% per annum. In addition,
the Company was required to issue the 1,271,500 additional warrants (the "Bridge
II Extension Warrants") (Note 18) to purchase such number of shares of common
stock equal to 1/2 of a share for each $1.00 of principal amount outstanding.
The Bridge II Extension Warrants have a term of 5 years and an exercise price of
$0.60 per share. The Bridge II Extension Warrants are included in Deferred
Financing Costs at their fair value, which amounts to $65,338.

The Company did not redeem the Bridge II Notes on December 2, 2005 and, as a
result, the notes became automatically convertible into 3.84 shares of common
stock for each $1 of principal then outstanding in accordance with the original
note agreement. Accordingly, the Company recorded a charge of $2,543,000 based
upon the intrinsic value of this conversion option measured at the original
issuance date of the note in accordance with EITF 00-27. The Company has agreed
to file with the SEC, a registration statement for the resale of the restricted
shares of the Company's common stock issuable upon exercise of the conversion
option that would be issued in this transaction, on a best efforts basis.

Contractual interest expense on the Bridge II Notes amounted to $171,434 for the
year ended December 31, 2005 and is included as a component of interest expense
in the accompanying statement of operations

The Company sold these securities to seven accredited investors introduced by
Laidlaw, placement agent in the Interim Bridge Financing II. As described in
Note 8, the Company incurred $386,027 of fees in connection with this
transaction including a cash fee of $305,160 and $80,867 for the fair value of
warrants to purchase 152,580 shares of the Company's common stock at an exercise
price of $0.60 per share.

INTERIM BRIDGE FINANCING III

Beginning on July 1, 2005, and continuing through December 31, 2005, the Company
completed, through 12 separate fundings, a $5,234,000 financing (the "Interim
Bridge Financing III") through the issuance of (i) 10% Junior Convertible
Promissory Notes (the "Bridge III Notes") and (ii) warrants to purchase up to
2,617,000 shares of common stock (the "Bridge III Warrants") (Note 18). The
warrants have a term of 5 years and an exercise price of $0.60 per share. Prior
to maturity, the Junior Convertible Promissory Notes may be converted into the
securities offered by the Company at the first closing of a subsequent financing
for the Company, for such number of offered securities as could be purchased for
the principal amount being converted.

In accordance with APB 14, the Company allocated $4,645,544 of the proceeds to
the Bridge III Notes and $587,595 of proceeds to the Bridge III Warrants. The
difference between the carrying amount of the Bridge III Notes and their
contractual redemption amount is being accreted as interest expense to various
dates from November 1, 2005, their earliest date of redemption. Accretion of the
aforementioned discount amounted to $566,686 for the year ended December 31,
2005 and is included as a component of interest expense in the accompanying
statement of operations.

The Bridge III Notes have an initial term of 120 days (due on various dates
beginning October 28, 2005) with interest at 10% per annum and feature an option
for the Company to extend the term for an additional 60 days to various dates
beginning December 28, 2005. Upon the extension of the maturity date of the
Bridge III Notes, the contractual interest rate would increase to 12% per annum,
and the Company would be required to issue warrants (the "Bridge III Extension
Warrants") (Note 18) to purchase such number of shares of the Company's common
stock equal to one-half of a share for each $1.00 of principal then outstanding.
The Bridge III Extension Warrants issuable upon extension of the maturity date
of the Junior Convertible Promissory Notes feature a term of 5 years and an
exercise price of $0.60 per share. In addition, if the Bridge III Notes are not
paid in full on or before the extended maturity date, each note becomes
convertible into 3.84 shares of the Company's common stock for each $1.00 of
principal then outstanding. The intrinsic value of this conversion option
measured at the issuance date of the notes amounts to $3,600,000 and would be
recognized as interest expense in accordance with EITF 00-27. The Company has
agreed to file with the SEC, a registration statement for the resale of the
restricted shares of its common stock issuable upon exercise of the conversion
option that would be issuable in this transaction, on a best efforts basis.

Beginning on October 29, 2005, the Company elected to extend the contractual
maturity date of the various Bridge III Notes for an additional 60 days to
various dates beginning December 28, 2005, which caused the contractual interest
rate to increase to 12% per annum. In addition, the Company was required to
issue the 1,200,000 additional warrants (the "Bridge III Extension Warrants") to
purchase such number of shares of common stock equal to 1/2 of a share for each
$1.00 of principal amount outstanding. The Bridge III Extension Warrants have a
term of 5 years and an exercise price of $0.60 per share. The Bridge III
Extension Warrants are included in Deferred Financing Costs at their fair value,
which amounts to $59,086.

The Company did not redeem the Bridge III Notes beginning on December 28, 2005
and, as a result, the notes became automatically convertible into 3.84 shares of
common stock for each $1 of principal then outstanding in accordance with the
original note agreement. This amounts to a total of 7,104,000 shares as of
December 31, 2005. Accordingly, the Company recorded a charge of $301,379 based
upon the intrinsic value of this conversion option measured at the original
issuance date of the notes in accordance with EITF 00-27. The Company has agreed
to file with the SEC, a registration statement for the resale of the restricted
shares of the Company's common stock issuable upon exercise of the conversion
option that would be issued in this transaction, on a best efforts basis.

Contractual interest expense on the Bridge III Notes amounted to $172,816 for
the year ended December 31, 2005 and is included as a component of interest
expense in the accompanying statement of operations

The Company sold these securities to Apex, Northwestern, and Advanced Equities.
Funding for the Bridge III Notes included the conversion of $1,650,000 of
stockholder advances made during the period March 30, 2005 to June 30, 2005 into
Bridge III Notes. In conjunction with Bridge III Notes, Advanced Equities was
paid a fee of $6,000 as described in Note 8.

NOTE 12 - RELATED PARTY TRANSACTIONS

EXPENSE REIMBURSEMENTS DUE TO OFFICERS AND STOCKHOLDERS

Certain stockholders and officers of the Company have paid expenses on the
Company's behalf since its inception, of which the outstanding balance amounts
to $172,238 which includes approximately $15,000 for additional expenses
submitted for reimbursement and approximately $270,000 of expenses reimbursed
during the year ended December 31, 2005. The amounts payable to such officers
and stockholders are due on demand.

NOTES PAYABLE TO OFFICERS AND STOCKHOLDERS

Notes payable to officers and stockholders, the outstanding balance of which
amounts to $235,712 at December 31, 2005 bear interest at 10% per annum and are
due on demand. Interest expense on these notes amounted to $18,900 and $18,900
for the years ended December 31, 2005 and 2004, respectively.

CONSULTING AGREEMENT PAYABLE

On June 8, 2005, the Company negotiated a settlement regarding the consulting
agreement payable with a related party. The terms of the settlement agreement
terminate the prior agreement and reduce the remaining payments due under the
contract to $150,000. A $50,000 payment was made upon the execution of the
agreement and two additional $50,000 payments were due, one to be made upon the
completion of a follow-on-financing by the Company

and one not later than September 30, 2005. The $150,000 reduction in payments
was recorded as a reduction of general and administrative expense during the
quarter ended June 30, 2005. Additionally, the settlement agreement terminates
an obligation for the Company to issue 100,000 shares of unrestricted stock. The
stock issuable under this commitment was recorded in 2004 as common stock issued
in lieu of cash for services in the amount of $78,900. The recission of the
stock issuable under this arrangement resulted in an additional reduction of
$78,900 in general and administrative expenses during the year ended December
31, 2005.

The payment due on September 30, 2005 was not made by the Company. The balance
due under this arrangement, which amounts to $100,000 as of December 31, 2005,
is included in the liabilities that the Company has offered to settle under the
proposed Creditor and Claimant Liabilities Restructuring described in Note 23.

NOTES PAYABLE (TO CREDITORS OF ACQUIRED BUSINESS)

The notes issued to creditors of Entelagent described in Note 4, include
$2,101,357 payable to related parties for settlement of accrued payroll, notes
payable and expense reimbursements. Aggregate interest expense on these notes
amounts to $155,959 for the year ended December 31, 2005.

RELATED PARTY PAYMENTS

During the year ended December 31, 2005, the Company made payments of $475,539
to related parties from the $1,388,000 restricted cash reserve account
established in connection with the Entelagent Merger (Note 4). Such payments
reduced certain outstanding liabilities of Entelagent including advances from
shareholders, accounts payable and payroll liabilities.

During the year ended December 31, 2005, the Company made a $200,000 payment to
Patrick J. Allin and the Allin Dynastic Trust under the terms of the settlement
agreement reached on June 6, 2005 (Note 15).

NOTE 13 - OTHER CURRENT LIABILITIES

Other current liabilities at December 31, 2005 principally consists of $476,594
of accrued payroll and sales tax liabilities and penalties, the settlement of
which is being negotiated, and estimated penalties that the Company assumed in
its acquisition of Entelagent (Note 4). These liabilities are intended to be
paid from restricted cash. Also included in this balance is $469,622 related to
two judgments against the Company (Note 17).

NOTE 14 - DEFERRED REVENUE

Deferred revenue at December 31, 2005 includes (1) $137,149 for the fair value
of remaining service obligations on maintenance and support contracts, and (2)
$194,932 for contracts on which the revenue recognition is deferred until
contract deliverables have been completed.

NOTE 15 - SETTLEMENT WITH PATRICK J. ALLIN, FORMER CHIEF EXECUTIVE OFFICER

On June 6, 2005, the Company entered into a settlement of certain employment and
indemnification related claims brought by Patrick J. Allin, the Company's former
Chief Executive Officer and former member of its Board of Directors, against the
Company during the year ended December 31, 2004. Pursuant to the Settlement
Agreement and Mutual Release dated June 2, 2005, among the Company, Patrick J.
Allin (Mr. Allin") and The Allin Dynastic Trust, the Company agreed to pay to
Mr. Allin, in settlement of all claims, an aggregate payment of $1,150,000
payable as follows: (i) $200,000 that was paid upon execution of the Settlement
Agreement and Mutual Release and (ii) $950,000 payable in cash and/or a
promissory note upon the consummation of a follow-on-financing by the Company.
The parties also agreed to release all claims existing as of the date of the
Settlement Agreement and Mutual Release. The Settlement Agreement and Mutual
Release featured a provision to terminate on August 15, 2005 if the Company did
not consummate a follow-on-financing by such date, which date was extended to
August 21, 2005. The Company accrued an aggregate of $933,493 in amounts
repayable to Mr. Allin up through the date of his termination in February 2004.
The difference between the amounts accrued and the cash settlement, which
difference amounts to $216,507, was recorded in general and administrative
expense in the quarter ended March 31, 2004. The amount payable to Mr. Allin
under this provision of the settlement, totaling $1,130,022, is presented net of
the $200,000 payment that was made upon the execution of the agreement and
includes $48,522 of interest and $130,500 of penalties (described below) accrued
during the year ended December 31, 2005.

Pursuant to the Settlement Agreement and Mutual Release, the Company also agreed
to purchase from Mr. Allin and The Allin Dynastic Trust an aggregate of four
million (4,000,000) shares of the Company's common stock as follows: (i) two
million (2,000,000) shares (the "Initial Shares") through the issuance of
promissory notes in the aggregate principal amount of One Million Six Hundred
Thousand Dollars ($1,600,000) and (ii) two million (2,000,000) shares (the
"Remainder Shares") through a cash payment from the proceeds of a
follow-on-financing by the Company, at a price per share equal to the lesser of
(a) $.50 per share or (b) 90% of the issue price or conversion price, as the
case may be, of the security issued in a follow-on-financing, provided however
that in the event that 90% of the issue price or conversion price, as the case
may be, of the security issued in the follow-on-financing is less than $.50 per
share, Mr. Allin and/or The Allin Dynastic Trust may, at their option, decline
to sell any or all of the Remainder Shares to the Company.

The promissory notes issued to purchase the Initial Shares bear interest at an
annual rate of 8%, with interest payments due and payable on the last day of
August, November, February and May during the term of the promissory notes, with
a maturity date of June 30, 2006. In addition, if the Company defaults on
certain terms under the promissory notes, and such default remains uncured for
five days, all payments under the promissory notes accelerate and the Company
agrees to confess to a judgment against the Company in a court of the promissory
note holder's choosing in Cook County, Illinois. In the alternative, the holders
of the promissory notes may demand that the shares purchased by the promissory
notes be returned in fulfillment of all obligations remaining under such
promissory notes.

As a result of this agreement to repurchase shares of common stock from Mr.
Allin and The Allin Dynastic Trust, the Company has recorded certain liabilities
and adjustments to stockholders' deficiency retroactively to the quarter ended
March 31, 2004.

For the Initial Shares the Company recorded a $1,738,667 note payable to Mr.
Allin with a corresponding increase of $1,600,000 in stockholders' deficiency
and a $138,667 charge to operations for interest payable through June 6, 2006.
For the Remainder Shares, the Company recorded a $1,000,000 put right as
temporary equity with a corresponding charge to operations of $300,000 for the
intrinsic value of the put right on June 6, 2005 (fair value of common stock of
$.65 per share less the minimum conversion price of $50. per share) and a
$700,000 net increase in stockholders' deficiency. The aggregate charge of
$438,667 for the interest and the intrinsic value of the conversion option
embedded in the remainder shares is presented as a litigation loss in the
statement of operations for the year ended December 31, 2004. Common stock
outstanding in the accompanying balance sheet is presented net of the 2,000,000
Initial Shares that are subject to the repurchase obligation.

As of December 31, 2005, the fair value of the Company's common stock was $0.05
per share, which resulted in a reduction of the charge for the intrinsic value
of the put right granted on June 6, 2005 to $0. Such reduction is presented as a
change in the intrinsic value of put right in the accompanying statement of
operations for the year ended December 31, 2005.

Effective January 1, 2006, the Company and Mr. Allin and the Allin Dynastic
Trust entered into Stock Subscription Agreement and Mutual Release agreements
(the "Series A-1 Agreements') to settle all claims as described in Note 23.

