Edgar Filing: PATRON SYSTEMS INC

As filed with the Securities and Exchange
Commission on October 17, 2006 Registration No. 333-135999

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

(AMENDMENT NO. 1)

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PATRON SYSTEMS, INC.
(Name of Small Business Issuer in Its Charter)

DELAWARE 7372
State or Other Jurisdiction of (Primary Standard Industrial
Incorporation or Organization Classification Code Number)

74-3055158
(I.R.S. Employer
Identification No.)

5775 FLATIRON PARKWAY, SUITE 230
BOULDER, COLORADO 80301
(303) 541-1005
(Address and Telephone Number of Principal Executive Offices)

ROBERT CROSS, CHIEF EXECUTIVE OFFICER
PATRON SYSTEMS, INC.
5775 FLATIRON PARKWAY, SUITE 230
BOULDER, COLORADO 80301
(303) 541-1005

Copy to:

V. JOSEPH STUBBS, ESQ.
STUBBS ALDERTON & MARKILES, LLP
15260 VENTURA BOULEVARD, 20TH FLOOR
SHERMAN OAKS, CALIFORNIA 91436
(818) 444-4500
(Name, Address and Telephone Number of Agent for Service)

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Approximate date of proposed sale to the public: AS SOON AS PRACTICABLE AFTER
THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT

If any of the securities being registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|

If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|

If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. |_|

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

Subject to completion, dated October 17, 2006

PROSPECTUS

PATRON SYSTEMS, INC.

15,190,860 Shares of Common Stock

This prospectus relates to the offer and sale by certain selling stockholders
identified in this prospectus (the "Selling Stockholders") of up to an aggregate
of 15,190,860 shares of common stock, par value $0.01 per share ("Common Stock")
which includes (i) 823,909 shares of Common Stock issued in various transactions
over the past two years, (ii) 1,287,168 shares issuable upon the conversion of
our Series A Convertible Preferred Stock ("Series A Preferred Stock"), (iii)
11,537,603 shares issued upon the automatic conversion of our Series A-1
Convertible Preferred Stock ("Series A-1 Preferred Stock"), (iv) 1,097,378
shares of Common Stock issuable upon the exercise of common stock purchase
warrants and (v) 444,802 shares of Common Stock issuable upon the exercise of
stock options. All of such shares of Common Stock are being offered for resale
by the Selling Stockholders.

As described in the prospectus, our stockholders approved an amendment to our
certificate of incorporation to effectuate a 1-for-30 reverse stock split and
certain other transactions intended to recapitalize our company. The reverse
split became effective on July 31, 2006. All share information included herein
gives retroactive effect to the reverse split.

The prices at which the Selling Stockholders may sell shares will be determined
by the prevailing market price for the shares or in negotiated transactions. We
will not receive any of the proceeds from the sale of these shares by the
Selling Stockholders. However, we will receive proceeds from the exercise of
warrants if exercised by the Selling Stockholders and we will receive proceeds
from the exercise of stock options if exercised by the Selling Stockholders. Any
such proceeds will be used for working capital and general corporate purposes.

We will bear all costs relating to the registration of the shares of Common
Stock to be sold hereunder, other than any Selling Stockholder's legal or
accounting costs or commissions.

Our Common Stock is quoted on the regulated quotation service of the OTC
Bulletin Board under the symbol "PTRN.OB" The last sales price of our Common
Stock on October 13, 2006 as reported by the OTC Bulletin Board was $2.00 per
share.

The information in this prospectus is not complete and may be changed. These
securities may not be sold (except pursuant to a transaction exempt from the
registration requirements of the Securities Act of 1993, as amended (the
"Securities Act")) until the registration statement filed with the Securities
and Exchange Commission ("SEC") is declared effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.

INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD READ
THIS ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE SECTION ENTITLED "RISK FACTORS"
BEGINNING ON PAGE 4 WHICH DESCRIBES CERTAIN MATERIAL RISK FACTORS YOU SHOULD
CONSIDER BEFORE INVESTING.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

The date of this prospectus is October__, 2006

TABLE OF CONTENTS

PAGE
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Prospectus Summary 1
Risk Factors 4
Forward-looking Statements 11
Use of Proceeds 11
Selling Security Holders 12
Plan of Distribution 22
Security Ownership of Certain Beneficial Owners and Management 26
Description of Securities 29
Legal Matters 35
Experts 35
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities 35
Description of Business 36
Management's Discussion and Analysis or Plan of Operation 44
Certain Relationships and Related Transactions 55
Market For Our Common Stock and Related Stockholder Matters 62
Executive Compensation 63
Available Information 66
Index to Financial Statements - December 31, 2005 67
Index to Financial Statements - June 30, 2006 110
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 141
Information Not Required in Prospectus 143

You should rely only on the information contained in this prospectus and in any
prospectus supplement we may file after the date of this prospectus. We have not
authorized anyone to provide you with different information. If anyone provides
you with different or inconsistent information, you should not rely on it. The
Selling Stockholders will not make an offer to sell these securities in any
jurisdiction where an offer or sale is not permitted. You should assume that the
information appearing in this prospectus or any supplement is accurate as of the
date on the front cover of this prospectus or any supplement only, regardless of
the time of delivery of this prospectus or any supplement or of any sale of
Common Stock. Our business, financial condition, results of operations and
prospects may have changed since that date.

PROSPECTUS SUMMARY

The following summary highlights aspects of the offering. This prospectus does
not contain all of the information that may be important to you. You should read
this entire prospectus carefully, including the "Risk Factors" section and the
financial statements, related notes and the other more detailed information
appearing elsewhere in this prospectus before making an investment decision.
Unless otherwise indicated, all references to "we", "us", "our" and similar
terms, as well as references to the "Registrant" in this prospectus, refer to
Patron Systems, Inc. and not to the Selling Stockholders.

CORPORATE BACKGROUND

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

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

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

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

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

In April of 2004, we failed to meet the reporting requirements under the
Exchange Act. As a result, we were de-listed from NASDAQ's OTC Bulletin Board
quotation system. During 2005, we completed the filing of a Form 10-KSB covering
the period from April 30, 2002 (inception) to December 31, 2004, completed the
filing of Forms 10-QSB for the periods ending March 31, 2005, June 30, 2005 and
September 30, 2005 and filed a Form 8-K covering each of the acquisitions
completed on February 25, 2005 and March 30, 2005. We are current with all SEC
filings as of October 13, 2006. Since November 14, 2005 our listing has been
reinstated on NASDAQ's OTC Bulletin Board quotation system.

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

During 2005, we completed 3 financings (Interim Bridge Financing I, Interim
Bridge Financing II and Interim Bridge Financing III) which totaled $11,277,000.
These financings involved the issuance of 10% convertible notes and warrants to
purchase the Company's Common Stock.

On January 12, 2006, we issued a Stock Subscription Agreement & Mutual Release
to each of our creditors and claimants pursuant to which we would sell to such
creditors and/or claimants shares of Series A-1 Preferred Stock in exchange for
a final and binding settlement with respect to any and all claims, liabilities,
demands, causes of action, costs, expenses, attorneys fees, damages,
indemnities, and obligations of every kind and nature that such creditors and/or
claimants may have with or against us. Creditors and/or claimants that have
accepted our offer have been issued and aggregate of 36,993,054 shares of Series
A-1 Preferred Stock. The shares of Series A-1 Preferred Stock automatically
converted into 12,331,056 shares of Common Stock on July 31, 2006, upon the
filing of an amendment to our certificate of incorporation, as amended,
effecting a 1-for-30 reverse stock split. There are currently no shares of
Series A-1 Preferred Stock outstanding.

On March 27, 2006, pursuant to the consummation of the Series A Preferred Stock
financing for aggregate proceeds of $4,820,501, we issued to the purchasers of
Series A Preferred Stock an aggregate of 964 shares of Series A Preferred Stock
and warrants to purchase an aggregate of 20,085,446 shares of Common Stock. The
964 shares of Series A Preferred Stock are, subject to certain conditions,
convertible at the option of the holders thereof, into 2,008,567 shares of
Common Stock.

At the time of the our three acquisitions in February 2005, our business plan
was to a) provide enterprise solutions to provide email and content protection
for data at rest and data in motion, to deliver a highly functional, automatic
and manageable policy-based messaging compliance review and to provide a secure
electronic forms solutions to public safety organizations and b) offer county
and municipal governments a model homeland security architecture with
state-of-the-art prevention, response and information management capabilities to
assist in the prevention of terrorist attack, reduce vulnerabilities and respond
to all hazards and emergencies within a city or county. Additionally, we planned
on providing Risk and Vulnerability Assessment evaluation services and we were
developing a full-spectrum, integrated homeland security data center solution
which would comply with all current national homeland security directives and
regulations. The acquisition of LucidLine, Inc. ("LucidLine") was intended to
supply the expertise to establish the homeland security architecture, the risk
and vulnerability assessment evaluation services and the development,
implementation and operation of the homeland security data center solutions.
Beginning in late 2005, our management undertook a review of all areas of our
business. Because of our limited financial resources, a decision was made to
streamline our business to focus on enterprise level software and service
solutions designed to help customers create, manage and apply complex rule sets
that support business policies, enhance work flow processes, enforce regulatory
compliance, and reduce the time, cost and overhead of electronic message
management. The decision to no longer focus on homeland security data center
solutions and other homeland security architecture and risk assessment services
left us with a LucidLine business with no sales or operational synergy with the
rest of our business and LucidLine's commercial data backup and storage business
was not growing sufficiently to cover the costs of operating the business. Based
on LucidLine's continuing drain of our capital, our precarious financial
position and our inability to procure a buyer who was willing to pay more for
the business, we decided to sell LucidLine at a significant discount to the
price we paid for it in February 2005.

On April 18, 2006, we entered into a Stock Purchase Agreement with Walnut
Valley, Inc., pursuant to which we sold all of the outstanding shares of
LucidLine to Walnut Valley, Inc. in consideration for a cash payment of $25,000
and the issuance of a Promissory Note in the principal amount of $25,000 by
Walnut Valley in our favor. We consummated the sale of LucidLine as a strategic
business transaction designed to enhance our long-term profitability and
strategic operations, and to further streamline our business focus on electronic
message management.

We sold LucidLine to Walnut Valley, Inc. for an aggregate consideration of
$50,000. In February 2005, we paid to LucidLine's stockholders cash in the
aggregate amount of $200,000 and issued an aggregate of 146,667 shares of our
common stock valued at $3,740,000.

On July 20, 2006, our stockholders approved an amendment to our Second Amended
and Restated Certificate of Incorporation, as amended, to provide for a 1-for-30
reverse stock split of our issued and outstanding Common Stock.

Effective September 19, 2006, we merged our wholly-owned subsidiaries
Entelagent, CSSI and PILEC Disbursement Company (a non-operating subsidiary)
("PILEC") into our company through the filing with the Secretary of State of the
States of Delaware and California, a Certificate of Ownership and Merger merging
Entelagent Software Corp., (a California corporation), Complete Security
Solutions, Inc., (a Delaware corporation) and PILEC Disbursement Company, (a
Delaware corporation) into Patron Systems, Inc., (a Delaware corporation).

On October 13, 2006, pursuant to the consummation of the first closing of the
Series B Preferred Stock financing for aggregate proceeds of $3,120,966, we
issued to the purchasers of units in that financing an aggregate of 624.2 shares
of Series B Preferred Stock and warrants to purchase up to 694,011 shares of
Common Stock. The 624.2 shares of Series B Preferred Stock are, subject to
certain conditions, convertible at the option of the holders thereof, into
1,387,992 shares of Common Stock.

Our principal offices are located at 5775 FLATIRON PARKWAY, SUITE 230, BOULDER,
COLORADO 80301 and our telephone number is (303) 541-1005. We are a Delaware
corporation.

THE OFFERING

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Common Stock offered by the
Selling Stockholders 15,190,860 shares, including 823,909 issued
and outstanding shares, 1,287,168 shares
issuable upon the conversion of the Series A
Preferred Stock, 11,537,603 shares issued
upon the conversion of the Series A-1
Preferred Stock, up to 1,097,378 shares
underlying common stock purchase warrants,
assuming full exercise of all such
outstanding common stock purchase warrants
and up to 444,802 shares underlying
outstanding stock options, assuming full
exercise of all such outstanding stock
options. This number represents 87.8% of our
total number of shares outstanding assuming
the conversion of the Series A Preferred
Stock, the exercise of all common stock
purchase warrants and the exercise of all
stock options.
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Common Stock to be outstanding
before the offering Up to 19,592,115 shares assuming the
conversion of Series A Preferred Stock, the
conversion of the Series B Preferred
Stock, the exercise of all common stock
purchase warrants and the exercise of all
stock options.
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Common Stock to be outstanding
after the offering Up to 19,592,115 shares assuming the
conversion of Series A Preferred Stock, the
conversion of the Series B Preferred
Stock, the exercise of all common stock
purchase warrants and the exercise of all
stock options.

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Use of proceeds The Selling Stockholders will receive all of
the proceeds from the sale of the shares
offered for sale by them under this
prospectus. We will not receive any proceeds
from the resale of shares by the Selling
Stockholders covered by this prospectus.
However, we will receive the exercise price
for any shares of Common Stock delivered in
connection with the exercise, by Selling
Stockholders, of the common stock purchase
warrants and the exercise, by Selling
Stockholders, of stock options. We expect to
use the proceeds received from the exercise
of the common stock purchase warrants and
the exercise of the stock options, if any,
for general working capital purposes.
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OTC Bulletin Board Symbol PTRN.OB

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Risk Factors See "Risk Factors" beginning on page 4 for a
discussion of factors that you should
consider carefully before deciding to
purchase our Common Stock.
---------------------------------- ---------------------------------------------

The above information regarding Common Stock to be outstanding after the
offering is based on 14,462,260 shares of Common Stock outstanding as of October
13, 2006.

RISK FACTORS

Investing in our Common Stock involves a high degree of risk. You should
carefully consider the following risk factors and all other information
contained in this prospectus before purchasing our Common Stock. The risks noted
below are risks and uncertainties that could cause our actual results to differ
materially from the results contemplated by the forward-looking statements
contained in this report and other public statements we make. The risks and
uncertainties described below are not the only ones facing us. Additional risks
and uncertainties that we are unaware of, or that we currently deem immaterial,
also may become important factors that affect us. If any of the following risks
occur, our business, financial condition or results of operations could be
materially and adversely affected. In that case, the trading price of our Common
Stock could decline, and you may lose some or all of your investment.

RISKS RELATED TO OUR COMMON STOCK

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

We currently have a number of obligations that we are unable to meet without
generating additional revenues or raising additional capital. We are also
subject to substantial litigation and an investigation by the SEC described
elsewhere herein. If we cannot generate additional revenues or raise additional
capital in the near future, we may become insolvent. As of June 30, 2006, our
cash balance was $195,432 and we had a working capital deficit of $4,375,799.
This raises substantial doubt about our ability to continue as a going concern.
Historically, we have funded our capital requirements with debt and equity
financing. Our ability to obtain additional equity or debt financing depends on
a number of factors including our financial performance and the overall
conditions in our industry. If we are not able to raise additional financing or
if such financing is not available on acceptable terms, we may liquidate assets,
seek or be forced into bankruptcy, and/or continue operations but suffer
material harm to our operations and financial condition. These measures could
have a material adverse affect on our ability to continue as a going concern.

We have restructured approximately 93% of our previously outstanding claims,
liabilities, demands, causes of action, costs, expenses, attorneys' fees,
damages, indemnities, and obligations of every kind and nature that certain
creditors and claimants had with us pursuant to our Creditor and Claimant
Liabilities Restructuring described elsewhere in this registration statement. We
are currently unable to provide assurance that the acceptance of the Creditor
and Claimant Liabilities Restructuring will actually improve our ability to fund
the further development of our business plan or improve our operations. Our
failure to fund the further development of our business plan and operations
would materially adversely affect our ability to continue as a going concern.

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

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

We generated no revenue from operations before December 31, 2004 and only
limited revenues in the year ended December 31, 2005. We have relied on
financing generated from our capital raising activities to fund the
implementation of our business plan. We have incurred operating and net losses
and negative cash flows from operations since our inception. As of June 30,
2006, we had an accumulated deficit of approximately $90.3 million. We may
continue to incur operating and net losses, due in part to implementing our
acquisitions strategy, engaging in financing activities and expansion of our
personnel and our business development capabilities. We will continue to seek
financing for the acquisition of other acquisition targets that we may identify
in the future. We continue to believe that we will secure financing in the near
future, but there can be no assurance of our success. If we are unable to obtain
the necessary funding, it will materially adversely affect our ability to
execute our business plan and to continue our operations.

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

THE AUTOMATIC CONVERSION OF OUR SERIES A-1 PREFERRED STOCK HAS RESULTED IN
SIGNIFICANT DILUTION TO OUR EXISTING STOCKHOLDERS AND A CHANGE IN CONTROL OF OUR
COMPANY, AND COULD ALSO RESULT IN ADDITIONAL VOLATILITY IN THE PRICE OF OUR
COMMON STOCK.

The automatic conversion of our Series A-1 Preferred Stock on July 31, 2006
resulted in significant dilution to our existing stockholders and resulted in
our former creditors and claimants owning approximately 85.3% of our outstanding
shares of common stock. These creditors and claimants, to the extent they act in
concert, would be able to determine all actions brought before our stockholders.

Upon the registration of the shares of common stock issued upon the conversion
of our Series A-1 Preferred Stock, there will be a substantial amount of shares
eligible for sale in the public market. If former holders of our Series A-1
Preferred Stock decide to sell their shares of registered stock, such sales
could result in significant volatility in the market price of our common stock
and would likely cause the market price of our common stock to decline.

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

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

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

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

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

WE ARE CURRENTLY SUBJECT TO AN SEC INVESTIGATION WHICH COULD HAVE AN ADVERSE
AFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.

Pursuant to Section 20(a) of the Securities Act and Section 21(a) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the staff of
the SEC (the "Staff"), issued an order (In the Matter of Patron Systems, Inc. -
Order Directing a Private Investigation and Designating Officers to Take
Testimony (C-03739-A, February 12, 2004)) (the "Order") that a private
investigation (the "SEC Investigation") be made to determine whether certain of
our actions and certain of the actions of our former officers and directors and
others (as described below) violated Section 5(a) and 5(c) of the Securities Act
and/or Section 10 and Rule 10b-5 promulgated under the Exchange Act. Generally,
the Order provides, among other things, that the Staff is investigating (i) the
legality of two (2) separate Registration Statements filed by us on Form S-8,
filed on December 20, 2002 and on April 2, 2003, as amended on April 9, 2003
(collectively, the "Registration Statements"), covering the resale of, in the
aggregate, 4,375,000 shares of Common Stock issued to certain of our
consultants, and (ii) whether in connection with the purchase or sale of shares
of Common Stock, certain of our officers, directors and others (a) sold Common
Stock in violation of Section 5 of the Securities Act and/or, (b) made
misrepresentations and/or omissions of material facts and/or employed fraudulent
devices in connection with such purchases and/or sales relating to certain of
our press releases regarding, among other items, proposed mergers and
acquisitions that were never consummated. If the SEC brings an action against
us, it could result in, among other items, a civil injunctive order or an
administrative cease-and-desist order being entered against us, in addition to
the imposition of a significant civil penalty. Moreover, the SEC Investigation
and/or a subsequent SEC action could affect adversely our ability to have our
Common Stock listed on a stock exchange and/or quoted on the OTC Bulletin Board
or NASDAQ, our ability to sell our securities and/or have our securities
registered with the SEC and/or in various states and/or our ability to implement
our business plan. Our legal counsel representing us in such matters has
indicated that while the SEC Investigation is ongoing and we have not received
correspondence from the SEC indicating that the matter is officially closed, the
Staff has indicated that it does not intend to request additional information
from us and that, at this time, it does not intend to recommend that the SEC
bring an enforcement action against us or our former officers and directors.
There can be no assurance that the SEC will accept the Staff's recommendation
not to bring an enforcement action against us or that the Staff will not elect
at some future time to seek additional information from us with respect to these
matters.

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

If our existing or future stockholders sell, or are perceived to sell,
substantial amounts of our Common Stock in the public market, the market price
of our Common Stock could decline. As of October 13, 2006, there were 14,462,260
shares of Common Stock outstanding, of which 5,526,587 shares were held by
directors, executive officers and other affiliates, the sale of which are
subject to volume limitations under Rule 144, various vesting agreements and our
quarterly and other "blackout" periods. Furthermore, shares subject to
outstanding options and warrants and shares reserved for future issuance under
our stock option plan will become eligible for sale in the public market to the
extent permitted by the provisions of various vesting agreements, the lock-up
arrangements and Rule 144 under the Securities Act.

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

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

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

o the length of sales cycles;

o the timing of recognizing revenues;

o new product introductions by us or our competitors;

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

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

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

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

o variations in the prices of the components we purchase;

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

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

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

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

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

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

o make a special written suitability determination for the
purchaser;

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

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

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

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

RISKS RELATED TO OUR BUSINESS

WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE ACQUIRED BUSINESSES.

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

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

To achieve our intended growth, we will require substantial additional capital.
We have encountered difficulty and delays in raising capital to date and the
market environment for development stage companies, like ours, remains
particularly challenging. There can be no assurance that funds will be available
when needed or on acceptable terms. Technology companies in general have
experienced difficulty in recent years in accessing capital. Our inability to
obtain additional financing may require us to delay, scale back or eliminate

certain of our growth plans which could have a material and adverse effect on
our business, financial condition or results of operations or could cause us to
cease operations. Even if we are able to obtain additional financing, such
financing could be structured as equity financing that would dilute the
ownership percentage of any investor in our securities.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Governmental regulation of imports or exports or failure to obtain required
export approval of our encryption technologies could harm our international and
domestic sales. The United States and various foreign governments have imposed

controls, export license requirements and restrictions on the import or export
of some technologies, especially encryption technology. In addition, from time
to time, governmental agencies have proposed additional regulation of encryption
technology, such as requiring the escrow and governmental recovery of private
encryption keys.

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

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

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

FORWARD-LOOKING STATEMENTS

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

USE OF PROCEEDS

The Selling Stockholders will receive all of the proceeds from the sale of the
shares offered for sale by them under this prospectus. We will not receive any
proceeds from the resale of shares by the Selling Stockholders covered by this
prospectus. However, we will receive the exercise price for any shares of Common
Stock delivered in connection with the exercise, by Selling Stockholders, of the
common stock purchase warrants and the exercise by Selling Stockholders of stock
options. We expect to use the proceeds received from the exercise of the common
stock purchase warrants and the exercise of the stock options, if any, for
working capital and general corporate purposes.

SELLING SECURITY HOLDERS

The Selling Stockholders are offering for sale up to an aggregate of 15,190,860
shares of Common Stock which includes (i) 823,909 shares of Common Stock issued
in various private placement transactions over the past two years, (ii)
1,287,168 shares issuable upon the conversion of the Series A Preferred Stock,
(iii) 11,537,603 shares issued upon the automatic conversion of the Series A-1
Preferred Stock, (iv) 1,097,378 shares of Common Stock issuable upon the
exercise of common stock purchase warrants and (v) 444,802 shares of Common
Stock issuable upon the exercise of stock options. All of such shares of Common
Stock are being offered for resale by the Selling Stockholders. Please refer to
the section captioned "Description of Securities" for a more detailed discussion
of the terms and provisions of the Series A Preferred Stock, Series A-1
Preferred Stock, options and warrants described above.

The following table sets forth: (1) the name of each of the stockholders for
whom we are registering shares under this registration statement; (2) the number
of shares of our Common Stock beneficially owned by each such stockholder prior
to this offering (including all shares of Common Stock issuable upon the
exercise of common stock purchase warrants and stock options as described below,
whether or not exercisable within 60 days of the date hereof); (3) the number of
shares of our Common Stock offered by such stockholder pursuant to this
prospectus; and (4) the number of shares, and (if one percent or more) the
percentage of the total of the outstanding shares, of our Common Stock to be
beneficially owned by each such stockholder after this offering, assuming that
all of the shares of our Common Stock beneficially owned by each such
stockholder and offered pursuant to this prospectus are sold and that each such
stockholder acquires no additional shares of our Common Stock prior to the
completion of this offering. Such data is based upon information provided by
each Selling Stockholder.

PERCENTAGE OF
SHARES SHARES SHARES
BENEFICIALLY SHARES TO BE BENEFICIALLY BENEFICIALLY
OWNED BEFORE SOLD IN THE OWNED AFTER OWNED AFTER
SELLING STOCKHOLDER OFFERING OFFERING OFFERING OFFERING(1)
----------------------------------------------- ----------------- --------------- ---------------- ---------------

Stephen R. Adams & Harriet J. Adams TTEES
Adams Family Trust U/D/T 12/29/97(2) 410 410 -- --

Advanced Equities Venture Partners I, L.P.(3) 196,474 196,474 -- --

Ramesh Akella 84,129 84,129 -- --

Beatrice Aleman(4) 179 179 -- --

Lani Allen 1,254 1,254 -- --

The Allin Dynastic Trust(5) 208,334 208,334 -- --

Patrick Allin 625,000 625,000 -- --

Andre J. Andrieux(6) 13,890 13,890 -- --

Apex Investment Fund III, L.P.(7) 29,847 29,847 -- --

--------
(1) Applicable percentage of ownership is based on 18,382,584 shares of common
stock outstanding as of the date of this prospectus assuming the conversion
of Series A Preferred Stock, the exercise of all common stock purchase
warrants and the exercise of all stock options.

(2) Stephen R. Adams and Harriet J. Adams exercise voting and dispositive power
over these shares.

(3) Includes 7,501 shares of common stock underlying common stock purchase
warrants. Dwight O. Badger and Keith Daubenspeck exercise voting and
dispositive power over these shares.

(4) Includes 179 shares underlying common stock purchase warrants.

(5) Nicole Allin and Patricia Allin exercise voting and dispositive power over
these shares.

(6) Includes 10,417 shares issuable upon the conversion of Series A Preferred
Stock and 3,473 shares of common stock underlying common stock purchase
warrants.

(7) Apex Management III, LLC is the general partner of Apex Investment Fund
III, L.P. A majority of George M. Middlemas (one of the Company's
directors, who disclaims beneficial ownership in these shares), First
Analysis Corporation and James A. Johnson, the managers of Apex Management
III, LLC, exercise voting and dispositive power over these shares. Bret R.
Maxwell and Mark T. Koulogeorge exercise voting and dispositive power for
First Analysis Corporation.

Apex Investment Fund IV, L.P.(8) 39,452 39,452 -- --

Apex Investment Fund V, L.P.(9) 4,441,537 4,441,537 -- --

Apex Investment Strategic Partners IV, LLC(10) 1,366 1.366 -- --

Apex Investment Strategic Partners, LLC(11) 1,499 1,499 -- --

Andrea Appatini 7,438 7,438 -- --

Fernando Archila(12) 86,666 86,666 -- --

Glenn Ashton 354 354 -- --

Anthony Asta 500 500 -- --

Curtis Bailey(13) 24,479 24,479 -- --

Narasimhan Balasubramanian(14) 2,334 2,334 -- --

Brian Barlett(15) 29 29 -- --

Richard G. Beggs 73,474 73,474 -- --

Richard K. Beggs 21,791 21,538 -- --

James Bielicki(16) 19,446 19,446 -- --

Anne F. Bivona 30,856 30,856 -- --

John V. Bivona 42,361 31,250 -- --

Fredrik Bjurle(17) 21,798 16,131 -- --

Craig Boden(18) 2,117 2,117 -- --

Bonanza Trust; Jeff Zaluda agent for
Trustee(19) 44,855 44,855 -- --

Robert Bonaventura(20) 10,522 10,255 -- --

Craig Bonn(21) 7,502 7,502 -- --

Bowne of Chicago, Inc.(22) 16,013 16,013 -- --

--------
(8) Apex Management IV, LLC is the general partner of Apex Investment Fund IV,
L.P. A majority of George M. Middlemas (one of the Company's directors, who
disclaims beneficial ownership in these shares), Lon H. H. Chow, Wayne T.
Boulais, Armando Pauker and Babu Ranganathan, the managers of Apex
Management IV, LLC, exercise voting and dispositive power over these
shares.

(9) Includes 520,834 shares issuable upon the conversion of Series A Preferred
Stock and 384,930 shares of common stock underlying common stock purchase
warrants. Apex Management V, LLC is the general partner of Apex Investment
Fund V, L.P. A majority of George M. Middlemas (one of the Company's
directors, who disclaims beneficial ownership in these shares), Lon H. H.
Chow, Wayne T. Boulais, Armando Pauker and Babu Ranganathan, the managers
of Apex Management IV, LLC, exercise voting and dispositive power over
these shares.

(10) Apex Management IV, LLC is the manager of Apex Investment Strategic
Partners IV, LLC. A majority of George M. Middlemas (one of the Company's
directors, who disclaims beneficial ownership in these shares), Lon H. H.
Chow, Wayne T. Boulais, Armando Pauker and Babu Ranganathan, the managers
of Apex Management IV, LLC, exercise voting and dispositive power over
these shares.

(11) Apex Management III, LLC is the manager of Apex Investment Strategic
Partners, LLC. A majority of George M. Middlemas (one of the Company's
directors, who disclaims beneficial ownership in these shares), First
Analysis Corporation and James A. Johnson, the managers of Apex Management
III, LLC, exercise voting and dispositive power over these shares. Bret R.
Maxwell and Mark T. Koulogeorge exercise voting and dispositive power for
First Analysis Corporation.

(12) Includes 709 shares underlying common stock options.

(13) Includes 1,668 shares underlying common stock purchase warrants.

(14) Includes 2,334 shares underlying common stock options.

(15) Includes 29 shares underlying common stock purchase warrants.

(16) Includes 14,584 shares issuable upon the conversion of Series A Preferred
Stock and 4,862 shares underlying common stock purchase warrants.

(17) Includes 16,131 shares underlying common stock purchase warrants.

(18) Includes 2,117 shares underlying common stock purchase warrants.

(19) Includes 44,855 shares underlying common stock purchase warrants. Jeff
Zaluda exercises voting and dispositive power over these shares.

(20) Includes 10,255 shares underlying common stock purchase warrants.

(21) Includes 7,502 shares underlying common stock purchase warrants.

(22) Bowne of Chicago, Inc. is a wholly-owned subsidiary of Bowne & Co., Inc.
The board of directors of Bowne & Co., Inc. exercises voting and
dispositive power over these shares.

Victoria M. J. Boydston(23) 2,021 2,021 -- --

John Boylan 274 274 -- --

Sean Brennan IRA(24) 24,479 24,479 -- --

Chris T. Brown(25) 27,779 27,779 -- --

Derek Buchanan(26) 34,727 34,727 -- --

Maria Caporrici 300,000 300,000 -- --

Michael B. & Stella Carroll, JTWROS(27) 48,955 48,95 -- --

Elena M. Castor(28) 4,861 4,861 -- --

The Centrifuge Group, Inc.(29) 25,230 25,230 -- --

Milene Cervo(30) 2,334 2,334 -- --

Keith Chamish(31) 167 167 -- --

Joel Cherande(32) 55,556 55,556 -- --

Stephen T. & Vicki J. Childs(33) 11,112 11,112 -- --

Todd Cirella(34) 13,075 13,075 -- --

Matthew Collier 1,254 1,254 -- --

Robert K. Conners(35) 7,552 7,552 -- --

Richard Contreras(36) 43,612 43,612 -- --

Derry Cook 410 410 -- --

Cook Associates(37) 13,334 13,334 -- --

Joseph Cordi(38) 370 370 -- --

Robert Cross(39) 35,557 35,557 -- --

Aroon Dalamal 56,876 53,876 -- --

Luan Dang 1,252 1,252 -- --

John G. D'Angelo 75,174 75,174 -- --

Joseph D'Angelo 714 714 -- --

Joseph D'Angelo & Elizabeth V. D'Angelo 1,024 1,024 -- --

Joseph U. D'Angelo & Catherine D'Angelo 512 512 -- --

Charlene Davidson 456 456 -- --

Michael W. Davidson(40) 33,334 33,334 -- --

--------
(23) Includes 1,667 shares underlying common stock options.

(24) Includes 1,668 shares underlying common stock purchase warrants. Sean
Brennan exercises voting and dispositive power over these shares.

(25) Includes 20,834 shares issuable upon the conversion of Series A Preferred
Stock and 6,945 shares underlying common stock purchase warrants.

(26) Includes 5,834 shares underlying common stock options.

(27) Includes 3,334 shares underlying common stock purchase warrants.

(28) Includes 2,334 shares underlying common stock options.

(29) Colin Mangham and Kiran Rajbhandary exercise voting and dispositive power
over these shares.

(30) Includes 2,334 shares underlying common stock options.

(31) Includes 167 shares underlying common stock purchase warrants.

(32) Includes 41,667 shares issuable upon the conversion of Series A Preferred
Stock and 13,889 shares underlying common stock purchase warrants.

(33) Includes 8,334 shares issuable upon the conversion of Series A Preferred
Stock and 2,778 shares underlying common stock purchase warrants.

(34) Includes 13,075 shares underlying common stock purchase warrants.

(35) Includes 7,552 shares underlying common stock purchase warrants.

(36) Includes 32,709 shares issuable upon the conversion of Series A Preferred
Stock and 10,903 shares underlying common stock purchase warrants.

(37) Includes 13,334 shares underlying common stock options. John Kins and Arnis
Kins exercise voting and dispositive power over these shares.

(38) Includes 370 shares underlying common stock purchase warrants.

(39) Includes 33,334 shares underlying common stock options.

(40) Includes 16,667 shares underlying common stock options.

Robert D. & Bernice J. Davidson 672 666 -- --

Philip G. and Gina M. deCarion 1,254 1,254 -- --

Thomas A. DeRosa(41) 27,779 27,779 -- --

DGC Ltd., Inc(42) 41,667 41,667 -- --

Dianthus LLC(43) 44,855 44,85 -- --

DICOM Holdings AG(44) 25,065 25,065 -- --

Andrew Diederich(45) 2,334 2,334 -- --

H.S.Djjkstra Holding BV(46) 55,556 55,556 -- --

John W. Eilers(47) 24,479 24,479 -- --

Joseph Elchak Living Trust(48) 24,149 24,149 -- --

Dale Emanuel & Caroline Rekoff(49) 27,779 27,779 -- --

Bruce Emmeluth & Canda Emmeluth JTWROS 307 307 -- --

Gail Fanelli(50) 9 9 -- --

Harald Faulhaber(51) 16,667 16,667 -- --

Mariano Ferrari & Halvecia Chaile(52) 14,687 14,687 -- --

FIBA Consultants Ltd.(53) 62,490 52,490 -- --

Carmine Fiore 21,584 20,834 -- --

Douglas N. Fowler II(54) 27,779 27,779 -- --

Ted Fowler(55) 13,205 13,205 -- --

Michael C. Fox Revocable Trust 5/5/05(56) 30,556 30,556 -- --

Paul G. Fray(57) 55,556 55,556 -- --

Christina Gallo(58) 73 73 -- --

Gregory Galstaun(59) 40,899 40,899 -- --

--------
(41) Includes 20,834 shares issuable upon the conversion of Series A Preferred
Stock and 6,945 shares underlying common stock purchase warrants.

(42) Paul Harary exercises voting and dispositive power over these shares.

(43) Includes 44,855 shares underlying common stock purchase warrants. Deirdr
Henderson exercises voting and dispositive power over these shares.

(44) Urs Niederberger exercises voting and dispositive power over these shares.

(45) Includes 2,334 shares underlying common stock options.

(46) Includes 41,667 shares issuable upon the conversion of Series A Preferre
Stock and 13,889 shares underlying common stock purchase warrants. H.S.
Dykstr exercises voting and dispositive power over these shares.

(47) Includes 1,668 shares underlying common stock purchase warrants.

(48) Includes 1,668 shares underlying common stock purchase warrants. Joseph
Elchak exercises voting and dispositive power over these shares.

(49) Includes 20,834 shares issuable upon the conversion of Series A Preferred
Stock and 6,945 shares underlying common stock purchase warrants.

(50) Includes 9 shares underlying common stock purchase warrants.

(51) Includes 12,500 shares issuable upon the conversion of Series A Preferred
Stock and 4,167 shares underlying common stock purchase warrants.

(52) Includes 1,000 shares underlying common stock purchase warrants.

(53) Includes 23,500 shares underlying common stock options. Theo Vermaelen
exercises voting and dispositive power over these shares.

(54) Includes 20,834 shares issuable upon the conversion of Series A Preferred
Stock and 6,945 shares underlying common stock purchase warrants.

(55) Includes 13,205 shares underlying common stock purchase warrants.

(56) Includes 22,917 shares issuable upon the conversion of Series A Preferred
Stock and 7,639 shares underlying common stock purchase warrants. Michael
C. Fox exercises voting and dispositive power over these shares.

(57) Includes 41,667 shares issuable upon the conversion of Series A Preferred
Stock and 13,889 shares underlying common stock purchase warrants.

(58) Includes 73 shares underlying common stock purchase warrants.

(59) Includes 5,834 shares underlying common stock options.

Mark Gergen(60) 40,056 40,056 -- --

Gail Gervin 1,391 1,391 -- --

Wesley L. Golby 103 103 -- --

Andrew Charles Good & Fiona McPhee(61) 9,793 9,793 -- --

Janice Grape(62) 19,360 19,360 -- --

Carl Greer 862 862 -- --

Jean-Marie van Griethuysen(63) 13,890 13,890 -- --

Sunny M. Grillo(64) 90 90 -- --

Donald Gross(65) 72,422 72,422 -- --

Nicholas Gupta(66) 79 79 -- --

Per Gustafsson(67) 994,289 994,289 -- --

Philip Lee Hage 103 103 -- --

Stephen Hall(68) 190,417 190,417 -- --

William & Susan Hammon 536,509 516,509 -- --

William Hammon(69) 51,667 51,667 -- --

Paul Harary 260,000 260,000 -- --

Afi M. Hasan 61,021 61,021 -- --

Robert C. Hawk 410 410 -- --

Robert M. Haxel(70) 3,756 3,756 -- --

Robert Hayes 345 345 -- --

Wayne H. Heldt Separate Property Revocable
Trust UA DTD 1-28-2004(71) 868 868 -- --

William F. Helwig, Jr. 224 224 -- --

Steven Hill(72) 132 132 -- --

Zenyk Horbowy(73) 26,926 26,926 -- --

Joaquin P. Horton & Nellie R. Horton ttees
FBO Horton Living Trust U/A dtd 8/7/91(74) 410 410 -- --

Erwin William Horwitch(75) 5,000 5,000 -- --

Edmund W. Hubard(76) 27,779 7,779 -- --

James Hugar 205 205 -- --

William & Nancy Hugie(77) 12,240 12,240 -- --

Albert S Humphrey III & Cynthia W Humphrey JT
TEN 512 512 -- --

Ki Douglas Ingersol 103 103 -- --

--------
(60) Includes 13,334 shares underlying common stock options.

(61) Includes 668 shares underlying common stock purchase warrants.

(62) Includes 19,360 shares underlying common stock purchase warrants.

(63) Includes 10,417 shares issuable upon the conversion of Series A Preferred
Stock and 3,473 shares underlying common stock purchase warrants.

(64) Includes 90 shares underlying common stock purchase warrants.

(65) Includes 5,000 shares underlying common stock purchase warrants.

(66) Includes 79 shares underlying common stock purchase warrants.

(67) Includes 68,520 shares underlying common stock purchase warrants.

(68) Includes 5,000 shares underlying common stock options.

(69) Includes 51,667 shares underlying common stock options.

(70) Includes 3,334 shares underlying common stock options.

(71) Wayne H. Heldt exercises voting and dispositive power over these shares.

(72) Includes 132 shares underlying common stock purchase warrants.

(73) Includes 1,834 shares underlying common stock purchase warrants.

(74) Joaquin P. Horton and Nellie R. Horton exercise voting and dispositive
power over these shares.

(75) Includes 5,000 shares underlying common stock options.

(76) Includes 20,834 shares issuable upon the conversion of Series A Preferred
Stock and 6,945 shares underlying common stock purchase warrants.

(77) Includes 834 shares underlying common stock purchase warrants.

Innovative Technology Partners II, L.P.(78) 8,612 8,612 -- --

Iroquois Master Fund Ltd.(79) 147,377 107,829 -- --

Fakhri Isa 1,264 880 -- --

Majdi Isa 550 367 -- --

Nasri Isa 1,184 734 -- --

Mahmoud A. Ismail 43,443 39,600 -- --

Andrew W. Jamison(80) 71,039 70,239 -- --

William & Joanne Jellison(81) 26,136 24,136 -- --

Jo-Bar Enterprises LLC(82) 1,206 1,206 -- --

Martin T. Johnson(83) 26,204 26,204 -- --

Ivo L. Karadjov(84) 2,587 2,587 -- --

Sherif Mohamed Fathi El Kilany(85) 32,268 32,268 -- --

Ryan Kirch(86) 19,168 19,168 -- --

Richard Kirschner(87) 101 101 -- --

Rafiq Kiswani 20,947 20,947 -- --

David T. Klemer & Deana R. Shelby(88) 16,134 16,134 -- --

Gary D. Klever 16,550 16,550 -- --

Knitowski Family Trust UDT dated 8/3/00(89) 2,495 2,495 -- --

Gloria C. Kohl(90) 6,947 5,861 -- --

Mark Koplik & Deirdre Henderson(91) 34 34 -- --

Mark W. Lamb 512 512 -- --

Ken & Nancy Larsen(92) 13,890 13,890 -- --

Robert Laughlin(93) 9,793 9,793 -- --

Bruce M. Lawlor(94) 33,334 33,334 -- --

Anthony Lee(95) 23,012 23,012 -- --

Diane F. Lee 868 868 -- --

Maris J. Licis(96) 29,660 29,660 -- --

Richard L. Linting Declaration of Trust DTD
10/13/1983(97) 625,755 625,755 -- --

Rebecca Gould Little(98) 1,836 1,836 -- --

--------
(78) Dwight O. Badger and Keith Daubenspeck exercise voting and dispositive
power over these shares.

(79) Joshua Silverman exercises voting and dispositive power over these shares.

(80) Includes 16,667 shares underlying common stock options.

(81) Includes 1,668 shares underlying common stock purchase warrants.

(82) Joel A. Stone, Barbara Stone and Russell G. Stone exercise voting and
dispositive power over these shares.

(83) Includes 26,204 shares underlying common stock options.

(84) Includes 2,334 shares underlying common stock options.

(85) Includes 32,268 shares underlying common stock purchase warrants.

(86) Includes 75,001 shares underlying common stock options.

(87) Includes 101 shares underlying common stock purchase warrants.

(88) Includes 16,134 shares underlying common stock purchase warrants.

(89) Alan S. Knitowski & Kelly D. Knitowski exercise voting and dispositive
power over these shares.

(90) Includes 3,334 shares underlying common stock options.

(91) Includes 34 shares underlying common stock purchase warrants.

(92) Includes 10,417 shares issuable upon the conversion of Series A Preferred
Stock and 3,473 shares underlying common stock purchase warrants.

(93) Includes 668 shares underlying common stock purchase warrants.

(94) Includes 16,667 shares underlying common stock options.

(95) Includes 3,334 shares underlying common stock options.

(96) Includes 20,001 shares underlying common stock options.

(97) Includes 33,334 shares underlying common stock options. Richard L. Linting
exercises voting and dispositive power over theses shares.

