Allied Security Innovations (ADSV) 10-Q 2008 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2008

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-21384

Allied Security Innovations Inc.

Formerly Digital Descriptor Systems, Inc.

(Exact name of registrant as specified in its charter)

Delaware	23-2770048
(State or other jurisdiction of organization)	(I.R.S. employer Identification no.)

1709 Route 34

Farmingdale, New Jersey 07727

Telephone Number (732) 751-1115

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   x    No  o

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

Large accelerated filer           Accelerated filer              Non-accelerated filer X

Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at August 4, 2008
Common stock, $.001 par value per share	1,774,877,918 shares

1

Condensed Consolidated Financial Statements

June 30, 2008

Condensed Consolidated Financial Statements:

Condensed Consolidated Balance Sheets at June 30, 2008 (Unaudited) and December 31, 2007 (Audited)

Condensed Consolidated Statements of Operations for the

Six and Three Months Ended June 30, 2008 and 2007 (Unaudited)

Condensed Consolidated Statements of Cash Flows for the

Six Months Ended June 30, 2008 and 2007 (Unaudited)

Notes to Condensed Consolidated Financial Statements (Unaudited)

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ALLIED SECURITY INNOVATIONS, INC. AND SUBSIDIARY FORMERLY DIGITAL DESCRIPTOR SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
		(Unaudited)			(Audited)
		June 30,			December 31,
ASSETS		2008			2007
Current Assets:
Cash and cash equivalents	$	264,882		$	386,628
Accounts receivable, net of allowance		371,727			406,655
Inventory		602,745			665,435
Prepaid expenses		16,414			8,241
Total Current Assets		1,255,768			1,466,959
Property and equipment, net		278,500			306,237
Other Assets:
Deposits		14,626			14,626
Goodwill		4,054,998			4,054,998
Intangible assets, net		145,553			153,137
Total Other Assets		4,215,177			4,222,761
TOTAL ASSETS	$	5,749,445		$	5,995,957
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES
Current Liabilities:
Accounts payable	$	201,667		$	133,113
Accrued expenses		329,496			297,934
Accrued payroll		50,174			93,856
Accrued interest		153,667			1,447,753
Deferred income		20,025			60,577
Note payable		4,000,000			3,500,000
Convertible debentures, net of debt discount		-			5,122,832
Derivative liabilities		17,696,107			22,898,360
Total Current Liabilities		22,451,136			33,554,425
Long Term Liabilities:
Convertible debentures, net of debt discount		14,165,897			655,281
Total Long Term Liabilities		14,165,897			655,281
Total Liabilities		36,617,033			34,209,706
STOCKHOLDERS' DEFICIT
Preferred stock, $.001 par value: authorized shares – 1,000,000;
issued and outstanding shares – none
Common stock, par value $.001; 9,999,000,000 shares authorized:
1,379,407,800 and 681,599,825 issued and outstanding at June 30, 2008 and December 31, 2007, respectively		1,379,408			681,600
Additional paid in capital		18,287,689			18,864,882
Accumulated deficit		(50,534,685	)		(47,760,231	)
Total Stockholders' Deficit		(30,867,588	)		(28,213,749	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	5,749,445		$	5,995,957
The accompanying notes are an integral part of the condensed consolidated financial statements.

3

ALLIED SECURITY INNOVATIONS, INC. AND SUBSIDIARY

FORMERLY DIGITAL DESCRIPTOR SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2008 AND 2007

(UNAUDITED)

		Three Months			Three Months			Six Months			Six Months
		Ended			Ended			Ended			Ended
		6/30/2008			6/30/2007			6/30/2008			6/30/2007
INCOME
Net Sales	$	1,134,954		$	1,037,477		$	2,129,008		$	2,029,333
Cost of Revenue		366,426			330,613			671,858			610,375
Gross Profit		768,528			706,864			1,457,150			1,418,958
OPERATING EXPENSES
General and administrative		518,264			612,621			1,165,575			1,067,676
Sales and marketing		196,106			104,575			291,407			274,157
Research and development		22,203			26,269			44,902			52,781
Total Operating Expenses		736,573			743,465			1,501,884			1,394,614
INCOME (LOSS) BEFORE OTHER INCOME (EXPENSE)		31,955			(36,601	)		(44,734	)		24,344
OTHER INCOME (EXPENSE)
Loss on extinguishment of debt		(7,237,883	)		-			(7,237,883	)		-
Interest expense		(289,684	)		(176,634	)		(475,875	)		(355,023	)
Beneficial interest from conversion		(7,497	)		(96,471	)		(91,022	)		(186,781	)
Amortization of debt discount and Loan cost		(37,115	)		(33,960	)		(81,346	)		(67,920	)
Change in fair value of derivative liability		(2,763,334	)		(1,237,268	)		5,202,253			(1,168,021	)
Depreciation and Amortization		(21,782	)		(31,418	)		(45,847	)		(52,897	)
Total Other Income (Expense)		(10,357,295	)		(1,575,751	)		(2,729,720	)		(1,830,642	)
(Loss) before provision for income taxes		(10,325,340	)		(1,612,352	)		(2,774,454	)		(1,806,298	)
`
Provision for income taxes		-			-			-			-
NET (LOSS) APPLICABLE TO COMMON SHARES	$	(10,325,340	)	$	(1,612,352	)	$	(2,774,454	)	$	(1,806,298	)
NET (LOSS) PER BASIC AND DILUTED SHARES	$	0.00		$	0.00		$	0.00		$	0.00
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING-BASIC		1,372,542,923			51,274,736			1,169,572,891			36,446,131