NOTE 16 - ACCOMMODATION AGREEMENT

In November 2002, the Company entered into a financing arrangement with a third
party financial institution (the "Lender"), pursuant to which the Company would
borrow $950,000 under a note to be collateralized by the pledge of 950,000
shares of registered stock from five different stockholders. In connection with
this arrangement, the Company executed a series of Accommodation Agreements with
these stockholders wherein each stockholder pledged their shares in return for
the right to receive on or before November 17, 2003 the return of the pledged
shares, or replacement shares in the event of foreclosure, and one additional
share of common stock for every four shares pledged as compensation. The Company
also agreed to use "best efforts" to register these shares with the US
Securities and Exchange Commission 12 months from the date of issue.

In December 2002, the Company received approximately $450,000 of proceeds under
the note and provided the Lender with the pledged shares. Since that date, no
additional proceeds were provided by the Lender. The Company accounted for the
Lender's failure to fund the facility and return the pledged shares as a
foreclosure on the loan collateral. In addition, the Accommodation Agreements
provided for the Company to pay a penalty in the event of its failure to cause
the replacement shares to be registered on or before March 31, 2003. As a
result, the Company

has accrued a penalty for the fair value of 450,000 shares per quarter which
penalty amounted to $777,076 and $1,434,900 for the years ended December 31,
2005 and 2004, respectively.

STOCK PLEDGE ARRANGEMENT

In April 2004, a stockholder of the Company entered into a one-year stock loan
financing arrangement ("Stock Financing Facility") with a third party financial
institution, pursuant to which such stockholder committed to obtain financing
for the Company under a credit facility collateralized by the pledge of 685,000
shares of registered stock (the "Pledged Stock") that was pledged by a second
stockholder (the "Pledging Stockholder"). In connection with this arrangement,
the Company executed an accommodation agreement with the Pledging Stockholder
committing to issue 685,000 shares of restricted stock (the "Replacement Stock")
on April 2, 2005 (the "Termination Date") in the event of a loss of the Pledged
Stock, plus a premium of 205,500 shares (the "Premium Shares") for entering into
the agreement. The Company also agreed to register 300,000 shares of restricted
stock held by the Pledging Stockholder (the "Held Stock") within thirty days of
the agreement and to use its best efforts to register with the SEC, both the
Replacement Stock and Premium Stock within 12 months from their date of issue.

The Company received $40,012 of funds but was unable to recover the Pledged
Stock on the Termination Date. In addition, due to a delay in registering all of
the shares under this arrangement, the Company entered into a secondary
agreement with the Pledging Stockholder providing for: (1) the immediate
issuance of the Replacement Shares and Premium Shares; (2) registration of the
Replacement Shares, Premium Shares and Held Shares; (3) the retroactive accrual
of a penalty from May 2, 2004 through the date the registration statement is
filed payable in such number of shares that is equal to 15% of the Held Stock
(prorated for each fraction of a year); and (4) the accrual of an additional
penalty from April 2, 2005 through the date the registration statement is filed
payable in such number of shares that is equal to 15% of the Replacement Stock
and Premium Stock (prorated for each fraction of a year), All such shares would
become issuable to the pledging stockholder at such time that the registration
statement required to be filed under this arrangement is declared effective..

The Company recorded a net charge of $366,193, which includes $406,205 for the
fair value of the Replacement Stock and Premium Stock (890,500 shares) issued to
the Pledging Stockholder under this arrangement less $40,012 of advances
received. The charge is presented as a loss on collateralized financing
arrangement in the accompanying statement of operations for the year ended
December 31, 2005. The Company also recorded an $81,928 charge during the year
ended December 31, 2005 for the fair value of 175,598 shares issuable to the
Pledging Stockholder as penalties for the delays in registering the stock. The
Company classified the accrual of the stock based penalty as a liability in the
accompanying balance sheet in accordance with SFAS 150 "Accounting For Certain
Financial Instruments with Characteristics of Both Liabilities and Equity",
because the quantity of such shares issuable under this arrangement is
conditioned upon the effectiveness of a registration statement. The
corresponding charge associated with the stock-based penalty is included in
stock based penalties under accommodation agreements in the accompanying
statements of operations.

NOTE 17 - COMMITMENTS AND CONTINGENCIES

SEC INVESTIGATION

ability to have its common stock become listed on a stock exchange and/or quoted
on the NASD Bulletin Board or NASDAQ, the Company being able to sell its
securities and/or have its securities registered with the SEC and/or in various
states and/or the Company's ability to implement its business plan. To date, the
Company's legal counsel representing the Company in such matters has indicated
that the SEC Investigation is ongoing and the Staff has not indicated whether it
will or will not recommend that the SEC bring an enforcement action against the
Company, its officers, directors and/or others.

LEGAL PROCEEDINGS

Sherleigh Associates Inc. Profit Sharing Plan ("SHERLEIGH") filed a complaint
against the Company, Patrick Allin, a former President and Chief Executive
Officer of the Company, and Robert E. Yaw, the Company's Chairman, in the United
States District Court for the Southern District of New York alleging common law
fraud. The complaint alleges that Sherleigh was fraudulently induced into
purchasing 1,000,000 shares of the Company's Common Stock in reliance upon
certain Company press releases and allegedly false statements by Mr. Allin and
Mr. Yaw, concerning the Company's plans to acquire two target companies, Trust
Wave and Entelagent (currently one of the Company's subsidiaries), and its
financing arrangements regarding those acquisitions. Sherleigh seeks rescission
of its purchase agreement and return of its $2,000,000 purchase price or
compensatory damages to be proven at trial. Mr. Allin recently entered into a
settlement agreement with Sherleigh and requested that the Court include in its
dismissal order a finding that the settlement is reasonable, and a prohibition
against any claims by the Company or Mr. Yaw against Mr. Allin for contribution
or indemnification with respect to Sherleigh's claims. Mr. Allin received an
order from the court barring claims by the Company or Mr. Yaw against Mr. Allin
for contribution with respect to Sherleigh's claims. Currently, no trial or
continuing discovery schedule has been set by the Court with respect to
Sherleigh's claims against Mr. Yaw and the Company. Settlement of the Sherleigh
claims is pending as part of the Creditor and Claimant Liabilities Restructuring
(Note 23).

On June 6, 2005, the Company entered into a settlement of claims for sums due
under the Allin Notes and certain employment and indemnification related claims
brought by Allin against the Company (Note 15). The Settlement Agreement and
Mutual Release featured a provision to terminate on August 15, 2005, which was
extended to August 21, 2005, if the Company did not consummate a
follow-on-financing by such date. The Company did not consummate a
follow-on-financing by August 21, 2005, and the Settlement Agreement and Mutual
Release terminated by its terms. On January 1, 2006, each of Mr. Allin and the
Allin Dynastic Trust entered into a Stock Subscription Agreement and Mutual
Release with the Company which settled these claims as part of the Creditor and
Claimant Liabilities Restructuring (Note 23).

shares ("LINTING SHARES") of its Common Stock (equivalent to $192,809 divided by
$0.456) to be transferred to Mr. Linting in such numbers and at such times as
directed by Mr. Linting subsequent to the registration of the Linting Shares,
(iii) the Company's agreement to register the Linting Shares through the filing
of a registration statement on or before September 30, 2005, and (iv) the
Company's affirmation of the validity of options previously issued to Mr.
Linting and agreement to permit exercises of those options for 100,000 shares in
each calendar month over a period of 3 years. The Company and Mr. Linting also
agreed to the filing of a stipulation to dismiss Mr. Linting's suit with
prejudice and without costs with the court retaining jurisdiction to reinstate
the case and enforce the terms of the Settlement Agreement and Release in the
event the Company defaulted on its obligations under the Settlement Agreement
and Release, and to enter judgment, by motion, against the Company for the
balance due or appropriate relief. The Company did not make the $100,000 payment
required under the Settlement Agreement and Release and did not file a
registration statement to register the Linting Shares on or before September 30,
2005. Consequently, Mr. Linting obtained a judgment against the Company in the
amount of $292,809 in cash and stock. The Company recorded a liability for this
amount which is included in other liabilities in the accompanying balance sheet
at December 31, 2005. On February 14, 2006, Mr. Linting entered into a Stock
Subscription Agreement and Mutual Release with the Company which settled these
claims as part of the Creditor and Claimant Liabilities Restructuring (Note 23).

On October 17, 2005, Paul Harary, Paris McKinzie, Maria Caporicci, LLB Ltd. and
DGC, Inc. filed a complaint against the Company in the Circuit Court of the
Fifteenth Judicial Circuit in and for Palm Beach County, Florida, alleging
breach of certain accommodation agreements between the plaintiffs and the
Company (Note 16) and seeking damages in an amount not less than $14,000,000,
plus interest and reasonable attorneys' fees and costs. On November 16, 2005, a
default was entered against the Company in this matter. On November 23, 2005,
plaintiffs filed a motion for default final judgment as to liability and motion
to set cause for jury trial as to damages. The Company, through counsel retained
in Florida, has filed a motion to set aside the clerk's default and to compel
artibration, which motion was denied. The Company appealed the denial of this
motion and filed an additional motion seeking to stay the case pending the
appeal. On March 27, 2006, the Company entered into an agreement to release and
resolve all outstanding claims between the parties (Note 23).

SETTLEMENT WITH COOK ASSOCIATES, INC.

On June 29, 2005, the Company entered into a settlement with Cook Associates,
Inc. ("Cook Associates") to settle all claims and potential claims related to
the lawsuit that had been filed by Cook Associates against the Company in
October 2004. Under the terms of the settlement, Cook Associates agreed to
dismiss its lawsuit and associated claim for $528,081 in damages and the Company
agreed to remove any and all conditions/restrictions that would prevent the
600,000 shares of Company common stock owned by Cook Associates from being
freely traded. The Company had previously recorded $389,103 of payables to Cook
Associates that it reversed following its execution of the

settlement. The reversal was recorded as a gain and is included in loss/(gain)
on settlement agreements in the accompanying statements of operations for the
year ended December 31, 2005.

LEASE AGREEMENT

On August 24, 2005, the Company entered into an office lease agreement for 4,876
square feet of space for its office in Boulder, Colorado. The lease commences on
October 1, 2005 and has a term of fifty-four months including a six-month lease
abatement. The minimum rental payments, beginning April 2006, amount to $4,063
per month. In addition, the Company was required to make a $19,995 security
deposit at the inception of the lease.

Additionally, the Company leases an office in Palos Heights, Illinois and leases
internet connectivity bandwidth capacity for its bundled and branded high speed
Internet access and synchronized remote data back-up, retrieval, and restoration
services business.

Future minimum rental payments, excluding the Company pro-rata share of
maintenance and operating charges under this arrangement are as follows:

For the year ended
December 31,
------------------
2006 $ 97,756
2007 87,956
2008 48,756
2009 48,756
2010 12,189
----- --------
Total $295,413

NOTE 18 - STOCKHOLDERS' DEFICIENCY

ISSUANCE OF COMMON STOCK AS PURCHASE CONSIDERATION

On February 25, 2005 the Company issued an aggregate of 11,900,000 shares of its
common stock with an aggregate fair value of $10,115,000 as purchase
consideration to the sellers of CSSI and LucidLine (Note 4). On February 28,
2005, the Company issued an additional 3,000,000 shares of its common stock with
an aggregate fair value of $2,550,000 as purchase consideration to the sellers
of Entelagent (Note 4). The aforementioned transactions were recorded as common
stock issued in purchase business combinations in the statement of stockholder's
deficiency.

ISSUANCE OF COMMON STOCK PURCHASE WARRANTS

On February 25, 2005, the Company issued 2,250,000 common stock purchase
warrants with a term of 5 years and an exercise price of $0.70 per share as a
portion of purchase consideration associated with the acquisition of the
preferred stock of CSSI (Note 4). The aggregate fair value of these warrants
amounted to $1,912,500.

On February 28, 2005 the Company issued warrants to purchase up to 1,750,000
shares of its common stock to the Bridge I Note investors described in Note 11.
The fair value of the warrants amounted to $1,043,860. Additionally, the Company
issued 350,000 common stock purchase warrants with an aggregate fair value of
$297,500 to the Placement Agent in the Interim Bridge Financing I transaction.

On February 28, 2005 the Company also issued warrants for 300,000 shares at a
$0.70 per share exercise price to Laidlaw & Company and/or its designees in
connection with the receipt of acquisition related services for the Entelagent,
LucidLine and CSSI mergers (Note 4). The aggregate fair value of these warrants
amounted to $255,000.

On June 6, 2005, the Company issued warrants to purchase up to 1,271,500 shares
of its common stock at $0.60 per share exercise price to the Bridge II Note
investors described in Note 11. The fair value of the warrants amounted to
$532,723.

On June 30, 2005 the Company issued warrants for 152,580 shares at a $0.60 per
share exercise price to Laidlaw in connection with the Interim Bridge Financing
II financing as described in Note 11. The aggregate fair value of these warrants
amounted to $80,867 and was accounted for as deferred financing costs.

On June 29, 2005, the Company issued warrants to purchase up to 1,750,000 shares
of its common stock at a $0.70 per share exercise price, as Bridge I Extension
Warrants, to the investors in Interim Bridge Financing I as described in Note
11. The fair value of the warrants, which amounted to $822,500, was accounted
for as a deferred financing cost.

On July 1, 2005, the Company issued warrants for 925,000 shares at a $0.60 per
share exercise price to Apex and Northwestern in connection with the Interim
Bridge Financing III financing as described in Note 11. The aggregate fair value
of these warrants amounted to $415,891.

On July 29, 2005, the Company issued warrants for 50,000 shares at a $0.60 per
share exercise price to Advanced Equities in connection with the Interim Bridge
Financing III financing as described in Note 11. The fair value of these
warrants amounted to $22,481.

On August 19, 2005, the Company issued warrants for 225,000 shares at a $0.60
per share exercise price to Apex in connection with the Interim Bridge Financing
III financing as described in Note 11. The fair value of these warrants amounted
to $55,263.

On September 30, 2005, the Company issued warrants for 600,000 shares at a $0.60
per share exercise price to Apex in connection with the Interim Bridge Financing
III financing as described in Note 11. The fair value of these warrants amounted
to $57,143.

On October 4, 2005, the Company issued warrants to purchase up to 1,271,500
shares of its common stock at $0.60 per share exercise price, as Bridge II
Extension Warrants, to the Interim Bridge Financing II investors described in
Note 11. The fair value of the warrants amounted to $65,338.