(98) Includes 1,667 shares underlying common stock options.

LLB Ltd.(99) 330,000 330,000 -- --

James R. Lockman 345 345 -- --

Daniel Loizzo 336 336 -- --

Hans Jurgen Mammitzsch(100) 27,779 27,779 -- --

Todd Y. Mapes(101) 13,334 13,334 -- --

Hugh Marasa(102) 2,778 2,745 -- --

John Marcus(103) 667 667 -- --

Lisette M. Martin 334 334 -- --

Kirsten Matti(104) 2,334 2,334 -- --

Olwen Matthews(105) 15,031 15,031 -- --

Claude M. Maynard II(106) 104 104 -- --

Frank G. Mazzola 50,000 50,000 -- --

Gerald L. McGarvin Jr.(107) 41,112 41,112 -- --

Edgar A. McIntosh & Kathleen M. McIntosh
JTWROS(108) 4,677 4,677 -- --

Glen McKelvey(109) 379 379 -- --

Paris McKenzie 70,000 70,000 -- --

John McMaude(110) 449 449 -- --

Heidi McRae 82 82 -- --

D. Jonathan Merriman 512 512 -- --

George Middlemas 759 759 -- --

Philip Mirabelli 287,452 226,449 -- --

Robert Mitro 3,760 3,760 -- --

Kelly S. Mock 253 253 -- --

Kenneth A. Monnig(111) 12,240 12,240 -- --

Mark J. Morgenstern 20,834 20,834 -- --

Jim Morriss(112) 14,067 12,500 -- --

Charles T. Murphy(113) 16,667 16,667 -- --

Craig Myers 18,617 18,617 -- --

Michael Neppl 2,380 2,380 -- --

Peter Neubauer 345 345 -- --

Brett Newbold 156,532 156,532 -- --

Newbold, Inc.(114) 86,667 86,667 -- --

Heidi B. Newton(115) 13,405 13,405 -- --

--------
(99) Paul Harary exercises voting and dispositive power over these shares.

(100) Includes 20,834 shares issuable upon the conversion of Series A Preferred
Stock and 6,945 shares underlying common stock purchase warrants.

(101) Includes 13,334 shares underlying common stock options.

(102) Includes 2,745 shares underlying common stock purchase warrants.

(103) Includes 667 shares underlying common stock purchase warrants.

(104) Includes 2,334 shares underlying common stock options.

(105) Includes 1,667 shares underlying common stock options.

(106) Includes 104 shares underlying common stock purchase warrants.

(107) Includes 10,278 shares underlying common stock purchase warrants.

(108) Edgar A. McIntosh & Kathleen M. McIntosh exercise voting and dispositive
power over these shares.

(109) Includes 379 shares underlying common stock purchase warrants.

(110) Includes 449 shares underlying common stock purchase warrants.

(111) Includes 834 shares underlying common stock purchase warrants.

(112) Includes 12,500 shares underlying common stock options.

(113) Includes 12,500 shares issuable upon the conversion of Series A Preferred
Stock and 4,167 shares underlying common stock purchase warrants.

(114) Brett Newbold exercises voting and dispositive power over these shares.

(115) Includes 6,667 shares underlying common stock options.

Ray Nofi(116) 24,479 24,479 -- --

Peter Nordin(117) 148,150 148,150 -- --

Peter Nordin APS(118) 111,112 111,112 -- --

Northport III Private Equity, LLC(119) 862 862 -- --

The Northwestern Mutual Life Insurance
Company(120) 553,747 553,747 -- --

Robin Nunley(121) 2,334 2,334 -- --

Lawrence O'Brien 267 267 -- --

Michael R. O'Donnell 512 512 -- --

Richard D. & Mary Phyllis O'Hallaron 103 103 -- --

Thomas P. O'Hallaron and Joyce L. O'Hallaron 455 455 -- --

William P. O'Keefe 147 147 -- --

Gregory Orlandella(122) 16,860 16,860 -- --

Mohamed Othman 1,467 1,467 -- --

Talat Othman 7,334 7,334 -- --

David Paladino(123) 51 51 -- --

Roland Pedraza(124) 9 9 -- --

Petros Ventures Limited Partnership(125) 1,120 1,120 -- --

Gregory V. Pierce 843 843 -- --

Louis Quagliata(126) 12,240 12,240 -- --

Joseph E. & Sandra C. Quinn JTWROS(127) 13,890 13,890 -- --

William Rabetz(128) 27,779 27,779 -- --

James K. & Sharon A. Randolph(129) 98,278 97,911 -- --

Hugh Regan(130) 696 696 -- --

James Reid(131) 1,071 1,071 -- --

Lyle Reigel 345 345 -- --

Charles Rimicci 19,167 19,167 -- --

Kathleen A. Robinson(132) 1,667 1,667 -- --

--------
(116) Includes 1,668 shares underlying common stock purchase warrants.

(117) Includes 111,112 shares issuable upon the conversion of Series A Preferred
Stock and 37,038 shares underlying common stock purchase warrants.

(118) Includes 83,334 shares issuable upon the conversion of Series A Preferred
Stock and 27,778 shares underlying common stock purchase warrants. Peter
Nordin exercises voting and dispositive power over these shares.

(119) David T. Shelby exercises voting and dispositive power over these shares.

(120) Includes 23,335 shares underlying common stock purchase warrants. Jerome
Baier exercises voting and dispositive power over these shares. The
Northwestern Mutual Life Insurance Company controls a registered broker
dealer. The Northwestern Mutual Life Insurance Company purchased the
securities to be resold in the ordinary course of business at the time of
the purchase of such securities, and, to the Company's knowledge, The
Northwestern Mutual Life Insurance Company has no agreement or
understanding, directly or indirectly, with any person to distribute the
securities.

(121) Includes 2,334 shares underlying common stock options.

(122) Includes 500 shares underlying common stock purchase warrants.

(123) Includes 51 shares underlying common stock purchase warrants.

(124) Includes 9 shares underlying common stock purchase warrants.

(125) Robert Baldavas exercises voting and dispositive power over these shares.

(126) Includes 834 shares underlying common stock purchase warrants.

(127) Includes 10,417 shares issuable upon the conversion of Series A Preferred
Stock and 3,473 shares underlying common stock purchase warrants.

(128) Includes 20,834 shares issuable upon the conversion of Series A Preferred
Stock and 6,945 shares underlying common stock purchase warrants.

(129) Includes 6,668 shares underlying common stock purchase warrants.

(130) Includes 696 shares underlying common stock purchase warrants.

(131) Includes 1,071 shares underlying common stock purchase warrants.

(132) Includes 1,667 shares underlying common stock options.

Fredric Rosman(133) 27,779 27,779 -- --

Patricia Rossi(134) 7,501 7,501 -- --

Robert Rotunno(135) 6,620 6,620 -- --

Frederick Ruby 464 464 -- --

Stuart L. Rudick 406,089 406,086 -- --

Jason Russo(136) 51,284 51,284 -- --

Schadler Living Trust(137) 97,911 97,911 -- --

Arlin Schmidt(138) 49,122 48,955 -- --

David Schorr 37,985 34,855 -- --

Victor Schwartz(139) 82,558 82,558 -- --

Adam Scott(140) 2,350 2,350 -- --

Jamileh Shalabi 334 334 -- --

Sherleigh Associates Inc. Profit Sharing
Plan(141) 837,501 770,834 -- --

Peter J. Shoebridge 3,369 3,369 -- --

Alex Shtaynberger(142) 362 362 -- --

Alvin I. Siegel 34,978 19,917 -- --

Peter Silverman(143) 469 469 -- --

Paul B. Smith 6,631 6,631 -- --

Thomas Bradley Sprague(144) 12,240 12,240 -- --

Stubbs Alderton & Markiles, LLP(145) 1,342 1,342 -- --

John Telfer(146) 262 262 -- --

Ten X Consulting and Business Development,
LLC(147) 5,867 5,867 -- --

R. Andrew Thamert(148) 1,920 1,920 -- --

Thomcapital Oy(149) 127,283 127,283 -- --

Scott Thorne(150) 2,334 2,334 -- --

Robert Tiefenbacher Jr.(151) 13,890 13,890 -- --

Steven J. Trinco 8,800 8 800 -- --

Daniel E. Twing 11,791 11,791 -- --

--------
(133) Includes 20,834 shares issuable upon the conversion of Series A Preferred
Stock and 6,945 shares underlying common stock purchase warrants.

(134) Includes 4,167 shares underlying common stock options.

(135) Includes 6,620 shares underlying common stock purchase warrants.

(136) Includes 51,284 shares underlying common stock purchase warrants.

(137) Includes 6,668 shares underlying common stock purchase warrants. John B.
Schadler exercises voting and dispositive power over these shares.

(138) Includes 3,334 shares underlying common stock purchase warrants.

(139) Includes 834 shares underlying common stock purchase warrants.

(140) Includes 2,350 shares underlying common stock purchase warrants.

(141) Jack Silver exercises voting and dispositive power over these shares.

(142) Includes 362 shares underlying common stock purchase warrants.

(143) Includes 469 shares underlying common stock purchase warrants.

(144) Includes 834 shares underlying common stock purchase warrants.

(145) Includes 1,342 shares underlying common stock purchase warrants. Scott
Alderton, the managing partner of Stubbs, Alderton & Markiles, LLP
exercises voting and dispositive power over these shares.

(146) Includes 262 shares underlying common stock purchase warrants.

(147) Rick Beston exercises voting and dispositive power over these shares.

(148) Includes 1,667 shares underlying common stock options.

(149) Includes 8,668 shares underlying common stock purchase warrants. Juha
Jouhki and Pekka Soikkeli exercise voting and dispositive power over these
shares.

(150) Includes 2,334 shares underlying common stock options.

(151) Includes 10,417 shares issuable upon the conversion of Series A Preferred
Stock and 3,473 shares underlying common stock purchase warrants.

Greg Unis(152) 6,667 6,667 -- --

Arnold Urson(153) 27,779 27,779 -- --

Carlos E. Valadares 276 276 -- --

F. Van Kasper 1,024 1,024 -- --

Natan & Miryam Vishlitzky(154) 72,856 72,856 -- --

Michael Wagner(155) 262 262 -- --

Ryan Walsh 3,369 3,369 -- --

John R. Walter(156) 7,844 7,844 -- --

Braden Waverley(157) 73,371 73,371 -- --

Martin R. Weigand(158) 13,890 13,890 -- --

Brian Wilhite 205 205 -- --

Blake Williams(159) 24,479 24,479 -- --

John T. Wilson(160) 13,890 13,890 -- --

Michael Wirth 7,964 6,250 -- --

Barry Wojcik(161) 55,556 55,556 -- --

Eric Wold 512 512 -- --

Michael Wolfe 1,981 1,981 -- --

Lyle E. Wright(162) 13,890 13,890 -- --

Robert E. Yaw II 105,146 105,146 -- --

Ron Zuckerman(163) 73 73 -- --

Oseas Zuluaga(164) 262 262 -- --
----------------- --------------- ---------------- ---------------
TOTAL 15,459,880 15,190,860 -- --

--------
(152) Includes 6,667 shares of common stock underlying common stock options.

(153) Includes 20,834 shares issuable upon the conversion of Series A Preferred
Stock and 6,945 shares underlying common stock purchase warrants.

(154) Includes 5,002 shares underlying common stock purchase warrants.

(155) Includes 262 shares underlying common stock purchase warrants.

(156) Includes 418 shares underlying common stock purchase warrants.

(157) Includes 73,371 shares underlying common stock options.

(158) Includes 10,417 shares issuable upon the conversion of Series A Preferred
Stock and 3,473 shares underlying common stock purchase warrants.

(159) Includes 1,668 shares underlying common stock purchase warrants.

(160) Includes 10,417 shares issuable upon the conversion of Series A Preferred
Stock and 3,473 shares underlying common stock purchase warrants.

(161) Includes 41,667 shares issuable upon the conversion of Series A Preferred
Stock and 13,889 shares underlying common stock purchase warrants.

(162) Includes 10,417 shares issuable upon the conversion of Series A Preferred
Stock and 3,473 shares underlying common stock purchase warrants.

(163) Includes 73 shares underlying common stock purchase warrants.

(164) Includes 262 shares underlying common stock purchase warrants.

PLAN OF DISTRIBUTION.

The Selling Stockholders and any of their respective pledgees, donees, assignees
and other successors-in-interest may, from time to time, sell any or all of
their shares of Common Stock on any stock exchange, market or trading facility
on which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The Selling Stockholders may use any one or more of
the following methods when selling shares:

o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;

o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;

o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;

o an exchange distribution in accordance with the rules of the
applicable exchange;

o privately-negotiated transactions;

o short sales that are not violations of the laws and regulations of
any state or the United States;

o broker-dealers may agree with the Selling Stockholders to sell a
specified number of such shares at a stipulated price per share;

o through the writing of options on the shares;

o a combination of any such methods of sale; and

o any other method permitted pursuant to applicable law.

The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The Selling
Stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.

The Selling Stockholders may also engage in short sales against the box
(provided that short sales are made subsequent to the effective date of the
registration statement), puts and calls and other transactions in our securities
or derivatives of our securities and may sell or deliver shares in connection
with these trades.

The Selling Stockholders or their respective pledgees, donees, transferees or
other successors in interest, may also sell the shares directly to market makers
acting as principals and/or broker-dealers acting as agents for themselves or
their customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of Common Stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
Selling Stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the Selling Stockholders. The Selling
Stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts; provided, however, the broker-dealers that are included as Selling
Stockholders in this prospectus that did not receive the securities included
herein for investment banking services are considered underwriters. In such
event, any commissions received by such broker-dealers or agents and any profit
on the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.

We are required to pay all fees and expenses incident to the registration of the
shares, including fees and disbursements of counsel to the Selling Stockholders,
but excluding brokerage commissions or underwriter discounts.

The Selling Stockholders, alternatively, may sell all or any part of the shares
offered in this prospectus through an underwriter. No selling stockholder has
entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.

The Selling Stockholders may pledge their shares to their brokers under the
margin provisions of customer agreements. If a Selling Stockholders defaults on
a margin loan, the broker may, from time to time, offer and sell the pledged

shares. The Selling Stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the Selling Stockholders or any other such person. In the
event that the Selling Stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the Selling
Stockholders will not be permitted to engage in short sales of Common Stock.

Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sales, the selling stockholder can only cover
its short position with the securities they receive from us upon conversion. In
addition, if such short sale is deemed to be a stabilizing activity, then the
selling stockholder will not be permitted to engage in a short sale of our
Common Stock. All of these limitations may affect the marketability of the
shares.

We have agreed to indemnify the Selling Stockholders, or their transferees or
assignees, against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the Selling
Stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.

If the Selling Stockholders notify us that they have a material arrangement with
a broker-dealer for the resale of the Common Stock, we would be required to
amend the registration statement of which this prospectus is a part, and file a
prospectus supplement to describe the agreements between the Selling
Stockholders and the broker-dealer.

LEGAL PROCEEDINGS.

SEC INVESTIGATION

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

EXISTING LITIGATION AGAINST THE COMPANY

On January 5, 2006, Mark P. Gertz, Trustee in bankruptcy for Arter & Hadden,
LLP, filed an Adversary Complaint for Recovery of Assets of the Estate in the
United States Bankruptcy Court Northern District of Ohio Eastern Division,
against us as successor in merger to Entelagent Software Corp. Mr. Gertz seeks
$32,278 plus interest accruing at the statutory rate since July 15, 2003 for
services rendered by Arter & Hadden, LLP to Entelagent Software Corp. On
September 11, 2006, we entered into a settlement and release agreement with Marc
P. Gertz, Trustee in bankruptcy for Arter & Hadden, LLP which calls for the
payment of $32,500 in 13 installments of $2,500.

On May 4, 2006, we became aware that Lok Technologies, Inc. had filed a
complaint on or about March 30, 2006 against us, Entelagent Software Corp. and
unnamed defendants in the Superior Court of California, County of Santa Clara
alleging breach of contract, breach of duty of good faith and fair dealing and
unjust enrichment related to a license agreement and certain promissory notes,
and seeking damages, interest, disgorgement of any unjust enrichment, attorneys'
fees and cost in an amount to be provided. Prior to receipt of this notice of
litigation, we had recorded a liability of $320,000 plus accrued interest of
$159,432. We believe that we have defenses to these claims. The Company cannot
provide any assurance that the ultimate settlement of this claim will not have a
material adverse affect on its financial condition.

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

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

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

Robert Cross joined the Company on February 28, 2005 as its Chief Executive
Officer. Mr. Cross has more than twenty years CEO-level experience in the
development and marketing of information technologies, including secure systems
for intelligence agencies and NATO markets. From 1984 through 2004, Mr. Cross
was Chief Executive Officer of Cross Technologies, Inc., a business process
outsourcing firm specializing in the structuring and commercialization of
information technologies. From 1993 through 1998, Mr. Cross was President and
CEO of Nanophase Technologies Corp. (NASDAQ: NANX). From 1984 through 1989, he
was Chairman and CEO of Delta Data Systems Corp., a manufacturer of secure
computers and peripherals for government intelligence agencies. From 1983 to
1984, Mr. Cross led the financial turnaround of Control Video Corporation,
predecessor to America Online (AOL). Prior thereto, Mr. Cross was General
Counsel of Electronic Data Systems. Prior thereto, Mr. Cross was a securities
counsel with Winthrop Stimson Putnam & Roberts. Mr. Cross received his business
and legal education at Washington University in St. Louis. He is a Marine Corps
veteran, and is an active member of Business Executives for National Security
and the Illinois Technology Development Alliance. Mr. Cross has served as a
director since February 28, 2005 with a term expiring at the Company's 2007
Annual Meeting of Stockholders.

BRADEN WAVERLEY, CHIEF OPERATING OFFICER & DIRECTOR; AGE 39

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

from the University of Wisconsin at Madison, and a masters of business
administration from the J.L. Kellogg Graduate School of Management at
Northwestern University. Mr. Waverley has served as a director since July 20,
2006 with a term expiring at the Company's 2008 Annual Meeting of Stockholders.

BRETT NEWBOLD, PRESIDENT & CHIEF TECHNOLOGY OFFICER; AGE 53

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

MARTIN T. "TORK" JOHNSON, CHIEF FINANCIAL OFFICER; AGE 55

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

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

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

GEORGE M. MIDDLEMAS, DIRECTOR; AGE 59

Mr. Middlemas is Managing General Partner of Apex Investment Partners. Prior to
joining Apex in 1991, Mr. Middlemas was a Senior Vice President and Principal of
Inco Venture Capital Management. Prior thereto, he was Vice President and a
member of the investment commitment committee of Citicorp Venture Capital. Mr.
Middlemas was a founder of both America Online (AOL) and RSA Security (NASDAQ:
RSAS). Mr. Middlemas holds a B.A. in history and political science from
Pennsylvania State University; an M.A. in political science from the University
of Pittsburgh; and an M.B.A. from the Harvard Graduate School of Business
Administration. Mr. Middlemas has served as a director since February 28, 2005
with a term expiring at the Company's 2009 Annual Meeting of Stockholders. Mr.
Middlemas also serves on the board of directors and the compensation committee
of the board of directors of Pure Cycle Corporation.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth certain information regarding beneficial
ownership of our Common Stock as of October 13, 2006, by (i) each person (or
group of affiliated persons) who is known by us to beneficially own more than 5%
of the outstanding shares of our Common Stock, (ii) each of our directors and
executive officers, and (iii) all of our executive officers and directors as a
group. Under Rule 13d-3, certain shares may be deemed to be beneficially owned
by more than one person (if, for example, persons share the power to vote or the
power to dispose of the shares). In addition, shares are deemed to be
beneficially owned by a person if the person has the right to acquire the shares
(for example, upon exercise of an option) within 60 days of the date as of which
the information is provided. In computing the percentage ownership of any
person, the amount of shares outstanding is deemed to include the amount of
shares beneficially owned by such person (and only such person) by reason of
these acquisition rights. As a result, the percentage of outstanding shares of
any person as shown in this table does not necessarily reflect the person's
actual ownership or voting power with respect to the number of shares of Common
Stock actually outstanding at October 13, 2006. As of October 13, 2006, there
were 14,462,260 shares of Common Stock outstanding. Except as otherwise
indicated, the address of each of the executive officers, directors and more
than 5% stockholders named below is c/o Patron Systems, Inc., 5775 Flatiron
Parkway, Suite 230, Boulder, CO 80301.

AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
CERTAIN BENEFICIAL OWNERS OWNERSHIP OF CLASS
------------------------------------------------------- ---------- --------
DIRECTORS, EXECUTIVE OFFICERS
Robert W. Cross(1) .................................... 35,557 *
Braden Waverley(2) .................................... 26,903 *
Brett Newbold(3) ...................................... 135,834 *
Martin T. Johnson(4) .................................. 9,609 *
Heidi B. Newton(5) .................................... 8,821 *
George M. Middlemas(6) ................................ 759 *
ALL DIRECTORS AND EXECUTIVE
OFFICERS AS A GROUP(7) ........................... 217,483 1.5%

5% STOCKHOLDERS
Apex Investment Fund V, L.P.(8) ....................... 5,309,104 33.8%
225 West Washington St., Ste. 1500
Chicago, Illinois 60606
Per Gustafsson ........................................ 925,769 6.4%
Sodergatan 20A
Vaxjo, Sweden 35235
Arco Van Nieuwland(9) ................................. 782,193 5.3%
Bunde 8
2970 Schilde
Belgium
Sherleigh Associates, Inc. Profit Sharing ............. 770,834 5.3%
Plan
c/o Jack Silver
920 5th Avenue, Apt. 3B
New York, New York 10021

* Less than 1%

(1) Consists of 33,334 shares of Common Stock that may be acquired from the
Company within 60 days of October 13, 2006 upon the exercise of
outstanding stock options.

(2) Consists of 26,903 shares of Common Stock that may be acquired from the
Company within 60 days of October 13, 2006 upon the exercise of
outstanding stock options.

(3) Consists of 49,167 shares of Common Stock that are directly owned by Mr.
Newbold, and 86,667 shares of Common Stock owned by Newbold, Inc., a
corporation of which Mr. Newbold is the sole stockholder.

(4) Consists of 9,609 shares of Common Stock that may be acquired from the
Company within 60 days of October 13, 2006 upon the exercise of
outstanding stock options.

(5) Consists of 2,083 shares of Common Stock that may be acquired from the
Company within 60 days of October 13, 2006 upon the exercise of
outstanding stock options.

(6) George Middlemas is one of three managers of Apex Management III, LLC, and
one of five managers of each of Apex Management IV, LLC and Apex
Management V, LLC. Apex Management III, LLC is the manager of Apex
Investment Strategic Partners, LLC and the general partner of Apex
Investment Fund III, L.P. Apex Management IV, LLC is the manager of Apex
Investment Strategic Partners IV, LLC and the general partner of Apex
Investment Fund IV, L.P. Apex Management V, LLC is the general partner of
Apex Investment Fund V, L.P. Mr. Middlemas, in his capacity as a manager
of each of Apex Management III, LLC, Apex Management IV, LLC and Apex
Management V, LLC, cannot independently exercise voting or dispositive
power over the shares of Common Stock held by the entities controlled by
each of Apex Management III, LLC, Apex Management IV, LLC and Apex
Management V, LLC. Mr. Middlemas therefore disclaims beneficial ownership
of the shares of the Company's Common Stock held by each of Apex
Investment Strategic Partners, LLC, Apex Investment Strategic Partners IV,
LLC, Apex Investment Fund III, L.P., Apex Investment Fund IV, L.P. and
Apex Investment Fund V, L.P.

(7) Consists of 71,929 shares of Common Stock that may be acquired from the
Company within 60 days of October 13, 2006 upon the exercise of
outstanding stock options.

(8) Consists of 520,834 shares of Common Stock that may be acquired from the
Company upon the conversion of outstanding shares of Series A Preferred
Stock, 462,656 shares of Common Stock that may be acquired from the
Company upon the conversion of outstanding shares of Series B Preferred
Stock and 789,841 shares of Common Stock that may be acquired from the
Company upon the exercise of outstanding warrants, within 60 days of
October 13, 2006.

(9) Consists of 250,000 shares of Common Stock that may be acquired from the
Company upon the conversion of outstanding shares of Series A Preferred
Stock and 83,334 shares of Common Stock that may be acquired from the
Company upon the exercise of outstanding warrants, within 60 days of
October 13, 2006.

The following table sets forth certain information regarding beneficial
ownership of our Series A Preferred Stock as of October 13, 2006, by (i) each
person (or group of affiliated persons) who is known by us to beneficially own
more than 5% of the outstanding shares of Series A Preferred Stock, (ii) each of
our directors and executive officers, and (iii) all of our executive officers
and directors as a group, as applicable. Under Rule 13d-3, certain shares may be
deemed to be beneficially owned by more than one person (if, for example,
persons share the power to vote or the power to dispose of the shares). In
addition, shares are deemed to be beneficially owned by a person if the person
has the right to acquire the shares (for example, upon exercise of an option)
within 60 days of the date as of which the information is provided. In computing
the percentage ownership of any person, the amount of shares outstanding is
deemed to include the amount of shares beneficially owned by such person (and
only such person) by reason of these acquisition rights. As a result, the
percentage of outstanding shares of any person as shown in this table does not
necessarily reflect the person's actual ownership or voting power with respect
to the number of shares of Series A Preferred Stock actually outstanding at
October 13, 2006. As of October 13, 2006, there were 964 shares of Series A
Preferred Stock outstanding.

AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
CERTAIN BENEFICIAL OWNERS OWNERSHIP OF CLASS
------------------------------------------------------- ---------- --------
5% HOLDERS
Apex Investment Fund V, L.P. .......................... 250 25.9%
225 West Washington St., Ste. 1500
Chicago, Illinois 60606
Arco Van Nieuwland .................................... 120 12.5%
Bunde 8
2970 Schilde
Belgium

Peter Nordin APS ...................................... 93.3334 9.7%
Bakkevej 2A
DK 3070 Snekkersten Denmark
Graham Smith .......................................... 52 5.4%
Vicolo Sport 15
20029 Turbigo
Milan, Italy

The following table sets forth certain information regarding beneficial
ownership of our Series B Preferred Stock as of October 13, 2006, by (i) each
person (or group of affiliated persons) who is known by us to beneficially own
more than 5% of the outstanding shares of Series B Preferred Stock, (ii) each of
our directors and executive officers, and (iii) all of our executive officers
and directors as a group, as applicable. Under Rule 13d-3, certain shares may be
deemed to be beneficially owned by more than one person (if, for example,
persons share the power to vote or the power to dispose of the shares). In
addition, shares are deemed to be beneficially owned by a person if the person
has the right to acquire the shares (for example, upon exercise of an option)
within 60 days of the date as of which the information is provided. In computing
the percentage ownership of any person, the amount of shares outstanding is
deemed to include the amount of shares beneficially owned by such person (and
only such person) by reason of these acquisition rights. As a result, the
percentage of outstanding shares of any person as shown in this table does not
necessarily reflect the person's actual ownership or voting power with respect
to the number of shares of Series B Preferred Stock actually outstanding at
October 13, 2006. As of October 13, 2006, there were 624.2 shares of Series B
Preferred Stock outstanding.

AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
CERTAIN BENEFICIAL OWNERS OWNERSHIP OF CLASS
------------------------------------------------------- ---------- --------

5% HOLDERS
Apex Investment Fund V, L.P. 208.06 33.3%
West Washington St., Ste. 1500
Chicago, Illinois 60606
Logan L. Hurst 100 16.0%
405 Hattie Clark Road
Greene, New York 13778

CHANGES IN CONTROL

On January 12, 2006, we issued a Stock Subscription Agreement & Mutual Release
to each of our creditors and claimants pursuant to which we would sell to such
creditors and/or claimants shares of our Series A-1 Preferred Stock in exchange
for a final and binding settlement with respect to any and all claims,
liabilities, demands, causes of action, costs, expenses, attorneys fees,
damages, indemnities, and obligations of every kind and nature that such
creditors and/or claimants may have with us. Creditors and/or claimants that
have accepted our offer have been issued an aggregate of approximately
36,993,054 shares of Series A-1 Preferred Stock. The shares of Series A-1
Preferred Stock automatically converted into 12,331,056 shares of Common Stock
on July 31, 2006, upon the filing of an amendment to our certificate of
incorporation, as amended, effecting a 1-for-30 reverse stock split. Based on
14,462,260 shares Common Stock outstanding as of October 13, 2006, the automatic
conversion of the Series A-1 Preferred Stock resulted in our former creditors
and/or claimants owning approximately 85.3% of the issued and outstanding shares
of Common Stock.

DESCRIPTION OF SECURITIES

COMMON STOCK

We are authorized to issue up to 150,000,000 shares of Common Stock. As of
October 13, 2006, there were 14,462,260 shares of Common Stock outstanding.
Holders of the Common Stock are entitled to one vote per share on all matters to
be voted upon by the stockholders. Holders of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared by our board of
directors out of funds legally available therefore. Upon the liquidation,
dissolution, or winding up of our company, the holders of Common Stock are
entitled, subject to the rights of holders of our preferred stock, to share
ratably in all of our assets which are legally available for distribution after
payment of all debts and other liabilities and liquidation preferences. Holders
of Common Stock have no preemptive, subscription, redemption or conversion
rights. The outstanding shares of Common Stock are validly issued, fully paid
and nonassessable.

An aggregate of approximately 6,218,908 shares of Common Stock have been
reserved for issuance as of October 13, 2006 pursuant to outstanding options,
warrants, an accommodation agreement and preferred stock. On July 20, 2006, our
stockholders approved the adoption of the Patron Systems, Inc. 2006 Stock
Incentive Plan which provides for the issuance of an additional 5,600,000 shares
of Common Stock.

SERIES A PREFERRED STOCK

We are authorized to issue up to 75,000,000 shares of preferred stock, par value
$0.01 per share. We have designated 2,160 shares of Series A Preferred Stock.
The Series A Preferred Stock has a stated value of $5,000 per share, has no
maturity date, carries a dividend of 10% per annum, with such dividend accruing
on a cumulative basis and is payable only (i) at such time as declared payable
by our board of directors or (ii) in the event of liquidation, as part of the
liquidation preference amount ("Liquidation Preference Amount"). The Liquidation
Preference Amount is equal to 125% of the sum of: (i) the stated value of any
then unconverted shares of Series A Preferred Stock and (ii) any accrued and
unpaid dividends thereon. An event of liquidation means any liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary, as
well as any change of control of the Company which includes the sale by the
Company of either (x) substantially all its assets or (y) the portion of its
assets which comprises its core business technology, products or services.

The Series A Preferred Stock is convertible, at the option of the holder, into
shares of Common Stock ("Conversion Shares") at an initial conversion price
("Initial Conversion Price) which shall be $2.40 per share based on the stated
value of the Series A Preferred Stock, subject to adjustment for stock splits,
dividends, recapitalizations, reclassifications, payments made to Common Stock
holders and other similar events and for issuances of additional securities at
prices more favorable than the conversion price at the date of such issuance. We
are obligated to register the Conversion Shares at such time that we file a
registration statement (other than on Form S-4 or Form S-8) with the SEC. We
have included the Conversion Shares for registration in this registration
statement.

The Series A Preferred Stock is mandatorily convertible at the then applicable
conversion price ("Conversion Price") into shares of Common Stock at the then
applicable Conversion Price on the date that: (i) there shall be an effective
registration statement covering the resale of the Conversion Shares, (ii) the
average closing price of Common Stock, for a period of 20 consecutive trading
days is at least 250% of the then applicable Conversion Price, and (iii) the
average daily trading volume of Common Stock for the same period is at least
8,334 shares.

On March 27, 2006, we consummated the sale of units ("Units"), at a per Unit
price of $100,000, consisting of (i) 20 shares of Series A Preferred Stock and
(ii) warrants ("Investor Warrants") to purchase 13,888.9 shares of our Common
Stock (the "Series A Preferred Financing") in the aggregate amount of
$4,465,501. This amount was comprised of $720,001 associated with the conversion
of the 2006 Bridge Notes, $895,000 provided by Apex Investment Fund V, L.P.
("Apex") and $2,850,500 provided by parties made available by Laidlaw & Company
(UK) Ltd. ("Laidlaw"), the Series A Preferred Financing placement agent. The
first closing of the Series A Preferred Financing resulted in our issuance of
893 shares of Series A Preferred Stock and Investor Warrants to purchase 620,233
shares of Common Stock. We also issued to Laidlaw 198,375 common stock purchase
warrants (the "Agent Warrants") for its services as the Series A Preferred
Financing placement agent.

On April 3, 2006, we consummated an additional closing of the Series A Preferred
Financing resulting in aggregate proceeds of $355,000 from Apex. This subsequent
closing resulted in our issuance of 71 shares of Series A Preferred Stock and
Investor Warrants to purchase 49,306 shares of Common Stock.

The Investor Warrants and Agent Warrants have a term of 5 years and an exercise
price of $3.00 per share.

We are obligated to register the shares of Common Stock issuable upon exercise
of the Investor Warrants and the Agent Warrants and conversion of the Series A
Preferred Stock at such time that we file a registration statement (other than
on Form S-4 or Form S-8) with the SEC. We have included the shares of Common
Stock issuable upon exercise of the Investor Warrants and the Agent Warrants and
conversion of the Series A Preferred Stock for registration in this registration
statement.

In connection with the Series A Preferred Financing, we retained Laidlaw as our
non-exclusive placement agent. Laidlaw received, in its role as Series A
Preferred Financing placement agent, (i) a cash fee equal to 10% of all gross
proceeds, excluding the Apex proceeds, delivered at each closing and (ii) a
warrant to purchase shares of Common Stock equal to 10% times the sum of (x) the
Conversion Shares to be issued upon conversion of the shares of Series A
Preferred Stock issued at each closing and (y) the number of shares of the
Company's common stock reserved for issuance upon the exercise of the Investor
Warrants issued at each closing. The Agent Warrants have a term of 5 years and
an exercise price of $3.00 per share. We paid Laidlaw $285,050 and issued to
Laidlaw Agent Warrants to purchase 198,375 shares of Common Stock for its
services as the placement agent. Additionally, we paid Laidlaw a non-accountable
expense allowance of $25,000.

As of October 13, 2006, the 964 shares of Series A Preferred Stock outstanding
are convertible, as described above, into 2,008,567 shares of Common Stock.

SERIES A-1 PREFERRED STOCK

We have designated 50,000,000 shares of preferred stock as Series A-1 Preferred
Stock. The Series A-1 Preferred Stock has a stated value of $0.80 per share, has
no maturity date, carries a non-cumulative dividend of 5% per annum, with such
dividend payable only (i) at such time as declared payable by our board of
directors or (ii) in the event of liquidation, as part of the liquidation
preference amount ("Series A-1 Liquidation Preference Amount"). The Series A-1
Liquidation Preference Amount is equal to the sum of: (i) the stated value of
any then unconverted shares of Series A-1 Preferred Stock and (ii) any accrued
and unpaid dividends thereon. An event of liquidation means any liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary, as
well as any change of control of the Company which includes the sale by the
Company of either (x) substantially all its assets or (y) the portion of its
assets which comprises its core business technology, products or services.

The Series A-1 Preferred Stock is not convertible at the option of the holder.
Each share of Series A-1 Preferred Stock automatically converts into 1/3 of a
share of Common Stock upon the effectiveness of an amendment to our certificate
of incorporation which provides for a sufficient number of authorized shares to
permit the exercise or conversion of all issued and outstanding shares of Series
A Preferred Stock, Series A-1 Preferred Stock and all options, warrants and
other rights to acquire shares of Common Stock.

On January 12, 2006, we issued a Stock Subscription Agreement & Mutual Release
("the Original Release") to each of our creditors and claimants ("Subscriber")
for purposes of entering into a final and binding settlement with respect to any
and all claims, liabilities, demands, causes of action, costs, expenses,
attorneys fees, damages, indemnities, and obligations of every kind and nature
that each Subscriber may have with the Company ("Subscriber Claims"). Under
terms of this agreement, we sold to the Subscribers and the Subscribers
purchased from us shares of our Series A-1 Preferred Stock at a price of $0.80
per share. The aggregate purchase price was equivalent to the value of the
Subscriber Claims being settled through this settlement and release. Each
Subscriber was deemed to have paid for the shares of Series A-1 Preferred Stock
through the settlement and release of such Subscriber's Subscriber Claims.

Preferred Stock automatically converted into 12,331,056 shares of Common Stock
on July 31, 2006, upon the filing of an amendment to our certificate of
incorporation, as amended, increasing our authorized shares of Common Stock and
effecting a 1-for-30 reverse stock split. There are currently no shares of
Series A-1 Preferred Stock outstanding.

We are obligated to register the shares of Common Stock issued upon the
automatic conversion of the Series A-1 Preferred Stock at such time that we file
a registration statement (other than on Form S-4 or Form S-8) with the SEC. We
have included 11,537,603 shares of Common Stock issued upon the automatic
conversion of the Series A-1 Preferred Stock for registration in this
registration statement.

SERIES B PREFERRED STOCK

We have designated 2,000 shares of preferred stock as Series B Preferred Stock.
The Series B Preferred Stock has a stated value of $5,000 per share, has no
maturity date, carries a dividend of 10% per annum, with such dividend accruing
on a cumulative basis and is payable only (i) at such time as declared payable
by our board of directors or (ii) in the event of liquidation, as part of the
liquidation preference amount ("Liquidation Preference Amount"). The Liquidation
Preference Amount is equal to 125% of the sum of: (i) the stated value of any
then unconverted shares of Series B Preferred Stock and (ii) any accrued and
unpaid dividends thereon. An event of liquidation means any liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary, as
well as any change of control of the Company which includes the sale by the
Company of either (x) substantially all its assets or (y) the portion of its
assets which comprises its core business technology, products or services. The
Series B Preferred Stock is junior to the Series A Preferred Stock with respect
to liquidation and dividend rights.

The Series B Preferred Stock is convertible, at the option of the holder, into
shares of Common Stock ("Conversion Shares") at an initial conversion price
("Initial Conversion Price) which shall be the lesser of i) $2.40 per share or
ii) that price per share equal to the volume weighted average closing price of
the Company's common stock for the 10 trading days prior to the original
issuance date of such shares, based on the stated value of the Series B
Preferred Stock, subject to adjustment for stock splits, dividends,
recapitalizations, reclassifications, payments made to Common Stock holders and
other similar events and for issuances of additional securities at prices more
favorable than the conversion price at the date of such issuance. We are
obligated to register the Conversion Shares within 90 days of completion of the
issuance of the Series B Preferred Stock.

The Series B Preferred Stock is mandatorily convertible at the then applicable
conversion price ("Conversion Price") into shares of Common Stock at the then
applicable Conversion Price on the date that: (i) there shall be an effective
registration statement covering the resale of the Conversion Shares, (ii) the
average closing price of Common Stock, for a period of 20 consecutive trading
days is at least 250% of the then applicable Conversion Price, and (iii) the
average daily trading volume of Common Stock for the same period is at least
8,334 shares.

On October 13, 2006, we consummated the sale of units ("Units"), at a per Unit
price of $100,000, consisting of (i) 20 shares of Series B Preferred Stock and
(ii) warrants ("Investor Warrants") to purchase Company common stock in an
amount equal to 50% of the Conversion Shares (the "Series B Preferred
Financing") in the aggregate amount of $3,120,966. This amount was comprised of
$1,040,322 provided by Apex Investment Fund V, L.P. ("Apex") and $2,080,644
provided by parties made available by Laidlaw & Company (UK) Ltd. ("Laidlaw"),
the Series B Preferred Financing placement agent. The first closing of the
Series B Preferred Financing resulted in our issuance of 624.2 shares of Series
B Preferred Stock and Investor Warrants to purchase 694,011 shares of Common
Stock. We also issued to Laidlaw 208,198 common stock purchase warrants (the
"Agent Warrants") for its services as the Series B Preferred Financing placement
agent.

The Investor Warrants and Agent Warrants have a term of 5 years and an exercise
price of $2.40 per share.

We are obligated to register the shares of Common Stock issuable upon exercise
of the Investor Warrants and the Agent Warrants and conversion of the Series B
Preferred Stock within 90 days after the completion of the Series B Preferred
Financing.

In connection with the Series B Preferred Financing, we retained Laidlaw as our
non-exclusive placement agent. Laidlaw received, in its role as Series B
Preferred Financing placement agent, (i) a cash fee equal to 13% of all gross
proceeds, excluding the Apex proceeds, delivered at each closing and (ii) a
warrant to purchase shares of Common Stock equal to 10% times the sum of (x) the
Conversion Shares to be issued upon conversion of the shares of Series A

Preferred Stock issued at each closing and (y) the number of shares of the
Company's common stock reserved for issuance upon the exercise of the Investor
Warrants issued at each closing. The Agent Warrants have a term of 5 years and
an exercise price of $2.40 per share. Through the first closing of the Series B
Preferred Financing, we paid Laidlaw $280,484 and issued to Laidlaw Agent
Warrants to purchase 207,302 shares of Common Stock for its services as the
placement agent. Additionally, we paid $25,000 of Laidlaw's legal expenses
associated with the Series B Preferred Financing.

As of October 13, 2006, the 624.2 shares of Series B Preferred Stock outstanding
are convertible, as described above, into 1,387,992 shares of Common Stock.

COMMON STOCK PURCHASE WARRANTS

We currently have 2,308,072 common stock purchase warrants outstanding of which
1,097,378 are included for registration in this registration statement. The
common stock purchase warrants are each exercisable into one share of Common
Stock at the holder's option at an exercise price ranging between $0.30 and
$51.00 per warrant.

In July 2002, we issued a warrant to Gregory Orlandella to purchase 500 shares
of Common Stock at an exercise price of $0.30 per share. The warrant expires in
July 2012. In May 2005, we issued a warrant to Stubbs Alderton & Markiles, LLP,
for services rendered, to purchase 1,342 shares of Common Stock at an exercise
price of $15.30 per share. The Warrant expires in May 2010.

As described above, we also issued warrants to purchase up to 669,539 shares of
Common Stock to investors in the Series A Preferred Financing, warrants to
purchase up to 198,375 shares of Common Stock to Laidlaw for its services as the
placement agent for the Series A Preferred Financing, warrants to purchase up to
694,011 shares of Common Stock to investors in the Series B Preferred Financing
and warrants to purchase up to 208,198 shares of Common Stock to Laidlaw for its
services as the placement agent for the Series B Preferred Financing.

The remaining warrants were issued in the following transactions:

ACQUISITIONS/INTERIM BRIDGE FINANCING I

On February 25, 2005, we issued warrants to purchase 75,001 shares of Common
Stock in partial consideration for the exchange of the outstanding shares of the
preferred stock of CSSI. The warrants have a term of 5 years and an exercise
price of $21.00 per share. The warrants were issued to Apex, The Northwestern
Mutual Life Insurance Company, and Advanced Equities Venture Partners I, L.P.

On February 28, 2005, we completed a $3,500,000 financing ("Interim Bridge
Financing I") with 33 accredited investors (the "Bridge I Investors") introduced
by Laidlaw, the placement agent for Interim Bridge Financing I, through the
issuance of 10% Senior Convertible Promissory Notes (the "Bridge I Notes") and
warrants to purchase up to 58,348 shares of Common Stock ("Bridge I Warrants").
The Bridge I Warrants have a term of 5 years and an exercise price of $21.00 per
share.

