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(m) Recent Pronouncements      In January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. 2) Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). This update provides amendments to Subtopic 820-10 that clarifies existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. These disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this ASU did not have a material impact on the Company’s financial statements.      In February 2010, FASB issued ASU No. 2010-9 - Amendments to Certain Recognition and Disclosure Requirements. This update addresses certain implementation issues related to an entity’s requirement to perform and disclose subsequent-events procedures, removes the requirement that public companies disclose the date of their financial statements in both issued and revised financial statements. According to the FASB, the revised statements include those that have been changed to correct an error or conform to a retrospective application of U.S. GAAP. The amendment is effective for interim and annual reporting periods in fiscal year ending after June 15, 2010. The adoption of this ASU did not have a material impact on the Company’s financial statements.      In December 2010, the FASB issued Accounting Standards Update No. 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations (Topic 805)—Business Combinations (ASU 2010-29), to improve consistency in how the pro forma disclosures are calculated. Additionally, ASU 2010-29 enhances the disclosure requirements and requires description of the nature and amount of any material, nonrecurring pro forma adjustments directly attributable to a business combination. ASU 2010-29 is effective for us in fiscal 2011 and should be applied prospectively to business combinations for which the acquisition date is after the effective date. Early adoption is permitted. The adoption of the ASU did not have a material impact on the Company’s financial statements.      In May, 2011, The FASB issued ASU 2011-4, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The objective of this amendment is to achieve common fair value measurement and disclosure requirements in U.S GAAP and IFRS. This amendment is to ensure that fair value has the same meaning in U.S. GAAP and IFRS and that their respective fair value measurement and disclosure requirements are the same. This guidance is effective for the first quarter of 2012. The Company does not expect that this authoritative guidance will have any material effect on the Company’s financial statements.      The Company has considered all new accounting pronouncements and has concluded that there are no new pronouncements that may have a material impact on results of operations, financial condition, or cash flows, based on current information. (n) Reclassifications      Certain amounts in the prior periods have been reclassified to conform to the current period’s presentation. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (a) Nature of Business      HS3 Technologies, Inc. (“HS3” or the “Company”) was incorporated in Nevada on January 28, 2003. Prior to a name change in October 2005, the Company was known as Zeno, Inc. The Company also changed its fiscal year end from March 31 to June 30. In November 2005, the Company acquired ip-Colo, Inc., in a reorganization, a development stage corporation (herein referred to as “ip-Colo”). On the date of the reorganization, the Company, a non-operating entity without any assets or liabilities, was to provide advanced wireless technologies integrated with high-speed internet, via satellite, and to provide real-time security and monitoring for many industries.      The Company provides a diverse line of cutting edge products and services to meet the growing needs of the security industry. To meet the ever changing needs of the industry, we have launched a combination of state-of-the art products and services that include digital video recording technology (DVR), personal biometric identification units, CCTV, video monitoring centers, cellular networks, wireless mesh network units and wireless internet-linked satellite surveillance systems. This combination of products encompasses a total line that we believe will meet many commercial, agricultural, governmental, and residential customer security needs. (b) Basis of presentation and use of estimates      The accompanying unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these statements reflect adjustments (consisting only of normal recurring entries), which in our opinion, are necessary for a fair presentation of the financial results for the interim periods presented. Certain information and notes normally included in annual financial statements have been condensed in or omitted from these interim financial statements pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes for the year ended June 30, 2011, together with the discussion and analysis of financial condition and results of operations, included in our Annual Report on Form 10-K filed on October 6, 2011 with Securities and Exchange Commission.      The Company’s accounting and financial reporting policies conform to accounting principles and practices generally accepted in the United States of America. The accompanying consolidated financial statements include the accounts of HS3 and its controlled subsidiaries. All significant inter-company accounts and transactions have been eliminated in the preparation of the accompanying condensed consolidated financial statements.      