On October 16, 2005, the Company issued warrants for 180,000 shares at a $0.60
per share exercise price to Apex in connection with the Interim Bridge Financing
III financing as described in Note 11. The fair value of these warrants amounted
to $9,018.

On October 24, 2005, the Company issued warrants for 37,500 shares at a $0.60
per share exercise price to Apex in connection with the Interim Bridge Financing
III financing as described in Note 11. The fair value of these warrants amounted
to $1,879.

On October 29, 2005, the Company issued warrants for 100,000 shares at a $0.60
per share exercise price, as Bridge III Extension Warrants, to Northwestern
Mutual Life Insurance Company in connection with the Interim Bridge Financing
III financing as described in Note 11. The fair value of these warrants amounted
to $5,139.

On October 29, 2005, the Company issued warrants for 825,000 shares at a $0.60
per share exercise price, as Bridge III Extension Warrants, to Apex in
connection with the Interim Bridge Financing III financing as described in Note
11. The fair value of these warrants amounted to $42,394.

On October 31, 2005, the Company issued warrants for 192,500 shares at a $0.60
per share exercise price to Apex in connection with the Interim Bridge Financing
III financing as described in Note 11. The fair value of these warrants amounted
to $9,644.

On November 16, 2005, the Company issued warrants for 112,500 shares at a $0.60
per share exercise price to Apex in connection with the Interim Bridge Financing
III financing as described in Note 11. The fair value of these warrants amounted
to $4,431.

On November 21, 2005, the Company issued warrants for 75,000 shares at a $0.60
per share exercise price to Apex in connection with the Interim Bridge Financing
III financing as described in Note 11. The fair value of these warrants amounted
to $2,954.

On November 26, 2005, the Company issued warrants for 50,000 shares at a $0.60
per share exercise price, as Bridge III Extension Warrants, to Advanced Equities
Venture Partners I, L.P. in connection with the Interim Bridge Financing III
financing as described in Note 11. The fair value of these warrants amounted to
$2,009.

On November 29, 2005, the Company issued warrants for 105,000 shares at a $0.60
per share exercise price to Apex in connection with the Interim Bridge Financing
III financing as described in Note 11. The fair value of these warrants amounted
to $4,135.

On December 8, 2005, the Company issued warrants for 114,500 shares at a $0.60
per share exercise price to Apex in connection with the Interim Bridge Financing
III financing as described in Note 11. The fair value of these warrants amounted
to $4,757.

On December 17, 2005, the Company issued warrants for 225,000 shares at a $0.60
per share exercise price, as Bridge III Extension Warrants, to Apex in
connection with the Interim Bridge Financing III financing as described in Note
11. The fair value of these warrants amounted to $9,544.

All of the aforementioned warrants, unless otherwise noted, are reflected as an
increase to additional paid-in capital in the accompanying balance sheet and
statement of stockholders' deficiency at December 31, 2005.

COMMON STOCK ISSUED AS A PENALTY UNDER AN ACCOMMODATION AGREEMENT

The Accommodation Agreements (Note 16) provided for the Company to pay a penalty
in the event of its failure to register the replacement shares on or before
March 31, 2003. The replacement shares were not registered on or before March
31, 2003. As a result, the Company recorded penalties in the aggregate amount of
150,000 shares per month at the then fair value of the common stock through
December 31, 2005. Aggregate penalties under this arrangement amounted to
$777,076 and $1,434,900 for the years ended December 31, 2005 and 2004,
respectively. Subsequent to December 31, 2005, the Company entered into
settlement agreements with the stockholders who participated in this arrangement
as described in Note 16 and 23.

COMMON STOCK ISSUED AS A PENALTY UNDER STOCK PLEDGE ARRANGEMENT

The Company issued an aggregate of 890,500 shares of common stock (Replacement
Shares and Premium Shares) with an aggregate fair value of $406,205 The Company
also accrued $81,928 of penalties representing the fair value of 175,598 shares
of stock for delays in registering the stock under the original agreement (Note
16). The penalty shares are issuable to the Pledging Stockholders under this
arrangement at such time that the Company files and causes to be declared
effective, a registration statement for the resale of these securities.

COMMON STOCK ISSUED IN PRIVATE PLACEMENT TRANSACTIONS

In May of 2004, the Company received $200,000 in proceeds in private placement
transactions with two investors. The Company issued 714,824 shares, in the
aggregate, on September 13, 2004 in consideration of these funds. The funds
received in these transactions were remitted directly to J. William Hammon, a
stockholder and affiliate who (from February 28, 2005 through January 9, 2006)
served as the Company's Chief Marketing Officer, as a reduction of funds he
advanced to the Company.

On August 24, 25 and September 13, 2004, the Company received an aggregate of
$500,000 in private placement transactions from 8 investors. The Company later
issued 500,000 shares, in the aggregate, on December 14, 2004 in consideration
of these funds.

STOCK ISSUED IN LIEU OF CASH FOR SERVICES

On September 13, 2004, the Company issued 40,000 shares of its common stock with
a fair value of $10,000 in consideration for services provided by Alvin I
Siegel. On September 13, 2004, the Company issued 200,000 shares of its common
stock with a fair value of $50,000 in consideration for services provided to us
by Joseph K Lemel.

During the year ended December 31, 2004, the Company issued, at various times,
1,500,000 shares of its common stock with an aggregate fair value of $1,159,000
to Frank G. Mazzola in exchange for consulting services. These shares were fully
vested and non-forfeitable at their dates of issuance.The Company accounted for
the fair value of these shares as deferred compensation. Amortization of
deferred compensation expense under this arrangement amounted to $521,332 and
$628,668 for the years ended December 31, 2005 and 2004, respectively and is
included as a component of salaries and related expense in the accompanying
statement of operations.

On June 8, 2005, the Company negotiated a settlement regarding the Consulting
Agreement Payable with a related party. In connection with this settlement, the
Company recorded a rescission of 100,000 shares of unrestricted common stock
previously recorded as compensation expense during the year ended December 31,
2004. This rescission of these shares resulted in a $78,900 reduction of general
and administrative expenses and a corresponding reduction of common stock and
additional paid in capital during the year ended December 31, 2005.

On October 28, 2005, the Company entered into a consulting agreement covering
the period May 26, 2004 to May 26, 2006 with Mr. Richard Rozzi to provide
financial public relations, financial communications and investor relations
consulting services. The Company will issue to Mr. Rozzi, 400,000 shares of its
common stock with a fair value of $35,600 in consideration for the services to
be provided. Additionally, Mr. Rozzi was granted a non-qualified stock option to
purchase 400,000 shares of the Company's common stock. These options are
fully-vested, have a term of 3 years and an exercise price of $0.25 per share
and a fair value, determined using the Black-Scholes option pricing model, of
$20,936.

ISSUANCE OF EMPLOYEE STOCK OPTIONS

During the year ended December 31, 2005, the Company issued stock options to
employees to purchase 5,315,000 shares. These options include a grant to
purchase 1,000,000 shares at $0.65 per share to the Chief Executive Officer of
the Company, Mr. Robert Cross. Mr. Cross' option grant resulted in a $30,000
expense related to the intrinsic value of the options versus the market price on
the date of grant. This amount is being amortized over the vesting period. For
the year ended December 31, 2005, the Company recorded $22,500 of compensation
expense related to Mr. Cross' options and recorded $7,500 to deferred
compensation at December 31, 2005. The remaining options were granted at the
closing sale price on the date immediately prior to the date of grant.

NOTE 19 - EMPLOYEE STOCK OPTIONS

STOCK OPTION GRANTS

In November 2002, options to purchase an aggregate of 800,000 shares of the
Company's common stock were granted in conjunction with seven employment
agreements executed in the United Kingdom, exercisable at a price of $4.00 per
share, the trading price of the underlying stock on November 1, 2002. The
options vest over a three year period and are not subject to each employee's
continued employment. The fair value of the options on the date of grant was
$1,832,000. This value was estimated using the Black-Scholes method using the
following assumptions: risk-free interest rate of 4.05 percent; expected
dividend yield zero percent; expected option life of three years; and expected
volatility of 87 percent.

In December 2004, the Company entered into a cash settlement agreement with a
United Kingdom employee in which 75,000 of these options were terminated.
Accordingly, the Company has reduced the total fair value on the options to the
United Kingdom employees as outlined above to $1,660,250 based on 725,000
options outstanding.

In December of 2004, options to purchase 500,000 shares of the Company's common
stock were granted in connection with two employment agreements, exercisable at
a price of $0.93 per share. The options vested immediately and are not subject
to each employee's continued employment. The fair value of the options on the
date of grant was $340,000. This value was estimated using the Black-Scholes
method using the following assumptions: risk-free interest rate of 4.23 percent;
expected dividend yield zero percent; expected option life of three years; and
current volatility of 124.8 percent.

During the year ended December 31, 2005, the Company issued stock options to
employees to purchase 5,315,000 shares. These options include a grant to
purchase 1,000,000 shares at $0.65 per share to the Chief Executive Officer of
the Company, Mr. Robert Cross. Mr. Cross' option grant resulted in a $30,000
expense related to the intrinsic value of the options versus the market price on
the date of grant. This amount is being amortized over the vesting period. For
the year ended December 31, 2005, the Company recorded $22,500 of compensation
expense related to Mr. Cross's options and recorded $7,500 deferred compensation
at December 31, 2005. The remaining options were granted at the closing sale
price on the date immediately prior to the date of grant.

The following table summarizes the changes in options outstanding and the
related exercise prices for the shares of the Company's common stock:

Options Outstanding
---------------------------------------
Weighted
Exercise Average
Shares Price Exercisable
---------- -------- -----------
Outstanding at December 31, 2003 ...... 2,400,000 1.68 1,309,616

Granted ............................ 500,000 0.93 500,000
Cancellations & Forfeitures ........ (75,000) 4.00 --
Exercised .......................... -- -- --
---------- -------- -----------
Outstanding at December 31, 2004 ...... 2,825,000 1.49 2,825,000

Granted ............................ 5,315,000 0.40 750,000
Cancellations & Forfeitures ........ -- -- --
Exercised .......................... -- -- --
---------- -------- -----------
Outstanding at December 31, 2005 ...... 8,140,000 $ 0.77 3,575,000
========== ======== ===========

The following table summarizes additional information about outstanding and
exercisable stock options at December 31, 2005.

Options Outstanding
----------------------------------- Options Exercisable
Weighted -----------------------
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
------------- ----------- ----------- -------- ----------- ---------
$0.01 - $0.34 5,515,000 8.92 $ 0.27 1,200,000 $ 0.01
$0.35 - $0.65 1,000,000 6.50 $ 0.65 750,000 $ 0.65
$0.66 - $2.05 900,000 5.26 $ 1.43 900,000 $ 1.43
$2.06 - $4.00 725,000 6.84 $ 4.00 725,000 $ 4.00
----------- -----------
8,140,000 3,575,000
=========== ===========

NOTE 20 - INCOME TAXES

At December 31, 2005, the Company has federal and state net operating loss
carryforwards available to offset future taxable income, if any, of
approximately $46,000,000 expiring at various times through 2025. The Company's
determination of the amount of its net operating loss carryforwards includes
approximately $13,000,000 associated with acquired business. The Company's net
operating losses (including those of the acquired businesses) may be subject to
substantial limitations due to the (a) "Change of Ownership" provisions under
Section 382 of the Internal Revenue Code and similar state provisions and (b)
delinquencies that the Company has experienced with respect to filing its income
tax returns on a timely basis. Such limitations may result in the expiration of
the net operating losses prior to their utilization.

The tax effects of significant temporary difference which give rise to the
Company's deferred tax assets and liabilities are as follows:

DECEMBER 31,
-------------------------------
2005 2004
------------ ------------
Deferred tax assets:
Net operating loss carry forwards ..... $ 17,968,394 $ 2,518,930
Start-up costs ........................ 7,278,114 7,278,114
Stock options ......................... 2,530,339 2,530,339
Accrued compensation and expenses ..... 1,186,213 1,186,213
-- --
------------ ------------
28,963,060 13,513,596
Valuation allowance ................... (28,963,060) (13,513,596)
------------ ------------

The increase in the Company's deferred tax assets during the year ended December
31, 2005 includes the effects of deferred tax assets associated with the net
operating losses of acquired business. The Company fully reserves for deferred
tax assets recorded in purchase accounting. The deferred tax assets and
subsequent valuation allowance recorded in purchase accounting were accompanied
by a corresponding decrease and increase, respectively, in goodwill at the time
the purchase price allocation was recorded. The Company's recorded income
benefit, net of the change in the valuation allowance for each of the period
presented, is as follows:

YEARS ENDED DECEMBER 31,
------------------------------
2005 2004
------------ ------------
Current
Federal .................................. $ -- $ --
State .................................... -- --
------------ ------------
Deferred
Federal .................................. (9,225,860) (1,502,906)
State .................................... (1,316,355) (214,436)
------------ ------------
(10,542,215) (1,717,342)
Change in valuation allowance ............... 10,542,215 1,717,342
------------ ------------
$ -- $ --
============ ============

Pursuant to SFAS No. 109 "Accounting for Income Taxes," management has evaluated
the recoverability of the deferred income tax assets and the level of the
valuation allowance required with respect to such deferred income tax assets.
After considering all available facts, the Company fully reserved for its
deferred tax assets because it is more likely than not that their benefit will
not be realized in future periods. The Company will continue to evaluate its
deferred tax assets to determine whether any changes in circumstances could
affect the realization of their future benefit. If it is determined in future
periods that portions of the Company's deferred income tax assets satisfies the
realization standard of SFAS No. 109, the valuation allowance will be reduced
accordingly.

A reconciliation of the expected Federal statutory rate of 34% to the Company's
actual rate as reported for each of the periods presented is as follows:

YEARS ENDED DECEMBER 31,
------------------------------
2005 2004
------------ ------------
Expected statutory rate ..................... (34.0%) (34.0%)
State income tax rate, net of Federal benefit (3.1%) (3.1%)
Effect of permanent differences ............. -- --
------------ ------------
(37.1%) (37.1%)
Valuation allowance ......................... 37.1% 37.1%
------------ ------------
-- --
============ ============

At December 31, 2005, the Company had net operating loss carryforwards of
approximately $48,000,000 for federal and state tax purposes expiring at various
times from 2018 to 2025.The net operating losses may be subject to substantial
limitation due to the "Change of Ownership" provisions under Section 382 of the
Internal Revenue Code and similar state provisions in addition to the Company's
failure to file its income tax returns on a timely basis. Such limitation may
result in the expiration of the net operating losses prior to their utilization.

