-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qogpd+W7iYAmh56b11ZodNhv+FXRDI/5f00kTzCGLa4g/+JAdqvy0UQ7CB5rOLL7 j/9K1ILxtYgE4pkLGIr5Jw== 0001144204-07-062937.txt : 20071119 0001144204-07-062937.hdr.sgml : 20071119 20071119133810 ACCESSION NUMBER: 0001144204-07-062937 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20070930 FILED AS OF DATE: 20071119 DATE AS OF CHANGE: 20071119 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VERTICAL COMPUTER SYSTEMS INC CENTRAL INDEX KEY: 0001099509 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 880441551 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-28685 FILM NUMBER: 071255633 BUSINESS ADDRESS: STREET 1: 201 MAIN STREET STREET 2: SUITE 1175 CITY: FORT WORTH STATE: TX ZIP: 76102 BUSINESS PHONE: 3236584211 MAIL ADDRESS: STREET 1: 201 MAIN STREET STREET 2: SUITE 1175 CITY: FORT WORTH STATE: TX ZIP: 76102 FORMER COMPANY: FORMER CONFORMED NAME: SCIENTIFIC FUEL TECHNOLOGY INC DATE OF NAME CHANGE: 19991122 10QSB 1 v094879_10qsb.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________

FORM 10-QSB

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934:
For the quarterly period ended September 30, 2007.

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934:
For the transition period from _____ to _____
_________________________

Commission file number 000-28685
_________________________

VERTICAL COMPUTER SYSTEMS, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)

Delaware
65-0393635
(State of Incorporation)
(I.R.S. Employer Identification No)

201 Main Street, Suite 1175
Fort Worth, Texas 76102
(Address of Principal Executive Offices)
 
(817) 348-8717
(Issuer’s Telephone Number)


 
Check whether the Issuer (1) filed all reports required to be filed by section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o No x
 
As of November 15, 2007, the issuer had 997,619,672 shares of common stock, par value $0.00001 per share, issued and outstanding.
 
Transitional Small Business Disclosure Format: Yes o No x 
 

1

VERTICAL COMPUTERS SYSTEMS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS FORM 10-QSB
 
PART I FINANCIAL INFORMATION
Page
     
Item 1.
Condensed Consolidated Financial Statements:
  
     
 
Condensed Consolidated Balance Sheet (unaudited) as of September 30, 2007 and December 31, 2006
3
     
 
Condensed Consolidated Statements of Operations (unaudited) for the Three and Nine months ended September 30, 2007 and 2006
5
     
 
Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine months ended September 30, 2007 and 2006
6
     
 
Notes to Condensed Consolidated Financial Statements
8
     
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
22
     
Item 3
Controls and Procedures
34
     
PART II OTHER INFORMATION
  
     
Item 1
Legal Proceedings
35
     
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
37
     
Item 3
Defaults Under Senior Securities
39
     
Item 4
Submission of Matters To A Vote Of Security Holders
39
     
Item 5
Other Information
39
     
Item 6.
Exhibits and Reports on Form 8-K
39
     
Signatures
41
     
Certifications
42


2

Item 1. Condensed Consolidated Financial Statements
 
Vertical Computer Systems, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
 
   
September 30,
  
December 31,
  
   
2007
  
2006
  
Assets
  
(Unaudited)
      
               
Current Assets
              
Cash
  
$
44,715
  
$
83,482
  
Securities available for sale
    
-
   
2,760
 
Accounts receivable, net of allowance for bad debts of $167,980 and $167,980
    
434,525
   
863,907
 
Other receivable
    
110,085
   
110,085
 
Employee receivables
    
130,538
   
86,010
 
Prepaid expenses and other assets
    
46,662
   
41,750
 
               
Total Current Assets
    
766,525
   
1,187,995
 
               
Property and equipment, net of accumulated depreciation
    
95,669
   
83,611
 
Deposits and other
    
10,122
   
9,958
 
               
Total Assets
  
$
872,316
  
$
1,281,564
  
               
Liabilities and Stockholder's Equity/ (Deficit)
              
               
Current liabilities
              
Accounts payable and accrued liabilities
  
$
7,933,579
  
$
6,251,710
  
Deferred revenue
    
2,099,794
   
2,659,522
 
Current portion - convertible debenture
    
40,000
   
40,000
 
Current portion-notes payable
    
3,085,574
   
2,544,682
  
               
Total current liabilities
    
13,158,947
   
11,495,914
 
               
Non-current portion-notes payable
    
2,777,310
   
3,183,249
  
Accrued dividends
    
3,954,712
   
3,513,712
 
               
Total liabilities
  
$
19,890,969
  
$
18,192,875
  
 
See accompanying notes to the condensed consolidated financial statements
 
(Continued on next page)

3


Vertical Computer Systems, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
 
(Continued from previous page)
        
 
   
September 30,
 
December 31,
 
 
 
2007
 
2006
  
 
 
(Unaudited)
      
               
Stockholders' Equity (Deficit)
              
               
Series A 4% Convertible Cumulative Preferred stock; $0.001 par value;
              
250,000 shares authorized; 48,500 shares issued and outstanding
    
49
   
49
 
               
Series B 10% Convertible Preferred stock; $0.001 Par Value; 375,000
              
Shares authorized; 7,200 shares issued and outstanding
    
45,000
   
45,000
 
 
              
Series C 4% Convertible Preferred stock; $100.00 par value; 200,000
              
shares authorized; 50,000 shares issued and outstanding
   
350,000
   
350,000
 
 
              
Series D 15% Convertible Preferred stock; $0.001 Par Value; 300,000
              
Shares authorized; 25,000 shares issued and outstanding
    
156,250
   
156,250
 
 
              
Common Stock; $.00001 par value; 1,000,000,000 shares authorized
              
990,585,149 and 996,926,857 issued and outstanding
    
9,906
    
9,970
 
 
              
Additional paid-in-capital
    
27,965,905
   
28,208,434
 
 
              
Accumulated deficit
    
(47,639,944
)
  
(45,802,957
)
 
              
Accumulated other comprehensive income
    
94,182
   
121,943
  
               
Total Stockholders' deficit
    
(19,018,652
)
  
(16,911,311
)
               
Total liabilities and stockholders' deficit
  
$
872,316
  
$
1,281,564
  
 
See accompanying notes to the condensed consolidated financial statements
 

4


Vertical Computer Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
 
Three months ended September 30,
 
Nine Months ended September 30,
 
 
 
2007
 
2006
 
2007
 
2006
  
Revenues
  
 
  
 
  
 
      
                   
Licensing and maintenance
  
$
1,482,627
  
$
1,193,682
  
$
3,951,839
  
$
3,857,330
  
Consulting Services
    
97,165
   
238,304
   
336,132
   
681,326
 
Other
    
(4,844
)
  
36,858
   
56,581
   
105,113
 
 
                  
Total Revenues
    
1,574,948
    
1,468,844
    
4,344,552
   
4,643,769
  
 
                  
Selling , general and administrative expenses
    
1,622,463
    
1,633,841
    
5,192,532
   
5,702,067
  
 
                    
Operating loss
    
(47,515
)
  
(164,997
)
  
(847,980
)
  
(1,058,298
)
 
                  
Interest income
    
216
   
556
   
1,597
   
2,247
 
Interest expense
    
(180,507
)
  
(139,078
)
  
(549,605
)
  
(444,786
)
 
                  
Net loss
    
(227,806
)
  
(303,519
)
  
(1,395,988
)
  
(1,500,837
)
 
                  
Dividend applicable to preferred stock
    
(147,000
)
  
(150,000
)
  
(441,000
)
  
(450,000
)
 
                  
Net loss applicable to common stockholders'
  
$
(374,806
)
$
(453,519
)
$
(1,836,988
)
$
(1,950,837
)
 
                  
Basic and diluted loss per share
  
$
(0
)
$
(0
)
$
(0
)
$
(0
)
 
                    
Basic and diluted weighted average
    
990,503,565
   
989,409,647
    
994,203,859
   
979,450,226
  
of common shares outstanding
                  
 
                  
Comprehensive loss and its components
                   
consist of the following:
                  
Net loss
  
$
(227,806
)
$
(303,519
)
$
(1,395,988
)
$
(1,500,837
)
Unrealized gain (loss) on securities available for sale
    
-
    
-
    
(3,603
)
  
-
  
Translation adjustments
    
(6,126
)
  
1,166
    
27,709
    
(13,449
)
Comprehensive loss
  
$
(233,932
)
$
(302,353
)
$
(1,371,882
)
$
(1,514,286
)
 
See accompanying notes to the condensed consolidated financial statements

5

 

Vertical Computer Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
   
 Nine months ended September 30
  
   
 2007
  
 2006
  
           
Cash flows from operating activities
          
 
          
Net loss
  
$
(1,395,988
)
$
(1,500,837
)
Adjustments to reconcile net loss to net cash
          
provided by operating activities:
          
Depreciation and amortization
    
47,472
   
192,857
 
Non employee stock compensation
    
-
   
185,090
 
Employee stock compensation expense
    
47,408
   
28,217
 
Allowance for bad debts
    
-
    
7,500
  
Loan origination costs included in issuance of notes payable
    
11,586
    
-
  
Changes in operating assets and liabilities:
          
Accounts receivable
    
429,382
   
687,080
 
Receivable from officers and employees
    
(44,528
)
  
(19,866
)
Prepaid expenses
    
(5,076
)
  
72,344
  
Accounts payable and accrued liabilities
    
1,391,869
    
954,463
  
Deferred revenue
    
(559,728
)
  
(412,804
)
 
          
Net cash provided by operating activities:
    
(77,603
)
  
194,044
  
 
          
Cash flow from investing activities:
          
Write-off of investment
    
2,760
    
-
  
Purchase of equipment
    
(59,530
)
  
(33,256
)
 
          
Net cash used in investing activities
    
(56,770
)
  
(33,256
)
 
See accompanying notes to condensed consolidated financial statements

  (Continued on next page)

6


Vertical Computer Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)

(Continued from previous page)
 
     
Nine months ended September 30
  
     
2007
    
2006
  
               
Cash flow from financing activities:
              
Payment of notes payable
    
(302,033
)
  
(1,132,569
)
Proceeds from issuance of notes payable
    
425,400
    
717,000
  
               
Net cash used in financing activities
    
123,367
    
(415,569
)
               
Effect of changes in exchange rates on cash
    
(27,761
)
  
13,449
  
               
Net decrease in cash and cash equivalents,
   
(38,767
)
  
(241,332
)
Cash and cash equivalents, beginning of period
    
83,482
   
285,366
 
Cash and cash equivalents, end of period
  
$
44,715
  
$
44,034
  
               
Supplemental disclosures of cash flow information:
              
Cash paid during the period:
             
Interest
  
$
328,779
  
$
219,398
  
Non-cash investing and financing activities:
              
Effect of stock lent to the company
  
$
290,000
  
$
-
  
Conversion of accounts payable and accrued liabilities to  
notes payable
  
$
-
  
$
554,497
  
Conversion of convertible debentures
  
$
-
  
$
190,000
  
 
See accompanying notes to condensed consolidated financial statements


7

VERTICAL COMPUTER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
Note 1 - Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect all adjustments that, in the opinion of the management of Vertical Computer Systems, Inc. and its subsidiaries (collectively, the “Company”), are considered necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements of the Company included in the Company’s Form 10-KSB for the year ended December 31, 2006.

Stock-Based Compensation

Effective January 1, 2004, the Company adopted the fair value provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 for share based payments to employees. In accordance with transition provisions under SFAS No. 148, the Company has adopted the prospective method for transitional recognition.

Effective January 1, 2006, the Company adopted SFAS 123(R) using the modified prospective method, which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of restricted stock and restricted stock units is determined based on the number of shares granted and the quoted price of our common stock, and the fair value of stock options is determined using the Black-Scholes valuation model, which is consistent with our valuation techniques previously utilized for options in footnote disclosures required under SFAS 123, Accounting for Stock Based Compensation, as amended by SFAS 148, Accounting for Stock-Based Compensation — Transition and Disclosure. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised.

Because the fair value recognition provisions of SFAS No. 123, Stock-Based Compensation, and SFAS No. 123(R) were materially consistent under the Company’s equity plans, the adoption of SFAS No. 123(R) did not have a significant impact on the Company’s financial position or the Company’s results of operations.

Going Concern Uncertainty
 
The accompanying condensed consolidated financial statements for the three and nine months ended September 30, 2007 and 2006, have been prepared assuming that the Company will continue as a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

The carrying amounts of assets and liabilities presented in the financial statements do not purport to represent realizable or settlement values. The Company has suffered significant recurring operating losses, used substantial funds in its operations, and needs to raise additional funds to accomplish its objectives. Negative stockholders’ equity at September 30, 2007 was approximately $19 million. Additionally, at September 30, 2007, the Company had negative working capital of approximately $12.4 million (although it includes deferred revenue of approximately $2.1 million) and has defaulted or is delinquent on several of its debt obligations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
 
8

 
Management of the Company is continuing its efforts to attempt to secure funds through equity and/or debt instruments for its operations, expansion and possible acquisitions, mergers, joint ventures, and/or other business combinations. The Company will require additional funds for its operations and to pay down its liabilities, as well as finance its expansion plans consistent with the Company’s anticipated changes in operations and infrastructure. In addition, the Company was awarded a judgment of $3,151,216 relating to the recent lawsuit won by the Company against Ross Systems Inc. (“Ross”). However, there can be no assurance that the Company will be able to secure additional funds and that if such funds are available, whether the terms or conditions would be acceptable to the Company and whether the Company will be able to turn into a profitable position and generate positive operating cash flow or collect on the Ross judgment. The condensed consolidated financial statements contain no adjustment for the outcome of this uncertainty.

Furthermore, the Company is exploring certain opportunities with a number of companies to participate in co-marketing of each other’s products. The Company is proceeding to license its intellectual property and filed suit for patent infringement against Microsoft (for more details, see Note 4, “Legal Proceedings”). The exact results of these opportunities are unknown at this time.

Note 2 - Common and Preferred Stock Transactions
 
In March 2007, Mountain Reservoir Corporation (“MRC”) and Victor Weber entered into a pledge agreement, whereby the MRC pledged 10,000,000 shares of common stock of the Company to secure the principal payments and interest payments on the $300,000 Note and interest payments on the $200,000 Note. MRC is a corporation controlled by the W5 Family Trust. Mr. Wade, the President and CEO of the Company, is the trustee of the W5 Family Trust. Mr. Weber is the President and a Director of Government Internet Systems, Inc., a subsidiary of the Company, and a member of CW International, LLC (“CWI”).

In April 2007, Luiz Valdetaro, on behalf of the Company, transferred 2,000,000 unrestricted shares of common stock of the Company owned by Mr. Valdetaro to an officer of Tara Financial in exchange for waiving the defaults and extending the payment terms on notes payable in the amounts of $438,795, $350,560, $955,103 and $450,000 issued to Tara Financial by the Company, NOW Solutions, and Taladin in February 2006. Mr. Valdetaro is the Chief Technology Officer of the Company. Also in April 2007, in connection with the transfer, the Company entered into an indemnity and reimbursement agreement to reimburse Mr. Valdetaro with 2,000,000 shares within one year and pay for all costs associated with the transfer of shares to Tara Financial and the reimbursement of shares to Mr. Valdetaro.
 
In connection with a $40,000 loan from Clark Consulting Group, Inc. (“CCS”) to the Company, Mr. Valdetaro, on behalf of the Company, transferred 1,000,000 unrestricted shares of common stock of the Company owned by Mr. Valdetaro to CCS. The Company is also obligated to arrange for a pledge of 1,000,000 shares of common stock of the Company to secure the loan. Mr. Valdetaro is the Chief Technology Officer of the Company. Also in April 2007, in connection with the transfer of shares to CCS, the Company entered into an indemnity and reimbursement agreement to reimburse Mr. Valdetaro with 1,000,000 shares within one year and pay for all costs associated with the transfer of shares to CCS and the reimbursement of shares to Mr. Valdetaro.