The preparation of financial statements in accordance with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. The Company regularly evaluates estimates and assumptions related to the useful life and recoverability of long-lived assets, stock-based compensation and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. (c) Cash and cash equivalents      The Company considers all short-term investments with a remaining maturity of three months or less at the date of purchase to be cash equivalents. (d) Furniture, Fixtures and Equipment      Furniture, fixtures and equipment are recorded at historical cost, net of accumulated depreciation. Depreciation is computed using the straight-line method based on estimated useful lives (3-5 years). Expenditures for maintenance and repairs are charged to expense. (e) Inventory      Inventory consists of finished goods purchased from third-party manufacturers and component parts and is valued at the lower of average cost or market. Average cost is determined using the first-in, first-out method of accounting. (f) Long-lived Assets      Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, in accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. (g) Loss Per Share      Basic and diluted earnings (loss) per share are computed using the weighted average number of shares outstanding during the period. Diluted earnings per share gives effect to all potential diluted common shares outstanding during the period. In periods of net loss, there are no diluted earnings per share since the result would be anti-dilutive. (h) Financial Instruments      The fair value of financial instruments is determined at a specific point in time, based on relevant information about financial markets and specific financial instruments. As these estimates are subjective in nature, involving uncertainties and matters of significant judgment, they cannot be ascertained with precision. Changes in assumptions can significantly affect estimated fair values.      The carrying value of cash and cash equivalents, accounts payable and accrued liabilities approximate their fair value because of the short-term nature of these instruments. (i) Income Taxes      The Company follows ASC subtopic 740-10 (formerly Statement of Financial Accounting Standard No. 109, (“Accounting for Income Taxes”) for recording the provision for income taxes. ACS 740-10 requires the use of the asset and liability method of accounting for income taxes. Under the asset and liability method , deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion of all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.      Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current on the periods in which the temporary differences are expected to reverse. (j) Equity-Based Compensation      Common stock, warrants, and options issued for services are accounted for based on the fair market value at the date the services are performed. If the awards are based on a vesting period the fair market value of the awards is determined as vesting is earned. If the services are to be performed over an extended period of time, the value (if material) is amortized over the life of the period that services are performed. (k) Concentration of Credit Risk      We sell products to customers in diversified industries and geographical regions. We continually evaluate the creditworthiness of our customers. We evaluate the collectability of accounts receivable on a combination of factors. The Company’s policies require it to record specific reserves if the Company becomes aware of anything that would cause it to question a specific customer’s inability to meet their financial obligations to the Company. The Company will write off receivables when it believes an amount is not collectible. The Company has $35,000 reserves for bad debts at December 31, 2011. (l) Revenue Recognition      The Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (a) Nature of Business      HS3 Technologies, Inc. (“HS3” or the “Company”) was incorporated in Nevada on January 28, 2003. Prior to a name change in October 2005, the Company was known as Zeno, Inc. The Company also changed its fiscal year end from March 31 to June 30. In November 2005, the Company acquired ip-Colo, Inc., in a reorganization, a development stage corporation (herein referred to as “ip-Colo”). On the date of the reorganization, the Company, a non-operating entity without any assets or liabilities, was to provide advanced wireless technologies integrated with high-speed internet, via satellite, and to provide real-time security and monitoring for many industries.      The Company provides a diverse line of cutting edge products and services to meet the growing needs of the security industry. To meet the ever changing needs of the industry, we have launched a combination of state-of-the art products and services that include digital video recording technology (DVR), personal biometric identification units, CCTV, video monitoring centers, cellular networks, wireless mesh network units and wireless internet-linked satellite surveillance systems. This combination of products encompasses a total line that we believe will meet many commercial, agricultural, governmental, and residential customer security needs. (b) Basis of presentation and use of estimates      The accompanying unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these statements reflect adjustments (consisting only of normal recurring entries), which in our opinion, are necessary for a fair presentation of the financial results for the interim periods presented. Certain information and notes normally included in annual financial statements have been condensed in or omitted from these interim financial statements pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes for the year ended June 30, 2011, together with the discussion and analysis of financial condition and results of operations, included in our Annual Report on Form 10-K filed on October 6, 2011 with Securities and Exchange Commission.      The Company’s accounting and financial reporting policies conform to accounting principles and practices generally accepted in the United States of America. The accompanying consolidated financial statements include the accounts of HS3 and its controlled subsidiaries. All significant inter-company accounts and transactions have been eliminated in the preparation of the accompanying condensed consolidated financial statements.      