American Security Resources (ARSC) 10-Q 2008 Q3 Quarterly report

United States Securities 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, 2008

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

For the transition period from _______to_________

Commission File Number 000-27419

American Security Resources Corporation

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

Nevada	90-0179050
(State or other jurisdiction of incorporation or organization)	IRS Employer Identification No.

9601 Katy Freeway, Suite 220 Houston, TX 77024	(713) 465-1001
(Address of principal executive offices)	(Issuer's telephone number)

Check whether the issuer (1) filed all reports required to be filed by Section 13 of 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. [ X ] Yes [ ] No

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

Check whether the issuer (1) filed all reports required to be filed by Section 13 of 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. [ X ] Yes [ ] No

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

Large accelerated filer  Accelerated o filer  Non-accelerated filer   Smaller reporting company   X 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date 297,802,813 as of October 31, 2008.

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

 [  ] Yes [ X ] No

FORM 10-Q

TABLE OF CONTENTS

	PAGE
PART I - FINANCIAL INFORMATION	3
Item 1.  Unaudited Financial Statements
Consolidated Balance Sheets  June 30, 2008 And December 31, 2007 (Unaudited)	3
Consolidated Statements Of Operations For The Three And Six Months Ended June 30, 2008  And 2007 And The Period From October 1, 2005 (Re-Entering Of Development Stage)  Through June 30, 2008 (Unaudited)	4
Consolidated Statement Of Stockholders' Deficiency For The Period From January 1, 2005  Through June 30, 2008 (Unaudited)	5
Consolidated Statements Of Cash Flows For The Three And Six Months Ended June 30, 2008  And 2007 And The Period From October 1, 2005 (Re- Entering Of Development Stage)  Through June 30, 2008 (Unaudited)	8
Notes To Consolidated Financial Statements (Unaudited)	10
Item 2. Management's Discussion And Analysis Or Plan Of Operation	22
Results Of Operations	24
Liquidity And Capital Resources	25
Item 3. Quantative And Qualitative Disclosures About Market Risk	25
Item 4T.  Controls And Procedures	25
Part II - Other Information	26
Item 1.Legal Proceedings	26
Item 2.Unregistered Sales Of Equity Securities And Use Of Proceeds	26
Item 3.Defaults Upon Senior Securities	26
Item 4.Submission Of Matters To A Vote Of Security Holders	26
Item 5.Other Information	26
Part III – Exhibits And Certifications
Item 1. Exhibits	27
Signature	28

Item 1 - Financial Statements

CONSOLIDATED BALANCE SHEET

September 30, 2008 and December 31, 2007

	September 30, 2008	December 31, 2007
ASSETS	(Unaudited)	(Audited - Restated)
Current Assets
Cash and cash equivalents	$    28,366	$         12,690
Prepaid expenses	3,890	3,815
Accrued interest receivable	-	4,968
Total Current Assets	32,256	21,473
Equipment , net of depreciation of $113,367 and 68,238 respectively	80,203	93,348
Capital lease, net of accumulated depreciation of $38,589 and $0, respectively	761,411	-
Deferred Financing Cost, net of amortization of $10,801 and $0, respectively	34,198	-
Intangible assets, net of amortization of $75,224 and $20,080, respectively	776,927	832,071
Note receivable	890,000	1,300,000
Total Assets	2,574,995	2,246,892
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
Current Liabilities
Accounts payable	371,629	411,659
Other current liabilities	659,633	1,074,103
Accrued contingent liability		154,875
Stock payable	88,000	-
Notes payable and accrued interest - shareholders	9,277	26,659
Accrual for default on convertible notes	325,000	-
Derivative liability	578,050	-
Convertible debentures, net of discounts of $520,548 and	154,875
$33,675, respectively	379,452	166,325
Total Current Liabilities	2,565,916	1,833,621
	-
Long Term Debt
Contingent liability	1,213,000	1,300,000
Capital lease obligation	830,210	-
	2,043,210	1,300,000
Total Liabilities	4,609,126	3,133,621
	-
Stockholders' Equity (Deficit)
Preferred stock - Series A - 1,000,000 shares authorized; $.001 par value; 1,000,000 shares issued and outstanding	1,000	-
Preferred stock - Series B - 1,000,000 shares authorized; $.001 par value; no shares issued and outstanding	-	-
Common stock - 500,000,000 shares authorized; $.001 par value,286,999,110 and 180,784,809 shares issued and outstanding,  respectively	286,999	180,785
Additional paid in capital	50,034,437	47,856,768
Stock subscription receivable	(8,500)	-
Deficit accumulated during the development stage	(20,239,783)	(16,815,998)
Deficit accumulated from prior operations	(32,108,284)	(32,108,284)
Total Shareholders' Deficit	(2,034,131)	(886,729)
Total Liabilities and Shareholders' Deficit	$   2,574,995	$        2,246,892

The accompanying notes are an integral part of these financial statements 

American Security Resources Corporation

(A Development Stage Enterprise)

CONSOLIDATED STATEMENTS OF OPERATIONS

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

and the period from October 1, 2005 (re-entering of Development Stage)

through September 30, 2008

	Three Months Ended September 30,		Nine Months Ended September 30		Re-entering Development Stage to September 30, 200 8
	2008	2007	2008	2007	(Restated)
General and administrative expenses	$ 669,058	$ 421,756	$ 2,329,907	$ 2,426,498	$ 15,863,488
Depreciation and amortization expenses	34,831	21,806	113,806	44,709	207,618
Research and development expenses	12,077	694,672	553,809	753,379	3,361,644
Operating expenses	715,967	1,138,234	2,997,523	3,224,586	19,432,751
Other income (expense):
Permanent impairment of investment					(225,000)
Gain (loss) and derivative liability	2,004,356		(55,496)		(55,496)
Gain on stock payable	-		60,000		60,000
Gain on license fee	194,273				-
Loss on default of convertible debentures			(325,000)		(325,000)
Other income	250		250		250
Interest expense	(19,489)	(1,132)	(171,589)	(9,688)	(240,827)
Interest income	17,158		65,580		65,580
Net gain (loss)	1,480,580	(1,139,366)	(3,423,779)	(3,234,274)	(20,153,245)
Other comprehensive loss:
Change in unrealized loss on investment available for sale					(86,538)
Comprehensive gain (loss)	$ 1,480,580	$   (1,139,366)	$  (3,423,779)	$   (3,234,274)	$ (20,239,783)
Gain (loss) per share - basic and fully diluted	$ 0.01	$ (0.01)	$   (0.01)	$ (0.03)

AMERICAN SECURITY RESOURCES CORPORATION

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (DEFICIT)

FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 AND THE PERIOD FROM OCTOBER 1, 2005

 (RE-ENTERING OF DEVELOPMENT STAGE) THROUGH SEPTEMBER 30, 2008 (UNAUDITED)

	No. of Shares	Paid-in Capital and Par Value	Accumulated Deficit		Comprehensive Loss
	Shares	Capital	Development Stage	Prior Operations	Other	Total
Balance at 12/31/04	35,319,977	$ 29,741,757	$(29,652,400)	$ -	$ -	$ 89,357
Shares issued for:
Cash	2,000,000	77,000	-	-	-	77,000
director services	2,624,501	248,567	-	-	-	248,567
Services	8,231,288	1,429,304	-	-	-	1,429,304
Warrant expense	-	1,505,897	-	-	-	1,505,897
Compensation	12,000,000	2,040,000	-	-	-	2,040,000
Equity swap investment	1,500,000	225,000				225,000
Net loss	-	-	(5,384,548)	-	-	(5,384,548)
Other comprehensive loss	-	-	-	-	(86,538)	(86,538)
Balance, 12/31/05	61,675,766	35,267,525	(35,036,948)	-	(86,538)	144,039
Reclassification of accumulated deficit	-	-	32,108,284	(32,108,284)	-	-
Shares issued for:
Cash	23,744,250	1,905,990	-	-	-	1,905,990
Director fees	6,698,000	690,885	-	-	-	690,885
Consulting service	14,786,051	1,724,639	-	-	-	1,724,639
Accrued liabilities	633,292	132,539	-	-	-	132,539
Cashless exercise of warrants	1,129,935	-	-	-	-	-
Employee and contractor bonuses	937,500	42,188	-	-	-	42,188
Warrants issued for cash	-	150,000	-	-	-	150,000
Warrants issued for services	-	2,405,847	-	-	-	2,405,847
Modification of Warrants	-	1,127,998	-	-	-	1,127,998
Net loss			(8,599,770)	-	-	(8,599,770)
Other equity items (1)	-	(84,070)			86,538	2,468
Balance, 12/31/06	109,604,794	43,363,541	(11,528,434)	(32,108,284)	-	(273,177)