In April 2007, the Company and MRC entered into an indemnity and reimbursement agreement for transfer and pledges of shares of common stock of the Company. Pursuant to the agreement, MRC loaned the Company 10,000,000 shares of common stock of the Company in order for the Company to meet current obligations concerning stock the Company has been obligated to issue and deliver. In connection with the loan of shares to the Company, the Company agreed to reimburse MRC with up to 10,000,000 shares of common stock of the Company and pay for all costs associated with such transfer and the reimbursement of shares to MRC within one year. In addition, in the event that any of the shares of common stock of the Company pledged by MRC on behalf of the Company in connection with promissory notes issued by the Company (or its subsidiaries, as applicable) are sold to cover a default under the respective note, the Company agreed to reimburse MRC with a number of shares equal to the number of shares sold to cover the default under the respective note within 1 year, and to reimburse MRC for all costs associated with such sales and the reimbursement of shares to MRC related to such sales.

In April 2007, the Company issued 4,250,000 shares of common stock of the Company in connection with the exercise of warrants and an agreement executed in 2006. All of the foregoing shares were previously accounted for in the 10-KSB Report for the period ended December 31, 2006.

During the nine months ended September 30, 2007, warrants to purchase 5,250,001 shares of common stock of the Company at a price of $0.025 to $0.10 per share expired.
 
9

 
During the nine months ended September 30, 2007, the Company issued 3,750,000 unregistered shares of common stock of the Company to employees and a consultant of the Company and NOW Solutions pursuant to restricted stock agreements executed in 2007 that provide for the shares to vest up to three years in equal installments at the anniversary date of the agreement.
 
During the nine months ended September 30, 2007, 3,689,292 unregistered shares of common stock of the Company issued to employees of the Company and Now Solutions vested. These shares were issued pursuant to restricted stock agreements executed in 2005, 2006, and 2007.

During the nine months ended September 30, 2007, 184,521 unregistered shares of the common stock of the Company were cancelled. These shares had been issued pursuant to restricted stock agreements with employees of Now Solutions executed in 2005 and 2006.

For an update on common stock transactions since September 30, 2007, please see “Subsequent Events” in Note 7.
 
Note 3 - Notes Payable
 
       
   
September 30, 2007
  
December 31, 2006
  
           
Note payable to Ross issued by NOW Solutions in the amount of $1,000,000. The note was unsecured and non-interest bearing. The note was recorded at a discount (which was amortized over the life of the note), payments of $250,000 and $750,000 to be due in February 2002 and 2003, respectively. If a payment was not received within three days from the due date, the note would begin to bear interest at 10% per annum. In 2002, NOW Solutions offset $250,000 payment through its receivable from Ross in terms of the agreement between NOW Solutions and Ross. In April 2007, the Company prevailed in a lawsuit against Ross and the balance of this note was deducted from the Company’s award from its breach of contract claim. For more details on legal proceedings between the Company, NOW Solutions and Ross, please refer to “Legal Proceedings” under Note 4.
    
750,000
    
750,000
  
 
    
   
 
Note payable in the amount of $31,859 to a third-party lender, bearing interest at an amount to be negotiated, principal and interest due on demand.
    
31,859
    
31,859
  
 
    
   
 
Notes payable in the amount of $27,000 to a third-party, payable upon demand.
    
27,000
    
27,000
  
 
    
   
 
Note payable to a third-party lender in the amount of a $239,004 bearing interest at 13% per annum and unsecured, with a $65,000 payment made in December 2002. This note was issued in 2002 to replace the note of $211,137 issued in August 2001 to a third-party lender. In March 2003, the note was amended and the Company agreed to pay the interest and expenses responsible by the lender for a third-party loan secured on the lender’s behalf instead of paying to the lender and the Company agreed to begin making monthly payment of $7,500, beginning on June 1, 2003, until the balance under the note has been paid. The note is in default.
    
161,504
    
161,504
  
               
Note payable in the amount of $50,000 to a third-party lender, bearing interest at 12% per annum. In May 2005, the Company and a third party lender amended the terms of the note. The Company agreed to commence monthly payments to the lender of $2,500 in June 2005, which would be raised to $4,000 beginning in October 2005, and to pay the lender’s reasonable attorney’s fees. The Company is in default.
    
35,568
    
35,568
  
 
10
 

       
   
September 30, 2007
  
December 31, 2006
  
           
Note payable in the amount of $50,000 to a third-party lender, bearing interest at the rate of 12% per annum. The parties amended the terms of the note so that the Company would begin making monthly installment payments of $5,000 in July 2003, with the payments first applied to the $25,000 note (issued below) and then to the $50,000 note. The note has been in default since April 1, 2003.
    
50,000
    
50,000
  
 
    
   
 
Note payable in the amount of $25,000 to a third-party lender, bearing interest at 12% per annum, secured by 10,000,000 shares of the Company’s common stock that are owned by MRC due in December 2002. MRC is a corporation controlled by the W5 Family Trust. Mr. Wade, the President and CEO of the Company, is the trustee of the W5 Family Trust. The parties amended the terms of the note so that the Company would begin making monthly installment payments of $5,000 in July 2003, with the payments first applied to the $25,000 note and then to the $50,000 (the above) note issued. The note has been in default since April 1, 2003.
    
12,583
    
12,583
  
 
    
   
 
Note payable in the amount of $215,000 issued by NOW Solutions to the Company was assigned to Victor Weber in January 2004 in connection with canceling notes issued to Weber and expenses paid by Weber on behalf of the Company that were included in trade accounts payable in the aggregate amount of $215,000. In October 2006, the parties amended the note. The note provides for monthly payments made from gross revenues of new sales of emPath by NOW Solutions and Taladin. In March 2007, the payment dates for this note were extended by sixty (60) days. The note is due October 27, 2007. In connection with the note, MRC pledged 5,000,000 shares of common stock of the Company to secure the note to the Company. MRC is a corporation controlled by the W5 Family Trust. Mr. Wade, the President and CEO of the Company, is the trustee of the W5 Family Trust. Mr. Weber is the President and a Director of GIS, a subsidiary of the Company, and a member of CWI. The note is delinquent.
    
215,000
    
215,000
  
 
    
   
 
Note payable in the amount $25,000 promissory note, bearing interest at 10% per annum, was issued in April 2003 to a consultant of the Company’s subsidiary, EnFacet, Inc., for past services rendered. The note is payable in monthly $1,000 installments beginning in May 2003 to be replaced by $2,000 monthly installments beginning in October 2003. The note is in default.
    
25,000
    
25,000
  
 
    
   
 
Note payable in the amount of $17,500, bearing no interest to a third-party lender in consideration of a loan in the amount of $15,000, was due in June 2003. In connection with the note, the Company paid a commitment fee of $2,500. In July 2006, the Company issued 250,000 unregistered shares of the common stock of the Company to the third-party lender pursuant to the lender’s exercise of warrants to purchase the shares for a total of $1,875. The purchase price was offset against monies owed under note payable. This note is in default.
    
11,000
    
11,000
  
 
    
   
 
Note payable in the amount of $17,500, bearing no interest to a third-party lender in consideration of a loan in the amount of $15,000, was due in June 2003. In July 2006, the Company issued 250,000 unregistered shares of the common stock of the Company to the third-party lender pursuant to the lender’s exercise of warrants to purchase the shares for a total of $1,875. The purchase price was offset against monies owed under note payable. This note is in default.
   
11,000
    
11,000
  
 
    
   
 
Note payable in the amount of $10,000 issued by EnFacet to a third-party lender, bearing interest at 8% per annum, unsecured, with principal and interest due on June 1, 2002. EnFacet has been in default since December 31, 2002.
    
10,000
    
10,000
  
 
    
   
 
Note payable in the amount of $10,365 dated January 17, 2003 bearing an interest of 10% per annum, with principal and interest due on December 5, 2003. Payments of $3,000 were made on this note in 2003. This note is in default. 
    
7,365
    
7,365
  
 
11

 
 
  
 
  
 
  
September 30, 2007
  
December 31, 2006
  
 
  
 
  
 
  
Note payable in the amount of $23,030 dated March 21, 2003 bearing an interest of 12% per annum, with principal and interest due on April 21, 2004. This note is in default.
    
23,030
    
23,030
  
 
    
   
 
Note payable in the amount of $60,000 issued by GIS to a third-party dated November 5, 2003, bearing an interest of 10% per annum, with principal and interest due on November 5, 2004. The note is secured by 4,000,000 shares of common stock of the Company that are owned by MRC. MRC is a corporation controlled by the W5 Family Trust. Mr. Wade, the President and CEO of the Company, is the trustee of the W5 Family Trust. This note is in default.
   
60,006
    
60,006
  
 
    
   
 
Note payable in the amount of $40,000 issued by GIS to a third-party dated November 19, 2003, bearing an interest of 10% per annum, with principal and interest due on November 19, 2004. The note is secured by 3,000,000 shares of common stock of the Company that are owned by MRC. MRC is a corporation controlled by the W5 Family Trust. Mr. Wade, the President and CEO of the Company, is the trustee of the W5 Family Trust. This note is in default.
    
40,000
    
40,000
  
 
    
   
 
Note payable in the amount of $5,000 to Mr. James Salz, bearing interest at 10% per annum with principal and interest due on demand. Mr. Salz is the Company’s corporate counsel.
    
5,000
    
5,000
  
 
    
   
 
Note payable in the amount of $10,000 to Mr. James Salz, bearing interest at 10% per annum. Mr. Salz is the Company’s corporate counsel. The note is in default.
    
10,000
    
10,000
  
 
    
   
 
Note payable in the amount of $600,000 issued to Arglen Acquisitions, LLC (“Arglen”) by the Company pursuant to the Company’s acquisition of Arglen’s 35% interest in NOW Solutions. In August 2004, Arglen obtained a default judgment the (“California Judgment”) in Los Angeles court for the outstanding principal, plus attorney’s fees and interest at the rate of 10% per annum when the Company did not make payment under the note. In April 2005, Arglen filed a Notice of Filing a Foreign Judgment in Tarrant County, Texas. In August 2005, Company entered into an agreement with Arglen allowing payout terms to the Company (the “Payout Agreement”) and pursuant to which the Company agreed to enter into an Agreed Judgment for the Foreign Judgment in Tarrant County, Texas (the “Agreed Judgment”). The Agreed Judgment and Payout Agreement were entered into concerning the California Judgment and Arglen's notice of Filing a Foreign Judgment in Tarrant County, Texas, which were in connection with the 2003 settlement agreement (the “2003 Settlement”). Pursuant to the terms of the Agreed Judgment and the Payout Agreement, the Company agreed to pay Arglen a total of $713,489, which includes principal and accrued interest under the note, post judgment interest and attorneys’ fees. Pursuant to the terms of the Payout Agreement, the Company is currently obligated to make monthly payments on the amount specified above of $25,000 or 10% of the Company's new sales, whichever is greater, until the remainder of the $713,489 is paid. In accordance with the Payout Agreement, Arglen shall not execute the Agreed Judgment so long as the Company continues to make its payments as agreed. For additional details, see Note 4, “Legal Proceedings”.
    
223,489
    
438,489
  
 
12

 
       
   
September 30, 2007
  
December 31, 2006
  
 
  
 
  
 
  
Note payable in the amount of $75,000 issued by the Company, bearing interest at a rate of 6% to the law firm of Parker Mills Morin, LLP (“PMM”) in October 2005. The note was issued in connection with a lawsuit filed by PMM to collect the outstanding balance of $23,974 due under the promissory note issued to them by the Company and for failure to pay fees for professional services in the amount of $89,930 rendered to the Company, plus interest. The $75,000 note has a maturity date of January 31, 2008 and shall be paid in equal monthly installments of $3,125, beginning February 1, 2006 for a period of 24 months. Bill Mills is a Director of the Company and a partner of PMM. PMM is the successor entity to Parker Mills & Patel, LLP. The note is in default.
    
58,318
    
58,318
  
 
    
   
 
Note payable in the amount of $992,723 issued by NOW Solutions, the Company’s wholly-owned subsidiary to Wolman Blair, PLLC on November 30, 2005. The note is secured with the assets of NOW Solutions and bears interest at the rate of 12% compounded annually. The note was issued in connection with refinancing outstanding legal fees and expenses (which where owed pursuant to the legal services retainer agreement), together with interest accrued as of the date the note was issued. The note is currently payable as follows: equal monthly installments of $40,000, each, commencing March 1, 2006, and continuing on the first day of each month thereafter, until March 1, 2008, upon which date all outstanding principal and interest shall be due. In connection with the loan, NOW Solutions entered into a security agreement with the lender to guarantee the note. In April 2007, the Company prevailed in a lawsuit against Ross and the Company is entitled to collect attorney fees from Ross, which will be applied to a portion of this note. For more details on legal proceedings between the Company, NOW Solutions and Ross, please refer to “Legal Proceedings” under Note 4. The note is in default.
    
992,723
    
992, 723
  
 
    
   
 
Note payable in the amount of $450,000 issued by Taladin to Tara Financial, dated February 13, 2006. The note bears interest at the rate of 12% per annum. The note was issued in connection with refinancing whereby Taladin acquired the indebtedness of NOW Solutions to Wamco. The note is secured by Taladin’s first lien position on the assets of NOW Solutions. Tara Financial, Strategic Growth Partners (“SGP”) and Mr. Weber share the first lien position, senior to all other security interests in the assets of NOW Solutions. The $450,000 note payable is currently payable as follows: (a) unpaid principal balance and interest payments of $7,000, beginning on January 1, 2007 and continuing through February 1, 2008; and (b) monthly payments increased to $12,700, beginning on March 1, 2008 and continuing until February 1, 2011 (the maturity date). The $450,000 note payable by Taladin contains provisions requiring additional principal reductions in the event sales by NOW Solutions exceed certain financial thresholds or from net proceeds collected from any judgment, settlement, or decree in favor of the Company with respect to the pending Ross litigation. For additional details on the Ross litigation, please see “Legal Proceedings” under Note 4. The $450,000 note also contains a conversion option pursuant to which all or any portion of the unpaid principal, plus interest, may be converted at the option of Tara Financial, into shares of common stock of Taladin equal to a maximum of 2.5% of Taladin’s outstanding common stock at the time of conversion.
    
415,514
    
435,023
  
               
Note payable in the amount of $150,000 issued by Taladin to SGP, dated February 13, 2006. The note bears interest at the rate of 12% per annum. The note was issued in connection with refinancing whereby Taladin acquired the indebtedness of NOW Solutions to Wamco. The note is secured by Taladin’s first lien position on the assets of NOW Solutions. Tara Financial, SGP and Mr. Weber share the first lien position, senior to all other security interests in the assets of NOW Solutions. The $150,000 note payable is currently payable as follows: (a) unpaid principal balance and interest payments of $2,334, beginning on January 1, 2007 and continuing through February 1, 2008; and (b) monthly payments increased $4,233, beginning on March 1, 2008 and continuing until March 1, 2011 (the “Maturity Date”). The $150,000 note payable by Taladin contains provisions requiring additional principal reductions in the event sales by NOW Solutions exceed certain financial thresholds or from net proceeds collected from any judgment, settlement, or decree in favor of the Company with respect to the pending Ross litigation. For additional details on the Ross litigation, please see “Legal Proceedings” under Note 4. The note is in default.
    
138,727
    
145,868
  
 
13
 

 
       
 
  
September 30, 2007
  
December 31, 2006
  
 
  
 
  
 
  
Note payable in the amount of $438,795 issued by the Company to Tara Financial, on February 13, 2006. The note bears interest at the rate of 12% per annum. The note was issued in connection with refinancing whereby Tara Financial acquired certain indebtedness under a $280,000 note payable, dated October 31, 2001, issued by the Company to Robert Farias. The $438,795 note payable reflects all outstanding debt, plus accrued interest and any fees under the $280,000 note payable. The $280,000 note was cancelled and any underlying security interests have been released. The $438,795 note payable is currently payable as follows: unpaid principal balance and interest payments of $5,763, beginning on January 1, 2007 and continuing until February 1, 2018. The new note is secured by an interest in certain technology developed by Adhesive Software and owned by the Company, commonly known as “SiteFlash™”.
    
417,235
    
427,134
  
 
    
   
 
Note payable in the amount of $359,560, issued by NOW Solutions to Tara Financial, dated February 13, 2006. The note bears interest at the rate of 12% per annum. The note was issued in connection with refinancing whereby Tara Financial acquired certain indebtedness under a $500,000 note payable, dated February 13, 2004, issued by NOW Solutions to Robert Farias. The $359,560 note payable reflects all outstanding debt, plus accrued interest and any fees under the $500,000 note payable. The $500,000 note was secured by the assets of NOW Solutions, as well as a pledge of a portion of the Company’s ownership of NOW Solutions. The original $500,000 note was cancelled. In connection with the cancellation, a royalty agreement for the benefit of Mr. Farias has also been cancelled. The $359,560 note payable is currently payable as follows: unpaid principal balance and interest of $4,723, beginning on January 1, 2007 and continuing until February 1, 2018 (the maturity date). The new note is secured by all of the assets of NOW Solutions. This note payable also contains provisions requiring additional principal reductions in the event sales by NOW Solutions exceed certain financial thresholds.
    
