- Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2010

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

For the transition period from to

Commission file number 0-21384

Allied Security Innovations Inc.

(Exact name of registrant as specified in its charter)

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

1709 Route 34

Farmingdale, New Jersey 07727

Telephone Number (732) 751-1115

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

Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No ¨

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

Large accelerated filer ¨	Accelerated filer ¨	Non-accelerated filer	Smaller reporting company þ
		(Do not check if a smaller reporting company)

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

Yes ¨ No þ

As of May 10, 2010 there were outstanding 117,775,914 shares of the Registrant’s common stock, par value $0.01 per share.

Allied Security Innovations, Inc.

INDEX

		Page No.
PART I. FINANCIAL INFORMATION

Item 1	Condensed Financial Statements:

	Consolidated Balance Sheets
	March 31, 2010 (unaudited) and December 31, 2009	3

	Consolidated Statements of Income
	(unaudited) for the three months ended March 31, 2010 and 2009	4

	Consolidated Statements of Cash Flows
	(unaudited) for the three months ended March 31, 2010 and 2009	5

	Notes to Condensed Consolidated Financial Statements (Unaudited)	7

Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3	Quantitative and Qualitative Disclosures about Market Risk	19

Item 4	Controls and Procedures	19

PART II. OTHER INFORMATION

Item 1	Legal Proceedings	20

Item 1A	Risk Factors	20

Item 3	Defaults Upon Senior Securities	20

Item 4.	Submission of Matters to a Vote of Security Holders	20

Item 5	Other Information	20

Item 6	Exhibits	20

	Signatures and Certifications	21

ALLIED SECURITY INNOVATIONS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
	2010			2009
	(Unaudited)
ASSETS

Current Assets:
Cash and cash equivalents	$	69,848		$	52,667
Accounts receivable, net		418,866			292,453
Inventory		104,381			117,621
Other Current Assets		1,500			3,375

Total Current Assets		594,595			466,116

Property and equipment, net		197,231			209,485

Other Assets:
Deposits		11,914			9,421
Intangible assets, net		31,999			33,541

Total Other Assets		43,913			42,962

TOTAL ASSETS	$	835,739		$	718,563

LIABILITIES AND STOCKHOLDERS' DEFICIT

LIABILITIES
Current Liabilities:
Accounts payable	$	415,681		$	319,651
Accrued expenses		-			160,312
Accrued payroll		19,681			61,748
Accrued interest		1,730,867			1,552,590
Deferred income		63,247			52,182
Convertible debentures current portion		6,554,471			25,279
Notes payable		4,100,000			5,000
Derivative liabilities		17,582,072			18,888,603

Total Current Liabilities		30,466,019			21,065,365

Long Term Liabilities:

Note payable		-			4,000,000
Convertible debentures, net of current portion		-			13,997,780
Total Long Term Liabilities		-			17,997,780

Total Liabilities		30,466,019			39,063,145

STOCKHOLDERS' DEFICIT
Preferred stock, $.001 par value: 1,000,000 shares
authorized ; 20,000 issued and outstanding shares		-			-
Common stock, par value $.001; authorized 9,999,000,000 shares;
82,910,275 and 23,176,249 issued and outstanding at
March 31, 2010 and December 31, 2010, respectively		82,910			23,176
Additional paid in capital		19,977,943			20,007,629
Accumulated deficit		(49,691,133	)		(58,375,387	)

Total Stockholders' Deficit		(29,630,280	)		(38,344,582	)

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	835,739		$	718,563

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

ALLIED SECURITY INNOVATIONS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009

(UNAUDITED)

	2010			2009
REVENUE
Product revenue		820,130		$	1,103,944
Service revenue		179,553			34,938
Total revenue		999,683			1,138,882

Cost of Revenue		232,007			411,329
Gross Profit		767,676			727,553

OPERATING EXPENSES
General and administrative		465,759			552,539
Sales and marketing		91,515			130,028
Research and development		22,941			21,471
Total Operating Expenses		580,215			704,038

INCOME BEFORE OTHER INCOME (EXPENSE)		187,461			23,515

OTHER INCOME (EXPENSE)