On June 28, 2005, we elected to extend the contractual maturity date of the
Bridge I Notes for an additional 60 days to August 27, 2005. In connection with
such extension, we issued additional warrants to purchase up to 58,348 shares of
Common Stock (the "Bridge I Extension Warrants") to the Bridge I Investors. The
Bridge I Extension Warrants have a term of 5 years and an exercise price of
$21.00 per share.

We did not redeem the Bridge I Notes on August 27, 2005 and, as a result, we
were obligated to issue warrants (the "Bridge I Penalty Warrants") to purchase
0.128 shares of Common Stock for each $1 of principal then outstanding to the
Bridge I Investors. The Bridge I Penalty Warrants are only exercisable in
consideration of the exchange and cancellation of the Bridge I Notes. Although a
significant majority of the Bridge I Notes (and the associated Bridge I Penalty
Warrants) were surrendered as payment for shares of our Series A-1 Preferred
Stock under our creditor and claimant liabilities restructuring program, Bridge
I Notes in the aggregate principal amount of $319,975 (and related Bridge I
Penalty Warrants to purchase an aggregate of 40,957 shares of Common Stock)
remain outstanding.

In consideration of its services as placement agent for Interim Bridge Financing
I and in consideration of consulting services related to our acquisitions of
CSSI, LucidLine and Entelagent, we paid Laidlaw a cash fee of $974,212 and
issued to Laidlaw warrants to purchase 21,681 shares of Common Stock at an
exercise prose of $21.00 per share with a term of 5 years.

INTERIM BRIDGE FINANCING II

On June 6, 2005, we completed a $2,543,000 financing ("Interim Bridge Financing
II") with 7 accredited investors (the "Bridge II Investors") introduced by
Laidlaw, the placement agent for Interim Bridge Financing II, through the
issuance of 10% Junior Convertible Promissory Notes (the "Bridge II Notes") and
warrants to purchase up to 42,388 shares of common stock (the "Bridge II
Warrants"). The Bridge II Warrants have a term of 5 years and an exercise price
of $18.00 per share.

Beginning on October 4, 2005, we elected to extend the contractual maturity
dates of the Bridge II Notes for an additional 60 days to various dates
beginning December 2, 2005. In connection with such extension, we issued
additional warrants to purchase up to 42,388 shares of Common Stock (the "Bridge
II Extension Warrants") to the Bridge II Investors. The Bridge II Extension
Warrants have a term of 5 years and an exercise price of $18.00 per share.

We did not redeem the Bridge II Notes on December 2, 2005 or thereafter and, as
a result, we were obligated to issue warrants (the "Bridge II Penalty Warrants")
to purchase 0.128 shares of Common Stock for each $1 of principal then
outstanding to the Bridge II Investors. The Bridge II Penalty Warrants are only
exercisable in consideration of the exchange and cancellation of the Bridge II
Notes. Although a significant majority of the Bridge II Notes (and the
associated Bridge II Penalty Warrants) were surrendered as payment for shares of
our Series A-1 Preferred Stock under our creditor and claimant liabilities
restructuring program, one Bridge II Note in the aggregate principal amount of
$200,000 (and the related Bridge II Penalty Warrant to purchase an aggregate of
25,600 shares of Common Stock) remains outstanding.

INTERIM BRIDGE FINANCING III

Beginning on July 1, 2005, and continuing through December 31, 2005, we
completed, through 12 separate fundings to Apex, The Northwestern Mutual Life
Insurance Company and Advanced Equities Venture Partners I, L.P., a $5,234,000
financing (the "Interim Bridge Financing III") through the issuance of 10%
Junior Convertible Promissory Notes (the "Bridge III Notes") and warrants to
purchase up to 87,235 shares of Common Stock (the "Bridge III Warrants"). The
Bridge III Warrants have a term of 5 years and an exercise price of $18.00 per
share.

Beginning on October 29, 2005, we elected to extend the contractual maturity
dates of the Bridge III Notes for an additional 60 days to various dates
beginning December 28, 2005. In connection with such extension, we issued
additional warrants to purchase up to 79,918 shares of Common Stock (the "Bridge
III Extension Warrants"). The Bridge III Extension Warrants have a term of 5
years and an exercise price of $18.00 per share.

We did not redeem the Bridge III Notes on December 28, 2005 or thereafter and,
as a result, we were obligated to issue warrants ("Bridge III Penalty Warrants")
to purchase 0.128 shares of Common Stock for each $1 of principal then
outstanding to the Bridge III Investors. The Bridge III Penalty Warrants were
only exercisable in consideration of the exchange and cancellation of the Bridge
III Notes. All of the Bridge III Notes (and the associated Bridge III Penalty
Warrants) were surrendered as payment for shares of our Series A-1 Preferred
Stock under our creditor and claimant liabilities restructuring program.

STOCK OPTIONS

We currently have 503,971 stock options outstanding. These stock options were
issued to our employees, directors and consultants from our inception through
July 2006. The stock options are each exercisable into one share of Common Stock
at the holder's option at an exercise price ranging from $0.30 to $120.00 per
option. We have included 444,502 stock options for registration in this
registration statement.

On July 20, 2006, our stockholders approved and adopted the Patron Systems, Inc.
2006 Stock Incentive Plan (the "Plan"). The Plan was adopted by our board of
directors on May 10, 2006. Under the Plan, we are authorized to grant
equity-based awards in the form of stock options, restricted common stock, stock
units and stock appreciation rights to our employees (including executive
officers), non-employee directors and consultants. As of October 13, 2006, there
were approximately 27 employees, 7 consultants and 1 non-employee director
eligible to participate in the Plan.

The maximum number of shares available for grant under the Plan is 5,600,000
shares of Common Stock. The number of shares available for award under the Plan
is subject to adjustment for certain corporate changes in accordance with the
provisions of the Plan. The aggregate number of shares available for grant will
increase annually by the lower of (i) 1,000,000 shares, (ii) 5% of the
outstanding shares on the last day of the immediately preceding year, or (iii)
an amount determined by our board of directors. Currently, the maximum number of
shares available for grant of awards under the Plan to any one participant is
1,500,000 shares during any fiscal year. The Plan may be administered by our
board of directors or another committee of our board of directors. The Plan is
currently administered by our board of directors. We have not granted any
options under the Plan.

POTENTIAL ANTI-TAKEOVER EFFECTS

Certain provisions of our certificate of incorporation, bylaws and Delaware law
may have the effect of delaying, deferring or discouraging another person from
acquiring control of the Company.

Our certificate of incorporation, as amended, allows our board of directors to
issue an additional 38,005,360 shares of preferred stock, in one or more series
and with such rights and preferences including voting rights, without further
stockholder approval. In the event that our board of directors designates
additional series of preferred stock with rights and preferences, including
super-majority voting rights, and issues such preferred stock, the preferred
stock could make our acquisition by means of a tender offer, a proxy contest or
otherwise, more difficult, and could also make the removal of incumbent officers
and directors more difficult. As a result, these provisions may have an
anti-takeover effect. The preferred stock authorized in our certificate of
incorporation, as amended, may inhibit changes of control that are not approved
by our board of directors. These provisions could limit the price that future
investors might be willing to pay in the future for our Common Stock. This could
have the effect of delaying, deferring or preventing a change in control of the
Company. The issuance of preferred stock could also effectively limit or dilute
the voting power of our stockholders. Accordingly, as amended, such provisions
of our certificate of incorporation may discourage or prevent an acquisition or
disposition of our business that could otherwise be in the best interest of our
stockholders.

We have available approximately 123.7 million authorized but unissued shares of
our Common Stock available for future issuance without stockholder approval.
These additional shares may be used for a variety of corporate purposes,
including a future public offering to raise additional capital, corporate
acquisitions and employee benefit plans. The existence of authorized but
unissued shares of Common Stock may enable our board of directors to issue
shares of stock to persons friendly to existing management. As a result, our
issuance of these shares could have an anti-takeover effect.

In addition, our board of directors is grouped into three classes, as nearly
equal in number as possible. Directors hold office for staggered terms of three
years and one of the three classes is elected each year to succeed the directors
whose terms are expiring. The staggered nature of election of members to our
board of directors may make it difficult to effect a change of incumbent
management and control. As our board of directors currently consists of three
(3) members, it would take two annual meetings to replace a majority of our
board of directors. This feature may also serve to entrench management and make
its removal or replacement more difficult.

Finally, we are subject to the provisions of Section 203 of the Delaware General
Corporation Law. That section provides, with some exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or affiliate, or associate of the person, who is an "interested
stockholder" for a period of three years from the date that the person became an
interested stockholder unless: (i) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved by
the board of directors of the corporation before the person becomes an
interested stockholder; (ii) the interested stockholder acquires 85% or more of
the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder, excluding shares owned by persons who are
both officers and directors of the corporation, and shares held by some employee
stock ownership plans; or (iii) on or after the date the person becomes an
interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. An "interested
stockholder" is defined as any person that is (a) the owner of 15% or more of
the outstanding voting stock of the corporation or (b) an affiliate or associate
of the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within the three-year period immediately
prior to the date on which it is sought to be determined whether the person is
an interested stockholder.

TRANSFER AGENT

Our transfer agent is American Stock Transfer and Trust Company. Their address
is 459 Maiden Lane, New York, New York 10038 and their telephone number is (212)
936-5100.

LEGAL MATTERS

Stubbs Alderton & Markiles, LLP, Sherman Oaks, California will issue an opinion
with respect to the validity of the shares of Common Stock being offered hereby.

EXPERTS

Marcum & Kliegman LLP, Independent Registered Public Accountants, have audited,
as set forth in their report thereon appearing elsewhere herein, Patron Systems,
Inc. and subsidiaries consolidated financial statements at December 31, 2005,
and the related consolidated statements of operations, stockholders' deficiency,
and cash flows for each of the two years in the period then ended that appear in
the prospectus. The financial statements referred to above are included in this
prospectus with reliance upon the independent registered public accountant's
opinion based on their expertise in accounting and auditing.

DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES

The Delaware General Corporation Law and certain provisions of our Bylaws under
certain circumstances provide for indemnification of our officers, directors and
controlling persons against liabilities which they may incur in such capacities.
A summary of the circumstances in which such indemnification is provided for is
contained herein, but this description is qualified in its entirety by reference
to our bylaws and to the statutory provisions.

In general, any officer, director, employee or agent may be indemnified against
expenses, fines, settlements or judgments arising in connection with a legal
proceeding to which such person is a party, if that person's actions were in
good faith, were believed to be in our best interest, and were not unlawful.
Unless such person is successful upon the merits in such an action,
indemnification may be awarded only after a determination by independent
decision of the board of directors, by legal counsel, or by a vote of the
stockholders, that the applicable standard of conduct was met by the person to
be indemnified.

The circumstances under which indemnification is granted in connection with an
action brought on our behalf is generally the same as those set forth above;
however, with respect to such actions, indemnification is granted only with
respect to expenses actually incurred in connection with the defense or
settlement of the action. In such actions, the person to be indemnified must
have acted in good faith and in a manner believed to have been in our best
interest, and have not been adjudged liable for negligence or misconduct.

Indemnification may also be granted pursuant to the terms of agreements which
may be entered into in the future or pursuant to a vote of stockholders or
directors. The statutory provision cited above also grants the power to us to
purchase and maintain insurance which protects our officers and directors
against any liabilities incurred in connection with their service in such a
position, and such a policy may be obtained by us.

A stockholder's investment may be adversely affected to the extent we pay the
costs of settlement and damage awards against directors and officers as required
by these indemnification provisions. At present, there is no pending litigation
or proceeding involving any of our directors, officers or employees regarding
which indemnification by us is sought, nor are we aware of any threatened
litigation that may result in claims for indemnification.

Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, we have been informed that, in the opinion of the SEC,
this indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.

DESCRIPTION OF BUSINESS

CORPORATE BACKGROUND

In April of 2004, we failed to meet the reporting requirements under the
Exchange Act. As a result, we were de-listed from NASDAQ's Over-the-Counter
Bulletin Board quotation system. During 2005, we completed the filing of a Form

10-KSB covering the period from April 30, 2002 (inception) to December 31, 2004,
completed the filing of Forms 10-QSB for the periods ending March 31, 2005, June
30, 2005 and September 30, 2005 and filed a Form 8-K covering each of the
acquisitions completed on February 25, 2005 and March 30, 2005. We are current
with all SEC filings as of October 13, 2006. Since November 14, 2005 our listing
has been reinstated on NASDAQ's Over-the-Counter Bulletin Board quotation
system.

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

In February 2005, our business plan was to a) provide enterprise solutions to
provide email and content protection for data at rest and data in motion, b)
deliver a highly functional, automatic and manageable policy-based messaging
compliance review, c) provide a secure electronic forms solution to public
safety organizations and d) offer county and municipal governments a model
homeland security architecture with state-of-the-art prevention, response and
information management capabilities to assist in the prevention of terrorist
attacks, reduce vulnerabilities and respond to all hazards and emergencies
within a city or county. Additionally, we hoped to provide Risk and
Vulnerability Assessment evaluation services and were working to develop a
full-spectrum, integrated homeland security data center solution which would
comply with all current national homeland security directives and regulations.
Beginning in late 2005, our management undertook a review of all areas of our
business. Because of our limited financial resources, a decision was made to
streamline our business to focus on enterprise level software and service
solutions related to electronic message management.

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

PATRON'S BUSINESS PLAN

PATRON'S STRATEGY

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

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

PATRON'S MARKETPLACE

E-mail is becoming the standard form of internal company and
business-to-business communications. AIIM International and Kahn Consulting
released a 2003 report revealing the ubiquitous nature of e-mail usage for
critical business communications. E-mail is being used to transmit and
collaborate on the most sensitive corporate and customer identifying
information. In 2003, ASIS International released a report discussing the impact
of proprietary information loss or theft from within or outside the network. The
participating Fortune 1000 companies recorded the cost of intellectual property
losses between $53 and $59 billion in 2001. Although it is believed that the
greatest perceived threat is from outside the enterprise, as the Federal Bureau
of Investigation has noted, the simple fact is that approximately 70% of IT
damage and theft comes from inside an organization. Forty percent of reported
incidents of known or suspected losses involved the most business critical and
regulated information: customer data, strategic plans, financial data, and R &
D.

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

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

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

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

OUR BUSINESS MODEL

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

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

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

LUCIDLINE, INC.: LucidLine, Inc. ("LucidLine") was a provider of
bundled and branded high speed Internet access and synchronized remote
data back-up, retrieval, and restoration services. The acquisition of
LucidLine was intended to supply the expertise to establish the
homeland security architecture, the risk and vulnerability assessment
evaluation services and the development and operation of the homeland
security data center solutions necessary to implement our former
business plan to offer model homeland security architecture with
state-of-the-art prevention, response and information management
capabilities. The actual results were substantially different. We were
unable to find any parties interested in our homeland security data
center solutions, our risk and vulnerability assessment services and
our homeland security architecture business. Additionally, LucidLine's
commercial data backup and storage business was not growing
sufficiently to cover the costs of operating the business.

During the period from the acquisition of LucidLine on February 25,
2005 through December 31, 2005, LucidLine generated revenue of almost
$227,000, incurred a net loss of approximately $1.4 million and used
net cash of over $1.4 million. For the period from January 1, 2006 to
March 31, 2006, LucidLine had revenue of nearly $99,000, a net loss of
approximately $105,000 and used net cash of approximately $194,000.
Additionally, we recognized a loss on disposal of almost $76,000.

Because of our precarious financial position, the difficulty we were
experiencing in finding parties interested in pursuing the concept of
homeland security compliant data centers and the general lack of
government funding for municipalities and counties to address homeland
security focused IT infrastructure projects, we decided in the first
quarter of 2006 to abandon our focus on the homeland security market
portion of our business plan and to streamline our business to focus on
enterprise level software and service solutions designed to help
customers create, manage and apply complex rule sets that support
business policies, enhance work flow processes, enforce regulatory
compliance, and reduce the time, cost and overhead of electronic
message management.

Having made this decision, our management undertook a thorough review
of all areas of our business, including the revenue, pricing, supplier
contracts and all other aspects of our LucidLine business unit, in an
attempt to further cost-reduce the already cost-reduced business which
had approximately $65,000 per month in negative cash flow. While this
effort reduced the potential negative cash flow to approximately
$35,000 per month through additional cost reductions, price increases
and improved contract management, this negative cash flow would still
result in a substantial drain on our very limited cash resources. On
the basis of this analysis, our management decided to sell the business
to a party who would purchase LucidLine and assume LucidLine's customer
and supplier contract commitments. After approaching a number of
parties, none of whom were interested in acquiring a money losing and
significantly negative cash flow business, Walnut Valley, Inc. agreed
to acquire the legal entity and all of its customer and supplier
contract commitments for a substantial discount from the price we paid
in February 2005. As we had found no other interested buyers and would
have incurred a cash cost to shutdown the business far in excess of
$50,000, our management decided to sell the LucidLine business to
Walnut Valley.

On April 18, 2006, we entered into a Stock Purchase Agreement with
Walnut Valley pursuant to which we sold all of the outstanding shares
of LucidLine to Walnut Valley in consideration for a cash payment of
$25,000 and the issuance of a Promissory Note in the principal amount
of $25,000 by Walnut Valley in our favor. We sold LucidLine to Walnut
Valley, Inc. for an aggregate consideration of $50,000. In February
2005, we paid to LucidLine's stockholders cash in the aggregate amount
of $200,000 and issued an aggregate of 146,667 shares of our common
stock valued at $3,740,000.

The sale of LucidLine had a marginal impact on our liquidity. We
received $25,000 in cash and a Promissory Note in the principal amount
of $25,000 for the sale of the business and reduced our net cash usage
by approximately $35,000 per month. Additionally, we realized a loss on
disposal of the LucidLine business of almost $76,000.

The president of Walnut Valley, Inc., Rafiq Kiswani, was the former
president of LucidLine prior to our acquisition of LucidLine in
February 2005, and is listed as a selling stockholder in this
registration statement.

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

The Company expects to generate its revenue from sales of software product
licenses and services associated with the PolicyBridge and FormStream software
products. PolicyBridge and FormStream software product licenses (described
below) will be licensed on a perpetual right to use or a finite term basis.
Pricing will typically be based on the number of users.

Effective September 19, 2006, we merged Entelagent, CSSI and PILEC into our
company through the filing with the Secretary of State of the States of Delaware
and California, a Certificate of Ownership and Merger merging Entelagent
Software Corp., (a California corporation), Complete Security Solutions, Inc.,
(a Delaware corporation) and PILEC Disbursement Company, (a Delaware
corporation) into Patron Systems, Inc., (a Delaware corporation).

POLICYBRIDGE

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

o Ensure compliance with external government regulations

o Enforce internal administrative policies

o Enable corporate governance

o Expedite litigation support

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

o Guard corporate trade secrets

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

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

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

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

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

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

o Attachment type or size

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

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

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

o QUARANTINE for administrative review

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

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

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

FORMSTREAM

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

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

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

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

COMPETITION

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

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

PATRON'S SUBSIDIARIES

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

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

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

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

LUCIDLINE -LucidLine was a provider of bundled and branded high speed Internet
access and synchronized remote data back-up, retrieval, and restoration
services. With the change in operating focus away from Homeland Security and
services associated with that effort, the Company completed the sale of the
LucidLine business on April 18, 2006.

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

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

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

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

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

PATRON'S TARGET ALLIANCE PARTNERSHIPS

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

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

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

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

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

SALES, MARKETING AND TECHNICAL SUPPORT

We market and sell our products and services through our direct sales force and
other resellers. Our sales force and our sales engineers and technical support
personnel provide ongoing interaction with current and future customers which

allows us to provide a high level of service and support and to strengthen
customer relationships. We utilize a variety of marketing strategies and
programs to support the Company's product and service offerings. These include
the enhancement of the Company's web-site, the development of whitepaper reports
on client success stories and critical issues related to the market focus for
our products, web-based seminars and webcasts, participation in major trade
shows and conferences, e-mail-based marketing campaigns, telemarketing programs
and industry and technology analyst briefings.

RESEARCH AND DEVELOPMENT

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

CUSTOMERS

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

EMPLOYEES

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

GEOGRAPHIC AREAS

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

MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND
RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS ON FORM SB-2 AND IN THE
COMPANY'S FILING ON FORM 10-KSB. THE FOLLOWING DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL
RESULTS COULD DIFFER SUBSTANTIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF SEVERAL FACTORS, INCLUDING THE RISK
FACTORS DISCUSSED BELOW.

OVERVIEW

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

approximately $1,634,000 in additional gross funds in seven capital financing
transactions. We discuss these transactions in further detail in this report.

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

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

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

CRITICAL ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

DEVELOPMENT STAGE OPERATIONS

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

CASH

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

REVENUE RECOGNITION

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

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

generated from licensing the rights to use products directly to end-users and
through third party service providers.

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

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

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

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

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

BUSINESS COMBINATIONS

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

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

ACCOUNTS RECEIVABLE

due accounts. All past due balances that are over 90 days are reviewed
individually for collectability. Account balances are charged off against the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote.

PROPERTY AND EQUIPMENT

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

GOODWILL AND INTANGIBLE ASSETS

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

LONG LIVED ASSETS

The Company periodically reviews the carrying values of its long lived assets in
accordance with SFAS 144 "Long Lived Assets" when events or changes in
circumstances would indicate that it is more likely than not that their carrying
values may exceed their realizable value and records impairment charges when
necessary. The Company has determined that an impairment charge of $1,705,455 is
necessary for the year ended December 31, 2005 (Note 9).

ACQUISITION COSTS

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

START UP COSTS

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

USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS

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

INCOME TAXES

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

NET LOSS PER SHARE

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

As a result of the consummation of the Share Exchange described in Note 1, the
Company included 40,001 stock options with an exercise price of $.30 per share
that it issued to certain employees during 2002 in its calculation of
weighted-average number of common shares outstanding for all periods presented.

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

DECEMBER 31
---------------------
2005 2004
--------- ---------
Options ......... 388,000 197,500
Warrants ........ 430,920 500
Convertible Notes 1,586,304 --
--------- ---------

2,405,224 198,000
========= =========

USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

STOCK OPTION PLANS

defined by Accounting Principles Board ("APB") Opinion No. 25 "Accounting for
Stock Issued to Employees," and related interpretations including Financial
Accounting Standards Board ("FASB") Interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation," an interpretation of APB No.
25.

NON-EMPLOYEE STOCK BASED COMPENSATION

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

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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

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

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

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

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

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2005

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

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

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

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

Interest expense during the year ended December 31, 2005 amounted to $17,682,201
as compared to $132,350 for the year ended December 31, 2004. The increase is
directly related to our issuances of notes and the increased borrowings that we
made to finance our acquisitions of CSSI, LucidLine and Entelagent and to fund
our working capital needs. Non-cash interest relating to the amortization of
deferred financing costs, penalty warrants issued to bridge note and
subordinated note holders and the accretion of debt discounts during the year
ended December 31, 2005 amounted to approximately $16,481,000 compared to $0 in
same period in 2004. Amortization of deferred finance charges which have been
classified as interest expense was approximately $1,945,000 in the year ended
December 31, 2005 compared to $0 in the same period in 2004. The intrinsic value
of the conversion feature on bridge notes and subordinated notes, which has been
classified as interest expense amounted to approximately $12,393,000 for the
year ended December 31, 2005 compared to $0 in the same period in 2004.
Accretion of debt discounts during the year ended December 31, 2005 were
approximately $2,143,000 compared to $0 in the same period in 2004. Interest
income, was $19,250 and $77,000 in the year ended December 31, 2005 and 2004,
respectively. Interest income represents the interest earned from loans that we
made to Entelagent prior to our acquisition of that business on March 30, 2005.
Other income also includes a gain associated with the change in the intrinsic
value of a common stock put right of $300,000 in the year ended December 31,
2005.

For the year ended December 31, 2005, the net loss was $44,446,151 or $(22.81)
per share on 1,948,857 weighted average shares outstanding compared to a net
loss of $4,665,451 or $(3.61) per share on 1,293,610 weighted average shares
outstanding for the year ended December 31, 2004.

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2004

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

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

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

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

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

For the year ended December 31, 2004, the net loss was $4,665,451 or $(3.61) per
share on 1,293,610 weighted average shares outstanding compared to a net loss of
$16,519,564 or $(13.34) per share on 1,238,127 weighted average shares
outstanding for the year ended December 31, 2003.

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

OFF-BALANCE SHEET ARRANGEMENTS

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

THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2005.

For the three months ended June 30, 2006, our consolidated revenues amounted to
$318,960 compared to $84,413 for the three months ended June 30, 2005. The
increase is principally the result of growth of our business, principally with
the FormStream product, since the combinations were consummated with CSSI in
February 2005 and Entelagent in March 2005.

Cost of Sales for the three months ended June 30, 2006 amounted to $27,522
compared to $128,501 for the three months ended June 30, 2005. Cost of sales
during the three months ended June 30, 2006 and June 30, 2005 is entirely
associated with the amortization of developed technology that we acquired from
CSSI and Entelagent.

Operating expenses amounted to $1,625,104 for the three months ended June 30,
2006 as compared to $2,534,373 for the three months ended June 30, 2005, a
reduction of $909,269. The reduction in operating expenses includes
approximately $159,000 for increased salaries associated with an increase in the

number of employees from acquired businesses, approximately $64,000 of employee
stock option compensation expense, an increase of approximately $263,000 in
general and administrative expense, approximately $17,000 reduction in gains
associated with the settlement of outstanding litigation under the creditor and
claimant liabilities restructuring and other settlement agreements and an
increase of approximately $2,000 associated with a stock-based penalty under a
collateralized financing arrangement. These increases were offset by an
approximately $444,000 reduction in expense associated with the amortization of
stock-based compensation arrangements, approximately $284,000 reduction in legal
and professional fees associated with the work performed in 2005 to bring the
Company's SEC filings into compliance and expenses associated with the 2005
acquisitions, an expense reduction of $366,000 associated with a 2005 loss on a
collateralized financing arrangement, a $320,000 reduction in expense associated
with 2005 penalties under stock-based accommodation agreements and approximately
$348,000 reduction in expense associated with a penalty provision of an
Accommodation Agreement.

Our consolidated loss from operations for the three months ended June 30, 2006
amounted to $1,333,666 compared to a loss of $2,578,461 for the same period in
2005. Our loss was reduced as a result of the reductions in operating expenses
and the increased revenues discussed above.

Interest expense during the three months ended June 30, 2006 amounted to $88,421
as compared to $1,701,547 for the three months ended June 30, 2005. The
reduction is principally related to the issuance, in the three months ended June
30, 2005, of the Bridge II Notes and the associated amortization of deferred
financing costs and the accretion of debt discounts incurred with that financing
not being incurred in the three months ended June 30, 2006. Additionally, the
interest expense associated with the outstanding Acquisition Notes and the
Bridge I Notes in the three months ended June 30, 2005 was reduced with the
exchange of a substantial portion of these notes for Series A-1 Preferred Stock
as of March 31, 2006. Non-cash interest relating to the amortization of deferred
financing costs and the accretion of debt discounts during the three months
ended June 30, 2006 amounted to approximately $0 compared to $1,473,140 in same
period in 2005. Amortization of deferred finance charges which have been
classified as interest expense was $0 in the three months ended June 30, 2006
compared to $557,065 in the same period in 2005. Accretion of debt discounts
during the three months ended June 30, 2006 were approximately $0 compared to
$916,075 in the same period in 2005. Interest income, was $1,961 and $0 in the
three months ended June 30, 2006 and 2005, respectively. Interest income
represents the interest earned on cash balances.

During the three months ended June 30, 2006, the Company accrued dividends on
its Series A Preferred of $124,784.

For the three months ended June 30, 2006, the net loss available to common
stockholders was $1,621,017 or $(0.75) per share on 2,170,653 weighted average
common shares outstanding compared to a net loss available to common
stockholders of $5,028,505 or $(2.47) per share on 2,032,823 weighted average
common shares outstanding for the three months ended June 30, 2005.

SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2005.

For the six months ended June 30, 2006, our consolidated revenues amounted to
$580,745 compared to $90,843 for the six months ended June 30, 2005. The
increase is principally the result of growth of our business, principally with
the FormStream product, since the combinations were consummated with CSSI in
February 2005 and Entelagent in March 2005.

Cost of Sales for the six months ended June 30, 2006 amounted to $84,941
compared to $149,734 for the six months ended June 30, 2005. Cost of sales
during the six months ended June 30, 2006 and June 30, 2005 includes $27,522 and
$19,230, respectively, associated with the amortization of developed technology
that we acquired from CSSI and Entelagent.

Operating expenses amounted to $4,509,130 for the six months ended June 30, 2006
as compared to $4,145,250 for the six months ended June 30, 2005, an increase of
$363,880. The increase in operating expenses includes approximately $1,134,000
for salaries associated with an increase in the number of employees from
acquired businesses, approximately $237,000 of employee stock option
compensation expense, approximately $233,000 for increased legal and
professional fees that we incurred principally in connection with the year-end
financial audit, the negotiation and settlement of various legal matters under
the creditor and claimant liabilities restructuring program and the
implementation of the Series A Preferred Stock private placement, approximately

$23,000 for amortization of acquired intangible assets, approximately $876,000
in charges associated with the settlement of outstanding litigation under the
creditor and claimant liabilities restructuring and approximately $5,000
associated with a stock-based penalty under a collateralized financing
arrangement. These increases were partially offset by an approximately $953,000
reduction in expense associated with the amortization of stock-based
compensation arrangements, a reduction of approximately $136,000 in general and
administrative expense, an expense reduction of $366,000 associated with a 2005
loss on a collateralized financing arrangement and approximately $689,000
reduction in expense associated with a penalty provision of an Accommodation
Agreement.

Our consolidated loss from operations for the six months ended June 30, 2006
amounted to $4,013,326 compared to a loss of $4,204,141 for the same period in
2005. Our loss increased as a result of the increases in operating expenses
discussed above.

Interest expense during the six months ended June 30, 2006 amounted to
$1,703,935 as compared to $2,196,535 for the six months ended June 30, 2005. The
reduction is due to the issuance of Series A Preferred stock and its associated
amortization of deferred financing costs and the accretion of debt discounts and
the intrinsic value of the conversion option for bridge note holders being lower
in total during the six months ended June 30, 2006 than the amortization of
deferred financing costs and the accretion of debt discounts incurred during the
six months ended June 30, 2005. Offsetting this reduction was the increase in
interest expense due to the increased level of total debt financing during the
six months ended June 30, 2006 than during the same period in 2005. Non-cash
interest relating to the amortization of deferred financing costs and the
accretion of debt discounts during the six months ended June 30, 2006 amounted
to approximately $303,038 compared to $1,887,625 in same period in 2005. The
intrinsic value of the conversion option for bridge note holders, which has been
classified as interest expense amounted to $550,000 for the six months ended
June 30, 2006 compared to $0 in the same period in 2005. Amortization of
deferred finance charges which have been classified as interest expense was
approximately $282,129 in the six months ended June 30, 2006 compared to
$710,585 in the same period in 2005. Accretion of debt discounts during the six
months ended June 30, 2006 were approximately $20,909 compared to $1,177,040 in
the same period in 2005. Interest income, was $1,961 and $19,250 in the six
months ended June 30, 2006 and 2005, respectively. Interest income represents
the interest earned from loans that we made to Entelagent prior to our
acquisition of that business on March 30, 2005 and interest on cash balances in
the six months ended June 30, 2006.

During the six months ended June 30, 2006, the Company accrued dividends on its
Series A Preferred of $124,784.

For the six months ended June 30, 2006, the net loss available to common
stockholders was $6,021,091 or $(2.83) per share on 2,127,543 weighted average
common shares outstanding compared to a net loss available to common
stockholders of $7,232,300 or $(3.93) per share on 1,838,106 weighted average
common shares outstanding for the six months ended June 30, 2005.

LIQUIDITY AND CAPITAL RESOURCES

We incurred a net loss of $5,896,307 for the six months ended June 30, 2006,
which includes $1,857,670 of non-cash charges including non-cash charges
associated with the fair value of common stock we issued as penalties under
certain registration rights agreements ($5,246), fair value of a conversion
option in connection with bridge note holders ($550,000), accretion related to
warrants issued in conjunction with notes payable ($20,909), amortization of
deferred financing costs ($282,129), amortization of deferred compensation
($7,500), loss on disposal of discontinued operation ($75,920), loss on issuance
of preferred stock in settlement of debt ($486,597), non-cash increase in
interest payable to a former stockholder ($48,400), depreciation and
amortization ($143,420), and a charge for stock option based compensation
($237,424). We also used $511,691 of our restricted cash escrowed to settle
liabilities assumed. Including the amounts above, we used net cash flows in our
operating activities of $3,956,439 during the six months ended June 30, 2006.
Our working capital deficiency at June 30, 2006 amounts to $4,375,799 and we are
continuing to experience shortages in working capital. We are involved in
litigation and are being investigated by the Securities and Exchange Commission
with respect to certain of our press releases and our use of form S-8 to
register shares of common stock that we issued to certain consultants in prior
periods. Our legal counsel representing us in such matters has indicated that
while the SEC Investigation is ongoing and we have not received correspondence
from the SEC indicating that the matter is officially closed, the Staff has
indicated that it does not intend to request additional information from us and
that, at this time, it does not intend to recommend that the SEC bring an
enforcement action against us, our officers or directors. We cannot provide any
assurance that the outcome of these matters will not have a material adverse
affect on our ability to sustain the business. These matters raise substantial
doubt about our ability to continue as a going concern.

OFF-BALANCE SHEET ARRANGEMENTS

At June 30, 2006, we did not have any relationships with unconsolidated entities
or financial partnerships, such as entities often referred to as structured
finance, variable interest or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes. As such, we are not exposed to
any financing, liquidity, market or credit risk that could arise if we had
engaged in such relationships.

DESCRIPTION OF PROPERTY.

As of July 1, 2006, we leased 4,876 square feet of office space in Boulder,
Colorado and 1,269 square feet of office space in Dallas, Texas. We believe that
the facilities utilized by us are well maintained, in good operating condition
and adequate to meet our current and foreseeable needs. We have no, and do not
intend to make any, investments in real estate, real estate mortgages or persons
primarily engaged in real estate activities.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

GENERAL

Other than the transactions described below, within the last two years there has
not been, nor is there currently proposed, any transaction or series of similar
transactions to which we were or will be a party:

o in which the amount involved exceeds $60,000; and

o in which any director, executive officer, other stockholders of more
than 5% of our equity securities or any member of their immediate
family had or will have a direct or indirect material interest.

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

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

On February 25, 2005, we issued warrants to purchase 54,167 shares of Common
Stock to Apex in exchange for the shares of CSSI's preferred stock held by Apex.
The aggregate fair value of these warrants amounted to $1,381,250.

Beginning on July 1, 2005, and continuing through December 31, 2005, we
completed Interim Bridge Financing III. The Bridge III Notes had an initial term
of 120 days (due on various dates beginning October 28, 2005) with interest at
10% per annum and featured an option for the Company to extend the term for an
additional 60 days to various dates beginning December 28, 2005. Upon the
extension of the maturity date of the Bridge III Notes, the contractual interest
rate would increase to 12% per annum, and we would be required to issue the
Bridge III Extension Warrants. We agreed to file with the SEC, a registration
statement for the resale of the restricted shares of its Common Stock issuable
upon exercise of the conversion option that would be issuable in this
transaction, on a best efforts basis.

Beginning on October 29, 2005, we elected to extend the contractual maturity
date of the various Bridge III Notes for an additional 60 days to various dates
beginning December 28, 2005, which caused the contractual interest rate to
increase to 12% per annum. In addition, we were required to issue the Bridge III
Extension Warrants. All of the Bridge III Notes have been redeemed in exchange
for the issuance of shares of Series A-1 Preferred Stock.

On July 1, 2005, we issued a Bridge III Note in the principal amount of
$1,650,000 and Bridge III Warrants to purchase 27,500 shares of Common Stock to
Apex. The aggregate fair value of these Bridge III Warrants amounted to
$415,891.

On August 19, 2005, the Company issued a Bridge III Note in the principal amount
of $450,000 and Bridge III Warrants to purchase 7,500 shares of Common Stock to
Apex. The fair value of these Bridge III Warrants amounted to $55,263.

On September 30, 2005, the Company issued a Bridge III Note in the principal
amount of $1,200,000 and Bridge III Warrants to purchase 20,000 shares of Common
Stock to Apex. The fair value of these Bridge III Warrants amounted to $57,143.

On October 16, 2005, the Company issued a Bridge III Note in the principal
amount of $360,000 and Bridge III Warrants to purchase 6,000 shares of Common
Stock to Apex. The fair value of these Bridge III Warrants amounted to $9,018.

On October 24, 2005, the Company issued a Bridge III Note in the principal
amount of $75,000 and Bridge III Warrants to purchase 1,250 shares of Common
Stock to Apex. The fair value of these Bridge III Warrants amounted to $1,879.

On October 29, 2005, the Company issued Bridge III Extension Warrants to
purchase 27,500 shares of Common Stock to Apex. The fair value of these Bridge
III Extension Warrants amounted to $42,394.

On October 31, 2005, the Company issued a Bridge III Note in the principal
amount of $385,000 and Bridge III Warrants to purchase 6,417 shares of Common
Stock to Apex. The fair value of these Bridge III Warrants amounted to $9,644.

On November 16, 2005, the Company issued a Bridge III Note in the principal
amount of $225,000 and Bridge III Warrants to purchase 3,750 shares of Common
Stock to Apex. The fair value of these Bridge III Warrants amounted to $4,431.

On November 21, 2005, the Company issued a Bridge III Note in the principal
amount of $150,000 and Bridge III Warrants to purchase 2,500 shares of Common
Stock to Apex. The fair value of these Bridge III Warrants amounted to $2,954.

On November 29, 2005, the Company issued a Bridge III Note in the principal
amount of $210,000 and Bridge III Warrants to purchase 3,500 shares of Common
Stock to Apex. The fair value of these Bridge III Warrants amounted to $4,135.

On December 8, 2005, the Company issued a Bridge III Note in the principal
amount of $229,000 and Bridge III Warrants to purchase 3,817 shares of Common
Stock to Apex. The fair value of these Bridge III Warrants amounted to $4,757.

On December 17, 2005, the Company issued Bridge III Extension Warrants to
purchase 7,500 shares of Common Stock to Apex. The fair value of these Bridge
III Extension Warrants amounted to $9,544.

On January 28, 2006, the Company issued Bridge III Extension Warrants to
purchase 20,000 shares of Common Stock to Apex. The fair value of these Bridge
III Extension Warrants amounted to $20,316.

On February 13, 2006, the Company issued Bridge III Extension Warrants to
purchase 6,000 shares of Common Stock to Apex. The fair value of these Bridge
III Extension Warrants amounted to $6,634.

On February 21, 2006, the Company issued Bridge III Extension Warrants to
purchase 1,250 shares of Common Stock to Apex. The fair value of these Bridge
III Extension Warrants amounted to $1,382.

On March 1, 2006, the Company issued Bridge III Extension Warrants to purchase
6,417 shares of Common Stock to Apex. The fair value of these Bridge III
Extension Warrants amounted to $10,029.

On March 17, 2006, the Company issued Bridge III Extension Warrants to purchase
3,750 shares of Common Stock to Apex. The fair value of these Bridge III
Extension Warrants amounted to $5,861.

On March 22, 2006, the Company issued Bridge III Extension Warrants to purchase
2,500 shares of Common Stock to Apex. The fair value of these Bridge III
Extension Warrants amounted to $3,907.

On March 27, 2006, in repayment and full settlement of aggregate obligations
outstanding to Apex amounting to $8,112,177, including obligations outstanding
under the Bridge III Notes issued to Apex, the Company issued to Apex 10,140,221
shares of Series A-1 Preferred Stock.

On March 27, 2006, we issued 179 shares of Series A Preferred Stock and warrants
to purchase 124,306 shares of Common Stock to Apex in consideration of an
investment of $895,000 in our Series A Preferred Financing.

On April 3, 2006, in repayment and full settlement of aggregate obligations
outstanding to Apex amounting to $373,676, including obligations outstanding
under the Bridge III Notes issued to Apex, the Company issued to Apex 467,095
shares of Series A-1 Preferred Stock.

On April 3, 2006, we issued 71 shares of Series A Preferred Stock and warrants
to purchase 49,306 shares of Common Stock to Apex in consideration of an
investment of $355,000 in our Series A Preferred Financing.

The president of Walnut Valley, Inc., Rafiq Kiswani, was the former president of
LucidLine prior to our acquisition of LucidLine in February 2005, and is listed
as a selling stockholder in this registration statement.

On October 13, 2006, we issued 208.06 shares of Series B Preferred Stock and
warrants to purchase 231,328 shares of Common Stock to Apex in consideration of
an investment of $1,040,322 in our Series B Preferred Financing.

We also have employment agreements with certain of our executive officers. The
terms of those employment agreements have been previously disclosed.

SELLING STOCKHOLDERS

Other than the transactions described below, within the last three years there
has not been, nor is there currently proposed, any transaction or series of
similar transactions to which we were or will be a party:

o in which the amount involved exceeds $60,000; and

o in which any selling stockholder had or will have a direct or
indirect material interest.

Certain stockholders and officers of the Company have paid expenses on the
Company's behalf since its inception, of which $130,201 remains outstanding at
June 30, 2006. The amounts payable to such officers and stockholders are due on
demand. Subsequent to June 30, 2006, $123,243 of the outstanding expenses were
settled as part of the creditor and claimant liabilities restructuring when
Robert E. Yaw II signed his subscription agreement. The remainder of the amount
outstanding at June 30, 2006 represented estimates of expense reports that had
not been completed as of that date.

Notes payable to officers and stockholders amount to $90,000, bear interest at
10% per annum and are due on demand. Interest expense on these notes amounted to
$6,475 for the six months ended June 30, 2006. As of June 30, 2006, $145,712 of
the original notes which amounted to $235,712 have been surrendered as payment
for Series A-1 Preferred stock as part of the creditor and claimant liabilities
restructuring. Subsequent to June 30, 2006, the remaining $90,000 of this amount
has been surrendered as payment for Series A-1 Preferred stock under the
creditor and claimant liabilities restructuring by Robert E. Yaw II..

ACQUISITIONS

On February 25, 2005, we consummated our acquisition of LucidLine. In connection
with the LucidLine acquisition, we issued 146,673 shares of Common Stock (with
an aggregate value of $3,740,000) and $200,000, in the aggregate, in exchange
for the outstanding shares of the capital stock of LucidLine. Pursuant to our
agreement to register the resale of the 146,673 shares of Common Stock issued to
the former holders of the outstanding capital stock of LucidLine, we have
included as a selling stockholder in this registration statement each such
former holder who submitted a selling stockholder questionnaire to us.

On February 25, 2005, we consummated our acquisition of CSSI. In connection with
the CSSI acquisition, we issued 250,023 shares of Common Stock (with an
aggregate value of $6,375,000) in exchange for the outstanding shares of the
common stock of CSSI, and subordinated promissory notes in the aggregate
principal amount of $4,500,000 and warrants to purchase 75,002 shares of Common
Stock in exchange for the outstanding shares of the preferred stock of CSSI. The
aggregate value of these warrants was $1,912,500. The subordinated promissory
notes and warrants were issued to Apex, The Northwestern Mutual Life Insurance
Company and Advanced Equities Venture Partners I, L.P. Pursuant to our agreement
to register the resale of the 325,025 shares of Common Stock issued to the
former holders of the outstanding capital stock of CSSI, we have included as a
selling stockholder in this registration statement each such former holder who
submitted a selling stockholder questionnaire to us.