4

ALLIED SECURITY INNOVATIONS, INC AND SUBSIDIARY

FORMERLY DIGITAL DESCRIPTOR SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007

(UNAUDITED)

		2008			2007
Cash Flows from Operating Activities:
Net(Loss)	$	(2,774,454	)	$	(1,806,298	)
Adjustments to reconcile net (loss) to net cash
used in operating activities:
Depreciation and amortization		45,847			52,897
Amortization of debt discount		81,346			67,920
Beneficial interest		91,022			186,781
Loss on extinguishment		7,237,883			-
Change in fair value of derivative liability		(5,202,253	)		1,168,021
Bad debt expense		45,000			47,488
Changes in operating assets and liabilities:
Accounts receivable		(10,072	)		84,208
Inventory		62,690			(116,045	)
Prepaid expenses, deposits and other assets		(8,173	)		(39,598	)
Accounts payable		68,554			49,630
Accrued expenses		(12,122	)		(31,105	)
Accrued interest		294,064			254,634
Deferred Income		(40,552	)		(43,056	)
Net Cash Used In Operating Activities		(121,220	)		(124,523	)
Cash Flows from Investing Activities:
Purchase of equipment		(10,526	)		(53,293	)
Net Cash Used in Investing Activities		(10,526	)		(53,293	)
Cash Flows from Financing Activities:
Increase in Note Payable		510,000			-
Increase in Convertible debentures		(500,000	)		(6,000	)
Net Cash provided by (used in) Financing Activities		10,000			(6,000	)
Net Decrease in Cash		(121,746	)		(183,816	)
Cash at Beginning of Period		386,628			392,719
Cash at End of Period	$	264,882		$	208,903

Supplemental Schedule of May 16, 2008 Debt Refinancing:
Convertible debentures at June 30, 2008	$	14,165,899
Convertible debentures satisfied May 16, 2008		(5,832,483	)
Loss on extinguishment		(7,237,883	)
Accrued interest capitalized to debt		(1,595,533	)
Cash payment of convertible debentures at settlement	$	(500,000	)

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

5

ALLIED SECURITY INNOVATIONS, INC AND SUBSIDIARY

FORMERLY DIGITAL DESCRIPTOR SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007

(UNAUDITED)

		2008		2007
Supplemental Disclosure of Cash Flow Information:
Cash Paid For:
Interest Expense	$	-	$	-
Income Taxes	$	-	$	-
Supplemental Disclosure of Non-Cash Investing
and Financing Activities:
Common stock issued in conversion of
convertible debentures	$	697,808	$	51,172
Beneficial interest in conjunction with
issuance of convertible debentures	$	91,022	$	186,781
Common stock issued in conversion of
accrued interest	$	2,616	$	19,735
The accompanying notes are an integral part of the condensed consolidated financial statements.

6

Allied Security Innovations, Inc. and Subsidiary

Formerly Digital Descriptor Systems, Inc.

Notes to the Condensed Consolidated Financial Statements (Unaudited)

June 30, 2008 and 2007

Note 1 - Organization and Basis of Presentation

The unaudited condensed interim financial information included has been prepared by Allied Security Innovations, Inc. (the “Company” or “ASII”) without audit, pursuant to the rules and regulations of the Security and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as allowed by such rules and regulations, and the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the December 31, 2007 audited consolidated financial statements and the accompanying notes thereto. While management believes the procedures followed in preparing these condensed consolidated financial statements are reasonable, the accuracy of the amounts are in some respects dependent upon the facts that will exist, and procedures that will be accomplished by the Company later in the year.

The management of the Company believes that the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the operations for the periods presented.

Note 2 - Description of Business and Recent Developments

On October 9, 2007 the companies stock began trading on the NADAQ-over-the-counter market. Previously, the Company’s common stock traded on Pink Sheets.

Allied Security Innovations, Inc., incorporated in Delaware in 1994, develops, assembles and markets computer installations consisting of hardware and software, which capture video and scanned images, link the digitized images to test and store the images and text on a computer database and transmit this information to remote locations. The principal product of the Company is the Compu-Capture ® Law Enforcement Program, which is marketed to law enforcement agencies and prison facilities and generates the majority of the Company's revenues. Substantially all of the Company's revenues are derived from governmental agencies in the United States.