Gain on extinuishment of debt		9,073,666			-
Interest expense		(255,398	)		(280,183	)
Beneficial interest from conversion		-			(8,922	)
Amortization of debt discount		(4,167	)		(3,744	)
Change in fair value of derivative liability		(317,309	)		19,378

Total Other Income (Expense)		8,496,792			(273,471	)

NET INCOME (LOSS) APPLICABLE TO COMMON SHARES	$	8,684,253		$	(249,956	)

NET INCOME (LOSS) PER SHARE - BASIC AND DILUTED	$	-		$	-

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-BASIC		55,345,966			3,106,474

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-DILUTED		9,999,000,000			9,999,000,000

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

ALLIED SECURITY INNOVATIONS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009

(UNAUDITED)

	2010			2009

Cash Flows from Operating Activities:
Net Income (Loss)	$	8,684,253		$	(249,956	)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization		13,796			18,319
Amortization of debt discount		4,167			3,744
Beneficial interest		-			8,922
Gain on extinuishment of debt		(9,073,666	)		-
Change in fair value of derivative liability		317,309			(19,378	)
Bad debt expense		(4,037	)		(32,468	)
Changes in operating assets and liabilities:
Accounts receivable		(122,376	)		98,582
Inventory		13,240			38,055
Prepaid expenses, deposits and other assets		(617	)		1,236
Accounts payable and accrued expenses		79,047			183,656
Deferred Income		11,065			1,186

Net Cash Provided by (Used In) Operating Activities		(77,819	)		51,898

Cash Flows from Financing Activities:
Proceeds from notes payable		95,000			50,000

Net Cash provided by Financing Activities		95,000			50,000

Net Increase in Cash		17,181			101,898
Cash at Beginning of Period		52,667			213,513

Cash at End of Period	$	69,848		$	315,411

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

ALLIED SECURITY INNOVATIONS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009

(UNAUDITED)

	2010		2009
Supplemental Disclosure of Cash Flow Information:

Cash Paid For:
Interest Expense	$	-	$	-
Income Taxes	$	-	$	-

Supplemental Disclosure of Non-Cash Investing and Financing Activities:

Common stock issued in conversion of convertible debentures	$	22,927	$	291,061

Beneficial interest in conjunction with issuance of convertible debentures	$	-	$	8,922

Common stock issued in conversion of accrued interest	$	7,121	$	3,170

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

Allied Security Innovations, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

Note 1 - Description of Business

CGM-AST is a manufacturer and distributor of indicative and barrier security seals, security tapes and related packaging security systems, protective security products for palletized cargo, physical security systems for tractors, trailers and containers as well as a number of highly specialized authentication products. Focused primarily on “deterrent technologies,” CGM-AST designs and develops customized tamper evident devices which when integrated into a security protocol; provide chain of custody and/or proof of tampering for targeted assets.

The primary factors behind the need for CGM-AST’s products are: (i) the escalation of cargo theft and tampering, (ii) the need for enhanced cargo security because of the fear of terrorism, (iii) damage control of freight and cargo, (iv) the need for security products, (v) brand protection and authentication requirements and (vi) governmental and regulatory requirements.

CGM-AST products are certified by the Customs-Trade Partnership Against Terrorism ("C-TPAT"), a joint initiative between government and business designed to protect the security of cargo entering the United States while improving the flow of trade. C-TPAT requires importers to take steps to assess, evolve and communicate new practices that ensure tighter security of cargo and enhanced security throughout the entire supply chain. In return, their goods and conveyances will receive expedited processing into the United States. Many of our products are also ISO 17712 compliant, which is a standard for international shipping and container security.

It is estimated that losses from cargo theft each year reach 30-50 billion dollars globally and 12 billion dollars in the US, and that these numbers will continue to rise. Figures taken from L.H. Gray entitled Facing the Growing Problem of Loss and Theft

Note 2 - Summary of Significant Accounting Policies

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

Use of Estimates

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

Revenue Recognition

The Company derives revenue from the sale of hardware, software, post customer support, and other related services. Post customer support includes telephone support, virus fixes, and rights to upgrades. Other related services include basic training. CGM derives its revenue from the sale of its tapes, labels and other security devices. Revenue is recognized when products are shipped or services are rendered, evidence of a contract exists, the price is fixed or reasonably determinable, and collectability is reasonably assured .