345,111
    
350,006
  
               
Note payable in the amount of $955,103, issued by NOW Solutions to Tara Financial, dated February 13, 2006. The note bears interest at the rate of 12% per annum, has a maturity date in the year 2018 and is payable in various installments of principal and interest. The note was issued in connection with refinancing whereby Tara Financial acquired certain indebtedness under the following four notes: (a) an $84,000 note payable, issued by EnFacet, the Company’s 100% owned subsidiary to Robert Farias, dated June 1, 2001 which had an outstanding balance at the time of the consolidation of $137,841; (b) a $181,583 note payable issued by the Company to Robert Farias, dated October 17, 2002, which had an outstanding balance at the time of the consolidation of $181,905; (c) a $350,000 note payable, issued by EnFacet to a third party, dated August 15, 2001, which had an outstanding balance at the time of the consolidation of $519,693; and (d) a $90,000 note payable issued by the Company to a third party, dated June 26, 2003, which had an outstanding balance at the time of the consolidation of $115,663. All four notes were cancelled and all related security interests under these notes have been released. The $955,103 note payable is currently payable as follows: unpaid principal balance and interest payments of $12,544, beginning on January 1, 2007, and continuing until February 1, 2018 (the maturity date). The new $955,103 note payable is secured by all of the assets of NOW Solutions. This note payable also contains provisions requiring additional principal reductions in the event sales by NOW Solutions exceed certain financial thresholds. For an update on an extension by Tara Financial regarding this note, please see “Subsequent Events” in Note 7.
    
915,632
    
929,721
  
 
14

 
       
   
September 30, 2007
  
December 31, 2006
  
           
Note payable in the amount of $51,000 issued by the Company in September 2006 to a third party lender, bearing interest at 10% per annum. The note was issued in connection with a $50,000 loan and includes $1,000 in legal fees. In connection with the loan, the Company issued 1,000,000 unregistered shares of common stock of the Company (at a fair-market value of $18,000). The note is in default.
    
28,500
    
51,000
  
 
    
   
 
Note payable in the amount of $200,000 issued by VCSY to Mr. Weber, dated October 24, 2006. The note bears interest at the rate of 12% per annum. The note was issued in connection with advances of $200,000 to TrueBaseline, Inc. (“TrueBaseline”) toward securing additional rights to StatePointPlus® and IA (formerly ImmuneApp). The Company shall pay accrued interest from the previous month on a monthly basis and make minimum payments on the balance of the note as follows: (a) $60,000 is due 6 months from the date of the note, (b) $30,000 is due 7 months from the date of the note, (c) $30,000 is due 8 months from the date of the note; (d) $30,000 is due 9 months from the date of the note; and (e) all outstanding principal and interest then outstanding is due 11 months from the date of the note. In March 2007, the payment dates for this note were extended by sixty (60) days. The note may be paid from gross revenues derived from StatePointPlus® after the payment of license and exclusivity fees to TrueBaseline for StatePoinPlus® to the extent such funds become available. In connection with the note, MRC pledged 5,000,000 shares of common stock of the Company to secure the note to the Company. In addition, to secure the principal payments and interest payments on a $300,000 note issued to Mr. Weber and the interest payments on this note payable, MRC pledged 10,000,000 shares of common stock of the Company. MRC is a corporation controlled by the W5 Family Trust. Mr. Wade, the President and CEO of the Company, is the trustee of the W5 Family Trust. Mr. Weber is the President and a Director of GIS and a member of CWI. The note is delinquent.
    
200,000
    
200,000
  
 
    
   
 
Note payable in the amount of $100,000 issued by Taladin to Mr. Weber, dated October 27, 2006. The note bears interest at the rate of 12% per annum. The note is secured by Taladin’s first lien position on the assets of NOW Solutions. Tara Financial, SGP and Mr. Weber share the first lien position, senior to all other security interests in the assets of NOW Solutions. The $100,000 note payable is currently payable as follows: (a) unpaid principal balance and interest payments of $1,556, beginning on January 1, 2007 and continuing through February 1, 2008; and (b) monthly payments increased $2,822, beginning on March 1, 2008 and continuing until March 1, 2011 (the “Maturity Date”). The $100,000 note payable by Taladin contains provisions requiring additional principal reductions in the event sales by NOW Solutions exceed certain financial thresholds or from net proceeds collected from any judgment, settlement, or decree in favor of the Company with respect to the pending Ross litigation. For additional details on the Ross litigation, please see “Legal Proceedings” under Note 4. Mr. Weber is the President and a Director of GIS and a member of CWI.
   
91,000
    
100,000
  
 
    
   
 
Note payable in the amount of $113,734 issued by NOW Solutions to Stephen Rossetti in December 2006, bearing interest at 10% per annum. The note was issued in connection with the cancellation of a $66,000 note payable issued to Mr. Rossetti in July 2006 and approximately $56,000 in fees owed to Markquest, Inc. Mr. Rossetti is Executive Vice-President of Government Affairs, Chairman, CEO and Director of GIS, Director of NOW Solutions and an officer of Markquest, Inc. The note is amortized over 24 months with monthly payments beginning in January 2007. The note is in default.
    
113,734
    
113,734
  
 
15

 
       
   
September 30, 2007
  
December 31, 2006
  
           
Note payable in the amount of $300,000 issued by the Company to Mr. Weber, bearing interest at 12% per annum and due in March 2008. The note may be paid from gross revenues derived from StatePointPlus® after the payment of license and exclusivity fees to TrueBaseline for StatePointPlus® to the extent such funds become available. In addition, to secure the principal payments and interest payments on this note and the interest payments on the $200,000 note issued to Mr. Weber, MRC pledged 10,000,000 shares of common stock of the Company. MRC is a corporation controlled by the W5 Family Trust. Mr. Wade, the President and CEO of the Company, is the trustee of the W5 Family Trust. Mr. Weber is the President and a Director of GIS and a member of CWI.
    
300,000
    
-
  
 
    
   
 
Note payable in the amount of $40,000 issued by the company to CCS, bearing interest at 12% per annum, and due in July 2007. The Company or an individual acting on the Company’s behalf is also obligated to arrange for a pledge of 1,000,000 shares of common stock of the Company to secure the loan. The note is in default.
    
40,000
    
-
  
 
    
   
 
Note payable, dated August 2007, in the amount of $46,586 to Stephen Rossetti, bearing interest at 10% per annum, with principal and interest due on demand. Mr. Rossetti is Executive Vice-President of Government Affairs, Chairman, CEO and Director of GIS, Director of NOW Solutions and an officer of Markquest, Inc.
    
46,586
    
-
  
 
    
   
 
Note payable, dated August 2007, in the amount of $20,000 to a third party lender, bearing interest at 12% per annum, with principal and interest due on demand.
    
20,000
    
-
  
 
    
   
 
Note payable, dated August 2007, in the amount of $30,400 to Victor Weber, bearing interest at 12% per annum, with principal and interest due on demand. . Mr. Weber is the President and a Director of GIS and a member of CWI.
    
30,400
   
-
  
 
    
   
 
Total notes payable
    
5,862,884
    
5,727,931
  
Current maturities
    
(3,085,574
)
  
(2,544,682
  
 
    
   
 
Long-Term portion of notes payable
  
$
2,777,310
  
$
3,183,249
  
 
Note 4 - Legal Proceedings
 
The Company is involved in the following ongoing legal matters:

In February 2003, the Company filed a lawsuit and a derivative action in New York Supreme Court Case against defendants Ross, Arglen, James Patrick Tinley (“Tinley”), and Garry Gyselen (“Gyselen”).  The Company filed a derivative action on behalf of its subsidiary NOW Solutions when Arglen refused to authorize a lawsuit against any parties who were alleged to have acted against the best interest of NOW Solutions.  In conjunction with the Company’s claim, NOW Solutions withheld its payments on the remaining $750,000 note that was due in February 2003 in connection with the acquisition of certain assets of Ross against the unpaid maintenance fees and gave notice in February 2003 to Ross of NOW Solutions’ claim of offset.  NOW Solutions claimed a total amount of approximately $3,562,000 to offset against the note, plus other damages.  The Company’s original claims sought damages and equitable relief arising out of actions of the defendants constituting breach of contract, fraud, conspiracy and breach of fiduciary duty in connection with certain transactions entered into between Ross and NOW Solutions; Ross and Arglen; Arglen and NOW Solutions; Gyselen and NOW Solutions; and the Company and Arglen. This action concerns claims of breach of contract and indemnification for failure to pay adjustments at the closing on the sale of assets of Ross to NOW Solutions for prepaid maintenance fees and for related relief. In November 2003, the New York Supreme Court dismissed the claims against Ross and Tinley. The portion of the lawsuit involving Arglen and Gyselen was settled in December 2003 and, pursuant to the settlement, dismissed in February 2004.   The Company appealed the decision with regard to its claim for breach of contract for Ross’ failure to give the proper maintenance fee adjustment and related claims for offset and attorney’s fees.  On June 1, 2004, the appeal of the dismissal of the action against Ross was submitted to the court for decision.  On appeal, the claims against Ross were reinstated pursuant to the order of the Appellate Division, dated October 26, 2004. In November 2004, Ross filed an answer containing affirmative defenses in the Derivative Action. For information concerning the decision regarding this action and the trial regarding the action between NOW Solutions and Ross, please see Ross’ action against NOW Solutions below.
 
16
 

In March 2003, Ross commenced an action in New York Supreme Court, Westchester County, by filing a motion for summary judgment in lieu of complaint against NOW Solutions to collect the note payable in the amount of $750,000 plus 10% interest.  In August 2003, the New York Supreme Court denied the motion and dismissed Ross’ action without prejudice.  In October 2003, the motion of Ross for re-argument was denied.  Ross appealed the August 2003 court order, but subsequently abandoned its appeal.   The time for Ross to appeal has run. Consequently, no further action will be had on this matter.

In December 2003, the Company settled its arbitration and litigation with Arglen, a minority partner of NOW Solutions, pursuant to the 2003 Settlement which pertains to issues related to NOW Solutions.  The 2003 Settlement resolved various allegations by the Company and Arglen concerning violations of NOW Solutions’ Operating Agreement.  The arbitration has been dismissed and any actions with respect to Arglen and Gary Gyselen and the Company and its related parties, including NOW Solutions, were also dismissed, except that the California Superior Court, Los Angeles County retained jurisdiction regarding the terms of the settlement between the parties.  In February 2004, the Company completed the settlement with Arglen. Pursuant to the terms of the settlement, the Company purchased Arglen’s interest in NOW Solutions for $1.4 million as follows: (a) $800,000, which was paid at the closing and (b) $600,000, pursuant to a non-interest bearing secured promissory note providing for payments of $200,000 in April 2004, $100,000 in June 2004, and $300,000 in September 2004, which was issued at closing. When the Company did not make the April 2004 payment, the Company began accruing interest at the rate of 10% from the inception of the note. In addition, at closing, the Company cancelled 80,763,943 warrants held by Arglen and issued to Arglen 20,000,000 unregistered shares of the common stock of the Company (at a fair market value of $280,000), which is subject to a lock-up agreement. The Company’s purchase of Arglen’s interest resulted in the Company recognizing $1,680,000 of goodwill, which was written-off in 2004. In December 2004, the Company recorded the expense of issuing 5,000,000 unregistered shares to Arglen at a fair market value of $82,273, which was based on an average share price during 11 days of August 2004. These shares were issued pursuant to the settlement agreement with Arglen whereby the Company was obligated to issue 5,000,000 unregistered shares of common stock of the Company to Arglen, due to its failure to file a registration statement on Form SB-2 within 180 days from the closing date of the settlement in February 2004. In March 2005, the Company issued these 5,000,000 shares to Arglen. The note is in default. In August 2004, Arglen obtained a default judgment in Los Angeles court for the outstanding principal, plus attorney’s fees and interest at the rate of 10% per annum. In April 2005, Arglen filed a Notice of Filing a Foreign Judgment in Tarrant County, Texas. In August 2005, the Company entered into a Payout Agreement with Arglen allowing payout terms to the Company and pursuant to which the Company agreed to enter into the Agreed Judgment. The Agreed Judgment and Payout Agreement were entered into concerning a California judgment and Arglen's notice of Filing a Foreign Judgment in Tarrant County, Texas, which were in connection with the 2003 Settlement. Pursuant to the terms of the Agreed Judgment and the Payout Agreement, the Company agreed to pay Arglen a total of $713,489, which includes the following amounts: (a) $600,000 in principal on the promissory note issued by the Company pursuant to the 2003 Settlement, (b) the accrued post-judgment interest on the California judgment from September 4, 2004 through September 15, 2005, at the rate of 10% per annum, which equals $61,989, and (c) attorney's fees incurred for the California and Texas judgment actions which were approximately $51,500. Pursuant to the terms of the Payout Agreement, the Company began making monthly interest payments on the amounts specified above of $5,945, beginning on September 15, 2005, which will be replaced by monthly payments of $25,000 or 10% of the Company's new sales, whichever is greater, beginning on February 15, 2006 until the remainder of the $713,489 is paid. In accordance with the Payout Agreement, Arglen shall not execute the Agreed Judgment so long as the Company continues to make its payments as agreed. 
 
17

 
In March 2004, Ross commenced an action in the New York Supreme Court by filing a motion for summary judgment in lieu of complaint against NOW Solutions to collect the note payable in the amount of $750,000 plus 10% interest and attorneys fees.  NOW Solutions filed its opposition to Ross’ motion, which was submitted to the court for decision on May 20, 2004.  NOW Solutions opposed the Ross motion and, on October 7, 2004, the Court ruled in favor of NOW Solutions and denied the motion for summary judgment. Pursuant to New York State law, in the event a motion for summary judgment in lieu of complaint is denied, the action continues and the pleadings supporting the motion are deemed to constitute the complaint. Accordingly, NOW Solutions filed an answer containing affirmative defenses and nine (9) counterclaims against Ross. The affirmative defenses asserted by NOW Solutions include the same grounds which comprise the causes of action against Ross in the Derivative Action, namely Ross’ breach of the Asset Purchase Agreement as a result of its failure to credit NOW Solutions with adjustments at closing in an amount not less than $3,562,201. All of the counterclaims asserted by NOW Solutions against Ross relate to the Asset Purchase Agreement and Ross’ breaches thereof. The counterclaims include: (i) breach of the covenant not to compete, whereby NOW Solutions seeks damages in excess of $10,000,000; (ii) breach of the covenant to deliver all assets to NOW Solutions at closing, whereby NOW Solutions seeks damages in an amount not less than $300,000; (iii) breach of a certain Transitional Services Agreement (executed in conjunction with the Asset Purchase Agreement), whereby NOW Solutions seeks damages in an amount not less than $73,129; and (iv) reasonable attorney’s fees. In December 2004, Ross filed a motion to dismiss two of NOW Solutions’ nine counterclaims: one which alleges that Ross and CDC Corporation used Ross to breach a covenant not to compete and the second which requested that Ross be enjoined from further competition with NOW Solutions in violation of the covenant. In February 2005, Ross’ motion was granted. Thereafter, NOW Solutions filed a motion to vacate the default, which motion was denied over the objections of NOW Solutions. NOW Solutions has filed a notice of appeal of this decision. NOW Solutions’ remaining counterclaims remain unaffected. In May 2006, NOW Solutions filed a motion for summary judgment in the derivative action in favor of NOW Solutions and against Ross on the second, fifth, sixth, and seventh causes of action seeking damages in excess $4,137,788 plus attorney’s fees. In addition, NOW Solutions’ motion for summary judgment seeks to dismiss the first through thirteenth affirmative defenses of Ross. In May 2006, Ross filed a motion for summary judgment seeking to dismiss all claims of NOW Solutions in the derivative action. At that time Ross also filed a motion for summary judgment in the action of Ross v. NOW Solutions, Inc., seeking to dismiss certain counterclaims of NOW Solutions therein. In July 2006, the court held a hearing on all three summary judgment motions. The court rendered decisions on the motions on November 30, 2006. The court dismissed NOW Solutions’ sixth and seventh counterclaims in the NOW Solutions action, dismissed Ross’ affirmative defenses numbered first, second, fourth, and seventh through thirteenth in the Vertical action, and denied all other requests for relief. Trial commenced on both actions on March 20, 2007. On April 13, 2007, the court rendered decisions in both actions as follows: (1) In the action of Ross Systems, Inc. v. NOW Solutions, Inc. a directed verdict was granted (a) to Ross Systems on its claim for payment of the promissory note, net of certain offsets that the court found due to NOW Solutions on its first, second and fifth counterclaims, other than for the amount claimed due by NOW for maintenance fee adjustments due at the closing of the sale transaction between the parties, in the amount of $664,000; (b) to NOW Solutions on its first counterclaim for maintenance fee adjustments in the amount of $1,943,482; accordingly, NOW Solutions was awarded the net amount of $1,279,482 ($1,943,482-$664,000), plus statutory (simple) interest at 9% per annum from the date the claim accrued; and (c) to Ross Systems dismissing NOW’s fourth counterclaim against Ross for failure to deliver certain assets at closing. (2) In the action of Vertical Computer Systems, Inc. v. Ross Systems, Inc., et. al., the court dismissed Vertical’s claim on behalf of NOW Solutions for maintenance fee adjustments, as moot in light of its directed verdict on this issue in the Ross Systems v. NOW Solutions action, and dismissed Ross’ defenses to the Vertical action and Ross’ claim for attorney fees therein. In the action of Ross Systems, Inc. v. NOW Solutions, Inc., NOW Solutions and Ross each filed motions for attorney's fees with the court in August 2007. In September 2007, the court awarded Now Solutions a judgment in the amount of $3,151,216, which consisted of $1,279,483 for Now Solutions’ claims (after deducting $664,000 for Ross’ claim), $912,464 in attorneys’ fees and expenses, and $865,361 of accrued interest. Now Solutions is currently seeking to collect the amounts due under the judgment. The judgment was entered on October 11, 2007.