The preparation of financial statements in accordance with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. The Company regularly evaluates estimates and assumptions related to the useful life and recoverability of long-lived assets, stock-based compensation and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. (c) Cash and cash equivalents      The Company considers all short-term investments with a remaining maturity of three months or less at the date of purchase to be cash equivalents. (d) Furniture, Fixtures and Equipment      Furniture, fixtures and equipment are recorded at historical cost, net of accumulated depreciation. Depreciation is computed using the straight-line method based on estimated useful lives (3-5 years). Expenditures for maintenance and repairs are charged to expense. (e) Inventory      Inventory consists of finished goods purchased from third-party manufacturers and component parts and is valued at the lower of average cost or market. Average cost is determined using the first-in, first-out method of accounting. (f) Long-lived Assets      Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, in accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. (g) Loss Per Share      Basic and diluted earnings (loss) per share are computed using the weighted average number of shares outstanding during the period. Diluted earnings per share gives effect to all potential diluted common shares outstanding during the period. In periods of net loss, there are no diluted earnings per share since the result would be anti-dilutive. (h) Financial Instruments      The fair value of financial instruments is determined at a specific point in time, based on relevant information about financial markets and specific financial instruments. As these estimates are subjective in nature, involving uncertainties and matters of significant judgment, they cannot be ascertained with precision. Changes in assumptions can significantly affect estimated fair values.      The carrying value of cash and cash equivalents, accounts payable and accrued liabilities approximate their fair value because of the short-term nature of these instruments.   (i) Income Taxes      The Company follows ASC subtopic 740-10 (formerly Statement of Financial Accounting Standard No. 109, (“Accounting for Income Taxes”) for recording the provision for income taxes. ACS 740-10 requires the use of the asset and liability method of accounting for income taxes. Under the asset and liability method , deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion of all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.      Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current on the periods in which the temporary differences are expected to reverse. (j) Equity-Based Compensation      Common stock, warrants, and options issued for services are accounted for based on the fair market value at the date the services are performed. If the awards are based on a vesting period the fair market value of the awards is determined as vesting is earned. If the services are to be performed over an extended period of time, the value (if material) is amortized over the life of the period that services are performed. (k) Concentration of Credit Risk      We sell products to customers in diversified industries and geographical regions. We continually evaluate the creditworthiness of our customers. We evaluate the collectability of accounts receivable on a combination of factors. The Company’s policies require it to record specific reserves if the Company becomes aware of anything that would cause it to question a specific customer’s inability to meet their financial obligations to the Company. The Company will write off receivables when it believes an amount is not collectible. The Company has $35,000 reserves for bad debts at December 31, 2011. (l) Revenue Recognition      The Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured.   (m) Recent Pronouncements      In January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. 2) Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). This update provides amendments to Subtopic 820-10 that clarifies existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. These disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this ASU did not have a material impact on the Company’s financial statements.      In February 2010, FASB issued ASU No. 2010-9 - Amendments to Certain Recognition and Disclosure Requirements. This update addresses certain implementation issues related to an entity’s requirement to perform and disclose subsequent-events procedures, removes the requirement that public companies disclose the date of their financial statements in both issued and revised financial statements. According to the FASB, the revised statements include those that have been changed to correct an error or conform to a retrospective application of U.S. GAAP. The amendment is effective for interim and annual reporting periods in fiscal year ending after June 15, 2010. The adoption of this ASU did not have a material impact on the Company’s financial statements.      In December 2010, the FASB issued Accounting Standards Update No. 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations (Topic 805)—Business Combinations (ASU 2010-29), to improve consistency in how the pro forma disclosures are calculated. Additionally, ASU 2010-29 enhances the disclosure requirements and requires description of the nature and amount of any material, nonrecurring pro forma adjustments directly attributable to a business combination. ASU 2010-29 is effective for us in fiscal 2011 and should be applied prospectively to business combinations for which the acquisition date is after the effective date. Early adoption is permitted. The adoption of the ASU did not have a material impact on the Company’s financial statements.      In May, 2011, The FASB issued ASU 2011-4, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The objective of this amendment is to achieve common fair value measurement and disclosure requirements in U.S GAAP and IFRS. This amendment is to ensure that fair value has the same meaning in U.S. GAAP and IFRS and that their respective fair value measurement and disclosure requirements are the same. This guidance is effective for the first quarter of 2012. The Company does not expect that this authoritative guidance will have any material effect on the Company’s financial statements.      The Company has considered all new accounting pronouncements and has concluded that there are no new pronouncements that may have a material impact on results of operations, financial condition, or cash flows, based on current information. (n) Reclassifications      Certain amounts in the prior periods have been reclassified to conform to the current period’s presentation.