NOTE 21 - PROPOSED CREDITOR AND CLAIMANT LIABILITIES RESTRUCTURING

On September 23, 2005, the Company mailed a package to substantially all of its
creditors containing a proposed arrangement to (a) restructure approximately
$26,000,000 of obligations it owes to a majority of its creditors, and (b)
settle $2,000,000 of contingent liabilities under the legal proceedings with
Sherleigh described in Note 17. The proposal was delivered to the holders of the
Company's indebtedness (including certain lenders, all past-due trade creditors,
and employees, consultants and other service providers with claims for fees,
wages or expenses). Under such arrangement, as originally proposed, all
creditors with acknowledged balances and all claimants with agreed claims would
promptly be issued one share of the Company's common stock for each $0.18 of
such balances or

claims upon the completion, by substantially all creditors and claimants
("Subscribers"), of a Subscription Agreement & Mutual Release for purposes of
entering into a final and binding settlement with respect to any and all claims,
liabilities, demands, causes of action, costs, expenses, attorneys fees,
damages, indemnities, and obligations of every kind and nature that the creditor
and/or claimant may have with the Company ("Subscriber Claims"). The Company
also indicated that it would endeavor to register such shares under applicable
securities laws promptly following the conclusion of this settlement program.
The proposal provided for no cash payment to be made to any holder of its
indebtedness, and no preferential payments. All creditors and claimants under
this proposal would be treated the same on a pro rata basis.

In November 2005, the Company reevaluated its settlement proposal. Due to a
reduction in the price per share of the Company's common stock since the
original proposal was issued to creditors and claimants, the Company repriced
the proposal to $0.10 per share and issued new documents to all creditors. As of
December 31, 2005 creditors representing approximately $640,000 of the Company's
claims outstanding responded favorably to the Company's proposal, however, due
to the (a) decrease in the trading price of the Company common stock to below
$0.10 per share, and (b) insufficient creditor interest in settling their claims
at or below the $0.10 per share level, the Company refrained from accepting any
subscription agreements it received by such date and refrained from effectuating
the steps necessary to proceed with its proposed restructuring. Accordingly, the
Company was unable to complete any portion of its proposed restructuring as of
December 31, 2005.

NOTE 22 - CONCENTRATION OF RISK

The Company maintains cash balances at financial institutions that are insured
by the Federal Deposit Insurance Corporation for up to $100,000. The Company's
cash balances exceeded such limits at certain times during the fiscal year.

The concentration of credit risk in the Company's accounts receivable is
mitigated by the Company's credit evaluation process, monitoring procedures and
reasonably short collection terms. Credit losses have been within management's
expectations and the Company does not require collateral to support accounts
receivable.

The Company had one customer to its which its sales amounted to 14% of its total
sales for the year ended December 31, 2005. The balance due from this customer
amounted to $63,116 at December 31, 2005.

NOTE 23 - SUBSEQUENT EVENTS

SERIES A AND SERIES A-1 PREFERRED STOCK

On March 1, 2006, the Company filed with the Delaware Secretary of State a
Certificate of Designation of Preferences, Rights and Limitations of Series A
Convertible Preferred Stock and Series A-1 Convertible Preferred Stock
designating the rights, preferences and privileges of 2,160 shares of Series A
Convertible Preferred Stock and 50,000,000 shares of Series A-1 Convertible
Preferred Stock.

SERIES A PREFERRED STOCK

The Series A Preferred Stock ("Series A Preferred") has a stated value of $5,000
per share, has no maturity date, carries a dividend of 10% per annum, with such
dividend accruing on a cumulative basis and is payable only (i) at such time as
declared payable by the Board of Directors of the Company or (ii) in the event
of liquidation, as part of the liquidation preference amount ("Liquidation
Preference Amount"). The Liquidation Preference Amount is equal to 125% of the
sum of: (i) the stated value of any then unconverted shares of Series A
Preferred and (ii) any accrued and unpaid dividends thereon. An event of
liquidation means any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, as well as any change of control of the
Company which includes the sale by the Company of either (x) substantially all
its assets or (y) the portion of its assets which comprises its core business
technology, products or services.

The Series A Preferred is convertible, at the option of the holder, into shares
of the Company's common stock ("Conversion Shares") at an initial conversion
price ("Initial Conversion Price) which shall be $0.08 per share based on the
stated value of the Series A Preferred, subject to adjustment for stock splits,
dividends, recapitalizations, reclassifications, payments made to Common Stock
holders and other similar events and for issuances of additional securities at
prices more favorable than the conversion price at the date of such issuance.

The Series A Preferred is mandatorily convertible at the then applicable
conversion price ("Conversion Price") into shares of the Company's common stock
at the then applicable Conversion Price on the date that: (i) there shall be an
effective registration statement covering the resale of the Conversion Shares,
(ii) the average closing price of the Company's common stock, for a period of 20
consecutive trading days is at least 250% of the then applicable Conversion
Price, and (iii) the average daily trading volume of the Company's common stock
for the same period is at least 250,000 shares.

SERIES A-1 PREFERRED STOCK

The Series A-1 Preferred Stock ("Series A-1 Preferred") has a stated value of
$0.80 per share, has no maturity date, carries a non-cumulative dividend of 5%
per annum, with such dividend payable only (i) at such time as declared payable
by the Board of Directors of the Company or (ii) in the event of liquidation, as
part of the liquidation preference amount ("Series A-1 Liquidation Preference
Amount"). The Series A-1 Liquidation Preference Amount is equal to the sum of:
(i) the stated value of any then unconverted shares of Series A-1 Preferred and
(ii) any accrued and unpaid dividends thereon. An event of liquidation means any
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, as well as any change of control of the Company which includes the
sale by the Company of either (x) substantially all its assets or (y) the
portion of its assets which comprises its core business technology, products or
services.

The Series A-1 Preferred is not convertible at the option of the holder. Each
share of Series A-1 Preferred automatically converts into the Company's common
stock, at a conversion price of $0.08 per share based on the stated value of the
Series A-1 Preferred, upon the effectiveness of an amendment to the Company's
certificate of incorporation which provides for a sufficient number of
authorized shares to permit the exercise or conversion of all issued and
outstanding shares of Series A Preferred, Series A-1 Preferred and all options,
warrants and other rights to acquire shares of the Company's common stock.

CREDITOR AND CLAIMANT LIABILITIES RESTRUCTURING

On January 12, 2006, the Company issued a Stock Subscription Agreement & Mutual
Release to each creditor and claimant ("Subscriber") of the Company for purposes
of entering into a final and binding settlement with respect to any and all
claims, liabilities, demands, causes of action, costs, expenses, attorneys fees,
damages, indemnities, and obligations of every kind and nature that the creditor
and/or claimant may have with the Company ("Subscriber Claims"). Under terms of
this agreement, the Company sells to the Subscriber and the Subscriber purchases
from the Company shares ("Stock") of its Series A-1 Preferred stock, par value
$0.01 per share ("Series A-1 Preferred"), at a price of $0.80 per share. The
aggregate purchase price is equivalent to the value of the Subscriber Claims
being settled through this settlement and release. Subscriber is deemed to have
paid for the Stock through the settlement and release of Subscriber Claims. Each
share of Stock is automatically convertible into ten shares of the Company's
common stock upon the effectiveness of an amendment to the Company's certificate
of incorporation which provides for a sufficient number of authorized but
unissued and unreserved shares of the Company's common stock to permit the
conversion of all issued and outstanding shares of Series A-1 Preferred. If the
requisite agreements and approvals are obtained, the Company anticipates issuing
the Series A-1 Preferred shares following the final determination of the claims
and acceptance by the Company of each claimant submitted Stock Subscription
Agreement and Mutual Release through countersignature thereof.

The Stock Subscription Agreement & Mutual Release also provided that in the
event that (a) a bona fide sale or (series of related sales) by the Company of
equity interests in the Company in an amount equal to or in excess of $3,000,000
or (b) any merger, consolidation, recapitalization, reclassification,
reincorporation, reorganization, share exchange, sale of all or substantially
all of the assets of the Company or comparable transaction, is not consummated
on or before March 31, 2006 (the "Termination Date"), the Stock Subscription
Agreement & Mutual Release shall terminate and be null and void, the Series A-1
Preferred issued to Subscriber shall be cancelled and the Subscriber Claims
shall remain in full force and effect on their terms. Each Subscriber agrees not
to transfer or sell any portion of the Stock until the next business day after
the Termination Date, subject to (i) an effective registration under the
Securities Act or in a transaction which is otherwise in compliance with the
Securities Act, (ii) an effective registration under any applicable state
securities statute or in a transaction otherwise in compliance with any
applicable state securities statue, and (iii) evidence of compliance with the
applicable securities laws of other jurisdictions.

As described below under the Private Placement Series A Preferred Stock and
Warrants, on March 3, 2006 the investors in the Series A Preferred Financing
modified the terms of their financing arrangement to provide funds to the

Company prior to the 100% completion of the Creditor and Claimant Liabilities
Restructuring. This modification provides for the establishment of an escrow
agent and establishes a methodology to disburse funds to the Company to cover
payroll, rent and other operating costs, including eligible payables not
otherwise subject to the Creditor and Claimant Liabilities Restructuring, on a
bi-monthly basis. As described below, the Company completed the sale of $4.8
million in equity securities under the Series A Preferred Financing on March 27,
2006 thereby eliminating the provision for automatic termination of this
arrangement.

The Company has committed to file with the Securities and Exchange Commission,
as soon as practicable and in any event no later than 120 days from the date
that the Company countersigns each Stock Subscription Agreement and Mutual
Release, a registration statement ("Registration Statement") covering the resale
of the Stock and cause such Registration Statement to become effective as soon
as practicable thereafter and in any event no later than 180 days from the date
that the Company countersigns each Stock Subscription Agreement and Mutual
Release. The Company shall keep the Registration Statement continuously
effective under the Securities Act until the earlier of (i) the date when all
shares of the Stock have been sold pursuant to the Registration Statement or an
exemption from the registration requirements of the Securities Act, and (ii) two
years from the effective date of the Registration Statement.

Currently, creditors representing approximately 75% of the Company's claims
outstanding, which includes amounts settled under the accommodation agreement,
have indicated their acceptance of the Company's proposal by signing and
returning to the Company the Stock Subscription Agreement and Mutual Release.
The Company is currently unable to provide assurance that the acceptance of such
proposal will actually improve the Company's ability to fund the further
development of its business plan or improve its operations.

PRIVATE PLAEMENT OF SERIES A PREFERRED STOCK AND WARRANTS

In January 2006, the Company initiated a proposed $5,400,000 financing
transaction (the "Series A Preferred Financing") which would, for each $100,000
Unit purchased, result in the issuance of (i) 20 shares of Series A Preferred
Stock and (ii) warrants ("Investor Warrants") to purchase 416,667 shares of the
Company's common stock. The minimum amount of the Series A Preferred Financing
is $3,000,000 ("Minimum Amount") and the maximum amount is $5,400,000. Apex has
agreed to purchase up to $1,500,000 which will all be available to fund the
Minimum Amount, provided however, in the event that the Series A Preferred
Financing is over-subscribed as to the Minimum Amount, then for each $1.00 of
such over subscription up to $250,000, the Apex funding commitment will be
reduced on a dollar for dollar basis, down to a minimum amount of $1,250,000.
Additionally, holders of the 2006 Bridge Notes are obligated to exchange their
2006 Bridge Notes for Units in the Series A Preferred Financing. The issuance of
Units to the holders of 2006 Bridge Notes will count toward satisfaction of the
Minimum Amount.

The Investor Warrants have a term of 5 years and an exercise price of $0.10 per
share. Each Investor Warrant will entitle the holder thereof to purchase 416,667
shares of the Company's common stock (the "Warrant Shares"), subject to
anti-dilution provisions similar to those of the conversion rights of the Series
A Preferred. The Company is obligated to include the Conversion Shares and the
Warrant Shares in the Registration Statement which the Company has committed to
file in connection with the Creditor and Claimant Liabilities Restructuring
described above. The Conversion Shares and the Warrant Shares will also have
piggyback registration rights.

In connection with the Series A Preferred Financing, the Company has retained
Laidlaw & Company (UK) Ltd. as its non-exclusive placement agent ("Series A
Preferred Placement Agent"). Laidlaw shall receive, in its role as Series A
Preferred Placement Agent, (i) a cash fee equal to 10% of all gross proceeds,
excluding the Apex proceeds, delivered at each Closing and (ii) a warrant (the
"Agent Warrants") to purchase the Company's common stock equal to 10% times the
sum of (x) the Conversion Shares to be issued upon conversion of the shares of
Series A Preferred issued at each Closing and (y) the number of shares of the
Company's common stock reserved for issuance upon the exercise of the Investor
Warrants issued at each closing. The Agent Warrants shall have a term of 5 years
and an exercise price of $0.10 per share. Additionally, the Company shall pay
the Series A Preferred Placement Agent a non-accountable expense allowance of
$25,000.

On March 3, 2006, the investors in the Series A Preferred Financing agreed to a
modification of the terms of this financing arrangement to waive the requirement
for 100% completion of the Creditor and Claimant Liabilities Restructuring for
release of the net proceeds of the Series A Preferred Financing in order to
allow the Company to proceed with its business plan and to protect the investors
in the Series A Preferred Financing. The modifications provide for the net
proceeds of the Series A Preferred Financing to be deposited with an escrow
agent whereby funds will be released to the Company to cover payroll, rent and
other operating costs, including eligible payables not otherwise subject to the
Creditor and Claimant Liabilities Restructuring, on a bi-monthly basis.