CGM is a manufacturer and distributor of indicative and barrier security seals, security tapes and related packaging security systems, protective security products for palletized cargo, physical security systems for tractors, trailers and containers as well as a number of highly specialized authentication products.

Note 3 - Summary of Significant Accounting Policies

Significant accounting policies followed by the Company in the preparation of the accompanying condensed consolidated financial statements are summarized below:

Use of Estimates

The preparation of the condensed consolidated 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 and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

Revenue Recognition

The Company derives revenue from the sale of hardware, software, post customer support, and other related services. Post customer support includes telephone support, bug fixes, and rights to upgrades. Other related services include basic training. The CGM-AST subsidiary derives its’ revenue from the sale of its tape, labels and other security devices.

The Company recognizes revenue upon delivery of the product to the end-user, when the fee is determinable and collectability is probable. Revenue allocable to post customer support is recognized on a straight-line basis over the period which the service is to be provided. Revenue collected for future services is recorded as deferred income and totaled $20,025 for the six months ended June 30 2008. Revenue allocable to other services is recognized as the services are provided. The CGM-AST subsidiary recognizes it revenue upon shipment of the product to the customer.

7

Software Development Costs

All costs incurred in the research and development of new software products and costs incurred prior to the establishment of a technologically feasible product are expensed as incurred. Research and development of software costs were $44,902 and $52,781, respectively, for the six months ended June 30, 2008 and 2007, respectively.

Cash and Cash Equivalents

For the purpose of the statement of cash flows, cash and cash equivalents include time deposits, certificates of deposits, restricted cash, and all highly liquid debt instruments with original maturities or three months or less.

Accounts Receivable

Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. No interest is charged on any past due accounts. Accounts receivable are stated at the amount billed to the customer. Accounts receivable, net of allowance was $371,727 on June 30, 2008 and $406,655 at December 31, 2007.

The carrying amount of accounts receivable is reduced by a valuation allowance that reflects management's best estimate of the amount that will not be collected. Management reviews all accounts receivable balances that exceed 90 days from invoice date and based on assessment of current creditworthiness, estimates the portion, if any that will not be collected. The allowance for doubtful accounts is $134,062 on June 30, 2008 and $89,062 at December 31, 2007.

Fixed Assets

Fixed assets are stated at cost. Depreciation is computed primarily using the straight-line method over the estimated useful life of the assets.

Machinery and equipment 7 years

Furniture and fixtures 7 years

Computers 3 years

Leasehold improvements 39 years

Income Taxes

The Company provides for income taxes under the liability method. Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Such differences result from differences in the timing of recognition by the Company of net operating loss carry forwards, certain expenses, and differences in the depreciable lives and depreciation methods for certain assets.

Net Loss Per Common Share

Basic loss per share is calculated by dividing the net loss by the weighted average common shares outstanding for the period. Diluted loss per share is calculated by dividing the net loss by the weighted average common shares outstanding of the period plus the dilutive effect of common stock equivalents. Common stock equivalents were not included in the computation of diluted earnings per share because to do so would be antidilutive for the period presented.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to a concentration of credit risk principally consist of cash and accounts receivable. Concentration of credit risk, with respect to accounts receivable, is limited due to the Company's credit evaluation process. The Company does not require collateral from its customers. The Company sells its principal products to end users and distributors principally in the United States.

The Company maintains cash and cash equivalents in various financial institutions that, in the aggregate, exceed the limit insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC insures cash deposits up to $100,000 per bank. Any amounts over $100,000 represent an uninsured risk to the Company.

Principles of Consolidation and Basis of Presentation

The condensed consolidated financial statements include the accounts of the Company and CGM-AST.  All inter-company accounts have been eliminated.

8

Inventory

Inventories consist principally of inks, adhesives, film and finished goods held in the Company’s warehouse. Inventory is stated at the lower of cost or market, utilizing the first-in, first-out method. The cost of finished goods includes the cost of raw materials, packaging supplies, direct and indirect labor and other indirect manufacturing costs. On a quarterly basis, management reviews inventory for unsalable or obsolete inventory. Obsolete or unsalable inventory write-offs have been immaterial to the financial statements.

Advertising

The Company’s policy is to expense the costs of advertising as incurred. The Company had advertising expenses of $59,839and $13,355 for the six months ended June 30, 2008 and 2007, respectively.

Fair Value of Financial Instruments

The carrying amount reported in the condensed consolidated balance sheet for cash and cash equivalents, accounts payable and accrued expenses approximates fair value because of the immediate or short-term maturity of these financial instruments. The carrying amount reported for the convertible debentures and notes payable approximates fair value because, in general, the interest on the underlying instruments fluctuates with market rates.

Goodwill and Other Intangible Assets

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 142 “Goodwill and Other Intangible Assets”. This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, “Intangible Assets”. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Goodwill was acquired upon the purchase of its wholly-owned subsidiary of CGM Security Solutions, Inc. totaling $4,054,998 (see footnote 11).

