In August of 2009 upon filing articles of merger in Nevada, Galaxy Gaming was merged into Secured Diversified Investment, Ltd.  At the effective date the separate legal existence of Galaxy Gaming ceased and the surviving corporation in the merger (SDI) continued its existence under the laws of the State of Nevada under the name Galaxy Gaming, Inc. (“The Company”)

On January 1, 2007, Galaxy Gaming, LLC (the “LLC”), which was organized as a Nevada limited liability company on September 27, 2000, entered into several agreements with the newly formed Galaxy Gaming.  Pursuant to these agreements, the LLC sold selected assets, such as inventory and fixed assets, to Galaxy Gaming.  On December 31, 2007, Galaxy Gaming acquired, through an asset purchase agreement, the LLC’s remaining intellectual property including patents, patent applications, trademarks, trademark applications, copyrights, know-how and trade secrets related to the casino gaming services including but not limited to games, side bets, inventions and ideas.  Galaxy Gaming also acquired the existing client base from the LLC.

The Company designs, manufactures and markets casino table games and electronic jackpot bonus system platforms played in land-based and cruise ship gaming establishments.  The game concepts and the intellectual property associated with these games are typically protected by patents, trademarks and/or copyrights.  The Company markets its products and licensed intellectual property via its own sales force to casinos throughout North America and to cruise ships worldwide.  Revenues come primarily from recurring royalties received from its clients for the licensing of game content and other fees paid based upon the performance of its electronic platforms.  Additionally, the Company receives revenue as reimbursement from the sale of its associated products.

This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements.  The financial statements and notes are representations of the Company’s management, who are responsible for their integrity and objectivity.  These accounting policies conform to generally accepted accounting principles and have been consistently applied to the preparation of the financial statements.

The accompanying interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Form 10-K filed with the SEC as of and for the period ended December 31, 2009.  In the opinion of management, all adjustments necessary in order for the financial statements to be not misleading have been reflected herein.  The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

The Company considers cash on hand, cash in banks, certificates of deposit, and other short-term securities with maturities of three months or less when purchased, as cash and cash equivalents.

The Company's bank accounts are deposited in insured institutions. The funds are insured up to $250,000. At JuneSeptember 30, 2010 the Company's bank deposits exceeded the insured amounts.  Management believes it has little risk related to the excess deposits.

Certain accounts and financial statement captions in the prior periods have been reclassified to conform to the current period financial statements.

Inventory consists of products designed to enhance table games, such as signs, layouts, bases for the different signs and electronic devices to support our enhanced bonus platforms. The inventory value is determined by the average cost method and management maintains inventory levels based on historical and industry trends. Signs and layouts do not change unless the table game changes.  The Company does not allocate overhead to inventory as such costs are not significant.

The fair value of cash, accounts receivable and accounts payable approximates the carrying amount of these financial instruments due to their short-term nature. The fair value of long-term debt, which approximates its carrying value, is based on current rates at which the Company could borrow funds with similar remaining maturities.

The capital assets are being depreciated over their estimated useful lives using the straight-line method of depreciation for book purposes.

The Company acquired, with an asset purchase agreement from the LLC, the remaining intellectual property including patents, patent applications, trademarks, trademark applications, copyrights, know-how and trade secrets related to the casino gaming services including, but not limited to, games, side bets, inventions and ideas.

These intangible assets have finite lives and are being amortized using the straight-line method over their economic useful lives andof twenty years.  The intangible assets are analyzed for potential impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. These assets were transferred at cost.

The Company purchased back a regional territory from an outside sales representative.  The total value of this agreement was $150,000 and the resulting intangible asset has an infinite life.

The client installation base and intellectual property have finite lives and are being amortized using the straight-line method over theirthe following economic useful lives andlives:

The intangible assets are analyzed for potential impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable.  The territorial license has an infinite life.