On March 30, 2005, we consummated our acquisition of Entelagent. In connection
with the Entelagent merger, we issued 100,029 shares of Common Stock (with an
aggregate value of $2,550,000) in exchange for the outstanding shares of the
capital stock of Entelagent. We also agreed to (i) issue to certain officers,

directors, shareholders and creditors of Entelagent, in consideration of amounts
owed by Entelagent to such parties, promissory notes in the aggregate principal
amount of approximately $2,602,913 (of which $554,202 remains outstanding), with
interest payable thereon at a rate of 8% per annum and maturing on February 28,
2006, and (ii) repay approximately $1,351,000 in outstanding liabilities of
Entelagent. Pursuant to our agreement to register the resale of the 100,029
shares of Common Stock issued to the former holders of the outstanding capital
stock of Entelagent, we have included as a selling stockholder in this
registration statement each such former holder who submitted a selling
stockholder questionnaire to us.

In consideration of its consulting services related to our acquisition of CSSI,
LucidLine and Entelagent, we paid Laidlaw a cash fee of $657,633 and issued to
Laidlaw warrants to purchase 10,007 shares of Common Stock. The aggregate value
of these warrants amounted to $255,000. Laidlaw distributed these warrants to
various parties. Pursuant to our agreement to register the shares of Common
Stock issuable in connection with these warrants, we have included as a selling
stockholder in this registration statement each such transferee who submitted a
selling stockholder questionnaire to us.

INTERIM BRIDGE FINANCING I

On February 28, 2005, we completed Interim Bridge Financing I in the aggregate
amount of $3,500,000 with the Bridge I Investors. We allocated $2,456,140 of the
proceeds to the Bridge I Notes and $1,043,860 of the proceeds to the Bridge I
Warrants based on the relative fair values of these financial instruments.
Pursuant to our agreement to register the shares of Common Stock issuable in
connection with Interim Bridge Financing I, we have included as a selling
stockholder in this registration statement each Bridge I Investor who submitted
a selling stockholder questionnaire to us.

On June 28, 2005, we elected to extend the contractual maturity date of the
Bridge I Notes for an additional 60 days to August 27, 2005. In connection with
such extension, we issued the Bridge I Extension Warrants to the Bridge I
Investors. The aggregate value of the Bridge I Extension Warrants amounted to
$822,500.

We did not redeem the Bridge I Notes on August 27, 2005 and, as a result, we
were obligated to issue the Bridge I Penalty Warrants to the Bridge I Investors.
Accordingly, we recorded a charge of $3,500,000 in 2005 based upon the intrinsic
value of the conversion option associated with the Bridge I Notes which was
measured at the original issuance date of the Bridge I Notes. Although a
significant majority of the Bridge I Notes (and the associated Bridge I Penalty
Warrants) were surrendered as payment for shares of our Series A-1 Preferred
Stock under our creditor and claimant liabilities restructuring program, Bridge
I Notes in the aggregate principal amount of $319,975 (and related Bridge I
Penalty Warrants to purchase an aggregate of 40,957 shares of Common Stock)
remain outstanding.

In consideration of its services as placement agent for Interim Bridge Financing
I, we paid Laidlaw a cash fee of $316,579 and issued to Laidlaw warrants to
purchase 11,674 shares of Common Stock. The aggregate value of these warrants
amounted to $297,500. Laidlaw distributed these warrants to various parties,
each of whom is listed in this registration statement as a selling stockholder
pursuant to our agreement to register the shares of Common Stock issuable in
connection with these warrants.

INTERIM BRIDGE FINANCING II

On June 6, 2005, we completed Interim Bridge Financing II in the aggregate
amount of $2,543,000 with 7 accredited investors introduced by Laidlaw (the
"Bridge II Investors"). We allocated $2,010,277 of the proceeds to the Bridge II
Notes and $532,723 of the proceeds to the Bridge II Warrants based on the
relative fair values of these financial instruments. Pursuant to our agreement
to register the shares of Common Stock issuable in connection with Interim
Bridge Financing II, we have included as a selling stockholder in this
registration statement each Bridge II Investor who submitted a selling
stockholder questionnaire to us.

Beginning on October 4, 2005, we elected to extend the contractual maturity date
of the Bridge II Notes for an additional 60 days to various dates beginning
December 2, 2005. In connection with such extension, we issued the Bridge II
Extension Warrants to the Bridge II Investors. The aggregate value of the Bridge
II Extension Warrants amounted to $65,338.

We did not redeem the Bridge II Notes on December 2, 2005 or thereafter and, as
a result, we were obligated to issue the Bridge II Penalty Warrants to the
Bridge II Investors. The Bridge II Penalty Warrants are only exercisable in
consideration of the exchange and cancellation of the Bridge II Notes.
Accordingly, we recorded a charge of $2,543,000 in 2005 based upon the intrinsic
value of the conversion option associated with the Bridge II Notes which was
measured at the original issuance date of the Bridge II Notes. Although a
significant majority of the Bridge II Notes (and the associated Bridge II
Penalty Warrants) were surrendered as payment for shares of our Series A-1
Preferred Stock under our creditor and claimant liabilities restructuring
program, one Bridge II Note in the aggregate principal amount of $200,000 (and
the related Bridge I Penalty Warrant to purchase an aggregate of 25,600 shares
of Common Stock) remains outstanding.

In consideration of its services as placement agent for Interim Bridge Financing
II, we paid Laidlaw a cash fee of $305,160 and issued to Laidlaw warrants to
purchase 4,243 shares of Common Stock. The aggregate value of these warrants
amounted to $80,867. Laidlaw distributed these warrants to various parties, each
of whom is listed in this registration statement as a selling stockholder
pursuant to our agreement to register the shares of Common Stock issuable in
connection with these warrants.

INTERIM BRIDGE FINANCING III

Beginning on July 1, 2005, and continuing through December 31, 2005, we
completed Interim Bridge Financing III in the aggregate amount of $5,234,000
with to Apex, The Northwestern Mutual Life Insurance Company and Advanced
Equities Venture Partners I, L.P. (the "Bridge III Investors"). We allocated
$4,645,544 of the proceeds to the Bridge III Notes and $587,595 of the proceeds
to the Bridge III Warrants based on the relative fair values of these financial
instruments. Pursuant to our agreement to register the shares of Common Stock
issuable in connection with Interim Bridge Financing III, we have included as a
selling stockholder in this registration statement each Bridge III Investor.

Beginning on October 9, 2005, we elected to extend the contractual maturity date
of the Bridge III Notes for an additional 60 days to various dates beginning
December 28, 2005. In connection with such extension, we issued the Bridge III
Extension Warrants to the Bridge III Investors. The aggregate value of the
Bridge III Extension Warrants amounted to $59,087.

We did not redeem the Bridge III Notes on December 28, 2005 or thereafter and,
as a result, we were obligated to issue the Bridge III Penalty Warrants to the
Bridge III Investors. The Bridge III Penalty Warrants are only exercisable in
consideration of the exchange and cancellation of the Bridge III Notes.
Accordingly, we recorded a charge of $301,379 in 2005 and $550,000 in the first
quarter of 2006 based upon the intrinsic value of the conversion option
associated with the Bridge III Notes which was measured at the original issuance
date of the Bridge III Notes. All of the Bridge III Notes (and the associated
Bridge III Penalty Warrants) were surrendered as payment for shares of our
Series A-1 Preferred Stock under our creditor and claimant liabilities
restructuring program.

CONSULTING AGREEMENT PAYABLE

On June 8, 2005, the Company negotiated a settlement regarding a consulting
agreement payable to Afi Hasan. The terms of the settlement agreement terminated
the prior agreement and reduced the remaining payments due under the contract to
$150,000 including a $50,000 payment that was made upon the execution of the
agreement and two additional $50,000 payments including one to be made upon the
completion of a follow-on-financing by the Company and one not later than
September 30, 2005. The payment due on September 30, 2005 was not made by the
Company. The $100,000 balance due under this arrangement has been surrendered as
payment for Series A-1 Preferred stock under the creditor and claimant
liabilities restructuring program. Additionally, the settlement agreement
terminated an obligation for the Company to issue 3,334 shares of unrestricted
stock.

2006 BRIDGE NOTES

On January 18, 2006, we completed a financing of approximately $540,000 in
additional gross funds (the "2006 Bridge Note Financing") through the issuance
of Subordinated Convertible Promissory Notes (the "2006 Bridge Notes") in the
amount of $720,001. The 2006 Bridge Notes automatically converted into an
aggregate of 144 shares of our Series A Preferred Stock and warrants to purchase
100,002 shares of Common Stock upon our consummation of the Series A Preferred

Financing. The $180,000 difference between the gross proceeds received upon the
original issuance of the notes and the redemption amount was recorded as an
original issuance discount that was fully expensed during first two fiscal
quarters of 2006.

Additionally, we paid Laidlaw, as placement agent in the 2006 Bridge Note
Financing, a fee of $54,000.

CREDITOR AND CLAIMANT LIABILITIES RESTRUCTURING

On January 12, 2006, we issued a Stock Subscription Agreement & Mutual Release
("the Original Release") to each of our creditors and claimants ("Subscriber")
for purposes of entering into a final and binding settlement with respect to any
and all claims, liabilities, demands, causes of action, costs, expenses,
attorneys fees, damages, indemnities, and obligations of every kind and nature
that each Subscriber may have with the Company ("Subscriber Claims"). Under the
terms of this agreement, we sold to the Subscribers and the Subscribers
purchased from us shares of our Series A-1 Preferred Stock at a price of $0.80
per share. The aggregate purchase price was equivalent to the value of the
Subscriber Claims being settled through this settlement and release. Each
Subscriber was deemed to have paid for the shares of Series A-1 Preferred Stock
through the settlement and release of such Subscriber's Subscriber Claims.

As of July 21, 2006, creditors representing $29,594,442 of Subscriber Claims had
accepted our proposal by signing and returning to us the Stock Subscription
Agreement and Mutual Release. In connection therewith, we issued an aggregate of
36,993,054 shares of Series A-1 Preferred Stock. Our board of directors
terminated this program on July 21, 2006. The shares of Series A-1 Preferred
Stock automatically converted into 12,331,056 shares of Common Stock on July 31,
2006, upon the filing of an amendment to our certificate of incorporation, as
amended, increasing our authorized shares of Common Stock and effecting a
1-for-30 reverse stock split. There are currently no shares of Series A-1
Preferred Stock outstanding.

Pursuant to our agreement to register the shares of Common Stock issued upon the
automatic conversion of the Series A-1 Preferred Stock, we have included as a
selling stockholder in this registration statement each of the former holders of
shares of our Series A-1 Preferred Stock who submitted a selling stockholder
questionnaire to us.

SERIES A PREFERRED FINANCING

On March 27, 2006, we consummated the Series A Preferred Financing through the
sale of Units, at a per Unit price of $100,000, consisting of (i) 20 shares of
Series A Preferred Stock and (ii) Investor Warrants to purchase 13,888.9 shares
of our Common Stock in the aggregate amount of $4,465,501. This amount was
comprised of $720,001 associated with the conversion of the 2006 Bridge Notes,
$895,000 provided by Apex and $2,850,500 provided by parties made available by
Laidlaw, the Series A Preferred Financing placement agent. The first closing of
the Series A Preferred Financing resulted in our issuance of 893 shares of
Series A Preferred Stock and Investor Warrants to purchase 620,233 shares of
Common Stock. We paid Laidlaw a fee of $285,050 and a non-accountable expense
allowance of $25,000, and issued to Laidlaw Agent Warrants to purchase 198,375
shares of Common Stock for its services as the Series A Preferred Financing
placement agent. Laidlaw distributed these warrants to various parties.

Pursuant to our agreement to register the shares of Common Stock issuable upon
exercise of the Investor Warrants and the Agent Warrants and conversion of the
Series A Preferred Stock, we have included as a selling stockholder in this
registration statement each holder of Investor Warrants, Agent Warrants and
Series A Preferred Stock who submitted a selling stockholder questionnaire to
us.

SERIES B PREFERRED FINANCING

On October 13, 2006, we consummated the Series B Preferred Financing through the
sale of Units, at a per Unit price of $100,000, consisting of (i) 20 shares of
Series B Preferred Stock and (ii) Investor Warrants to purchase shares of Common
Stock in an amount equal to 50% of the shares issuable upon conversion of the
Series B Preferred Stock, in the aggregate amount of $3,120,966. This amount was
comprised of $1,040,322 provided by Apex and $2,080,644 provided by parties made
available by Laidlaw, the Series B Preferred Financing placement agent. The

first closing of the Series B Preferred Financing resulted in our issuance of
624.2 shares of Series B Preferred Stock and Investor Warrants to purchase
694,011 shares of Common Stock. We paid Laidlaw a fee of $280,484 and issued to
Laidlaw Agent Warrants to purchase 208,198 shares of Common Stock for its
services as the Series B Preferred Financing placement agent.

Certain of the selling stockholders participated in the Series B Preferred
Financing. We are not registering the shares issuable upon conversion of the
Series B Preferred Stock or upon exercise of the Investor Warrants issued in
connection therewith in this registration statement.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

HIGH LOW
---- ---
2004:
First Quarter .............................. $39.00 $3.30
Second Quarter ............................. 43.80 11.10
Third Quarter .............................. 34.80 20.70
Fourth Quarter ............................. 35.10 20.70
2005:
First Quarter .............................. $34.80 $19.50
Second Quarter ............................. 24.90 15.00
Third Quarter............................... 20.40 4.20
Fourth Quarter.............................. 4.20 1.50
2006:
First Quarter .............................. $2.70 $1.50
Second Quarter ............................. $2.30 $0.90
Third Quarter .............................. $10.01 $0.96

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

As of October 13, 2006, there were 14,462,260 shares of Common Stock
outstanding.

As of October 13, 2006 there were approximately 135 holders of record of the
Common Stock. However, we believe that the number of beneficial owners is in
excess of 500, because a large portion of the Common Stock is held of record
through brokerage firms in "street name."

DIVIDEND POLICY

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

EXECUTIVE COMPENSATION.

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

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

Robert Cross(1) 2005 186,458 82,388 0 0 33,334 0 0
Director, Chief Executive 2004 0 0 0 0 0 0 0
Officer 2003 0 0 0 0 0 0 0

----------------------------------------------------------------------------------------------------------------------------------
Brett Newbold(2) 2005 150,624 0 0 0 0 0 0
President & Chief Technology 2004 0 0 0 0 0 0 0
Officer 2003 159,000 0 0 0 0 0 0
----------------------------------------------------------------------------------------------------------------------------------
William Hammon(3) 2005 157,500 0 0 0 13,334 0 0
Chief Marketing Officer 2004 0 0 0 0 0 0 0
2003 0 0 0 0 0 0 0
----------------------------------------------------------------------------------------------------------------------------------
James E. Morriss(4) 2005 141,666 0 0 0 20,000 0 0
Vice President - 2004 0 0 0 0 0 0 0
Engineering 2003 0 0 0 0 0 0 0
----------------------------------------------------------------------------------------------------------------------------------
Heidi B. Newton(5) 2005 142,500 15,000 0 0 6,667 0 0
Vice President - Finance 2004 0 0 0 0 0 0 0
and Administration 2003 0 0 0 0 0 0 0
----------------------------------------------------------------------------------------------------------------------------------

(1) Mr. Cross became Patron's Chief Executive Officer on February 28, 2005.
On July 1, 2005, Mr. Cross was granted an option to purchase 33,334
shares of the Company's Common Stock at a per share exercise price of
$19.50. This option terminates on June 30, 2015.

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

(3) Mr. Hammon became Patron's Chief Marketing Officer upon the acquisition
of Entelagent on March 30, 2005. On August 17, 2005, Mr. Hammon
received an option to purchase 13,334 shares of the Company's Common
Stock at a per share exercise price of $10.20. This option grant
terminates on August 16, 2015. Mr. Hammon's employment with the Company
ended on January 9, 2006 at which time this option grant was forfeited.

(4) Mr. Morriss became Patron's Vice President-Engineering on March 31,
2005. On August 17, 2005, Mr. Morriss was granted an option to purchase
20,000 shares of the Company's Common Stock at a per share exercise
price of $10.20. Mr.Morriss' employment with the Company ended on June
30, 2006 at which time options on 7,500 shares were forfeited. The
option on the remaining 12,500 shares terminates on March 31, 2007.

(5) Ms. Newton became Patron's Vice President - Finance and Administration
on February 26, 2005. On August 17, 2005 Ms. Newton was granted an
option to purchase 6,667 shares of the Company's Common Stock at a per
share exercise price of $10.20. This option terminates on August 16,
2015.

OPTION GRANTS IN THE YEAR ENDED DECEMBER 31, 2005

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

Robert Cross ....... 33,334 18.8% $19.50(3) 6/30/15
Brett Newbold ...... -- -- -- --
William Hammon ..... 13,334 7.5% $10.20 8/16/15
James E. Morriss ... 20,000 11.3% $10.20 8/16/15
Heidi B. Newton .... 6,667 3.8% $10.20 8/16/15

(1) The total number of stock options granted to employees during the
year ended December 31, 2005 was 177,180 shares.

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

(3) Mr. Cross' options were granted at a per share exercise price of
$19.50. The closing price on the date of grant was $20.40.

DIRECTOR COMPENSATION

Patron's non-employee directors do not receive compensation for their services.
Directors are reimbursed for travel expenses associated with attendance at Board
meetings. There were no reimbursement of travel expenses in each of the years
ended December 31, 2005 and 2004.

EXECUTIVE EMPLOYMENT AGREEMENTS

ROBERT W. CROSS

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

On July 1, 2005, we entered into an employment agreement with Mr. Cross in
connection with Mr. Cross's employment for a one-year term, subject to automatic
renewal, commencing on July 1, 2005, as Chief Executive Officer. The Employment
Agreement provides for a base salary of $200,000 per year with a non-recoverable
draw of $100,000 (grossed up for taxes) during the first six months of the
Agreement. In the event that his employment is terminated, Mr. Cross shall
continue to receive his base salary and shall be entitled to continued
participation in our executive benefit plans for a period of six (6) months. The
Employment Agreement also provides for a performance bonus determined in
accordance with quarterly revenue milestones that are to be established by the
Board. Mr. Cross is eligible to receive a bonus of up to 100% of quarterly base
salary for each quarter that the Company achieves the agreed upon revenue
milestones. Additionally, the Employment Agreement provides for the grant of
33,334 stock options at an exercise price of $19.50 per share with the options
vesting 25% on July 1, 2005, 25% on September 30, 2005, 25% on December 31, 2005
and 25% on March 31, 2006. The options expire on June 30, 2012.

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

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

BRETT NEWBOLD

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

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

BRADEN WAVERLEY

On February 17, 2006, the Company entered into an employment agreement (the
"Waverley Agreement") with Braden Waverley ("Waverley"), the Company's new Chief
Operating Officer. The term of the Waverley Agreement is one year with automatic
one-year renewal unless Mr. Waverley is provided with written notice of
non-renewal 90 days prior to expiration of the current term of the Waverley
Agreement. The Waverley Agreement provides for a base salary of $200,000 per
year. The Waverley Agreement provides for a performance bonus determined in
accordance with revenue milestones established by the Board on a quarterly
basis. Mr. Waverley is eligible to receive a bonus of up to 75% of base salary
for each quarter that the Company achieves the agreed upon revenue milestones.
Additionally, the Waverley Agreement provides for the grant of stock options in
an amount representing an aggregate 3.5% of the outstanding shares of Company
Common Stock on the date of grant ("Waverley Initial Grant"). The Waverley
Initial Grant is for 73,371 shares at an exercise price of $1.65 per share.
Additionally, upon the completion of the resolution of Claims through the
issuance of Series A-1 Preferred Stock, Mr. Waverley will be granted an
additional option ("Waverley Additional Option") which together with the
Waverley Initial Grant shall enable Mr. Waverley to purchase, along with the
Waverley Initial Grant, shares of Company Common Stock representing 3.5% of the
Common Stock issued and outstanding after completion of the Creditor and
Claimant Liabilities Restructuring on a fully-diluted basis. These options have
a term of 10 years and vest 20% on the date of grant and 1/48th of the balance
on the last day of each month for the next 48 months following the effective
date of this agreement.

MARTIN T. JOHNSON

On February 17, 2006, the Company entered into an employment agreement (the
"Johnson Agreement") with Martin T. Johnson ("Johnson"), the Company's new Chief
Financial Officer. The term of the Johnson Agreement is one year with automatic
one-year renewal unless Mr. Johnson is provided with written notice of
non-renewal 90 days prior to expiration of the current term of the Johnson
Agreement. The Johnson Agreement provides for a base salary of $180,000 per
year. The Johnson Agreement provides for a performance bonus determined in
accordance with revenue milestones established by the Board on a quarterly
basis. Mr. Johnson is eligible to receive a bonus of up to 50% of base salary
for each quarter that the Company achieves the agreed upon revenue milestones.
Additionally, the Johnson Agreement provides for the grant of stock options in
an amount representing an aggregate 1.25% of the outstanding shares of Company
Common Stock on the date of grant ("Johnson Initial Grant"). The Johnson Initial
Grant is for 26,204 shares at an exercise price of $1.65 per share.
Additionally, upon the completion of the resolution of Claims through the
issuance of Series A-1 Preferred Stock, Mr. Johnson will be granted an
additional option ("Johnson Additional Option") which together with the Johnson
Initial Grant shall enable Mr. Johnson to purchase, along with the Johnson
Initial Grant, shares of Company Common Stock representing 1.25% of the Common
Stock issued and outstanding after completion of the Creditor and Claimant
Liabilities Restructuring on a fully-diluted basis. These options have a term of
10 years and vest 20% on the date of grant and 1/48th of the balance on the last
day of each month for the next 48 months following the effective date of this
agreement.

AVAILABLE INFORMATION

We have filed a registration statement on Form SB-2 under the Securities Act of
1933, as amended, relating to the shares of common stock being offered by this
prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of Patron Systems, Inc., filed as part of
the registration statement, and it does not contain all information in the
registration statement, as certain portions have been omitted in accordance with
the rules and regulations of the Securities and Exchange Commission.

We are subject to the informational requirements of the Securities Exchange Act
of 1934 that require us to file reports, proxy statements and other information
with the Securities and Exchange Commission. Such reports, proxy statements and
other information may be inspected at public reference facilities of the SEC at
Judiciary Plaza, 100 F Street NE, Washington D.C. 20549. Copies of such material
can be obtained from the Public Reference Section of the SEC at Judiciary Plaza,
100 F Street NE, Washington, D.C. 20549 at prescribed rates. The public could
obtain information on the operation of the public reference room by calling the
Securities and Exchange Commission at 1-800-SEC-0330. Because we file documents
electronically with the SEC, you may also obtain this information by visiting
the SEC's Internet website at http://www.sec.gov.

FINANCIAL STATEMENTS
PATRON SYSTEMS, INC.
DECEMBER 31, 2005

CONTENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ................. 68

FINANCIAL STATEMENTS

Consolidated Balance Sheet as of December 31, 2005 .................. 69

Consolidated Statements of Operations for the years
ended December 31, 2005 and 2004 ................................ 70

Consolidated Statements of Stockholders' Deficiency
for the years ended December 31, 2005 and 2004 .................. 71

Consolidated Statements of Cash Flows for the years
ended December 31, 2005 and 2004 ................................ 72

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .............................. 73

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

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

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

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

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

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

New York, New York
March 27, 2006

PATRON SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET

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

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

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

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

Common stock subject to put right (66,667 shares) ............. 1,000,000
------------

Commitments and Contingencies

Stockholders' Deficiency
Preferred stock, par value $0.01 per share, 75,000,000
shares authorized, none issued and outstanding .......... --
Common stock, par value $0.01 per share, 150,000,000
shares authorized, 1,978,283 shares issued and
outstanding as of December 31, 2005 (net of 66,667
shares subject to put right) ............................ 4,049,143
Additional paid-in capital ................................. 61,571,916
Common stock repurchase obligation ......................... (1,300,000)
Deferred compensation ...................................... (7,500)
Accumulated deficit ........................................ (84,388,027)
------------
Total stockholders' deficiency .......................... (20,074,468)
------------
Total liabilities and stockholders' deficiency .......... $ 11,818,638
============

See notes to condensed consolidated financial statements.

PATRON SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

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

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

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

Other Income (Expense)
Interest income ............................. 19,250 77,000
Change in intrinsic value of common
stock put right .......................... 300,000 --
Loss on sale of property and equipment ...... (8,886) --
Interest expense ............................ (17,682,201) (132,350)
------------ ------------
Total Other Expense ............................ (17,371,837) (55,350)
------------ ------------

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

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

Net Loss Per Share - Basic and Diluted ......... $ (22.81) $ (3.61)
============ ============

Weighted Average Number of Shares
Outstanding - Basic and diluted ............. 1,948,857 1,293,610
============ ============

See notes to condensed consolidated financial statements.

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

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

BALANCE, JANUARY 1, 2004 .................. 1,280,047 1,477,514 29,003,259 --

Common stock to be repurchased under
Allin Settlement Agreement ............. (66,667) (20,000) (980,000) (1,300,000)
Issuance of common stock for services
at March 24, 2004 for $12.60 per share . 16,667 5,000 205,000 --
Issuance of common stock in private
placement transaction on May 21, 2004
at $8.37 per share ..................... 23,828 7,148 192,852 --
Issuance of common stock for services
at June 4, 2004 for $20.97 per share ... 16,667 349,500 -- --
Issuance of common stock for services
at August 4, 2005 for $35.97 per share . 16,667 599,500 -- --
Common stock issued in lieu of cash for
services on September 10, 2004 for
$23.67 per share ....................... 3,334 78,900 -- --
Common stock issued in lieu of cash for
services on September 13, 2004 for
$7.50 per share ........................ 8,000 2,400 57,600 --
Issuance of common stock in private
placement transaction on December 14,
2004 for $30.00 per share .............. 16,667 5,000 495,000 --
Common stock issued for conversion of
convertible notes on December 28,
2004 for $23.10 per share .............. 6,722 156,600 -- --
Common stock issued under Accommodation
Agreement penalty at end-of-month
fair values beginning January 31, 2004 . 60,000 1,434,900 -- --
Stock options issued in lieu of cash
for services on December 31, 2004
with a fair value of $18.90 per share .. -- -- 945,000 --
Amortization of Deferred stock-based
compensation ........................... -- -- -- --
Net Income ................................ -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2004................. $ 1,381,932 $ 4,096,462 $ 29,918,711 $ (1,300,000)

Common stock issued in purchase business
combinations
Complete Security Solutions, Inc. ... 250,000 75,000 6,300,000 --
LucidLine, Inc. ..................... 146,667 44,000 3,696,000 --
Entelagent Software Corporation ..... 100,000 30,000 2,520,000 --
Amortization of deferred stock-based
compensation ........................... -- -- -- --
Issuance of warrants to Bridge Note I
Investors .............................. -- -- 1,043,860 --
Issuance of warrants issued as purchase
consideration .......................... -- -- 1,912,500 --
Issuance of warrants to transaction
advisors ............................... -- -- 255,000 --
Issuance of warrants to placement agent
- Interim Bridge Financing I ........... -- -- 297,500 --
Common stock under accommodation
agreement as a penalty ................. 60,000 777,076 -- --
Common stock issued under collateralized
financing arrangement .................. 29,684 8,905 397,300 --
Common stock issued in lieu of cash ....... -- (939,000) 939,000 --
Common stock issued on consulting agreement 13,334 35,600 -- --
Recission of common stock under
consulting agreement ................... (3,334) (78,900) -- --
Issuance of warrants to Bridge Note II
investors .............................. -- -- 532,723 --
Issuance of warrants to placement agent
- Interim Bridge Financing II .......... -- -- 80,867 --
Issuance of warrants in connection with
bridge loan extension .................. -- -- 946,924 --
Issuance of stock options to Chief
Executive Officer ...................... -- -- 30,000 --
Issuance of warrants to Bridge Note
III investors .......................... -- -- 587,595 --
Reduction of intrinsic value of put right . -- -- (300,000) --
Conversion option penalty incurred upon
default of Bridge Financing I .......... -- -- 3,500,000 --
Conversion option penalty incurred upon
default of Subordinated Notes .......... -- -- 4,500,000 --
Conversion option penalty incurred upon
default of Bridge Financing II ......... -- -- 2,543,000 --
Conversion option penalty incurred upon
default of Bridge Financing III ........ -- -- 1,850,000 --
Issuance of options to non-employee ....... -- -- 20,936 --
Net Loss .................................. -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2005 ................ 1,978,283 $ 4,049,143 $ 61,571,916 $ (1,300,000)
============ ============ ============ ============

DEFERRED ACCUMULATED
COMPENSATION DEFICIT TOTAL
------------ ------------ ------------

BALANCE, JANUARY 1, 2004 .................. -- (35,276,425) (4,795,652)

Common stock to be repurchased under
Allin Settlement Agreement ............. -- -- (2,300,000)
Issuance of common stock for services
at March 24, 2004 for $12.60 per share . (210,000) -- --
Issuance of common stock in private
placement transaction on May 21, 2004
at $8.37 per share ..................... -- -- 200,000
Issuance of common stock for services
at June 4, 2004 for $20.97 per share ... (349,500) -- --
Issuance of common stock for services
at August 4, 2005 for $35.97 per share . (599,500) -- --
Common stock issued in lieu of cash for
services on September 10, 2004 for
$23.67 per share ....................... -- -- 78,900
Common stock issued in lieu of cash for
services on September 13, 2004 for
$7.50 per share ........................ -- -- 60,000
Issuance of common stock in private
placement transaction on December 14,
2004 for $30.00 per share .............. -- -- 500,000
Common stock issued for conversion of
convertible notes on December 28,
2004 for $23.10 per share .............. -- -- 156,600
Common stock issued under Accommodation
Agreement penalty at end-of-month
fair values beginning January 31, 2004 . -- -- 1,434,900
Stock options issued in lieu of cash
for services on December 31, 2004
with a fair value of $18.90 per share .. (945,000) -- --
Amortization of Deferred stock-based
compensation ........................... 628,667 -- 628,667
Net Income ................................ -- (4,665,451) (4,665,451)
------------ ------------ ------------
BALANCE, DECEMBER 31, 2004................. $ (1,475,333) $(39,941,876) $ (8,702,036)

Common stock issued in purchase business
combinations
Complete Security Solutions, Inc. ... -- -- 6,375,000
LucidLine, Inc. ..................... -- -- 3,740,000
Entelagent Software Corporation ..... -- -- 2,550,000
Amortization of deferred stock-based
compensation ........................... 1,467,833 -- 1,467,833
Issuance of warrants to Bridge Note I
Investors .............................. -- -- 1,043,860
Issuance of warrants issued as purchase
consideration .......................... -- -- 1,912,500
Issuance of warrants to transaction
advisors ............................... -- -- 255,000
Issuance of warrants to placement agent
- Interim Bridge Financing I ........... -- -- 297,500
Common stock under accommodation
agreement as a penalty ................. -- -- 777,076
Common stock issued under collateralized
financing arrangement .................. -- -- 406,205
Common stock issued in lieu of cash ....... -- -- --
Common stock issued on consulting agreement -- -- 35,600
Recission of common stock under
consulting agreement ................... -- -- (78,900)
Issuance of warrants to Bridge Note II
investors .............................. -- -- 532,723
Issuance of warrants to placement agent
- Interim Bridge Financing II .......... -- -- 80,867
Issuance of warrants in connection with
bridge loan extension .................. -- -- 946,924
Issuance of stock options to Chief
Executive Officer ...................... -- -- 30,000
Issuance of warrants to Bridge Note
III investors .......................... -- -- 587,595
Reduction of intrinsic value of put right . -- -- (300,000)
Conversion option penalty incurred upon
default of Bridge Financing I .......... -- -- 3,500,000
Conversion option penalty incurred upon
default of Subordinated Notes .......... -- -- 4,500,000
Conversion option penalty incurred upon
default of Bridge Financing II ......... -- -- 2,543,000
Conversion option penalty incurred upon
default of Bridge Financing III ........ -- -- 1,850,000
Issuance of options to non-employee ....... -- -- 20,936
Net Loss .................................. -- (44,446,151) (44,446,151)
------------ ------------ ------------
BALANCE, DECEMBER 31, 2005 ................ $ (7,500) $(84,388,027) $(20,074,468)
============ ============ ============

See notes to condensed consolidated financial statements.

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

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

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

NET (DECREASE) INCREASE IN CASH .................................... (45,887) 22,944

CASH, beginning of period .......................................... 45,901 22,957
------------ ------------
CASH, end of period ................................................ $ 14 $ 45,901
------------ ------------
Supplemental Disclosures of Cash Flow Information:
Issuance of note under stock repurchase obligation .............. $ -- $ 1,300,000
Obligation to repurchase 66,667 shares of common stock subject
to put right .................................................... -- 1,000,000
Cash paid during the period for:
Interest ........................................................ 527,715 --
Supplemental non-cash investing and finanicial activity:
Acquisition of businesses:
Current tangible assets acquired ................................ 328,411
Non-current tangible assets acquired ............................ 2,809,689
Current liabilities assumed with acquisitions ................... (8,457,986)
Non-current liabilities assumed with acquisitions ............... (447,790)
Intangible assets acquired ...................................... 3,101,000
Goodwill recognized on purchase business combinations ........... 22,440,412
Non-cash consideration .......................................... (19,332,500)
Cash acquired in purchase business combinations ................. 416,397
------------
Cash paid to acquire businesses ................................. 857,633
============

See notes to condensed consolidated financial statements.

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

NOTE 1 - THE COMPANY

ORGANIZATION AND DESCRIPTION OF BUSINESS

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

DEVELOPMENT STAGE OPERATIONS

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

NOTE 2 - LIQUIDITY AND FINANCIAL CONDITION

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

principally includes the cash component of purchase business combinations that
the Company consummated (during February and March of 2005), net of cash
acquired in the business combinations and the purchase of property and
equipment. In addition, the Company repaid an aggregate of $1,239,909 of certain
obligations due to certain officer/stockholders, $475,539 of which was a
reduction of the funds held in the restricted cash reserve account established
in connection with the Entelagent Merger (Note 4). Subsequent to December 31,
2005 the Company raised approximately $720,000 (approximately $540,000 net of
transaction expenses) in additional gross funds in a bridge note transaction
("2006 Bridge Notes" - Note 23). In addition, the Company raised $895,000 in a
financing which will become part of the Series A Preferred Stock and Warrants
(Note 23). The Company is attempting to raise up to an additional $5,400,000
through a proposed sale of its Series A Preferred Stock and Warrants. On March
27, 2006, the Company closed on $4,820,500 of the Series A Preferred Stock and
Warrants (Note 23). This amount includes the amounts noted for the 2006 Bridge
notes and the $895,000 financing noted above.

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

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

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

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

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

DEVELOPMENT STAGE OPERATIONS

CASH

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

REVENUE RECOGNITION

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

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

BUSINESS COMBINATIONS

their estimated fair values. We engaged a third-party appraisal firm to assist
management in determining the fair values of certain assets acquired and
liabilities assumed. Such a valuation requires management to make significant
estimates and assumptions, especially with respect to intangible assets.

ACCOUNTS RECEIVABLE

The Company adjusts its accounts receivable balances that it deems to be
uncollectible. The allowance for doubtful accounts is the Company's best
estimate of the amount of probable credit losses in the Company's existing
accounts receivable. The Company reviews its allowance for doubtful accounts on
a monthly basis and determines the allowance based on an analysis of its past
due accounts. All past due balances that are over 90 days are reviewed
individually for collectability. Account balances are charged off against the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote.

PROPERTY AND EQUIPMENT

GOODWILL AND INTANGIBLE ASSETS

LONG LIVED ASSETS

USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

STOCK OPTION PLANS

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

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

Year ended December 31,
------------- ------------
2005 2004
------------- ------------
Net Loss, as reported ...................... $(44,446,151) $ (4,665,451)
(+) Stock-based compensation cost
reflected in the financial statements ... 22,500 --
(-) Stock-based employee compensation
expense under the fair value method ..... (440,753) (1,143,611)
------------- ------------
Proforma Net Loss .......................... $(44,864,404) $ (5,809,062)
============= ============
Net Loss per Share-
Basic and Diluted, as reported .......... $ (22.81) $ (3.61)
============= ============
Basic and Diluted, proforma ............. $ (23.02) $ (4.49)
============= ============

NON-EMPLOYEE STOCK BASED COMPENSATION

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

COMMON STOCK PURCHASE WARRANTS

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

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

INCOME TAXES

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

NET LOSS PER SHARE

As a result of the consummation of the Share Exchange described in Note 1, the
Company included 40,001 stock options with an exercise price of $0.30 per share
that it issued to certain employees during 2002 in its calculation of
weighted-average number of common shares outstanding for all periods presented.

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

December 31
-----------------------
2005 2004
---------- ----------
Options ......... 388,000 197,500
Warrants ........ 430,920 500
Convertible Notes 1,589,304 --
---------- ----------
2,408,224 198,000
========== ==========

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

to as special-purpose entities for periods ending after December 15, 2003.
Application by public issuers' entities is required in all interim and annual
financial statements for periods ending after December 15, 2004. The adoption of
this pronouncement did not have material effect on the Company's financial
statements.

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

APB Opinion No. 20 previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of the change
the cumulative effect of changing to the new accounting principle. This
Statement requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. When it is impracticable to determine the period-specific effects of an
accounting change on one or more individual prior periods presented, this
Statement requires that the new accounting principle be applied to the balances
of assets and liabilities as of the beginning of the earliest period for which
retrospective application is practicable and that a corresponding adjustment be
made to the opening balance of retained earnings (or other appropriate
components of equity or net assets in the statement of financial position) for
that period rather than being reported in an income statement. When it is
impracticable to determine the cumulative effect of applying a change in
accounting principle to all prior periods, this Statement requires that the new
accounting principle be applied as if it were adopted prospectively from the
earliest date practicable. This Statement shall be effective for

accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company does not believe that the adoption of SFAS
154 will have a significant effect on its financial statements.

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

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

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

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

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

NOTE 4 - BUSINESS COMBINATIONS

MERGER WITH COMPLETE SECURITY SOLUTIONS, INC.

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

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

In connection with the CSSI merger, the Company issued 250,000 shares of common
stock in exchange for the outstanding shares of the common stock of CSSI, and
subordinated promissory notes in the aggregate principal amount of $4,500,000
(the "Subordinated Notes") and warrants to purchase 75,001 shares of common
stock ("Purchase Warrants") in exchange for the outstanding shares of the
preferred stock of CSSI. The Purchase Warrants have a term of 5 years and an
exercise price of $21.00 per share. The Subordinated Notes and Purchase Warrants
were issued to Apex Investment Fund V, L.P. ("Apex"), The Northwestern Mutual
Life Insurance Company ("Northwestern"), and Advanced Equities Venture Partners
I, L.P ("Advanced Equities").

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

The Company did not redeem the Subordinated Notes on August 24, 2005 and, as a
result, the notes became automatically convertible into 0.128 shares of common
stock for each $1 of principal then outstanding in accordance with the original
note agreement. Accordingly, the Company recorded a charge of $4,500,000 based
upon the intrinsic value of this conversion option measured at the original
issuance date of the note. The Company has agreed to file with the SEC, a
registration statement for the resale of the restricted shares of the Company's
common stock issuable upon exercise of the conversion option that would be
issued in this transaction, on a best efforts basis.

The Company has agreed to register the resale of the 250,023 shares of common
stock issued to the holders of the outstanding common stock of CSSI and the
75,001 shares of common stock issuable upon the exercise of the warrants issued
to the holders of the outstanding preferred stock of CSSI at such time as the
Company next files a registration statement with the Securities and Exchange
Commission ("SEC") on a best efforts basis.

MERGER WITH LUCIDLINE, INC.

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

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

In connection with the LucidLine merger, the Company issued 146,673 shares of
common stock and $200,000 of cash, in exchange for all of the outstanding shares
of LucidLine's common stock. The Company has agreed to register the resale of
the shares of common stock issued to the holders of the outstanding common stock
of LucidLine at such time as the Company next files a registration statement
with the SEC on a best efforts basis.

MERGER WITH ENTELAGENT SOFTWARE CORP.

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

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

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

In connection with the Entelagent Merger, the Company issued 100,029 shares of
the Company's common stock in exchange for all of the outstanding shares of the
capital stock of Entelagent. The Company has agreed to register the resale of
the 100,029 shares of common stock issued to the holders of the outstanding
capital stock of Entelagent at such time as the Company next files a
registration statement with the SEC on a best efforts basis. In addition,
pursuant to the terms of the Amended and Restated Supplemental Agreement, the
Company also agreed to (i) issue to certain officers, directors, stockholders
and creditors of Entelagent, in consideration of amounts owed by Entelagent to
such parties, promissory notes in the aggregate principal amount of $2,640,000,
with interest payable thereon at a rate of 8% per annum and maturing one year
after the completion of the merger and (ii) pay and satisfy $1,388,000 in
outstanding liabilities of Entelagent. The Company placed $1,388,000 of the
proceeds it received from the Interim Bridge Financing I financing transaction
completed on February 28, 2005 in a reserve account established to assist the
Company in the payment of such liabilities. The non-disbursed funds as of
December 31, 2005 are presented as restricted cash in the accompanying balance
sheet.

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

BUSINESS COMBINATION ACCOUNTING

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

The Company evaluated each of the aforementioned transactions to identify the
acquiring entity as required under SFAS 141 for business combinations effected
through an exchange of equity interests. Based on such evaluation the Company
determined that it was the acquiring entity in each transaction (and
cumulatively for all transactions) as (1) the larger portion of the relative
voting rights in the Company after each combination was retained by its
previously existing stockholders, (2) the previously existing stockholders,
through their retention of

a majority of voting rights, retained the ability to elect or appoint a voting
majority of the governing body of the combined entity, and (3) under the terms
of the exchange of equity securities, the Company paid a premium over the market
value of the equity securities of the other combining entities.

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

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

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

Transaction expenses, which include legal fees and transaction advisory services
directly related to the acquisitions amount to $912,633. Such fees include
$657,633 paid in cash and $255,000 for the fair value of 10,007 common stock
purchase warrants issued to Laidlaw & Company UK Ltd. ("Laidlaw") in its
capacity as a transaction advisor.

PURCHASE PRICE ALLOCATION

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

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

The purchase price allocation was based upon a valuation study performed by an
independent outside appraisal firm. The Company, in formulating the allocation,
considered its intention for future use of the acquired assets, analyses of the
historical financial performance of each of the acquired businesses and
estimates of future performance of each acquired businesses' products and
services. The Company made certain adjustments during the year ended December
31, 2005 to its original purchase price allocation as a result of (a) having
negotiated settlements of certain liabilities that it assumed in its business
combination with Entelagent, (b) having completed the audits of the acquired
businesses and (c) the reevaluation of the carrying amounts of certain accounts
receivable balances recorded in purchase accounting. These changes resulted in a
net increase of $6,660 to the Company's original determination of goodwill. In
addition, the Company reduced both other current assets and current liabilities
by $27,500 to offset a prepayment of a liability that occurred prior to the
acquisition.