As of March 27, 2006, the Company consummated the Series A Preferred Financing
with the closing of funds totaling $4,820,500, this amount is comprised on
$720,000 associated with the conversion of the Bridge Notes, $1,250,000 provided
by Apex and $2,850,500 from parties made available by the Series A Preferred
Placement Agent. In order to effect the availability of these funds to the
Company prior to the completion of the Creditor and Claimant Liabilities
Restructuring, the Company, on March 27, 2006, entered into a post-closing
escrow agreement ("Post-Closing Escrow Agreement") with an escrow agent ("Escrow
Agent"). As of March 27, 2006, the Escrow Agent was provided $2,183,026 in net
offering proceeds, The escrow agent shall hold the funds and make periodic
disbursements to the Company. These disbursements shall be made on or after the
15th of each calendar month and on or after the last day of each calendar month.
A schedule detailing the mid-month, month-end and maximum monthly disbursement
amounts is defined. The Post-Closing Escrow Agreement provides for the release
of the remaining escrow funds to the Company after the Company has received
executed agreements under the Creditor and Claimant Liabilities Restructuring
for not less than 99% in dollar amount of creditor and claimant claims.

The Company cannot provide any assurance that it will be successful in its
efforts to complete the Creditor and Claimant Liabilities Restructuring and that
if such restructuring is completed that the Company will secure the Minimum
Amount of the Series A Preferred Financing. Additionally there is no assurance
that by securing this additional financing the Company will be successful in the
implementation and execution of its business plan.

2006 BRIDGE NOTES

On January 18, 2006, the Company completed a financing of approximately $720,000
in additional gross fund (the "2006 Bridge Note Financing") through the issuance
of Subordinated Convertible Promissory Notes (the "2006 Bridge Notes"). The 2006
Bridge Notes will automatically convert into the same securities (consisting of
shares of Series A Preferred Stock and warrants to purchase shares of the
Company's common stock) offered by the Company in connection with the Company's
Series A Preferred Financing. At the time of the first closing of the Series A
Preferred Financing, the 2006 Bridge Notes will be converted for such number of
Units in the Series A Preferred Financing as could be purchased by the holder
for the principal amount being converted. The 2006 Bridge Notes converted on
March 27, 2006 upon the closing of the Series A Preferred Financing described
above.

GRAUL CLAIM

On March 3, 2006, the Company, Ms. Graul and a third party ("Buyer") entered
into an arrangement providing for Ms. Graul to assign and transfer all rights,
title and interest in her original claim of $931,659 against the Company to the
Buyer in exchange for a cash payment in the amount of $180,000. On March 15,
2006, the Company advanced the $180,000 payment to Ms. Graul in exchange for her
immediate release of all claims against the Company. The Company is currently
awaiting payment in the same amount from the Buyer in order to complete the
assignment of such claim to the Buyer. This arrangement further provides for the
Company to acknowledge Ms. Graul's original claim for the benefit of the Buyer,
the rescission of the August 2005 settlement and release, and for the Buyer to
participate in the Claimant and Creditor Liabilities Restructuring with respect
to the settlement of Ms. Graul's original claim.

STOCK SUBSCRIPTION AND MUTUAL RELEASE AGREEMENTS WITH PATRICK ALLIN AND THE
ALLIN DYNASTIC TRUST

On January 1, 2006, the Company and Mr. Allin and the Allin Dynastic Trust
entered into Stock Subscription Agreement and Mutual Release agreements (the
"Series A-1 Agreements') to settle all claims in law, equity, or otherwise
("Allin Subscriber Claims") arising out of the business relationship between the
parties that Mr. Allin and the Allin Dynastic Trust may have with the Company.
The Series A-1 Agreements provide for the issuance of 1,875,000 shares of Series
A-1 Preferred Stock to Mr. Allin and 625,000 shares of Series A-1 Preferred
Stock to the Allin Dynastic Trust. The aggregate purchase price is equivalent to
the value of the Allin Subscriber Claims being settled through this settlement
and release. The total of these claims at December 31, 2005 amounted to
$2,000,000. Mr. Allin and the Allin Dynastic Trust are each deemed to have paid
for the Series A-1 Preferred Stock through the settlement and release of Allin
Subscriber Claims. Each share of Series A-1 Preferred Stock shall automatically
convert into ten shares of the Company's common stock upon the effectiveness of
an amendment to the Company's certificate of incorporation which provides for a
sufficient number of authorized but unissued and unreserved shares of the
Company's common stock to permit the conversion of all issued and outstanding
shares of Series A-1 Preferred. See Note 23 for further details of the Series
A-1 Preferred and the Creditor and Claimant Liabilities Restructuring.

SETTLEMENT OF LINTING LAWSUIT

On February 14, 2006, the Company and Richard Linting entered into a Stock
Subscription Agreement & Mutual Release ("Linting Agreement") to settle all
claims in law, equity or otherwise ("Linting Subscriber Claims") arising out of
the business relationship between the parties that Mr. Linting may have with the
Company. The Linting Agreement provides for the issuance of 1,777,261 shares
(the "Shelved Stock") of Series A-1 Preferred. The aggregate purchase price is
equivalent to the value of the Linting Subscriber Claims being settled through
this settlement and release. The total set aside purchase price for the Shelved
Stock shall be $0.80 per share or an aggregate of $1,421,809. Mr Linting is
deemed to have paid for the Series A-1 Preferred through the settlement and
release of the Linting Subscriber Claims. Each share of Series A-1 Preferred
shall automatically convert into ten shares of the Company's common stock upon
the effectiveness of an amendment to the Company's certificate of incorporation
which provides for a sufficient number of authorized but unissued and unreserved
shares of the Company's common stock to permit the conversion of all issued and
outstanding shares of Series A-1 Preferred. This agreement provides for the
transfer of the Shelved Stock in stock certificate installments and in such
numbers and at such times as directed by Mr. Linting. See above in this Note 23
for further details of the Series A-1 Preferred and the Creditor and Claimant
Liabilities Restructuring.

SETTLEMENT OF HARARY, ET AL. LAWSUITS

On March 27, 2006, the Company reached agreement with Paul Harary, Paris
McKinzie, Maria Caporicci, LLB Ltd. and DGC, Inc. (the "Subscribers") whereby
each of the Subscribers and the Company mutually release the other party and its
respective stockholders, directors, officers, employees, etc. from any and all
past, present and future claims that can or have been brought by the other party
relating to any act or omission occurring on or prior to the date of the
Agreement. Additionally, the Company agreed to a payment to the Subscribers,
including attorneys fees, of $125,090. The Subscribers agreed to purchase from
the Company 3,000,000 shares of the Company's Series A-1 Preferred Stock, the
purchase price for the stock shall be $0.80 per share and shall be paid through
this settlement and release of $2,400,000 of Subscriber claims. As described
above in the Creditor and Claimant Liabilities Restructuring, the Series A-1
Preferred will convert automatically into 10 shares of the Company's common
stock upon the effectiveness of an amendment to the Company's certificate of
incorporation which provides for a sufficient number of authorized but unissued
and unreserved shares of the Company's common stock to permit the conversion of
all issued and outstanding shares of Series A-1 Preferred. See above in this
Note 23 for further details of the Series A-1 Preferred and the Creditor and
Claimant Liabilities Restructuring

BRADEN WAVERLEY, CHIEF OPERATING OFFICER - EMPLOYMENT AGREEMENT

On February 17, 2006, the Company entered into an employment agreement (the
"Waverley Agreement") with Braden Waverley ("Waverley"), the Company's new Chief
Operating Officer. The term of the Waverley Agreement is one year with automatic
one-year renewal unless Mr. Waverley is provided with written notice of
non-renewal 90 days prior to expiration of the current term of the Waverley
Agreement. The Waverley Agreement provides for a base salary of $200,000 per
year. The Waverley Agreement provides for a performance bonus determined in
accordance with revenue milestones established by the Board of Directors on a
quarterly basis. Mr. Waverley is eligible to receive a bonus of up to 75% of
base salary for each quarter that the Company achieves the agreed upon revenue
milestones. Additionally, the Waverley Agreement provides for the grant of stock
options in an amount representing an aggregate 3.5% of the outstanding shares of
Company common stock on the date of grant ("Waverley Initial Grant").
Additionally, upon the completion of the Creditor and Claimant Liabilities
Restructuring, Mr. Waverley will be granted an additional option ("Waverley
Additional Option") which together with the Waverley Initial Grant shall enable
Mr. Waverley to purchase, along with the Waverley Initial Grant shares of
Company common stock representing 3.5% of the common stock issued and
outstanding after completion of the Creditor and Claimant Liabilities
Restructuring on a fully-diluted basis. These options have a term of 10 years
and vest 20% on the date of grant and 1/48th of the balance on the last day of
each month for the next 48 months following the effective date of this
agreement.

MARTIN T. JOHNSON, CHIEF FINANCIAL OFFICER - EMPLOYMENT AGREEMENT

On February 17, 2006, the Company entered into an employment agreement (the
"Johnson Agreement") with Martin T. Johnson ("Johnson"), the Company's new Chief
Financial Officer. The term of the Johnson Agreement is one year with automatic
one-year renewal unless Mr. Johnson is provided with written notice of
non-renewal 90 days prior to expiration of the current term of the Johnson
Agreement. The Johnson Agreement provides for a base salary of $180,000 per
year. The Johnson Agreement provides for a performance bonus determined in
accordance with revenue milestones established by the Board of Directors on a
quarterly basis. Mr. Johnson is eligible to receive a bonus of up to 50% of base
salary for each quarter that the Company achieves the agreed upon revenue
milestones. Additionally, the Johnson Agreement provides for the grant of stock
options in an amount representing an aggregate

1.25% of the outstanding shares of Company common stock on the date of grant
("Johnson Initial Grant"). Additionally, upon the completion of the Creditor and
Claimant Liabilities Restructuring, Mr. Johnson will be granted an additional
option ("Johnson Additional Option") which together with the Johnson Initial
Grant shall enable Mr. Johnson to purchase, along with the Johnson Initial Grant
shares of Company common stock representing 1.25% of the common stock issued and
outstanding after completion of the Creditor and Claimant Liabilities
Restructuring on a fully-diluted basis. These options have a term of 10 years
and vest 20% on the date of grant and 1/48th of the balance on the last day of
each month for the next 48 months following the effective date of this
agreement.

ROBERT CROSS - BONUS ARRANGEMENT

On March 7, 2006, the Patron Board of Directors, in executive session without
Mr. Cross being present, approved a bonus arrangement ("Bonus Arrangement") for
Mr. Cross. The Bonus Arrangement provides for (i) a cash bonus equal to
$200,000, grossed up for taxes (the "Cash Bonus"), (ii) the Cash Bonus would be
payable only after agreement has been reached with creditors holding the
applicable percentage of Patron's creditor obligations agree to convert their
obligations under the Creditor and Claimant Liabilities Restructuring and when
the funding escrow established by Laidlaw has been released (the "Eligibility
Date"), (iii) 50% of the Cash Bonus would be paid on the Eligibility Date, and
the other 50% would be paid in ten equal monthly installments beginning one
month following the Eligibility Date, and (iv) on the Eligibility Date, Mr.
Cross would be granted a stock option in an amount representing an aggregate
2.5% of the outstanding shares of Company common stock on the Eligibility Date
("Initial Cross Grant"). Additionally, upon the completion of the Creditor and
Claimant Liabilities Restructuring, Mr. Cross will be granted an additional
option ("Cross Additional Option") which together with the Cross Initial Grant
shall enable Mr. Cross to purchase, along with the Cross Initial Grant shares of
Company common stock representing 2.5% of the common stock issued and
outstanding after completion of the Creditor and Claimant Liabilities
Restructuring on a fully-diluted basis. These options have a term of 10 years
and vest 20% on the date of grant and 1/48th of the balance on the last day of
each month for the next 48 months following the Eligibility Date.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable

ITEM 8A. CONTROLS AND PROCEDURES

Members of our management, including our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures, as defined by paragraph (e) of Exchange Act Rules 13(a)-15 or
15(d)-15 for the fiscal year ended December 31, 2005, the period covered by this
report. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of December 31, 2005 our disclosure
controls and procedures were not effective.

DISCLOSURE CONTROLS AND INTERNAL CONTROLS

Disclosure controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in our reports filed under
the Securities Exchange Act of 1934, as amended, such as this Report, is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. Disclosure controls are also designed with the
objective of ensuring that such information is accumulated and communicated to
our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. Internal controls are procedures which are designed with the
objective of providing reasonable assurance that our transactions are properly
authorized, recorded and reported and our assets are safeguarded against
unauthorized or improper use, to permit the preparation of our financial
statements in conformity with generally accepted accounting principles.

Our company is not an "accelerated filer" (as defined in the Securities Exchange
Act) and is not required to deliver management's report on control over our
financial reporting until our year ended December 31, 2006. Nevertheless, we
identified certain matters that constitute material weakness (as defined under
the Public Company Accounting Oversight Board Auditing Standard No. 2) in our
internal controls over financial reporting.

In previous periods, we reported that we had identified certain matters that
constituted material weakness (as defined under the Public Company Accounting
Oversight Board Auditing Standard No. 2) in our internal controls over financial

reporting. The material weaknesses that we identified related to the fact that
that our overall financial reporting structure and current staffing levels were
not sufficient to support the complexity of our financial reporting
requirements, we lacked the expertise we needed to apply complex accounting
principles relating to our business combinations and participation in equity
transactions and lacked the structure we need to ensure the timely filing of our
tax returns.

Until recently, we did not have any full time employees including a Principal
Accounting Officer assigned to perform any duties related to our financial
reporting obligations. Accordingly we were unable, until the second quarter of
2005, to record, process and summarize all of the information that we needed to
close our books and records on a timely basis and deliver our reports to the
Securities and Exchange Commission within the time frames required under the
Commission's rules.

During the third quarter of 2005, under the direction of our Chief Executive
Officer, we engaged the services of an outside financial reporting specialist
who, together with our full time personnel, undertook the process of forming a
system of internal controls. We have since hired personnel and instituted
various procedures that have enabled us to record, process and summarize
transactions within the time frames required to timely file our reports under
the Commission's rules. These improvements have enabled us to resolve all
previous delinquencies relating to the filing of our annual and quarterly
reports with the SEC as of the quarter ended June 30, 2005. We also resolved the
delinquent filing of our Form 8-K/A's from the acquisitions of CSSI, Entelagnet
and Lucidline in December 2005. We also assigned a key member of the accounting
department with the task of filing previously delinquent tax returns and are
undertaking a structure to ensure that our tax returns in the future are filed
on a timely basis. We recently completed filing all delinquent tax returns
through the year ended December 31, 2004. This member of our accounting
department is also working with an outside specialist to ensure that our tax
returns for the year ended December 31, 2005 are filed in a timely manner.