In addition, the Company has acquired licenses, which are included as other intangible assets. The licenses are being amortized over a period of 15 years based on the expected benefits to be consumed or otherwise used up. Goodwill and other intangible assets are tested annually for impairment in the fourth quarter, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. The Company assesses the recoverability of its goodwill and other intangible assets by comparing the projected undiscounted net cash flows associated with the related asset, over their remaining lives, in comparison to their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets.

Derivative Instruments

The Company has an outstanding convertible debt instrument that contains free-standing and embedded derivative features. The Company accounts for these derivatives in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” , and EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock” . In accordance with the provisions of SFAS No. 133 and EITF Issue No. 00-19, the embedded derivatives are required to be bifurcated from the debt instrument and recorded as a liability at fair value on the condensed consolidated balance sheet. Changes in the fair value of the derivatives are recorded at each reporting period and recorded in net gain (loss) on derivative, a separate component of the other income (expense). As of June 30, 2008, the fair value of derivatives was $17,696,107, a decrease of $5,202,253 from December 31, 2007. 

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statement. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Reclassifications

Certain reclassifications have been made to the June 30, 2007 financial statements to conform to the June 30, 2008 presentation. These changes had no impact on net loss for the six months period ended June 20, 2007.

Note 4 - Impact of Recent Accounting Pronouncements

In February 2008, FASB Staff Position ("FSP") FAS No. 157-2, "Effective Date of FASB Statement No. 157" ("FSP No. 157-2") was issued. FSP No. 157-2 defers the effective date of SFAS No. 157 to fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Examples of items within the scope of FSP No. 157-2 are nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods), and long-lived assets, such as property, plant and equipment and intangible assets measured at fair value for an impairment assessment under SFAS No. 144.

9

        The partial adoption of SFAS No. 157 on January 1, 2008 with respect to financial assets and financial liabilities recognized or disclosed at fair value in the financial statements on a recurring basis did not have a material impact on the Company's consolidated financial statements. See Note 12 for the fair value measurement disclosures for these assets and liabilities. The Company is in the process of analyzing the potential impact of SFAS No. 157 relating to its planned January 1, 2009 adoption of the remainder of the standard.

        On January 1, 2008 (the first day of fiscal 2008), the Company adopted SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115" ("SFAS No. 159"). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value, which are not otherwise currently required to be measured at fair value. Under SFAS No. 159, the decision to measure items at fair value is made at specified election dates on an instrument-by-instrument basis and is irrevocable. Entities electing the fair value option are required to recognize changes in fair value in earnings and to expense upfront costs and fees associated with the item for which the fair value option is elected. The new standard did not impact the Company's Condensed Consolidated Financial Statements as the Company did not elect the fair value option for any instruments existing as of the adoption date. However, the Company will evaluate the fair value measurement election with respect to financial instruments the Company enters into in the future.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” and SFAS No. 160, “Non controlling Interests in Consolidated Financial Statements - an amendment to ARB No. 51.” SFAS Nos. 141R and 160 require most identifiable assets, liabilities, non controlling interests, and goodwill acquired in a business combination to be recorded at “full fair value” and require non controlling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with non controlling interest holders. Both statements are effective for periods beginning on or after December 15, 2008, and early adoption is prohibited. Accordingly, SFAS No. 141R will be applied by the Company to business combinations occurring on or after January 1, 2009. SFAS No. 160 will be applied prospectively to all non controlling interests, including any that arose before the effective date. The adoption of SFAS No. 160 is not expected to have any impact on the Company’s consolidated financial position and results of operations.

        In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities: an amendment of FASB Statement No. 133" ("SFAS No. 161"). SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. The Company is reviewing the provisions of SFAS No. 161, which is effective the first quarter of fiscal 2009, and currently does not anticipate that this new accounting standard will have a significant impact on the Consolidated Financial Statements.

Note 5 - Intangible Assets

Intangible assets consist of the following at June 30, 2008 and December 31, 2007.

		June 30, 2008		December 31, 2007
Licenses	$	222,076	$	222,076
Accumulated amortization		76,523		68,939
Total	$	145,553	$	153,137

Licenses are being amortized over its estimated useful life of 15 years. Amortization expense for the six months ended June 30, 2008 and 2007 was $7,584 and $7,584, respectively.

The following is a listing of the estimated amortization expense for the next five years:

Year ended December 31, 

2008	$15,168
2009	15,168
2010	15,168
2011	15,168
2012	15,168

10

Note 6- Property and Equipment

Fixed assets consist of the following at June 30, 2008 and December 31, 2007:

		June 30, 2008			December 31, 2007
Furniture and Fixtures	$	72,115		$	71,367
Leasehold Improvements		159,607			159,607
Computers		209,179			209,179
Machinery and Equipment		762,987			753,209
		1,203,888			1,193,362
Less: Accumulated depreciation		(925,388	)		(887,125	)
Net		278,500			306,237

Depreciation expense for the years six months ended June 30, 2008 and 2007 was $38,263 and $45,312, respectively.