Substantially all revenue is recognized when it is earned. Clients are typically invoiced one month in advance for content fees and the advance billings are carried as deferred revenue on the balance sheet.  Additionally, clients may be invoiced at the time of shipment or delivery of product sales and invoiced in arrears for performance-based items.  The monthly recurring invoices are based on executed agreements with each client.  Total revenue from recurring royalties for the licensing of game content, and other fees paid based upon the performance of our electronic platforms and Inter Casino Jackpot network was $1,433,941$2,191,971 and $1,203,952$1,846,342 for the sixnine months ended JuneSeptember 30, 2010 and 2009 respectively.  Revenue from reimbursement from the sale of product was $55,655$ 79,762 and $79,247$219,349 for the sixnine months ended Juneen ded September 30, 2010 and 2009 respectively.

Revenue as reimbursement from the sale of our associated products is recognized when the following criteria are met:

Research and development costs are charged to expense when incurred and are included in the consolidated statements of operations. These costs include salaries, benefits, and other internal costs allocated to software and hardware development efforts, as well as purchased components.

Deferred income taxes are recognized by applying enacted statutory rates, applicable to future years, to temporary differences between the tax bases and financial statement carrying values of the Company’s asset and liabilities.  Valuation allowances are recorded to reduce deferred tax assets to amounts that are more likely than not to be realized.

Basic earnings per share excludes dilution and is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period.  Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Estimates and assumptions have been made in determining the depreciable lives of such assets and the allowance for doubtful accounts receivable. Actual results could differ from those estimates.

The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the Company’s results of operations, financial position or cash flow.

The note receivable at JuneSeptember 30, 2010 and December 31, 2009 was as follows:

The Company acquired, with an asset purchase agreement from the LLC, the note receivable stated above, as part of the purchase of the remaining intellectual property including patents, patent applications, trademarks, trademark applications, copyrights, know-how and trade secrets related to the casino gaming services including but not limited to games, side bets, inventions and ideas. The purchase was financed by a ten year unsecured note with a 6% fixed interest rate.rate, monthly principal and interest payments of $6,598 with the unpaid principal and interest due in February 2017.  Interest income associated with this note receivable was $13,484$19,931 and $14,932$20,691 for the sixnine months ended JuneSeptember 30, 2010 and 2009 respectively. The terms of the note were amended in September 2010 whereby (1) the monthly principal and interest paymen t was reduced to $3,332; (2) the unpaid principal and interest is due August 2015 and (3) the note will be collaterized by a second deed of trust on real property.

Management evaluates collectability on a regular basis and will set up reserves for uncollectible amounts when it has determined that some or all of this receivable may be uncollectible.  At JuneSeptember 30, 2010 management believed that 100% of the notes receivable principal and interest amounts are collectable.

Prepaid expenses consist of the following as of JuneSeptember 30, 2010 and December 31, 2009:

The Company owned property and equipment, recorded at cost, which consisted of the following at JuneSeptember 30, 2010 and December 31, 2009:

Depreciation expense was $7,291$9,420 and $7,873$11,969 for the sixnine months ended JuneSeptember 30, 2010 and 2009, respectively.

The Company recorded accrued expenses and taxes which consisted of the following at September 30, 2010 and December 31, 2009:

The note payable is due to a commercial bank in monthly installments of $9,159 including fixed interest of 7.3%, for ten years, through February 2017, at which time there is a balloon payment of $1,003,230. This liability was assumed with the asset purchase agreement from the LLC.  The note payable financed the purchase of the remaining intellectual property including patents, patent applications, trademarks, trademark applications, copyrights, know-how and trade secrets related to the casino gaming services including but not limited to games, side bets, inventions and ideas. The note agreement remains in the name of the LLC.

During 2009 the Company issued $200,000 of convertible notes payable with an interest rate of 12%.  The holders of the convertible notes chose to convert the notes, including accrued interest, into 1,042,989 shares of the Company’s common stock.  The notes and accrued interest totaling $8,600 were convertible into common stock of the Company at the conversion rate of .20 cents per share.  The holders of the notes were also granted stock purchase warrants allowing the holders to purchase up to an additional 175,000 shares of common stock at the price of $.40 per share.  The warrants expire April 2014. In lieu of cash exercising, the warrant the holders may elect to receive shares equal to the value of the warrant.  The Company recorded interest expense in the amount of $29,966 rela ting to the fair value of the warrants issued during the quarter ended December 31, 2009.