2. GOING CONCERN      The accompanying condensed consolidated financial statements have been prepared assuming that we will continue as a going concern. Our ability to continue as a going concern is dependent upon us obtaining additional working capital to develop our business operations. We intend to use borrowings from our revolving line of credit facility, equity sales and/or further shareholder loans and advances from related parties to mitigate the effects of our cash position; however, no assurance can be given that debt or equity financing, if and when required, will be available. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and classification of liabilities that might be necessary should we be unable to continue as a going concern.

3. FIXED ASSETS Fixed assets consisted of the following: <div> <table border="0" cellpadding="0" cellspacing="0" style="border-color: black; font-size: 10pt; border-collapse: collapse;" width="80%"> <tr valign="top"> <td align="left"> </td> <td align="left" width="1%"> </td> <td align="center" nowrap="nowrap" width="12%"> December 31, </td> <td align="center" nowrap="nowrap" width="2%"> </td> <td align="center" nowrap="nowrap" width="1%"> </td> <td align="center" nowrap="nowrap" width="12%"> June 30, </td> <td align="left" width="2%"> </td> </tr> <tr valign="top"> <td align="left"> </td> <td align="left" width="1%"> </td> <td align="center" nowrap="nowrap" width="12%"> 2011 </td> <td align="center" nowrap="nowrap" width="2%"> </td> <td align="center" nowrap="nowrap" width="1%"> </td> <td align="center" nowrap="nowrap" width="12%"> 2011 </td> <td align="left" width="2%"> </td> </tr> <tr> <td> </td> <td width="1%"> </td> <td width="12%"> </td> <td width="2%"> </td> <td width="1%"> </td> <td width="12%"> </td> <td width="2%"> </td> </tr> <tr valign="top"> <td align="left" bgcolor="#e6efff"> Computer hardware </td> <td align="left" bgcolor="#e6efff" width="1%"> $ </td> <td align="right" bgcolor="#e6efff" width="12%">  122,448 </td> <td align="left" bgcolor="#e6efff" width="2%"> </td> <td align="left" bgcolor="#e6efff" width="1%"> $ </td> <td align="right" bgcolor="#e6efff" width="12%">  118,978 </td> <td align="left" bgcolor="#e6efff" width="2%"> </td> </tr> <tr valign="top"> <td align="left"> Leasehold improvements </td> <td align="left" width="1%"> </td> <td align="right" width="12%"> 10,500 </td> <td align="left" width="2%"> </td> <td align="left" width="1%"> </td> <td align="right" width="12%"> 10,500 </td> <td align="left" width="2%"> </td> </tr> <tr valign="top"> <td align="left" bgcolor="#e6efff"> Opie/VMS installed </td> <td align="left" bgcolor="#e6efff" width="1%"> </td> <td align="right" bgcolor="#e6efff" width="12%"> 11,295 </td> <td align="left" bgcolor="#e6efff" width="2%"> </td> <td align="left" bgcolor="#e6efff" width="1%"> </td> <td align="right" bgcolor="#e6efff" width="12%"> 11,295 </td> <td align="left" bgcolor="#e6efff" width="2%"> </td> </tr> <tr valign="top"> <td align="left"> Vehicles </td> <td align="left" style="border-bottom: 1px solid rgb(0, 0, 0);" width="1%"> </td> <td align="right" style="border-bottom: 1px solid rgb(0, 0, 0);" width="12%"> 23,992 </td> <td align="left" width="2%"> </td> <td align="left" style="border-bottom: 1px solid rgb(0, 0, 0);" width="1%"> </td> <td align="right" style="border-bottom: 1px solid rgb(0, 0, 0);" width="12%"> 23,992 </td> <td align="left" style="border-bottom: 1px solid rgb(0, 0, 0);" width="2%"> </td> </tr> <tr valign="top"> <td align="left" bgcolor="#e6efff"> </td> <td align="left" bgcolor="#e6efff" width="1%"> </td> <td align="right" bgcolor="#e6efff" width="12%"> 168,235 </td> <td align="left" bgcolor="#e6efff" width="2%"> </td> <td align="left" bgcolor="#e6efff" width="1%"> </td> <td align="right" bgcolor="#e6efff" width="12%"> 164,765 </td> <td align="left" bgcolor="#e6efff" width="2%"> </td> </tr> <tr valign="top"> <td align="left"> Accumulated depreciation </td> <td align="left" style="border-bottom: 1px solid rgb(0, 0, 0);" width="1%"> </td> <td align="right" style="border-bottom: 1px solid rgb(0, 0, 0);" width="12%"> (149,214 </td> <td align="left" width="2%"> ) </td> <td align="left" style="border-bottom: 