Note 7 - Convertible Debentures

Based on the guidance in SFAS133 and EITF00-19, the Company concluded that the conversion features of its convertible debentures were required to be accounted for as derivatives. The imbedded derivative feature was bi-furcated and the fair market value was determined using a convertible bond valuation model. The derivative instruments are recorded at fair market value with changes in value recognized during the period of change.

On May 16, 2008 convertible debentures in the net amount of $5,832,481 were satisfied.

During May 2008, the Company issued sixteen convertible notes for an aggregate amount of $14,165,897. Each note has terms of three year due on May 16, 2011. The debentures are collateralized by substantially all of the Company's assets. The debentures accrue interest at the rate of 6% per annum.

The holders have the right to convert the principal amount plus accrued interest into shares of the Company's common stock based on the terms set forth in the debentures.

We recorded a derivative liability related to these convertible debentures.

Note 8 - Commitments and Contingencies

Operating Lease

CGM-AST has a lease in Staten Island, New York under non-cancelable lease agreement that ends December 2008.

On July 1, 2007 the offices of Allied Security Innovations, Inc. and the Somerset office of CGM-AST were combined into a new office located at 1709 Route 34, Farmingdale, NJ in a 6,000 square foot combination warehouse /office space. The reason for this was cost savings and improved operational efficiencies. The new lease is a five year lease that ends in May 2012.

Employment Agreements

Anthony R. Shupin, Chairman, President and Chief Executive Officer. Mr. Shupin was re-appointed as Chairman, President and Chief Executive Officer effective February, 2005. On February 25, 2005, ASII entered into a five-year employment agreement with Mr. Shupin, which entitled him to a base salary of $227,900 per year, which may at the Board of Directors discretion adjust his base salary (but not below $215,000 per year). Mr. Shupin is also entitled to participate in the Annual Management Bonus Plan. As a participant in the Annual Management Bonus Plan, Mr. Shupin will be eligible to receive bonuses, based on performance, in any amount from 10% to 200% of the Base Salary. In addition, Mr. Shupin shall participate in the Management Equity Incentive Plan. As a participant in the Management Equity Plan, Mr. Shupin will be eligible to receive options, which vest over a period of time from the date of the option's issue, to purchase common shares of ASII. The Company may grant Mr. Shupin, following the first anniversary of the date hereof and at the sole discretion of the Board of Directors, options to purchase common shares of the Company (subject to the vesting and the satisfaction of the other terms and conditions of such options). Mr. Shupin will be entitled to 25 vacations days per year at such times as may be mutually agreed with the Board of Directors. ASII will provide Mr. Shupin a monthly car allowance of One Thousand Dollars ($1,000) along with related car expenses.

11

Michael J. Pellegrino, Senior Vice President and Chief Financial Officer. Mr. Pellegrino was appointed as Senior Vice President and Chief Financial Officer effective February 25, 2005. On February 25, 2005, ASII entered into a five-year employment agreement with Mr. Pellegrino, which entitled him to a base salary of $185,500 per year which may at the Board of Directors discretion adjust his base salary (but not below $175,000 per year). Mr. Pellegrino is also entitled to participate in the Annual Management Bonus Plan. As a participant in the Annual Management Bonus Plan, Mr. Pellegrino will be eligible to receive bonuses, based on performance, in any amount from 10% to 200% of the Base Salary. In addition, Mr. Pellegrino shall participate in the Management Equity Incentive Plan. As a participant in the Management Equity Incentive Plan, Mr. Pellegrino will be eligible to receive options, which vest over a period of time from the date of the option's issue, to purchase common shares of ASII. ASII may also grant to the Employee, following the first anniversary of the date of the Agreement and at the sole discretion of the Board of Directors, options to purchase common shares of the Company (subject to the vesting and the satisfaction of the other terms and conditions of such options). Mr. Pellegrino will be entitled to 25 vacation days per year at such times as may be mutually agreed with the Board of Directors. ASII shall also furnish Mr. Pellegrino with monthly car allowance of One Thousand Dollars ($1,000) and related car expenses.

Note 9 - Stock Option and Other Plans

Effective November 13, 2006, Allied Security Innovations, Inc. ("ASII") granted to each of Anthony Shupin, its President and Chief Executive Officer and Michael Pellegrino, its Chief Financial Officer, 10,000 shares of newly created Series A Preferred Stock ("A Preferred") as recognition for services.

The shares will vest in five equal monthly installments and will be issued at the discretion of Mr. Shupin and Mr. Pellegrino. These share have not been issued as of June 30, 2008. Each share of A Preferred is convertible into 480 shares of common stock of the Company starting three years from the date of issuance, provided that the closing bid price of the Company's common stock is then $2.00 per share. The shares of A Preferred may be voted with the Company's common stock on an as converted basis on any matters that the common stock is entitled to vote on as a class.