The accompanying notes are an integral part of these financial statements

AMERICAN SECURITY RESOURCES CORPORATION

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (DEFICIT)

FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 AND THE PERIOD FROM OCTOBER 1, 2005

 (RE-ENTERING OF DEVELOPMENT STAGE) THROUGH SEPTEMBER 30, 2008 (UNAUDITED)

	No. of Shares	Paid-in Capital and Par Value	Accumulated Deficit	Comprehensive Loss
	Shares	Capital	Development Stage	Prior Operations	Other	Total
Balance, 12/31/06	109,604,794	43,363,541	(11,528,434)	(32,108,284)	-	(273,177)
Shares issued for:
Cashless exercise of warrants	76,873	-	-	-	-	-
Warrants issued for cash	46,850,000	1,479,518	-	-	-	1,479,518
O&D fees	2,931,818	126,435	-	-	-	126,435
Consulting service	8,031,407	349,006	-	-	-	349,006
Accrued liabilities	11,289,917	510,151	-	-	-	510,151
Technology  License	2,000,000	82,000	-	-	-	82,000
Warrants issued for services		2,022,243	-	-	-	2,2022,243
Warrants issued for:
Technology License		70,150	-	-	-	70,150
Beneficial conversion feature related to convertible note		34,509	-	-	-	34,509
Net loss	-	-	(5,287,564)	-	-	(5,287,564)
Balance, 12/31/07 (Restated)	180,784,809	$  48,037,553	$  (16,815,998)	$(32,108,284)	$      -	$(886,729)
Less: par value of common stock ($0.01)		$     180,785
Additional paid-in capital		$  47,856,768

(1) Other Equity Items:

$84,070 subtraction from Paid In Capital results from subscription receivable for cash received subsequent to 12/31/06

$86,538 addition to “Other Comprehensive Loss” results from the reclassification of loss on investment from temporary to permanent.

The accompanying notes are an integral part of these financial statements

AMERICAN SECURITY RESOURCES CORPORATION

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (DEFICIT)

FOR THE PERIOD FROM December 31, 2007 TO SEPTEMBER 30, 2008 (UNAUDITED)

	No. of Shares	Paid-in Capital and  Par Value	Accumulated Deficit	Comprehensive Loss
	Shares	Capital	Development Stage	Prior Operations	Total
Balance, 12/31/2007 (Restated)	180,784,809	48,037,553	(16,8115,998)	(32,108,284)	(886,729)
Shares issued for:
Cashful exercise	2,400,000	30,000			30,000
Cashless exercise of warrants	18,584,615		-	-
Warrants exercised for cash	2,000,000	57,000	-	-	57,000
O&D fees	20,589,868	533,716	-	-	533,716
Compensation expense		27,000			27,000
Consulting service	14,655,000	385,885	-	-	385,885
Accrued liabilities	47,984,818	983,945	-	-	983,945
Advances on stock purchases		211,291			211,291
Warrants issued for services		40,249	-	-	40,249
Warrants issued for:
Beneficial conversion feature related to convertible notes		14,797	-	-	14,797
Net loss	-	-	(3,423,779)	-	(3,423,779)
Balance, 9/30/2008	286,999,110	$ 50,321,436	$  (20,239,777)	$(32,108,284)	$(2,026,625)
Less: par value of common stock ($0.001)		(253,156)
Additional paid-in capital		$49,609,670
Less stock subscription agreement					(96,000)
Plus: 1,000,000 Preferred
Shares ($0.001 par value)					1,000
Total Stockholders’ Deficit					$(4,250,290)

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

American Security Resources Corporation

(A Development Stage Enterprise)

Consolidated Statement of Cash Flows For the nine months ended September 30, 2008 and

2007 and for the period from October 1, 2005 (re-entering Development Stage) through September 30, 2008

	Nine Months Ended September 30,		Re-entering Development Stage to September 30, 2008
	2008	2007	(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$     (3,423,779)	$   (3,234,274)	$     (19,563,119)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	110,206	44,709	195,339
Amortization of debt discount and deferred financing cost	58,379	-	58,379
Acretion of capital lease obligation	20,140	-	20,140
Loss on derivatives	55,496	-	55,496
Loss due to default on debentures	325,000	-	325,000
Common stock issued for services	1,630,751	851,547	9,284,365
Discounts on convertible debenture			835
Stock option and warrant expense	40,249	1,186,034	4,526,430
Gain on stock payable	(60,000)		(60,000)
Permanent  impairment of investment available for sale			225,000
Contingent liquidated damages expense			150,000
Changes in operating assets and liabilities
Prepaid expenses	(75)	2,632	(828)
Accounts payable	(40,030)	(34,543)	(10,750)
Accrued liabilities	(362,854)	735,878	185,195
Net cash used in operating activities	(1,646,517)	(448,017)	(4,608,518)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment	(3,327)	(377)	(153,597)
Purchase of technology license	-	(700,000)	(700,000)
Net cash used in investing activities	(3,327)	(700,377)	(853,597)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the sale of common stock	-	1,165,349	1,821,920
Proceeds from convertible debentures	660,000	-	860,000
Proceeds from shareholder loans	(25,000)	5,000	-
Paydown on note receivable	360,000		360,000
Net borrowings/(paydowns) on line of credit	(7,733)	-	37,757
Proceeds from the exercise of warrants	663,253		2,304,771
Proceeds from the sale of warrants	15,000	-	15,000
Net cash provided from financing activities	1,665,520	1,170,349	5,399,448
Net change in cash and cash equivalents	15,676	21,955	(62,667)
Cash and cash equivalents, beginning of period	12,690	6,575	91,033
Cash and cash equivalents, end of period	$        28,366	$          28,530	$         28,366
Disclosure of non-cash accrued expenses:
Stock issued for accrued expenses	544,549		1,266,985
Stock issued for accrued salaries	179,200		179,200
Cashless exercise of warrants	18,585		18,585
Obligation to pay capital leases	800,000		800,000
Supplemental disclosure of non-cash activities
Cash paid for interest and income taxes	25,770		25,770

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

AMERICAN SECURITY RESOURCES CORPORATION

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION & CHANGES IN OR ADDITIONAL ACCOUNTING POLICIES

The accompanying consolidated financial statements of American Security Resources Corporation (“ASRC”, “the Company”, “we” or “us”) have been prepared by ASRC without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in conformity with generally accepted accounting principles have been omitted or condensed pursuant to such rules and regulations. These statements should be read in conjunction with ASRC’s audited consolidated financial statements and notes thereto included in ASRC’s Form 10-KSB for the year ended December 31, 2007, except for restated portions discussed in Note 2 below. In management’s opinion, these interim consolidated financial statements reflect all adjustments (consisting of normal and recurring adjustments) necessary for a fair presentation of the consolidated financial position and results of operations for each of the periods presented. The accompanying unaudited interim financial statements as of and for the nine-months ended September 30, 2008 are not necessarily indicative of the results which can be expected for the entire year.

The consolidated financial statements of ASRC include the accounts of ASRC and its wholly-owned subsidiaries, Hydra Fuel Cell, Inc., American Hydrogen Corporation and American Wind Power Corporation. All significant inter-company transactions have been eliminated.

Certain prior period amounts have been reclassified to conform to current period presentation.

Derivative Financial Instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. Derivative financial instruments are initially measured at their fair value. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. For option-based derivative financial instruments, the Company uses the Black-Scholes model to value the derivative instruments. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

NOTE 2 – RESTATEMENT

In preparing the financial statements for the quarter ended June 30, 2008, the Company determined that it had failed to recognize an agreement dated December 17, 2007 with a distributor for 40,000,000 warrants, that are exercisable at the lower of $0.03 or the lowest closing price at any time prior to the exercise of any or all of the warrants that have a expiration date of December 18, 2008.   As the result of this error, we restated our financial statements (“The Restatement”) and associated disclosures to include the cost associated with the warrants.  The error resulted in the understatement of non-cash expenses and a corresponding understatement of net loss by $719,022, for the year ending December 31, 2007 and for the Period of Re-Entering the Development Stage to December 31, 2007.  The restatement impacted certain line items within cash flows from operations, but had no effect on total cash flows from operations and did not impact cash flows from financing or investing activities.