1px solid rgb(0, 0, 0);" width="1%"> </td> <td align="right" style="border-bottom: 1px solid rgb(0, 0, 0);" width="12%"> (139,150 </td> <td align="left" style="border-bottom: 1px solid rgb(0, 0, 0);" width="2%"> ) </td> </tr> <tr valign="top"> <td align="left" bgcolor="#e6efff"> </td> <td align="left" bgcolor="#e6efff" style="border-bottom: 1px solid rgb(0, 0, 0);" width="1%"> $ </td> <td align="right" bgcolor="#e6efff" style="border-bottom: 1px solid rgb(0, 0, 0);" width="12%">  19,021 </td> <td align="left" bgcolor="#e6efff" width="2%"> </td> <td align="left" bgcolor="#e6efff" style="border-bottom: 1px solid rgb(0, 0, 0);" width="1%"> $ </td> <td align="right" bgcolor="#e6efff" style="border-bottom: 1px solid rgb(0, 0, 0);" width="12%">  25,615 </td> <td align="left" bgcolor="#e6efff" style="border-bottom: 1px solid rgb(0, 0, 0);" width="2%"> </td> </tr> </table> </div> During the six-months ended December 31, 2011 and 2010, depreciation expense was $10,064 and $14,315, respectively.

4. OTHER ACCRUED LIABILITIES <table border="0" cellpadding="0" cellspacing="0" style="border-color: black; font-size: 10pt; border-collapse: collapse;" width="100%"> <tr valign="top"> <td align="left"> Other accrued liabilities are as follows: </td> <td align="left" width="1%"> </td> <td align="center" nowrap="nowrap" width="12%"> December 31, </td> <td align="center" nowrap="nowrap" width="2%"> </td> <td align="center" nowrap="nowrap" width="1%"> </td> <td align="center" nowrap="nowrap" width="12%"> June 30, </td> <td align="left" width="2%"> </td> </tr> <tr valign="top"> <td align="left"> </td> <td align="left" width="1%"> </td> <td align="center" nowrap="nowrap" width="12%"> 2011 </td> <td align="center" nowrap="nowrap" width="2%"> </td> <td align="center" nowrap="nowrap" width="1%"> </td> <td align="center" nowrap="nowrap" width="12%"> 2011 </td> <td align="left" width="2%"> </td> </tr> <tr> <td bgcolor="#e6efff"> </td> <td bgcolor="#e6efff" width="1%"> </td> <td bgcolor="#e6efff" width="12%"> </td> <td bgcolor="#e6efff" width="2%"> </td> <td bgcolor="#e6efff" width="1%"> </td> <td bgcolor="#e6efff" width="12%"> </td> <td bgcolor="#e6efff" width="2%"> </td> </tr> <tr valign="top"> <td align="left"> Accrued board fees </td> <td align="left" width="1%"> $ </td> <td align="right" width="12%">  12,500 </td> <td align="left" width="2%"> </td> <td align="left" width="1%"> $ </td> <td align="right" width="12%">  - </td> <td align="left" width="2%"> </td> </tr> <tr valign="top"> <td align="left" bgcolor="#e6efff"> Payroll liabilities </td> <td align="left" bgcolor="#e6efff" width="1%"> </td> <td align="right" bgcolor="#e6efff" width="12%"> 6,045 </td> <td align="left" bgcolor="#e6efff" width="2%"> </td> <td align="left" bgcolor="#e6efff" width="1%"> </td> <td align="right" bgcolor="#e6efff" width="12%"> 25,081 </td> <td align="left" bgcolor="#e6efff" width="2%"> </td> </tr> <tr valign="top"> <td align="left"> Sales tax payable </td> <td align="left" style="border-bottom: 1px solid rgb(0, 0, 0);" width="1%"> </td> <td align="right" style="border-bottom: 1px solid rgb(0, 0, 0);" width="12%"> 4,748 </td> <td align="left" width="2%"> </td> <td align="left" style="border-bottom: 1px solid rgb(0, 0, 0);" width="1%"> </td> <td align="right" style="border-bottom: 1px solid rgb(0, 0, 0);" width="12%"> 40 </td> <td align="left" style="border-bottom: 1px solid rgb(0, 0, 0);" width="2%"> </td> </tr> <tr valign="top"> <td align="left" bgcolor="#e6efff"> </td> <td align="left" bgcolor="#e6efff" style="border-bottom: 3px double rgb(0, 0, 0);" width="1%"> $ </td> <td align="right" bgcolor="#e6efff" style="border-bottom: 3px double rgb(0, 0, 0);" width="12%">  23,293 </td> <td align="left" bgcolor="#e6efff" width="2%"> </td> <td align="left" bgcolor="#e6efff" style="border-bottom: 3px double rgb(0, 0, 0);" width="1%"> $ </td> <td align="right" bgcolor="#e6efff" style="border-bottom: 3px double rgb(0, 0, 0);" width="12%">  25,121 </td> <td align="left" bgcolor="#e6efff" style="border-bottom: 3px double rgb(0, 0, 0);" width="2%"> </td> </tr> </table>      Board fees to the two independent directors are $25,000 each annually. The board members have the option to receive cash or convert into common stock at the rate of $0.12 or the rate of the last conversion agreement. The accrued board fees represent the board fees for the quarter ended December 31, 2011.