Unconverted shares of A Preferred will automatically cease to exist, and all rights associated therewith will be terminated upon the earlier of (i) that person's termination of employment with the Company for any reason, or (ii) five years from the date of issuance.

On November 13, 2006, the Company filed with the Secretary of State of Delaware a Certificate of Designation of Preferences, Rights and Limitations of Series A Preferred Stock.

The Company maintains the 1994 Restated Stock Option Plan (the 1994 Plan) pursuant to which the Company reserved 5,000,000 shares of common stock. The options granted have a term of ten years and are issued at or above the fair market value of the underlying shares on the grant date.

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Note 10 - Fair Value Measurements

On January 1, 2008, the Company adopted SFAS No. 157 “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, provides a consistent framework for measuring fair value under Generally Accepted Accounting Principles and expands fair value financial statement disclosure requirements. SFAS 157’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. SFAS 157 classifies these inputs into the following hierarchy:

Level 1 Inputs- Quoted prices for identical instruments in active markets.

Level 2 Inputs- Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs- Instruments with primarily unobservable value drivers.

The following table represents the fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2008.

Fair Value Measurements on a Recurring Basis as of June 30, 2008

Assets	Level I		Level II		Level III		Total
Assets	$	-		-	$	-	$	-
Total Assets	$	-	$	-	$	-	$	-
Liabilities		-	$	31,862,004		-	$	31,862,004
Total Liabilities	$	-	$	31,862,004	$	-	$	31,862,004

Note 11 - Acquisitions and Note Payable

On March 1, 2005, the Company acquired substantially all of the assets of CGM Security Solutions, Inc., a Florida corporation ("CGM"), for (i) $1,500,000 in cash and (ii) a 2.86% promissory note (the "Note") in the principal amount of $3,500,000, subject to adjustment (the "Acquisition"). The assets of CGM Security Solutions, Inc. were acquired pursuant to an Asset Purchase Agreement among the Company and CGM Security Solutions, Inc. dated as of February 25, 2005. In connection with the acquisition, the Company and CGM-AST each entered into an employment agreement with Erik Hoffer (the "Employment Agreement"). CGM Security Solutions, Inc is a manufacturer and distributor of barrier security seals, security tapes and related packaging security systems, protective security products for palletized cargo, physical security systems for tractors, trailers and containers.

The principal amount of the three year Note is subject to adjustment based upon the average of (i) the gross revenues of CGM-AST for the fiscal year ending December 31, 2007 and (ii) an independent valuation of CGM-AST Sub based upon the audited consolidated financial statements of the Company and CGM-AST Sub for the fiscal years ending December 31, 2006 and 2007. In addition, the Company has granted CGM-AST a secondary security interest in substantially all of its assets and intellectual property. If the Company is unable to fulfill its obligations pursuant to the Asset Purchase Agreement and the Note, there is a likelihood that CGM Security Solutions, Inc. can declare default and attempt to take back the asset. As of March 31, 2008 the Company did not secure sufficient funding but was in negotiations with private investors in an attempt to obtain same.

In connection with the Acquisition, the Company entered into a letter agreement with certain of its investors (the "Investors") which extended the maturity date of debt instruments issued on November 30, 2004 until September 1, 2008, and amended the conversion price of the debt that is held by the Investors to the lower of (i) $0.0005 or (ii) 40% of the average of the three lowest intraday trading prices for the Company's common stock during the 20 trading days before, but not including, the conversion date. In addition, the exercise price of the warrants held by the Investors was amended to $.001 per share. 

Whereas the Company did not have sufficient funds to satisfy this obligation and was not able to raise the required payment when due the Company came to an agreement to pay CGM Security Solutions, Inc. and it’s owner Mr. Erik Hoffer Five Hundred Thousand Dollars ($500,000) and signed a new note with him raising the purchase price by One Million Dollars (1,000,000).The new note for Four Million Dollars is a three year note carrying an annual interest rate of 7% of which the interest is due quarterly.

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Note 12 - Going Concern

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. The Company has sustained recurring losses and has accumulated a significant deficit as of June 30, 2008. These factors raise substantial doubt about its ability to continue as a going concern.

Management has formulated and is in the process of implementing its business plan intended to develop steady revenues and income, as well as reducing expenses in the areas of operations. This plan includes the following management objectives:

·   Soliciting new customers in the U.S.

·   Expanding sales in the international market

·   Expanding sales through E-commerce

·   Adding new distributor both in the U.S and internationally

·   The introduction of new products into the market

·   Seeking out possible merger candidates

Presently, the Company cannot ascertain the eventual success of management’s plan with any degree of certainty. Each objective is contingent upon a number of factors and the Company does not represent that any or all of these objectives will occur. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the eventual outcome of the risks and uncertainties described above.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The information in this report contains forward-looking statements. All statements other than statements of historical fact made in report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as “believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,” “projects,” “expects,” “may,” “will,” or “should” or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations.