The restatement also affected Note 9.

The effect of the restatement on specific items in the balance sheet is as follows:

			December 31, 2007
			As Previously Reported	Adjustments	As Restated
STOCKHOLDERS' EQUITY:
	Additional paid-in capital		$     47,137,746	$   719,022	$ 47,856,768
	Retained earnings (deficit)		(16,096,979)	(719,022)	(16,816,001)
		Total Stockholders' Equity	886,732	-	886,732

The effect of the restatement on specific items in the statements of operations is as follows:

		Year ended December 31, 2007
		As Previously
		Reported	Adjustments	As Restated
COSTS AND EXPENSES:
	General and administrative	$    3,457,273	$   719,022	$   4,176,295
LOSS FROM OPERATIONS		(4,568,776)	(719,022)	(5,287,798)
NET LOSS		(4,568,542)	(719,022)	(5,287,564)
COMPREHENSIVE LOSS		(4,568,542)	(719,022)	(5,287,564)

		Re-entering Development Stage to December 31, 2007
		As Previously
		Reported	Adjustments	As Restated
COSTS AND EXPENSES:
	General and administrative	$  12,858,155	$   719,022	$13,577,177
LOSS FROM OPERATIONS		(15,759,802)	(719,022)	(16,478,824)
NET LOSS		(16,054,040)	(719,022)	(16,773,062)
COMPREHENSIVE LOSS		(16,140,578)	(719,022)	(16,859,600)

The effect of the restatement on specific items in the statements of cash flows is as follows:

			Year ended December 31, 2007
			As Previously Reported	Adjustments	As Restated
OPERATING ACTIVITIES:
	Net Loss		$    (4,568,542)	$  (719,022)	$  (5,287,564)
	Adjustments to reconcile net loss to net cash
		Stock options and warrant expense	1,303,221	719,022	2,022,243
Net cash used in operating activities			(1,651,404)	-	(1,651,404)

			Re-entering Development State to December 31, 2007
			As Previously Reported	Adjustments	As Restated
OPERATING ACTIVITIES:
	Net Loss		$ (16,054,040)	$  (719,022)	$  (16,773,062)
	Adjustments to reconcile net loss to net cash
		Stock options and warrant expense	3,760,933	719,022	4,479,955
Net cash used in operating activities			(3,625,000)	-	(3,625,000)

NOTE 3 - GOING CONCERN

As shown in the accompanying consolidated financial statements, ASRC incurred recurring losses from continuing operations of $20,239,783 since re-entering the development stage through September 30, 2008. This condition creates an uncertainty as to ASRC’s ability to continue as a going concern. Management is trying to raise additional capital through sales of common stock either through private placements or public offerings, as well as seeking other sources of funding. There are no assurances that ASRC will be able to achieve a level of revenues adequate to generate sufficient cash flow from operations or obtain the additional financing through private placements or public offerings to support the investment in Hydra’s fuel cell technology. If these funds are not available ASRC may not continue its operations or execute its business plan. The conditions raise substantial doubt about ASRC’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might be necessary should ASRC be unable to continue as a going concern.

NOTE 4 - INTANGIBLE ASSETS

The Company’s intangible asset consists of a license with Ohio University, for Hydrogen technology.

Pursuant to the License Agreement dated as of August 2, 2007 between the Company and Ohio University (the “License Agreement”); the Company has a revocable, exclusive, royalty-bearing, worldwide license in and to technology relating to ammonia fuel cell electrolyzer.

As consideration for the license from Ohio University, the Company agreed to pay $100,000, issued 2,000,000 shares of restricted stock, issued 2,000,000 warrants exercisable for a three year period at $0.041 per share (the closing price on the transaction date) and agreed to provide the University with $600,000 in sponsored research on the patent, all which in the aggregate the Company valued at $852,150.   The Company determined the fair value of the 2,000,000 shares of restricted stock by using the closing price ($.041 per share) of the stock on the Agreement. The warrants were valued at $37,300 using the Black-Scholes model as described in Note 10. Additionally, the Agreement calls for the Company to pay a royalty of 4% of annual sales of manufactured ammonia Electrolyzer units, 8% of net sales of Hydrogen fuel and other products and services based on the Licensed Technology, Company improvements or joint improvements.  The Company shall also pay Ohio University 30% of the upfront fees, milestone fees, royalties and/or other compensation or consideration received by the Company in exchange for the grant of sublicense rights in any portion of the Licensed Technology, Company improvements or joint improvements to persons or entities not party to the License Agreement.  The Company has agreed to pay Ohio University an annual development budget of $25,000 until the annual royalties due Ohio University exceed $25,000.  A failure to comply with any of the above requirements could result in the termination of the License Agreement by Ohio University.

At March 31, 2008, the Company was in default of the agreement due to non payment. Therefore, at March 31, 2008, the Company wrote off the intangible asset and the associated liabilities on all payments to be made after March 31, 2008, resulting in a loss on the license fee of $194,273. On August 12, 2008, the Company paid Ohio University approximately $208,000 to bring current its liability on the license fees and sponsored research payments.  On November 19, 2008, the Company filed amended Forms 10QSB/A reversing the effect of having previously written-off the intangible asset and its associated liabilities and all payments after December 31, 2007 through June 30, 2008.

NOTE 5 – CONVERTIBLE DEBENTURE

At September 30, 2008, the Company had convertible debentures outstanding as follows;

	Outstanding Balance of Convertible Debenture	Unamortized Discount
December 13, 2007 Debenture	$250,000	$39,409
January 17, 2008 Debenture	100,000	69,558
February 28, 2008 Debenture	400,000	366,668
May 16, 2008 Debenture	50,000	44,913
Total Convertible Debentures at September 30, 2008	$800,000	$520,548

Following is a description of each of the convertible debentures listed above;

On December 13, 2007, the Company entered into a Securities Purchase Agreement with an accredited investor for the sale of $1,500,000 in a convertible debenture bearing interest at 7.25% per annum, payable on or before December 12, 2010.

A prospectus relates to the resale of the common stock underlying the convertible debenture.  The terms of the convertible debenture calls for the investor to provide the Company with an aggregate of $1,500,000 as follows;

· $50,000 was disbursed on February 8, 2008

· $200,000 was disbursed on December 13, 2007

· $1,300,000 ($890,000 balance at September 30, 2008) secured promissory note bearing interest at 7.75% per annum, due on demand at any time after February 1, 2011.  The investor is obligated to make monthly periodic prepayments of $250,000 during each month that the promissory is outstanding.  Interest is payable on a monthly basis, commencing January 15, 2008.  The interest rate shall be increased by 0.25 percentage points per each Periodic Prepayment that is not paid by the investor, provided however that in no event shall the interest rate exceed an amount equal to 12.5%.  The September 30, 2008 balance of $890,000 receivable on this note is offset by an equal amount shown at a convertible debenture liability in the liabilities section of the Company’s balance sheet.

Accordingly, at September 30, 2008, we have received a total of $250,000 pursuant to the Securities Purchase Agreement.  Pursuant to the convertible debenture the investor may convert the amount paid towards the Securities Purchase Agreement into common stock of the Company at a conversion price equal to the lesser of (i) $0.25, or (ii) 80% of the average of the 5 lowest volume weighted average prices during the 20 trading days prior to investor’s election to convert (the percentage being a “Discount Multiplier”).  If any portion of the principal or accrued interest on this convertible debenture is not paid within ten (10) days of when it is due, the Discount Multiplier shall decrease by one percentage point (1%) for all conversions of the convertible debenture.  If the investor elects to convert a portion of the convertible debenture and, on the day that the election is made, the volume weighted average price is below $0.01, we shall have the right to prepay that portion of the convertible debenture that investor elected to convert, plus any accrued and unpaid interest, at 150% of such amount.  In the event that we elect to prepay that portion of the convertible debenture, investor shall have the right to withdraw its conversion notice.

We evaluated this agreement pursuant to FASB Statement No. 133 and due to the Company’s option to settle in cash if the weighted average price drops below a certain point and sufficient shares appear available, we determined no embedded derivatives existed and FASB No. 133 did not apply.

In the event that we default on the payment of the convertible debenture, the investor shall have the right to declare the outstanding principal and accrued interest immediately due and payable in cash at a price of 150% of the outstanding principal and accrued interest.