Deferred Income

Revenue allocable to post customer support is recognized on a straight-line basis over the period which the service is to be provided. Revenue collected for future services is recorded as deferred income. Deferred revenue at March 31, 2010 was $63,247 and at December 31, 2009 was $52,182.. Revenue allocable to other services is recognized as the services are provided. The CGM-AST subsidiary recognizes it revenue upon shipment of the product to the customer.

Software Development Costs

All costs incurred in the research and development of new software products and costs incurred prior to the establishment of a technologically feasible product are expensed as incurred. Research and development of software costs were $22,941 and $21,471, for the three months ended March 31, 2010 and 2009.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company had no cash equivalents at March 31, 2010. The Company maintains cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to federally insured limits. At times balances may exceed FDIC insured limits. The Company has not experienced any losses in such accounts.

Accounts Receivable

Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. No interest is charged on any past due accounts. Accounts receivable are stated at the amount billed to the customer.

The carrying amount of accounts receivable is reduced by a valuation allowance that reflects management's best estimate of the amount that will not be collected. Management reviews all accounts receivable balances that exceed 90 days from invoice date and based on assessment of current creditworthiness, estimates the portion, if any that will not be collected. The allowance for doubtful accounts is $134,590 at March31, 2010 and $138,027 at December 31, 2009.

Property and Equipment

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

Machinery and equipment	7 years
Furniture and fixtures	7 years
Computers	3 years
Leasehold improvements	39 years

Income Taxes

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

Accounting for Stock Options

The Company has adopted Accounting Standards Codification ASC 718-10, “Accounting for Stock-Based Compensation”, which establishes financial accounting and reporting standards for stock-based employee compensation plans. This pronouncement also applies to transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. Those transactions must be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. For stock options, fair value is determined using an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock and the expected dividends on it, and the risk-free interest rate over the expected life of the option.

Net Loss Per Common Share

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

Concentration of Credit Risk

Financial instruments which potentially subject the Company to a concentration of credit risk principally consist of cash and accounts receivable. The Company does not require collateral from its customers. The Company sells its principal products to end users and distributors principally in the United States. ASII has no major customer as of March 31, 2010.

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary CGM. All inter-company accounts have been eliminated.

Inventory

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

Advertising

The Company’s policy is to expense the costs of advertising as incurred. The Company had advertising expenses of $90 and $12,625 for the three months ended March 31, 2010 and 2009, respectively.

Fair Value of Financial Instruments

The carrying amount reported in the consolidated balance sheet for cash and cash equivalents, accounts payable and accrued expenses approximates fair value because of the immediate or short-term maturity of these financial instruments. The fair value of long-term debt is discussed in Note 13.

Goodwill and Other Intangible Assets

In June 2001, the Financial Accounting Standards Board (“FASB”) issued ASC 350 “Goodwill and Other Intangible Assets”. This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, “Intangible Assets.” It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Goodwill was acquired upon the purchase of its wholly-owned subsidiary of CGM totaling $4,054,998.

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

In December of 2008 the Company determined its’ goodwill was impaired and recorded a loss of $2,000,000 and in December 2009 the Company wrote off the balance of the goodwill to $0.

Derivative Instruments

The Company has an outstanding convertible debt instrument that contains free-standing and embedded derivative features. The Company accounts for these derivatives in accordance with ASC 815, “Accounting for Derivative Instruments and Hedging Activities,” including “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock.” In accordance with the provisions of ASC 815, the embedded derivatives are required to be bifurcated from the debt instrument and recorded as a liability at fair value on the consolidated balance sheet. Changes in the fair value of the derivatives are recorded at each reporting period and recorded in change in fair market value of derivative liability, a separate component of the other income (expense).

Earnings (Loss) Per Share of Common Stock

Historical net income (loss) per common share is computed using the weighted average number of common shares outstanding. Diluted earnings per share (EPS) include additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants. Common stock equivalents were not included in the computation of diluted earnings per share at March 31, 2010 and 2009 when the Company reported a loss because to do so would be anti-dilutive for years presented.