In March 2004, Ross commenced an action in the Court of Chancery, State of Delaware by filing a summons and complaint against the Company, NOW Solutions and Arglen alleging a fraudulent transfer in connection with the Company’s payment of monies to Arglen pursuant to the settlement dated December 2003.  The Company and NOW Solutions have filed a motion to stay the Delaware action pending the resolution of the parties’ rights in Supreme Court, New York County and Appellate Division. Specifically, Ross seeks a judgment against the Company: (i) attaching the assets transferred to Arglen pursuant to the Settlement Agreement; (ii) enjoining the Company and NOW Solutions from making further transfers to Arglen pursuant to the Arglen Note; (iii) avoiding the transfers to the Company and Arglen or for judgment in the amount equivalent to the value of the asserts transferred to them pursuant to the Settlement Agreement; and (iv) appointing a receiver to take possession of the assets transferred to the Company and Arglen pursuant to the Settlement Agreement. In July 2004, the Company and NOW Solutions filed a motion to stay the Delaware Action pending the resolution of the parties’ rights in the Derivative Action and Ross Action. In October 2004, the motion was granted and the Delaware action has been stayed. This action is subject to dismissal; however, this action may be further stayed if Ross appeals the above decision and posts bond for the appeal.

In January 2005, PMM filed a lawsuit in Los Angeles Superior Court to collect the outstanding balance of $23,974 due under the promissory note issued to them by the Company and for failure to pay fees for professional services in the amount of $89,930 rendered to the Company, plus interest. In March 2005, the Company filed a demurrer. In April 2005, the Company answered the complaint, asserting various legal defenses. In October 2005, the parties entered into a settlement agreement. Pursuant to the terms of the settlement, the Company issued a promissory note to PMM in the amount of $75,000 with a maturity date of January 31, 2008, bearing interest at a rate of 6% per annum, which shall be paid in equal monthly installments of $ 3,125, beginning February 1, 2006 for a period of 24 months. In connection with the settlement, the lawsuit was dismissed. The note is currently delinquent. Bill Mills is a Director of the Company and a partner of PMM. PMM is the successor entity to Parker Mills & Patel, LLP.
 
18

The IRS has a claim for unpaid Employment (Form 941) taxes and Federal Unemployment (Form 940) taxes for the period December 31, 2001 through December 31, 2005. As of August 27, 2006 the total tax, penalties and interest due was $313,839. In that matter, the Company appealed from a Notice of Intent to Levy served to collect this tax and on February 8, 2007, following a Due Process Hearing, the IRS determined that its decision to seek collection of the tax by levy was proper. On March 9, 2007, the Company filed an appeal of the IRS’s determination to the United States Tax Court. The Company hopes that the Court will hold that the IRS’s refusal to consider an Installment Agreement to pay the liability over several years was erroneous. There is no guarantee, however, that the Court will not sustain the IRS determination and will allow it to collect the tax, penalties and interest by levy.

On April 18, 2007, the Company filed suit for patent infringement against Microsoft Corp. in the United States District Court for the Eastern District of Texas. The Company claims that the Microsoft .Net System infringes U.S. Patent No. 6,826,744. On July 13, 2007, Microsoft filed an answer to the Company’s complaint, alleging various defenses and counterclaims. On August 2, 2007, the Company filed a reply to Microsoft’s defenses and counterclaims. The court has set trial for March 2009.

In the opinion of management, the ultimate resolution of any pending matters may have a significant effect on the financial position, operations or cash flows of the Company. Also, the Company in the future may become involved in other legal actions that may have a significant effect on the financial position, operations or cash flows of the Company.
 
Note 6 - Stock Options & Warrants
 
Stock Option Plan

In December 1999, the Company established a stock option plan (the “Plan”) whereby the Company may grant both Incentive Stock Options (within the meaning of Section 422 and the Internal Revenue Code of 1986, as amended) and non-statutory options. Under the Plan, the Company may issue up to 50,000,000 shares (adjusted post stock split). Most options issued are non-assignable, non-transferable, vest on the date of grant, and expire between 3 - 5 years from the date of grant.

Summary of Outstanding Employee Stock Options and Warrants

Below is a summary of outstanding stock options and warrants issued to employees and former employees of the Company through September 30, 2007.

In December 2001, the Company issued 5-year warrants to the President and Chief Executive Officer of the Company to purchase a total of 20,600,000 shares of the Company’s common stock at an exercise price of $0.10 per share. The warrants vested over a 36-month period in equal amounts on a monthly basis from the date of issuance. All shares had vested but 19,455,557 shares have expired through September 30, 2007.
 
In December 2002 and January of 2003, the Company issued 5-year warrants to purchase 2,750,000 share shares of common stock of the Company at an exercise price of $0.010 per share to officers and directors of the Company’s subsidiary, GIS. In July 2006, a director of GIS sent the Company a notice of exercise to purchase a total of 1,250,000 shares of common stock of the Company under two warrants issued to the director in December 2002. The purchase price for the shares was $12,500, which was offset against outstanding interest payments due under notes payable issued to the director and unreimbursed expenses incurred by the director. These shares were issued in April 2007. The remaining warrants are vested and will expire in December 2007 or January 2008, as applicable.

In March 2004, the Company issued 5-year incentive stock options to a former executive of the Company to purchase 2,500,000 shares of common stock of the Company at a strike price of $0.014 per share in connection with an employment agreement. The options are vested and will expire in March 2009.

For an update on warrants and stock options since September 30, 2007, please see “Subsequent Events” in Note 7.
 
19

 
   
Incentive Stock Options
  
Non-Statutory Stock Options
  
Warrants
  
Weighted Average Exercise Price
  
Outstanding at 12/31/06
    
2,500,000
   
-
   
31,394,444
   
0.029
 
                           
Options/Warrants exercised
    
-
   
-
   
-
   
-
  
                           
Options/Warrants expired/cancelled
    
-
   
-
   
5,250,001
   
0.099
  
                           
Outstanding at 09/30/07
    
2,500,000
   
-
   
26,144,443
   
0.020
 
 
Information relating to stock options/warrants as of September 30, 2007, summarized by exercise price, is as follows:

   
Warrants/Options Outstanding
  
Exercisable
  
       
Weighted
              
       
Average
  
Weighted
      
Weighted
  
       
Remaining
  
Average
      
Average
  
   
Number
  
Contractual
  
Exercise
  
Number
  
Exercise
  
Exercise Price Per Share
  
Outstanding
  
Life (Months)
  
Price
  
Exercisable
  
Price
  
Incentive Stock Options
                      
$0.01 - $0.09
    
2,500,000
   
17.23
 
$
0.014
    
2,500,000
 
$
0.014
  
     
2,500,000
   
17.23
 
$
0.014
    
2,500,000
  
$
0.014
  
Warrants
                                
$0.003 - $0.100
    
26,144,443
   
14.29
 
$
0.021
    
26,144,443
  
$
0.021
  
     
26,144,443
    
14.29
  
$
0.021
    
26,144,443
  
$
0.021
  
                                 
Grand total
    
28,644,443
    
14.54
 
$
0.020
    
28,644,443
  
$
0.020
  
 
Restricted Stock
 
Summary of Employee and Consultants Restricted Stock Awards

The Company has not established a restricted stock award plan for employees or consultants. The following is a summary of the terms of restricted stock awards issued to employees of the Company and NOW Solutions for the period that runs from January 1, 2005 through September 30, 2007.

During 2005, the Company issued 5,100,000 unregistered shares of common stock of the Company to employees of NOW Solutions pursuant to restricted stock agreements. The shares vest in equal amounts each year over a 3-year period. Of these shares, 1,665,480 have vested and 850,000 have been cancelled through September 30, 2007.

During 2006, the Company agreed to issue 12,525,000 unregistered shares of common stock of the Company to employees and consultants of NOW Solutions and the Company pursuant to restricted stock agreements. Of the 12,525,000 shares the Company agreed to issue, 1,000,000 shares had no vesting period, 6,200,000 shares vest over a 1-year period and 5,325,000 shares vest in equal amounts each year over a 3-year period. Of these 12,525,000 shares, 6,973,810 have vested and 3,351,187 shares have been cancelled though September 30, 2007.

During the nine months ended September 30, 2007, the Company issued 3,750,000 unregistered shares of common stock of the Company to employees and a consultant of the Company and NOW Solutions. These shares were issued pursuant to restricted stock agreements executed in 2007 with the Company that provide for the shares to vest up to three years in equal installments at the anniversary date of the agreement. Of those shares, 500,000 are vested.
 
20
 
For issuances, vesting, and cancellations of restricted stock since September 30, 2007, please see “Subsequent Events” in Note 7.

The following activity has occurred through September 30, 2007:
 
   
Shares
  
Weighted
Average
Grant-Date
Fair Value 
  
               
Stock awards:
          
Non-vested balance at December 31, 2006
    
8,158,336
  
$
0.010512
  
Granted
    
3,750,000
    
0.0173733
  
Vested
    
3,689,292
    
0.01284
  
Forfeited / Cancelled
    
184,521
    
0.0067
  
Non-vested balance at September 30, 2007
    
8,034,523
    
0.01859
  
 
As of September 30, 2007, there was $69,668 of total unrecognized compensation costs related to stock awards. These costs are expected to be recognized over a weighted average period of 1.91 years.
 
Note 7 - Subsequent Events
 

For the period from October 1, 2007 to November 15, 2007, warrants to purchase 572,222 shares of the common stock of the Company at an exercise price of $0.10 per share expired.

For the period from October 1, 2007 to November 15, 2007, 950,000 unregistered shares of the common stock of the Company vested. These shares were issued pursuant to restricted stock agreements with employees of the Company and Now Solutions executed in 2005.
 
As of the Date of this Report for the period ended September 30, 2007, the Company has also determined that it currently has (i) the following shares of common stock issued, and (ii) outstanding instruments which are convertible into the shares of common stock indicated below in connection with stock options, warrants, and preferred shares previously issued by the Company:

997,619,672
  
Common Stock Issued
25,572,221
 
Common Shares that may be purchased from outstanding Warrants (or have been purchased but not issued)
2,500,000
  
Common Shares convertible from Outstanding Options
24,250,000
  
Common Shares convertible from Preferred Series A stock (48,500 shares outstanding)
27,274
  
Common Shares convertible from Preferred Series B stock (7,200 shares outstanding)
20,000,000
  
Common Shares convertible from Preferred Series C (50,000 shares outstanding)
94,700
  
Common Shares convertible from Preferred Series D (25,000 shares outstanding)
1,000,000
  
Common Shares that the Company is obligated to issue pursuant to a previously executed agreement
13,000,000
  
Common Shares that the Company has agreed to issue within 1 year to an employee of the Company and an entity beneficially owned by an Executive of the Company pursuant to agreements
1,084,063,867
  
Total Common Shares Outstanding or Accounted For/Reserved
 
21

 
In addition, the Company has $40,000 in outstanding debentures that it has issued to third parties.

Accordingly, given the fact that the Company currently has 1,000,000,000 shares of common stock authorized, the Company could exceed its authorized shares of common stock by approximately 84,000,000 shares if all of the financial instruments described in the table above were exercised or converted into shares of common stock (excluding the $40,000 of outstanding debentures noted above). The Company is currently investigating its options in order to present its shareholders, as soon as practicable, with a plan whereby the Company could meet all of its outstanding obligations without exceeding its authorized shares of common stock.
 
Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
 
Forward-Looking Statements
 
This Form 10-QSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. Such statements include the Company’s beliefs, expectations, hopes, goals and plans regarding the future, including but not limited to statements regarding the Company’s strategy, competition, development plans, financing, revenue and operations. Forward-looking statements often can be identified by the use of terms such as “may,” “will,” “expect,” “anticipate”, “estimate,” or “continue,” or the negative thereof. Such forward-looking statements speak only as of the date made. Any forward-looking statements represent management’s best judgment as to what may occur in the future. However, forward-looking statements are subject to risks, uncertainties, and important factors beyond the control of the Company that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected. The Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events.
 
Management’s Discussion and Analysis or Plan of Operation
 
The following discussion is a summary of the key factors management considers necessary or useful in reviewing the Company’s results of operations, liquidity and capital resources. The following discussion and analysis should be read together with the accompanying Condensed Consolidated Financial Statements of the Company, and the cautionary statements and risk factors included below in this item of the report.
 
Business Overview
 
The Company is a multi-national provider of Internet core technologies, administrative software, and software services through its distribution network. The Company's primary Internet core technologies include SiteFlash™, ResponseFlash™, and the Emily® XML Scripting Language, which can be used to build Web services. The Company's main administrative software product is emPath®, which is designed to handle the most complex Payroll and Human Resources challenges. Software services include emPath® delivered as a software-as-a-service (“SaaS”) and its Managed Baseline Solution, comprised of two security products (IA, StatePointPlus®). IA is a security software program that allows a system administrator to stop the use of unauthorized programs, including unlicensed software, viruses, Trojans, spyware, adware and malicious code. StatePointPlus® is an intelligent System Baseline Management (SBM) patented technology that improves information technology management by providing a highly cost-effective complete inventory of network hardware, giving a complete picture of all existing workstations, servers, and software on a network.
 
The Company attempts to acquire marketing rights for products, which, in the Company’s belief, are proven and best of the breed; are profitable or on the path to profitability; complement each other; and provide cross-product distribution channels. The Company’s business model combines complementary, integrated software products, internet core technologies, and a multinational distribution system of partners, in order to create a distribution matrix that we believe is capable of penetrating multiple sectors through cross promotion.
 
22
 
The Company recently released a new version of emPath® (emPath® 6.4) which encompasses ASP.net and a new user interface which has increased the customization capabilities. These new features, when coupled with the Brazil development staff gaining experience (over one year in existence) on the product, will enable for substantially faster development. The Company is also exploring opportunities to utilize emPath®’s powerful payroll component to provide private label contracting to existing HR providers as well as payroll providers in localized markets. Additionally, the Company has completed months of testing its emPath® SaaS model to ensure a robust and competitive solution.
 
The Company is converting its SiteFlash™ product as a SaaS model with initial marketing concentration in the affiliate, government and publishing markets.
 
The Company, through its distribution agreements for StatePointPlus® and IA, is marketing the combined products as a Managed Baseline Solution.
 
The Company is pursuing licensing its intellectual property and protecting its intellectual property rights.
 