As required by Emerging Issues Task Force Issue 98-05 “Accounting for Convertible Securities with Beneficial Conversion Features”, we valued the beneficial conversion feature related to the $250,000 in outstanding debt at ($34,509 on the first $200,000 advance and $11,897 on the second advance of $50,000) which was treated as a loan discount and was amortized to interest expense using the effective interest method over the life of the note.

The company became in default on the Golden Gate Convertible Debenture when we were unable to timely file the March 31, 2008  quarterly report. One of the requirements in our convertible debenture agreement with Golden Gate was that the Company timely file all reports required to be filed pursuant to Section 12 or 15(d) of the 1934 Securities and Exchange Act. The extended date for filers in our class was May 20, 2008 and we were not filed by this date. As a result, the convertible debenture was callable by the holder at 150% of the unpaid principal balance at March 31, 2008. This resulted in a penalty expense of $125,000 and an accrued liability of the same. This also made this convertible debenture a current liability as it became payable on demand. The company will remain in default until either the company files this report and pays a 1.5% penalty per month on the unpaid balance, or the loan is called by the debenture holder. The Company determined that the penalty should not be given derivative treatment, because in the event the penalty is called by the holder, it is to be paid in cash.  (See Subsequent Event Footnote 13 for forbearance of default by Golden Gate).

On January 17, 2008, the Company entered into a Convertible Debenture Agreement with an accredited investor for a $100,000 convertible debenture bearing interest at 10% per annum, payable on or before November 30, 2008. There were $10,000 in financing costs for this debt issuance. The financing costs were deferred and amortized using the effective interest method. This expense was $3,852 for the period ending June 30, 2008.

Pursuant to the convertible debenture the debenture holder did  not have the right to convert the debenture  until June 1, 2008, at which he has  the right to convert at 80% of the average closing share price of the five (5) trading days prior to conversion.  Prior to the conversion date, the Company reserves the right to pay back the full amount of principal plus any interest due at that time.  In the event that the Company pays the debenture on or before May 31, 2008, a bonus (Conversion Bonus) of share per dollar of principal will be paid to the debenture holder. The Company found that this bonus results in a beneficial conversion feature which was valued at $2,900. This feature was expensed on the date of issuance.

We evaluated this agreement pursuant to FASB Statement No. 133 and due to there being no minimum or fixed conversion price resulting in an indeterminate number of shares to be issued in the future, the Company determined an embedded derivative existed and FASB No. 133 applied.

In accordance with the option allowed in SFAS 155, the Company has elected to value the derivative separately at the fair value on the issuance date using the Black-Scholes valuation model and bifurcate the instrument. The result of the valuation is a derivative liability in the amount of $14,282 and an offsetting discount on debt of $14,282. We estimated the fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term of .2 – 3.4 years; (2) a computed volatility rate of 47.36% to750.34 % (3) a discount rate of 1.37% and (4) zero dividends. The discount is equal to the value of the note issued, as it can only be discounted up to the value of the note and is being amortized over the life of the note using the effective interest method. For the three months ended September 30, 2008, $4,000 was amortized and is included in interest expense. The instrument was re-valued at period end, and the resulting change of $48,557 was included in the statement of operations as a gain on the derivative liability.

On February 28, 2008, the Company entered into a Securities Purchase Agreement with an accredited investor for the sale of $400,000 in a convertible debenture bearing interest at 7.25% per annum, payable on or before February 28, 2012. There were $35,000 in financing costs for this debt issuance. The financing costs were deferred and amortized using the effective interest method. This expense was $1,229 for the period ending September 30, 2008.

Pursuant to the convertible debenture the investor may convert the debenture  into common stock of the Company at a conversion price equal to 80% of the volume weighted average price for three regular trading days selected by the debenture holder from twenty trading days ending on the trading day immediately before the conversion date.

We evaluated this agreement pursuant to FASB Statement No. 133 and due to there being no minimum or fixed conversion price resulting in an indeterminate number of shares to be issued in the future, the Company determined an embedded derivative existed and FASB No. 133 applied.

In accordance with the option allowed in SFAS 155, the Company has elected to value the derivative separately at the fair value on the issuance date using the Black-Scholes valuation model and bifurcate the instrument. The result of the valuation is a derivative liability in the amount of $182,648 and an offsetting loss on derivative of $182,648 and discount on debt of $400,000. We estimated the fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term of .2 to 3.4 years; (2) a computed volatility rate of 47.36% to 750.34 (3) a discount rate of 1.37% and (4) zero dividends. The discount is equal to the value of the note issued, as it can only be discounted up to the value of the note and is being amortized over the life of the note using the effective interest method. For the six months ended September 30, 2008, $33,332 was amortized and is included in interest expense. The loss on derivative is equal to the difference between the discount on debt and the derivative liability. The instrument was re-valued at period end, and the resulting change of $27,276 was included in the statement of operations as a gain on the derivative liability.

The Company evaluated all convertible debt and outstanding warrants to determine whether these instruments may be tainted from the aforementioned derivative. All warrants outstanding were considered tainted as a result of the derivative treatment. The Company valued these warrants using the Black-Scholes valuation model. The result of the valuation is a derivative liability in the amount of $373,200. We estimated the fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term ranging from .2 to 3.4  years; (2) a computed volatility rate ranging from 47.36% to 750.34% (3) a discount rate of 1.37% and (4) zero dividends. The valuation of these warrants was run through the same way as the liability associated with the debt. There were no other instruments found to be tainted by the derivative treatment.

	Derivative Liability September 30, 2008	Gain (Loss) on Derivative Three months ended September 30, 2008
Convertible Note St. George Debenture	$182,648	$213,455
Convertible Note - Balcones	14,282	48,557
Convertible Note – Isabel	8,010	27,276
Warrants Outstanding	2373,200	1,715,068
Derivative Liability	$578,140	$2,004,356

The company became in default on the St. George Convertible Debenture when we were unable to timely file the March 31, 2008 quarterly report. One of the requirements in our convertible debenture agreement with St. George, was that the Company timely file all reports required to be filed pursuant to Section 12 or 15(d) of the 1934 Securities and Exchange Act. The extended date for filers in our class was May 20, 2008 and we were not filed by this date. As a result, the convertible debenture was callable by the holder at 150% of the unpaid principal balance at March 31, 2008. This resulted in a penalty expense of $200,000 and an accrued liability of the same. This also made this convertible debenture a current liability as it became payable on demand. The company will remain in default until either the company files this report and pays a 1.5% penalty per month on the unpaid balance, or the loan is called by the debenture holder. The Company determined that the penalty should not be given derivative treatment, because in the event the penalty is called by the holder, it is to be paid in cash.

On May 16, 2008, the Company entered into a Convertible Debenture Agreement with an accredited investor for a $50,000 convertible debenture bearing interest at 10% per annum, payable on or before May 14, 2009.

Pursuant to the convertible debenture the debenture holder did not have the right to convert the debenture  until June 1, 2008, at which he has  the right to convert at the lower of $0.20 per share or 80% of the average closing share price of the five (5) trading days prior to conversion.  Prior to the conversion date, the Company reserves the right to pay back the full amount of principal plus any interest due at that time. 

We evaluated this agreement pursuant to FASB Statement No. 133 and due to there being no minimum or fixed conversion price resulting in an indeterminate number of shares to be issued in the future, the Company determined an embedded derivative existed and FASB No. 133 applied.

In accordance with the option allowed in SFAS 155, the Company has elected to value the derivative separately at the fair value on the issuance date using the Black-Scholes valuation model and bifurcate the instrument. The result of the valuation is a derivative liability in the amount of $182,648 and an offsetting and discount on debt of $182,648. We estimated the fair value of the derivative using the Black-Scholes valuation method with assumptions including: (1) term of.2 to 3.4 years; (2) a computed volatility rate of 47.36% to 750.34% (3) a discount rate of 1.37% and (4) zero dividends. The discount is equal to the value of the note issued, as it can only be discounted up to the value of the note and is being amortized over the life of the note using the effective interest method. For the nine months ended September 30, 2008, $4,083 was amortized and is included in interest expense. The instrument was re-valued at period end, and the resulting change of $213,455 was included in the statement of operations as a gain on the derivative liability.

NOTE 6 - COMMON STOCK

In June 2008, there were cashless exercises of 20,000,000 warrants resulting in 13,584,615 shares of common stock being issued.

In March 2008, there was a cashless exercise of warrants resulting in 5,000,000 shares of common stock being issued.