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

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

Advances to prospective affiliates 2,674,689 -- -- 2,674,689
----------------------------------- ------------ ------------ ------------ ------------
Total tangible assets ....... 3,321,066 95,825 137,606 3,554,497
Liabilities assumed:
Accounts payable ............... (128,854) (32,473) (345,769) (507,096)
Advances from prospective
affiliate ................... -- (829,032) (2,363,359) (3,192,391)
Accrued expenses and other
current liabilities ......... (404,168) -- (4,354,331) (4,758,499)
----------------------------------- ------------ ------------ ------------ ------------
Total current liabilities ... (533,022) (861,505) (7,063,459) (8,457,986)
Long term liabilities ............. -- (102,460) (345,330) (447,790)
----------------------------------- ------------ ------------ ------------ ------------
Total liabilities assumed ... (533,022) (963,965) (7,408,789) (8,905,776)
----------------------------------- ------------ ------------ ------------ ------------
Net tangible assets acquired ...... 2,788,044 (868,140) (7,271,183) (5,351,279)

Value of excess allocated to:
Developed technology ........... 670,000 -- 1,900,000 2,570,000
Customer relationships ......... 180,000 -- -- 180,000
Trademarks and tradenames ...... 55,000 -- 106,000 161,000
In-process research and
development ................. 190,000 -- -- 190,000
Goodwill ....................... 9,302,584 4,962,751 8,175,077 22,440,412
----------------------------------- ------------ ------------ ------------ ------------
Purchase Price .................... $ 13,185,628 $ 4,094,611 $ 2,909,894 $ 20,190,133
============ ============ ============ ============

PROFORMA FINANCIAL INFORMATION

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

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

2005 2004
----------------------------------------------- ------------ ------------
Total revenues ................................ $ 800,710 $ 1,822,197
Net loss ...................................... (46,152,799) (12,390,906)
Weighted average shares outstanding on a
proforma basis .............................. 2,034,099 1,790,276
Proforma net loss per share, basic and diluted $ (22.69) $ (6.92)

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

NOTE 5 - IMPAIRMENT OF GOODWILL

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

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

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

NOTE 6 - OTHER CURRENT ASSETS

Other current assets consist of the following:

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

Note 7 - Property and Equipment

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

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

NOTE 8 - DEFERRED FINANCING COSTS

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

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

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

The Company incurred $316,579 of cash fees and $297,500 of non-cash fees
representing the fair value of 11,674 common stock purchase warrants issued to
Laidlaw in its capacity as the placement agent in the $3,500,000 Interim Bridge
Financing I (Note 11) completed in February 2005. Fees incurred in connection
with the Interim Bridge I Financing were fully amortized during the year ended
December 31, 2005.

On June 28, 2005, the Company elected to extend the due date of the Interim
Bridge Financing I notes in exchange for 58,348 additional common stock purchase
warrants (the "Bridge I Extension Warrants") that were issued to the investors
in this transaction. The aggregate fair value of the warrants, which amounted to
$822,500 was recorded as a deferred financing cost and was fully amortized over
the 60-day extension period, which ended on August 27, 2005.

The Company incurred cash fees of $305,160 and non-cash fees of $80,867
representing the fair value of 4,243 common stock purchase warrants issued to
Laidlaw & Company (UK) Ltd. in its capacity as the placement agent in the
$2,543,000 Interim Bridge Financing II (Note 11). These deferred financing costs
were fully amortized during the year ended December 31, 2005.

Beginning on October 4, 2005, the Company elected to extend the due date of the
Interim Bridge Financing II notes in exchange for 42,388 additional common stock
purchase warrants (the "Bridge II Extension Warrants") that were issued to
investors in this transaction. The aggregate fair value of the warrants, which
amounted to $65,338 was recorded as a deferred financing cost and was fully
amortized over the 60-day extension period, which ended on December 2, 2005.

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

Beginning on October 29, 2005, the Company elected to extend the due date of the
Interim Bridge Financing III notes in exchange for 40,000 additional common
stock purchase warrants (the "Bridge III Extension Warrants") that were issued
to investors in this transaction. The aggregate fair value of the warrants,
which amounted to $59,087, was recorded as deferred financing cost. This
deferred financing cost was fully amortized as of December 31, 2005.

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

NOTE 9 - INTANGIBLE ASSETS

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

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

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

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

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

AMORTIZATION OF INTANGIBLE ASSETS

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

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

NOTE 10 - DEMAND NOTES PAYABLE

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

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

NOTE 11 - BRIDGE NOTES PAYABLE

INTERIM BRIDGE FINANCING I

On February 28, 2005, the Company completed a $3,500,000 financing (the "Interim
Bridge Financing I") through the issuance of 10% Senior Convertible Promissory
Notes (the "Bridge I Notes") and warrants to purchase 58,348 shares of the
Company's common stock ("Bridge I Warrants") (Note 18). The warrants have a term
of 5 years and an exercise price of $21.00 per share. Prior to final maturity,
the Bridge I Notes may be converted into securities that would be issuable at
the first closing of a subsequent financing by the Company, for such number of
offered securities that could be purchased for the principal amount being
converted. The Bridge I Notes had an initial term of 120 days (due on June 28,
2005) with interest at a contractual rate of 10% per annum and featured an
option for the Company to extend the term for an additional 60 days to August
27, 2005.

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

On June 28, 2005, the Company elected to extend the contractual maturity date of
the Bridge I Notes for an additional 60 days to August 27, 2005, which caused
the contractual interest rate to increase to 12% per annum. In addition, the
Company was required to issue the 58,348 additional warrants (the "Bridge I
Extension Warrants") (Note 18) to purchase such number of shares of common stock
equal to 1/60 of a share for each $1.00 of principal amount outstanding. The
Bridge I Extension Warrants have a term of 5 years and an exercise price of
$21.00 per share. The Bridge I Extension Warrants are included in Deferred
Financing Costs at their fair value, which amounts to $822,500.

The Company did not redeem the Bridge I Notes on August 27, 2005 and, as a
result, the notes became automatically convertible into 0.128 shares of common
stock for each $1 of principal then outstanding in accordance with the original

note agreement. Accordingly, the Company recorded a charge of $3,500,000 based
upon the intrinsic value of this conversion option which was measured at the
original issuance date of the note in accordance with EITF 00-27. The Company
has agreed to file with the SEC, a registration statement for the resale of the
restricted shares of the Company's common stock issuable upon exercise of the
conversion option that would be issued in this transaction, on a best efforts
basis.

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

The Company sold these securities to thirty-three accredited investors
introduced by Laidlaw, the placement agent in the Interim Bridge Financing I. As
described in Note 8, the Company incurred $614,079 of fees in connection with
this transaction including $297,500 for the fair value of warrants to purchase
up to 11,674 shares of the Company's common stock (the "Placement Agent
Warrants") at an exercise price of $21.00 per share.

INTERIM BRIDGE FINANCING II

On June 6, 2005, the Company completed a $2,543,000 financing (the "Interim
Bridge Financing II") through the issuance of (i) 10% Junior Convertible
Promissory Notes (the "Bridge II Notes") and (ii) warrants to purchase 42,388
shares of common stock (the "Bridge II Warrants") (Note 18). The warrants have a
term of 5 years and an exercise price of $18.00 per share. Prior to maturity,
the Junior Convertible Promissory Notes may be converted into the securities
offered by the Company at the first closing of a subsequent financing for the
Company, for such number of offered securities as could be purchased for the
principal amount being converted.

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

On October 4, 2005, the Company elected to extend the contractual maturity date
of the Bridge II Notes for an additional 60 days to December 2, 2005, which
caused the contractual interest rate to increase to 12% per annum. In addition,
the Company was required to issue the 42,388 additional warrants (the "Bridge II
Extension Warrants") (Note 18) to purchase such number of shares of common stock
equal to 1/60 of a share for each $1.00 of principal amount outstanding. The
Bridge II Extension Warrants have a term of 5 years and an exercise price of
$18.00 per share. The Bridge II Extension Warrants are included in Deferred
Financing Costs at their fair value, which amounts to $65,338.

The Company did not redeem the Bridge II Notes on December 2, 2005 and, as a
result, the notes became automatically convertible into 0.128 shares of common
stock for each $1 of principal then outstanding in accordance with the original
note agreement. Accordingly, the Company recorded a charge of $2,543,000 based
upon the intrinsic value of this conversion option measured at the original
issuance date of the note in accordance with EITF 00-27. The Company has agreed
to file with the SEC, a registration statement for the resale of the restricted
shares of the Company's common stock issuable upon exercise of the conversion
option that would be issued in this transaction, on a best efforts basis.

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

The Company sold these securities to seven accredited investors introduced by
Laidlaw, placement agent in the Interim Bridge Financing II. As described in
Note 8, the Company incurred $386,027 of fees in connection with this
transaction including a cash fee of $305,160 and $80,867 for the fair value of
warrants to purchase 4,243 shares of the Company's common stock at an exercise
price of $18.00 per share.

INTERIM BRIDGE FINANCING III

Beginning on July 1, 2005, and continuing through December 31, 2005, the Company
completed, through 12 separate fundings, a $5,234,000 financing (the "Interim
Bridge Financing III") through the issuance of (i) 10% Junior Convertible
Promissory Notes (the "Bridge III Notes") and (ii) warrants to purchase up to
87,235 shares of common stock (the "Bridge III Warrants") (Note 18). The
warrants have a term of 5 years and an exercise price of $18.00 per share. Prior
to maturity, the Junior Convertible Promissory Notes may be converted into the
securities offered by the Company at the first closing of a subsequent financing
for the Company, for such number of offered securities as could be purchased for
the principal amount being converted.

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

The Bridge III Notes have an initial term of 120 days (due on various dates
beginning October 28, 2005) with interest at 10% per annum and feature an option
for the Company to extend the term for an additional 60 days to various dates
beginning December 28, 2005. Upon the extension of the maturity date of the
Bridge III Notes, the contractual interest rate would increase to 12% per annum,
and the Company would be required to issue warrants (the "Bridge III Extension
Warrants") (Note 18) to purchase such number of shares of the Company's common
stock equal to 1/60 of a share for each $1.00 of principal then outstanding. The
Bridge III Extension Warrants issuable upon extension of the maturity date of
the Junior Convertible Promissory Notes feature a term of 5 years and an
exercise price of $18.00 per share. In addition, if the Bridge III Notes are not
paid in full on or before the extended maturity date, each note becomes
convertible into 0.128 shares of the Company's common stock for each $1.00 of
principal then outstanding. The intrinsic value of this conversion option
measured at the issuance date of the notes amounts to $3,600,000 and would be
recognized as interest expense in accordance with EITF 00-27. The Company has
agreed to file with the SEC, a registration statement for the resale of the
restricted shares of its common stock issuable upon exercise of the conversion
option that would be issuable in this transaction, on a best efforts basis.

Beginning on October 29, 2005, the Company elected to extend the contractual
maturity date of the various Bridge III Notes for an additional 60 days to
various dates beginning December 28, 2005, which caused the contractual interest
rate to increase to 12% per annum. In addition, the Company was required to
issue the 40,000 additional warrants (the "Bridge III Extension Warrants") to
purchase such number of shares of common stock equal to 1/60 of a share for each
$1.00 of principal amount outstanding. The Bridge III Extension Warrants have a
term of 5 years and an exercise price of $18.00 per share. The Bridge III
Extension Warrants are included in Deferred Financing Costs at their fair value,
which amounts to $59,086.

The Company did not redeem the Bridge III Notes beginning on December 28, 2005
and, as a result, the notes became automatically convertible into 0.128 shares
of common stock for each $1 of principal then outstanding in accordance with the
original note agreement. This amounts to a total of 236,800 shares as of
December 31, 2005. Accordingly, the Company recorded a charge of $301,379 based
upon the intrinsic value of this conversion option measured at the original
issuance date of the notes in accordance with EITF 00-27. The Company has agreed
to file with the SEC, a registration statement for the resale of the restricted
shares of the Company's common stock issuable upon exercise of the conversion
option that would be issued in this transaction, on a best efforts basis.

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

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

NOTE 12 - RELATED PARTY TRANSACTIONS

EXPENSE REIMBURSEMENTS DUE TO OFFICERS AND STOCKHOLDERS

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

NOTES PAYABLE TO OFFICERS AND STOCKHOLDERS

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

CONSULTING AGREEMENT PAYABLE

On June 8, 2005, the Company negotiated a settlement regarding the consulting
agreement payable with a related party. The terms of the settlement agreement
terminate the prior agreement and reduce the remaining payments due under the
contract to $150,000. A $50,000 payment was made upon the execution of the
agreement and two additional $50,000 payments were due, one to be made upon the
completion of a follow-on-financing by the Company and one not later than
September 30, 2005. The $150,000 reduction in payments was recorded as a
reduction of general and administrative expense during the quarter ended June
30, 2005. Additionally, the settlement agreement terminates an obligation for
the Company to issue 3,334 shares of unrestricted stock. The stock issuable
under this commitment was recorded in 2004 as common stock issued in lieu of
cash for services in the amount of $78,900. The rescission of the stock issuable
under this arrangement resulted in an additional reduction of $78,900 in general
and administrative expenses during the year ended December 31, 2005.

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

NOTES PAYABLE (TO CREDITORS OF ACQUIRED BUSINESS)

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

RELATED PARTY PAYMENTS

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

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

NOTE 13 - OTHER CURRENT LIABILITIES

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

NOTE 14 - DEFERRED REVENUE

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

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

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

Pursuant to the Settlement Agreement and Mutual Release, the Company also agreed
to purchase from Mr. Allin and The Allin Dynastic Trust an aggregate of 133,334
shares of the Company's common stock as follows: (i) 66,667 shares (the "Initial
Shares") through the issuance of promissory notes in the aggregate principal
amount of One Million Six Hundred Thousand Dollars ($1,600,000) and (ii) 66,667
shares (the "Remainder Shares") through a cash payment from the proceeds of a
follow-on-financing by the Company, at a price per share equal to the lesser of
(a) $15.00 per share or (b) 90% of the issue price or conversion price, as the
case may be, of the security issued in a follow-on-financing, provided however
that in the event that 90% of the issue price or conversion price, as the case
may be, of the security issued in the follow-on-financing is less than $15.00
per share, Mr. Allin and/or The Allin Dynastic Trust may, at their option,
decline to sell any or all of the Remainder Shares to the Company.

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

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

For the Initial Shares the Company recorded a $1,738,667 note payable to Mr.
Allin with a corresponding increase of $1,600,000 in stockholders' deficiency
and a $138,667 charge to operations for interest payable through June 6, 2006.
For the Remainder Shares, the Company recorded a $1,000,000 put right as
temporary equity with a corresponding charge to operations of $300,000 for the
intrinsic value of the put right on June 6, 2005 (fair value of common stock of
$19.50 per share less the minimum conversion price of $15.00 per share) and a
$700,000 net increase in stockholders' deficiency. The aggregate charge of
$438,667 for the interest and the intrinsic value of the conversion option
embedded in the remainder shares is presented as a litigation loss in the

statement of operations for the year ended December 31, 2004. Common stock
outstanding in the accompanying balance sheet is presented net of the 66,667
Initial Shares that are subject to the repurchase obligation.

As of December 31, 2005, the fair value of the Company's common stock was $1.50
per share, which resulted in a reduction of the charge for the intrinsic value
of the put right granted on June 6, 2005 to $0. Such reduction is presented as a
change in the intrinsic value of put right in the accompanying statement of
operations for the year ended December 31, 2005.

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

NOTE 16 - ACCOMMODATION AGREEMENT

In November 2002, the Company entered into a financing arrangement with a third
party financial institution (the "Lender"), pursuant to which the Company would
borrow $950,000 under a note to be collateralized by the pledge of 31,667 shares
of registered stock from five different stockholders. In connection with this
arrangement, the Company executed a series of Accommodation Agreements with
these stockholders wherein each stockholder pledged their shares in return for
the right to receive on or before November 17, 2003 the return of the pledged
shares, or replacement shares in the event of foreclosure, and one additional
share of common stock for every four shares pledged as compensation. The Company
also agreed to use "best efforts" to register these shares with the US
Securities and Exchange Commission 12 months from the date of issue.

In December 2002, the Company received approximately $450,000 of proceeds under
the note and provided the Lender with the pledged shares. Since that date, no
additional proceeds were provided by the Lender. The Company accounted for the
Lender's failure to fund the facility and return the pledged shares as a
foreclosure on the loan collateral. In addition, the Accommodation Agreements
provided for the Company to pay a penalty in the event of its failure to cause
the replacement shares to be registered on or before March 31, 2003. As a
result, the Company has accrued a penalty for the fair value of 15,000 shares
per quarter which penalty amounted to $777,076 and $1,434,900 for the years
ended December 31, 2005 and 2004, respectively.

STOCK PLEDGE ARRANGEMENT

In April 2004, a stockholder of the Company entered into a one-year stock loan
financing arrangement ("Stock Financing Facility") with a third party financial
institution, pursuant to which such stockholder committed to obtain financing
for the Company under a credit facility collateralized by the pledge of 22,834
shares of registered stock (the "Pledged Stock") that was pledged by a second
stockholder (the "Pledging Stockholder"). In connection with this arrangement,
the Company executed an accommodation agreement with the Pledging Stockholder
committing to issue 22,834 shares of restricted stock (the "Replacement Stock")
on April 2, 2005 (the "Termination Date") in the event of a loss of the Pledged
Stock, plus a premium of 6,850 shares (the "Premium Shares") for entering into
the agreement. The Company also agreed to register 10,000 shares of restricted
stock held by the Pledging Stockholder (the "Held Stock") within thirty days of
the agreement and to use its best efforts to register with the SEC, both the
Replacement Stock and Premium Stock within 12 months from their date of issue.

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

and Premium Stock (prorated for each fraction of a year), All such shares would
become issuable to the pledging stockholder at such time that the registration
statement required to be filed under this arrangement is declared effective.

The Company recorded a net charge of $366,193, which includes $406,205 for the
fair value of the Replacement Stock and Premium Stock (29,684 shares) issued to
the Pledging Stockholder under this arrangement less $40,012 of advances
received. The charge is presented as a loss on collateralized financing
arrangement in the accompanying statement of operations for the year ended
December 31, 2005. The Company also recorded an $81,928 charge during the year
ended December 31, 2005 for the fair value of 5,854 shares issuable to the
Pledging Stockholder as penalties for the delays in registering the stock. The
Company classified the accrual of the stock based penalty as a liability in the
accompanying balance sheet in accordance with SFAS 150 "Accounting For Certain
Financial Instruments with Characteristics of Both Liabilities and Equity",
because the quantity of such shares issuable under this arrangement is
conditioned upon the effectiveness of a registration statement. The
corresponding charge associated with the stock-based penalty is included in
stock based penalties under accommodation agreements in the accompanying
statements of operations.

NOTE 17 - COMMITMENTS AND CONTINGENCIES

SEC INVESTIGATION

Pursuant to Section 20(a) of the Securities Act and Section 21(a) of the
Securities Exchange Act, the staff of the SEC (the "Staff"), issued an order (IN
THE MATTER OF PATRON SYSTEMS, INC. - ORDER DIRECTING A PRIVATE INVESTIGATION AND
DESIGNATING OFFICERS TO TAKE TESTIMONY (C-03739-A, February 12, 2004)) (the
"Order") that a private investigation (the "SEC Investigation") be made to
determine whether certain actions of, among others, the Company, certain of its
officers and directors and others violated Section 5(a) and 5(c) of the
Securities Act and/or Section 10 and Rule 10b-5 promulgated under the Exchange
Act. Generally, the Order provides, among other things, that the Staff is
investigating (i) the legality of two (2) separate Registration Statements filed
by the Company on Form S-8, filed on December 20, 2002 and on April 2, 2003, as
amended on April 9, 2003 (collectively, the "Registration Statements"), covering
the resale of, in the aggregate, 145,834 shares of common stock issued to
various consultants of the Company, and (ii) whether in connection with the
purchase or sale of shares of common stock, certain officers and directors of
the Company and others (a) sold common stock in violation of Section 5 of the
Securities Act and/or, (b) made misrepresentations and/or omissions of material
facts and/or employed fraudulent devices in connection with such purchases
and/or sales relating to certain of the Company's press releases regarding,
among other items, proposed mergers and acquisitions that were never
consummated. If the SEC brings an action against the Company, it could result
in, among other items, a civil injunctive order or an administrative
cease-and-desist order being entered against the Company, in addition to the
imposition of a significant civil penalty. Moreover, the SEC Investigation
and/or a subsequent SEC action could affect adversely the Company's ability to
have its common stock become listed on a stock exchange and/or quoted on the
NASD Bulletin Board or NASDAQ, the Company being able to sell its securities
and/or have its securities registered with the SEC and/or in various states
and/or the Company's ability to implement its business plan. To date, the
Company's legal counsel representing the Company in such matters has indicated
that the SEC Investigation is ongoing and the Staff has not indicated whether it
will or will not recommend that the SEC bring an enforcement action against the
Company, its officers, directors and/or others.

LEGAL PROCEEDINGS

On February 4, 2004, Sherleigh Associates Inc. Profit Sharing Plan ("SHERLEIGH")
filed a complaint against the Company, Patrick Allin, a former President and
Chief Executive Officer of the Company, and Robert E. Yaw, the Company's
Chairman, in the United States District Court for the Southern District of New
York alleging common law fraud. The complaint alleges that Sherleigh was
fraudulently induced into purchasing 33,334 shares of the Company's Common Stock
in reliance upon certain Company press releases and allegedly false statements
by Mr. Allin and Mr. Yaw, concerning the Company's plans to acquire two target
companies, Trust Wave and Entelagent (currently one of the Company's
subsidiaries), and its financing arrangements regarding those acquisitions.
Sherleigh seeks rescission of its purchase agreement and return of its
$2,000,000 purchase price or compensatory damages to be proven at trial. Mr.
Allin recently entered into a settlement agreement with Sherleigh and requested
that the Court include in its dismissal order a finding that the settlement is
reasonable, and a prohibition against any claims by the Company or Mr. Yaw

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

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

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

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

In April of 2005, Richard L. Linting, a former President of the Company's
Professional Services Group, filed a complaint against the Company and Robert E.
Yaw, II, the Company's non-executive Chairman, in the Circuit Court of Cook
County, Illinois alleging breach of his purported employment contract and
seeking sums allegedly owed under the employment contract in the amount of
$1,321,809, plus court costs and fees. On August 22, 2005, the Company, Mr.
Linting and Mr. Yaw entered into a Settlement Agreement and Release whereby Mr.
Linting agreed to release all claims against the Company and Mr. Yaw existing as
of that date in consideration for (i) the payment by the Company to Mr. Linting
of $100,000 in cash, (ii) the issuance by the Company of an aggregate of 14,095
shares ("LINTING SHARES") of its Common Stock (equivalent to $192,809 divided by
$13.68) to be transferred to Mr. Linting in such numbers and at such times as
directed by Mr. Linting subsequent to the registration of the Linting Shares,
(iii) the Company's agreement to register the Linting Shares through the filing
of a registration statement on or before September 30, 2005, and (iv) the
Company's affirmation of the validity of options previously issued to Mr.
Linting and agreement to permit exercises of those options for 3,333.3 shares in
each calendar month over a period of 3 years. The Company and Mr. Linting also
agreed to the filing of a stipulation to dismiss Mr. Linting's suit with
prejudice and without costs with the court retaining jurisdiction to reinstate
the case and enforce the terms of the Settlement Agreement and Release in the
event the Company defaulted on its obligations under the Settlement Agreement
and Release, and to enter judgment, by motion, against the Company for the
balance due or appropriate relief. The Company did not make the $100,000 payment
required under the Settlement Agreement and Release and did not file a
registration statement to register the Linting Shares on or before September 30,
2005. Consequently, Mr. Linting obtained a judgment against the Company in the
amount of $292,809 in cash and stock. The Company recorded a liability for this

amount which is included in other liabilities in the accompanying balance sheet
at December 31, 2005. On February 14, 2006, Mr. Linting entered into a Stock
Subscription Agreement and Mutual Release with the Company which settled these
claims as part of the Creditor and Claimant Liabilities Restructuring (Note 23).

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

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

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

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

SETTLEMENT WITH COOK ASSOCIATES, INC.

On June 29, 2005, the Company entered into a settlement with Cook Associates,
Inc. ("Cook Associates") to settle all claims and potential claims related to
the lawsuit that had been filed by Cook Associates against the Company in
October 2004. Under the terms of the settlement, Cook Associates agreed to
dismiss its lawsuit and associated claim for $528,081 in damages and the Company
agreed to remove any and all conditions/restrictions that would prevent the
20,000 shares of Company common stock owned by Cook Associates from being freely
traded. The Company had previously recorded $389,103 of payables to Cook
Associates that it reversed following its execution of the settlement. The
reversal was recorded as a gain and is included in loss/(gain) on settlement
agreements in the accompanying statements of operations for the year ended
December 31, 2005.

LEASE AGREEMENT

On August 24, 2005, the Company entered into an office lease agreement for 4,876
square feet of space for its office in Boulder, Colorado. The lease commences on
October 1, 2005 and has a term of fifty-four months including a six-month lease

abatement. The minimum rental payments, beginning April 2006, amount to $4,063
per month. In addition, the Company was required to make a $19,995 security
deposit at the inception of the lease.

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

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

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

NOTE 18 - STOCKHOLDERS' DEFICIENCY

ISSUANCE OF COMMON STOCK AS PURCHASE CONSIDERATION

On February 25, 2005 the Company issued an aggregate of 396,696 shares of its
common stock with an aggregate fair value of $10,115,000 as purchase
consideration to the sellers of CSSI and LucidLine (Note 4). On February 28,
2005, the Company issued an additional 100,029 shares of its common stock with
an aggregate fair value of $2,550,000 as purchase consideration to the sellers
of Entelagent (Note 4). The aforementioned transactions were recorded as common
stock issued in purchase business combinations in the statement of stockholder's
deficiency.

ISSUANCE OF COMMON STOCK PURCHASE WARRANTS

On February 25, 2005, the Company issued 2,250,000 common stock purchase
warrants with a term of 5 years and an exercise price of $21.00 per share as a
portion of purchase consideration associated with the acquisition of the
preferred stock of CSSI (Note 4). The aggregate fair value of these warrants
amounted to $1,912,500.

On February 28, 2005 the Company issued warrants to purchase up to 58,348 shares
of its common stock to the Bridge I Note investors described in Note 11. The
fair value of the warrants amounted to $1,043,860. Additionally, the Company
issued 11,674 common stock purchase warrants with an aggregate fair value of
$297,500 to the Placement Agent in the Interim Bridge Financing I transaction.

On February 28, 2005 the Company also issued warrants for 10,007 shares at a
$21.00 per share exercise price to Laidlaw & Company and/or its designees in
connection with the receipt of acquisition related services for the Entelagent,
LucidLine and CSSI mergers (Note 4). The aggregate fair value of these warrants
amounted to $255,000.

On June 6, 2005, the Company issued warrants to purchase up to 42,388 shares of
its common stock at $18.00 per share exercise price to the Bridge II Note
investors described in Note 11. The fair value of the warrants amounted to
$532,723.

On June 30, 2005 the Company issued warrants for 4,243 shares at a $18.00 per
share exercise price to Laidlaw in connection with the Interim Bridge Financing
II financing as described in Note 11. The aggregate fair value of these warrants
amounted to $80,867 and was accounted for as deferred financing costs.

On June 29, 2005, the Company issued warrants to purchase up to 58,348 shares of
its common stock at a $21.00 per share exercise price, as Bridge I Extension
Warrants, to the investors in Interim Bridge Financing I as described in Note
11. The fair value of the warrants, which amounted to $822,500, was accounted
for as a deferred financing cost.

On July 1, 2005, the Company issued warrants for 30,834 shares at a $18.00 per
share exercise price to Apex and Northwestern in connection with the Interim
Bridge Financing III financing as described in Note 11. The aggregate fair value
of these warrants amounted to $415,891.

On July 29, 2005, the Company issued warrants for 1,667 shares at a $18.00 per
share exercise price to Advanced Equities in connection with the Interim Bridge
Financing III financing as described in Note 11. The fair value of these
warrants amounted to $22,481.

On August 19, 2005, the Company issued warrants for 7,500 shares at a $18.00 per
share exercise price to Apex in connection with the Interim Bridge Financing III
financing as described in Note 11. The fair value of these warrants amounted to
$55,263.

On September 30, 2005, the Company issued warrants for 20,000 shares at a $18.00
per share exercise price to Apex in connection with the Interim Bridge Financing
III financing as described in Note 11. The fair value of these warrants amounted
to $57,143.

On October 4, 2005, the Company issued warrants to purchase up to 42,388 shares
of its common stock at $18.00 per share exercise price, as Bridge II Extension
Warrants, to the Interim Bridge Financing II investors described in Note 11. The
fair value of the warrants amounted to $65,338.

On October 16, 2005, the Company issued warrants for 6,000 shares at a $18.00
per share exercise price to Apex in connection with the Interim Bridge Financing
III financing as described in Note 11. The fair value of these warrants amounted
to $9,018.

On October 24, 2005, the Company issued warrants for 1,250 shares at a $18.00
per share exercise price to Apex in connection with the Interim Bridge Financing
III financing as described in Note 11. The fair value of these warrants amounted
to $1,879.

On October 29, 2005, the Company issued warrants for 3,334 shares at a $18.00
per share exercise price, as Bridge III Extension Warrants, to Northwestern
Mutual Life Insurance Company in connection with the Interim Bridge Financing
III financing as described in Note 11. The fair value of these warrants amounted
to $5,139.

On October 29, 2005, the Company issued warrants for 27,500 shares at a $18.00
per share exercise price, as Bridge III Extension Warrants, to Apex in
connection with the Interim Bridge Financing III financing as described in Note
11. The fair value of these warrants amounted to $42,394.

On October 31, 2005, the Company issued warrants for 6,417 shares at a $18.00
per share exercise price to Apex in connection with the Interim Bridge Financing
III financing as described in Note 11. The fair value of these warrants amounted
to $9,644.

On November 16, 2005, the Company issued warrants for 3,750 shares at a $18.00
per share exercise price to Apex in connection with the Interim Bridge Financing
III financing as described in Note 11. The fair value of these warrants amounted
to $4,431.

On November 21, 2005, the Company issued warrants for 2,500 shares at a $18.00
per share exercise price to Apex in connection with the Interim Bridge Financing
III financing as described in Note 11. The fair value of these warrants amounted
to $2,954.

On November 26, 2005, the Company issued warrants for 1,667 shares at a $18.00
per share exercise price, as Bridge III Extension Warrants, to Advanced Equities
Venture Partners I, L.P. in connection with the Interim Bridge Financing III
financing as described in Note 11. The fair value of these warrants amounted to
$2,009.

On November 29, 2005, the Company issued warrants for 3,500 shares at a $18.00
per share exercise price to Apex in connection with the Interim Bridge Financing
III financing as described in Note 11. The fair value of these warrants amounted
to $4,135.

On December 8, 2005, the Company issued warrants for 3,817 shares at a $18.00
per share exercise price to Apex in connection with the Interim Bridge Financing
III financing as described in Note 11. The fair value of these warrants amounted
to $4,757.

On December 17, 2005, the Company issued warrants for 7,500 shares at a $18.00
per share exercise price, as Bridge III Extension Warrants, to Apex in
connection with the Interim Bridge Financing III financing as described in Note
11. The fair value of these warrants amounted to $9,544.

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

COMMON STOCK ISSUED AS A PENALTY UNDER AN ACCOMMODATION AGREEMENT

The Accommodation Agreements (Note 16) provided for the Company to pay a penalty
in the event of its failure to register the replacement shares on or before
March 31, 2003. The replacement shares were not registered on or before March
31, 2003. As a result, the Company recorded penalties in the aggregate amount of
5,000 shares per month at the then fair value of the common stock through
December 31, 2005. Aggregate penalties under this arrangement amounted to
$777,076 and $1,434,900 for the years ended December 31, 2005 and 2004,
respectively. Subsequent to December 31, 2005, the Company entered into
settlement agreements with the stockholders who participated in this arrangement
as described in Note 16 and 23.

COMMON STOCK ISSUED AS A PENALTY UNDER STOCK PLEDGE ARRANGEMENT

The Company issued an aggregate of 29,684 shares of common stock (Replacement
Shares and Premium Shares) with an aggregate fair value of $406,205 The Company
also accrued $81,928 of penalties representing the fair value of 5,854 shares of
stock for delays in registering the stock under the original agreement (Note
16). The penalty shares are issuable to the Pledging Stockholders under this
arrangement at such time that the Company files and causes to be declared
effective, a registration statement for the resale of these securities.

COMMON STOCK ISSUED IN PRIVATE PLACEMENT TRANSACTIONS

In May of 2004, the Company received $200,000 in proceeds in private placement
transactions with two investors. The Company issued 23,828 shares, in the
aggregate, on September 13, 2004 in consideration of these funds. The funds
received in these transactions were remitted directly to J. William Hammon, a
stockholder and affiliate who (from February 28, 2005 through January 9, 2006)
served as the Company's Chief Marketing Officer, as a reduction of funds he
advanced to the Company.

On August 24, 25 and September 13, 2004, the Company received an aggregate of
$500,000 in private placement transactions from 8 investors. The Company later
issued 16,667 shares, in the aggregate, on December 14, 2004 in consideration of
these funds.

STOCK ISSUED IN LIEU OF CASH FOR SERVICES

On September 13, 2004, the Company issued 1,334 shares of its common stock with
a fair value of $10,000 in consideration for services provided by Alvin I
Siegel. On September 13, 2004, the Company issued 6,667 shares of its common
stock with a fair value of $50,000 in consideration for services provided to us
by Joseph K. Lemel.

During the year ended December 31, 2004, the Company issued, at various times,
50,000 shares of its common stock with an aggregate fair value of $1,159,000 to
Frank G. Mazzola in exchange for consulting services. These shares were fully
vested and non-forfeitable at their dates of issuance.The Company accounted for
the fair value of these shares as deferred compensation. Amortization of
deferred compensation expense under this arrangement amounted to $521,332 and
$628,668 for the years ended December 31, 2005 and 2004, respectively and is
included as a component of salaries and related expense in the accompanying
statement of operations.

On June 8, 2005, the Company negotiated a settlement regarding the Consulting
Agreement Payable with a related party. In connection with this settlement, the
Company recorded a rescission of 3,334 shares of unrestricted common stock
previously recorded as compensation expense during the year ended December 31,
2004. This rescission of these shares resulted in a $78,900 reduction of general
and administrative expenses and a corresponding reduction of common stock and
additional paid in capital during the year ended December 31, 2005.

On October 28, 2005, the Company entered into a consulting agreement covering
the period May 26, 2004 to May 26, 2006 with Mr. Richard Rozzi to provide
financial public relations, financial communications and investor relations
consulting services. The Company will issue to Mr. Rozzi, 13,334 shares of its
common stock with a fair value of $35,600 in consideration for the services to
be provided. Additionally, Mr. Rozzi was granted a non-qualified stock option to
purchase 13,334 shares of the Company's common stock. These options are
fully-vested, have a term of 3 years and an exercise price of $7.50 per share
and a fair value, determined using the Black-Scholes option pricing model, of
$20,936.

ISSUANCE OF EMPLOYEE STOCK OPTIONS

During the year ended December 31, 2005, the Company issued stock options to
employees to purchase 177,180 shares. These options include a grant to purchase
33,334 shares at $19.50 per share to the Chief Executive Officer of the Company,
Mr. Robert Cross. Mr. Cross' option grant resulted in a $30,000 expense related
to the intrinsic value of the options versus the market price on the date of
grant. This amount is being amortized over the vesting period. For the year
ended December 31, 2005, the Company recorded $22,500 of compensation expense
related to Mr. Cross' options and recorded $7,500 to deferred compensation at
December 31, 2005. The remaining options were granted at the closing sale price
on the date immediately prior to the date of grant.

NOTE 19 - EMPLOYEE STOCK OPTIONS

STOCK OPTION GRANTS

In November 2002, options to purchase an aggregate of 26,669 shares of the
Company's common stock were granted in conjunction with seven employment
agreements executed in the United Kingdom, exercisable at a price of $120.00 per
share, the trading price of the underlying stock on November 1, 2002. The
options vest over a three year period and are not subject to each employee's
continued employment. The fair value of the options on the date of grant was
$1,832,000. This value was estimated using the Black-Scholes method using the
following assumptions: risk-free interest rate of 4.05 percent; expected
dividend yield zero percent; expected option life of three years; and expected
volatility of 87 percent.

In December 2004, the Company entered into a cash settlement agreement with a
United Kingdom employee in which 2,500 of these options were terminated.
Accordingly, the Company has reduced the total fair value on the options to the
United Kingdom employees as outlined above to $1,660,250 based on 24,169 options
outstanding.

In December of 2004, options to purchase 16,668 shares of the Company's common
stock were granted in connection with two employment agreements, exercisable at
a price of $27.90 per share. The options vested immediately and are not subject
to each employee's continued employment. The fair value of the options on the
date of grant was $340,000. This value was estimated using the Black-Scholes
method using the following assumptions: risk-free interest rate of 4.23 percent;
expected dividend yield zero percent; expected option life of three years; and
current volatility of 124.8 percent.

During the year ended December 31, 2005, the Company issued stock options to
employees to purchase 177,180 shares. These options include a grant to purchase
33,334 shares at $19.50 per share to the Chief Executive Officer of the Company,
Mr. Robert Cross. Mr. Cross' option grant resulted in a $30,000 expense related
to the intrinsic value of the options versus the market price on the date of
grant. This amount is being amortized over the vesting period. For the year
ended December 31, 2005, the Company recorded $22,500 of compensation expense
related to Mr. Cross's options and recorded $7,500 deferred compensation at
December 31, 2005. The remaining options were granted at the closing sale price
on the date immediately prior to the date of grant.

100

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

Options Outstanding
---------------------------------------
Weighted
Exercise Average
Shares Price Exercisable
---------- -------- -----------
Outstanding at December 31, 2003 ...... 80,004 50.40 43,654

Granted ............................ 16,668 27.90 16,667
Cancellations & Forfeitures ........ (2,500) 120.00 --
Exercised .......................... -- -- --
---------- -------- -----------
Outstanding at December 31, 2004 ...... 94,172 44.70 94,167

Granted ............................ 177,180 12.00 25,000
Cancellations & Forfeitures ........ -- -- --
Exercised .......................... -- -- --
---------- -------- -----------
Outstanding at December 31, 2005 ...... 271,352 $ 23.10 119,167
========== ======== ===========

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

Options Outstanding
----------------------------------- Options Exercisable
Weighted -----------------------
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
--------------- ----------- ----------- -------- ----------- ---------
$0.30 - $10.20 183,847 8.92 $ 8.10 40,000 $ 0.30
$10.50 - $19.50 33,334 6.50 $ 19.50 25,000 $ 19.50
$19.80 - $61.50 30,002 5.26 $ 42.90 30,000 $ 42.90
$61.80 - $120.00 24,169 6.84 $ 120.00 24,167 $ 120.00
----------- -----------
271,352 119,167
=========== ===========

NOTE 20 - INCOME TAXES

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

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

101

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

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

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

Change in valuation allowance ............... 10,542,215 1,717,342
------------ ------------
$ -- $ --
============ ============

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

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

102

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

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

NOTE 21 - PROPOSED CREDITOR AND CLAIMANT LIABILITIES RESTRUCTURING

On September 23, 2005, the Company mailed a package to substantially all of its
creditors containing a proposed arrangement to (a) restructure approximately
$26,000,000 of obligations it owes to a majority of its creditors, and (b)
settle $2,000,000 of contingent liabilities under the legal proceedings with
Sherleigh described in Note 17. The proposal was delivered to the holders of the
Company's indebtedness (including certain lenders, all past-due trade creditors,
and employees, consultants and other service providers with claims for fees,
wages or expenses). Under such arrangement, as originally proposed, all
creditors with acknowledged balances and all claimants with agreed claims would
promptly be issued one share of the Company's common stock for each $5.40 of
such balances or claims upon the completion, by substantially all creditors and
claimants ("Subscribers"), of a Subscription Agreement & Mutual Release for
purposes of entering into a final and binding settlement with respect to any and
all claims, liabilities, demands, causes of action, costs, expenses, attorneys
fees, damages, indemnities, and obligations of every kind and nature that the
creditor and/or claimant may have with the Company ("Subscriber Claims"). The
Company also indicated that it would endeavor to register such shares under
applicable securities laws promptly following the conclusion of this settlement
program. The proposal provided for no cash payment to be made to any holder of
its indebtedness, and no preferential payments. All creditors and claimants
under this proposal would be treated the same on a pro rata basis.

In November 2005, the Company reevaluated its settlement proposal. Due to a
reduction in the price per share of the Company's common stock since the
original proposal was issued to creditors and claimants, the Company repriced
the proposal to $3.00 per share and issued new documents to all creditors. As of
December 31, 2005 creditors representing approximately $640,000 of the Company's
claims outstanding responded favorably to the Company's proposal, however, due
to the (a) decrease in the trading price of the Company common stock to below
$3.00 per share, and (b) insufficient creditor interest in settling their claims
at or below the $3.00 per share level, the Company refrained from accepting any
subscription agreements it received by such date and refrained from effectuating
the steps necessary to proceed with its proposed restructuring. Accordingly, the
Company was unable to complete any portion of its proposed restructuring as of
December 31, 2005.

NOTE 22 - CONCENTRATION OF RISK

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

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

103

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

NOTE 23 - SUBSEQUENT EVENTS

SERIES A AND SERIES A-1 PREFERRED STOCK

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

SERIES A PREFERRED STOCK

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

The Series A Preferred is convertible, at the option of the holder, into shares
of the Company's common stock ("Conversion Shares") at an initial conversion
price ("Initial Conversion Price) which shall be $2.40 per share based on the
stated value of the Series A Preferred, subject to adjustment for stock splits,
dividends, recapitalizations, reclassifications, payments made to Common Stock
holders and other similar events and for issuances of additional securities at
prices more favorable than the conversion price at the date of such issuance.

The Series A Preferred is mandatorily convertible at the then applicable
conversion price ("Conversion Price") into shares of the Company's common stock
at the then applicable Conversion Price on the date that: (i) there shall be an
effective registration statement covering the resale of the Conversion Shares,
(ii) the average closing price of the Company's common stock, for a period of 20
consecutive trading days is at least 250% of the then applicable Conversion
Price, and (iii) the average daily trading volume of the Company's common stock
for the same period is at least 8,334 shares.

SERIES A-1 PREFERRED STOCK

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

The Series A-1 Preferred is not convertible at the option of the holder. Each
share of Series A-1 Preferred automatically converts into the Company's common
stock, at a conversion price of $2.40 per share based on the stated value of the
Series A-1 Preferred, upon the effectiveness of an amendment to the Company's
certificate of incorporation which provides for a sufficient number of
authorized shares to permit the exercise or conversion of all issued and
outstanding shares of Series A Preferred, Series A-1 Preferred and all options,
warrants and other rights to acquire shares of the Company's common stock.