The Company’s current products address the following market segments:
 
MARKET
  
PRODUCT
  
OWNERSHIP/
LICENSOR
  
LICENSEE
             
Human Resources and Payroll
  
emPath®
  
NOW Solutions
  
NOW Solutions
Large Corporations and Universities
  
SiteFlash™
  
Vertical Computer
  
Vertical Computer Systems
Government Sector- Emergency Response
  
ResponseFlash™
  
Vertical Computer
  
GIS
Publishing Content
  
NewsFlash™
  
Vertical Computer
  
EnFacet
Emily® XML Scripting Language
  
Emily®
  
Vertical Computer
  
Vertical Internet Solutions
Security
  
IA
  
CWI
  
Vertical Computer Systems
IT Management and Compliance
  
StatePointPlus®
  
CWI
  
Vertical Computer Systems
 
Results of Operations
 
Total Revenues. The Company had total revenues of $1,574,948 and $1,468,844 in the three months ended September 30, 2007 and 2006, respectively. The increase in total revenue was $106,104 for the three months ended September 30, 2007 representing a 7% increase compared to the total revenue for the three months ended September 30, 2006. Of the $1,574,948 in the three months ended September 30, 2007 and the $1,468,844 in the three months ended September 30, 2006, $1,574,948 and $1,467,628, respectively, was related to the business operations of Now Solutions, a wholly-owned subsidiary of the Company.
 
The total revenues primarily consist of software licenses, consulting and maintenance fees. The revenue from license and maintenance in the three months ended September 30, 2007 increased by $288,945 from the same period in the prior year, representing a 24% increase, due to increases in software license sales and contractual maintenance fees by Now Solutions.
 
Consulting revenue in the three months ended September 30, 2007, decreased by $141,139 from the same period in the prior year, which represented a 59% decrease, due to slow-downs in customer modifications, training needs and installations at new customers.
 
Other revenue in the three months ended September 30, 2007 decreased by $41,702 from the same period in the prior year, which represented a 113% decrease. Other revenue is primarily billable travel time and reimbursable travel expenses. However, other revenue also includes foreign currency gains and losses and other income. The foreign currency loss in Canada and Brazil along with almost no reimbursable travel expenses for the three months ended September 30, 2007 caused the sharp decline.
 
The Company had total revenues of $4,344,552 and $4,643,769 in the nine months ended September 30, 2007 and 2006, respectively. The decrease in total revenue was $299,217 for the nine months ended September 30, 2007 representing a 5% decrease compared to the total revenue for the nine months ended September 30, 2006. Of the $4,344,552 in the nine months ended September 30, 2007 and the $4,643,769 in the nine months ended September 30, 2006, $4,344,552 and $4,636,577, respectively, was related to the business operations of Now Solutions, a wholly-owned subsidiary of the Company.
 
23
 
The total revenues primarily consist of software licenses, consulting and maintenance fees. The revenue from license and maintenance in the nine months ended September 30, 2007 increased by $94,509 from the same period in the prior year, representing a 3% increase, due to increases in maintenance revenues from current customers. This increase was partially offset by a decrease in new software licenses by Now Solutions when compared to the nine months ended September 30, 2007.
 
Consulting revenue in the nine months ended September 30, 2007 decreased by $345,194, from the same period in the prior year, which represented a 51% decrease, due to slow-downs in customer modifications and installations at new customers.
 
Other revenue in the nine months ended September 30, 2007 decreased by $48,532 from the same period in the prior year, which represented a 46% decrease. Other revenue is primarily billable travel time and reimbursable travel expenses and decreases when consulting revenue decreases.
 
Selling, General and Administrative Expenses. The Company had selling, general and administrative expenses of $1,622,463 and $1,633,841 for the three months ended September 30, 2007 and 2006, respectively. The total operating expenses in the three months ended September 30, 2007 decreased by $11,378 compared to the operating expenses in the three months ended September 30, 2006, representing a 1% decrease. Of the $1,622,463 in the three months ended September 30, 2007 and the $1,633,841 in the three months ended September 30, 2006, Now Solutions accounted for $1,476,015 and $1,463,301, respectively. The decrease of $11,378 was primarily attributable to a reduction in advertising and promotions, travel and contract labor, offset by increases in payroll and related costs, legal fees, office rent and consulting costs.
 
The Company had selling, general and administrative expenses of $5,192,532 and $5,702,067 in the nine months ended September 30, 2007 and 2006, respectively. The total operating expenses in the nine months ended September 30, 2007 decreased by $509,535 compared to the operating expenses in the nine months ended September 30, 2006, representing a 9% decrease. Of the $5,192,532 in the nine months ended September 30, 2007 and the $5,702,067 in the nine months ended September 30, 2006, Now Solutions accounted for $4,253,331 and $4,909,306, respectively. The $509,535 decrease was primarily attributable to reductions in amortization, travel, legal fees, consulting and contract labor costs that were partially offset by increases in payroll and related benefits and loan commitment fees.
 
Operating Loss. The Company had an operating loss of $47,515 and $164,997 in the three months ended September 30, 2007 and 2006, respectively. The operating loss decreased by $117,482 compared to the operating loss in the three months ended September 30, 2006, representing a decrease of 71%. The decrease was primarily attributable to an increase in the revenues of $106,104 and a decrease in operating expenses of $11,378 as described in the above paragraph (Selling, General and Administrative Expenses).
 
The Company had an operating loss of $847,980 and $1,058,298 in the nine months ended September 30, 2007 and 2006, respectively. The operating loss decreased by $210,317 compared to the operating loss in the nine months ended September 30, 2006, representing a decrease of 20%. The decrease was primarily attributable a decrease in selling, general and administrative expenses of $509,535 discussed above, partly offset by a reduction in revenues of $299,217.
 
Interest Expense. The Company had an interest expense of $180,507 and $139,078 for the three months ended September 30, 2007 and 2006, respectively. Interest expense increased in the third quarter of 2007 by $41,429, representing an increase of 30%, compared to the three months ended September 30, 2006. The increase was related to additional notes payable and the compounding effect of interest on late payments made on certain notes.
 
The Company had interest expense of $549,605 and $444,786 for the nine months ended September 30, 2007 and 2006, respectively. Interest expense increased in 2007 by $104,819, representing an increase of 24%, compared to the nine months ended September 30, 2006. The increase was related to additional notes payable, increased interest rates on certain notes, and the compounding effect of interest on late payments made on certain notes.
 
Net Loss. The Company had a net loss of $227,806 and $303,519 for the three months ended September 30, 2007 and 2006, respectively. Net loss for the three months ended September 30, 2007 decreased by $75,713, representing a decrease of 25%. The decrease was primarily attributable to an increase in revenues of $106,104 and a decrease in operating expenses of $11,378 as described in the above paragraph (Selling, General and Administrative Expenses). The decrease was partially offset by an increase in interest expense of $41,429.
 
24
 
The Company had a net loss of $1,395,988 and $1,500,837 for the nine months ended September 30, 2007 and 2006, respectively. Net loss for the nine months ended September 30, 2007 decreased by $104,849, representing a decrease of 7%. The decrease was primarily attributable to a decrease in operating expenses of $509,535 as described in the above paragraph (Selling, General and Administrative Expenses), partially offset by a decrease in revenues of $299,217 and an increase in interest expense of $104,819.
 
Dividends Applicable to Preferred Stock. The Company has outstanding Series A 4% convertible cumulative preferred stock that accrues dividends at a rate of 4% on a semi-annual basis. The Company also has outstanding Series C 4% convertible cumulated preferred stock that accrues dividends at a rate of 4% on a quarterly basis. The total dividends applicable to Series A and Series C preferred stock were $147,000 and $150,000 for the three months ended September 30, 2007 and 2006 respectively.
 
The total dividends applicable to Series A and Series C preferred stock were $441,000 and $450,000 for the nine months ended September 30, 2007 and 2006, respectively.
 
Net Loss Available to Common Stockholders. The Company had a net loss attributed to common stockholders of $374,806 and $453,519 for the three months ended September 30, 2007 and 2006, respectively. Net loss attributed to common stockholders decreased by $78,713, representing a decrease of 17%, compared to the net loss attributed to common stockholders in the three months ended September 30, 2006. The decrease was primarily attributable to an increase in revenues of $106,104 and a decrease in the operating expenses of $11,378 as described in the above paragraph (Selling, General and Administrative Expenses), partially offset by an increase in interest expense of $41,429.
 
The Company had a net loss attributed to common stockholders of $1,836,988 and $1,950,837 for the nine months ended September 30, 2007 and 2006, respectively. Net loss attributed to common stockholders decreased by $113,849, representing a decrease of 6%, compared to the net loss attributed to common stockholders in the nine months ended September 30, 2006. The decrease was primarily attributable a decrease in operating expenses of $509,535 as described in the above paragraph (Selling, General and Administrative Expenses), partially offset by a decrease in revenues of $299,217 and an increase in interest expense of $104,819.
 
Net Loss Per Share. The Company had a net loss per share of $0.00 and $0.00 for the three months ended September 30, 2007 and 2006, respectively. The Company had a net loss per share of $0.00 and $0.00 for the nine months ended September 30, 2007 and 2006, respectively.
 
Liquidity And Capital Resources
 
At September 30, 2007, the Company had non-restricted cash-on-hand of $44,715 as compared to $44,034 at September 30, 2006.
 
Net cash used in operating activities for the nine months ended September 30, 2007 was $77,603. This negative cash flow was primarily related to a net loss of $1,395,988 adjusted by total non-cash items of $106,466 (including depreciation and amortization of $47,472, loan origination costs included in new notes payable of $11,586, and expenses paid by the issuance of common stock and restricted stock options totaling $47,408), increases in accounts payable and accrued liabilities of $1,391,869, a decrease in deferred revenue of $559,728, a decrease in receivables of $429,382, and an increase in prepaid expenses of $5,076.

Net cash used in investing activities for the nine months ended September 30, 2007 was $56,770, which consisted of the purchase of equipment and software.

Net cash from financing activities for the nine months ended September 30, 2007 was $123,367, consisting of the repayment of notes payables of $302,033 which was partially offset by the issuance of $425,400 of new notes payable.  In addition, common stock lent to the company of $290,000 by company executives and related parties resulted in a non-cash financing activity.
 
25

 
The total change in cash and cash equivalents for the nine months ended September 30, 2007 when compared to nine months ended September 30, 2006 was an increase of $202,565.

As of the date of the filing of this Report, the Company does not have sufficient funds available to fund its operations and repay its debt obligations under their existing terms. Therefore, the Company needs to raise additional funds through selling securities, obtaining loans, renegotiating the terms of its existing debt and/or increasing sales with its new products. The Company’s inability to raise such funds or renegotiate the terms of its existing debt will significantly jeopardize its ability to continue operations.
 
Contractual Obligations
  
Balance at
  
Due in Next Five Years
  
   
09/30/07
  
2007
  
2008
  
2009
  
2010
  
2011+
  
Notes payable
  
$
5,862,884
  
$
3,085,574
  
$
723,485
  
$
274,226
  
$
307,560
  
$
1,472,039
  
Convertible debts
    
40,000
   
40,000
   
-
   
-
   
-
    
-
  
Operating lease
    
167,942
   
35,150
   
87,044
   
45,748
   
-
    
-
 
Total
  
$
6,070,826
  
$
3,860,724
  
$
810,529
  
$
319,974
  
$
307,560
  
$
1,472,039
  
 
Of the above notes payable of $5,862,884, the default situation is as follows:

Notes Payable
  
09/30/07
  
12/31/06
  
           
In default
  
$
2,361,950
  
$
2,263,638
  
Due under terms of the note
    
3,500,934
    
3,464,293
  
               
Total Notes Payable
  
$
5,862,884
  
$
5,727,931
  
 
Going Concern Uncertainty
 
The accompanying condensed consolidated financial statements for the three and nine months ended September 30, 2007 and 2006, have been prepared assuming that the Company will continue as a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

The carrying amounts of assets and liabilities presented in the financial statements do not purport to represent realizable or settlement values. The Company has suffered significant recurring operating losses, used substantial funds in its operations, and needs to raise additional funds to accomplish its objectives. Negative stockholders’ equity at September 30, 2007 was approximately $19 million. Additionally, at September 30, 2007, the Company had negative working capital of approximately $12.4 million (although it includes deferred revenue of approximately $2.1 million) and has defaulted or is delinquent on several of its debt obligations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

Management of the Company is continuing its efforts to attempt to secure funds through equity and/or debt instruments for its operations, expansion and possible acquisitions, mergers, joint ventures, and/or other business combinations. The Company will require additional funds for its operations and to pay down its liabilities, as well as finance its expansion plans consistent with the Company’s anticipated changes in operations and infrastructure. In addition, the Company was awarded a judgment of $3,151,216 relating to the recent lawsuit won by the Company against Ross Systems Inc. (“Ross”). However, there can be no assurance that the Company will be able to secure additional funds and that if such funds are available, whether the terms or conditions would be acceptable to the Company and whether the Company will be able to turn into a profitable position and generate positive operating cash flow or collect on the Ross judgment. The condensed consolidated financial statements contain no adjustment for the outcome of this uncertainty.
 
26

 
Furthermore, the Company is exploring certain opportunities with a number of companies to participate in co-marketing of each other’s products. The Company is proceeding to license its intellectual property and filed suit for patent infringement against Microsoft (for more details, see Note 4, “Legal Proceedings”). The exact results of these opportunities are unknown at this time.
 
Market Risks
 
The Company anticipates that it will have activities in foreign countries in future periods. These operations will expose the Company to a variety of financial and market risks, including the effects of changes in foreign currency exchange rates and interest rates. As of September 30, 2007, there are no material gains or losses requiring separate disclosure.
 
Dividends
 
The Company has outstanding Series A and Series C 4% Convertible Cumulative Preferred stock that accrue dividends at a rate of 4% on a semi-annual basis.
 
Related Party Transactions 
 
In January 2005, in connection with the amendment of a $215,000 promissory note issued by NOW Solutions to the Company in September 2003 and assigned to Victor Weber in January 2004, the Company issued an additional 2,000,000 unregistered shares of common stock to Mr. Weber at a fair market value of $10,000. In October 2006, Mr. Weber and NOW Solutions and Taladin entered into an agreement concerning the note. Pursuant to the agreement, NOW Solutions and Taladin agreed to pay 5% of gross revenues derived from all new sales of the HRMS software solution (emPath®) to state and local governments until the balance under the note is paid. Under the terms of the amended note, NOW Solutions shall pay accrued interest from the previous month on a monthly basis and make minimum payments on the balance as follows: (a) $60,000 by the date that is 6 months from the amendment date, (b) $30,000 by the date that is 7 months from the amendment date, (c) $30,000 by the date that is 8 months from the amendment date; (d) $30,000 by the date that is 9 months from the amendment date and (e) all outstanding principal and interest then outstanding by the date that is 11 months from the amendment date. In March 2007, the payment dates for this note were extended by an additional 60 days. In connection with the agreement, MRC pledged 5,000,000 shares of common stock of the Company to secure the note. MRC is a corporation controlled by the W5 Family Trust. Mr. Wade, the President and CEO of the Company, is the trustee of the W5 Family Trust. Mr. Weber is the President and a Director of GIS and a member of CWI. For additional details on this note, please see “Notes Payable” under Note 3. The note is delinquent.
 
Also in January 2005, the Company entered into a marketing agreement with CWI whereby CWI will be entitled to receive a percentage of fees for new customers of the Company generated by CWI’s efforts. Mr. Weber is a Director and President of GIS and a member of CWI.
 
Also in January 2005, PMM filed a lawsuit in Los Angeles Superior Court to collect the outstanding balance of $23,974 due under the promissory note issued to them by the Company and for failure to pay fees for professional services in the amount of $89,930 rendered to the Company, plus interest. In March 2005, the Company filed a demurrer. In April 2005, the Company answered the complaint, asserting various legal defenses. In October 2005, the parties entered into a settlement agreement. Pursuant to the terms of the settlement, the Company issued a promissory note to PMM in the amount of $75,000 with a maturity date of January 31, 2008, bearing interest at a rate of 6% per annum, which shall be paid in equal monthly installments of $3,125, beginning February 1, 2006 for a period of 24 months. In connection with the settlement, the lawsuit was dismissed. The note is in default. Bill Mills is a Director of the Company and a partner of PMM. PMM is the successor entity to Parker Mills & Patel, LLP.