The following is a reconciliation of the computation for basic and diluted EPS:

	March 31, 2010		March 31, 2009

Net Income (Loss)	$	8,684,253	$	(249,956	)

Weighted-average common shares outstanding (Basic)		55,345,966		3,106,474

Weighted-average common stock Equivalents:
Stock options		-		-
Warrants		-		-

Weighted-average common shares outstanding (Diluted)		55,345,966		3,106,474

Options and warrants outstanding to purchase stock were not included in the computation of diluted EPS on March 31, 2010 and December 31, 2009 because inclusion would have been anti-dilutive. There were no options and warrants available at March 31, 2010 and 2009.

Going Concern

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company has sustained operating losses and has accumulated large deficits for the period ended March 31, 2010. These factors raise substantial doubt about its ability to continue as a going concern.

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

· Soliciting new customers in the U.S.

· Expanding sales in the international market

· Expanding sales through E-commerce

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

· The introduction of new products into the market

· Seeking out possible merger candidates

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

Note 3 - Impact of Recent Accounting Pronouncements

ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements This ASU amends FASB ASC Topic 820, Fair Value Measurements and Disclosures, to require reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information about purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. The ASU also clarifies existing fair-value measurement disclosure guidance about the level of disaggregation, inputs, and valuation techniques.

Except for the detailed Level 3 roll forward disclosures, the guidance in the ASU was adopted by the Company on January 1, 2010 with no material impact on its financial statements. The new disclosures about purchases, sales, issuances, and settlements in the roll forward activity for Level 3 fair-value measurements are effective January 1, 2011.

From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that we adopt as of the specified effective date. Unless otherwise discussed in these financial statements and notes or in our financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2009, we believe the impact of any other recently issued standards that are not yet effective are either not applicable to us at this time or will not have a material impact on our consolidated financial statements upon adoption.

Note 4 – Intangible Assets

Intangible assets consist of the following at March 31, 2010 and December 31, 2009:

	2010		2009
Licenses	$	87,076	$	87,076
Accumulated amortization		55,077		53,535
Total	$	31,999	$	33,541

Licenses are being amortized over its estimated useful life of 15 years. The Licenses are amortized using the straight-line method over the useful life of 15 years.

Based on the results of its most recent annual impairment tests, the Company determined that there would be no future value on the Brake Lock License. Therefore, management recorded an impairment of $89, 260 in 2009. There was no impairment determined for the other licenses that exist. However, future impairment tests could result in a charge to earnings.

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

Year ended December 31,

2011	$	6,168
2012		6,168
2013		6,168
2014		6,168
2015		6,168

Note 5- Property and Equipment

Property and Equipment consist of the following at March 31, 2010 and December 31, 2009.

	2010			2009

Furniture and Fixtures $ 75,613	$	75,613
Leasehold Improvements		159,607			159,607
Computers		219,301			219,301
Machinery and Equipment 762,987		762,987
		1,217,508			1,217,508
Less: Accumulated depreciation		(1,020,277	)		(1,008,023	)
Net	$	197,231		$	209,485

Note 6 - Convertible Debentures

Based on the guidance ASC 815, the Company concluded that its convertible debentures were required to be accounted for as derivatives. The imbedded conversion features were bi-furcated and the fair market value was determined using a convertible bond valuation model. The derivative instruments are recorded at fair market value with changes in value recognized during the period of change.

On May 16, 2008 convertible debentures in the net amount of $5,832,483 were satisfied.

On May 16, 2008, the Company issued convertible notes for an aggregate amount of $14,165,899. The debentures are collateralized by substantially all of the Company's assets. The debentures accrue interest at the rate of 6% per annum.

During January 2009, the Company issued 5 convertible notes for an aggregate amount of $50,000. The debentures are collateralized by substantially all of the Company's assets. The debentures accrue interest at the rate of 6% per annum with terms of three years.

The Company recorded a derivative liability related to these convertible debentures at their fair market value and adjusts the balance to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of income.

On March 2, 2010, the Company entered into a rescission agreement (the “Rescission Agreement”) with each of AJW Partners, LLC, AJW Master Fund, Ltd., New Millennium Capital Partners II, LLC and AJW Offshore, Ltd. as holders (the “Holders”) of the Company’s Callable Secured Convertible Notes (the “New Notes”). Under the terms of the Rescission Agreement, the parties agreed to rescind a recapitalization agreement dated May 16, 2008 among the Company and the Holders (the “Recapitalization Agreement”). Under the Recapitalization Agreement, certain convertible debt securities previously held by the Holders (the “Old Notes”) were exchanged for the New Notes.