During the nine months ended September 30, 2008, ASRC granted options to purchase 4,400,000  shares of its common stock pursuant to a consulting contract with an exercise price equal to 70% of the average closing price of the lowest 8 days of the prior twenty trading days and were exercisable for 90 days. The value of the options was computed using the Black-Scholes pricing model using the following input values and assumption: (1) Stock price: the closing price on the day previous to the grant date; (2) warrant exercise price equal to 70% of the weighted average price of the lowest eight days of the prior twenty trading days; (3) volatility of 47.36% - 750.34%; (4) discount rate of 1.37%; (5) term of .2 to 3.4 years and (6) a zero dividend rate.  The amount of expense recognized during the nine months ended September 30, 2008 in connection with these warrants was $40,249 and is included in general and administrative expenses.  All of these options were exercised, resulting in cash receipts of $72,000.

During the nine months ended September 30, 2008, ASRC issued 14,655,000 common shares to external parties in exchange for consulting and legal services and recorded a total expense of $385,885.  The expense is equal to the fair value of the shares based upon the closing price at the date that either a definitive agreement to issue the shares was reached with external parties or the date the Board authorized their issuance.

During the nine months ended September 30, 2008, ASRC issued 38,278,769 shares of stock in lieu of compensation to consultants for services rendered at Hydra Fuel Cell and American Hydrogen.  These shares were valued at $976,726 based on their market value at the time of issuance, as reflected in these financial statements.

On January 12, 2008, we issued 300,000 shares of our common stock for consulting services.  These shares were valued at $9,000 based on their market value at the time of issuance.

On January 25, 2008, we issued 500,000 shares to our board of directors for services rendered.  These shares were valued at $16,000 based on their market value at the time of issuance.

On March 7, 2008, we issued 8,054,253 shares to our Chairman and Chief Executive Officer, Frank Neukomm as indemnification for his pledging an equal number of shares on the St. George Investments, LLC convertible debenture transaction in February 2008 and also guaranteeing the convertible debenture liability.  These shares were valued at $225,519 based on their market value at the time of issuance.

On March 7, 2008, we issued 4,035,615 shares to our President and Director, Robert Farr as indemnification for his pledging an equal number of shares on the St. George Investments, LLC convertible debenture transaction in February 2008 and also guaranteeing the convertible debenture liability.  These shares were valued at $112,997 based on their market value at the time of issuance.

On March 7, 2008, we issued 500,000 shares of our common stock for consulting services.  These shares were valued at $14,000 based on their market value at the time of issuance.

On March 7, 2008, we issued 5,000,000 shares for a cashless exercise of warrants and valued at par value of $5,000.

On May 20, 2008, we issued 2,000,000 shares to our Chairman and Chief Executive Officer, Frank Neukomm as compensation.  These shares were valued at $56,000 based on their market value at the time of issuance.

On May 20, 2008, we issued 2,000,000 shares to our President and Director, Robert Farr as compensation.  These shares were valued at $56,000 based on their market value at the time of issuance.

On June 2, 2008, we issued 5,000,000 shares for a cashless exercise of warrants and valued them at par value of $5,000.

On June 12, 2008, we issued 18,584,615 shares for a cashless exercise of warrants and valued them at par value of $8,585.

On August 7, 2008, we issued 2,000,000 shares to our Chairman and Chief Executive Officer, Frank Neukomm as compensation.  These shares were valued at $33,600 based on their market value at the time of issuance.

On August 7, 2008, we issued 2,000,000 shares to our President and Director, Robert Farr as compensation.  These shares were valued at $33,600 based on their market value at the time of issuance.

NOTE 7 – PREFERRED STOCK

On February 15, 2008, the board of directors and shareholders representing a majority of the voting rights voted to amend its articles of incorporation to designate its existing authorized 1,000,000 preferred shares, par value $0.001 as Series A Preferred Stock, par value $0.001 and establish a Series B Preferred Stock, 1,000,000 shares authorized, par value $0.001.

On February 15, 2008, the Company’s directors and shareholders representing a majority of the voting rights, voted to amended its articles of incorporation to designate the existing 1,000,000 shares of preferred stock, par value $0.001 to Preferred Series A Super Voting Convertible Preferred with voting rights equal to five hundred (500) to one (1) on matters requiring a vote of the common stock shareholders and further authorized the creation of 1,000,000 shares of Series B Preferred Stock, par value $0.001.

On February 15, 2008, the board of directors and shareholders representing a majority of the voting rights voted to issue Frank Neukomm, CEO, 666,667 shares of Series A Preferred Stock and Robert Farr, President, 333,333 shares of Series A Preferred Stock in return for their encumbering their personal share holdings of approximately 12 million shares and for them  personally guaranteeing a $400,000 convertible debenture agreement with an accredited investor that the Company closed on February 29, 2008, that could possibly reach $2,000,000 if further advances are made to the Company.  These Series A Preferred shares are convertible into common stock on a 1 to 1 basis and entitled to 500 to 1 Super Voting Rights on any issue requiring a shareholder vote.  These Super Voting Rights shall expire with the expiry of the obligations under the convertible debenture or at such time as holder of the Series A Preferred Shares convert to common stock. The shares were valued at market price at the date of issuance and expensed as compensation to executives. The valuation of these shares was $28,000.

There are no Series B Preferred Shares issued and outstanding as of September 30, 2008.

NOTE 8 - STOCK-BASED COMPENSATION

During the nine months ended September 30, 2008, ASRC issued 38,278,769 shares of stock in lieu of compensation to consultants for services rendered at Hydra Fuel Cell and American Hydrogen.  These shares were valued at $976,726 based on their market value at the time of their issuance, as reflected in these financial statements.

On May 20, 2008, ARSC issued a total of 4,000,000 shares to Frank Neukomm, Chairman and Chief Executive Officer, and Robert Farr, President and Director as compensation.  These shares were valued at $112,000 based on their market value at the time of issuance.

During the nine months ended September 30, 2008, ASRC issued 14,655,000 common shares to external parties in exchange for consulting and legal services and recorded a total expense of $385,885.  The expense is equal to the fair value of the shares based upon the closing price at the date that either a definitive agreement to issue the shares was reached with external parties or the date the Board authorized their issuance.

On January 25, 2008 ASRC issued 500,000 shares of our common stock to our Board of Directors as compensation for their service. These shares were valued at $16,000 based on their market value at the time of their issuance.

On March 7, 2008, ARSC issued a total of 12,089,868 shares to Frank Neukomm, Chairman and Chief Executive Officer, and Robert Farr, President and Director, for their guarantee and pledging of an equal number of shares to St. George Investments LLC as a condition of St. George Investments LLC loaning ARSC $400,000 on a convertible debenture.  These shares were valued at $338,516 based on their market value at the time of issuance.

NOTE 9 –WARRANTS AND OPTIONS

During the nine months ended September 30, 2008, ASRC granted options to purchase 4,400,000 shares of our common stock pursuant to a consulting contract with an exercise price equal to 70% of the weighted average price of the lowest eight days of the prior twenty trading days. These options vested immediately and had a term of 90 days. We estimated the fair value of these options using the Black-Scholes method with assumptions including: (1) term of 90 days; (2) a computed volatility rate of 92% to 136%(3) a discount rate of 1.26% to 3.02% and (4) zero dividends. The fair value of these options was estimated to be $40,249 and is included in general and administrative expenses for the nine months ended June 30, 2008.  All of these options were exercised, resulting in cash receipts of $72,000.

Restatement of Warrants and Options

In preparing the financial statements for the quarter ended June 30, 2008, the Company determined that it had failed to recognize an agreement dated December 18, 2007 with a distributor for 40,000,000 warrants, that are exercisable at the lower of $0.03 or the lowest closing price at any time prior to the exercise of any or all of the warrants that have a expiration date of December 18, 2008.   As the result of this error, we restated our financial statements (“The Restatement”) and associated disclosures to include the cost associated with the warrants.  The error resulted in the understatement of non-cash expenses and a corresponding understatement of net loss by $719,022, for the year ending December 31, 2007 and for the Period of Re-Entering the Development Stage to December 31, 2007.  The restatement impacted certain line items within cash flows from operations, but had no effect on total cash flows from operations and did not impact cash flows from financing or investing activities.  This restatement had no impact on the balance sheets, statements of operations or the net decrease in cash and cash equivalents reported in the statements of cash flows for any periods reported prior to October 1, 2007.

Based on the warrant agreement, consulting expense of $719,022 was recorded as general and administrative expense for the valuation of the warrants as of December 31, 2007.