In August 2005, Mr. Salz made a $5,000 payment to a third party pursuant to an agreement and promissory note on the Company’s behalf. Mr. Salz is the Company’s corporate counsel.
 
27
 
In September 2005, NOW Solutions entered into a consulting agreement with Markquest, Inc. Mr. Rossetti is Executive Vice-President of Government Affairs, Chairman, CEO and Director of GIS, Director of NOW Solutions and an officer of Markquest, Inc.

In March 2006, CWI entered into a sublicense agreement with the Company to license software, including IA (formerly ImmuneApp) to the Company on a partially exclusive basis. The sublicense agreement was last amended in March 2007. In May 2006, in connection with the sublicense agreement with CWI, the Company acquired the rights to be a value-added reseller of StatePointPlus®. As a value-added reseller, the Company may market and distribute StatePointPlus®. Pursuant to the terms of the agreement, as amended, the Company currently has exclusive rights to market IA and StatePointPlus® for all users in Brazil and in the healthcare and government industry in the United States and Canada. In addition, NOW Solutions has the exclusive rights to offer IA on an ASP platform for its HRMS solution. The Company may also market IA or StatePointPlus® to any other users on a non-exclusive basis. Any prospective customer may be registered by the Company for six months on an exclusive basis. Mr. Weber is a Director and President of GIS and a member of CWI. Sean Chumura is a member of CWI and an employee of the Company.

In July 2006, Stephen Rossetti loaned the Company $55,000. In connection with the loan, NOW Solutions agreed to pay $55,000 plus a commitment fee of $11,000 and issued a promissory note in the amount of $66,000 bearing interest at 10% per annum with a maturity date of September 7, 2006. In December 2006, the Company entered into an agreement with Mr. Rossetti concerning the $66,000 note as well as approximately $56,000 in fees owed to Markquest, Inc. Pursuant to the agreement, the Company cancelled the $66,000 note and issued a $113,734 promissory note bearing interest at 10% per annum. The note is amortized over 24 months with monthly payments beginning in January 2007. In connection with the agreement, the Company also agreed to give Mr. Rossetti 3,000,000 shares of common stock of the Company, which were booked at a fair market value of $48,000 in 2006. These shares were issued and delivered to Mr. Rossetti in April 2007. Mr. Rossetti is Executive Vice-President of Government Affairs, Chairman, CEO and Director of GIS, Director of NOW Solutions and an officer of Markquest, Inc. For additional details on this note , please see “Notes Payable” under Note 3.
 
In October 2006, the Company issued a $200,000 promissory note, bearing interest at 10% per annum and due in September 2007, to Mr. Weber in connection with advances of $200,000 to TrueBaseline toward securing additional rights to StatePointPlus® and IA. Pursuant to the note, the Company shall pay 6% of gross revenues derived from all sales of StatePointPlus® (not to exceed $1.00 per user per month) until the balance under the note is paid. The Company shall pay accrued interest from the previous month on a monthly basis and make minimum payments on the balance of the note as follows: (a) $60,000 is due 6 months from the date of the note, (b) $30,000 is due 7 months from the date of the note, (c) $30,000 is due 8 months from the date of the note; (d) $30,000 is due 9 months from the date of the note; and (e) all outstanding principal and interest then outstanding is due 11 months from the date of the note. In March 2007, the payment dates for this note were extended by an additional 60 days. In connection with the note, MRC pledged 5,000,000 shares of common stock of the Company to secure the note to the Company. MRC is a corporation controlled by the W5 Family Trust. Mr. Wade, the President and CEO of the Company, is the trustee of the W5 Family Trust. Mr. Weber is the President and a Director of GIS and a member of CWI. For additional details on this note, please see “Notes Payable” under Note 3. The note is delinquent.
 
28
 
In October 2006, Taladin issued a $100,000 promissory note, bearing interest at 12% per annum and due in October 2011, to Mr. Weber on October 27, 2006. The note was issued in connection with refinancing whereby Taladin acquired the indebtedness of NOW Solutions to Wamco. The note is secured by Taladin’s first lien position on the assets of NOW Solutions. Tara Financial, SGP, and Weber share the first lien position, senior to all other security interests in the assets of NOW Solutions. The note is payable as follows: (a) interest only, beginning on November 1, 2006, and continuing through December 1, 2006; (b) unpaid principal balance and interest payments of $1,556, beginning on January 1, 2007 and continuing through February 1, 2008; and (c) monthly payments increased $2,822, beginning on March 1, 2008 and continuing until March 1, 2011 (the “Maturity Date”). The $100,000 note payable by Taladin contains provisions requiring additional principal reductions in the event sales by NOW Solutions exceed certain financial thresholds or if there is a judgment in favor of the Company with respect to the pending Ross litigation. For additional details on the Ross litigation, please see “Legal Proceedings” under Note 4. As incentives to make the $100,000 loan, the Company agreed to issue 1,000,000 unregistered shares of the common stock of the Company (which were booked in 2006 at a fair market value of $21,000) to Mr. Weber and NOW Solutions agreed to pay Mr. Weber a 0.5% royalty from its gross revenues in excess of $6.5 million, up to a cap of $100,000. These shares have not been issued as the Company cannot issue shares above the authorized amount of 1,000,000,000 shares of common stock. The Company is currently investigating its options in order to present its shareholders, as soon as practicable, with a plan whereby the Company could meet all of its outstanding obligations without exceeding its authorized shares of common stock. Mr. Weber is the President and a Director of GIS and a member of CWI. For additional details on this note, please see “Notes Payable” under Note 3.
 
In April 2007, Luiz Valdetaro, on behalf of the Company, transferred 2,000,000 unrestricted shares of common stock of the Company owned by Mr. Valdetaro to an officer of Tara Financial in exchange for waiving the defaults and extending the payment terms on notes payable in the amounts of $438,795, $350,560, $955,103 and $450,000 issued to Tara Financial by the Company, NOW Solutions, and Taladin in February 2006. Mr. Valdetaro is the Chief Technology Officer of the Company.
 
Also in April 2007, in connection with the transfer of 2,000,000 shares from Mr. Valdetaro to Tara Financial, the Company entered into an indemnity and reimbursement agreement to reimburse Mr. Valdetaro with 2,000,000 shares within one year and pay for all costs associated with the transfer of shares to Tara Financial and the reimbursement of shares to Mr. Valdetaro. Mr. Valdetaro is the Chief Technology Officer of the Company.
 
In April 2007, Mr. Valdetaro, on behalf of the Company, transferred 1,000,000 unrestricted shares of common stock of the Company owned by Mr. Valdetaro to CCS in connection with a $40,000 loan from CCS. Also in April 2007, in connection with the transfer of shares to CCS, the Company entered into an indemnity and reimbursement agreement to reimburse Mr. Valdetaro with 1,000,000 shares within one year and pay for all costs associated with the transfer of shares to CCS and the reimbursement of shares to Mr. Valdetaro. Mr. Valdetaro is the Chief Technology Officer of the Company.

In April 2007, the Company and MRC entered into an indemnity and reimbursement agreement for transfer and pledges of shares of common stock of the Company. Pursuant to the agreement, MRC loaned the Company 10,000,000 shares of common stock of the Company in order for the Company to meet current obligations concerning stock the Company has been obligated to issue and deliver to various parties.

Also in connection with the loan of 10,000,000 shares by MRC to the Company, the Company agreed to reimburse MRC with up to 10,000,000 shares of common stock of the Company and pay for all costs associated with such transfer and the reimbursement of shares to MRC within one year. In addition, in the event that any of the shares of common stock of the Company pledged by MRC on behalf of the Company in connection with promissory notes issued by the Company (or its subsidiaries, as applicable) are sold to cover a default under the respective note, the Company agreed to reimburse MRC with a number of shares equal to the number of shares sold to cover the default under the respective note within 1 year, and to reimburse MRC for all costs associated with such sales and the reimbursement of shares to MRC related to such sales.
 
In July 2007, the Company agreed to pay $46,586 to Stephen Rossetti for a loan, with the principal bearing at 10% per annum and principal and interest due on demand. Mr. Rossetti is Executive Vice-President of Government Affairs, Chairman, CEO and Director of GIS, Director of NOW Solutions and an officer of Markquest, Inc.
 
In August 2007, the Company agreed to pay Victor Weber $30,400 to Victor Weber for a loan, with the principal bearing interest at 12% per annum and principal and interest due on demand. Mr. Weber is the President and a Director of GIS and a member of CWI.
 
Critical Accounting Policies
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenue and expenses during the reporting period. Among the more significant estimates included in these financial statements are the estimated allowance for doubtful accounts receivable and the deferred income tax asset allowance. Actual results could materially differ from those estimates.
 
Capitalized Software Costs
 
Software costs incurred internally in creating computer software products are expensed until technological feasibility has been established upon completion of a detailed program design. Thereafter, all software development costs are capitalized until the point that the product is ready for sale and subsequently reported at the lower of unamortized cost or net realizable value. The Company considers annual amortization of capitalized software costs based on the ratio of current year revenues by product to the total estimated revenues by the product, subject to an annual minimum based on straight-line amortization over the product’s estimated economic useful life, not to exceed five years. The Company periodically reviews capitalized software costs for impairment where the fair value is less than the carrying value. During the nine months ended September 30, 2007 and 2006, no costs were capitalized.
 
29
 
Impairment of Long-Lived Assets
 
Effective January 1, 2002, the Company began applying the provisions of Statement of Financial Accounting Standard No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value. During 2004, in accordance with Financial Accounting Standard No. 142 (“SFAS No 142”), the Company determined that there was $1,760,000 impairment in goodwill, all of which was located in the Company. During the nine months ended September 30, 2007, the Company determined that there was no impairment in goodwill, since all goodwill in the Company had been written-off.
 
Revenue Recognition
 
Service revenue generated from professional consulting and training services are recognized as the services are performed. Maintenance revenue, including revenues bundled with original software product license revenues, are deferred and recognized over the related contract period, generally twelve months. The Company’s revenue recognition policies are designed to comply with American Institute of Certified Public Accountants Statement of Position 97-2, “Software Revenue Recognition” (“SOP 97-2”) and with Emerging Issues Task Force (“EITF”) issued No 00-21, “Revenue Arrangement with Multiple Deliverables.”
 
Deferred revenue on maintenance contracts represent cash received in advance which is recognized over the life of the contract.
 
In accordance with SEC Staff Accounting Bulletin No. 104 “Revenue Recognition,” the Company recognizes revenue from license of computer software up-front provided that a non-cancelable license agreement has been signed, the software and related documentation have been shipped, there are no material uncertainties regarding customer acceptance, collection of resulting receivables is deemed probable, and no significant other vendor obligations exist.
 
Stock-Based Compensation
 
Effective January 1, 2004, the Company adopted the fair value provisions of SFAS 123 for share based payments to employees. In accordance with transition provisions under SFAS 148, the Company has adopted the prospective method for transitional recognition.
 
Investments
 
Investments in entities in which the Company exercises significant influence, but does not control, are accounted for using the equity method of accounting in accordance with Accounting Principles Board (“APB”) Opinion No. 18 “The Equity Method of Accounting for Investments in Common Stock”. Investments in securities with a readily determinable market value in which the Company does not exercise significant influence, does not have control, and does not plan on selling in the near term are accounted for as available for sale securities in accordance with SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities”.
 
New Accounting Pronouncements
 
On July 13, 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement 109” (“FIN 48”).  FIN 48 prescribes how the Company should recognize, measure and present in the Company’s financial statements uncertain tax positions that have been taken or are expected to be taken in a tax return. Pursuant to FIN 48, the Company can recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained upon examination or audit. To the extent the “more likely than not” standard has been satisfied, the benefit associated with a tax position is measured as the largest amount that is greater than 50% likely of being realized upon settlement.  The Company adopted FIN 48 on January 1, 2007.  The adoption of FIN 48 did not require any restatement of the Company’s financial statements.

30

Risk Factors Affecting the Company’s Business, Operating Results and Financial Condition 

We are subject to various risks that may materially harm our business, financial condition and results of operations. You should carefully review the risks and uncertainties described below and the other information in this report. If any of these risks or uncertainties actually occurs, our business, financial condition or operating results could be materially harmed. In that case, the trading price of our common stock could decline and you could lose all or part of your investment.
 
We Are in Default Under Substantially All Of Our Notes Payable, Certain Of Which Are Secured By Pledges Of Our Assets

As noted above under Note 3 to our Condensed Consolidated Financial Statements, the Company is currently in default under the terms of substantially all of its notes payable. While the terms of these notes vary, they typically permit the holder thereof to call the entire principal amount, plus accrued interest thereunder, due and payable upon the occurrence of an event of default. Further, certain of these notes are secured by different assets of the Company, including Now Solutions’ assets which secure the Taladin note payable. Notwithstanding the foregoing, it is uncertain at this time what action, if any, will be taken by the holders of these notes in light of these defaults. While the Company is attempting to cure these defaults, it can offer no assurances that such attempts will be successful. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

We Have Historically Incurred Losses And May Continue To Do So In The Future

We have historically incurred losses. In the nine months ended September 30, 2007 and the year ended December 31, 2006, the Company had net losses applicable to common shareholders of $1,836,988 and $2,328,709, respectively. Future losses are likely to occur. Accordingly, we have and may continue to experience significant liquidity and cash flow problems because our operations are not profitable. No assurances can be given that we will be successful in reaching or maintaining profitable operations.

We Have Been Subject To A Going Concern Opinion From Our Independent Auditors, Which Means That We May Not Be Able To Continue Operations Unless We Obtain Additional Funding

The report of our independent registered public accounting firm included an explanatory paragraph in connection with our financial statements for the year ended December 31, 2006. This paragraph states that our recurring operating losses, negative working capital and accumulated deficit, the substantial funds used in our operations and the need to raise additional funds to accomplish our objectives raise substantial doubt about our ability to continue as a going concern. Our ability to develop our business plan and to continue as a going concern depends upon our ability to raise capital and to achieve improved operating results. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The Company’s Ability To Continue As A Going Concern Is Dependent On Its Ability To Raise Additional Funds And To Establish Profitable Operations.

The accompanying condensed consolidated financial statements for the three and nine months ended September 30, 2007 and 2006 have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

The carrying amounts of assets and liabilities presented in the financial statements do not purport to represent realizable or settlement values. The Company has suffered significant recurring operating losses, used substantial funds in its operations, and needs to raise additional funds to accomplish its objectives. Negative stockholders’ equity at September 30, 2007 was approximately $19 million. Additionally, at September 30, 2007, the Company had negative working capital of approximately $12.4 million (although it includes deferred revenue of approximately $2.1 million) and has defaulted on several of its debt obligations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
 
31

 
Management of the Company is continuing its efforts to attempt to secure funds through equity and/or debt instruments for its operations, expansion and possible acquisitions, mergers, joint ventures, and/or other business combinations. The Company will require additional funds for its operations and to pay down its liabilities, as well as finance its expansion plans consistent with the Company’s anticipated changes in operations and infrastructure. However, there can be no assurance that the Company will be able to secure additional funds and that if such funds are available, whether the terms or conditions would be acceptable to the Company and whether the Company will be able to turn into a profitable position and generate positive operating cash flow. The condensed consolidated financial statements contain no adjustment for the outcome of this uncertainty.

Our Success Depends On Our Ability To Generate Sufficient Revenues To Pay For The Expenses Of Our Operations
 
We believe that our success will depend upon our ability to generate revenues from our SiteFlash™ and Emily® technology products and other products we have marketing rights to, as well as increased revenues from NOW Solutions products, none of which can be assured. Our ability to generate revenues is subject to substantial uncertainty and our inability to generate sufficient revenues to support our operations and debt repayment could require us to curtail or suspend operations. Such an event would likely result in a decline in our stock price.

Our Success Depends On Our Ability To Obtain Additional Capital
 
The Company has funding that is expected to be sufficient to fund its present operations for three months. The Company, however, will need significant additional funding in order to complete its business plan objectives. Accordingly, the Company will have to rely upon additional external financing sources to meet its cash requirements. Management will continue to seek additional funding in the form of equity or debt to meet its cash requirements. The Company does not have any common stock available to issue to raise money. However, there is no guarantee the Company will raise sufficient capital to execute its business plan. In the event that the Company is unable to raise sufficient capital, the Company’s business plan will have to be substantially modified and operations curtailed or ceased.