Under the Rescission Agreement, the New Notes are deemed void as if they were never issued by the Company to the Holders and the Old Notes were returned to the Holders as if they had never been exchanged for the New Notes pursuant to the Recapitalization Agreement. On March 2, 2010 $13,458,796 convertible debt principal was extinguished and $6,008,968 of principal was reinstated for a net decrease of $7,449,828. See Note 10.

The fair market value of the conversion feature is shown as a derivative liability on the Company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.

Note 7 – Derivative Liability

In accordance with ASC 815, the conversion feature associated with the Secured Convertible Debentures represents embedded derivatives. As such, the Company had recognized embedded derivatives as a liability in the accompanying consolidated balance sheet, and it was measured at its estimated fair value of $17,582,072 and $18,888,603 as of March 31, 2010 and December 31, 2009. The estimated fair value of the embedded derivative has been calculated based on a Black-Scholes pricing model using the following assumptions:

	2010			2009
	$	0.0012		$	0.0001
Exercise price	$	0.0003 to 0 .0009		$	0.0003 to 0 0009
Dividend yield		0.00	%		0.00	%
Risk free interest rate	0.81% to 2.03		%	0.81% to 2.03		%
Expected volatility	254% to 356		%	254% to 356		%
Expected life	1 to 30 Years			1 to 2 Years

Note 8 - Commitments

Operating Leases

CGM-AST leases one facility in Staten Island, New York on a month to month basis. In addition, the Company’s Farmingdale, NJ location is a 6,000 square foot combination warehouse /office. The lease is a 5 year lease ending May 12, 2012 with a 5 year renewal option. The Company is required to pay utilities, insurance and other costs relating to the lease facility. The following is a schedule of future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of March 31, 2010:

	Per Year
2010	$	43,897
2011		60,285
2012		30,588
Thereafter		-0-
Total Minimum Payment required	$	134,770

Employment Agreements

On July 18 2008, 2005, ASII entered into a five-year employment agreement with Anthony R. Shupin, Chairman, President and Chief Executive Officer, which entitled him to a base salary of $227,900 per year. The Board of Directors may adjust his base salary at their discretion but it may not be adjusted below $225,000 per year. Mr. Shupin is also entitled to participate in the Annual Management Bonus Plan. As a participant in the Annual Management Bonus Plan, Mr. Shupin will be eligible to receive bonuses, based on performance, in any amount from 10% to 200% of the Base Salary. In addition, Mr. Shupin shall participate in the Management Equity Incentive Plan. As a participant in the the Management Equity Incentive Plan, Mr. Shupin will be eligible to receive options, which vest over a period of time from the date of the option's issue, to purchase common shares of ASII. The Company may grant Mr. Shupin, following the first anniversary of the date hereof and at the sole discretion of the Board of Directors, options to purchase common shares of the Company (subject to the vesting and the satisfaction of the other terms and conditions of such options). Mr. Shupin will be entitled to 25 vacations days per year at such times as may be mutually agreed with the Board of Directors. ASII will provide Mr. Shupin a monthly car allowance of One Thousand Dollars ($1,000) along with related car expenses.

On July 18, 2008, ASII entered into a five-year employment agreement with Michael J. Pellegrino, Senior Vice President and Chief Financial Officer, which entitled him to a base salary of $185,500 per year. The Board of Directors may adjust his base salary at their discretion but it may not be adjusted below $175,000 per year. Mr. Pellegrino is also entitled to participate in the Annual Management Bonus Plan. As a participant in the Annual Management Bonus Plan, Mr. Pellegrino will be eligible to receive bonuses, based on performance, in any amount from 10% to 200% of the Base Salary. In addition, Mr. Pellegrino shall participate in the Management Equity Incentive Plan. As a participant in the Management Equity Incentive Plan, Mr. Pellegrino will be eligible to receive options, which vest over a period of time from the date of the option's issue, to purchase common shares of ASII. ASII may also grant to the Employee, following the first anniversary of the date of the Agreement and at the sole discretion of the Board of Directors, options to purchase common shares of the Company (subject to the vesting and the satisfaction of the other terms and conditions of such options). Mr. Pellegrino will be entitled to 30 vacation days per year at such times as may be mutually agreed with the Board of Directors. ASII shall also furnish Mr. Pellegrino with monthly car allowance of One Thousand Dollars ($1,000) and related car expenses.