We used the Black-Scholes option-pricing model (“Black-Scholes model”) to value our stock options with the following assumptions:

Volatility	148%
Risk-Fee Interest Rate	3.31%
Dividend Yield	0.00%
Expected Term (years)	1.00

Summary of warrant and option information is as follows:

	Weighted Avg. Exercise Price	Outstanding Beginning of Period	New Grants	Forfeitures and Cancellations	Exercises	Outstanding End of Period
Year ended December 31, 2004	$0.58	-	19,500,000	-	-	19,500,000
2005 Activity:
2005 Grants	$0.30		1,000,000	-	-	1,000,000
2005 Grants	$0.30		5,000,000	-	-	5,000,000
Exercised for cash	$0.04		-	-	2,000,000	(2,000,000)
Cancelled	$0.30		-	4,000,000	-	(4,000,000)
December 31, 2005	$ 0.60	19,500,000	6,000,000	4,000,000	2,000,000	19,500,000
2006 Activity:
Granted pursuant to consulting arrangements	$ 0.08		15,250,000	-	15,250,000	-
Forfeitures and cashless exercise	$ 0.13		-	500,000	1,500,000	(2,000,000)
Options granted to directors	$ 0.19		5,500,000	-	-	5,500,000
Granted pursuant to private placements	$ 0.41		1,119,250	-	-	1,119,250
Granted pursuant to warrant agreement	$ 0.01		50,000,000	-	-	50,000,000
December 31, 2006	$ 0.13	19,500,000	71,869,250	500,000	16,750,000	74,119,250
2007 Activity:
Granted pursuant to warrant agreement	$ 0.03		46,850,000	-	46,850,000	-
Options granted to directors	$ 0.07		3,500,000	-	-	3,500,000
Granted pursuant to private placements	$ 0.15		650,000	-	-	650,000
Cashless exercise of warrants		-	-	-	76,873	(76,873)
Warrants granted for patent	$ 0.04		2,000,000	-	-	2,000,000
Granted pursuant to warrant agreement	$0.03		40,000,000			40,000,000
December 31, 2007 (Restated)	$ 0.0302	74,119,250	93,000,000	-	46,926,873	120,192,377
Cashless adjustment	-	-	-	-	(76,873)	76,873
Warrants exercised	-	-	-	-	44,670,462	(44,670,462)
September 30, 2008	$0.0384	120,192,377	-	-	44,593,589	75,598,788

NOTE 10 - RELATED PARTY TRANSACTIONS

During 2007, ASRC’s Chief Executive Officer and Chief Operating Officer both made loans to the Company of $10,000 each. During the six months ended June 30, 2007, they made additional loans of $5,000 each. These loans pay interest at 6 percent and are due May 12, 2007. ARSC retired these loans plus accrued interest in February 2008.

On January 25, 2008 ASRC issued 500,000 shares of our common stock to our Board of Directors as compensation for their service. These shares were valued at $15,000 based on their market value at the time of their issuance.

On March 7, 2008, ARSC issued a total of 12,089,868 shares to Frank Neukomm, Chairman and Chief Executive Officer, and Robert Farr, President and Director, for their pledging an equal number of shares and guaranteeing a $400,000 convertible debenture note, which can possibly reach a total of $2,000,000 if additional advances are made by the debenture holder.  These shares were valued at $338,516 based on their market value at the time of issuance.

On February 15, 2008, the board of directors and shareholders representing a majority of the voting rights voted to issue Frank Neukomm, CEO, 666,667 shares of Series A Preferred Stock and Robert Farr, President, 333,333 shares of Series A Preferred Stock in return for their encumbering their personal share holdings of approximately 12 million shares and personally guaranteeing a $400,000 convertible debenture agreement that the Company closed on February 29, 2008, which can possibly reach a total of $2,000,000 if additional advances are made by the debenture holder.  These Series A Preferred Shares are convertible into common stock on a 1 to 1 basis and are entitled to 500 to 1 Super Voting Rights on any issue requiring a shareholder vote.  These Super Voting Rights shall expire with the expiry of the obligations under the convertible debenture or at such time as the holders of the Series A Preferred Shares convert to common stock.

On May 20, 2008, ARSC issued a total of 4,000,000 shares to Frank Neukomm, Chairman and Chief Executive Officer, and Robert Farr, President and Director as compensation.  These shares were valued at $112,000 based on their market value at the time of issuance.

NOTE 11 - LEASES

ASRC leased office space under an operating lease during the nine months ended September 30, 2008. The lease agreement provided for monthly rent of $2,365 to be paid through March 31, 2009. Additionally, ASRC’s subsidiary, Hydra Fuel Cell Corporation leases approximately 2,625 square feet in Portland, Oregon for monthly rent of $4,930.

On January 7, 2008, the Company entered into a lease/purchase agreement with Meigs County Community Improvement Corporation of Pomeroy, Ohio on a 10,000 square foot building and approximately 3 acres of property in Tuppers Plains, Ohio.  The Company shall commence monthly payments of $7,050 on February 1, 2009 for the fifteen-year term of the lease.  The Company shall have an option to purchase the building and property during the term of the lease for a sum of $800,000 less the amount of principal that has been paid to date of closing based on a 6% interest rate.

Due to the fact that the term of the lease is greater than 75% of the estimated useful life of the building, the Company is accounting for the lease as a capital lease. The capital lease is valued at $800,000 which is the fair market value of the minimum lease payments and is being amortized over the fifteen year term of the lease. The Company has also imputed interest on the obligation for the three months of the total one year term the Company is not required to make payments. For the nine months ended September 30, 2008, the Company has recorded $29,925 of depreciation expense and $21,665 of imputed interest.

NOTE 12 – COMMITMENTS AND CONTINGENCIES

ASRC is involved in pending litigation for alleged patent infringement by a third party related to its hydrogen fuel cell technology. ASRC affirmatively defends its position that it has not infringed on the third party patent. While the final outcome is not known at this time, management does not believe it will have a material impact on its financial position or results of operations.

In July 2006, ASRC issued warrants to purchase 50,000,000 shares to an investor for cash proceeds of $150,000 in contemplation of negotiating a further financing arrangement that ultimately did not occur. The warrants have a 3-year term and an exercise price of $0.01. ASRC estimated the fair market value of these warrants to be $4,113,000 using a Black-Scholes with key assumptions of (1) expected term of 3 years, (2) calculated volatility of 284.93%, (3) discount rate of 4.3% and (4) zero dividends. Included in the damages, was a potential to refund the $150,000 proceeds received. At the same time, a shareholder pledged 4,000,000 shares of his own stock in ASRC to the investor for collateral. ASRC evaluated these warrants for liability treatment under SFAS 133 and EITF 00-19 taking into consideration View A of EITF 05-04 and determined that it was more economical to settle in “unregistered shares”, thus these instruments were not considered to be liabilities under the authoritative literature. As of September 30, 2008, we are considered to be in default under this warrant agreement because no registration statement was filed. As a result, we have accrued a contingent liability of $150,000 for the original proceeds received and estimated liquidated damages of $35,000 and have recorded a corresponding expense. The company will continue to evaluate further liquidated damages if necessary.  The Company evaluated the liquidated damages to determine whether it qualified for derivative treatment. Based on FASB Staff Position No. EITF 00-19-2, it was determined that since the transfer of consideration under a registration payment arrangement becomes probable and can be reasonably estimated subsequent to the inception of the arrangement or if the measurement of a previously recognized contingent liability increases or decreases in a subsequent period, the initial recognition of the contingent liability or the change in the measurement of the previously recognized contingent liability shall be recognized in earnings. The entity would be required to deliver shares under a registration payment arrangement, (b) the transfer of that consideration is probable, and (c) the number of shares to be delivered can be reasonably estimated, the issuer’s share price at the reporting date shall be used to measure the contingent liability under Statement 5.

After December 31, 2007, the investor sold 3,150,238 shares of common stock of American Securities of the collateral held from the original warrant purchase agreement. As a result of the investor accepting the collateral for this debt, American Securities debt has shifted to a liability owed to the individual that provided the collateral. The valuation of the debt owed to this individual remained the same as of September 30, 2008 as the valuation noted in the preceding paragraph.

NOTE 13 – SUBSEQUENT EVENT

Subsequent to September 30, 2008 through August 7, 2008, the Company issued 18,312,146 shares of its commons stock as follows:

Conversion of  convertible debenture plus accrued interest	9,600,137	shares
Hydra Fuel Cell contractor	1,203,703	shares
	10,803,703	shares

On November 4, 2008 US Patent No. 7,445,647 B1was issued for a method for making a single unit fuel cell, with assignment to Hydra Fuel Cell Corporation.