The Company received working capital loans from the LLC, a related party, in 2008 and 2007.  The loans bear 9% interest and are due 90 days after demand.  The terms of the loan call for interest to be accrued on interest if payments are not made.  Interest expense associated with these loans was $18,287 and $30,098 for the nine months ended September 30, 2010 and 2009 respectively.

The Company paid legal fees directly to the law firm retained by its CEO.  The law firm was employed in 2009 and 2010 for the express purpose of defending the Sherron litigation described above.  In 2009, the CEO’s attorneys were successful in vacating the judgment which is the subject of the Sherron litigation.  The Company believes this strategy to vacate the underlying judgment to be a faster, surer and less expensive method to defend the Sherron litigation, than other alternatives available to the Company.  The Company has also agreed to continue to be responsible for these legal fees during any and all appeal processes.  Total fees from this law firm charged to expense were $25,050 for the nine months ended September 30, 2010.  The Company anticipates its legal fees pertaining to the Sherron litigation to increase in subsequent quarters until the matter has reached a final conclusion.

The Company and its CEO have jointly filed actions against Sherron in Nevada for various abuses of process in the litigation and their malicious attempts to improperly enforce a judgment.  This case is likewise stayed pending the final outcome of the Spokane County action.

In the ordinary course of conducting its business, the Company is, from time to time, involved in other litigation, administrative proceedings and regulatory government investigations including but not limited to those in which the Company is a plaintiff.

The Company records an allowance for doubtful accounts based on periodic reviews of accounts receivable.  As of JuneSeptember 30, 2010 and December 31, 2009, the Company had an allowance for doubtful accounts of $38,712$42,561 and $23,935, respectively.

The Company had 65,000,000 shares of $.001 par value common stock and 10,000,000 shares of $.001 par value preferred stock authorized as of JuneSeptember 30, 2010 and December 31, 2009. There were 34,524,75834,974,758 common shares and -0- preferred shares issued and outstanding at JuneSeptember 30, 2010.

During the sixnine months ended JuneSeptember 30, 2010, the Company issued 92,500138,750 stock warrants to a board member. The warrants were valued at the fair market value of the services performed which resulted in an expense of $8,000$12,000 for the sixnine months ended JuneSeptember 30, 2010.  As indicated in Note 15 the Company issued 714,286 warrants in connection with the sale of common stock.stock on April 1, 2010.  The Company has accounted for these warrants as equity instruments in accordance with EITF 00-19 (ASC 815-40), Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, and as such, will be classified in stockholders’ equity as they meet the definition of “…indexed to the issuer’s stock” in EITF 01-06 (ASC 815-40) The Meaning of Indexed to a Company’s Own Stock. The Company has estimated the fair value of the warrants issued in connection with the sale of common stock at $323,128 using the Black-Scholes option pricing model.

Following confirmation of the Plan and the consummation of the Share Exchange, SDI pursued the business plan of Galaxy Gaming.

After the consummation of the Plan and Share Exchange, SDI continued to own a twenty-five percent interest in certain real property in Arizona.  On or about April 17, 2009, SDI transferred this property to a former officer and director, in exchange for the former officer tendering fifty thousand shares of the common stock of SDI for cancellation.

On April 15, 2010 the Company executed an Asset Purchase Agreement (”Agreement”) with T&P Gaming, Inc., and its majority owners (“Sellers”) whereby the Company acquired the client installation base, intellectual

The purchase price of $216,000 was allocated as follows:

The Sellers agreed to finance $126,000 over eighteen months at an interest rate of 6% per annum.  Monthly principal and interest payments of $7,301 are required with the first payment paid upon closing.  Additionally, the Company agreed to transfer to the Sellers $90,000 worth of the Company’s common stock once certain obligations, as defined inat such time the Agreement, areSellers assigned the valid and fully enforceable patent to the Company.  Such assignment was completed byand 450,000 shares of the Sellers.Company’s common stock were issued during the quarter ended September 30, 2010.

The Agreement also has a bonus performance provision, whereby the Company will pay to the Sellers $50 per month, per table over 10 games placed in the United States.  The bonus performance is not due until a game is in its fourth month of live play.  No performance bonuses have been paid during the nine months ended September 30, 2010.