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

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2008 COMPARED TO THREE MONTHS ENDED JUNE 30, 2007

Revenues for the three months ended June 30, 2008 were $1,134,954 compared to $1,037,477 for the three months ended June 30, 2007, an increase of $97,477. ASII generates its revenues through software licenses, hardware, post customer support arrangements and other services. CGM-AST generates its revenue through the manufacture and distribution of indicative and barrier security seals, security tapes and related packaging security systems, protective security products for palletized cargo, physical security systems for tractors, trailers and containers as well as a number of highly specialized authentication products.

Cost of revenue for the three months ended June 30, 2008 was $366,426 compared to $330,613 for the three months ended June 30, 2007 an increase of $35,813 or 9%. Cost of revenue sold as a percentage of revenue for the three months ended June 30, 2008 was 32% of total revenues.

Operating expenses for the three months ended June 30, 2008 were $736,573 compared to $743,465 for the three months ended June 30, 2007, an decrease of $6,892 or 1%. In 2007 the corporate office moved to Farmingdale New Jersey along with the Somerset office and warehouse. The decrease in operating expense is due to the completion of this move.

General and Administrative expenses for the three months ended June 30, 2008 were $518,264 compared to $612,621 for the three months ended June 30, 2007 for an decrease of $94,357 or 15.4%. This decrease was mainly attributable to the completion of the move to Farmingdale which allows better control on spending.

Sales and Marketing expenses for the three months ended June 30, 2008 were $196,106 compared $104,575 for the three months ended June 30, 2007 for an increase of $91,531 or 87.5%.

Research and development expenses for the three months ended June 30, 2008 were $22,203 compared to $26,269 for the three months ended June 30, 2007 for a decrease of $4,066 or 15%. This decrease was due to the termination of the part-time support employee.

SIX MONTHS ENDED JUNE 30, 2008 COMPARED TO SIX MONTHS ENDED JUNE 30, 2007

Revenues for the six months ended June 30, 2008 were $2,129,008 compared to $2,029,333 for the six months ended June 30, 2007, an increase of $99,675. ASII generates its revenues through software licenses, hardware, post customer support arrangements and other services. CGM-AST generates its revenue through the manufacture and distribution of indicative and barrier security seals, security tapes and related packaging security systems, protective security products for palletized cargo, physical security systems for tractors, trailers and containers as well as a number of highly specialized authentication products.

Cost of revenue for the six months ended June 30, 2008 was $671,858 compared to $610,375 for the six months ended June 30, 2007 an increase of $61,483 or 10%. Cost of revenue sold as a percentage of revenue for the six months ended June 30, 2008 was 32% of total revenues.

Operating expenses for the six months ended June 30, 2008 were $1,501,884 compared to $1,394,614 for the six months ended June 30, 2007, an increase of $107,270 or 8%. This increase was mainly attributable to an increase in investor relation and legal expenses.

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General and Administrative expenses for the six months ended June 30, 2008 were $1,165,575 compared to $1,067,676 for the six months ended June 30, 2007 for an increase of $97,899 or 9%. This increase was mainly attributable to an increase in investor relation and legal expenses.

Sales and Marketing expenses for the six months ended June 30, 2008 were $291,407 compared $274,157 for the six months ended June 30, 2007 for an increase of $17,250 or 6%..

Research and development expenses for the six months ended June 30, 2008 were $44,902 compared to $52,781 for the six months ended June 30, 2007 for a decrease of $7,879 or 15%. This decrease was due to the termination of the part-time support employee.

ASII had a net loss for the six months ended June 30, 2008 of $2,774,454 and a net loss for the six months ended June 30, 2007 of $1,806,298. This is an increase in net loss of $968,156. This loss was primarily due to the restructure of the security purchase agreement for CGM-AST.

Net cash used in operating activities for the six months ended June 30, 2008 was $121,220 and the six months ended June 30, 2007 was $124,523. The decrease in cash used in operating activities for the six months ended June 30, 2008 was $3,303.

Net cash used in investing activities was $10,526 and $53,293 for the six months ended June 30, 2008 and the six months ended June 30, 2007 respectively. This decrease was $42,767.

Net cash provided by (used in) financing activities was $10,000 and ($6,000) for the six months ended June 30, 2008 and the six months ended June 30, 2007, respectively. 

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LIQUIDITY AND CAPITAL RESOURCES

 The Company's revenues have been insufficient to cover the cost of revenues and operating expenses. Therefore, the Company has been dependent on private placements of its Common Stock and issuance of convertible notes in order to sustain operations. In addition, there can be no assurances that the proceeds from private placements or other capital will continue to be available, or that revenues will increase to meet the Company's cash needs, or that a sufficient amount of the Company's Common Stock or other securities can or will be sold or that any Common Stock purchase options/warrants will be exercised to fund the operating needs of the Company.