5. SUBORDINATED NOTES PAYABLE      At December 31, 2011, the following subordinated notes payable are outstanding. The notes bear interest at 12% and are on a month to month term. The Company recorded $40,278 interest for the six-months ended December 31, 2011, associated with these subordinated notes. <table border="0" cellpadding="0" cellspacing="0" style="border-color: black; font-size: 10pt; border-collapse: collapse;" width="100%"> <tr valign="top"> <td width="10%"> </td> <td align="left" bgcolor="#e6efff"> William S. Dickey </td> <td align="left" bgcolor="#e6efff" width="1%"> $ </td> <td align="right" bgcolor="#e6efff" width="12%">  480,000 </td> <td align="left" bgcolor="#e6efff" width="2%"> </td> </tr> <tr valign="top"> <td width="10%"> </td> <td align="left"> Robert A. Morrison </td> <td align="left" width="1%"> </td> <td align="right" width="12%"> 66,000 </td> <td align="left" width="2%"> </td> </tr> <tr valign="top"> <td width="10%"> </td> <td align="left" bgcolor="#e6efff"> Charles Ferris </td> <td align="left" bgcolor="#e6efff" width="1%"> </td> <td align="right" bgcolor="#e6efff" width="12%"> 16,000 </td> <td align="left" bgcolor="#e6efff" width="2%"> </td> </tr> <tr valign="top"> <td width="10%"> </td> <td align="left"> Michael Yinger </td> <td align="left" width="1%"> </td> <td align="right" width="12%"> 24,000 </td> <td align="left" width="2%"> </td> </tr> <tr valign="top"> <td width="10%"> </td> <td align="left" bgcolor="#e6efff"> Greg Dickey </td> <td align="left" bgcolor="#e6efff" width="1%"> </td> <td align="right" bgcolor="#e6efff" width="12%"> 20,000 </td> <td align="left" bgcolor="#e6efff" width="2%"> </td> </tr> <tr valign="top"> <td width="10%"> </td> <td align="left"> Mira Fine </td> <td align="left" style="border-bottom: 1px solid rgb(0, 0, 0);" width="1%"> </td> <td align="right" style="border-bottom: 1px solid rgb(0, 0, 0);" width="12%"> 20,000 </td> <td align="left" style="border-bottom: 1px solid rgb(0, 0, 0);" width="2%"> </td> </tr> <tr valign="top"> <td width="10%"> </td> <td align="left" bgcolor="#e6efff"> </td> <td align="left" bgcolor="#e6efff" style="border-bottom: 3px double rgb(0, 0, 0);" width="1%"> $ </td> <td align="right" bgcolor="#e6efff" style="border-bottom: 3px double rgb(0, 0, 0);" width="12%">  626,000 </td> <td align="left" bgcolor="#e6efff" style="border-bottom: 3px double rgb(0, 0, 0);" width="2%"> </td> </tr> </table>

6. LONG-TERM DEBT      In February and March 2008 the Company, pursuant to a loan and security agreement, entered into two (2) $200,000 promissory notes. In addition, the Company issued to the lender a warrant for the purchase of one million (1,000,000) shares of common stock at a purchase price of $.12 per share with an expiration date of five (5) years after the commencement date of the first loan. The notes had an interest rate of 15.499% and matured in three (3) years from the commencement date, and were collateralized with the Company’s personal property as defined in the loan and security agreement. Each note also had a final payment fee of $14,000 that was due on the earlier to occur of the maturity date or prepayment.      On December 30, 2010 the Company entered into a loan payment modification/settlement agreement with the lender in which we paid $65,000 as a one-time payment and will pay a remaining balance of $36,000 as the settlement of the outstanding balance and accrued interest on these notes. The discount on the notes was accrued into interest expense through the date of the settlement agreement. For the six months ended December 31, 2010 the Company recorded $2,689 as additional interest expense and amortized $5,833 of other assets. The lender also subordinated to our subordinated notes payable. The $36,000 will be paid at $3,000 a month through January 10, 2012 at zero interest. As of December 31, 2011, one $3,000 payment remained and is included in trade payables and was subsequently paid off on January 8, 2012.