The Company has analyzed its operations subsequent to JuneSeptember 30, 2010 through AugustNovember 9, 2010, the date these financial statements were issued and has determined that it does not have any additional material subsequent events to disclose.

Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.   These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continu e,cont inue,” “will likely result,” and similar expressions.  We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions.  Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  Factors which could have a material adverse affect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.  We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.  Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.

We are engaged in the business of developing proprietary casino table games.  We receive fees in the form of recurring revenues for our content and services we provide to land-based, riverboat and cruise ship casinos in the United States and internationally.  Currently, we have an installed base of our products on over 1,7501,780 gaming tables.  Casinos use our content and services to enhance their gaming floor operations and improve their profitability, productivity and security, as well as offer popular cutting-edge gaming entertainment content and technology to their players.  Our revenues are primarily derived from “Proprietary Table Games”.  We have also developed an advanced table game platforms known as the “Bonus Jackpot System.”   The Bonus J ackpotJackpot System serves as a vehicle to deploy additional Proprietary Table Games and provide us with added revenue streams via performance payments. We are also seeking to increase our revenues through interconnected systems related to gaming operations which we refer to as the Inter Casino Jackpot network.

We develop and deliver proprietary titles that enhance our casino clients’ table game operations.  Our Games are grouped into two product types which include stand-alone proprietary ”Premium Games” as well as proprietary features added to public domain games such as poker, baccarat, pai gow poker and blackjack table games, also known as “Side Bets”.  Casinos use our proprietary table games in lieu of those games in the public domain (e.g. Blackjack, Craps, Roulette, etc.) because of their popularity with players and the increased profitability for casinos.

Our side bets are known as Lucky Ladies, Suited Royals, Super Pairs, Lucky 8 Baccarat, 21 Magic, Bust Bonus, Emperor’s Treasure, Triple Match, Pai Gow Insurance, Bonus Blackjack and Four Card Bonus.

We are proud of the products that we develop and market and believe we can have continued growth and expansion. To that end, we have devised and are implementing the following ongoing strategic plan:

Our products generate additional profit for our clients yet require an insignificant capital expenditure.  Accordingly, we have demonstrated a 18%19% increase in recurring revenues compared to the same quarter last year.  We expect continued growth in our recurring revenues through the development and/or acquisition of new products and game content.  In February 2010 the Company announced the release of a new casino table game called Triple Attack Blackjack(TM).  The game is a variation of the standard game of blackjack, but offers the player new strategic options, while still conforming to basic blackjack fundamentals.

We intend to increase our recurring revenues and market share not only in North America, but throughout all available international markets.  Expanding our distribution network requires that we first seek and obtain registration or licensing in most additional gaming jurisdictions.  In regulated gaming jurisdictions, this is not always a simple task.  Accordingly, our plan is to selectively choose jurisdictional expansion opportunities whereby we believe we can obtain the greatest results compared against the cost and duration of the regulatory approval process.

Competitor’s games such as Caribbean Stud and Let it Ride benefitted from electronic enhancements.  Previously, only our Bonus Blackjack game utilized electronics.  We set out to overcome this disadvantage and initiated the development of our Bonus Jackpot System in 2008.  In March 2009, we installed the first Bonus Jackpot System into a casino.  We receive a fee from casinos based upon the amount of wagers placed by their players via the Bonus Jackpot System.

We expect each of these products to generate additional recurring revenues for us in 2010 and beyond.

We have identified an opportunity to offer gambling promotions and the financing of gambling promotions to our casino clients which in turn they would offer to their customers.  Our planned Inter-Casino Jackpot Network, formerly known as the Manufacturer’s Gambling Promotion, is designed to assist casino operators with the ability to offer increased incentives and promotions, including but not limited to substantial life-altering cash jackpots, which in turn, can potentially attract additional customers to their establishment.  Competition among casinos is intense and although many casino operators can (and do) provide numerous promotions, most are either financially restrained from offering larger, more lucrative prizes and promotions or concerned about the effect the award of a large prize can have on the casinoR 17;casino& #8217;s bottom line for the reporting period.

We intend to collect a fee from the casino based upon their player’s participation in the gambling promotion.  The purpose of these gambling promotions is to stimulate play thereby increasing the profitability for the casino and for us.  We expect the offering of our gambling promotion plan will commence and add revenues for us in 2010.