Item 2 - Management’s Plan of Operation

THIS REPORT CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. THESE FORWARD LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE SET FORTH UNDER “RISK FACTORS” IN THIS “MANANGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” AND ELSEWHERE IN THIS REPORT. THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH “SELECTED FINANCIAL DATA” AND THE COMPANY’S FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT.

Plan for Future Operations

In 2005, we contracted with engineers to begin our hydrogen fuel cell division.  Through 2006, our subsidiary Hydra Fuel Cell, Inc.  (“Hydra”) continued the development and testing of its HydraStax® hydrogen electric generators.  Seven patent applications have been filed covering some of the innovations incorporated in the HydraStax® and we intend to file additional patent applications.

Our Hydra Fuel Cell subsidiary completed the initial development stage of the HydraStax® unit and testing for certification is currently underway. We believe that the HydraStax® unit's cost per kilowatt hour will be significantly below that of our competitors, giving us a competitive edge. Thus, upon certification we intend to aggressively market these units.  We are actively pursuing financing to begin manufacturing and distribution.

We formed two new subsidiaries in 2007 to pursue the development of clean energy sources. We formed American Wind Power Corporation that is negotiating the acquisition of manufacturing and intellectual property for residential wind turbines that spin in a horizontal plane.  Additionally, we formed American Hydrogen Corporation to develop and commercialize a technology to formulate hydrogen that we hope will change the economics of producing hydrogen sufficiently to enable the hydrogen economy.

All three of the Company’s subsidiaries had significant events during the past year.

Our Hydra Fuel Cell subsidiary completed the initial development stage of the HydraStax® unit and testing for certification is currently underway. We believe that the HydraStax® unit's cost per kWh will be significantly below that of its competitors, giving them a competitive edge as a replacement for residential grid power. Thus, upon certification, Hydra intends to aggressively market these units and the Company is actively pursuing financing to begin manufacturing and distribution. Hydra installed two of its HydraStax® fuel cells in residences, one in Texas in October 2007 and one in Florida in December 2007, as “Beta Test demonstration units”.  These are milestones for Hydra and for the fuel cell industry. Hydra continues to vigorously defend itself from claims of patent infringement brought by a third party in 2006.  Hydra’s fuel cell is original and Hydra categorically denies that it infringes on any patents.  

American Wind Power Corporation, which has had no operations to-date, is in the process of acquiring two companies with vertical axis wind turbine technologies.  The Company has engaged NW Financial of Jersey City, NJ to arrange the financing for these acquisitions.

American Hydrogen Corporation (AHC) was formed to develop and commercialize a technology to formulate hydrogen that we believe will change the economics of producing hydrogen sufficiently to enable the hydrogen economy.  In August 0f 2007, American Hydrogen Corporation was granted a worldwide exclusive license for patent pending ammonia-to-hydrogen catalytic electrolyzer technology (ACE) by Ohio University that will be the basis of operations for AHC.  The first ACE units will be matched to the fuel cells made by Hydra. AHC has entered into a Sponsored Research Agreement with Ohio University to develop large commercial electrolyzer technology and to develop an ammonia-to-hydrogen fueling system for vehicles.

The Company continues to review acquisition opportunities that would enhance its fuel cell offerings, expand its offerings in alternative energy production or represent opportunities in homeland security or national defense.

We have had no revenue since beginning our Hydra subsidiary.  Although we expect revenues from our HydraStax™ unit during 2008, we do not expect cash flows from distribution of the unit to be self-funding during 2008.  We estimate that our Hydra Fuel Cell subsidiary will require approximately $2 million to produce and sell HydraStax® units to cash flow self-sufficiency. There is no guarantee that management will be successful in obtaining these funds.

Critical Accounting Policies

Derivative Financial Instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. Derivative financial instruments are initially measured at their fair value. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. For option-based derivative financial instruments, the Company uses the Black-Scholes model to value the derivative instruments. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

Recently Issued Accounting Pronouncements

On January 1, 2006, we adopted the provisions of SFAS No. 123 (revised 2004), “Share-Based Payment,” (SFAS No. 123(R)), which revises SFAS No. 123, “Accounting for Stock-Based Compensation,” (SFAS No. 123) and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (APB No. 25).

Accounting for Stock-Based Compensation

ASRC accounts for stock-based employee compensation arrangements using the fair value method in accordance with the provisions of Statement of Financial Accounting Standards no.123(R) or SFAS No. 123(R), Share-Based Payments, and Staff Accounting Bulletin No. 107, or SAB 107, Share-Based Payments. The company accounts for the stock options issued to non-employees in accordance with the provisions of Statement of Financial Accounting Standards No. 123, or SFAS No. 123, Accounting for Stock-Based Compensation, and Emerging Issues Task Force No. 96-18, Accounting for Equity Instruments with Variable Terms That Are Issued for Consideration other Than Employee Services Under FASB Statement No. 123. The fair value of stock options and warrants granted to employees and non-employees is determined using the Black-Scholes option pricing model.

Intangible Assets

Intangible assets with estimable useful lives are amortized over respective estimated useful lives, and reviewed for impairment in accordance with FASB Statement No. 142,  Goodwill and Other Intangible Assets .

Off Balance Sheet Arrangements

The Company has no off balance sheet arrangements.

Recent Accounting Pronouncements 

In September 2006, the FASB issued FASB Statement 157 “Fair Value Measurements” (“SFAS No. 157”) that defines and measures fair value and expands disclosures about fair value measurements. The statement emphasizes that fair value is a market-based measurement and not an entity-specific measurement. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits entities to choose to measure many financial instruments and certain other items at fair value.  The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  SFAS No. 159 applies to all entities and is effective for fiscal years beginning after November 15, 2007.

ASRC does not expect the adoption of any other recently issued accounting pronouncements to have a significant impact on their consolidated financial position, results of operations or cash flow.

Results of Operations

The Company had no revenue during the nine months or three months periods ended September 30, 2008 and 2007.

The Company had no gross profit during the nine months or three months periods ended September 30, 2008 and 2007.

General and administrative expenses were $2,329,907 and $2,426,498 for the nine months ended September 30, 2008 and 2007, respectively.

Principal general and administrative expenses included contracted services ($548,538 and $519,637, respectively); legal expenses ($295,119 and $45,360, respectively); officers, directors and professional expense ($669,216 and $261,874 respectively); and rent ($48,245 and $43,330, respectively).    The increase in legal expenses is due increased legal fees related to pending litigation for alleged patent infringement by a third party related to its hydrogen fuel cell technology.   The increase in officers, directors and professional expenses is primarily due to an expense of $337,516 from the issuance of 12,089,868 shares of common stock to the Company’s Chairman/CEO and President to indemnify and compensate them for pledging an equal number of their personal shares and personally guaranteeing the $400,000 convertible debenture received in February 2008 .

General and administrative expenses were $669,058 and $421,756for the three months ended September 30, 2008 and 2007, respectively. The increase is primarily due to non-cash expense incurred during the nine months ended September 30, 2008.

During the three and nine months periods ended September 30, 2008 and 2007, respectively, a significant amount of the expenses resulted from the Company issuing common stock for services for the following expense categories:

	Three Months Ended September 30, 2008	Nine Months Ended September 30, 2008	Three Months Ended September 30, 2007	Nine Months Ended September 30, 2007
Fair value of warrants issued for services	$308,073	$976,726	$274,420	$548,185
Stock issued for officers and directors' services	67,200	533,716	0	126,182
Stock issued for outside consultants	76,118	385,885	271,256	324,006
Totals	$451,391	$1,896,327	$545,676	$872,191

Research and development expenses were $553,809 and $753,379 for the nine months ended September 30, 2008 and 2007, respectively for costs incurred in its Hydra Fuel Cell and American Hydrogen subsidiaries relating to the development of its HydraStax® hydrogen fuel and hydrogen generator.  The decrease  in 2008 is due primarily to  research and development expenses  incurred by American Hydrogen and Hydra Fuel Cell as the Company continues to develop its HydraStax® hydrogen fuel and hydrogen generator decreasing for the three months ended September 30, 2008 of $12,077 compared to $694,672 for the three months ended September 30, 2007.

The Company had net operating gains/(losses) of $1,480,580 and $(1,139,366) for the three months ended September 30, 2008 and 2007, respectively.  The primary difference is $2,004,356 gain on derivative liability and $194,273 gain on license fee.