We Have A Working Capital Deficit, Which Means That Our Current Assets On September 30, 2007 Were Not Sufficient To Satisfy Our Current Liabilities On That Date
 
We had a working capital deficit of approximately $12.4 million at September 30, 2007, which means that our current liabilities exceeded our current assets by approximately $12.4 million (although it includes deferred revenue of approximately $2.1 million). Current assets are assets that are expected to be converted into cash within one year and, therefore, may be used to pay current liabilities as they become due. Our working capital deficit means that our current assets on September 30, 2007 were not sufficient to satisfy all of our current liabilities on that date.
 
Our Operating Results May Fluctuate Because Of A Number Of Factors, Many Of Which Are Outside Of Our Control
 
Our operating results may fluctuate significantly as a result of variety of factors, many of which are outside of our control. These factors include, among others:
 
·
the demand for our SiteFlash™ and Emily® technology;
 
·
the demands for Now Solutions’ emPath® product;
 
·
the level of usage of the Internet;
 
·
the level of user traffic on our Websites;
 
·
seasonal trends and budgeting cycles in sponsorship;
 
·
incurrence of costs relating to the development, operation and expansion of our Internet operations;
 
·
introduction of new products and services by us and our competitors;
 
·
costs incurred with respect to acquisitions;
 
·
price competition or pricing changes in the industry;
 
·
technical difficulties or system failures; and
 
·
general economic conditions and economic conditions specific to the Internet and Internet media.
 
32
 
We May Have Difficulty Managing Our Growth And Integrating Recently Acquired Companies
 
Our recent growth has placed a significant strain on our managerial, operational, and financial resources. To manage our growth, we must continue to implement and improve our operational and financial systems and to expand, train, and manage our employee base. Any inability to manage growth effectively could have a material adverse effect on our business, operating results, and financial condition. Acquisition transactions are accompanied by a number of risks, including:
 
 
·
the difficulty of assimilating the operations and personnel of the acquired companies;
 
·
the potential disruption of our ongoing business and distraction of management;
 
·
the difficulty of incorporating acquired technology or content and rights into our products and media properties;
 
·
the correct assessment of the relative percentages of in-process research and development expense which needs to be immediately written-off as compared to the amount which must be amortized over the appropriate life of the asset;
 
·
the failure to successfully develop an acquired in-process technology resulting in the impairment of amounts currently capitalized as intangible assets;
 
·
unanticipated expenses related to technology integration;
 
·
the maintenance of uniform standards, controls, procedures and policies;
 
·
the impairment of relationships with employees and customers as a result of any integration of new management personnel; and
 
·
the potential unknown liabilities associated with acquired businesses.
 
We may not be successful in addressing these risks or any other problems encountered in connection with these acquisitions. Our failure to address these risks could negatively affect our business operations through lost opportunities, revenues or profits, any of which would likely result in a lower stock price.
 
Our Success Depends On Our Ability To Protect Our Proprietary Technology
 
Our success is dependent, in part, upon our ability to protect and leverage the value of our original SiteFlash™ and Emily® technology products and Internet content, as well as our trade secrets, trade names, trademarks, service marks, domain names and other proprietary rights we either currently have or may have in the future. Given the uncertain application of existing trademark laws to the Internet and copyright laws to software development, there can be no assurance that existing laws will provide adequate protection for our technologies, sites or domain names. Policing unauthorized use of our technologies, content and other intellectual property rights entails significant expenses and could otherwise be difficult or impossible to do given the global nature of the Internet and our potential markets.
 
Our Stock Price Has Historically Been Volatile, Which May Make It More Difficult For Shareholders To Resell Their Shares When They Choose To At Prices They Find Attractive
 
The trading price of our common stock has been and may continue to be subject to wide fluctuations. The stock price may fluctuate in response to a number of events and factors, such as quarterly variations in operating results, announcements of technological innovations or new products and media properties by us or our competitors, changes in financial estimates and recommendations by securities analysts, the operating and stock price performance of other companies that investors may deem comparable, and news reports relating to trends in our markets. In addition, the stock market in general, and the market prices for Internet-related and technology-related companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance.
 
Our Common Stock Is Deemed To Be “Penny Stock,” Which May Make It More Difficult For Investors To Sell Their Shares Due To Suitability Requirements
 
Our common stock is deemed to be “penny stock” as that term is defined in Rule 3a51-1 promulgated under the Exchange Act. Penny stocks are stock:
 
33
 
·
 With a price of less than $5.00 per share;
 
·
 That are not traded on a “recognized” national exchange;
 
·
 Whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ listed stock must still have a price of not less than $5.00 per share); or
 
·
 In issuers with net tangible assets less than $2.0 million (if the issuer has been in continuous operation for at least three years) or $5.0 million (if in continuous operation for less than three years), or with average revenues of less than $6.0 million for the last three years.
 
Broker/dealers dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Moreover, broker/dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. These requirements may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline.

The Company Will Likely Experience Losses For the Foreseeable Future
 
Our lack of an extensive operating history makes prediction of future operating results difficult. We believe that a comparison of our quarterly results is not meaningful. As a result, you should not rely on the results for any period as an indication of our future performance. Accordingly, there can be no assurance that we will generate significant revenues or that we will attain a level of profitability in the future. We currently intend to expand and improve our Internet operations, fund increased advertising and marketing efforts, expand and improve our Internet user support capabilities and develop new Internet technologies, products and services. As a result, we may experience significant losses on a quarterly and annual basis.
 
Item 3. Controls and Procedures
 
(A) 
 
Evaluation Of Disclosure Controls And Procedures
 
The Company’s Principal Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Report, have concluded that as of such date, the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company that is required to be disclosed by the Company in Reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and accumulated and communicated to the Company’s management, including its Principal Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
 
(B)
 
  Changes In Internal Controls Over Financial Reporting
 
In March 2007, the Company hired David Braun as the Chief Financial Officer of the Company and NOW Solutions. Ms. Pantermuehl, the former Chief Financial Officer of the Company and NOW Solutions, has and will continue to provide accounting services to the Company and NOW Solutions, on a part-time basis, in exchange for remuneration.
 
In connection with the evaluation of the Company’s internal controls during the Company’s last fiscal quarter, the Company’s Chief Executive Officer and Chief Financial Officer have determined that there are no changes to the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially effect, the Company’s internal controls over financial reporting.
 

34

 
PART II
 
OTHER INFORMATION
 
Item 1. Legal Proceedings
 
The Company is involved in the following ongoing legal matters:
 
In February 2003, the Company filed a lawsuit and a derivative action in New York Supreme Court Case against defendants Ross, Arglen, Tinley, and Gyselen.  The Company filed a derivative action on behalf of its subsidiary NOW Solutions when Arglen refused to authorize a lawsuit against any parties who were alleged to have acted against the best interest of NOW Solutions.  In conjunction with the Company’s claim, NOW Solutions withheld its payments on the remaining $750,000 note that was due in February 2003 in connection with the acquisition of certain assets of Ross against the unpaid maintenance fees and gave notice in February 2003 to Ross of NOW Solutions’ claim of offset.  NOW Solutions claimed a total amount of approximately $3,562,000 to offset against the note, plus other damages.  The Company’s original claims sought damages and equitable relief arising out of actions of the defendants constituting breach of contract, fraud, conspiracy and breach of fiduciary duty in connection with certain transactions entered into between Ross and NOW Solutions; Ross and Arglen; Arglen and NOW Solutions; Gyselen and NOW Solutions; and the Company and Arglen. This action concerns claims of breach of contract and indemnification for failure to pay adjustments at the closing on the sale of assets of Ross to NOW Solutions for prepaid maintenance fees and for related relief. In November 2003, the New York Supreme Court dismissed the claims against Ross and Tinley. The portion of the lawsuit involving Arglen and Gyselen was settled in December 2003 and, pursuant to the settlement, dismissed in February 2004.   The Company appealed the decision with regard to its claim for breach of contract for Ross’ failure to give the proper maintenance fee adjustment and related claims for offset and attorney’s fees.  On June 1, 2004, the appeal of the dismissal of the action against Ross was submitted to the court for decision.  On appeal, the claims against Ross were reinstated pursuant to the order of the Appellate Division, dated October 26, 2004. In November 2004, Ross filed an answer containing affirmative defenses in the Derivative Action. For information concerning the decision regarding this action and the trial regarding the action between NOW Solutions and Ross, please see Ross’ action against NOW Solutions below.

In March 2003, Ross commenced an action in New York Supreme Court, Westchester County, by filing a motion for summary judgment in lieu of complaint against NOW Solutions to collect the note payable in the amount of $750,000 plus 10% interest.  In August 2003, the New York Supreme Court denied the motion and dismissed Ross’ action without prejudice.  In October 2003, the motion of Ross for re-argument was denied.  Ross appealed the August 2003 court order, but subsequently abandoned its appeal.   The time for Ross to appeal has run. Consequently, no further action will be had on this matter.

In December 2003, the Company settled its arbitration and litigation with Arglen, a minority partner of NOW Solutions, pursuant to the 2003 Settlement which pertains to issues related to NOW Solutions.  The 2003 Settlement resolved various allegations by the Company and Arglen concerning violations of NOW Solutions’ Operating Agreement.  The arbitration has been dismissed and any actions with respect to Arglen and Gary Gyselen and the Company and its related parties, including NOW Solutions, were also dismissed, except that the California Superior Court, Los Angeles County retained jurisdiction regarding the terms of the settlement between the parties.  In February 2004, the Company completed the settlement with Arglen. Pursuant to the terms of the settlement, the Company purchased Arglen’s interest in NOW Solutions for $1.4 million as follows: (a) $800,000, which was paid at the closing and (b) $600,000, pursuant to a non-interest bearing secured promissory note providing for payments of $200,000 in April 2004, $100,000 in June 2004, and $300,000 in September 2004, which was issued at closing. When the Company did not make the April 2004 payment, the Company began accruing interest at the rate of 10% from the inception of the note. In addition, at closing, the Company cancelled 80,763,943 warrants held by Arglen and issued to Arglen 20,000,000 unregistered shares of the common stock of the Company (at a fair market value of $280,000), which is subject to a lock-up agreement. The Company’s purchase of Arglen’s interest resulted in the Company recognizing $1,680,000 of goodwill, which was written-off in 2004. In December 2004, the Company recorded the expense of issuing 5,000,000 unregistered shares to Arglen at a fair market value of $82,273, which was based on an average share price during 11 days of August 2004. These shares were issued pursuant to the settlement agreement with Arglen whereby the Company was obligated to issue 5,000,000 unregistered shares of common stock of the Company to Arglen, due to its failure to file a registration statement on Form SB-2 within 180 days from the closing date of the settlement in February 2004. In March 2005, the Company issued these 5,000,000 shares to Arglen. The note is in default. In August 2004, Arglen obtained a default judgment in Los Angeles court for the outstanding principal, plus attorney’s fees and interest at the rate of 10% per annum. In April 2005, Arglen filed a Notice of Filing a Foreign Judgment in Tarrant County, Texas. In August 2005, the Company entered into a Payout Agreement with Arglen allowing payout terms to the Company and pursuant to which the Company agreed to enter into the Agreed Judgment. The Agreed Judgment and Payout Agreement were entered into concerning a California judgment and Arglen's notice of Filing a Foreign Judgment in Tarrant County, Texas, which were in connection with the 2003 Settlement. Pursuant to the terms of the Agreed Judgment and the Payout Agreement, the Company agreed to pay Arglen a total of $713,489, which includes the following amounts: (a) $600,000 in principal on the promissory note issued by the Company pursuant to the 2003 Settlement, (b) the accrued post-judgment interest on the California judgment from September 4, 2004 through September 15, 2005, at the rate of 10% per annum, which equals $61,989, and (c) attorney's fees incurred for the California and Texas judgment actions which were approximately $51,500. Pursuant to the terms of the Payout Agreement, the Company began making monthly interest payments on the amounts specified above of $5,945, beginning on September 15, 2005, which will be replaced by monthly payments of $25,000 or 10% of the Company's new sales, whichever is greater, beginning on February 15, 2006 until the remainder of the $713,489 is paid. In accordance with the Payout Agreement, Arglen shall not execute the Agreed Judgment so long as the Company continues to make its payments as agreed. 
 
35

 
In March 2004, Ross commenced an action in the New York Supreme Court by filing a motion for summary judgment in lieu of complaint against NOW Solutions to collect the note payable in the amount of $750,000 plus 10% interest and attorneys fees.  NOW Solutions filed its opposition to Ross’ motion, which was submitted to the court for decision on May 20, 2004.  NOW Solutions opposed the Ross motion and, on October 7, 2004, the Court ruled in favor of NOW Solutions and denied the motion for summary judgment. Pursuant to New York State law, in the event a motion for summary judgment in lieu of complaint is denied, the action continues and the pleadings supporting the motion are deemed to constitute the complaint. Accordingly, NOW Solutions filed an answer containing affirmative defenses and nine (9) counterclaims against Ross. The affirmative defenses asserted by NOW Solutions include the same grounds which comprise the causes of action against Ross in the Derivative Action, namely Ross’ breach of the Asset Purchase Agreement as a result of its failure to credit NOW Solutions with adjustments at closing in an amount not less than $3,562,201. All of the counterclaims asserted by NOW Solutions against Ross relate to the Asset Purchase Agreement and Ross’ breaches thereof. The counterclaims include: (i) breach of the covenant not to compete, whereby NOW Solutions seeks damages in excess of $10,000,000; (ii) breach of the covenant to deliver all assets to NOW Solutions at closing, whereby NOW Solutions seeks damages in an amount not less than $300,000; (iii) breach of a certain Transitional Services Agreement (executed in conjunction with the Asset Purchase Agreement), whereby NOW Solutions seeks damages in an amount not less than $73,129; and (iv) reasonable attorney’s fees. In December 2004, Ross filed a motion to dismiss two of NOW Solutions’ nine counterclaims: one which alleges that Ross and CDC Corporation used Ross to breach a covenant not to compete and the second which requested that Ross be enjoined from further competition with NOW Solutions in violation of the covenant. In February 2005, Ross’ motion was granted. Thereafter, NOW Solutions filed a motion to vacate the default, which motion was denied over the objections of NOW Solutions. NOW Solutions has filed a notice of appeal of this decision. NOW Solutions’ remaining counterclaims remain unaffected. In May 2006, NOW Solutions filed a motion for summary judgment in the derivative action in favor of NOW Solutions and against Ross on the second, fifth, sixth, and seventh causes of action seeking damages in excess $4,137,788 plus attorney’s fees. In addition, NOW Solutions’ motion for summary judgment seeks to dismiss the first through thirteenth affirmative defenses of Ross. In May 2006, Ross filed a motion for summary judgment seeking to dismiss all claims of NOW Solutions in the derivative action. At that time Ross also filed a motion for summary judgment in the action of Ross v. NOW Solutions, Inc., seeking to dismiss certain counterclaims of NOW Solutions therein. In July 2006, the court held a hearing on all three summary judgment motions. The court rendered decisions on the motions on November 30, 2006. The court dismissed NOW Solutions’ sixth and seventh counterclaims in the NOW Solutions action, dismissed Ross’ affirmative defenses numbered first, second, fourth, and seventh through thirteenth in the Vertical action, and denied all other requests for relief. Trial commenced on both actions on March 20, 2007. On April 13, 2007, the court rendered decisions in both actions as follows: (1) In the action of Ross Systems, Inc. v. NOW Solutions, Inc. a directed verdict was granted (a) to Ross Systems on its claim for payment of the promissory note, net of certain offsets that the court found due to NOW Solutions on its first, second and fifth counterclaims, other than for the amount claimed due by NOW for maintenance fee adjustments due at the closing of the sale transaction between the parties, in the amount of $664,000; (b) to NOW Solutions on its first counterclaim for maintenance fee adjustments in the amount of $1,943,482; accordingly, NOW Solutions was awarded the net amount of $1,279,482 ($1,943,482-$664,000), plus statutory (simple) interest at 9% per annum from the date the claim accrued; and (c) to Ross Systems dismissing NOW’s fourth counterclaim against Ross for failure to deliver certain assets at closing. (2) In the action of Vertical Computer Systems, Inc. v. Ross Systems, Inc., et. al., the court dismissed Vertical’s claim on behalf of NOW Solutions for maintenance fee adjustments, as moot in light of its directed verdict on this issue in the Ross Systems v. NOW Solutions action, and dismissed Ross’ defenses to the Vertical action and Ross’ claim for attorney fees therein. In the action of Ross Systems, Inc. v. NOW Solutions, Inc., NOW Solutions and Ross each filed motions for attorney's fees with the court in August 2007. In September 2007, the court awarded Now Solutions a judgment in the amount of $3,151,216, which consisted of $1,279,483 for Now Solutions’ claims (after deducting $664,000 for Ross’ claim), $912,464 in attorneys’ fees and expenses, and $865,361 of accrued interest. Now Solutions is currently seeking to collect the amounts due under the judgment. The judgment was entered on October 11, 2007.
 