On July 1, 2010 the Company commenced its Inter-Casino Jackpot Network program in Washington State as a result of authorization received from the Washington State Gambling Commission in March, 2010.  The program was interrupted on July 29, 2010 when a staff member of the Commission instructed the Company to discontinue this program until an alternate program was submitted and approved.  Subsequently, the Company has submitted two alternative proposals to the Commission for their approval.  Until an alternative is approved, the Company may not operate its program in Washington.  The Company expectsis in continuing discussions with officials of the Washington State Gambling Commission, seeking one of its alternative programs to be approved.  The Company is also seeking to commence this program ini n other jurisdictions.

Although we seek to take advantage of the current high demand of our products and in the process, rapidly expand our recurring revenues, our goal is to maintain profitability and closely guard our cash flow.  Our plan is to monitor and adjust our expenses accordingly in order to meet these important objectives.

Fundamentally, we will focus first and foremost on our company’s financial performance both in terms of revenue growth, profitability and cash flow.  While our successful performance is essential, we launched, in 2009, an Investor Relations / Public Relations campaign to build the Galaxy Gaming brand in the financial community.  Furthermore, we maintain frequent and informative communication with our stakeholders.

We primarily derive our revenue from the licensing of our products and intellectual property.  Consistent with our strategy, we generate revenue from negotiated recurring licensing fees for our table game content and the performance of our electronic table game platform. We also receive a one-time sale or reimbursement of our manufactured equipment.  When we license a table game without electronic enhancements, we generally sell the associated products and negotiate a month-to-month license fee for the game content.  When we license a table game with electronic enhancements, such as our Bonus Jackpot System, we generally sell the associated products, negotiate a month-to-month license fee for the game content, and collect an additional recurring fee associated with the performance of our system such as a feef ee per each wager placed.

 

Additional funding may be necessary to facilitate our current aggressive growth plans and acquisition strategy, as well as the investments in our infrastructure.  If we determine that additional funding is required and we are unsuccessful in raising capital, we will still pursue acquisitions and growth, however, our acquisition opportunities could be limited and our growth strategy could be negatively impacted.

We do not have plans to purchase significant physical plant or equipment during the next twelve months.  As we continue to grow and expand our business, we will evaluate the necessary increases to our employee base over the course of the next year.

For the three months ended JuneSeptember 30, 2010 our continuing operations generated gross revenues of $735,569, an increase of 9% from$782,137, compared to gross revenues of $674,490$782,493 for the three months ended JuneSeptember 30, 2009.  We experienced increases in our recurring revenue from table game content and fees associated with the performance of our electronic game platform and inter casino jackpot network offset by a decline in sale or reimbursement of our manufactured equipment.   The decrease in our installations of our Bonus Jackpot System resulted in a decrease of costs of ancillary products and assembled components from $91,158 in the prior quarter to $29,731 for the current quarter.  Selling, general and administrative expenses for the quarter were $616,573, compared to 2009 selling, general and administrative expenses of $618 ,908.  We experienced increases in regulatory costs associated with game and product approvals and applying for gaming licenses in new jurisdictions such as Pennsylvania offset by reductions in rent. Research and development expenses for the quarter were $70,624, an increase of 12% over the third quarter 2009 research and development expenses of $62,957.  The increase was primarily due to increased payroll and related benefits. Other expenses decreased from $41,204 in 2009 to $21,707 in 2010 due to decreased interest expense.

For the nine months ended September 30, 2010 our continuing operations generated gross revenues of $2,271,733, an increase of 10% from gross revenues of $2,065,691 for the nine months ended September 30, 2009.  The increase in revenue was driven by increases in our recurring revenue from table game content and fees associated with the performance of our electronic game platform offset by a decline in sale or reimbursement of our manufactured equipment.   The decrease in our installations of our Bonus Jackpot System resulted in a decrease of costcosts of goods soldancillary products and assembled components from $64,440$179,410 in the prior quarternine months to $10,768$88,591 for the current quarter.year.  Selling, general and administrative expenses for the quarternine months were $613,176,$1,924,993, an increase of 3%7% over the second quarter 2009prior year selling, general and administrativeadmini strative expenses of $597,557.   ;The$1,803,489.  The increase was primarily due to increased payroll in sales and finance, and outside servicesincreases in regulatory costs associated with game and product approvals offset by a decrease in legal fees, rent and rent.outside services.  Research and development expenses for the quarternine months were $66,873,$225,404, an increase of 65% over the second quarter 2009 research and development expenses of $40,482.  The increase was primarily due to increased payroll as the result of adding personnel to the department. Other expenses decreased from $26,988 in 2009 to $23,994 in 2010 due to decreased interest expense.