The Company had net operating losses of $3,423,779 and $3,234,274 for the nine months ended September 30, 2008 and 2007, respectively.  The primary difference is related to the $55,496 loss on derivative liability, the $325,000 loss on default of convertible debentures and an increase in interest expense ($171,589 and 9,688, respectively) in the nine months ended September 30, 2008.

Liquidity and Capital Resources.

We had no revenues for the three months and nine month periods ended September 30, 2008 and 2007.

Our working capital deficit increased by $721,509 to ($2,533,660) at September 30, 2008 compared to ($1,812,151) at December 31, 2007. This deficit is primarily due to lack of revenues while we are in development stage and we continue to incur ordinary research and development and operating expenses and the derivative liability.

Our cash flows from operations were negative during the nine months ended September 30, 2008 and 2007, respectively, due to our lack of revenues and the continuation of research and development and operating costs. Our primary funding sources during the six months ended September 30, 2008 came from $660,000 in convertible debentures, $663,253 from exercise of warrants for cash. Also there were repayments on debt of $32,733. The resulting cash provided by financing activities was $1,665,520.

We consumed $1,646,517 in cash from operating activities for the nine months ended September 30, 2008 compared with $448,017 for the nine months ended September 30, 2007.

We had a net comprehensive gain/(loss) of $1,480,580, $(1,139,366), $(3,423,779), and $3,234,274 or $0.01, $(0.01), $(0.01), and $(0.03) per share for the three and nine months ended September 30, 2008 and 2007, respectively.

Our financial statements are prepared using principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, we do not have significant cash or other material liquid assets, nor do we have an established source of revenue sufficient to cover our operating costs and to allow us to continue as a going concern. We may, in the future, experience significant fluctuations in our results of operations. If we are required to obtain additional debt and equity financing or our illiquidity could suppress the value and price of our shares if and when trading in those shares develops. However, our future offerings of securities may not be undertaken, and if undertaken, may not be successful or the proceeds derived from these offerings may be less than anticipated and/or may be insufficient to fund operations and meet the needs of our business plan. Our current working capital is not sufficient to cover expected cash requirements for 2008 or to bring us to a positive cash flow position. If we do not raise sufficient capital to execute our business plan, it is possible that we will not be able to continue as a going concern.

Additionally, we will need to raise additional capital to fully develop the Hydrogen Formulator. We are currently evaluating the levels of capital and operating expenditures required to fully develop and exploit this new technology.

We are attempting to raise additional capital through sales of common stock either through private placements or public offerings, as well as seeking other sources of funding. There are no assurances that ASRC will be able to achieve a level of revenues adequate to generate sufficient cash flow from operations or obtain the additional financing through private placements or public offerings to support the investment in Hydra’s fuel cell technology. If these funds are not available ASRC may not continue its operations or execute its business plan.

Item 3.  -  Quantitative and Qualitative Disclosures about Market Risk

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

Item 4T.  -  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of September 30, 2008, the Company's management carried out an evaluation, under the supervision of the Company's Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of the Company's system of disclosure controls and procedures pursuant to the Securities and Exchange Act, Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were not effective, as of the date of their evaluation, for the purposes of recording, processing, summarizing and timely reporting material information required to be disclosed in reports filed by the Company under the Securities Exchange Act of 1934.

As of September 30, 2008, we did not maintain effective controls over financial statement disclosure.  Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements.   Accordingly, management has determined that this control deficiency constitutes a material weakness.

Changes in Internal Control Over Financial Reporting.   

No change in the Company’s internal control over financial reporting occurred during the quarter ended September 30, 2008, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

From time to time, the Company may become involved in litigation arising in the ordinary course of its business. The Company is presently involved in pending litigation for alleged patent infringement by a third party regarding their patent. The Company has made attempts to seek settlement of this matter with the opposing party, however, the Company affirmatively defends its position that it has not infringed on the third party patent. An evaluation of the likelihood of an unfavorable outcome regarding the above mentioned matter is too preliminary at this time to determine. The Company will continue to assess the impact in future periods.

Item 2 - Changes in Securities

Recent Sales of Unregistered Securities

On August 7, 2008, we issued 2,000,000 shares to our Chairman and Chief Executive Officer, Frank Neukomm as compensation for deferring payments on his employment agreement.  These shares were valued at $33,600.

On August 7, 2008, we issued 2,000,000 shares to our President and Director, Robert Farr as compensation for deferring payments on his employment agreement.    These shares were valued at $33,600.

On August 7, 2008, we issued 150,000 shares of our common stock for consulting services.  These shares were valued at $4,200.

On September 29, 2008, we issued 1,666,667 shares of our common stock for consulting services.  These shares were valued at $25,000.

On September 26, 2008, we issued 333,333 shares to our common stock for consulting services.  These shares were valued at $5,000.

The above transactions were completed pursuant to either Section 4(2) of the Securities Act or Rule 506 of Regulation D of the Securities Act or Rule 506 of Regulation D of the Securities Act. With respect to issuances made pursuant to Section 4(2) of the Securities Act, the transactions did not involve any public offering and were sold to a limited group of persons. Each investor either received adequate information about the Company or had access to such information. The Company determined that each investor had such knowledge and experience in financial and business matters that they were able to evaluate the merits and risks of an investment in the Company.

Item 3 - Defaults Upon Senior Securities

None.

Item 4 - Submission of Matters to a Vote of Security Holders

On July 11, 2008, the Company held a shareholder meeting, at which a majority of American Security Resources Corp.’s (the “Company”) shareholders entitle to vote approved the amendments to the Articles of Incorporation to (i) increase the number of authorized shares of common stock of the Company from 200,000,000 to 500,000,000 shares and (ii) increase the number of authorized shares of preferred stock of the Company from 1,000,000 to 2,000,000 shares.  In addition, a majority of the Company’s shareholders entitled to vote approved the Amended and Restated Articles of Incorporation of the Company.  The Amended and Restated Articles of Incorporation have been filed with the Secretary of State of the State of Nevada.

The shareholders also elected Frank Neukomm, Bob Farr, Averill Merril, Robert Wilson, James Twedt, Brian Klock and Ken Detko as directors of the Company.

Item 5 – Other Information

None

PART III - EXHIBITS AND CERTIFICATIONS

Item 1 - Exhibits.

Index of Exhibits

			Incorporated by reference
No.	Name of Exhibit	Filed Herewith	Form	Period Ending	Exhibit	Filing Date
3.1	Initial Articles of Incorporation filed in the State of Utah.		10-SB		3.1	09/22/99
3.2	Initial Articles of Incorporation filed in the State of Nevada.		10-SB		3.1	09/22/99
3.3	Articles of Merger to change the Company's domicile filed in the State of Utah and Nevada and effecting a one for four reverse split of the outstanding securities of The Company.		10/SB/12GA		3.3	09/02/99
3.5	By-Laws		10/SB/12GA		3.5	02/02/00
10.1	Purchase agreement - eGO Design		10-KSB/A	12/31/05	10.1	11/01/06
10.2	2.0 Million Warrants issued		10-KSB/A	12/31/05	10.1	11/01/06
10.3	2.5 Million-Unit Warrants		10-KSB/A	12/31/05	10.1	11/01/06
10.4	Employment Agreement - Joe Grace		10-KSB	12/31/04	14B	03/31/05
10.5	Form of Warrant Agreement		10-KSB/A	12/31/05	10.1	11/01/06
21	Subsidiaries of Registrant		10-KSB/A	12/31/05	10.1	11/01/06
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X
99.1	Code of Business Conduct and Ethics		10-KSB/A	12/31/05	10.1	11/01/06

(b)  Reports on Form 8-K.

     On June 19, 2008, the Company filed an 8K to report entering a material definitive agreement, to report events triggering acceleration of debt obligations, the issuance of restricted common stock and amendment of the Company’s Articles of Incorporation.

      On July 16, 2008, the Company filed an 8K to report the amendment of the Company’s Articles of Incorporation to increase its authorized shares and the actions taken at it’s the annual shareholder meeting on July, 11, 2008.

      On July 24, 2008, the Company filed an 8K to report the Chairman’s report at the annual shareholders’ meeting held on July 11, 2008.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	AMERICAN SECURITY RESOURCES CORPORATION
Date: November 19, 2008	By: /s/ Frank Neukomm
	Frank Neukomm, CEO
Date: November 19, 2008	By: /s/ Sam H. Lindsey, Jr.
	Sam H. Lindsey, Jr., CFO