104

CREDITOR AND CLAIMANT LIABILITIES RESTRUCTURING

On January 12, 2006, the Company issued a Stock Subscription Agreement & Mutual
Release to each creditor and claimant ("Subscriber") of the Company for purposes
of entering into a final and binding settlement with respect to any and all
claims, liabilities, demands, causes of action, costs, expenses, attorneys fees,
damages, indemnities, and obligations of every kind and nature that the creditor
and/or claimant may have with the Company ("Subscriber Claims"). Under terms of
this agreement, the Company sells to the Subscriber and the Subscriber purchases
from the Company shares ("Stock") of its Series A-1 Preferred stock, par value
$0.01 per share ("Series A-1 Preferred"), at a price of $0.80 per share. The
aggregate purchase price is equivalent to the value of the Subscriber Claims
being settled through this settlement and release. Subscriber is deemed to have
paid for the Stock through the settlement and release of Subscriber Claims. Each
share of Stock is automatically convertible into 1/3 share of the Company's
common stock upon the effectiveness of an amendment to the Company's certificate
of incorporation which provides for a sufficient number of authorized but
unissued and unreserved shares of the Company's common stock to permit the
conversion of all issued and outstanding shares of Series A-1 Preferred. If the
requisite agreements and approvals are obtained, the Company anticipates issuing
the Series A-1 Preferred shares following the final determination of the claims
and acceptance by the Company of each claimant submitted Stock Subscription
Agreement and Mutual Release through countersignature thereof.

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

As described below under the Private Placement Series A Preferred Stock and
Warrants, on March 3, 2006 the investors in the Series A Preferred Financing
modified the terms of their financing arrangement to provide funds to the
Company prior to the 100% completion of the Creditor and Claimant Liabilities
Restructuring. This modification provides for the establishment of an escrow
agent and establishes a methodology to disburse funds to the Company to cover
payroll, rent and other operating costs, including eligible payables not
otherwise subject to the Creditor and Claimant Liabilities Restructuring, on a
bi-monthly basis. As described below, the Company completed the sale of $4.8
million in equity securities under the Series A Preferred Financing on March 27,
2006 thereby eliminating the provision for automatic termination of this
arrangement.

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

105

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

PRIVATE PLACEMENT OF SERIES A PREFERRED STOCK AND WARRANTS

In January 2006, the Company initiated a proposed $5,400,000 financing
transaction (the "Series A Preferred Financing") which would, for each $100,000
Unit purchased, result in the issuance of (i) 20 shares of Series A Preferred
Stock and (ii) warrants ("Investor Warrants") to purchase 13,889 shares of the
Company's common stock. The minimum amount of the Series A Preferred Financing
is $3,000,000 ("Minimum Amount") and the maximum amount is $5,400,000. Apex has
agreed to purchase up to $1,500,000 which will all be available to fund the
Minimum Amount, provided however, in the event that the Series A Preferred
Financing is over-subscribed as to the Minimum Amount, then for each $1.00 of
such over subscription up to $250,000, the Apex funding commitment will be
reduced on a dollar for dollar basis, down to a minimum amount of $1,250,000.
Additionally, holders of the 2006 Bridge Notes are obligated to exchange their
2006 Bridge Notes for Units in the Series A Preferred Financing. The issuance of
Units to the holders of 2006 Bridge Notes will count toward satisfaction of the
Minimum Amount.

The Investor Warrants have a term of 5 years and an exercise price of $3.00 per
share. Each Investor Warrant will entitle the holder thereof to purchase 13,889
shares of the Company's common stock (the "Warrant Shares"), subject to
anti-dilution provisions similar to those of the conversion rights of the Series
A Preferred. The Company is obligated to include the Conversion Shares and the
Warrant Shares in the Registration Statement which the Company has committed to
file in connection with the Creditor and Claimant Liabilities Restructuring
described above. The Conversion Shares and the Warrant Shares will also have
piggyback registration rights.

In connection with the Series A Preferred Financing, the Company has retained
Laidlaw & Company (UK) Ltd. as its non-exclusive placement agent ("Series A
Preferred Placement Agent"). Laidlaw shall receive, in its role as Series A
Preferred Placement Agent, (i) a cash fee equal to 10% of all gross proceeds,
excluding the Apex proceeds, delivered at each Closing and (ii) a warrant (the
"Agent Warrants") to purchase the Company's common stock equal to 10% times the
sum of (x) the Conversion Shares to be issued upon conversion of the shares of
Series A Preferred issued at each Closing and (y) the number of shares of the
Company's common stock reserved for issuance upon the exercise of the Investor
Warrants issued at each closing. The Agent Warrants shall have a term of 5 years
and an exercise price of $3.00 per share. Additionally, the Company shall pay
the Series A Preferred Placement Agent a non-accountable expense allowance of
$25,000.

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

As of March 27, 2006, the Company consummated the Series A Preferred Financing
with the closing of funds totaling $4,820,500, this amount is comprised on
$720,000 associated with the conversion of the Bridge Notes, $1,250,000 provided
by Apex and $2,850,500 from parties made available by the Series A Preferred
Placement Agent. In order to effect the availability of these funds to the
Company prior to the completion of the Creditor and Claimant Liabilities
Restructuring, the Company, on March 27, 2006, entered into a post-closing
escrow agreement ("Post-Closing Escrow Agreement") with an escrow agent ("Escrow
Agent"). As of March 27, 2006, the Escrow Agent was provided $2,183,026 in net
offering proceeds, The escrow agent shall hold the funds and make periodic
disbursements to the Company. These disbursements shall be made on or after the
15th of each calendar month and on or after the last day of each calendar month.
A schedule detailing the mid-month, month-end and maximum monthly disbursement
amounts is defined. The Post-Closing Escrow Agreement provides for the release

106

of the remaining escrow funds to the Company after the Company has received
executed agreements under the Creditor and Claimant Liabilities Restructuring
for not less than 99% in dollar amount of creditor and claimant claims.

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

2006 BRIDGE NOTES

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

GRAUL CLAIM

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

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

On January 1, 2006, the Company and Mr. Allin and the Allin Dynastic Trust
entered into Stock Subscription Agreement and Mutual Release agreements (the
"Series A-1 Agreements') to settle all claims in law, equity, or otherwise
("Allin Subscriber Claims") arising out of the business relationship between the
parties that Mr. Allin and the Allin Dynastic Trust may have with the Company.
The Series A-1 Agreements provide for the issuance of 1,875,000 shares of Series
A-1 Preferred Stock to Mr. Allin and 625,000 shares of Series A-1 Preferred
Stock to the Allin Dynastic Trust. The aggregate purchase price is equivalent to
the value of the Allin Subscriber Claims being settled through this settlement
and release. The total of these claims at December 31, 2005 amounted to
$2,000,000. Mr. Allin and the Allin Dynastic Trust are each deemed to have paid
for the Series A-1 Preferred Stock through the settlement and release of Allin
Subscriber Claims. Each share of Series A-1 Preferred Stock shall automatically
convert into 1/3 share of the Company's common stock upon the effectiveness of
an amendment to the Company's certificate of incorporation which provides for a
sufficient number of authorized but unissued and unreserved shares of the
Company's common stock to permit the conversion of all issued and outstanding
shares of Series A-1 Preferred. See Note 23 for further details of the Series
A-1 Preferred and the Creditor and Claimant Liabilities Restructuring.

SETTLEMENT OF LINTING LAWSUIT

On February 14, 2006, the Company and Richard Linting entered into a Stock
Subscription Agreement & Mutual Release ("Linting Agreement") to settle all
claims in law, equity or otherwise ("Linting Subscriber Claims") arising out of
the business relationship between the parties that Mr. Linting may have with the
Company. The Linting Agreement provides for the issuance of 1,777,261 shares
(the "Shelved Stock") of Series A-1 Preferred. The aggregate purchase price is

107

equivalent to the value of the Linting Subscriber Claims being settled through
this settlement and release. The total set aside purchase price for the Shelved
Stock shall be $0.80 per share or an aggregate of $1,421,809. Mr Linting is
deemed to have paid for the Series A-1 Preferred through the settlement and
release of the Linting Subscriber Claims. Each share of Series A-1 Preferred
shall automatically convert into 1/3 share of the Company's common stock upon
the effectiveness of an amendment to the Company's certificate of incorporation
which provides for a sufficient number of authorized but unissued and unreserved
shares of the Company's common stock to permit the conversion of all issued and
outstanding shares of Series A-1 Preferred. This agreement provides for the
transfer of the Shelved Stock in stock certificate installments and in such
numbers and at such times as directed by Mr. Linting. See above in this Note 23
for further details of the Series A-1 Preferred and the Creditor and Claimant
Liabilities Restructuring.

SETTLEMENT OF HARARY, ET AL. LAWSUITS

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

BRADEN WAVERLEY, CHIEF OPERATING OFFICER - EMPLOYMENT AGREEMENT

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

MARTIN T. JOHNSON, CHIEF FINANCIAL OFFICER - EMPLOYMENT AGREEMENT

108

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

ROBERT CROSS - BONUS ARRANGEMENT

109

FINANCIAL STATEMENTS.
PATRON SYSTEMS, INC.
JUNE 30, 2006

CONTENTS

FINANCIAL STATEMENTS

Consolidated Balance Sheet as of June 30, 2006 (unaudited) 111

Consolidated Statements of Operations for the three and six
months ended June 30, 2006 and 2005 (unaudited) 112

Consolidated Statements of Stockholders' Equity for the six
months ended June 30, 2006 (unaudited)
113
Consolidated Statements of Cash Flows for the six months ended
June 30, 2006 and 2005 (unaudited) 114

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 115

110

PATRON SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)

ASSETS JUNE 30, 2006
------------
Current Assets
Cash ........................................................ $ 195,432
Accounts receivable, net .................................... 571,248
Other current assets ........................................ 231,573
------------
Total current assets ..................................... 998,253

Property and equipment, net ................................... 125,608
Intangible assets, net ........................................ 1,399,618
Goodwill ...................................................... 9,510,716
------------
Total assets ............................................. $ 12,034,195
============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable ............................................ $ 1,023,432
Accrued payroll and related expenses ........................ 280,673
Accrued interest ............................................ 604,444
Dividends payable ........................................... 124,784
Demand notes payable ........................................ 447,556
Bridge notes payable ........................................ 544,975
Notes payable (to creditors of acquired business,
including $554,202 to related parties) ................... 799,982
Expense reimbursements due to officers and stockholders ..... 130,201
Notes payable to officers and stockholders .................. 90,000
Other current liabilities ................................... 742,051
Accrued registration rights penalty ......................... 87,174
Deferred revenue ............................................ 498,780
------------
Total current liabilities ................................ 5,374,052

Commitments and contingencies

Stockholders' Equity
Preferred stock, par value $0.01 per share,
75,000,000 shares authorized,
- Series A convertible: 2,160 shares authorized;
964 shares issued and outstanding
liquidation preference of $5,581,250 ............... 10
- Series A-1 convertible: 50,000,000 authorized;
36,388,907 issued and outstanding
liquidation preference of $29,111,126 .............. 363,889
Common stock, par value $0.01 per share, 150,000,000
shares authorized, 2,131,496 shares issued and
outstanding .............................................. 21,316
Additional paid-in capital .................................. 97,792,968
Deferred compensation ....................................... (1,108,922)
Accumulated deficit ......................................... (90,409,118)
------------
Total stockholders' equity ............................... 6,660,143
------------
Total liabilities and stockholders' equity ............... $ 12,034,195
============

See notes to condensed consolidated financial statements.

111

PATRON SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
-------------------------- --------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------

Revenue ........................................................ $ 580,745 $ 90,843 $ 318,960 $ 84,413
----------- ----------- ----------- -----------

Cost of Sales
Cost of products/services .................................... 29,897 2,003 -- --
Amortization of technology ................................... 55,044 147,731 27,522 128,501
----------- ----------- ----------- -----------
Total cost of sales ........................................ 84,941 149,734 27,522 128,501
----------- ----------- ----------- -----------
Gross profit (loss) .......................................... 495,804 (58,891) 291,438 (44,088)
----------- ----------- ----------- -----------

Operating Expenses
Salaries and related expenses ................................ 2,448,188 1,076,437 1,438,065 1,214,588
Consulting expense (non-employee stock based compensation) ... -- 952,875 -- 444,375
Professional fees ............................................ 885,897 653,383 227,782 511,982
General and administrative ................................... 621,575 757,486 297,666 35,422
Amortization of intangibles .................................. 61,627 38,877 30,813 30,814
Stock based penalties under accomodation agreements .......... -- 689,102 -- 320,102
Stock based penalty under collateralized financing arrangement 5,246 -- 2,394 --
Loss on collateralized financing arrangement ................. -- 366,193 -- 366,193
Loss/(gain) associated with settlement agreements ............ 486,597 (389,103) (371,616) (389,103)
----------- ----------- ----------- -----------
Total operating expenses .................................. 4,509,130 4,145,250 1,625,104 2,534,373

Operating loss ................................................. (4,013,326) (4,204,141) (1,333,666) (2,578,461)

Other Income (Expense)
Interest income .............................................. 1,961 19,250 1,961 --
Loss on sale of property and equipment ....................... (125) -- (187) --
Interest expense ............................................. (1,703,935) (2,196,535) (88,421) (1,701,547)
----------- ----------- ----------- -----------
Total other income (expense) .............................. (1,702,099) (2,177,285) (86,647) (1,701,547)
----------- ----------- ----------- -----------
Loss from continuing operations before income taxes ............ (5,715,425) (6,381,426) (1,420,313) (4,280,008)

Income taxes ................................................. -- -- -- --
----------- ----------- ----------- -----------
Loss from continuing operations ................................ (5,715,425) (6,381,426) (1,420,313) (4,280,008)
----------- ----------- ----------- -----------

Loss from discontinued operations .............................. (104,962) (850,874) -- (748,497)
Loss on disposal of discontinued operations .................... (75,920) -- (75,920) --
----------- ----------- ----------- -----------
(180,882) (850,874) (75,920) (748,497)
----------- ----------- ----------- -----------

Net loss ....................................................... (5,896,307) (7,232,300) (1,496,233) (5,028,505)

Preferred stock dividend ....................................... (124,784) -- (124,784) --
----------- ----------- ----------- -----------
Net loss available to common stockholders ...................... $(6,021,091) $(7,232,300) $(1,621,017) $(5,028,505)
=========== =========== =========== ===========

Net Loss Per Share - Basic and Diluted
- Continuing operations ...................................... $ (2.75) $ (3.47) $ (0.71) $ (2.11)
- Discontinued operations .................................... (0.08) (0.46) (0.04) (0.36)
----------- ----------- ----------- -----------
- Total Net Loss per share available to common stockholders .. $ (2.83) $ (3.93) $ (0.75) $ (2.47)
=========== =========== =========== ===========

Weighted Average Number of Shares Outstanding
- Basic and diluted ......................................... 2,127,543 1,838,106 2,170,653 2,032,823
=========== =========== =========== ===========

See notes to condensed consolidated financial statements.

112

PATRON SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2006
(UNAUDITED)

SHARES OF PAR VALUE SHARES OF PAR VALUE
SERIES A SERIES A SERIES A-1 SERIES A-1 SHARES OF PAR VALUE
PREFERRED PREFERRED PREFERRED PREFERRED COMMON COMMON
STOCK STOCK STOCK STOCK STOCK STOCK
------------ ------------ ------------ ------------ ------------ ------------

Balance - January 1, 2006 ............ -- $ -- -- $ -- 1,978,655 $ 19,787

Fair value of unamortized stock options
granted prior to January 1, 2006 ... -- -- -- -- -- --
Current year option grants ............ -- -- -- -- -- --
Issuance of Series A Preferred Stock
to investors ....................... 964 10 -- -- -- --
Issuance of warrants in connection
with bridge loan extension -
extension warrants ................. -- -- -- -- -- --
Conversion option penalty incurred upon
default of Bridge Financing III .... -- -- -- -- -- --
Issuance of Series A-1 Preferred stock
in settlement of debt .............. -- -- 36,388,907 363,889 (98,334) (983
Issuance of shares in connection with
anti-dilution provision ............ -- -- -- -- 251,175 2,512
Amortization of deferred compensation . -- -- -- -- -- --
Series A dividends .................... -- -- -- -- -- --
Net Loss .............................. -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------

BALANCE - JUNE 30, 2006 .............. 964 $ 10 36,388,907 $ 363,889 2,131,496 $ 21,316
============ ============ ========== ============ ========= ============

COMMON
ADDITIONAL STOCK
PAID IN REPURCHASE DEFERRED ACCUMULATED
CAPITAL OBLIGATION COMPENSATION DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------

Balance - January 1, 2006 ............ $ 65,601,272 $(1,300,000) $ (7,500) $(84,388,027) $(20,074,468)

Fair value of unamortized stock options
granted prior to January 1, 2006 ... 1,214,907 -- (1,214,907) -- --
Current year option grants ............ 131,439 -- (131,439) -- --
Issuance of Series A Preferred Stock
to investors ....................... 4,820,490 -- -- -- 4,820,500
Issuance of warrants in connection
with bridge loan extension -
extension warrants ................. 48,129 -- -- -- 48,129
Conversion option penalty incurred upon
default of Bridge Financing III .... 550,000 -- -- -- 550,000
Issuance of Series A-1 Preferred stock
in settlement of debt .............. 25,429,243 1,300,000 -- -- 27,092,149
Issuance of shares in connection with
anti-dilution provision ............ (2,512) -- -- -- --
Amortization of deferred compensation . -- -- 244,924 -- 244,924
Series A dividends .................... -- -- -- (124,784) (124,784)
Net Loss .............................. -- -- -- (5,896,307) (5,896,307)
------------ ------------ ------------ ------------ ------------

BALANCE - JUNE 30, 2006 .............. $ 97,792,968 $ -- $ (1,108,922) $(90,409,118) $ 6,660,143
============ ============ ============ ============ ============

See notes to condensed consolidated financial statements.

113

PATRON SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

Six Months Ended June 30,
----------------------------
2006 2005
------------ ------------

Cash Flows from Operating Activities
Net loss from continuing operations .......................... $ (5,715,425) $ (6,381,426)
============ ============
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ............................. 143,420 192,298
Stock based compensation .................................. 244,924 952,875
Non-cash interest expense ................................. 901,438 1,887,625
Loss (gain) associated with settlement agreements ......... 486,597 (389,103)
Accrued registration penalty .............................. 5,246 --
Loss on disposition of discontinued operations ............ 75,920 --
Loss on sale of fixed assets .............................. 125 --
Stock based penalty under accomodation agreements ......... -- 689,102
Gain on settlement of consulting agreement payable ........ -- (228,900)
Loss on collateralized financing arrangement .............. -- 366,194
Non-cash interest income .................................. -- (19,250)
Changes in assets and liabilities:
Restricted cash escrowed to settle liabilities assumed . 511,691 (527,003)
Prepaid expenses ....................................... -- 51,487
Accounts receivable .................................... (347,104) 14,429
Other current assets ................................... (12,874) 44,299
Accounts payable ....................................... (489,363) (393,819)
Accrued interest ....................................... 517,268 (342,746)
Deferred revenue ....................................... 166,699 28,017
Accrued payroll and payroll related expenses ........... (246,891) (1,015,946)
Other current liabilities .............................. 29,607 367,897
Consulting agreements payable .......................... -- (50,000)
Expense reimbursements due to officers and stockholders (29,835) --
Other accrued expenses ................................. -- (3,413)
------------ ------------
Total adjustments ............................................ 1,956,868 1,624,043
------------ ------------
NET CASH USED IN CONTINUING OPERATIONS .......................... (3,758,557) (4,757,383)
============ ============
NET CASH USED IN DISCONTINUED OPERATIONS ........................ (197,882) (844,222)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES ........................... (3,956,439) (5,601,605)
------------ ------------

CASH FLOWS USED IN INVESTING ACTIVITIES
Cash payments in purchase business combinations .............. -- (857,633)
Cash acquired in purchase business combinations .............. -- 406,834
Purchase and development of technology ....................... (283,530) --
Proceeds from sale of fixed assets ........................... 1,755 --
Purchase of fixed assets ..................................... (46,948) (37,634)
------------ ------------
NET CASH USED IN CONTINUING INVESTING ACTIVITIES ................ (328,723) (488,433)
============ ============
NET CASH USED IN DISCONTINUED INVESTING ACTIVITIES .............. (78,920) (10,182)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES ........................... (407,643) (498,615)
------------ ------------

CASH FLOWS FROM FINANCING ACTIVITIES
Expenses repaid to officers and stockholders ................. -- (373,060)
Payments on settlement of accommodation agreements ........... (125,000) --
Advances from stockholders ................................... 1,650,000
Deferred financing costs ..................................... (54,000) (621,739)
Proceed from issuance of Series A Preferred Stock ............ 4,640,501 --
Repayments of amounts due under settlement with former officer -- (200,000)
Proceeds from issuance of bridge notes ....................... -- 3,500,000
Repayments of notes payable .................................. (7,001) --
Proceeds from disposition of discontinued operations ......... 50,000 --
Proceeds received in connection with financing settlement .... 55,000 --
Proceeds from issuance of notes, less fees ................... -- 2,543,000
Repayments of advances from stockholders ..................... -- (32,774)
------------ ------------
NET CASH PROVIDED BY CONTINUING FINANCING ACTIVITIES ............ 4,559,500 6,465,427
============ ============
NET CASH USED BY DISCONTINUED FINANCING ACTIVITIES .............. -- (93,483)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ....................... 4,559,500 6,371,944
------------ ------------

NET INCREASE IN CASH ............................................ 195,418 271,724

CASH, beginning of period ....................................... 14 45,901
------------ ------------
CASH, end of period ............................................. $ 195,432 $ 317,625
============ ============

Supplemental Disclosures of Cash Flow Information:

Cash paid during the period for:
Interest ...................................................... $ 285,517 $ 515,798
============ ============

Supplemental non-cash investing and finanical activity
Current tangible assets acquired ............................. $ -- $ 300,911
Non-current tangible assets acquired ......................... -- 2,756,470
Current liabilities assumed with acquisitions ................ -- (8,379,271)
Non-current liabilities assumed with acquisitions ............ -- (439,126)
Intangible assets acquired ................................... -- 3,101,000
Goodwill recognized on purchase business combinations ........ -- 22,433,752
Non-cash consideration ....................................... -- (19,332,500)
Cash acquired in purchase business combinations .............. -- 416,397
------------ ------------
Cash paid to acquire businesses .............................. $ -- $ 857,633
============ ============

See notes to condensed consolidated financial statements.

114

PATRON SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2006

NOTE 1 - BASIS OF INTERIM FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited Condensed Consolidated Financial Statements of Patron
Systems, Inc. and subsidiaries (the "Company," "Patron," "we," "us," or "our")
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and the instructions to
Form 10-QSB. Accordingly, they do not include all the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows for all periods
presented have been made. The results of operations for the three-month and
six-month periods ended June 30, 2006 are not necessarily indicative of the
operating results that may be expected for the entire year ending December 31,
2006.

This form 10-QSB should be read in conjunction with the Company's 10-KSB for the
year ended December 31, 2005.

NOTE 2 - THE COMPANY

ORGANIZATION AND DESCRIPTION OF BUSINESS

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

Pursuant to an Amended and Restated Share Exchange Agreement dated October 11,
2002, Combined Professional Services ("CPS"), Systems and the stockholders of
Systems consummated a share exchange ("Share Exchange"). As a result of the
Share Exchange, the former stockholders of Systems became the majority
stockholders of CPS. Accordingly, Systems became the accounting acquirer of CPS
and the exchange was accounted for as a reverse merger and recapitalization of
Systems. CPS subsequently merged with Systems, with Systems surviving the
merger. The combined entity continued to use the name Patron Systems, Inc.

REVERSE STOCK SPLIT AND AMENDMENT TO CERTIFICATE OF INCORPORATION

As described in Note 20, the Company's stockholders approved an amended to its
certificate of incorporation to effectuate a 1-for-30 reverse stock split and
certain other transactions intended to recapitalize the Company. All share
information included in the accompanying financial statements and notes thereto
give retroactive effect to the reverse split.

NOTE 3 - LIQUIDITY AND FINANCIAL CONDITION

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company incurred a net loss of
$5,896,307 for the six months ended June 30, 2006, which includes an aggregate
of $1,857,670 of non-cash charges including the conversion option cost for
bridge note and subordinated note holders, non-cash interest expense, the
amortization of deferred compensation and the charge for stock option based
compensation. The Company used net cash in its operating activities of
$3,956,439 during the six months ended June 30, 2006. The Company's working
capital deficiency at June 30, 2006 amounted to $4,375,799 and the Company is
continuing to experience shortages in working capital. The Company is also
involved in litigation and is being investigated by the Securities and Exchange
Commission with respect to certain of its press releases and its use of form S-8
to register shares of common stock issued to certain consultants (Note 15). The
Company cannot provide any assurance that the outcome of these matters will not
have a material adverse affect on its ability to sustain the business. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. The accompanying financial statements do not include any
adjustments that may result from the outcome of this uncertainty.

115

The Company expects to continue incurring losses for the foreseeable future due
to the inherent uncertainty that is related to establishing the commercial
feasibility of technological products and developing a presence in new markets.
The Company's ability to successfully market its software products, grow revenue
and generate cash flows of certain businesses it acquired in 2005 is critical to
the realization of its business plan. The Company raised $4,640,501 of gross
proceeds ($4,301,450 net proceeds after the payment of certain transaction
expenses) in financing transactions during the six months ended June 30, 2006.
The Company used $3,956,439 of these proceeds to fund its operations and a net
of $407,643 in investing activities. On January 12, 2006, the Company offered
its creditors and claimants an agreement to receive Series A-1 Preferred Stock,
par value $0.01 per share ("Series A-1 Preferred") for amounts owed to the
holders of the Company's indebtedness (including lenders, past-due trade
accounts, and employees, consultants and other service providers with claims for
fees, wages or expenses) (Note 16). As of June 30, 2006, creditors representing
approximately 91% of the Company's outstanding claims accepted this proposal by
signing and returning to the Company the Stock Subscription Agreement and Mutual
Release. On July 21, 2006, the Company's Board of Directors approved the
completion of the creditor and claimant liabilities restructuring. A total of
$29,594,442 of debts, liabilities and other claims were settled by the issuance
of Series A-1 Preferred Stock. The total of all these settlements represent 93%
of the eligible claims. In addition, the Company settled $382,584 in claims for
$12,140. The Company is currently unable to provide assurance that the
acceptance of the claims settlement will actually improve the Company's ability
to fund the further development of its business plan or improve its operations.

The Company is currently in the process of attempting to raise additional
capital and has taken certain steps to conserve its liquidity while it continues
to integrate the businesses acquired in 2005. Although management believes that
the Company has access to capital resources, the Company has not secured any
commitments for additional financing at this time nor can the Company provide
any assurance that it will be successful in its efforts to raise additional
capital and/or successfully execute its business plan.

NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Entelagent Software Corporation, Complete
Security Solutions, Inc. and PILEC Disbursement Company. The accounts of
LucidLine, Inc. have been included in discontinued operations through April 18,
2006, the date on which LucidLine was sold (Note 19). All significant
inter-company transactions have been eliminated.

CASH

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

REVENUE RECOGNITION

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

116

Revenue from post-contract customer support arrangements or undelivered elements
are deferred and recognized at the time of delivery or over the period in which
the services are performed based on vendor specific objective evidence of fair
value for such undelivered elements. Vendor specific objective evidence is
typically based on the price charged when an element is sold separately or, if
an element is not sold separately, on the price established by an authorized
level of management, if it is probable that the price, once established, will
not change before market introduction. The Company uses the residual method
prescribed in SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition
With Respect to Certain Transaction" to allocate revenues to delivered elements
once it has established vendor-specific objective evidence of fair value for
such undelivered elements.

The Company provides its internet access and back-up, retrieval and restoration
services under contractual arrangements with terms ranging from 1 year to 5
years. These contracts are billed monthly, in advance, based on the
contractually stated rates. At the inception of a contract, the Company may
activate the customer's account for a contractual fee that it amortizes over the
term of the contract in accordance with Emerging Issues Task Force Issue
("EITF") 00-21, "Revenue Arrangements with Multiple Deliverables." The Company's
standard contracts are automatically renewable by the customer unless terminated
on 30 days written notice. Early termination of the contract generally results
in an early termination fee equal to the lesser of six months of service or the
remaining term of the contract. These revenues are included in discontinued
operations as described in Note 19.

BUSINESS COMBINATIONS

117

ACCOUNTS RECEIVABLE

PROPERTY AND EQUIPMENT

GOODWILL AND INTANGIBLE ASSETS

The Company accounts for Goodwill and Intangible Assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." Under
SFAS No. 142, goodwill and intangibles that are deemed to have indefinite lives
are no longer amortized but, instead, are to be reviewed at least annually for
impairment. Application of the goodwill impairment test requires judgment,
including the identification of reporting units, assigning assets and
liabilities to reporting units, assigning goodwill to reporting units, and
determining the fair value. Significant judgments required to estimate the fair
value of reporting units include estimating future cash flows, determining
appropriate discount rates and other assumptions. Changes in these estimates and
assumptions could materially affect the determination of fair value and/or
goodwill impairment for each reporting unit. We have recorded goodwill in
connection with the Company's acquisitions described in Note 5 amounting to
$22,440,412. The Company's annual impairment review of goodwill resulted in
goodwill impairment charges totaling $12,929,696 for the year ended December 31,
2005 (Note 5) resulting in $9,510,716 in goodwill at June 30, 2006. Intangible
assets continue to be amortized over their estimated useful lives. The Company
evaluated the carrying amounts of its goodwill and intangible assets as of June
30, 2006 and determined that impairment charges are not necessary.

LONG LIVED ASSETS

The Company periodically reviews the carrying values of its long lived assets in
accordance with SFAS 144, "Long Lived Assets" when events or changes in
circumstances would indicate that it is more likely than not that their carrying
values may exceed their realizable value and records impairment charges when
necessary. The Company's review of the carrying values of its long lived assets
resulted in an impairment charge of $1,705,455 for the year ended December 31,
2005 (Note 8).

USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

118

values based on the short-term maturity of these instruments. The carrying
amounts of the Company's convertible and subordinated note obligations, stock
repurchase obligation and common stock subject to put right approximate fair
value as such instruments feature contractual interest rates that are consistent
with current market rates of interest or have effective yields that are
consistent with instruments of similar risk, when taken together with any equity
instruments concurrently issued to holders.

CONVERTIBLE PREFERRED STOCK

The Company accounts for conversion options embedded in convertible preferred
stock in accordance with Statement of Financial Accounting Standard ("SFAS) No.
133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
and Emerging Issues Task Force Issue ("EITF") 00-19 "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock" ("EITF 00-19"). SFAS 133 generally requires companies to bifurcate
conversion options embedded in convertible notes and preferred shares from their
host instruments and to account for them as free standing derivative financial
instruments in accordance with EITF 00-19. SFAS 133 provides for an exception to
this rule when convertible notes and mandatorily redeemable preferred shares, as
host instruments, are deemed to be conventional as that term is described in the
implementation guidance provided in paragraph 61 (k) of Appendix A to SFAS 133
and further clarified in EITF 05-2 "The Meaning of Conventional Convertible Debt
Instrument" in Issue No. 00-19.

SFAS 133 provides for an additional exception to this rule when the economic
characteristics and risks of the embedded derivative instrument are clearly and
closely related to the economic characteristics and risks of the host
instrument.

The Company determined that the conversion option embedded in its Series A
Convertible Preferred Stock, par value $0.01 per share ("Series A Preferred"),
is not a free standing derivative in accordance with the implementation guidance
provided in paragraph 61 (l) of Appendix A to SFAS 133.

STOCK BASED COMPENSATION

Prior to January 1, 2006, the Company accounted for employee stock transactions
in accordance with Accounting Principles Board ("APB") Opinion No. 25
"Accounting for Stock Issued to Employees." The Company applied the proforma
disclosure requirements of SFAS No. 123 "Accounting for Stock-Based
Compensation."

Effective January 1, 2006, the Company adopted SFAS No. 123R "Share Based
Payment." This statement is a revision of SFAS Statement No. 123, and supersedes
APB Opinion No. 25, and its related implementation guidance. SFAS 123R addresses
all forms of share based payment ("SBP") awards including shares issued under
employee stock purchase plans, stock options, restricted stock and stock
appreciation rights. Under SFAS 123R, SBP awards result in a cost that will be
measured at fair value on the awards' grant date, based on the estimated number
of awards that are expected to vest that will result in a charge to operations.
The Company adopted the modified prospective method with respect to accounting
for its transition to SFAS 123(R) and measured unrecognized compensation cost as
described in Note 18. Accordingly, the Company recognized in salaries and
related expense on the statement of operations, $237,424 and $64,089 for the
fair value of stock options expected to vest during the six- and three-month
periods ended June 30, 2006, respectively.

For the six and three months ended June 30, 2005, the Company applied APB
Opinion No. 25, "Accounting for Stock Issued to Employees." As required under
SFAS No. 148, "Accounting for Stock-based Compensation - Transition and
Disclosure," the following table presents pro-forma net income and basic and
diluted earnings per share as if the fair value-based method had been applied to
all awards during that period.

119

SIX MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 2005 JUNE 30, 2005
----------- -----------
Net Loss ..................................... $(7,232,300) $(5,028,505)
Stock-based employee compensation
cost, under fair value accounting ......... (370,556) (185,278)
----------- -----------
Pro-forma net loss under fair value
method .................................... $(7,602,856) $(5,213,783)
=========== ===========

Net loss per share - basic and diluted ....... $ (3.93) $ (2.47)

Per share stock-based employee
compensation cost, under fair value
accounting
Pro-forma net loss per share, basic
and diluted ............................... $ (4.14) $ (2.56)

The fair value of all awards was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions: risk fee interest rate: 3.44% to 4.05%; expected dividend yield:
0%; expected option life: 3 to 4 years; volatility: 87% to 125%.

COMMON STOCK PURCHASE WARRANTS

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

INCOME TAXES

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

NET LOSS PER SHARE

As a result of the consummation of the Share Exchange described in Note 2, the
Company included 40,001 stock options with an exercise price of $.01 per share
that it issued to certain employees during 2002 in its calculation of
weighted-average number of common shares outstanding for all periods presented.

The following table sets forth the computation of basic and diluted earnings per
share:

120

Six Months Ended Three Months Ended
June 30, June 30,
-------------------------- --------------------------
Numerator: 2006 2005 2006 2005
----------- ----------- ----------- -----------

Net loss .......................... $(5,896,307) $(7,232,300) $(1,496,233) $(5,028,505)
Preferred stock dividends ......... (124,784) -- (124,784) --
----------- ----------- ----------- -----------
Numerator for basic and diluted loss
per share - net loss available to
common stockholders, as reported .. $(6,021,091) $(7,232,300) $(1,621,017) $(5,028,505)

Denominator:
Denominator for basic and diluted
earnings per share - weighted
average shares .................... 2,127,543 1,838,106 2,170,653 2,032,823

Net loss per share available to common
stockholders - basic and diluted .. $ (2.83) $ (3.93) $ (0.75) $ (2.47)

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

JUNE 30,
---------------------
2006 2005
--------- ---------
Options 428,090 197,505
Warrants 1,405,863 235,927
--------- ---------
1,833,953 433,432
========= =========

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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

121

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

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

In September 2005, the FASB also ratified the EITF's Issue No. 05-8, "Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature,"
which discusses whether the issuance of convertible debt with a beneficial
conversion feature results in a basis difference arising from the intrinsic
value of the beneficial conversion feature on the commitment date (which is
recorded in the stockholders' equity for book purposes, but as a liability for
income tax purposes), and, if so, whether that basis difference is a temporary
difference under FASB Statement No. 109, "Accounting for Income Taxes." This
Issue should be applied by retrospective application pursuant to Statement 154
to all instruments with a beneficial conversion feature accounted for under
Issue 00-27 included in financial statements for reporting periods beginning
after December 15, 2005. The adoption of this pronouncement did not have a
material effect on the Company's financial statements.

In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 150." SFAS
No. 155 (a) permits fair value remeasurement for any hybrid financial instrument
that contains an embedded derivative that otherwise would require bifurcation,
(b) clarifies that certain instruments are not subject to the requirements of
SFAS 133, (c) establishes a requirement to evaluate interests in securitized

122

financial assets to identify interests that may contain an embedded derivative
requiring bifurcation, (d) clarifies what may be an embedded derivative for
certain concentrations of credit risk and (e) amends SFAS 140 to eliminate
certain prohibitions related to derivatives on a qualifying special-purpose
entity. SFAS 155 is applicable to new or modified financial instruments in
fiscal years beginning after September 15, 2006, though the provisions related
to fair value accounting for hybrid financial instruments can also be applied to
existing instruments. Early adoption, as of the beginning of an entity's fiscal
year, is also permitted, provided interim financial statements have not yet been
issued. We are currently evaluating the potential impact, if any, that the
adoption of SFAS 155 will have on our consolidated financial statements.

In March 2006, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 156, Accounting for Servicing of Financial Assets (SFAS No. 156).
SFAS No. 156 amends SFAS No. 140 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," to require all separately
recognized servicing assets and servicing liabilities to be initially measured
at fair value, if practicable. SFAS No. 156 also permits servicers to
subsequently measure each separate class of servicing assets and liabilities at
fair value rather than at the lower of cost or market. For those companies that
elect to measure their servicing assets and liabilities at fair value, SFAS No.
156 requires the difference between the carrying value and fair value at the
date of adoption to be recognized as a cumulative effect adjustment to retained
earnings as of the beginning of the fiscal year in which the election is made.
SFAS No. 156 is effective for the first fiscal year beginning after September
15, 2006. We are currently evaluating the potential impact, if any, that the
adoption of SFAS 156 will have on our consolidated financial statements.

NOTE 5 - BUSINESS COMBINATIONS

On February 25, 2005, the Company acquired Complete Security Solutions, Inc.
("CSSI") and LucidLine, Inc. ("LucidLine") in separate merger transactions.
Additionally, on March 30, 2005, the Company acquired Entelagent Software Corp.
("Entelagent") in a merger transaction. The Company accounted for these business
combinations in accordance with the provisions of SFAS 141 "Accounting for
Business Combinations."

In connection with these three merger transactions, the Company paid, $200,000
in cash, 496,667 shares of common stock with a fair market value of $12,665,000,
subordinated promissory notes in the aggregate principal amount of $4,500,000,
warrants to purchase up to 75,001 shares of common stock which were valued at
$1,912,500. Direct expenses incurred by the Company to complete these
transactions amounted to $912,663. The total purchase price for the three
companies amounted to $20,190,133.

The allocation of the purchase price was based upon a valuation study performed
by an independent outside appraisal firm. The purchase price allocation resulted
in the allocation of $3,101,000 to intangible assets, including $2,570,000 to
developed technology and $190,000 to in-process research and development.
Additionally, the purchase price allocation resulted in the allocation of
$22,440,412 to goodwill.

The Company performed its annual impairment test of goodwill at its designated
valuation date of December 31, 2005 in accordance with SFAS 142. As a result of
these tests, the Company determined that the recoverable amount of goodwill with
respect to its business amounted to $9,510,716. Accordingly, the Company
recorded a goodwill impairment charge in the amount of $12,929,696 for the year
ended December 31, 2005. Additionally, after reevaluating the resources
available to the Company, the strategic direction of the business as well as the
revised business plans and financial projections, the Company, during the
quarter ended December 31, 2005, recorded a $1,705,455 charge for the impairment
of the developed technology assets acquired in the CSSI and Entelagent
acquisitions. The remaining amount of goodwill and intangible assets is
presented net of such impairment charges recorded during the year ended December
31, 2005.

123

On April 18, 2006, the Company entered into a Stock Purchase Agreement with
Walnut Valley, Inc. pursuant to which the Company sold all of the outstanding
shares of LucidLine, Inc. As a result, LucidLine has been treated as a
discontinued operation in these financial statements (Note 19).

NOTE 6 - OTHER CURRENT ASSETS

Other current assets consist of the following:

JUNE 30,
2006
--------
Employee receivables . $ 23,517
Prepaid expenses ..... 52,417
Deposits ............. 30,639
Other current assets . 125,000
--------
Other current assets $231,573
========

NOTE 7 - PROPERTY AND EQUIPMENT

JUNE 30,
2006
---------
Computers ..................... $ 147,524
Furniture and Fixtures ........ 31,962
Leasehold improvements ........ 4,490
---------
sub-total ................. 183,976
less: accumulated depreciation (58,368)
---------
Property and equipment, net $ 125,608
=========

Depreciation expense amounted to $26,751 and $13,753 for the six months ended
June 30, 2006 and 2005, respectively.

NOTE 8 - INTANGIBLE ASSETS

The components of intangible assets as of June 30, 2006 are set forth in the
following table:

JUNE 30, 2006
-----------
Developed technology .............. $ 2,570,000
Customer relationships ............ 180,000
Trademarks and tradenames ......... 161,000
In-process research and development 807,917
-----------
3,718,917
Amortization and impairment charge (2,319,299)
-----------
Intangible assets, net ......... $ 1,399,618
===========

During the year ended December 31, 2005, the Company recorded a $1,705,455
charge for the impairment of the developed technology assets acquired in the
CSSI and Entelagent acquisitions (Note 5).

124

The Company classifies amortization of developed technology as a component of
cost of sales and amortization of customer relationship and trademarks and
tradenames as a component of general and administrative expense. Amortization
expense amounted to $116,669 and $178,545 for the six months ended June 30, 2006
and 2005, respectively. Included in these amounts is $55,044 and $147,731 for
the six months ended June 30, 2006 and 2005, respectively, which is classified
as cost of sales.

NOTE 9 - DEMAND NOTES PAYABLE

Through December 31, 2004, the Company borrowed an aggregate amount of $695,000
from several unrelated parties. At June 30, 2006, all but one note was settled
in the creditor and claimant liabilities restructuring. The outstanding balance
on this note amounts to $135,000. This note is payable on demand and bears
interest at the rate of 10% per annum. Interest expense on the notes amounted to
$20,750 and $35,750 for the six months ended June 30, 2006 and June 30, 2005,
respectively.

Other demand notes at June 30, 2006 total $312,556 and is associated with a note
payable to Lok Technology which is secured by Entelagent's accounts receivable
and bears interest at 15% per annum. Interest on this demand note amounted to
$23,442 for the six months ended June 30, 2006 and $0 for six months ended June
30, 2005. As described in Note 15, on May 4, 2006, the Company became aware of a
complaint that Lok Technologies, Inc. had filed in the Superior Court of
Californian, County of Santa Clara on or about March 30, 2006 against the
Company, Entelagent Software Corp. and unnamed defendants.

As of June 30, 2006, $608,500 of the Demand Notes have been surrendered as
payment for Series A-1 Preferred stock as part of the creditor and claimant
liabilities restructuring (Note 16).

NOTE 10 - BRIDGE NOTES PAYABLE

INTERIM BRIDGE FINANCING I

On February 28, 2005, the Company completed a $3,500,000 financing (the "Interim
Bridge Financing I") through the issuance of 10% Senior Convertible Promissory
Notes (the "Bridge I Notes") and warrants to purchase up to 58,348 shares of the
Company's common stock ("Bridge I Warrants"). The warrants have a term of 5
years and an exercise price of $21.00 per share. The aggregate fair value of the
Bridge I Warrants amounts to $1,487,500. Prior to final maturity, the Bridge I
Notes may be converted into securities that would be issuable at the first
closing of a subsequent financing by the Company, for such number of offered
securities that could be purchased for the principal amount being converted. The
Bridge I Notes had an initial term of 120 days (due on June 28, 2005) with
interest at a contractual rate of 10% per annum and featured an option for the
Company to extend the term for an additional 60 days to August 27, 2005.