36

 
In March 2004, Ross commenced an action in the Court of Chancery, State of Delaware by filing a summons and complaint against the Company, NOW Solutions and Arglen alleging a fraudulent transfer in connection with the Company’s payment of monies to Arglen pursuant to the settlement dated December 2003.  The Company and NOW Solutions have filed a motion to stay the Delaware action pending the resolution of the parties’ rights in Supreme Court, New York County and Appellate Division. Specifically, Ross seeks a judgment against the Company: (i) attaching the assets transferred to Arglen pursuant to the Settlement Agreement; (ii) enjoining the Company and NOW Solutions from making further transfers to Arglen pursuant to the Arglen Note; (iii) avoiding the transfers to the Company and Arglen or for judgment in the amount equivalent to the value of the asserts transferred to them pursuant to the Settlement Agreement; and (iv) appointing a receiver to take possession of the assets transferred to the Company and Arglen pursuant to the Settlement Agreement. In July 2004, the Company and NOW Solutions filed a motion to stay the Delaware Action pending the resolution of the parties’ rights in the Derivative Action and Ross Action. In October 2004, the motion was granted and the Delaware action has been stayed. This action is subject to dismissal; however, this action may be further stayed if Ross appeals the above decision and posts bond for the appeal.

In January 2005, PMM filed a lawsuit in Los Angeles Superior Court to collect the outstanding balance of $23,974 due under the promissory note issued to them by the Company and for failure to pay fees for professional services in the amount of $89,930 rendered to the Company, plus interest. In March 2005, the Company filed a demurrer. In April 2005, the Company answered the complaint, asserting various legal defenses. In October 2005, the parties entered into a settlement agreement. Pursuant to the terms of the settlement, the Company issued a promissory note to PMM in the amount of $75,000 with a maturity date of January 31, 2008, bearing interest at a rate of 6% per annum, which shall be paid in equal monthly installments of $ 3,125, beginning February 1, 2006 for a period of 24 months. In connection with the settlement, the lawsuit was dismissed. The note is currently delinquent. Bill Mills is a Director of the Company and a partner of PMM. PMM is the successor entity to Parker Mills & Patel, LLP.

The IRS has a claim for unpaid Employment (Form 941) taxes and Federal Unemployment (Form 940) taxes for the period December 31, 2001 through December 31, 2005. As of August 27, 2006 the total tax, penalties and interest due was $313,839. In that matter, the Company appealed from a Notice of Intent to Levy served to collect this tax and on February 8, 2007, following a Due Process Hearing, the IRS determined that its decision to seek collection of the tax by levy was proper. On March 9, 2007, the Company filed an appeal of the IRS’s determination to the United States Tax Court. The Company hopes that the Court will hold that the IRS’s refusal to consider an Installment Agreement to pay the liability over several years was erroneous. There is no guarantee, however, that the Court will not sustain the IRS determination and will allow it to collect the tax, penalties and interest by levy.

On April 18, 2007, the Company filed suit for patent infringement against Microsoft Corp. in the United States District Court for the Eastern District of Texas. The Company claims that the Microsoft .Net System infringes U.S. Patent No. 6,826,744. On July 13, 2007, Microsoft filed an answer to the Company’s complaint, alleging various defenses and counterclaims. On August 2, 2007, the Company filed a reply to Microsoft’s defenses and counterclaims. The court has set trial for March 2009.

In the opinion of management, the ultimate resolution of any pending matters may have a significant effect on the financial position, operations or cash flows of the Company. Also, the Company in the future may become involved in other legal actions that may have a significant effect on the financial position, operations or cash flows of the Company.
 
Item 2. Unregistered Sales of Equity Securities And Use Of Proceeds
 
In March 2007, MRC and Victor Weber entered into a pledge agreement, whereby the MRC pledged 10,000,000 shares of common stock of the Company to secure the principal payments and interest payments on the $300,000 Note and interest payments on the $200,000 Note. MRC is a corporation controlled by the W5 Family Trust. Mr. Wade, the President and CEO of the Company, is the trustee of the W5 Family Trust. Mr. Weber is the President and a Director of Government Internet Systems, Inc., a subsidiary of the Company, and a member of CWI.
 
37

 
In April 2007, Luiz Valdetaro, on behalf of the Company, transferred 2,000,000 unrestricted shares of common stock of the Company owned by Mr. Valdetaro to an officer of Tara Financial in exchange for waiving the defaults and extending the payment terms on notes payable in the amounts of $438,795, $350,560, $955,103 and $450,000 issued to Tara Financial by the Company, NOW Solutions, and Taladin in February 2006. Mr. Valdetaro is the Chief Technology Officer of the Company. Also in April 2007, in connection with the transfer, the Company entered into an indemnity and reimbursement agreement to reimburse Mr. Valdetaro with 2,000,000 shares within one year and pay for all costs associated with the transfer of shares to Tara Financial and the reimbursement of shares to Mr. Valdetaro.

In connection with a $40,000 loan made by CCS to the Company, Mr. Valdetaro, on behalf of the Company, transferred 1,000,000 unrestricted shares of common stock of the Company owned by Mr. Valdetaro to CCS. The Company is also obligated to arrange for a pledge of 1,000,000 shares of common stock of the Company to secure the loan. Mr. Valdetaro is the Chief Technology Officer of the Company. Also in April 2007, in connection with the transfer of shares to CCS, the Company entered into an indemnity and reimbursement agreement to reimburse Mr. Valdetaro with 1,000,000 shares within one year and pay for all costs associated with the transfer of shares to CCS and the reimbursement of shares to Mr. Valdetaro.

In April 2007, the Company and MRC entered into an indemnity and reimbursement agreement for transfer and pledges of shares of common stock of the Company. Pursuant to the agreement, MRC loaned the Company 10,000,000 shares of common stock of the Company in order for the Company to meet current obligations concerning stock the Company has been obligated to issue and deliver. In connection with the loan of shares to the Company, the Company agreed to reimburse MRC with up to 10,000,000 shares of common stock of the Company and pay for all costs associated with such transfer and the reimbursement of shares to MRC within one year. In addition, in the event that any of the shares of common stock of the Company pledged by MRC on behalf of the Company in connection with promissory notes issued by the Company (or its subsidiaries, as applicable) are sold to cover a default under the respective note, the Company agreed to reimburse MRC with a number of shares equal to the number of shares sold to cover the default under the respective note within 1 year, and to reimburse MRC for all costs associated with such sales and the reimbursement of shares to MRC related to such sales.

In April 2007, the Company issued 4,250,000 shares of common stock of the Company in connection with the exercise of warrants and an agreement executed in 2006. All of the foregoing shares were previously accounted for in the 10-KSB Report for the period ended December 31, 2006.

Also in April 2007, the Company issued 200,000 shares of common stock to employees and consultants of NOW Solutions in connection with restricted stock agreements executed in 2006, of which 66,666 shares vested during the three months ended March 31, 2007 and are therefore accounted for in this Report. In addition, the Company issued 2,750,000 unregistered shares of common stock of the Company to employees of the Company and NOW Solutions pursuant to restricted stock agreements executed in 2007, of which no shares have vested. All remaining unvested shares will be accounted for when these shares vest.

During the nine months ended September 30, 2007, warrants to purchase 5,250,001 shares of common stock of the Company at an exercise price of $0.025 to $0.10 per share expired.
 
During the nine months ended September 30, 2007, the Company issued 3,750,000 unregistered shares of common stock of the Company to employees and a consultant of the Company and NOW Solutions pursuant to restricted stock agreements executed in 2007 that provide for the shares to vest up to three years in equal installments at the anniversary date of the agreement.
 
During the nine months ended September 30, 2007, 3,689,292 unregistered shares of common stock of the Company vested. These shares were issued pursuant to restricted stock agreements with employees and consultants of the Company and NOW Solutions executed in 2005, 2006 and 2007.

During the nine months ended September 30, 2007, 184,521 unregistered shares of the common stock of the Company were cancelled. These shares had been issued pursuant to restricted stock agreements with employees of NOW Solutions executed in 2005 and 2006.
 
38

 
For the period from October 1, 2007 to November 15, 2007, warrants to purchase 572,222 shares of common stock of the Company at an exercise price of $0.10 per share expired.

For the period from October 1, 2007 to November 15, 2007, 950,000 unregistered shares of the common stock of the Company vested. These shares were issued pursuant to restricted stock agreements with employees of the Company and Now Solutions executed in 2005.
 
Unless otherwise noted, the offers, sales and issuances of the Company’s unregistered securities set forth above involved no underwriter’s discounts or commissions. In engaging in the transactions described above which involved the Company’s unregistered securities, the Company relied upon the private offering exemption provided under Section 4(2) of the Securities Act of 1933, as amended, in that the transactions involved private offerings of the Company’s unregistered securities, the Company did not make a public offering or sale of its securities, the investors were either accredited or unaccredited but sophisticated, and the investors represented to the Company that they were acquiring the securities for investment purposes and for their own accounts, and not with an eye toward further distribution. With regard to the unaccredited investors, all information required to be delivered to them concerning the Company, including financial statements, was in fact delivered to them.
 
Item 3.    Defaults Under Senior Securities

None.
 
Item 4.    Submission Of Matters To A Vote Of Security Holders
 
None.
 
Item 5.    Other Information
 
None.
 
Item 6.    Exhibits And Reports On Form 8-K 
 
The following documents are filed as part of this report:
 
  (a)   Exhibits
 
Exhibit No.
  
Description
  
Location
         
31.1
  
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 15, 2007
  
Provided herewith
         
31.2
  
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 15, 2007
  
Provided herewith
         
32.1
  
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 15, 2007
  
Provided herewith
         
32.2
  
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 15, 2007
  
Provided herewith
 
 
39
 
 
(b)
Reports on Form 8-K:
 
On March 5, 2007, the Company closed two series of transactions having the effect of amending the sublicense agreement between the Company and its subsidiaries and CWI and obtaining financing from Mr. Weber to secure exclusive rights for the Company and CWI to distribute StatePointPlus® (a software product owned by TrueBaseline) to government agencies and the healthcare industry in the United States and Canada and to all users in Brazil. 
 
In order to obtain the exclusive rights for StatePointPlus®, Mr. Weber made payments of $500,000 to TrueBaseline on behalf of the Company and CWI. In order to maintain the exclusive rights, CWI and the Company must make certain additional payments by July 31, 2008. Thereafter, the Company must make certain average monthly minimum payments to TrueBaseline, which increase on a yearly basis, in order to retain the partial exclusivity rights during the term of the Sublicense Agreement.
 
For the territory of Italy, the Company also obtained the rights to distribute IA to all users in the health care industry and all users in any federal, state and local government agencies or their equivalents in Italy. In addition, the Company acquired from CWI partial exclusivity rights for a security access management software program that functions as an ID verification system. The Company has the exclusive rights to distribute SAM to all users in government agencies and the healthcare and casino industries in the United States and Canada. In order to retain these exclusivity rights for SAM and for IA in Italy, the Company must achieve minimum monthly gross revenues (for SAM and IA in Italy, as applicable), which increase on a yearly basis during the term of the Sublicense Agreement.
 
In connection with the $500,000 payment of fees by Mr. Weber to obtain the partial exclusivity rights for StatePointPlus®, the Company issued an additional note payable in the amount of $300,000 (the “$300,000 Note”) to Mr. Weber. In addition, the payment terms of the $200,000 Note payable (the “$200,000 Note”) issued on October 24, 2006 by the Company to Mr. Weber were extended for an additional 60 days. Both the $200,000 Note and the $300,000 Note may be paid from certain revenues derived from StatePointPlus® by CWI and the Company if and to the extent such funds are available. Accrued interest shall be paid on a monthly basis by the Company, or from revenues derived from StatePointPlus® if such funds are available. To secure the principal payments and interest payments on the $300,000 Note and interest payments on the $200,000 Note, MRC pledged 10,000,000 shares of common stock of the Company. MRC is a corporation controlled by the W5 Family Trust. Mr. Wade, the President and CEO of the Company, is the trustee of the W5 Family Trust. Mr. Weber is the President and a Director of Government Internet Systems, Inc., a subsidiary of the Company, and a member of CWI.

On September 11, 2007, the New York Supreme Court awarded attorney's fees in the amount of $912,464 to Now Solutions (the wholly owned subsidiary of the Company) in the action of Ross Systems, Inc. v. NOW Solutions, Inc. The award was made pursuant to motions for attorneys' fees filed in August 2007 by Now Solutions and Ross Systems, Inc.
 
Now Solutions is in the process of entering the judgment in the total amount of $2,191,946, plus statutory (simple) interest at 9% per annum from the date the claim accrued. (Subsequent to the filing of the foregoing 8-K, the judgment was entered on October 11, 2007).


40


 
SIGNATURES
 
Pursuant to the requirements of the Exchange Act, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date: November 15, 2007
    
     
 
Vertical Computer Systems, Inc.
 
 		  
 		  
 
  By:   /s/ Richard Wade
 
Richard Wade
 
President and Chief Executive Officer
 
     
  By:   /s/ David Braun
 
David Braun
 
Chief Financial Officer
 

41
 EX-31.1 2 v094879_ex31-1.htm
 
EXHIBIT 31.1

OFFICER’S CERTIFICATE
PURSUANT TO SECTION 302

I, Richard Wade, Chief Executive Officer, certify that:
 
1.        I have reviewed this form 10-QSB for the fiscal quarter ended September 30, 2007 of Vertical Computer Systems, Inc.;
 
2.        Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;
 
3.        Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this Report;
 
4.        The small business issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the small business issuer and have:
 
(a)        Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;
 
(b)        Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;
 
(c)        Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and
 
(d)        Disclosed in this Report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and
 
5.        The small business issuer’s other certifying officer(s) and I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s Board of Directors (or persons performing the equivalent functions):
 
(a)        All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and
 
(b)        Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.
 
     
Date:        November 15, 2007
 By:   /s/ Richard Wade
  Name:  
Richard Wade
  Title:   
Chief Executive Officer
 
 EX-31.2 3 v094879_ex31-2.htm
 
EXHIBIT 31.2
 
OFFICER’S CERTIFICATE
PURSUANT TO SECTION 302
 
I, David Braun, certify that:
 
1.        I have reviewed this form 10-QSB for the fiscal quarter ended September 30, 2007 of Vertical Computer Systems, Inc.;
 
2.        Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;
 
3.        Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this Report;
 
4.        The small business issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the small business issuer and have:
 
(a)        Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;
 
(b)        Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;
 
(c)        Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and
 
(d)        Disclosed in this Report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and
 
5.        The small business issuer’s other certifying officer(s) and I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):
 
(a)        All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and
 
(b)        Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.
 
     
Date:        November 15, 2007
 By:   /s/ David Braun
  Name:  
David Braun
  Title:    Chief Financial Officer
 
 EX-32.1 4 v094879_ex32-1.htm
 
EXHIBIT 32.1
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Vertical Computer System, Inc. (the “Company”) on Form 10-QSB for the fiscal quarter ended September 30, 2007 as filed with the United States Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
 
1.        The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
 
2.        The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
 
     
Date:        November 15, 2007
 By:   /s/ Richard Wade
  Name:  
Richard Wade
  Title:   
Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided by Vertical Computer Systems, Inc. and will be retained by Vertical Computer Systems, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
 
 EX-32.2 5 v094879_ex32-2.htm
 
EXHIBIT 32.2
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Vertical Computer System, Inc. (the “Company”) on Form 10-QSB for the fiscal quarter ended September 30, 2007 as filed with the United States Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to her knowledge:
 
1.        The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
 
2.        The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
 
     
Date:        November 15, 2007
 By:   /s/ David Braun
  Name:  
David Braun
  Title:    Chief Financial Officer
 
A signed original of this written statement required by Section 906 has been provided by Vertical Computer Systems, Inc. and will be retained by Vertical Computer Systems, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
 
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