Note 9 - Stock Option and Other Plans

Effective November 13, 2006 the Company granted to each of the executives discussed in Note 8, 10,000 shares of newly created Series A Preferred Stock ("A Preferred") as recognition for services. On May 11, 2009 the Series A Preferred Stock was cancelled and replaced with 10,000 shares each of newly created Series B Preferred Stock.

Each share of B Preferred stock is convertible into 200,000 shares of common stock of the Company starting three years from the date of issuance, provided that the closing bid price of the Company's common stock is $2.00 per share. The shares of B Preferred may be voted with the Company's common stock on an “as converted” basis on any matters that common stock is entitled to vote on. The shares are not exercisable unless common stock is $2.00 per share and only after these preferred shares have been outstanding for 2 years. After 1 more year they would become exercisable. Currently, a zero-value contingency is reported and a value will be assigned only if the $2.00 target is achieved within the allotted time frame and the shares become exercisable.

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

On May 11, 2009 the Company filed with the Secretary of State of Delaware a Certificate of Designation of Preferences, Rights and Limitations of Series B Preferred Stock.

The Company maintains the 1994 Restated Stock Option Plan (the 1994 Plan) pursuant to which the Company reserved 5,000,000 shares of common stock. The options granted have a term of ten years and are issued at or above the fair market value of the underlying shares on the grant date., The Company also maintains the 1996 Director Option Plan (the Director Plan) pursuant to which the Company reserved 200,000 shares of common stock. Options granted under the Director Plan are issued at or above the fair market value of the underlying shares on the grant date. A portion of the first option vests at the six-month anniversary of the date of the grant and continues over a four-year period. Subsequent options vest on the first anniversary of the grant date. The options expire ten years from the date of the grant or 90 days after termination of employment, whichever comes first.

The following is a summary of option activity under all plans:

	1994 Plan		1996 Director Plan		Nonqualified		Total Number of Options		Weighted Average Exercise Price
Outstanding at December 31, 2008		0		—		—		00		0
Outstanding at March 31, 2010		0						0		0

Note 10 – Extinguishment of debt

The accompanying condensed consolidated Statement of Operations for the three months ended March 31, 2010, reports a gain on extinguishment of debt in the amount of $9,073,666 . As required by the Troubled Debt Restructurings by Debtors Topic discussed in Note 6, the transaction was accounted for as a troubled debt restructurings under ASC 470-60 as follows:

Convertible debentures rescinded March 2, 2010	$	13,458,796
Convertible debentures reinstated March 2, 2010		6,008,969
Gain on extinguishment- notes		7,449,827

Derivative liability rescinded March 2, 2010		16,696,175
Derivative liability reinstated March 2, 2010		15,072,336
Gain on extinguishment- derivatives		1,623,839

Total Gain on Extinguishment of Debt	$	9,073,666

The Company has determined it received a concession from the creditor through a reduction in principal balance; the Rescission Agreement meets the definition of a troubled debt restructuring. Paragraph 35-6 of ASC 47-60 notes that if total future cash payments specified by new terms, including face amount and interest, is less than the current carrying amount, then the debtor shall reduce the carrying amount equal to the total future cash payments specified by the new terms and shall recognize a gain on restructuring. The Company has determined that the future cash payments are less than the current carrying amount due to the conversion feature.

Note 11 - Contingency

There were two holders of convertible notes dated December 31, 2001 who could potentially seek damages from the Company. Should they seek these damages, the Company could incur an additional expense of $71,668. Management feels however, that the likelihood that the other holders will seek the damages is remote, and therefore, no provision for this expense has been made in the accompanying consolidated financial statements.

Note 12 – Acquisitions and Note Payable

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

The principal amount of the three year Note is subject to adjustment based upon the average of (i) the gross revenues of CGM-AST for the fiscal year ending December 31, 2009 and (ii) an independent valuation of CGM-AST Sub based upon the audited consolidated financial statements of the Company and CGM-AST Sub for the fiscal years ending December 31, 2007 and 2008. In addition, the Company has granted CGM-AST a secondary security interest in substantially all of its assets and intellectual property. If the Company is unable to fulfill its obligations pursuant to the Asset Purchase Agreement and the Note, there is a likelihood that CGM Security Solutions, Inc. can declare default and attempt to take back the asset.