Although the improvements we have made in our financial reporting processes have
enabled us to (a) bring the Company into compliance with the SEC's reporting
requirement, (b) better plan transactions that involve the application of
complex accounting principles and (c) improve our ability to comply with our tax
reporting obligations, additional time is still required to test and document
our internal and disclosure control processes to ensure their operating
effectiveness.

We believe that the changes we have made in our financial reporting procedures
have enabled us to substantially reduce previous financial reporting risks that
existed as a result of our limited resources. We are continuing to evaluate our
risks and resources. We will seek to make additional changes in our financial
reporting systems and procedures wherever necessary and appropriate to ensure
their effectiveness in future periods.

ITEM 8B. OTHER INFORMATION

Not Applicable.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

DIRECTORS AND EXECUTIVE OFFICERS OF PATRON SYSTEMS, INC. AS OF MARCH 21, 2006

ROBERT W. CROSS, CHIEF EXECUTIVE OFFICER & DIRECTOR; AGE 68

Robert Cross joined the Company on February 28, 2005 as its Chief Executive
Officer. Mr. Cross has more than twenty years CEO-level experience in the
development and marketing of information technologies, including secure systems
for intelligence agencies and NATO markets. From 1984 through 2004, Mr. Cross
was Chief Executive Officer of Cross Technologies, Inc., a business process
outsourcing firm specializing in the structuring and commercialization of
information technologies. From 1993 through 1998, Mr. Cross was President and
CEO of Nanophase Technologies Corp. (NASDAQ: NANX). From 1984 through 1989, he
was Chairman and CEO of Delta Data Systems Corp., a manufacturer of secure
computers and peripherals for government intelligence agencies. From 1983 to
1984, Mr. Cross led the financial turnaround of Control Video Corporation,
predecessor to America Online (AOL). Prior thereto, Mr. Cross was General
Counsel of Electronic Data Systems. Prior thereto, Mr. Cross

was a securities counsel with Winthrop Stimson Putnam & Roberts. Mr. Cross
received his business and legal education at Washington University in St. Louis.
He is a Marine Corps veteran, and is an active member of Business Executives for
National Security and the Illinois Technology Development Alliance. Mr. Cross
has served as a director since February 28, 2005 with a term expiring at the
Company's 2006 Annual Meeting of Stockholders.

BRADEN WAVERLEY, CHIEF OPERATING OFFICER; AGE 39

Mr. Waverley joined the Company on February 17, 2006 as its Chief Operating
Officer. Mr. Waverely has been an active advisor to start-up companies in
technology services, distribution and software, Mr. Waverley was most recently
President of Vsource, Inc., a publicly traded business process outsourcing (BPO)
services firm from 2002 to 2004. While at Vsource, he was responsible for sales,
marketing, solutions development, public and investor relations, and strategic
planning. Under his leadership the Company expanded account acquisition,
positioning the business for a successful sale to an Asian based investment
group. From 1996 to 2001, Mr. Waverley was with Dell Inc., where he was Vice
President and General Manager in the company's Canadian operations. With full
P&L responsibility for the Consumer and Small Business Divisions, he grew the
combined business unit to over $500 million in sales and the top market share
position in Canada. Previously, he held marketing and general management posts
for Dell's business throughout the Asia-Pacific region, where he grew a new
business unit over five-fold, with sales in excess of $250 million. Prior to
Dell, Mr. Waverley co-founded Paradigm Research, a successful management
consulting firm specializing in business process automation and redesign
strategies. Clients came from industries such as computer hardware, software and
wireless technology. Earlier, Mr. Waverley held operations and marketing
management positions at Motorola, Inc. Mr. Waverley holds a bachelors degree
from the University of Wisconsin at Madison, and a masters of business
administration from the J.L. Kellogg Graduate School of Management at
Northwestern University.

BRETT NEWBOLD, PRESIDENT & CHIEF TECHNOLOGY OFFICER; AGE 53

Mr. Newbold rejoined the Company on February 28, 2005 as its President and Chief
Technology Officer. From October 2002 until June 2003, Mr. Newbold was the
Company's Chief Technology Officer and President, Technology Products Group. Mr.
Newbold has more than twenty-five years of software development and technology
company management experience. From 1989 through 1997, Mr. Newbold was Vice
President/Research & Development, New Technologies for Oracle Corporation
(NASDAQ: ORCL), where he held senior operating management responsibility for the
selection, development and integration of new technologies, reporting directly
to Oracle's Chief Executive Officer, Mr. Larry Ellison. Thereafter, Mr. Newbold
was President and Chief Operating Officer of Open Text Corporation (NASDAQ:
OTEX), a market leader of collaboration and knowledge management software. Since
1999, Mr. Newbold served as an Executive Consultant to various software
development companies. Mr. Newbold received his undergraduate education in
physics at the University of Washington.

MARTIN T. "TORK" JOHNSON, CHIEF FINANCIAL OFFICER; AGE 54

Mr. Johnson joined the Company on February 17, 2006 as its Chief Financial
Officer. Mr. Johnson has served as an independent consultant providing
financial, strategy and operations consulting services since 2002. From 2000 to
2001, he was Vice President - Planning and Business Development for Cabletron
Systems, a provider of network hardware, network management software and
consulting services. From 1999 to 2000, Mr. Johnson was Senior Vice President,
Chief Financial Officer for MessageMedia, Inc., a publicly-held e-mail messaging
services and software company. From 1993 to 1999, he worked for Technology
Solutions Company, a publicly-held management and information technology
professional services firm. Initially, he led the business case consulting
practice serving as Vice President, Business Case Consulting and from February
1994 was the firm's Senior Vice President and Chief Financial Officer. From 1990
to 1993, he was Corporate Controller for The Marmon Group, Inc., a $4.5 billion
autonomous association of over 70 independent member companies. From 1987 to
1990, he was Vice President-Finance and Chief Financial Officer of COMNET
Corporation, a publicly-held computer software and computer services firm and
was also Vice President-Finance and Chief Financial Officer for its
publicly-held subsidiary, Group 1 Software, Inc. Mr. Johnson holds a bachelor of
science in electrical engineering degree from Lehigh University and a masters
degree in management from the J.L. Kellogg Graduate School of Management at
Northwestern University.

JAMES E. MORRISS, VICE PRESIDENT, ENGINEERING; AGE 51

Mr. Morriss joined the Company on March 31, 2005 as its Vice President,
Engineering. Since 1999, Mr. Morriss has provided technology, product and
strategic consulting services through Black Dog Research, and has focused on
helping early stage hardware and software startups translate their visions into
product concepts, specifications and go-to-market strategies. Mr. Morriss was VP
Engineering & Products for vCIS Technology, Inc., where he managed an
international team of developers to create next-generation anti-virus solutions
that provide real time protection

against known and unknown malicious code. Prior thereto, Mr. Morriss was a
Director of Solution Design for Renaissance Worldwide, where he delivered
strategic consulting and implementation support services to a diverse client
base including Fortune 100 telecommunication companies. Prior thereto, Mr.
Morriss was General Manager, Application Business Unit and Director, Marketing
and Product Research for PictureTel Corporation. Mr. Morriss led marketing and
product development efforts that established the company's leadership
positioning in the video conferencing market. Mr. Morriss' product concepts and
marketing strategy helped PictureTel grow from start-up to $225 million of
annual revenue and achieve market domination. Prior thereto, Mr. Morriss was a
National Account Sales/Product Manager for AT&T Communications. Mr. Morriss
managed sales and product development teams to establish new communication
services and capture new market opportunities. During his tenure, Mr. Morriss
managed the deployment of high-speed switch digital services across the United
States and established an entrepreneurial team that developed, deployed, and
marketed new digital satellite services and resulted in the establishment of a
satellite business unit. Mr. Morriss received his undergraduate and graduate
education in Management Engineering from Rensselaer Polytechnic Institute.

HEIDI B. NEWTON, VICE PRESIDENT FINANCE AND ADMINISTRATION; AGE 44

Ms. Newton most recently was Vice President of Finance and CFO for
IDK/NETdelivery, having joined IDK/NETdelivery in June 2001. Prior to that, she
was CFO for both ENSCICON Corporation and American Pharmaceutical Services
(APS). In both roles, Ms. Newton was responsible for reengineering and
development of all areas of finance and administration with a focus on customer
service. With APS, she was responsible for over 20 acquisitions and joint
ventures, assisting in growing the business from $50M to more than $330M in five
years. She has participated with a variety of institutional and private
investors to market companies and business segments. Ms. Newton is a CPA, holds
a BS in Accounting and an MBA from California Polytechnic University.

ROBERT E. YAW II, CHAIRMAN OF THE BOARD OF DIRECTORS; AGE 59

Mr. Yaw started his career with Citicorp International and later joined the
Investment Banking Department of Salomon Brothers in 1973. In 1975, at the
request of William R. Salomon, Mr. Yaw created its Global Telecommunications
Group. In 1980, Mr. Yaw and Mr. Lewis Ranieri created mortgage securitization
through a partnership with AT&T and Bank of America. Also in 1980, Mr. Yaw
became Chairman of Salomon Brothers' New Products Group--formally coordinating
Salomon Brothers' public offering origination and distribution processes. In
1981, Mr. Yaw assumed senior responsibility for Salomon Brothers' Private
Placement Group--the leading U.S. private placement agent throughout his tenure.
Thereafter, he has been an advisor, founder, and Director of private and public
companies, including partnerships with Prudential Insurance Company of America
and New York Life Insurance Company and he has held staff positions with the
United States Senate Foreign Relations Committee, United States Senate
Republican Policy Committee, and the Presidential Commission on the Causes and
Prevention of Violent Crime. Mr. Yaw completed his undergraduate education at
Bowdoin College and Clare College (Cambridge University) in 1968, and his
graduate legal education at Georgetown University and the University of London
in 1973. Mr. Yaw has served as a director since October 10, 2002 with a term
expiring at the Company's 2006 Annual Meeting of Stockholders.

GEORGE M. MIDDLEMAS, DIRECTOR; AGE 59

Mr. Middlemas is Managing General Partner of Apex Investment Partners. Prior to
joining Apex in 1991, Mr. Middlemas was a Senior Vice President and Principal of
Inco Venture Capital Management. Prior thereto, he was Vice President and a
member of the investment commitment committee of Citicorp Venture Capital. Mr.
Middlemas was a founder of both America Online (AOL) and RSA Security (NASDAQ:
RSAS). Mr. Middlemas holds a B.A. in history and political science from
Pennsylvania State University; an M.A. in political science from the University
of Pittsburgh; and an M.B.A. from the Harvard Graduate School of Business
Administration. Mr. Middlemas has served as a director since February 28, 2005
with a term expiring at the Company's 2006 Annual Meeting of Stockholders.

AUDIT COMMITTEE FINANCIAL EXPERT

Our Board of Directors has determined that we do not have an audit committee
financial expert serving on the Board of Directors. Our Board of Directors
performs the functions of the audit committee. We are in the process of finding
an audit committee financial expert to fill this position.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Based upon its review of Forms 3, 4 and 5 submitted to us, we are aware that the
following individuals failed to file on a timely basis, as disclosed in the
forms above, reports required by Section 16(a) of the Exchange Act: Robert

Cross, our Chief Executive Officer, failed to timely file one report reporting
one transaction; Brett Newbold, our President and Chief Technology Officer
failed to file one report reporting one transaction; Heidi B. Newton, our Vice
President-Finance and Administration, failed to timely file one report reporting
one transaction; James E. Morriss, our Vice President-Engineering, failed to
timely file one report reporting one transaction; and J. William Hammon, our
former Chief Marketing Officer failed to timely file one report reporting one
transaction.

CODE OF ETHICS DISCLOSURE

Our Board of Directors has adopted a Code of Ethical Conduct (the "Code of
Conduct"). We require all employees, directors and officers, including our Chief
Executive Officer and Chief Financial Officer, to adhere to the Code of Conduct
in addressing legal and ethical issues encountered in conducting their work. The
Code of Conduct requires that these individuals avoid conflicts of interest,
comply with all laws and other legal requirements, conduct business in an honest
and ethical manner and otherwise act with integrity and in our best interest.
The Code of Conduct contains additional provisions that apply specifically to
our Chief Financial Officer and other financial officers with respect to full
and accurate reporting.

ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth, as to the Chief Executive Officer and the other
four most highly compensated executive officers at the end of the fiscal year
ended December 31, 2005 (collectively the "Named Executive Officers") whose
compensation exceeded $100,000 during the fiscal year ended December 31, 2005,
information concerning all compensation paid for services to us in all
capacities

SUMMARY COMPENSATION TABLE

LONG-TERM COMPENSATION
-------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------ ------------------------ -------
Other Securities
Annual Restricted Underlying All other
Compensation Stock Options/ LTIP compensation
Name and Principal Position Year Salary($) Bonus($) ($) Award(s)($) SARs (#) Payouts ($)
----------------------------- ---- --------- -------- ------------ ----------- ---------- ------- ------------

Robert Cross(1).............. 2005 186,458 82,388 0 0 1,000,000 0 0
Director, Chief Executive 2004 0 0 0 0 0 0 0
Officer and Acting Chief 2003 0 0 0 0 0 0 0
Financial Officer

Brett Newbold(2)............. 2005 150,624 0 0 0 0 0 0
President & Chief Technology 2004 0 0 0 0 0 0 0
Officer ..................... 2003 159,000 0 0 0 0 0 0

William Hammon(3)............ 2005 157,500 0 0 0 400,000 0 0
Chief Marketing Officer 2004 0 0 0 0 0 0 0
2003 0 0 0 0 0 0 0

James E. Morriss(4).......... 2005 141,666 0 0 0 600,000 0 0
Vice President - 2004 0 0 0 0 0 0 0
Engineering 2003 0 0 0 0 0 0 0

Heidi B. Newton(5)........... 2005 142,500 15,000 0 0 200,000 0 0
Vice President - Finance 2004 0 0 0 0 0 0 0
and Administration 2003 0 0 0 0 0 0 0

(1) Mr. Cross became Patron's Chief Executive Officer on February 28, 2005.
On July 1, 2005, Mr. Cross was granted an option to purchase 1,000,000
shares of the Company's common stock at a per share exercise price of
$0.65. This option terminates on June 30, 2015.