7. NOTE PAYABLE      On December 17, 2011, the Company entered into a one year promissory note with a commercial bank. The note is a revolving line of credit, wherein the Company can receive advances up to $150,000. The note bears interest at approximately 4.00% and is guaranteed pursuant to a Guaranty Fee Agreement between William S. Dickey and the Company, wherein the Company pays Mr. Dickey a monthly fee of $750 to provide the guaranty. At December 31, 2011 the Company had $150,000 outstanding on this line of credit and no unused capacity available.

Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. At June 30, 2011, the Company has approximately a $4,000,000 net operating loss carry-forward which may or may not be used to reduce future income taxes payable. Current Federal Tax Law limits the amount of loss available to offset against future taxable income when a substantial change in ownership occurs. Therefore, the amount available to offset future taxable income may be limited. A valuation allowance has been recorded to reduce the net benefit recorded in the financial statements related to this deferred asset. The valuation allowance is deemed necessary as a result of the uncertainty associated with the ultimate realization of these deferred tax assets. 8. INCOME TAXES      The Company follows ASC subtopic 740-10 (formerly Statement of Financial Accounting Standard No. 109, (“Accounting for Income Taxes”) for recording the provision for income taxes. ASC 740-10 requires the use of the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion of all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.

9. COMMON STOCK      During fiscal year ended June 30, 2010 the Company: (a) issued 4,500,000 shares of our common stock for $225,000 which was used to repay $150,000 of convertible and subordinated notes payable; (b) issued 15,000,000 shares of our common stock to convert $775,000 of convertible notes payable; (c) issued 5,870,834 shares of our common stock to two officers for cancellation of $181,996 of accrued salaries, and (d) issued 250,000 shares of our common stock for services rendered to the Company.      During fiscal year ended June 30, 2011 the Company: (a) issued 12,207,200 shares of our common stock for conversion of $542,607 of various accrued liabilities ($.04445) , (b) issued 600,000 shares of our common stock to an employee ( $.012) , (c) issued 500,000 shares of our common stock pursuant to a teaming and employment agreement with Wizard Works Security Systems Inc and Chester A. Gilliam ( $.012), and (d) issued 1,200,000 shares of our common stock for services rendered to the Company ($.025).      The Company has cancelled its 2005 Stock Option Plan and has adopted a new 10 year 2012 Stock Option Plan at its annual meeting on January 30, 2012. At June 30, 2011 there are 1,000,000 outstanding warrants at a strike price of $.120 and expiring in February 2013. There are no outstanding stock options.

10. CONCENTRATIONS AND CONTINGENCIES      The Company leases its office premises on a month to month basis from an officer of the Company. The Company incurs monthly utilities and trash removal. In addition, pursuant to the teaming agreement, the Company leases from Chester Gilliam the use of his shop premises for $400 per month. Sales to one major customer represented approximately 86% of revenue for the six-months ended December 31, 2011 and approximately 44% of accounts receivable outstanding at December 31, 2011.

11. SUBSEQUENT EVENTS      Management has evaluated subsequent events through the date in which the financial statements were available for issue. There are no subsequent events related to the financial statements.