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

Whereas the Company did not have sufficient funds to satisfy this obligation and was not able to raise the required payment when due the Company came to an agreement to pay CGM Security Solutions, Inc. and its owner Mr. Erik Hoffer Five Hundred Thousand Dollars ($500,000) and signed a new note with him raising the purchase price by One Million Dollars ($1,000,000). The new note for Four Million Dollars is a three year note due on May 15, 2011 carrying an annual interest rate of 7% of which the interest is due quarterly.

On March 2, 2010 the Company signed a six month promissory note in the amount of Seventy Thousand Dollars ($70,000) which carries and interest rate of 12% and is due in 5 monthly installments of $7,000 with a balloon payment in the sixth month of $38,242.

As of March 31, 2010 there are two note payables totaling $30,000 owed to corporate officers with no terms.

Note 13 -Fair Value Measurements

On January 1, 2008, the Company adopted ASC 820 “Fair Value Measurements”. ASC 820 defines fair value, provides a consistent framework for measuring fair value and expands fair value financial statement disclosure requirements. ASC 820’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. ASC 820 classifies these inputs into the following hierarchy:

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

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

Level 3 Inputs– Instruments with primarily unobservable value drivers.

The following table represents the fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2010.

Fair Value Measurements on a Recurring Basis as of March 31, 2010

	Level I		Level II		Level III		Total

Assets	$	-		-	$	-	$	-

Total Assets	$	-	$	-	$	-	$	-

Convertible debentures				6,554,471				6,554,471

Derivative liability				17,582,072				17,582,072

Notes payable		-	$	4,100,000		-	$	4,100,000

Total Liabilities	$	-	$	28,236,543	$	-	$	28,236,543

Note 14 - Subsequent Events

Within the last twelve months, many of the Company’s customers have changed their terms from 30 days to 45 to 90 days. To insure a level cash flow the Company entered into a factoring agreement with Universal Funding Corporation in April 2010 for one year with advances not to exceed 80% of accounts receivable up to a $450,000 limit. Interest is calculated and charged at .4375% per month.

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

Forward-Looking Statements

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

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

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2010 COMPARED TO THREE MONTHS ENDED MARCH 31, 2009

Revenues for the three months ended March 31, 2010 were $999,683 compared to $1,138,882 for the three months ended March 31, 2009, a decrease of $139,199 or 12,2%. ASII generates its revenues through software licenses, hardware, post customer support arrangements and other services. The revenue from ASII service was $179,553 and $34,938 for the three months ended March 31, 2010 and 2009. CGM-AST generates its revenue through the manufacture and distribution of indicative and barrier security seals, security tapes and related packaging security systems, protective security products for palletized cargo, physical security systems for tractors, trailers and containers as well as a number of highly specialized authentication products. The revenue from these products was $820,130 and $1,103,944 for the three months ended March 31, 2010 and 2009.

Cost of revenue for the three months ended March 31, 2010 was $232,007 compared to $411,329 for the three months ended March 31, 2009 a decrease of $179,322 or 43.6%. Cost of revenue sold as a percentage of revenue for the three months ended March 31, 2010 was 23.2% of total revenues.

Operating expenses for the three months ended March 31, 2010 were $580,215 compared to $704,038 for the three months ended March 31, 2009, a decrease of $123,823 or 17.6%. This decrease was mainly attributable to a decrease in payroll. Management also put tight cost controls in place in 2010.

General and Administrative expenses for the three months ended March 31, 2010 were $465,759 compared to $552,539 for the three months ended March 31, 2009 for a decrease of $86,780 or 15.7%. This decrease was mainly attributable to tighter controls on spending.

Sales and Marketing expenses for the three months ended March 31, 2010 were $91,515 compared $130,028 for the three months ended March 31, 2009 for a decrease of $38,513 or 29.6%. This decrease was mainly attributable to a decrease in payroll.