In accordance with APB 14, "Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants," the Company allocated $2,456,140 of the proceeds to
the Bridge I Notes and $1,043,860 of proceeds to the Bridge I Warrants. The
difference between the carrying amount of the Bridge I Notes and their
contractual redemption amount was accreted as interest expense to June 28, 2005,
their earliest date of redemption.

On June 28, 2005, the Company elected to extend the contractual maturity date of
the Bridge I Notes for an additional 60 days to August 27, 2005, which caused
the contractual interest rate to increase to 12% per annum. In addition, the
Company was required to issue the 58,348 additional warrants (the "Bridge I
Extension Warrants") to purchase such number of shares of common stock equal to
1/60 of a share for each $1.00 of principal amount outstanding. The Bridge I
Extension Warrants have a term of 5 years and an exercise price of $21.00 per
share.

The Company did not redeem the Bridge I Notes on August 27, 2005 and, as a
result, the notes automatically became convertible into 0.128 shares of common
stock for each $1 of principal then outstanding in accordance with the original
note agreement. Accordingly, the Company recorded a charge of $3,500,000 in 2005
based upon the intrinsic value of this conversion option measured at the
original issuance date of the note in accordance with EITF 00-27. The Company
has agreed to file with the SEC, a registration statement for the resale of the

125

restricted shares of the Company's common stock issuable upon exercise of the
conversion option that would be issued in this transaction, on a best efforts
basis.

Contractual interest expense on the Bridge I Notes amounted to $113,883 and
$116,667 for the six months ended June 30, 2006 and 2005, respectively, and is
included as a component of interest expense in the accompanying statement of
operations.

As of June 30, 2006, $3,155,025 of the Bridge I Notes have been surrendered as
payment for Series A-1 Preferred stock as part of the creditor and claimant
liabilities restructuring (Note 16).

INTERIM BRIDGE FINANCING II

On June 6, 2005, the Company completed a $2,543,000 financing (the "Interim
Bridge Financing II") through the issuance of (i) 10% Junior Convertible
Promissory Notes (the "Bridge II Notes") and (ii) warrants to purchase up to
42,388 shares of common stock (the "Bridge II Warrants"). The warrants have a
term of 5 years and an exercise price of $18.00 per share. The aggregate fair
value of the Bridge II Warrants amounts to $673,895. Prior to maturity, the
Junior Convertible Promissory Notes may be converted into the securities offered
by the Company at the first closing of a subsequent financing for the Company,
for such number of offered securities as could be purchased for the principal
amount being converted.

In accordance with APB 14, the Company allocated $2,010,277 of the proceeds to
the Bridge II Notes and $532,723 of proceeds to the Bridge II Warrants. The
difference between the carrying amount of the Bridge II Notes and their
contractual redemption amount is being accreted as interest expense to October
3, 2005, their earliest date of redemption.

The Bridge II Notes have an initial term of 120 days (due on various dates
beginning October 3, 2005) with interest at 10% per annum and feature an option
for the Company to extend the term for an additional 60 days to various dates
beginning December 2, 2005. Upon the extension of the maturity date of the
Bridge II Notes, the contractual interest rate would increase to 12% per annum,
and the Company would be required to issue warrants (the "Bridge II Extension
Warrants") to purchase such number of shares of the Company's common stock equal
to 1/60th of a share for each $1.00 of principal then outstanding. The Bridge II
Extension Warrants issuable upon extension of the maturity date of the Junior
Convertible Promissory notes feature a term of 5 years and an exercise price of
$18.00 per share. In addition, if the Bridge II Notes are not paid in full on or
before the extended maturity date, each note becomes convertible into .128
shares of the Company's common stock for each $1.00 of principal then
outstanding. The intrinsic value of this conversion option measured at the
issuance date of the notes amounts to $2,543,000 and would be recognized as
interest expense in accordance with EITF 00-27. The Company has agreed to file
with the SEC, a registration statement for the resale of the restricted shares
of its common stock issuable upon exercise of the conversion option that would
be issuable in this transaction, on a best efforts basis.

The Company sold these securities to seven accredited investors introduced by
Laidlaw, placement agent in the Interim Bridge Financing II. The Company
incurred $386,027 of fees in connection with this transaction including a cash
fee of $305,160 and $80,867 for the fair value of warrants to purchase 4,243
shares of the Company's common stock at an exercise price of $18.00 per share.

The Company elected to extend the due dates of these notes by an additional 60
days to various dates beginning December 2, 2005. In addition, the Company was
required to issue Bridge II Extension Warrants to purchase 42,388 shares of the
Company's common stock . The Bridge II Extension Warrants have at term of 5
years and an exercise price of $18.00 per share.

The Company did not redeem the Bridge II Notes on December 2, 2005 and, as a
result, the notes automatically became convertible into 0.128 shares of common
stock for each $1 of principal then outstanding in accordance with the original
note agreement. Accordingly, the Company recorded a charge of $2,543,000 based
upon the intrinsic value of this conversion option measured at the original
issuance date of the note in accordance with EITF 00-27. The Company has agreed
to file with the SEC, a registration statement for the resale of the restricted
shares of the Company's common stock issuable upon exercise of the conversion
option that would be issued in this transaction, on a best efforts basis.

126

Contractual interest expense on the Bridge II Notes amounted to $111,146 and
$21,192 for the six months ended June 30, 2006 and 2005, respectively and is
included as a component of interest expense in the accompanying statement of
operations.

As of June 30, 2006, $2,343,000 of the Bridge II Notes have been surrendered as
payment for Series A-1 Preferred stock as part of the creditor and claimant
liabilities restructuring (Note 16).

INTERIM BRIDGE FINANCING III

Beginning on July 1, 2005, and continuing through December 31, 2005, the Company
completed, through 12 separate fundings, a $5,234,000 financing (the "Interim
Bridge Financing III") through the issuance of (i) 10% Junior Convertible
Promissory Notes (the "Bridge III Notes") and (ii) warrants to purchase up to
87,235 shares of common stock (the "Bridge III Warrants"). The warrants have a
term of 5 years and an exercise price of $18.00 per share. Prior to maturity,
the Junior Convertible Promissory Notes may be converted into the securities
offered by the Company at the first closing of a subsequent financing for the
Company, for such number of offered securities as could be purchased for the
principal amount being converted.

In accordance with APB 14, the Company allocated $4,645,544 of the proceeds to
the Bridge III Notes and $587,595 of proceeds to the Bridge III Warrants. The
difference between the carrying amount of the Bridge III Notes and their
contractual redemption amount is being accreted as interest expense to various
dates from November 1, 2005, their earliest date of redemption. Accretion of the
aforementioned discount amounted to $20,909 for the three months ended March 31,
2006 and is included as a component of interest expense in the accompanying
statement of operations.

The Bridge III Notes have an initial term of 120 days (due on various dates
beginning October 28, 2005) with interest at 10% per annum and feature an option
for the Company to extend the term for an additional 60 days to various dates
beginning December 28, 2005. Upon the extension of the maturity date of the
Bridge III Notes, the contractual interest rate would increase to 12% per annum,
and the Company would be required to issue warrants (the "Bridge III Extension
Warrants") to purchase such number of shares of the Company's common stock equal
to 1/60th of a share for each $1.00 of principal then outstanding. The Bridge
III Extension Warrants issuable upon extension of the maturity date of the
Junior Convertible Promissory Notes feature a term of 5 years and an exercise
price of $18.00 per share. In addition, if the Bridge III Notes are not paid in
full on or before the extended maturity date, each note becomes convertible into
0.128 shares of the Company's common stock for each $1.00 of principal then
outstanding. The intrinsic value of this conversion option measured at the
issuance date of the notes amounts to $5,234,000 and would be recognized as
interest expense in accordance with EITF 00-27. The Company has agreed to file
with the SEC, a registration statement for the resale of the restricted shares
of its common stock issuable upon exercise of the conversion option that would
be issuable in this transaction, on a best efforts basis.

Beginning on October 29, 2005, the Company elected to extend the contractual
maturity date of the various Bridge III Notes for an additional 60 days to
various dates beginning December 28, 2005, which caused the contractual interest
rate to increase to 12% per annum. In addition, during the three month ended
March 31, 2006, the Company was required to issue 39,917 additional warrants
(the "Bridge III Extension Warrants"). The aggregate fair value of the warrants,
which amounted to $48,129 was recorded as a deferred financing cost and was
being amortized over the 60-day extension period or until March 27, 2006 when
the Bridge III Notes were surrendered as payment for the Series A-1 Preferred
stock under the creditor and claimant liabilities restructuring. The Bridge III
Extension Warrants have a term of 5 years and an exercise price of $18.00 per
share.

The Company did not redeem Bridge III Notes on contractual maturity dates that
occurred through January 12, 2006 (the date of the Series A-1 creditor and
claimant liabilities restructuring). As a result, $3,400,000 of the Notes
automatically became convertible into 0.128 shares of common stock for each $1
of principal then outstanding in accordance with the original note agreement.
This amounts to a total of 70,400 shares during the three months ended of March
31, 2006. Accordingly, the Company recorded a charge of $550,000, in the three
months ended March 31, 2006, based upon the intrinsic value of this conversion
option measured at the original issuance date of the notes in accordance with
EITF 00-27. With the surrender of the Bridge III Notes in payment for Series A-1
Preferred stock under the creditor and claimant liabilities restructuring, these
conversion options are no longer exercisable and have been cancelled.

127

As of March 31, 2006, all of the Bridge III Notes have been surrendered as
payment for Series A-1 Preferred stock as part of the creditor and claimant
liabilities restructuring (Note 16).

Contractual interest expense on the Bridge III Notes amounted to $153,036 and $0
for the six months ended June 30, 2006 and 2005, respectively, and is included
as a component of interest expense in the accompanying statement of operations.

2006 BRIDGE NOTES

On January 18, 2006, the Company completed a financing of approximately $540,000
in additional gross funds (the "2006 Bridge Note Financing") through the
issuance of Subordinated Convertible Promissory Notes (the "2006 Bridge Notes")
in the amount of $720,001. The 2006 Bridge Note agreement provided for these
notes to automatically convert into the same securities (consisting of shares of
Series A Preferred Stock and warrants to purchase shares of the Company's common
stock) offered by the Company in connection with its Series A Preferred
Financing (as defined below). On March 27, 2006 (the date of the first closing
of the Series A Preferred Financing), the 2006 Bridge Notes were converted into
7.2 Units in the Series A Preferred Financing described below. The $180,000
difference between the gross proceeds received upon the original issuance of the
notes and the redemption amount was recorded as an original issuance discount
that was fully expensed during the six months ended June 30, 2006.

Additionally, the Company paid Laidlaw & Company (UK) Ltd. (Laidlaw), as
placement agent in the transaction, a fee of $54,000 in conjunction with the
2006 Bridge Note Financing. This fee was fully amortized and recognized as
interest expense during the six months ended June 30, 2006.

NOTE 11 - RELATED PARTY TRANSACTIONS

EXPENSE REIMBURSEMENTS DUE TO OFFICERS AND STOCKHOLDERS

Certain stockholders and officers of the Company have paid expenses on the
Company's behalf since its inception, of which $130,201 remains outstanding at
June 30, 2006. The amounts payable to such officers and stockholders are due on
demand. The balance due under these arrangements is included in the liabilities
that the Company has offered to settle under the creditor and claimant
liabilities restructuring described in Note 16.

NOTES PAYABLE TO OFFICERS AND STOCKHOLDERS

Notes payable to officers and stockholders amount to $90,000, bear interest at
10% per annum and are due on demand. Interest expense on these notes amounted to
$6,475 for the six months ended June 30, 2006. As of June 30, 2006, $145,712 of
the original notes which amounted to $235,712 have been surrendered as payment
for Series A-1 Preferred stock as part of the creditor and claimant liabilities
restructuring (Note 16). Subsequent to June 30, 2006, the remaining $90,000 of
this amount has been surrendered as payment for Series A-1 Preferred stock under
the creditor and claimant liabilities restructuring.

CONSULTING AGREEMENT PAYABLE

On June 8, 2005, the Company negotiated a settlement regarding a consulting
agreement payable with a related party. The terms of the settlement agreement
terminated the prior agreement and reduced the remaining payments due under the
contract to $150,000 including a $50,000 payment that was made upon the

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execution of the agreement and two additional $50,000 payments including one to
be made upon the completion of a follow-on-financing by the Company and one not
later than September 30, 2005. The $150,000 reduction in payments was recorded
as a reduction of general and administrative expense during the quarter ended
June 30, 2005. Additionally, the settlement agreement terminated an obligation
for the Company to issue 3,334 shares of unrestricted stock. The stock issuable
under this commitment was recorded in 2004 as common stock issued in lieu of
cash for services in the amount of $78,900. The rescission of the stock issuable
under this arrangement resulted in an additional reduction of $78,900 in general
and administrative expenses during the year ended December, 31, 2005.

The payment due on September 30, 2005 was not made by the Company. The $100,000
balance due under this arrangement has been surrendered as payment for Series
A-1 Preferred stock under the creditor and claimant liabilities restructuring
described in Note 16.

NOTES PAYABLE (TO CREDITORS OF ACQUIRED BUSINESS)

The notes issued to creditors of Entelagent (in connection with the acquisition
described in Note 5) include $554,202 that is payable to related parties for
settlements of accrued payroll, notes payable and other payables that remain
outstanding at June 30, 2006. The original amount of these notes amounted to
$2,602,913. Aggregate interest expense on these notes amounted to $77,370 and
$51,842 for the six months ended June 30, 2006 and 2005, respectively. The
balance due under these notes is included in the liabilities that the Company
has offered to settle under the creditor and claimant liabilities restructuring
described in Note 16.

During the six months ended June 30, 2006, $1,795,930 of the notes payable to
creditors of acquired business was surrendered as payment for Series A-1
Preferred stock under the creditor and claimant liabilities restructuring.

NOTE 12 - OTHER CURRENT LIABILITIES

Other current liabilities principally consist of $439,769 of accrued payroll and
sales tax liabilities and estimated penalties that the Company assumed in its
acquisition of Entelagent (Note 5). The balance consists of various
miscellaneous other current liabilities.

NOTE 13 - DEFERRED REVENUE

Deferred revenue at June 30, 2006 includes (1) $128,093 for the fair value of
remaining service obligations on maintenance and support contracts and (2)
$370,687 for contracts on which the revenue recognition is deferred until
contract deliverables have been completed. Included in the contracts for which
revenue recognition has been deferred is one contract with contract value of
$272,610 for which no revenue has been recognized and for which the revenue is
expected to be recorded during 2006. Also included is a down payment of $53,202
received on a contract in the amount of $266,009 for which no revenue has yet
been reported and for which revenue is expected to be recognized during 2006 and
2007 and the non-cancelable portion of a $716,965 contract in the amount of
$89,750 less the revenue already recognized of $44,875.

NOTE 14 - ACCOMMODATION AGREEMENT

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In December 2002, the Company received approximately $450,000 of proceeds under
the note and provided the Lender the pledged shares. Since that date, no
additional proceeds were provided by the Lender and repeated attempts were made
by the Company to secure the additional proceeds. The Company has effectively
accounted for the Lender's failure to fund the facility and return the pledged
shares as a foreclosure on the loan collateral. Accordingly, the Company
recorded a $1,047,728 loss during the year ended December 31, 2002.

On March 13, 2003, the Company issued 40,000 replacement shares with an
aggregate fair value of $3,708,000 to the stockholders who pledged their shares
under the Accommodation Agreements. Accordingly, the Company recorded an
additional loss of $2,210,272 during the year ended December 31, 2003 for the
difference between the loss the Company recorded upon the Lender's foreclosure
of the collateral and the aggregate fair value of the replacement shares.

In addition, the Accommodation Agreements provided for the Company to pay a
penalty in the event of its failure to cause the replacement shares to be
registered on or before March 31, 2003. As a result, the Company has recorded
stock based penalties for the fair value of 15,000 shares per quarter through
December 31, 2005.

The total stock-based penalties associated with the Accommodation Agreements
from April 2003 to December 31, 2005 were $3,318,975. An aggregate of 165,000
shares were issuable through December 31, 2005 under the stock-based penalties
associated with the Accommodation Agreements.

On March 27, 2006, the Company entered into an agreement to release and resolve
all outstanding claims between the parties under the creditor and claimant
liabilities restructuring (Note 16).

STOCK PLEDGE ARRANGEMENT

In April 2004, a stockholder of the Company entered into a one-year stock loan
financing arrangement ("Stock Financing Facility") with a third party financial
institution (the "Lender I"), pursuant to which such stockholder committed to
obtain financing for the Company under a credit facility collateralized by the
pledge of 22,834 shares of registered stock (the "Pledged Stock") that was
pledged by a second stockholder (the "Pledging Stockholder"). In connection with
this arrangement, the Company executed an accommodation agreement with the
Pledging Stockholder committing to issue 22,834 shares of restricted stock (the
"Replacement Stock") on April 2, 2005 (the "Termination Date") in the event of a
loss of the Pledged Stock, plus a premium of 6,850 shares (the "Premium Shares")
for entering into the agreement. The Company also agreed to register 10,000
shares of restricted stock held by the Pledging Stockholder (the "Held Stock")
within thirty days of the agreement and to use its best efforts register with
the SEC, both the Replacement Stock and Premium Stock within 12 months from
their date of issue.

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

The Company recorded a charge of $406,205 for the fair value of the Replacement
Stock and Premium Stock (29,684 shares) issued to the Pledging Stockholder under
this arrangement. Such charge, net of $40,012 of advances received, is presented
as a loss on collateralized financing arrangement in the accompanying statement
of operations. The Company also recorded charges of $5,246 and $62,102 during
the six months ended June 30, 2006 and 2005, respectively for the fair value of
2,952 and 2,853 shares issuable during the six months ended June 30, 2006 and
2005, respectively to the Pledging Stockholder as penalties for the delays in
registering the stock. The charges associated with the penalties are included in
stock based penalties under accommodation agreements in the accompanying
statements of operations.

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NOTE 15 - COMMITMENTS AND CONTINGENCIES

SEC INVESTIGATION

Pursuant to Section 20(a) of the Securities Act and Section 21(a) of the
Securities Exchange Act, the staff of the SEC (the "Staff"), issued an order (In
the Matter of Patron Systems, Inc. - Order Directing a Private Investigation and
Designating Officers to Take Testimony (C-03739-A, February 12, 2004)) (the
"Order") that a private investigation (the "SEC Investigation") be made to
determine whether certain actions of, among others, the Company, certain of its
officers and directors and others violated Section 5(a) and 5(c) of the
Securities Act and/or Section 10 and Rule 10b-5 promulgated under the Exchange
Act. Generally, the Order provides, among other things, that the Staff is
investigating (i) the legality of two (2) separate Registration Statements filed
by the Company on Form S-8, filed on December 20, 2002 and on April 2, 2003, as
amended on April 9, 2003 (collectively, the "Registration Statements"), covering
the resale of, in the aggregate, 145,834 shares of common stock issued to
various consultants of the Company, and (ii) whether in connection with the
purchase or sale of shares of common stock, certain officers and directors of
the Company and others (a) sold common stock in violation of Section 5 of the
Securities Act and/or, (b) made misrepresentations and/or omissions of material
facts and/or employed fraudulent devices in connection with such purchases
and/or sales relating to certain of the Company's press releases regarding,
among other items, proposed mergers and acquisitions that were never
consummated. If the SEC brings an action against the Company, it could result
in, among other items, a civil injunctive order or an administrative
cease-and-desist order being entered against the Company, in addition to the
imposition of a significant civil penalty. Moreover, the SEC Investigation
and/or a subsequent SEC action could affect adversely the Company's ability to
have its common stock become listed on a stock exchange and/or quoted on the
NASD Bulletin Board or NASDAQ, the Company being able to sell its securities
and/or have its securities registered with the SEC and/or in various states
and/or the Company's ability to implement its business plan. The Company's legal
counsel representing the Company in such matters has indicated that while the
SEC Investigation is ongoing and the Company has not received correspondence
from the SEC indicating that the matter is officially closed, the Staff has
indicated that it does not intend to request additional information from the
Company and that, at this time, it does not intend to recommend that the SEC
bring an enforcement action against the Company, its officers and directors.

LEGAL PROCEEDINGS

Sherleigh Associates Inc. Profit Sharing Plan ("Sherleigh") filed a complaint
against the Company, Patrick Allin, former Chief Executive Officer of the
Company, and Robert E. Yaw, the Company's non-executive Chairman, on February 3,
2004, in the United States District Court for the Southern District of New York
(the "Court") alleging common law fraud. The complaint alleged that Sherleigh
was fraudulently induced into purchasing 33,334 shares of Company common stock
in reliance upon certain of the Company's press releases and allegedly false
statements by Mr. Allin and Mr. Yaw, concerning the Company's plans to acquire
two target companies, TrustWave Corporation (currently a strategic partner of
the Company) and Entelagent (a current subsidiary of the Company), and its
financing arrangements regarding those acquisitions. Sherleigh sought rescission
of its purchase agreement and return of its $2,000,000 purchase price or
compensatory damages to be proven at trial. Mr. Allin entered into a settlement
agreement with Sherleigh and is requesting that the Court include in its
dismissal order a finding that the settlement is reasonable and a prohibition
against any claims by the Company or Mr. Yaw against Mr. Allin for contribution
or indemnification with respect to Sherleigh's claims. The Company has opposed
Mr. Allin's request. The Court has not yet issued any ruling on Mr. Allin's
request. Discovery has been completed, but no trial date has been set by the
Court. On April 24, 2006, the Company and the Sherleigh Associates Inc. Profit
Sharing Plan entered into a final and binding settlement of all claims as part
of the creditor and claimant liabilities restructuring (Note 16).

On January 5, 2006, Mark P. Gertz, Trustee in bankruptcy for Arter & Hadden,
LLP, filed an Adversary Complaint for Recovery of Assets of the Estate in the
United States Bankruptcy Court Northern District of Ohio Eastern Division,
against the Company as successor in merger to Entelagent. Mr. Gertz seeks
$32,278.18 plus interest accruing at the statutory rate since July 15, 2003 for
services rendered by Arter & Hadden, LLP to Entelagent. The Company and Mr.
Gertz have agreed to a settlement through mediation in the amount of $32,500 in
13 installments of $2,500. The Company is awaiting final documents from Mr.
Gertz.

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On May 4, 2006, Patron became aware that Lok Technologies, Inc. had filed a
complaint on or about March 30, 2006 against the Company, Entelagent Software
Corp. and unnamed defendants in the Superior Court of California, County of
Santa Clara alleging breach of contract, breach of duty of good faith and fair
dealing and unjust enrichment and seeking damages, interest, disgorgement of any
unjust enrichment, attorneys fees and cost. Prior to receipt of this notice of
litigation, the Company had recorded a liability of $320,000 plus accrued
interest of $159,432. The Company believes that it has defenses to these claims.
The Company cannot provide any assurance that the ultimate settlement of this
claim will not have a material adverse affect on its financial condition.

NOTE 16 - CREDITOR AND CLAIMANT LIABILITIES RESTRUCTURING

On January 12, 2006, the Company issued a Stock Subscription Agreement & Mutual
Release ("the Original Release") to each creditor and claimant ("Subscriber") of
the Company for purposes of entering into a final and binding settlement with
respect to any and all claims, liabilities, demands, causes of action, costs,
expenses, attorneys fees, damages, indemnities, and obligations of every kind
and nature that the creditor and/or claimant may have with the Company
("Subscriber Claims"). Under terms of this agreement, the Company sells to the
Subscriber and the Subscriber purchases from the Company shares ("Stock") of its
Series A-1 Preferred stock at a price of $0.80 per share. The aggregate purchase
price is equivalent to the value of the Subscriber Claims being settled through
this settlement and release. Subscriber is deemed to have paid for the Stock
through the settlement and release of Subscriber Claims. Each share of Stock is
automatically convertible into 1/3 share of the Company's common stock upon the
effectiveness of an amendment to the Company's certificate of incorporation
which provides for a sufficient number of authorized but unissued and unreserved
shares of the Company's common stock to permit the conversion of all issued and
outstanding shares of Series A-1 Preferred. If the requisite agreements and
approvals are obtained, the Company anticipates issuing the Series A-1 Preferred
shares following the final determination of the claims and acceptance by the
Company of each claimant submitted Stock Subscription Agreement and Mutual
Release through countersignature thereof.

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

As described below under the Private Placement Series A Preferred Stock and
Warrants, on March 3, 2006 the investors in the Series A Preferred Financing
modified the terms of their financing arrangement to provide funds to the
Company prior to the 100% completion of the creditor and claimant liabilities
restructuring. This modification provides for the establishment of a restricted
cash escrow agent and establishes a methodology to disburse funds to the Company
to cover payroll, rent and other operating costs, including eligible payables
not otherwise subject to the creditor and claimant liabilities restructuring, on
a bi-monthly basis. As described below, the Company completed the sale of $4.8
million in equity securities under the Series A Preferred Financing on March 27,
2006 thereby eliminating the provision for automatic termination of this
arrangement.

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Release. The Company shall keep the Registration Statement continuously
effective under the Securities Act until the earlier of (i) the date when all
shares of the Stock have been sold pursuant to the Registration Statement or an
exemption from the registration requirements of the Securities Act, and (ii) two
years from the effective date of the Registration Statement.

Through July 21, 2006, the Company issued additional Stock Subscription
Agreements & Mutual Releases ("the Additional Release") to several creditors
that had not signed the January 12, 2006 Original Release by April 30, 2006. The
terms of the Additional Release are predominantly the same as the Original
Release with the exception of the 120 day requirement for filing the
Registration Statement.

As of July 21, 2006, creditors representing $29,594,442 of the Company's claims
outstanding, which includes amounts settled under the accommodation agreement,
have indicated their acceptance of the Company's proposal by signing and
returning to the Company the Stock Subscription Agreement and Mutual Release.
The total of all claims settled represents 93% of the eligible claims.
Additionally, the Company has settled $382,584 of claims for $12,140. The
Company is currently unable to provide assurance that the acceptance of the
claims settlement will actually improve the Company's ability to fund the
further development of its business plan or improve its operations.

LOSS (GAIN) ASSOCIATED WITH SETTLEMENT AGREEMENTS

During the six months ended June 30, 2006 as part of the creditor and claimant
liabilities restructuring, the Company settled a number of disputed and
unresolved payables and outstanding claims. Included among the claims settled
was a claim associated with Accommodation Agreements (Note 14). Settlement of
this matter resulted in a gain of approximately $3,022,000 which was offset by,
among others, settlement losses associated with the Sherleigh Associates Profit
Sharing Plan complaint ($1,850,000), loss on the settlement of Richard Linting's
lawsuit against the Company ($1,129,000) and a loss associated with the
reinstatement and subsequent settlement of the claim associated with the lawsuit
brought by Marie Graul against the Company ($931,377).

During the six months ended June 30, 2005, the Company entered into a settlement
agreement with Cook Associates to settle all claims related to a lawsuit filed
by Cook Associates filed against the Company. This settlement resulted in the
Company recognizing a gain on settlement of $389,103.

NOTE 17 - SERIES A AND SERIES A-1 PREFERRED STOCK

SERIES A PREFERRED STOCK

The Series A Preferred Stock has a stated value of $5,000 per share, has no
maturity date, carries a dividend of 10% per annum, with such dividend accruing
on a cumulative basis. The dividend is payable only (i) at such time as declared
payable by the Board of Directors of the Company or (ii) in the event of
liquidation, as part of the liquidation preference amount ("Liquidation
Preference Amount"). Accrued but unpaid dividends on the Series A Preferred
amount to $124,784 at June 30, 2006.

The Series A Preferred is convertible, at the option of the holder, into shares
of the Company's common stock ("Conversion Shares") at an initial conversion
price ("Initial Conversion Price") of $2.40 per share based on the stated value
of the Series A Preferred, subject to adjustment for stock splits, dividends,
recapitalizations, reclassifications, payments made to Common Stock holders and
other similar events and for issuances of additional securities at prices more
favorable than the conversion price at the date of such issuance. The Company
evaluated the conversion option at the commitment date of the financing in
accordance with APB 14 and EITF 00-27 and determined that conversion price was
not beneficial.

133

The Series A Preferred is mandatorily convertible into shares of the Company's
common stock at the Initial Conversion Price, which is subject to adjustment as
described above, on the date that: (i) there shall be an effective registration
statement covering the resale of the Conversion Shares, (ii) the average closing
price of the Company's common stock, for a period of 20 consecutive trading days
is at least 250% of the then applicable Conversion Price, and (iii) the average
daily trading volume of the Company's common stock for the same period is at
least 8,334 shares.

The potential adjustment to the conversion price that would occur upon the
completion of a subsequent financing transaction on terms more favorable than
that of the Series A Preferred (if any) is considered to be a contingent
conversion price in accordance with EITF 00-27. Accordingly, such adjustments
would be measured and accounted for at the effective time of such adjustment, if
any.

The Series A Preferred Liquidation Preference Amount is equal to 125% of the sum
of: (i) the stated value of any then unconverted shares of Series A Preferred
and (ii) any accrued and unpaid dividends thereon. An event of liquidation means
any liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, as well as any change of control of the Company which includes the
sale by the Company of either (x) substantially all its assets or (y) the
portion of its assets which comprises its core business technology, products or
services.

SERIES A-1 PREFERRED STOCK

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

Through June 30, 2006, the Company has issued 36,388,907 shares of Series A-1
Preferred Stock which are convertible, upon the effectiveness of an amendment to
the Company's Second Amended and Restated Certificate of Incorporation to affect
a 1-for-30 reverse stock split, into 12,129,674 shares of the Company's newly
split common stock.

PRIVATE PLACEMENT OF SERIES A PREFERRED STOCK AND WARRANTS

In January 2006, the Company initiated a proposed $5,400,000 financing
transaction (the "Series A Preferred Financing") which would, for each $100,000
Unit purchased, result in the issuance of (i) 20 shares of Series A Preferred
Stock and (ii) warrants ("Investor Warrants") to purchase 13,888.9 shares of the
Company's common stock. The minimum amount of the Series A Preferred Financing
is $3,000,000 ("Minimum Amount") and the maximum amount is $5,400,000. Apex
agreed to purchase up to $1,500,000 which will all be available to fund the
Minimum Amount, provided however, in the event that the Series A Preferred
Financing is over-subscribed as to the Minimum Amount, then for each $1.00 of
such over subscription up to $250,000, the Apex funding commitment will be
reduced on a dollar for dollar basis, down to a minimum amount of $1,250,000.
Additionally, holders of the 2006 Bridge Notes were mandatorily obligated to
exchange their 2006 Bridge Notes for Units in the Series A Preferred Financing
upon consummation of the Series A Preferred Financing at the face value of their
2006 Bridge Notes. The issuance of Units to the holders of 2006 Bridge Notes
counts toward satisfying the Minimum Amount.

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The Investor Warrants have a term of 5 years and an exercise price of $3.00 per
share. Each Investor Warrant will entitle the holder thereof to purchase
13,888.9 shares of the Company's common stock (the "Warrant Shares"), subject to
anti-dilution provisions similar to those of the conversion rights of the Series
A Preferred. The Company is obligated to include the Conversion Shares and the
Warrant Shares in the Registration Statement which the Company has committed to
file in connection with the creditor and claimant liabilities restructuring
described above. The Conversion Shares and the Warrant Shares will also have
piggyback registration rights.

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

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

As of March 27, 2006, the Company consummated the Series A Preferred Financing
with the closing of funds totaling $4,465,501, resulting in the issuance of 893
shares of Series A Preferred Stock and 620,233 common stock purchase warrants to
the purchasers of the Series A Preferred Stock. This amount is comprised on
$720,001 associated with the conversion of the Bridge Notes, $895,000 provided
by Apex and $2,850,500 from parties made available by the Series A Preferred
Placement Agent. The Company has also issued to Laidlaw 5,950,837 common stock
purchase warrants, the "Agent Warrants", as Series A Preferred Placement Agent.

On April 3, 2006, the Company consummated an additional Series A Preferred
Financing with the closing of funds totaling $355,000, resulting in the issuance
of 71 shares of Series A Preferred Stock and 49,306 common stock purchase
warrants.

The 964 shares of Series A Preferred Stock outstanding as of April 3, 2006 will
be convertible, as described above and following the effectiveness of an
amendment to the Company's Second Amended and Restated Certificate of
Incorporation to affect a 1-for-30 reverse stock split, into 2,008,567 shares of
the Company's newly split common stock. Additionally, upon the effectiveness of
the 1-for-30 reverse stock split, the 20,085,446 common stock purchase warrants
issued to holders of the Series A Preferred Stock will be exercisable for
669,539 shares of the Company's newly split common stock and the 5,950,837
common stock purchase warrants issued to Laidlaw as Series A Preferred Placement
Agent will be exercisable for 198,375 shares of the Company's newly split common
stock.

In order to affect the availability of these funds to the Company prior to the
completion of the creditor and claimant liabilities restructuring, the Company,
on March 27, 2006, entered into a post-closing restricted cash escrow agreement
("Post-Closing Escrow Agreement") with an escrow agent ("Escrow Agent"). As of
March 27, 2006, the Escrow Agent was provided $2,183,026 in net offering
proceeds. The escrow agent is holding the funds and making periodic
disbursements to the Company on or after the 15th of each calendar month and on
or after the last day of each calendar month. The Company is required to provide
a detailed schedule of the mid-month, month-end and maximum monthly disbursement
amounts to substantiate its request for a release of any funds. The Company is

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currently unable to provide assurance that the securing of additional funding,
the completion of the creditor and claimant liabilities restructuring program
and the acceptance by individual creditors of the claims settlement will
actually improve the Company's ability to fund the further development of its
business plan or improve its operations.

NOTE 18 - STOCKHOLDERS' EQUITY

ADDITIONAL SHARES ISSUED UNDER ANTI-DILUTION PROVISION

Effective April 1, 2006, the Company issued 251,175 shares of common stock under
the provisions of an anti-dilution agreement associated with private placements
of common stock that occurred in March, August and September 2004.

ISSUANCE OF COMMON STOCK PURCHASE WARRANTS

On January 28, 2006 the Company issued warrants for 20,000 shares at an $18.00
per share exercise price to Apex in connection with the Interim Bridge Financing
III financing. The aggregate fair value of these warrants amounted to $20,316.

On February 13, 2006 the Company issued warrants for 6,000 shares at an $18.00
per share exercise price to Apex in connection with the Interim Bridge Financing
III financing. The aggregate fair value of these warrants amounted to $6,634.

On February 21, 2006 the Company issued warrants for 1,250 shares at an $18.00
per share exercise price to Apex in connection with the Interim Bridge Financing
III financing. The aggregate fair value of these warrants amounted to $1,382.

On March 1, 2006 the Company issued warrants for 6,417 shares at an $18.00 per
share exercise price to Apex in connection with the Interim Bridge Financing III
financing. The aggregate fair value of these warrants amounted to $10,029.

On March 17, 2006 the Company issued warrants for 3,750 shares at an $18.00 per
share exercise price to Apex in connection with the Interim Bridge Financing III
financing. The aggregate fair value of these warrants amounted to $5,861.

On March 22, 2006 the Company issued warrants for 2,500 shares at an $18.00 per
share exercise price to Apex in connection with the Interim Bridge Financing III
financing. The aggregate fair value of these warrants amounted to $3,907.

On March 27, 2006 the Company issued warrants for 620,233 shares at a $3.00 per
share exercise price to the investors in the Series A Preferred Financing in
connection with the Series A Preferred Financing. Additionally, the Company
issued 198,375 common stock purchase warrants at a $3.00 per share exercise
price to Laidlaw as placement agent in the Series A Preferred Financing.

On April 3, 2006 the Company issued warrants for 49,306 shares at a $3.00 per
share exercise price to Apex in connection with their investment in the Series A
Preferred Financing.

ISSUANCE OF EMPLOYEE STOCK OPTIONS

During the six months ended June 30, 2006, the Company issued stock options to
employees to purchase 99,575 shares. These options include a grant to purchase
73,371 shares at $1.65 per share, with a fair value of $96,850, to the Chief
Operating Officer of the Company, Mr. Braden Waverley, upon the signing of his
employment agreement with the Company. Additionally, the Company granted options
to purchase 26,204 shares at $1.65 per share, with a fair value of $34,589, to
Mr. Martin T. Johnson, the Company's Chief Financial Officer, upon the signing
of his employment agreement with the Company.

136

The fair value of the unvested portion of stock options at June 30, 2006 is
$706,601 with a weighted-average remaining vesting period of 3.3 years.

SHARE-BASED COMPENSATION ARRANGEMENTS

The Company, since its inception has granted non-qualified stock options to
various employees and non-employees at the discretion of the Board of Directors.
Substantially all options granted to date have exercise prices equal to the fair
value of underlying stock at the date of grant and terms of ten years. Vesting
periods range from fully vested at the date of grant to four years.

As described in Note 4, the fair value of all awards was estimated at the date
of grant using the Black-Scholes option pricing model. Assumptions relating to
the estimated fair value of stock options that the Company granted prior to
January 1, 2006 that were accounted for and recorded under the intrinsic value
method prescribed under APB 25 are also described in Note 4.

On February 16, 2006, the Company issued an aggregate of 99,575 stock options to
two newly hired executives upon signing their employment agreements. These
options are exercisable at $1.65 per share and have a term of ten years. The
aggregate fair value of these options amounts to $131,439. Assumptions relating
to the estimated fair value of these stock options, which the Company is
accounting for in accordance with SFAS 123(R) are as follows: risk-free interest
rate of 4.45%; expected dividend yield zero percent; expected option life of
four years; and current volatility of 125%.

The risk-free rate is based on the U.S. Treasury yield curve in effect at the
time of grant. The Company has not paid dividends to date and does not expect to
pay dividends in the foreseeable future due to its substantial accumulated
deficit and limited capital resources. Accordingly, expected dividends yields
are currently zero. Historical cancellations and forfeitures of stock options
granted through December 31, 2004 have been insignificant. However, the
Company's operations and the nature of its business changed substantially during
2005 with the acquisition of businesses and the recruitment of a new Chief
Operating Officer in 2006. Accordingly, the Company considers more recent data
relating to employee turnover rates to be indicative of future vesting. Based on
available data, the Company has assumed that approximately 84% of outstanding
options will vest annually. Deferred compensation relating to options granted
through December 31, 2005 has been adjusted to reflect this assumption. No
options have been exercised to date. The Company will prospectively monitor
employee terminations, exercises and other factors that could affect its
expectations relating to the vesting of options in future periods. The Company
will adjust its assumptions relating to its expectations of future vesting and
the terms of options at such times that additional data indicates that changes
in these assumptions are necessary. Expected volatility is principally based on
the historical volatility of the Company's stock.

A summary of option activity for the six months ended June 30, 2006 is as
follows:

---------------------------------- ----------- ------------ ---------------
WEIGHTED-
WEIGHTED- AVERAGE
AVERAGE REMAINING
EXERCISE CONTRACTUAL
OPTIONS SHARES PRICE TERM
---------------------------------- ----------- ------------ ---------------
Outstanding at January 1, 2006 428,022 $21.09 7.2 years
---------------------------------- ----------- ------------ ---------------
Granted 99,575 $1.65 9.6 years
---------------------------------- ----------- ------------ ---------------
Exercised -- -- --
---------------------------------- ----------- ------------ ---------------
Forfeited or expired (59,506) $10.20 9.1 years
---------------------------------- ----------- ------------ ---------------
Outstanding at June 30, 2006 468,091 $18.34 7.5 years
---------------------------------- ----------- ------------ ---------------
Exercisable at June 30, 2006 319,886 $22.54 6.2 years
---------------------------------- ----------- ------------ ---------------

At June 30, 2006, the aggregate intrinsic value of options outstanding and
options exercisable, based on the June 30, 2006 split adjusted closing price of
the Company common stock ($.90 per share) amounted to $40,000 and $24,000,
respectively. In addition the table includes 156,670 fully vested and
non-forfeitable stock options outstanding that it issued to non-employees
through December 31, 2005. As of June 30, 2006, these options have a weighted
average exercise price of $17.39, weighted average remaining contractual term of
6.65 years and an aggregate intrinsic value $5,731,105. The Company did not

137

enter into any stock based compensation arrangements with non-employees during
the six months ended June 30, 2006. Stock based compensation expense to
non-employees amounted to $952,875 during the six months ended June 30, 2005,
including $472,500 relating to stock options and $480,375 relating to issuances
of common stock for services. All non-employee stock based compensation awards
were accounted for in accordance with the provisions of EITF 96-18.

A summary of the status of the Company's non-vested shares as of June 30, 2006,
and changes during the six months ended June 30, 2006 is presented below:

-------------------------------- --------------- ----------------------------
WEIGHTED-AVERAGE
NON-VESTED SHARES SHARES GRANT DATE FAIR VALUE
-------------------------------- --------------- ----------------------------
Non-vested at January 1, 2006 149,680 $8.12
-------------------------------- --------------- ----------------------------
Granted 99,575 $1.32
-------------------------------- --------------- ----------------------------
Vested (41,546) $3.80
-------------------------------- --------------- ----------------------------
Forfeited (59,506) $8.10
-------------------------------- --------------- ----------------------------
Non-vested at June 30, 2006 148,203 $4.42
-------------------------------- --------------- ----------------------------

The weighted-average grant-date fair value of options granted during the six
months ended June 30, 2006 amounted to $1.32 per share. The Company did not
grant any stock options to employees or non-employees during the six months
ended June 30, 2005. There have also not been any exercises of stock options to
date.

As of June 30, 2006, there was $1,108,922 of unrecognized compensation cost
related to non-vested share-based compensation arrangements including $1,014,724
for the fair value of stock options that the Company accounted for under APB 25
through December 31, 2005 and $94,198 for option granted during the six months
ended June 30, 2006 that that the Company is accounting for in accordance with
SFAS 123(R). These costs are expected to be recognized over a weighted-average
period of 3.3 years.

The total fair value of options vested during the six months ended June 30, 2006
amounted to $157,746. The Company did not modify any stock options granted to
employees or non employees under share based payment arrangements. In addition,
the Company did not capitalize the cost associated with stock based
compensation.

NOTE 19 - DISCONTINUED OPERATIONS/ SALE OF LUCIDLINE

During the three months ended March 31, 2006, the Company undertook a plan to
streamline its business. As a result, the Company redirected its focus on
providing enterprise level software and service solutions and is no longer
providing internet access, backup and retrieval services through LucidLine, a
former wholly-owned subsidiary acquired in 2005.

On April 18, 2006, the Company entered into a Stock Purchase Agreement with
Walnut Valley, Inc. pursuant to which the Company sold, effective April 1, 2006,
all of the outstanding shares of LucidLine, Inc. to Walnut Valley, Inc. for
$50,000 including $25,000 in cash and a $25,000 Promissory Note The loss on
discontinued operations for the six months ended June 30, 2006 and June 30, 2005
amounted to $104,962 and $850,874, respectively. During the six months ended
June 30, 2006, the Company recorded a $75,920 loss on the disposal of its
investment in LucidLine.

NOTE 20 - SUBSEQUENT EVENTS

RATIFICATION OF AGREEMENT WITH STUBBS, ALDERTON & MARKILES, LLP

On July 12, 2006, the Board of Directors ratified, approved and adopted the
indemnification and escrow agreements that the Company has entered into with its
legal counsel, Stubbs, Alderton & Markiles, LLP. Accordingly, cash that was
previously held in escrow for general working capital purposes, including the
repayment of outstanding obligations, under the Company's merger agreement with
Entelagent and the Series A Preferred Stock Financing documents was used to fund
general operating activities.