Net loss from continuing operations for the sixnine months ended JuneSeptember 30, 2010 was $78,750,$35,248, compared to a loss from continuing operations of $122,692$154,426 for the sixnine months ended JuneSeptember 30, 2009.  

During the quarter ended June 30, 2009 we experienced a net loss from discontinued operations in the amount of $99,950.  This transaction represented a disposal of a real estate investment related to the former business of Secured Diversified Investment, Ltd. that remained after the confirmation of the Chapter 11 plan of reorganization of SDI.

As of JuneSeptember 30, 2010, we had total current assets of $1,208,953$1,143,223 and total assets in the amount of $2,117,676.$2,080,930. Our total current liabilities as of JuneSeptember 30, 2010 were $966,747.$810,150.  Our working capital increased from a deficit of $22,942 at December 31, 2009 to $242,206$333,073 at JuneSeptember 30, 2010.  The increase in working capital was due to an increase in cash and inventory and a reduction in accounts payable.payable and notes payable-related party..

At JuneSeptember 30, 2010 we do not have any available third-party lines or letters of credit.  Furthermore we do not have any written or oral commitments from officers or shareholders to provide the Company with loans or advances to support our operations or fund potential acquisitions.

Galaxy’s operating activities used $184,700$134,561 in cash for the sixnine months ended JuneSeptember 30, 2010 compared to $190,607$520,967 of cash used for the sixnine months ended JuneSeptember 30, 2009.  The primary components of our negative operating cash flow for the sixnine months ended JuneSeptember 30, 2010 were our net loss of $78,750, increases in inventory of $41,873$78,929 and a decrease in accounts payable of $101,375$114,126 offset by non cash charges consisting of depreciation and amortization expenses, $17,210;$27,512; provision for bad debts, $18,000;$27,000; and share based compensation, $8,000.$12,000.

Cash flows generated by investing activities for the sixnine months ended JuneSeptember 30, 2010 were $5,116,$5,507, consisting of $6,509$36,188 in payments received on a note receivable offset by $12,568 in acquisition of property and equipment, increases in other assets of $14,481 offset by $26,106 in payments received on a note receivable.$18,113.  Cash generated by financing activities during the sixnine months ended JuneSeptember 30, 2010 were $349,647$258,144 consisting of proceeds from the sale of common stock; in the amount of $500,000, payments received on stock subscription receivable totaling $9,330$12,038 offset by $121,124$189,375 in payments on notes payable-related party and $38,559$64,519 in payments on notes payable.

In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis.  The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  Currently, we do not believe that we have any accounting policies that fit this definition.

We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.

A smaller reporting company is not required to provide the information required by this Item.

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2009.  This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and our former Interim Chief Financial Officer, Robert Saucier.  Based upon that evaluation, our Chief Executive Officer and former Interim Chief Financial Officer concluded that, as of September 30, 2009, our disclosure controls and procedures are effective.  There have been no changes in our internal controls over financial reporting during the quarter ended JuneSeptember 30, 2010.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error.  Our disclosure controls and procedures are designed to provide reasonable assurance of achieving our objectives and our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at that reasonable assurance level.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Compan yCom pany have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control.  The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

(See Note 9 of Item 1 Financial Statements regarding current litigation)

A smaller reporting company is not required to provide the information required by this Item.

On April 1, 2010 the Company sold a total of 1,428,572 shares of common stock and 714,286 warrants for total cash proceeds of $500,000.  The offering and sale of the shares was exempt from registration under Rule 506 of Regulation D.  The shares were offered exclusively to accredited and/or sophisticated investors and there was no general solicitation or advertising.