Research and development expenses for the three months ended March 31, 2010 were $22,941 compared to $21,471 for the three months ended March 31, 2009 for an increase of $1,470.

ASII had a net income for the three months ended March 31, 2010 of $8,684,253 and a net (loss) for the three months ended March 31, 2009 of $(249,956). This is an increase in net income of $8,934,209. This was primarily due to the rescission agreement of March 2, 2010.

Net cash provided by (used in) operating activities for the three months ended March 31, 2010 and the three months ended March 31, 2009 was $(77,819) and $51,898. The decrease in cash provided by operating activities for the three months ended March 31, 2010 was $129,717.

Net cash provided by financing activities was $95,000 and $50,000 for the three months ended March 31, 2010 and the three months ended March 31, 2009.

LIQUIDITY AND CAPITAL RESOURCES

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

Over the next twelve months, management is hopeful that sufficient working capital may be obtained from operations and external financing to meet ASII's liabilities and commitments as they become payable. ASII has in the past relied on private placements of common stock securities, and loans from private investors to sustain operations. However, if ASII is unable to obtain additional funding in the future, it may be forced to curtail or terminate operations. At March 31, 2010, ASII had assets of $835,739 compared to $718,563 on December 31, 2009 an increase of $117,176 and shareholder (deficit) of $ (29,630,280) on March 31, 2010 compared to shareholder (deficit) of $(38,344,582) on December 31, 2009, a decrease of $8,714,302. This decrease in shareholder (deficit) for the three months ended March 31, 2010 resulted from the net income for the three months ended March 31, 2010.

The Company had net income of $8,684,253 and net (loss) of ($249,956) during the three months ended March 31, 2010 and 2009. As of March 31, 2010, we had a cash balance in the amount of $69,848 and current liabilities of $30,466,019. The total amount of notes payable and debentures is $10,654,471. We may not have sufficient cash or other assets to meet our current liabilities. In order to meet these obligations, we may need to raise cash from the sale of securities or from borrowings.

The Company has contractual obligations of $12,820,800 as of March 31, 2010. These contractual obligations, along with the dates on which such payments are due are described below:

Contractual Obligations	Total		One Year or Less		More Than One Year
Due to Related Parties	$	0	$	0	$	0
Accounts Payable and Accrued Expenses		435,362		435,362		0
Accrued interest on loans		1,730,867		1,730,867		0
Note payable		4,100,000		4,100,000		0
Convertible Debentures		6,554,571		6,554,571		0
Total Contractual Obligations	$	12,820,800	$	12,820,800	$	0

The Company is currently in default on several of the convertible debentures that are included in current liabilities.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements as of March 31, 2010 or as of the date of this report.

Plan of Operations

The short-term objective of ASII is the following:

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

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

ASII's long-term objective is as follows:

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

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

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

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

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

o Derive funds through investigating business alliances with other companies.

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

None

Item 4. Control and Procedures

Management of the Company has evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this interim Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer of the Company had concluded that the Company's disclosure controls and procedures as of the period covered by this Interim Report on Form 10-Q were not effective for the following reasons:

a) The deficiency was identified as the Company's limited segregation of duties among the Company's employees with respect to the Company's control activities. This deficiency is the result of the Company's limited number of employees. This deficiency may affect management's ability to determine if errors or inappropriate actions have taken place. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible changes in our disclosure controls and procedures.

b) The deficiency was identified in respect to the Company's Board of Directors. This deficiency is the result of the Company's limited number of external board members. This deficiency may give the impression to the investors that the board is not independent from management. Management and the Board of Directors are required to apply their judgment in evaluating the cost-benefit relationship of possible changes in the organization of the Board of Directors.

Changes in internal controls.

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 1A. Risk Factors

None

Item 2. Changes in Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities:

none

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

None.

Item 5. Other Information

None.

Item 6. Exhibits

No.
31.1		Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes- Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ALLIED SECURITY INNOVATIONS, INC.
	(Registrant)

Date: May 21, 2010	By:	/s/ ANTHONY SHUPIN
		Anthony Shupin
		(President, Chief Executive Officer)
		(Chairman)

Date: May 21, 2010	By:	/s/ MICHAEL J. PELLEGRINO
		Michael J. Pellegrino
		Senior Vice President & CFO
		(Principal Financial and Accounting Officer)