(2) Mr. Newbold was named Patron's President and Chief Technology Officer
on February 28, 2005. Previously, Mr. Newbold was Patron's Chief
Technology Officer and President, Technology Products Group joining the
Company on October 11, 2002. He later terminated his employment as of
June 30, 2003.

(3) Mr. Hammon became Patron's Chief Marketing Officer upon the acquisition
of Entelagent on March 30, 2005. On August 17, 2005, Mr. Hammon
received an option to purchase 400,000 shares of the Company's common
stock at a per share exercise price of $0.34. This option grant
terminates on August 16, 2015. Mr. Hammon's employment with the Company
ended on January 9, 2006.

(4) Mr. Morriss became Patron's Vice President-Engineering on March 31,
2005. On August 17, 2005, Mr. Morriss was granted an option to purchase
600,000 shares of the Company's common stock at a per share exercise
price of $0.34. This option terminates on August 16, 2015.

(5) Ms. Newton became Patron's Vice President - Finance and Administration
on February 26, 2005. On August 17, 2005 Ms. Newton was granted an
option to purchase 200,000 shares of the Company's common stock at a
per share exercise price of $0.34. This option terminates on August 16,
2015.

OPTION GRANTS IN THE YEAR ENDED DECEMBER 31, 2005

NUMBER OF
SECURITIES % OF TOTAL OPTIONS
UNDERLYING OPTIONS GRANTED TO EMPLOYEES EXERCISE EXPIRATION
NAME GRANTED IN FISCAL YEAR(1) PRICE(2) DATE
------------------------- ------------------ -------------------- -------- ----------

Robert Cross ............ 1,000,000 18.8% $ 0.653 6/30/15
Brett Newbold ........... -- -- -- --
William Hammon .......... 400,000 7.5% $ 0.34 8/16/15
James E. Morriss ........ 600,000 11.3% $ 0.34 8/16/15
Heidi B. Newton ......... 200,000 3.8% $ 0.34 8/16/15

(1) The total number of stock options granted to employees during the year
ended December 31, 2005 was 5,315,000 shares.

(2) The exercise price of such options was equal to closing price on the
trading day immediately preceding the date of grant, except as noted.

(3) Mr. Cross' options were granted at a per share exercise price of $0.65.
The closing price on the date of grant was $0.68.

DIRECTOR COMPENSATION

Patron's non-employee directors do not receive compensation for their services.
Directors are reimbursed for travel expenses associated with attendance at Board
of Directors meetings. Reimbursement of travel expenses totalled $0 in each of
the years ended December 31, 2005 and 2004.

EXECUTIVE EMPLOYMENT AGREEMENTS

ROBERT W. CROSS

On February 28, 2005, the Company's Board of Directors approved the appointment
of Mr. Cross as our Chief Executive Officer and Acting Chief Financial Officer.

On July 1, 2005, we entered into an employment agreement with Mr. Cross in
connection with Mr. Cross's employment for a one year term, subject to automatic
renewal, commencing on July 1, 2005, as Chief Executive Officer. The Employment
Agreement provides for a base salary of $200,000 per year with a non-recoverable
draw of $100,000 (grossed up for taxes) during the first six months of the
Agreement. In the event that his employment is terminated, Mr. Cross shall
continue to receive his base salary and shall be entitled to continued
participation in our executive benefit plans for a period of six (6) months. The
Employment Agreement also provides for a performance bonus determined in
accordance with quarterly revenue milestones that are to be established by the
Board of Directors. Mr. Cross is eligible to receive a bonus of up to 100% of
quarterly base salary for each quarter that the Company achieves the agreed upon
revenue milestones. Additionally, the Employment Agreement provides for the
grant of 1,000,000 stock options at an exercise price of $0.65 per share with
the options vesting 25% on July 1, 2005, 25% on September 30, 2005, 25% on
December 31, 2005 and 25% on March 31, 2006. The options expire on June 30,
2012.

Mr. Cross's employment agreement will terminate on the expiration of the
agreement's term, his death, or delivery of written notice of termination by us
to Mr. Cross if he were to suffer a permanent disability rendering him unable to
perform his duties and obligations under the agreement for 90 days in any
12-month period. We can terminate Mr. Cross's employment by delivery of written
notice of such termination "for cause" or "without cause" (as such terms are

defined in his employment agreement) to Mr. Cross. Mr. Cross can terminate his
employment by delivery of written notice of termination "for good reason" (as
such term is defined in his employment agreement) to us. Mr. Cross agrees not to
compete with us or solicit certain of our employees or clients for a period of
one year after the termination of his employment.

BRETT NEWBOLD

On February 28, 2005, we entered into an employment agreement with Brett Newbold
in connection with Mr. Newbold's employment for a one year term, subject to
automatic renewal, commencing on February 28, 2005, as President and Chief
Technology Officer. Mr. Newbold will receive a minimum annual base salary of
$190,000 during each fiscal year of the agreement, subject to adjustment on an
annual basis by the Board. In the event that his employment is terminated, Mr.
Newbold shall continue to receive his base salary and shall be entitled to
continued participation in our executive benefit plans for a period of six (6)
months. Mr. Newbold is eligible to receive (i) an annual bonus of 50% of his
annual base salary if certain financial performance measures are attained and
(ii) such discretionary bonuses as may be authorized by the Compensation
Committee from time to time for executive employees. Mr. Newbold also is
eligible to participate in stock option and other employee benefit plans of the
Company that may be in effect from time to time.

Mr. Newbold's employment agreement will terminate on the expiration of the
agreement's term, his death, or delivery of written notice of termination by us
to Mr. Newbold if he were to suffer a permanent disability rendering him unable
to perform his duties and obligations under the agreement for 90 days in any
12-month period. We can terminate Mr. Newbold's employment by delivery of
written notice of such termination "for cause" or "without cause" (as such terms
are defined in his employment agreement to Mr. Newbold. Mr. Newbold can
terminate his employment by delivery of written notice of termination "for good
reason" (as defined in his employment agreement) to us. Mr. Newbold agrees not
to compete with us or solicit certain of our employees or clients for a period
of two years after the termination of his employment.

J. WILLIAM HAMMON

On February 28, 2005, we entered into an employment agreement with J. William
Hammon in connection with Mr. Hammon's employment for a one year term commencing
on February 28, 2005, as Chief Marketing Officer of the Company. The terms of
Mr. Hammon's employment agreement are substantially similar to those described
above for Mr. Newbold's employment agreement except that Mr. Hammon will receive
a minimum annual base salary of $180,000 per annum and a commission of 1% on all
of our product sales. This percentage is subject to review at the end of each
fiscal year. Mr. Hammon received a non-recoverable draw of $60,000 during the
first six months of his employment. On January 9, 2006, Mr. Hammon's employment
with the Company ended.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The following table sets forth certain information regarding beneficial
ownership of our common stock as of March 21, 2006, by (i) each person (or group
of affiliated persons) who is known by us to beneficially own more than 5% of
the outstanding shares of our common stock, (ii) each of our directors and
executive officers, and (iii) all of our executive officers and directors as a
group. Under Rule 13d-3, certain shares may be deemed to be beneficially owned
by more than one person (if, for example, persons share the power to vote or the
power to dispose of the shares). In addition, shares are deemed to be
beneficially owned by a person if the person has the right to acquire the shares
(for example, upon exercise of an option) within 60 days of the date as of which
the information is provided. In computing the percentage ownership of any
person, the amount of shares outstanding is deemed to include the amount of
shares beneficially owned by such person (and only such person) by reason of
these acquisition rights. As a result, the percentage of outstanding shares of
any person as shown in this table does not necessarily reflect the person's
actual ownership or voting power with respect to the number of shares of common
stock actually outstanding at March 21, 2006. As of March 21, 2006, there were
61,648,360 shares of common stock outstanding and to-be-issued, not including
vested, un-issued stock options totaling 8,906,108 shares. Except as otherwise
indicated, the address of each of the executive officers, directors and more
than 5% stockholders named below is c/o Patron Systems, Inc., 5775 Flatiron
Parkway, Suite 230, Boulder, CO 80301

AMOUNT AND
NATURE OF
CERTAIN BENEFICIAL OWNERS BENEFICIAL PERCENT
DIRECTORS AND EXECUTIVE OFFICERS OWNERSHIP OF CLASS
---------------------------------------------- ---------- --------
Robert W. Cross(1)............................ 1,066,667 1.7%
Braden Waverley(2)............................ 536,570 *
Brett Newbold(3).............................. 4,075,000 6.6%
J. William Hammon(4).......................... 2,150,000 3.5%
Martin T. Johnson(5).......................... 191,632 *
James E. Morriss ............................. 47,000 *
Heidi B. Newton .............................. 202,114 *
Robert E. Yaw II(6)........................... 2,950,000 4.8%
George M. Middlemas .......................... 22,751 *
ALL DIRECTORS AND EXECUTIVE ---------- --------
OFFICERS AS A GROUP(7)........................ 11,241,734 18.2%

* Less than 1%

(1) Consists of 1,000,000 shares of common stock that may be acquired from
the Company within 60 days of March21, 2006 upon the exercise of
outstanding stock options.

(2) Consists of 536,570 shares of common stock that may be acquired from
the Company within 60 days of March 21, 2006 upon the exercise of
outstanding stock options.

(3) Consists of 1,475,000 shares of common stock that are directly owned by
Mr. Newbold, and 2,600,000 shares of common stock owned by Newbold,
Inc., a corporation of which Mr. Newbold is the sole stockholder.

(4) Consists of 1,550,000 share of common stock that may be acquired from
the Company within 60 days of March 21, 2006 upon the exercise of
outstanding stock options.

(5) Consists of 191,632 shares of common stock that may be acquired from
the Company within 60 days of March 21, 2006 upon the exercise of
outstanding stock options.

(6) Consists of 950,000 shares of common stock that are directly owned by
Mr. Yaw, and 2,000,000 shares of common stock owned by Mr. Yaw's
spouse.

(7) Consists of 3,278,202 shares of common stock that may be acquired from
the Company within 60 days of March 21, 2006 upon the exercise of
outstanding stock options.

CHANGES IN CONTROL

On January 12, 2006, we issued a Stock Subscription Agreement & Mutual Release
to each of our creditors and claimants pursuant to which we would sell to such
creditors and/or claimants shares of our Series A-1 Preferred Stock in exchange
for a final and binding settlement with respect to any and all claims,
liabilities, demands, causes of action, costs, expenses, attorneys fees,
damages, indemnities, and obligations of every kind and nature that such
creditors and/or claimants may have with the Company. If all creditors and/or
claimants accept the Company's offer, the Company will issue an aggregate of
approximately 39,963,000 shares of Series A-1 Preferred Stock. The shares of
Series A-1 Preferred Stock will automatically convert into 390,963,000 shares of
the Company's common stock at such time that the Company amends its Certificate
of Incorporation, as amended, to provide for the conversion of all shares of
Series A-1 Preferred Stock. Based on 61,648,360 shares of the Company's common
tock outstanding and to-be-issued as of March 21, 2006, if the automatic
conversion of the maximum number of shares of Series A-1 preferred stock were to
occur on such date, the creditors and/or claimants would own approximately 86.4%
of the issued and outstanding shares of the Company's common stock.

On March 27, 2006, pursuant to the consummation of the Series A Preferred
Financing for aggregate proceeds of $4,820,501, the Company issued to the
purchasers of Series A Preferred Stock an aggregate of 964.1 shares of Series A
Preferred Stock and warrants to purchase an aggregate of 20,085,417 shares of
common stock. The 964.1 shares of Series A Preferred Stock are, subject to
certain conditions, convertible at the option of the holders thereof, into
60,256,250 shares of the Company's common stock. Based on 61,648,360 shares of
the Company's common stock outstanding as of March 21, 2006, if all holders of
Series A Preferred Stock elected to convert all of their shares of Series A
Preferred Stock and to exercise all of their warrants issued in connection with
the Series A Preferred Financing on such date, such holders of Series A
Preferred Stock and warrants would own approximately 56.6% of the issued and
outstanding shares of the Company's common stock.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table sets forth information concerning our equity compensation
plans as of December 31, 2005.

NUMBER OF SECURITIES NUMBER OF SECURITIES REMAINING
TO BE ISSUED UPON WEIGHTED-AVERAGE AVAILABLE FOR FUTURE ISSUANCE
EXERCISE OF EXERCISE PRICE OF UNDER EQUITY COMPENSATION
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, PLANS (EXCLUDING SECURITIES
WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
PLAN CATEGORY (A) (B) (C)
-------------------------------- -------------------- ----------------------- --------------------------------

Equity compensation plans
approved by security holders -- -- --
Equity compensation plans not
approved by security holders[1] 12,840,000 $0.70 --
TOTAL

[1] Represents options granted pursuant to individual option agreements.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

TRANSACTIONS WITH EXECUTIVE OFFICERS AND STOCKHOLDERS

In 2002 we, through our then Chief Executive Officer, Patrick J. Allin, agreed
to reimburse recurring office expenses of the non-executive Chairman of the
Board in the aggregate of $142,500. The monthly recurring amount of $9,500
continued through June of 2003 at which time the office was relocated and the
amount increased to $15,000 per month. The aggregate office expense in 2003 and
2004 was $147,000 and $180,000, respectively. This accrual continued through May
31, 2005, at which time the monthly office expense of $15,000 ceased to accrue.

From April 30, 2002 (Inception) to December 31, 2004, J. William Hammon, our
Chief Marketing Officer, and his spouse, have advanced $345,712 in the aggregate
to us. For $119,000 of this total amount, we issued two notes, payable on demand
and accruing interest at a rate of 10% per annum. In an effort to secure legal
counsel and pay certain reimbursable expenses, we completed two Private
Placements of restricted securities for $200,000 in the aggregate, which funds
were deposited into the personal bank account of Mr. Hammon. From this account,
he paid certain of our outstanding obligations, including legal retainers and
fees and reimbursable expenses of officers and stockholders. The $200,000 in
private placement funds were netted against the total he advanced to us.