Over the next twelve months, management is hopeful that sufficient working capital may be obtained from operations and external financing to meet ASII's liabilities and commitments as they become payable. ASII has in the past relied on private placements of common stock securities, and loans from private investors to sustain operations. However, if ASII is unable to obtain additional funding in the future, it may be forced to curtail or terminate operations. At June 30, 2008, ASII had assets of $5,749,445 compared to $5,995,957 on December 31, 2007 a decrease of $246,512 and shareholder (deficit) of $ (50,534,685) on June 30, 2008 compared to shareholder (deficit) of $(47,760,231) on December 31, 2007, a increase of $2,774,454. This increase in shareholder (deficit) for the six months ended June 30, 2008 resulted from the net loss for the six months ended June 30, 2008.

The Company had net (loss) of ($2,774,454) and ($1,806,298) during the six months ended June 30, 2008 and 2007, respectively. As of June 30, 2008, we had a cash balance in the amount of $264,882 and current liabilities of $22,451,136. The total amount of notes payable and debentures is $18,165,897. We may not have sufficient cash or other assets to meet our current liabilities. In order to meet these obligations, we may need to raise cash from the sale of securities or from borrowings.

The Company's revenues have been insufficient to cover the cost of revenues and operating expenses. Therefore, the Company has been dependent on private placements of its Common Stock and issuance of convertible notes in order to sustain operations. In addition, there can be no assurances that the proceeds from private placements or other capital will continue to be available, or that revenues will increase to meet the Company's cash needs, or that a sufficient amount of the Company's Common Stock or other securities can or will be sold or that any Common Stock purchase options/warrants will be exercised to fund the operating needs of the Company.

The Company has contractual obligations of $18,900,901 as of June 30, 2008. These contractual obligations, along with the dates on which such payments are due are described below:

Contractual Obligations	Total		One Year or Less		More Than One Year
Due to Related Parties	$	0	$	0	$	0
Accounts Payable and Accrued Expenses		581,337		581,337		0
Accrued interest on loans		153,667,		153,667		0
Note payable		4,000,000		0		4,000,000
Convertible Debentures		14,165,897		0		14,165,897
Total Contractual Obligations	$	18,900,901	$	735,004	$	18,165,897

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements as of June 30, 2008 or as of the date of this report.

Plan of Operations

The short-term objective of ASII is the following:

o The short-term objective of ASII is to increase the market penetration of the product line of its CGM-AST subsidiary as the Company believes this is the area where the greatest revenue growth exists.

o Additionally, ASII plans to execute an acquisition strategy based upon fund availability.

ASII's long-term objective is as follows:

o To seek additional products to sell into its basic business market - Criminal Justice - so that ASII can generate sales adequate enough to allow for profits.

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ASII believes that it will not reach profitability in the foreseeable future. Over the next twelve months, management is of the opinion that sufficient working capital will be obtained from operations and external financing to meet ASII's liabilities and commitments as they become payable. ASII has in the past successfully relied on private placements of common stock securities, bank debt, loans from private investors and the exercise of common stock warrants in order to sustain operations. If ASII is unable to obtain additional funding in the future, it may be forced to curtail or terminate operations.

ASII is doing the following in its effort to reach profitability:

o Cut costs in areas that add the least value to ASII.

o Concentrate on increasing the sales of the CGM-AST product line.

o Derive funds through investigating business alliances with other companies.

o Acquire and effectively add management support to profitable companies complementary to its broadened target markets 

Item 4T. Control and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Management of the Company has evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the fiscal year covered by this Annual Report on Form 10-KSB. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer of the Company have concluded that the Company's disclosure controls and procedures as of the end of the fiscal year covered by the Annual Report on Form 10-KSB were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that the information required to be disclosed in the reports is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in internal controls.

Management of the Company has also evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, any change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q. There was no change in the Company's internal control over financial reporting identified in that evaluation that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On March 28, 2008 a lawsuit was file against Allied Security Innovations Inc. from Med Gen Inc., in the amount of $100,000. The Complaint pleads that the Company breached a contract by failing to pay for alleged services rendered.

This lawsuit was withdrawn during the month of June.

Item 2. Changes in Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities:

None

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

None.

Item 5. Other Information

On October 9, 2007 the companies stock trading moved from the Pink Sheets to NASDAQ Bulletin Board.

Item 6. Exhibits

31.1	Certification by Chief Executive Officer pursuant to Sarbanes-Oxley Section 302
31.2	Certification by Chief Financial Officer pursuant to Sarbanes-Oxley Section 302
32.1	Certification by Chief Executive Officer pursuant to 18 U.S.C., Section 1350
32.2	Certification by Chief Financial Officer pursuant to Sarbanes-Oxley Section 1350

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

	ALLIED SECURITY INNOVATIONS, INC. (Registrant)
Date: August 13, 2008	By:	/s/ ANTHONY SHUPIN
		Anthony Shupin
		(President, Chief Executive Officer) (Chairman)

Date: August 13, 2008	By:	/s/ MICHAEL J. PELLEGRINO
		Michael J. Pellegrino
		Senior Vice President & CFO (Principal Financial and Accounting Officer)

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