138

STOCK OPTION GRANT

On July 12, 2006, the Board of Directors approved the grant of 40,339
non-qualified stock options to 11 individuals. The strike price for these
options was $1.35, the closing price for the Company's common stock on the date
of grant, July 12, 2006.

ANNUAL MEETING OF STOCKHOLDERS

On July 20, 2006, the Company held its annual meeting of stockholders. The
stockholders approved the election of three directors: Mr. Robert Cross to serve
until the annual meeting of stockholders in 2007; Mr. Braden Waverley to serve
until the annual meeting of stockholders in 2008; and Mr. George Middlemas to
serve until the annual meeting of stockholders in 2009. Additionally, the
stockholders approved the three other proposals made as part of the 2006 proxy
statement including the adoption of the Patron Systems, Inc. 2006 Stock
Incentive Plan which provides for the grant of up to 5.6 million stock options
and the approval of an amendment to the Second Amended and Restated Certificate
of Incorporation, as amended, to provide for a 1-for-30 reverse stock split of
the Company's issued and outstanding common stock.

COMPLETION OF THE CREDITOR AND CLAIMANT LIABILITIES RESTRUCTURING PROGRAM

On July 21, 2006, the Board of Directors authorized the completion of the
Creditor and Claimant Liabilities Restructuring program. Under this program,
claims totaling $29,594,442 have been settled for 36,993,054 shares of Series
A-1 Preferred Stock which were automatically converted, on July 31, 2006, into
12,331,056 shares of the Company's common stock. The total of all claims settled
represents 93% of the eligible claims. Additionally, the Company has settled
claims totaling $382,584 for $12,140.

CONSOLIDATION OF SUBSIDIARIES

Effective September 19, 2006, we merged our wholly-owned subsidiaries
Entelagent, CSSI and PILEC into our company through the filing with the
Secretary of State of the States of Delaware and California, a Certificate of
Ownership and Merger merging Entelagent Software Corp., (a California
corporation), Complete Security Solutions, Inc., (a Delaware corporation) and
PILEC Disbursement Company, (a Delaware corporation) into Patron Systems, Inc.,
(a Delaware corporation).

SERIES B PREFERRED STOCK

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

The Series B Preferred is convertible, at the option of the holder, into shares
of the Company's common stock ("Conversion Shares") at an initial conversion
price ("Initial Conversion Price) which shall be the lesser of i) $2.40 per
share or ii) that price per share equal to the volume weighted average closing
price of the Company's common stock for the 10 trading days prior to the
original issuance date of such shares, based on the stated value of the Series B
Preferred, subject to adjustment for stock splits, dividends, recapitalizations,
reclassifications, payments made to Common Stock holders and other similar
events and for issuances of additional securities at prices more favorable than
the conversion price at the date of such issuance.

The Series B Preferred is mandatorily convertible at the then applicable
conversion price ("Conversion Price") into shares of the Company's common stock
at the then applicable Conversion Price on the date that: (i) there shall be an
effective registration statement covering the resale of the Conversion Shares,
(ii) the average closing price of the Company's common stock, for a period of 20
consecutive trading days is at least 250% of the then applicable Conversion
Price, and (iii) the average daily trading volume of the Company's common stock
for the same period is at least 8,334 shares.

PRIVATE PLACEMENT OF SERIES B PREFERRED STOCK AND WARRANTS

On August 29, 2006, the Company initiated a proposed $5,000,000 financing
transaction (the "Series B Preferred Financing") which would, for each $100,000
Unit purchased, result in the issuance of (i) 20 shares of Series B Preferred
Stock and (ii) warrants ("Investor Warrants") to purchase Company common stock
in an amount equal to 50% of the Conversion Shares. The minimum amount of the
Series B Preferred Financing is $3,000,000 ("Minimum Amount") and the maximum
amount is $5,000,000. Apex has agreed to purchase up to $1,000,000 which will
all be available to fund the Minimum Amount, provided however, in the event that
the Series B Preferred Financing is over-subscribed as to the Minimum Amount,
then for each $1.00 of such over subscription up to $2,000,000, the Apex funding
commitment will be increased by $0.333 to a maximum amount of $1,666,667.

The Investor Warrants have a term of 5 years and an exercise price of the
greater of i) $2.40 per share or ii) that price per share equal to the volume
weighted average closing price of the Company's common stock for the 10 trading
days prior to the Closing date. Each Investor Warrant will entitle the holder
thereof to purchase up to 50% of the Conversion Shares in Company's common stock
(the "Warrant Shares"), subject to anti-dilution provisions similar to those of
the conversion rights of the Series B Preferred. The Conversion Shares and the
Warrant Shares will also have piggyback registration rights.

In connection with the Series B Preferred Financing, the Company has retained
Laidlaw & Company (UK) Ltd. as its non-exclusive placement agent ("Series B
Preferred Placement Agent"). Laidlaw shall receive, in its role as Series B
Preferred Placement Agent, (i) a cash fee equal to 13% of all gross proceeds,
excluding the Apex proceeds, delivered at each Closing and (ii) a warrant (the
"Agent Warrants") to purchase the Company's common stock equal to 10% times the
sum of (x) the Conversion Shares to be issued upon conversion of the shares of
Series B Preferred issued at each Closing and (y) the number of shares of the
Company's common stock reserved for issuance upon the exercise of the Investor
Warrants issued at each closing. The Agent Warrants shall have a term of 5 years
and an exercise price of the greater of i) $2.40 per share or ii) that price per
share equal to the volume weighted average closing price of the Company's common
stock for the 10 trading days prior to the Closing date. Additionally, the
Company shall pay the Series B Preferred Placement Agent legal expenses not to
exceed $25,000.

On October 13, 2006, the Company consummated the first closing of the Series B
Preferred Financing with the closing of funds totaling $3,120,966, this amount
is comprised of $1,040,322 provided by Apex and $2,080,644 from parties made
available by the Series B Preferred Placement Agent. As part of this closing
cash fees equal to $280,484 were paid to the Series B Preferred Placement
Agent.

139

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

As reported on a current report filed with the Securities & Exchange Commission
on February 10, 2004, on January 21, 2004, we received notification from Grant
Thornton LLP ("Grant Thornton") of its decision to resign as our independent
public accountants.

Grant Thornton's reports on the our consolidated financial statements as of
September 30, 2002 and for the period from inception (April 30, 2002) through
September 30, 2002 and as of December 31, 2002 and for the period from inception
(April 30, 2002) through December 31, 2002 did not contain an adverse opinion or
disclaimer of opinion and were not qualified as to uncertainty, audit scope, or
accounting principles except such reports did contain an explanatory paragraph
related to the Company's ability to continue as a going concern. During the
fiscal period ended December 31, 2002 and through the date of Grant Thornton's
resignation, there were no disagreements with Grant Thornton on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreement, if not resolved to the satisfaction of
Grant Thornton, would have caused it to make reference to the subject matter of
the disagreement in connection with its reports. During the interim period
ending September 30, 2002, the fiscal period ended December 31, 2002 and the
subsequent interim periods preceding such resignation, there were no "reportable
events" (as that term is defined in Items 304(a)(l)(v) of Regulation S-K) except
as follows:

o During the course of reviewing the Company's quarterly unaudited
financial statements on Form 10-QSB in 2003, the Company had on
numerous occasions in 2003 been provided with confirmation letters
from an investor, InterCap Group LLC, committing to $50 million in
financing. In reliance on these documents and other discussions with
the investor about such financing, management continually believed
it had met the conditions precedent to funding and that the funding
would be imminent, having disclosed in its Form 10-QSB for the
quarter ending September 30, 2003 that the funding would take place
no later than January 5, 2004. In its letter of resignation, Grant
Thornton concluded based on background information related to the
investor it had independently obtained and later had been brought to
its attention by management through subsequent discussions, that
this background information had not been brought to Grant Thornton's
attention on a timely basis. In its resignation letter, Grant
Thornton indicated that it believed a representation made by the
Company that Hogan & Hartson LLP ("Hogan") had agreed to be
re-engaged as the Company's legal counsel upon payment of
outstanding fees was not factual based upon its own inquires made to
Hogan. In addition, Grant Thornton also indicated that the Company
had not been forthcoming with contact information requested from the
Company for an official reference regarding the background of the
investor. These factors, coupled with newly found information
concerning the investor's background, and the fact that the funding
had never occurred as promised by the investor, led Grant Thornton
to conclude that it could no longer rely on the Company's
representations and, as a result, Grant Thornton was unwilling to be
associated with the financial statements prepared by our management,
and accordingly, advised us that Grant Thornton was withdrawing its
audit reports and those audit reports could no longer be relied
upon.

Based on our subsequent discussion with a representative of Hogan, we believe
our statements made to Grant Thornton regarding our relationship with Hogan at
the time were true, and that there was either a miscommunication or
misunderstanding between Grant Thornton and Hogan. In addition, at the time of
Grant Thornton's resignation, we were unaware that Grant Thornton had not been
provided with the official reference information for the investor it had
requested.

Lastly, our disclosure of the InterCap funding was based on written and verbal
communication from InterCap and verified by knowledgeable third parties. We
believe the statements made in previous filings and press releases accurately
and completely described InterCap's commitments at the time of each disclosure.

Our Board did not recommend or approve the resignation of Grant Thornton.

140

We requested that Grant Thornton furnish us with a letter addressed to the
Securities and Exchange Commission ("SEC") stating whether or not it agreed with
our statements in our filings with the SEC. We do not have a record of receipt
of such a letter.

On October 27, 2004, the Board resolved to engage Marcum & Kliegman LLP as our
new independent accountants to audit our financial statements for the period
from April 30, 2002 through December 31, 2002, and for the fiscal years ended
December 31, 2003 and 2004. We engaged Marcum & Kliegman as our new independent
accountants as of November 15, 2004. During the two most recent fiscal years and
the interim periods preceding the engagement of Marcum & Kliegman, we have not
consulted with Marcum & Kliegman regarding any matters specified in Items
304(a)(2)(i) or (ii) of Regulation S-B.

141

PART II - INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:

EXHIBIT
EXHIBIT DOCUMENT NUMBER
---------------- -------

Certificate of Incorporation of Registrant, as amended........... 3.1
Bylaws of Registrant............................................. 3.2

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISCLOSURE.

The following table sets forth an itemization of all estimated expenses, all of
which we will pay, in connection with the issuance and distribution of the
securities being registered:

142

NATURE OF EXPENSE AMOUNT

SEC Registration fee ....... $ 5,521.63
Accounting fees and expenses 30,000.00*
Legal fees and expenses .... 20,000.00*
-----------
Total ........... $ 55,521.63
===========
* Estimated.

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.

The following unregistered securities have been sold by us during the last three
fiscal years pursuant to an exemption from the registration requirements of the
Securities Act under Section 4(2) of the Securities act as such securities were
issued to either accredited investors or investors who represented that they had
sufficient information about our company and business to make an informed
investment decision, and such securities were not issued pursuant to any general
solicitation or advertisement:

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

January 2003 192,308/Common Stock None Mercatus & Partners Ltd. $0.00(1)

March 2003 1,250/Common Stock None TJM Investment Management $150,000(2)

March 2003 4,167/Common Stock None Eugenia Valdes $500,000(3)

March 2003 10,334/Common Stock None Paul Harary $0.00(4)

March 2003 13,334/Common Stock None LLB Ltd. $0.00(4)

March 2003 11,667/Common Stock None Maria Caporicci $0.00(4)

March 2003 3,000/Common Stock None Paris McKenzie $0.00(4)

----------
(1) On January 3, 2003, we entered into another loan agreement with Mercatus
for a collateralized loan of $1,500,000. As collateral for this loan, we
placed in escrow 192,308 shares of common stock. For failure to provide
funding pursuant to the terms of the collateral loan agreement and
promissory note and for breach of contract, the Company sent notification
to Mercatus in March 2003 terminating the agreements. On October 28, 2004,
the shares were cancelled and retired by our transfer agent in accordance
with a letter from Mercatus' attorney stating that the certificates were
lost and unrecoverable.

(2) On March 31, 2003, we issued 1,250 shares of common stock to TJM
Investment Management in a Private Placement transaction.

(3) On March 31, 2003, we issued 4,167 shares of common stock to Eugenia
Valdes in a Private Placement transaction.

(4) On March 13, 2003, we replaced the shares to the five stockholders who
pledged shares under the Accommodation Agreements for a total of 40,002
shares of Patron common stock. The five stockholders are Paul Harary, LLB
Ltd., Maria Caporicci, Paris McKenzie and DGC Ltd., Inc. These shares had
an aggregate value of $3,708,000.

143

March 2003 1,667/Common Stock None DGC Ltd., Inc. $0.00(4)

March 2003 33,334/Common Stock None Sherleigh Associates, Inc. Profit $2,000,000(5)
Sharing Plan

April 2003 4,167/Common Stock None Robert O'Neel III $250,000(6)

March 2004 10,811/Common Stock None Anne F Bivona $100,000(7)

March 2004 13,017/Common Stock None Victor Schwartz $100,000(8)

August 2004 1,667/Common Stock None Carmine Fiore $50,000(9)

August 2004 5,000/Common Stock None Seabatical LLC $150,000(10)

August 2004 1,667/Common Stock None Charles F. Rimicci $50,000(11)

August 2004 1,667/Common Stock None John V. Bivona $50,000(12)

August 2004 1,667/Common Stock None Mark Morgenstern $50,000(13)

August 2004 1,167/Common Stock None Alvin I. Siegel $35,000(14)

August 2004 500/Common Stock None Michael Wirth $15,000(15)

----------
(5) On March 20 and March 31, 2003, we issued an aggregate of 33,334 shares of
common stock to Sherleigh Associates, Inc. Profit Sharing Plan in Private
Placement transactions of 16,667 shares each.

(6) On April 4, 2003, we issued 4,167 shares of common stock to Robert O'Neel
III in a Private Placement transaction.

(7) In March of 2004, we received $100,000 in a Private Placement transaction
from John V. Bivona. These shares were later issued to Anne F. Bivona, at
Mr. Bivona's direction, on May 21, 2004 in favor of this transaction.

(8) In March of 2004, we received $100,000 in a Private Placement transaction
from Victor Schwartz. These shares were later issued to Mr. Schwartz on
May 21, 2004 in favor of this transaction.

(9) On August 24, 2004, we received $50,000 in a Private Placement transaction
from Carmine Fiore. These shares were later issued to Mr. Fiore on
December 14, 2004 in favor of this transaction.

(10) On August 24, 2004, we received $150,000 in a Private Placement
transaction from Seabatical LLC. These shares were later issued to
Seabatical LLC on December 14, 2004 in favor of this transaction.

(11) On August 24, 2004, we received $50,000 in a Private Placement transaction
from Charles F. Rimicci. These shares were later issued to Mr. Rimicci on
December 14, 2004 in favor of this transaction.

(12) On August 24, 2004, we received $50,000 in a Private Placement transaction
from John V Bivona. These shares were later issued to Mr. Bivona on
December 14, 2004 in favor of this transaction.

(13) On August 30, 2004, we received $50,000 in a Private Placement transaction
from Mark Morgenstern. These shares were later issued to Mr. Morgenstern
on December 14, 2004 in favor of this transaction.

(14) On August 25, 2004, we received $50,000 in a Private Placement transaction
from Arthur Wirth. Under the direction of Mr. Wirth, we later issued these
shares, on December 14 and 15, 2004, respectively, to Alvin I Siegel and
Michael Wirth.

(15) See footnote 14 immediately above.

144

August/ 3,334/Common Stock None Victor Schwartz $100,000(16)
September 2004

September 2004 1,334/Common Stock None Alvin I Siegel $0.00(17)

September 2004 6,667/Common Stock None Joseph K Lemel $0.00(18)

December 2004 16,667/Common Stock None Frank G. Mazzola $0.00(19)

February 2005 146,673/Common Stock None 15 Accredited Stockholders of $0.00(20)
LucidLine, Inc.

February 2005 250,023/Common Stock None 42 Stockholders of Complete $0.00(21)
Security Solutions, Inc.

March 2005 100,029/Common Stock None 53 Stockholders of Entelagent $0.00(22)
Software Corp.

April 2005 29,684/Common Stock None FIBA Consultants Ltd. $0.00(23)

April 2005 33,334/Common Stock None Frank G. Mazzola $0.00(24)

October 2005 13,334/Common Stock None Richard Rozzi $0.00(25)

January 2006 1,875,000/Series A-1 Preferred None Patrick J. Allin $1,500,000 in
Stock cancelled debt(26)

----------
(16) On August 25 and September 14, 2004, we received an aggregate of $100,000
in Private Placement transactions from Victor Schwartz. These shares were
later issued to Mr. Schwartz on December 14, 2004 in favor of this
transaction.

(17) On September 13, 2004, we issued 1,334 shares of common stock in
consideration for services provided to us by Alvin I Siegel with an
aggregate value of $40,000.

(18) On September 13, 2004, we issued 6,667 shares of common stock in
consideration for services provided to us by Joseph K Lemel with an
aggregate value of $200,000.

(19) On December 14, 2004, we issued 16,667 shares of common stock in
consideration for services provided to us by Frank G Mazzola with an
aggregate value of $210,000.

(20) On February 25, 2005, we agreed to issue 146,673 shares of common stock to
the stockholders of our subsidiary, LucidLine, Inc. in consideration of
our merger with LucidLine, Inc. These shares had an aggregate value of
$3,740,000. We issued these shares to 15 stockholders, each of whom was
accredited.

(21) On February 25, 2005, we agreed to issue 250,023 shares of common stock to
the stockholders of Complete Security Solutions, Inc. in consideration of
our merger with Complete Security Solutions, Inc. These shares had an
aggregate value of $6,375,000. We issued these shares to 42 stockholders,
35 of whom were accredited.

(22) On March 30, 2005, we agreed to issue 100,029 shares of common stock to
the stockholders of Entelagent Software Corp. in consideration of our
merger with Entelagent Software Corp. These shares had an aggregate value
of $2,550,000. We issued these shares to 53 stockholders, 50 of whom were
accredited.

(23) On May 16, 2005, we issued 29,684 shares of common stock in consideration
for services provided to us by FIBA Consultants Ltd. with an aggregate
value of $406,205.

(24) On April 20, 2005 we issued 33,334 shares of common stock in consideration
for services provided to us by Frank G Mazzola with an aggregate value of
$949,000.

(25) On October 28, 2005, we issued 13,334 shares of common stock in
consideration for services provided to us by Richard Rozzi with an
aggregate value of $35,600.

(26) On January 1, 2006, we issued 1,875,000 shares of Series A-1 Preferred
Stock in consideration of $1,500,000 in outstanding obligations owed to
Patrick J. Allin. Each share of Series A-1 Preferred Stock was issued in
consideration of the cancellation of $0.80 of debt.

145

January 2006 625,000/Series A-1 Preferred None The Allin Dynastic Trust $500,000 in
Stock cancelled debt(27)

February 2006 1,777,261/Series A-1 Preferred None Richard Linting $1,421,809 in
Stock cancelled debt(28)

March 2006 893/Series A Preferred None 56 Accredited Investors in $4,465,501(29)
Stock Series A Preferred Stock
Financing

March 2006 29,144,926/Series A-1 Preferred None 70 Accredited Creditors and $23,315,940 in
Stock Claimants in the Company's cancelled debt(30)
Debt Restructuring

April 2006 1,591,003/Series A-1 Preferred None 3 Accredited Creditors and $1,272,802 in
Stock Claimants in the Company's cancelled debt(31)
Debt Restructuring

April 2006 71/Series A Preferred None Apex Investment Fund V, L.P. $355,000(32)
Stock

June 2006 1,346,575/Series A-1 Preferred None Arco van Nieuwland $1,077,260 in
Stock cancelled debt(33)

June 2006 31,250/Series A-1 Preferred None John V. Bivona $25,000 in
Stock cancelled debt(34)

June 2006 251,175/Common Stock None 9 Investors $0.00(35)

July 2006 602,039/Series A-1 Preferred None 3 Accredited Creditors and $481,631 in
Stock Claimants in the Company's cancelled debt(36)
Debt Restructuring

October 2006 624.2/Series B Preferred Stock None 46 Accredited Investors $3,120,966(37)
in Series A Preferred
Stock Financing

----------
(27) On January 1, 2006, we issued 625,000 shares of Series A-1 Preferred Stock
in consideration of $500,000 in outstanding obligations owed to The Allin
Dynastic Trust. Each share of Series A-1 Preferred Stock was issued in
consideration of the cancellation of $0.80 of debt.

(28) On February 14, 2006, we issued 1,777,261 shares of Series A-1 Preferred
Stock in consideration of $1,421,809 in outstanding obligations owed to
Richard Linting. Each share of Series A-1 Preferred Stock was issued in
consideration of the cancellation of $0.80 of debt.

(29) On March 27, 2006, we issued 893 shares of Series A Preferred Stock in
consideration for $4,285,501 of cash and $180,000 financing charge.

(30) On March 27, 2006, we issued 29,142,819 shares of Series A-1 Preferred
Stock in consideration for $23,314,253 of debt cancellation and claims
settlement under the Creditor and Claimant Liabilities Restructuring. Each
share of Series A-1 Preferred Stock was issued in consideration of the
cancellation of $0.80 of debt.

(31) On April 30, 2006, we issued 1,591,003 shares of Series A-1 Preferred
Stock in consideration for $1,272,802 of debt cancellation and claims
settlement under the Creditor and Claimant Liabilities Restructuring. Each
share of Series A-1 Preferred Stock was issued in consideration of the
cancellation of $0.80 of debt.

(32) On April 3, 2006, we issued 71 shares of Series A Preferred Stock in
consideration for $355,000 from Apex Investment Fund V, L.P.

(33) On June 3, 2006, we issued 1,346,575 shares of Series A-1 Preferred Stock
in consideration for $1,077,260 of debt cancellation and claims settlement
under the Creditor and Claimant Liabilities Restructuring. Each share of
Series A-1 Preferred Stock was issued in consideration of the cancellation
of $0.80 of debt.

(34) On June 29, 2006, we issued 31,250 shares of Series A-1 Preferred Stock in
consideration for $25,000 of debt cancellation and claims settlement under
the Creditor and Claimant Liabilities Restructuring. Each share of Series
A-1 Preferred Stock was issued in consideration of the cancellation of
$0.80 of debt.

(35) On June 30, 2006, we issued 251,175 shares of Common Stock to 9 investors
as an anti-dilution adjustment to their share purchases made directly from
the Company during the March 2004 and August/September 2004 periods.

(36) On July 18, 2006, we issued 602,039 shares of Series A-1 Preferred Stock
to three parties in consideration for $481,631 of debt cancellation and
claims settlement under the Creditor and Claimant Liabilities
Restructuring. Each share of Series A-1 Preferred Stock was issued in
consideration of the cancellation of $0.80 of debt.

(37) On October 13, 2006, we issued 624.2 shares of Series B Preferred Stock in
consideration for $3,120,966.

146

The following unregistered derivative securities (warrants) have been sold by us
during the last three fiscal years pursuant to an exemption from the
registration requirements of the Securities Act under Section 4(2) of the
Securities act as such derivative securities were issued to either accredited
investors or investors who represented that they had sufficient information
about our company and business to make an informed investment decision, and such
derivative securities were not issued pursuant to any general solicitation or
advertisement:

February 2005 75,001/Common Stock Purchase None 3 Accredited Series A Preferred $0.00(37)
Warrants Stockholders of Complete
Security Solutions, Inc.

February 2005 58,348/Common Stock Purchase None 33 Accredited Investors in $0.00(38)
Warrants Interim Bridge Financing I

February 2005 21,681/Common Stock Purchase None Laidlaw & Company (UK) Ltd. $0.00(39)
Warrants

June 2005 1,342/Common Stock Purchase None Stubbs, Alderton & Markiles LLP $0.00(40)
Warrants

June 2005 42,388/Common Stock Purchase None 7 Accredited Investors in $0.00(41)
Warrants Interim Bridge Financing II

June 2005 4,243/Common Stock Purchase None Laidlaw & Company (UK) Ltd. $0.00(42)
Warrants

June 2005 58,348/Common Stock Purchase None 33 Accredited Investors in $0.00(43)
Warrants Interim Bridge Financing I

July 2005 30,384/Common Stock Purchase None 2 Accredited Investors in $0.00(44)
Warrants Interim Bridge Financing III

----------
(38) On February 25, 2005, we agreed to issue warrants to purchase up to 75,001
shares of our common stock to the Series A Preferred stockholders of
Complete Security Solutions, Inc. in consideration of our merger with
Complete Security Solutions, Inc. The warrants have a term of 5 years and
an exercise price of $21.00 per share. The warrants had an aggregate value
of $1,912,500.

(39) On February 28. 2005, we issued warrants to purchase up to 58,348 shares
of our common stock to 33 accredited investors who invested in our Interim
Bridge Financing I. The warrants have a term of 5 years and an exercise
price of $21.00 per share. The warrants had an aggregate value of
$1,043,860.

(40) On February 28, 2005, we issued warrants to purchase up to 21,681 shares
of our common stock to Laidlaw & Company (UK) Ltd. in connection with
services rendered to us as the placement agent for Interim Bridge
Financing I and financial services related to the acquisitions of
Entelagent, CSSI and LucidLine. The warrants have a term of 5 years and an
exercise price of $21.00 per share. The warrants had an aggregate value of
$552,500.

(41) On June 1, 2005, we agreed to issue warrants to purchase up to 1,342
shares of our common stock to Stubbs Alderton & Markiles, LLP in
connection to services rendered to us as legal counsel. The warrants have
a term of 5 years and an exercise price of $15.30 per share. The warrants
had an aggregate value of $18,750.

(42) Beginning on June 6, 2005, we agreed to issue warrants to purchase up to
42,388 shares of our common stock to 7 accredited investors who invested
in our Interim Bridge Financing II. The warrants have a term of 5 years
and an exercise price of $18.00 per share. The warrants had an aggregate
value of $532,723.

(43) On June 30, 2005, we issued warrants to purchase up to 4,243 shares of our
common stock to Laidlaw & Company (UK) Ltd. in connection with services
rendered to us as placement agent for Interim Bridge Financing II. The
warrants have a term of 5 years and an exercise price of $18.00 per share.
The warrants had an aggregate value of $80,867.

(44) On June 29, 2005, we issued warrants to purchase up to 58,348 shares of
our common stock to 33 accredited investors who invested in our Interim
Bridge Financing I. The warrants have a term of 5 years and an exercise
price of $21.00 per share. The warrants had an aggregate value of
$822,500.

(45) On July 1, 2005, we issued warrants to purchase up to 30,384 shares of our
common stock to 2 accredited investors who invested in our Interim Bridge
Financing III. The warrants have a term of 5 years and an exercise price
of $18.00 per share. The warrants had an aggregate value of $415,891.

147

July 2005 1,667/Common Stock Purchase None Advanced Equities Venture $0.00(45)
Warrants Partners I, L.P.

August 2005 7,500/Common Stock Purchase None Apex Investment Fund V, L.P. $0.00(46)
Warrants

September 2005 20,000/Common Stock Purchase None Apex Investment Fund V, L.P. $0.00(47)
Warrants

October 2005 42,388/Common Stock Purchase None 7 Accredited Investors in $0.00(48)
Warrants Interim Bridge Financing II

October 2005 6,000/Common Stock Purchase None Apex Investment Fund V, L.P. $0.00(49)
Warrants

October 2005 1,250/Common Stock Purchase None Apex Investment Fund V, L.P. $0.00(50)
Warrants

October 2005 30,384/Common Stock Purchase None 2 Accredited Investors in $0.00(51)
Warrants Interim Bridge Financing III

October 2005 6,417/Common Stock Purchase None Apex Investment Fund V, L.P. $0.00(52)
Warrants

November 2005 3,750/Common Stock Purchase None Apex Investment Fund V, L.P. $0.00(53)
Warrants

----------
(46) On July 29, 2005, we issued warrants to purchase up to 1,667 shares of our
common stock to Advanced Equities Investment Fund V, L.P. who invested in
our Interim Bridge Financing III. The warrants have a term of 5 years and
an exercise price of $18.00 per share. The warrants had an aggregate value
of $22,481.

(47) On August 19, 2005, we issued warrants to purchase up to 7,500 shares of
our common stock to Apex Investment Fund V, L.P. who invested in our
Interim Bridge Financing III. The warrants have a term of 5 years and an
exercise price of $18.00 per share. The warrants had an aggregate value of
$55,263.

(48) On September 30, 2005, we issued warrants to purchase up to 20,000 shares
of our common stock to Apex Investment Fund V, L.P. who invested in our
Interim Bridge Financing III. The warrants have a term of 5 years and an
exercise price of $18.00 per share. The warrants had an aggregate value of
$57,143.

(49) Beginning on October 4, 2005, we agreed to issue warrants to purchase up
to 42,388 shares of our common stock to 7 accredited investors who
invested in our Interim Bridge Financing II. The warrants have a term of 5
years and an exercise price of $18.00 per share. The warrants had an
aggregate value of $65,388.

(50) On October 16, 2005, we issued warrants to purchase up to 6,000 shares of
our common stock to Apex Investment Fund V, L.P. who invested in our
Interim Bridge Financing III. The warrants have a term of 5 years and an
exercise price of $18.00 per share. The warrants had an aggregate value of
$9,018.

(51) On October 24, 2005, we issued warrants to purchase up to 1,250 shares of
our common stock to Apex Investment Fund V, L.P. who invested in our
Interim Bridge Financing III. The warrants have a term of 5 years and an
exercise price of $18.00 per share. The warrants had an aggregate value of
$1,879.

(52) On October 29, 2005, we issued warrants to purchase up to 30,384 shares of
our common stock to 2 accredited investors who invested in our Interim
Bridge Financing III. The warrants have a term of 5 years and an exercise
price of $18.00 per share. The warrants had an aggregate value of $5,139.

(53) On October 31, 2005, we issued warrants to purchase up to 6,417 shares of
our common stock to Apex Investment Fund V, L.P. who invested in our
Interim Bridge Financing III. The warrants have a term of 5 years and an
exercise price of $18.00 per share. The warrants had an aggregate value of
$9,644.

(54) On November 16, 2005, we issued warrants to purchase up to 3,750 shares of
our common stock to Apex Investment Fund V, L.P. who invested in our
Interim Bridge Financing III. The warrants have a term of 5 years and an
exercise price of $18.00 per share. The warrants had an aggregate value of
$4,431.

148

November 2005 2,500/Common Stock Purchase None Apex Investment Fund V, L.P. $0.00(54)
Warrants

November 2005 1,667/Common Stock Purchase None Advanced Equities Venture $0.00(55)
Warrants Partners I, L.P.

November 2005 3,500/Common Stock Purchase None Apex Investment Fund V, L.P. $0.00(56)
Warrants

December 2005 3,817/Common Stock Purchase None Apex Investment Fund V, L.P. $0.00(57)
Warrants

December 2005 7,500/Common Stock Purchase None Apex Investment Fund V, L.P. $0.00(58)
Warrants

January 2006 20,000/Common Stock Purchase None Apex Investment Fund V, L.P. $0.00(59)
Warrants

February 2006 6,000/Common Stock Purchase None Apex Investment Fund V, L.P. $0.00(60)
Warrants

February 2006 1,250/Common Stock Purchase None Apex Investment Fund V, L.P. $0.00(61)
Warrants

March 2006 6,417/Common Stock Purchase None Apex Investment Fund V, L.P. $0.00(62)
Warrants

----------
(55) On November 21, 2005, we issued warrants to purchase up to 2,500 shares of
our common stock to Apex Investment Fund V, L.P. who invested in our
Interim Bridge Financing III. The warrants have a term of 5 years and an
exercise price of $18.00 per share. The warrants had an aggregate value of
$2,954.

(56) On November 26, 2005, we issued warrants to purchase up to 1,667 shares of
our common stock to Advanced Equities Investment Fund V, L.P. who invested
in our Interim Bridge Financing III. The warrants have a term of 5 years
and an exercise price of $18.00 per share. The warrants had an aggregate
value of $2,009.

(57) On November 29, 2005, we issued warrants to purchase up to 3,500 shares of
our common stock to Apex Investment Fund V, L.P. who invested in our
Interim Bridge Financing III. The warrants have a term of 5 years and an
exercise price of $18.00 per share. The warrants had an aggregate value of
$4,135.

(58) On December 8, 2005, we issued warrants to purchase up to 3.817 shares of
our common stock to Apex Investment Fund V, L.P. who invested in our
Interim Bridge Financing III. The warrants have a term of 5 years and an
exercise price of $18.00 per share. The warrants had an aggregate value of
$4,757.

(59) On December 17, 2005, we issued warrants to purchase up to 7,500 shares of
our common stock to Apex Investment Fund V, L.P. who invested in our
Interim Bridge Financing III. The warrants have a term of 5 years and an
exercise price of $18.00 per share. The warrants had an aggregate value of
$9,544.

(60) On January 28, 2006, we issued warrants to purchase up to 20,000 shares of
our common stock to Apex Investment Fund V, L.P. who invested in our
Interim Bridge Financing III. The warrants have a term of 5 years and an
exercise price of $18.00 per share. The warrants had an aggregate value of
$20,316.

(61) On February 13, 2006, we issued warrants to purchase up to 6,000 shares of
our common stock to Apex Investment Fund V, L.P. who invested in our
Interim Bridge Financing III. The warrants have a term of 5 years and an
exercise price of $18.00 per share. The warrants had an aggregate value of
$6,634.

(62) On February 21, 2006, we issued warrants to purchase up to 1,250 shares of
our common stock to Apex Investment Fund V, L.P. who invested in our
Interim Bridge Financing III. The warrants have a term of 5 years and an
exercise price of $18.00 per share. The warrants had an aggregate value of
$1,382.

(63) On March 1, 2006, we issued warrants to purchase up to 6,417 shares of our
common stock to Apex Investment Fund V, L.P. who invested in our Interim
Bridge Financing III. The warrants have a term of 5 years and an exercise
price of $18.00 per share. The warrants had an aggregate value of $10,029.

149

March 2006 3,750/Common Stock Purchase None Apex Investment Fund V, L.P. $0.00(63)
Warrants

March 2006 2,500/Common Stock Purchase None Apex Investment Fund V, L.P. $0.00(64)
Warrants

March 2006 620,233/Common Stock Purchase None 56 Accredited Investors $0.00(65)
Warrants purchasing Series A Preferred
Stock

March 2006 198,375/Common Stock Purchase None Laidlaw & Company (UK) Ltd. $0.00(66)
Warrants

April 2006 49,306/Common Stock Purchase None Apex Investment Fund V, L.P. $0.00(67)
Warrants

October 2006 694,011/Common Stock Purchase None 46 Accredited Investors $0.00(69)
Warrants purchasing Series B
Preferred Stock

October 2006 208,198/Common Stock Purchase None Laidlaw & Company (UK) Ltd. $0.00(70)
Warrants

----------
(64) On March 17, 2006, we issued warrants to purchase up to 3,750 shares of
our common stock to Apex Investment Fund V, L.P. who invested in our
Interim Bridge Financing III. The warrants have a term of 5 years and an
exercise price of $18.00 per share. The warrants had an aggregate value of
$5,861.

(65) On March 22, 2006, we issued warrants to purchase up to 2,500 shares of
our common stock to Apex Investment Fund V, L.P. who invested in our
Interim Bridge Financing III. The warrants have a term of 5 years and an
exercise price of $18.00 per share. The warrants had an aggregate value of
$3,907.

(66) On March 27, 2006, we issued warrants to purchase up to 620,233 shares of
our common stock to 56 accredited investors in conjunction with the
investment by these 56 accredited investors in our Series A Preferred
Stock private placement. The warrants have a term of 5 years and an
exercise price of $3.00 per share. The warrants had an aggregate value of
$857,908.

(67) On March 27, 2006, we issued warrants to purchase up to 198,375 shares of
our common stock to Laidlaw & Company (UK) Ltd. in connection with
services rendered to us as placement agent for the Series A Preferred
Stock private placement. The warrants have a term of 5 years and an
exercise price of $3.00 per share. The warrants had an aggregate value of
$274,393.

(68) On April 3, 2006, we issued warrants to purchase up to 49,306 shares of
our common stock to Apex Investment Fund V, L.P. in conjunction with the
investment by Apex Investement Fund V, L.P. in our Series A Preferred
Stock private placement. The warrants have a term of 5 years and an
exercise price of $3.00 per share. The warrants had an aggregate value of
$95,102.

(69) On October 13, 2006, we issued warrants to purchase up to 691,022 shares
of our common stock to 46 accredited investors in conjunction with the
investment by these 46 accredited investors in our Series B Preferred
Stock private placement. The warrants have a term of 5 years and an
exercise price of $2.40 per share. The warrants had an aggregate value of
$1,167,308.

(70) On October 13, 2006, we issued warrants to purchase up to 208,198 shares
of our common stock to Laidlaw & Company (UK) Ltd. in connection with
services rendered to us as placement agent for the Series B Preferred
Stock private placement. The warrants have a term of 5 years and an
exercise price of $2.40 per share. The warrants had an aggregate value of
$350,184.

150

ITEM 27. EXHIBITS.

See attached Exhibit Index.

ITEM 28. UNDERTAKINGS.

The undersigned registrant hereby undertakes to:

(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:

(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement; and notwithstanding the forgoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospects
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in the volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement; and

(iii) Include any additional or changed material information on the plan
of distribution

(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time as the initial bona
fide offering.

(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.

Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.

In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.

Each prospectus filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be
deemed to be part of and included in this registration statement as of the date
it is first used after effectiveness, provided, however, that no statement made
in this registration statement or prospectus that is part of this registration
statement or made in a document incorporated or deemed incorporated by reference
into this registration statement or prospectus that is part of this registration
statement will, as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of this registration statement or made in
any such document immediately prior to such date of first use.

151

SIGNATURES

In accordance with the requirement of the Securities Act of 1933, the
registrant certifies that it has reasonable ground to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
New York, State of New York on October 17, 2006.

(Registrant) PATRON SYSTEMS, INC.

By (Signatures and Title) /S/ ROBERT CROSS
-------------------------------------------------
Chief Executive Officer

In accordance with the requirement of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated:

SIGNATURE TITLE DATE
--------- ----- ----

/S/ ROBERT CROSS Chief Executive Officer & October 17, 2006
------------------------------ Director
Robert Cross

/S/ BRADEN WAVERLEY Chief Operating Officer & October 17, 2006
------------------------------ Director
Braden Waverley

/S/ MARTIN T. JOHNSON Chief Financial Officer October 17, 2006
------------------------------
Martin T. Johnson

/S/ HEIDI B. NEWTON Vice President-Finance and October 17, 2006
------------------------------ Administration
Heidi B. Newton (Principal Accounting
Officer)

/S/ GEORGE MIDDLEMAS Director October 17, 2006
------------------------------
George Middlemas

152

EXHIBIT INDEX

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

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

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

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

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

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

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

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

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

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

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

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

3.1.3 Certificate of Designation of Preferences, Rights and Limitations of
Series B Convertible Preferred Stock of Patron Systems, Inc. dated as
of October 11, 2006. Incorporated by reference to Exhibit 3.1 to the
Current Report on Form 8-K filed on October 17, 2006.

5.1 Opinion of Stubbs Alderton & Markiles, LLP.

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

153

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

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

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

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

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

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

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

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

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

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

10.12 Executive Employment Agreement dated February 28, 2005, between Brett
Newbold and Patron Systems, Inc. Incorporated by reference to Exhibit
10.12 to the Annual Report on Form 10-KSB filed April 3, 2006.

10.13 Executive Employment Agreement dated February 28, 2005, between J.
William Hammon and Patron Systems, Inc. Incorporated by reference to
Exhibit 10.13 to the Annual Report on Form 10-KSB filed April 3, 2006.

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

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

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EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
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10.16 Settlement Agreement and Mutual Release dated June 2, 2005, among
Patrick J. Allin, The Allin Dynastic Trust and Patron Systems, Inc.
Incorporated by reference to Exhibit 10.16 to the Annual Report on Form
10-KSB filed April 3, 2006.

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

10.18 Registration Rights Agreement among Patron Systems, Inc. and each of
the investors in Interim Bridge Financing II. Incorporated by reference
to Exhibit 10.18 to the Annual Report on Form 10-KSB filed April 3,
2006.

10.19 Form of 10% Junior Convertible Promissory Note issued by Patron
Systems, Inc. in favor of investors in Interim Bridge Financing II.
Incorporated by reference to Exhibit 10.19 to the Annual Report on Form
10-KSB filed April 3, 2006.

10.20 Form of Common Stock Purchase Warrant issued by Patron Systems, Inc. in
favor of the Placement Agent for, and investors in, Interim Bridge
Financing II. Incorporated by reference to Exhibit 10.20 to the Annual
Report on Form 10-KSB filed April 3, 2006.

10.21 Option Agreement dated July 1, 2005, between Robert Cross and Patron
Systems, Inc. Incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-QSB filed August 22, 2005. Incorporated by
reference to Exhibit 10.21 to the Annual Report on Form 10-KSB filed
April 3, 2006.

10.22 Employment Agreement dated July 1, 2005, between Robert Cross and
Patron Systems, Inc. Incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-QSB filed August 22, 2005. Incorporated by
reference to Exhibit 10.22 to the Annual Report on Form 10-KSB filed
April 3, 2006.

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

10.24 Registration Rights Agreement among Patron Systems, Inc. and each of
the investors in Interim Bridge Financing III. Incorporated by
reference to Exhibit 10.24 to the Annual Report on Form 10-KSB filed
April 3, 2006.

10.25 Form of 10% Junior Convertible Promissory Note issued by Patron
Systems, Inc. in favor of each of the investors in Interim Bridge
Financing III. Incorporated by reference to Exhibit 10.25 to the Annual
Report on Form 10-KSB filed April 3, 2006.

10.26 Form of Common Stock Purchase Warrant issued by Patron Systems, Inc. in
favor of each of the investors in, Interim Bridge Financing III.
Incorporated by reference to Exhibit 10.26 to the Annual Report on Form
10-KSB filed April 3, 2006.

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

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

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

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

155

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

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

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

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

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

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

10.37 Form of Subscription Agreement between Patron Systems, Inc.
and0each0of7the purchasers of shares of the Series B Preferred Stock of
Patron Systems, Inc. Incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed on October 17, 2006.

10.38 Form of Common Stock Purchase Warrant issued by Patron Systems, Inc. in
favor of each of the placement agent and the purchasers of shares of
the Series B Preferred Stock of Patron Systems, Inc. Incorporated by
reference to Exhibit 10.2 to the Current Report on Form 8-K filed on
October 17, 2006.

10.39 Registration Rights Agreement dated October 12, 2006, among Patron
Systems, Inc., Laidlaw & Company (UK) Ltd. and each of the purchasers
of shares of the Series B Preferred Stock of Patron Systems, Inc.
Incorporated by reference to Exhibit 10.3 to the Current Report on Form
8-K filed on October 17, 2006.

23.1 Consent of Marcum & Kliegman, LLP

23.2 Consent of Stubbs Alderton & Markiles, LLP (included in Exhibit 5.1)

24.1 Power of Attorney (included as part of the signature page of this
Registration Statement on Form SB-2).

99.1 Certificate of Ownership and Merger merging Entelagent Software
Corp.,.(a California corporation), Complete Security Solutions, Inc.,
(a Delaware corporation) and PILEC Disbursement Company, (a Delaware
corporation) into Patron Systems, Inc., (a Delaware corporation).

156