We also have employment agreements with certain of our executive officers. The
terms of those employment agreements are discussed in Item 10 and Note 23 to the
financial statements.

ITEM 13. EXHIBITS

SEE ATTACHED EXHIBIT INDEX.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

AUDIT FEES

The aggregate fees billed for each of the fiscal years ended December 31, 2005
and 2004, for professional services rendered by the principal accountant for the
audit of our annual financial statements were $364,786 and $60,000,
respectively.

AUDIT RELATED FEES

The aggregate fees billed for the fiscal year ended December 31, 2005 for
professional services rendered by the principal accountant for audit related
services associated with the preparation of the acquisition Form 8-K filing was
$30,214.

None

TAX FEES

None.

ALL OTHER FEES

None

Our Board of Directors is directly responsible for interviewing and retaining
our independent accountant, considering the accounting firm's independence and
effectiveness, and pre-approving the engagement fees and other compensation to
be paid to, and the services to be conducted by, the independent accountant. The
Board of Directors does not delegate these responsibilities. During each of the
fiscal years ended December 31, 2005 and December 31, 2004, respectively, our
Board of Directors pre-approved 100% of the services described above.

SIGNATURES

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

PATRON SYSTEMS, INC.

By: /S/ ROBERT CROSS
--------------------------------
Robert Cross

Its: Chief Executive Officer

Date: March 31, 2006

POWER OF ATTORNEY

The undersigned directors and officers of Patron Systems, Inc. do hereby
constitute and appoint each of Robert Cross and Heidi Newton with full power of
substitution and resubstitution, as their true and lawful attorney and agent, to
do any and all acts and things in our name and on our behalf in our capacities
as directors and officers and to execute any and all instruments for us and in
our names in the capacities indicated below, which said attorney and agent may
deem necessary or advisable to enable said corporation to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission, in connection with this
Annual Report on Form 10-KSB, including specifically, but without limitation,
power and authority to sign for us or any of us in our names in the capacities
indicated below, any and all amendments (including post-effective amendments)
hereto, and we do hereby ratify and confirm all that said attorney and agent
shall do or cause to be done by virtue hereof.

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

SIGNATURE TITLE DATE
--------------------- ------------------------------ --------------
/S/ ROBERT CROSS Chief Executive Officer March 31, 2006
--------------------- & Director
Robert Cross

/S/ MARTIN T. JOHNSON Chief Financial Officer March 31, 2006
---------------------
Martin T. Johnson

/S/ HEIDI B. NEWTON Vice President-Finance and March 31, 2006
--------------------- Administration
Heidi B. Newton (Principal Accounting Officer)

/S/ ROBERT E. YAW, II Chairman of the Board March 31, 2006
---------------------
Robert E. Yaw, II

/S/ GEORGE MIDDLEMAS Director March 31, 2006
---------------------
George Middlemas

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- -----------------------------------------------------------------------

2.1 Agreement and Plan of Merger dated as of November 24, 2002, among
Patron Systems, Inc., ESC Acquisition, Inc. and Entelagent Software
Corp. Incorporated by reference to Exhibit 2.3 to the Current Report on
Form 8-K filed November 27, 2002.

2.2 Supplemental Agreement dated as of November 24, 2002, among Patron
Systems, Inc., ESC Acquisition, Inc. and Entelagent Software Corp.
Incorporated by reference to Exhibit 2.4 to the Current Report on Form
8-K filed November 27, 2002.

2.3 Agreement and Plan of Merger dated as of March 26, 2003, between Patron
Systems, Inc. and Patron Holdings, Inc. Incorporated by reference to
Exhibit A to the Definitive Information Statement on Schedule 14C filed
on March 7, 2003.

2.4 Supplemental Agreement dated February 24, 2005, among Patron Systems,
Inc., LL Acquisition I Corp. and LucidLine, Inc. Incorporated by
reference to Exhibit 10.2 to the Current Report on Form 8-K filed March
2, 2005.

2.5 Agreement and Plan of Merger dated February 24, 2005, among Patron
Systems, Inc., LL Acquisition I Corp. and LucidLine, Inc. Incorporated
by reference to Exhibit 10.3 to the Current Report on Form 8-K filed
March 2, 2005.

2.6 Supplemental Agreement dated February 24, 2005, among Patron Systems,
Inc., CSSI Acquisition Co. I, Inc. and Complete Security Solutions,
Inc. Incorporated by reference to Exhibit 10.5 to the Current Report on
Form 8-K filed March 2, 2005.

2.7 Agreement and Plan of Merger dated February 24, 2005, among Patron
Systems, Inc., CSSI Acquisition Co. I, Inc. and Complete Security
Solutions, Inc. Incorporated by reference to Exhibit 10.6 to the
Current Report on Form 8-K filed March 2, 2005.

2.8 Amended and Restated Supplemental Agreement dated as of February 24,
2005, by and among Patron Systems, Inc., ESC Acquisition, Inc. and
Entelagent Software Corp. Incorporated by reference to Exhibit 10.1 to
the Current Report on Form 8-K filed March 2, 2005.

2.9 Amended and Restated Agreement and Plan of Merger dated March 30, 2005,
by and among Patron Systems Inc., ESC Acquisition, Inc. and Entelagent
Software Corp. Incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K filed April 5, 2005.

3.1.1 Second Amended and Restated Certificate of Incorporation of Patron
Systems, Inc. dated as of March 7, 2003. Incorporated by reference to
Exhibit B to the Definitive Information Statement on Schedule 14C filed
on March 7, 2003.

3.1.2 Certificate of Designation of Preferences, Rights and Limitations of
Series A Convertible Preferred Stock and Series A-1 Convertible
Preferred Stock of Patron Systems, Inc. dated as of March 1, 2006.
Incorporated by reference to Exhibit 3.1 to the Current Report on Form
8-K filed on March 31, 2006.

3.2 Amended and Restated By-laws of Patron Systems, Inc., dated as of March
7, 2003. Incorporated by reference to Exhibit C to the Definitive
Information Statement on Schedule 14C filed with the SEC on March 7,
2003.

10.1 Registration Rights Agreement dated February 24, 2005, among Patron
Systems, Inc. and each of the former LucidLine, Inc. shareholders
signatory thereto. Incorporated by reference to Exhibit 10.4 to the
Current Report on Form 8-K filed March 2, 2005.

10.2 Registration Rights Agreement dated February 24, 2005, among Patron
Systems, Inc. and each of the former Complete Security Solutions, Inc.
stockholders signatory thereto. Incorporated by reference to Exhibit
10.7 to the Current Report on Form 8-K filed March 2, 2005.

10.3 Form of Subordinated Promissory Note issued to the former preferred
stockholders of Complete Security Solutions, Inc. Incorporated by
reference to Exhibit 10.8 to the Current Report on Form 8-K filed March
2, 2005.

EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- -----------------------------------------------------------------------
10.4 Form of Common Stock Purchase Warrant issued by Patron Systems, Inc. in
favor of the former preferred stockholders of Complete Security
Solutions, Inc. Incorporated by reference to Exhibit 10.9 to the
Current Report on Form 8-K filed March 2, 2005.

10.5 Form of Subscription Agreement dated February 28, 2005, among Patron
Systems, Inc. and each of the investors in Interim Bridge Financing I.
Incorporated by reference to Exhibit 10.10 to the Current Report on
Form 8-K filed March 2, 2005.

10.6 Registration Rights Agreement dated February 28, 2005, among Patron
Systems, Inc. and each of the investors in Interim Bridge Financing I.
Incorporated by reference to Exhibit 10.11 to the Current Report on
Form 8-K filed March 2, 2005.

10.7 Form of 10% Senior Convertible Promissory Note issued by Patron
Systems, Inc. in favor of investors in Interim Bridge Financing I.
Incorporated by reference to Exhibit 10.12 to the Current Report on
Form 8-K filed March 2, 2005.

10.8 Form of Common Stock Purchase Warrant issued by Patron Systems, Inc. in
favor of investors in Interim Bridge Financing I. Incorporated by
reference to Exhibit 10.13 to the Current Report on Form 8-K filed
March 2, 2005.

10.9 Registration Rights Agreement dated February 28, 2005, among Patron
Systems, Inc. and Laidlaw & Company (UK) Ltd. Incorporated by reference
to Exhibit 10.14 to the Current Report on Form 8-K filed March 2, 2005.

10.10 Form of Common Stock Purchase Warrant issued by Patron Systems, Inc. in
favor of Laidlaw & Company (UK) Ltd. in connection with placement agent
services. Incorporated by reference to Exhibit 10.15 to the Current
Report on Form 8-K filed March 2, 2005.

10.11 Form of Common Stock Purchase Warrant issued by Patron Systems, Inc. in
favor of Laidlaw & Company (UK) Ltd in connection with advisory
services. Incorporated by reference to Exhibit 10.16 to the Current
Report on Form 8-K filed March 2, 2005.

10.12 Executive Employment Agreement dated February 28, 2005, between Brett
Newbold and Patron Systems, Inc.*

10.13 Executive Employment Agreement dated February 28, 2005, between J.
William Hammon and Patron Systems, Inc.*

10.14 Registration Rights Agreement dated March 30, 2005, among Patron
Systems, Inc. and each of the former Entelagent Software Corp.
shareholders signatory thereto. Iincorporated by reference to Exhibit
10.2 to the Current Report on Form 8-K filed April 5, 2005.

10.15 Form of Promissory Note issued to certain creditors of Entelagent
Software Corp. Incorporated by reference to Exhibit 10.3 to the Current
Report on Form 8-K filed April 5, 2005.

10.16 Settlement Agreement and Mutual Release dated June 2, 2005, among
Patrick J. Allin, The Allin Dynastic Trust and Patron Systems, Inc.

10.17 Form of Subscription Agreement between Patron Systems, Inc. and each of
the investors in Interim Bridge Financing II. Incorporated by reference
to Exhibit 10.3 to the Quarterly Report on Form 10-QSB filed August 22,
2005.

10.18 Registration Rights Agreement among Patron Systems, Inc. and each of
the investors in Interim Bridge Financing II.

10.19 Form of 10% Junior Convertible Promissory Note issued by Patron
Systems, Inc. in favor of investors in Interim Bridge Financing II.

10.20 Form of Common Stock Purchase Warrant issued by Patron Systems, Inc. in
favor of the Placement Agent for, and investors in, Interim Bridge
Financing II.

10.21 Option Agreement dated July 1, 2005, between Robert Cross and Patron
Systems, Inc. Incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-QSB filed August 22, 2005.*

EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- -----------------------------------------------------------------------
10.22 Employment Agreement dated July 1, 2005, between Robert Cross and
Patron Systems, Inc. Incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-QSB filed August 22, 2005.*

10.23 Form of Subscription Agreement between Patron Systems, Inc. and each of
the investors in Interim Bridge Financing III.

10.24 Registration Rights Agreement among Patron Systems, Inc. and each of
the investors in Interim Bridge Financing III.

10.25 Form of 10% Junior Convertible Promissory Note issued by Patron
Systems, Inc. in favor of each of the investors in Interim Bridge
Financing III.

10.26 Form of Common Stock Purchase Warrant issued by Patron Systems, Inc. in
favor of each of the investors in, Interim Bridge Financing III.

10.27 Lease Agreement dated August 31, 2005, between Flatiron Boulder Office,
Inc. and Patron Systems, Inc. Incorporated by reference to Exhibit 10.1
to the Quarterly Report on Form 10-QSB filed November 21, 2005.

10.28 Employment Agreement dated February 17, 2006, between Patron Systems,
Inc. and Braden Waverley. Incorporated by reference to Exhibit 10.1 to
the Current Report on Form 8-K filed February 23, 2006.

10.29 Employment Agreement dated February 17, 2006, between Patron Systems,
Inc. and Martin Johnson. Incorporated by reference to Exhibit 10.2 to
the Current Report on Form 8-K filed February 23, 2006.

10.30 Option Agreement dated February 17, 2006, between Patron Systems, Inc.
and Braden Waverley. Incorporated by reference to Exhibit 10.3 to the
Current Report on Form 8-K filed February 23, 2006.

10.31 Option Agreement dated February 17, 2006, between Patron Systems, Inc.
and Martin Johnson. Incorporated by reference to Exhibit 10.4 to the
Current Report on Form 8-K filed February 23, 2006.

10.32 Form of Subscription Agreement between Patron Systems, Inc. and each of
the purchasers of shares of the Series A Preferred Stock of Patron
Systems, Inc. Incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K filed on March 31, 2006.

10.33 Form of Common Stock Purchase Warrant issued by Patron Systems, Inc. in
favor of each of the purchasers of shares of the Series A Preferred
Stock of Patron Systems, Inc. Incorporated by reference to Exhibit 10.2
to the Current Report on Form 8-K filed on March 31, 2006.

10.34 Registration Rights Agreement dated March 27, 2006, among Patron
Systems, Inc. and each of the purchasers of shares of the Series A
Preferred Stock of Patron Systems, Inc. Incorporated by reference to
Exhibit 10.3 to the Current Report on Form 8-K filed on March 31, 2006.

10.35 Form of Stock Subscription Agreement and Mutual Release issued by
Patron Systems, Inc. in favor of each of the Creditors and/or Claimants
exchanging claims for shares of the Series A-1 Preferred Stock of
Patron Systems, Inc. Incorporated by reference to Exhibit 10.4 to the
Current Report on Form 8-K filed on March 31, 2006.

10.36 Post Closing Escrow Agreement dated March 27, 2006, between Stubbs
Alderton & Markiles, LLP and Patron Systems, Inc. Incorporated by
reference to Exhibit 10.5 to the Current Report on Form 8-K filed on
March 31, 2006.

14.1 Code of Ethics.

21.1 Subsidiaries of the Company.

24.1 Power of Attorney (included as part of the signature page of this
Annual Report on Form 10-KSB).

31.1 Certification of Principal Executive Officer pursuant to Securities
Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Principal Financial Officer pursuant to Securities
Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.

EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- -----------------------------------------------------------------------

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

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

* Indicates a management contract or compensatory plan.