Note 1 - Interim Financial Statements

The accompanying unaudited financial statements of Security Intelligence Technologies, Inc. and subsidiaries (the "Company") have been prepared pursuant to generally accepted accounting principles for interim financial statements and the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's latest audited financial statements for the year ended June 30, 2003 filed on Form 10-KSB.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the Company's financial condition, results of operations and cash flows for the periods presented have been included. The Company's quarterly results presented herein are not necessarily indicative of results for a full year.

Organization and Nature of Business

Security Intelligence Technologies, Inc. ("SIT"), a Florida Corporation and its wholly owned subsidiaries (collectively the "Company") are engaged in the design, manufacture and sale of security and surveillance products and systems. The Company purchases finished items for resale from independent manufacturers, and also assembles off-the-shelf electronic devices and other components into proprietary products and systems at its own facilities. The Company generally sells to businesses, distributors, government agencies and consumers through five retail outlets located in Miami, Florida; Beverly Hills, California; Washington, DC; New York City, and London, England and from its showroom in New Rochelle, New York. On April 17, 2002, CCS International, Ltd. ("CCS"), a Delaware corporation, and its wholly-owned subsidiaries, merged with SIT and became a wholly owned subsidiary of SIT. The merger has been accounted for as a reverse acquisition, since the management and stockholder of CCS obtained control of the merged entity after the transaction was completed. Under reverse acquisition accounting, CCS is considered the accounting acquirer and SIT (then known as Hipstyle.com, Inc.) is considered the acquired company. Inasmuch as SIT had no substantive assets or operations at the date of the transaction, the merger has been recorded as an issuance of CCS stock to acquire SIT, accompanied by a recapitalization, rather than as a business combination.

Principles of Consolidation

The consolidated financial statements include the accounts of SIT and its wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.

Basis of Financial Statement Presentation

The financial statements of the Company have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred net losses of $438,457 and $716,781 for the three months ended September 30, 2003 and September 30, 2002 respectively. In addition, at September 30, 2003, the Company had a working capital deficit of $5,661,658 and a deficiency in stockholders' equity of $5,497,673. The Company is also a defendant in material and costly litigation, which has significantly impacted liquidity. See Note 7. The Company requires additional financing which may not be readily available. The Company's bank facility has terminated, and the only sources of funds other than operations has been loans

1. Basis of Financial Statement Presentation (continued)

from the Company's chief executive officer, customer deposits and proceeds from the issuance of common stock. (See Notes 2, 3 and 5). These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans with respect to these matters include to settle vendor payables wherever possible, a reduction in operating expenses, and continued financing from the chief executive officer in the absence of other sources of funds. Management cannot provide any assurance that its plans will be successful in alleviating its liquidity concerns and bringing the Company to the point of profitability. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Revenue recognition

The Company recognizes revenue from store sales upon the delivery of merchandise to a customer. Non-refundable advance payments received under marketing and distribution arrangements are deferred and either applied as payments towards customer purchases made pursuant to the terms of the respective agreements, or recognized as income at the termination of the agreement if specified purchase quotas have not been met by the customer. Customer deposits are initially recorded as liabilities and recognized as revenue when the related goods are shipped.

Financial Guarantees

Certain shares issued by the Company to settle debt obligations contain a price guarantee that requires the Company to settle in cash any difference between the original face amount of the debt and proceeds from the creditor's subsequent sale of the shares. The Company accounts for these transactions by recording the debt at fair value with periodic mark-to-market adjustments until the guarantee is settled. Unrealized gains or losses resulting from changes in fair value are included in earnings and accrued expenses.

Stock-based Compensation

The Company periodically grants stock options to employees in accordance with the provisions of its stock option plans, with the exercise price of the stock options being set at the closing market price of the common stock on the date of grant. The Company accounts for stock-based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and accordingly accounts for employee stock-based compensation utilizing the intrinsic value method. FAS No. 123, "Accounting for Stock-Based Compensation", establishes a fair value based method of accounting for stock-based compensation plans. The Company has adopted the disclosure only alternative under FAS No. 123, which requires disclosure of the pro forma effects on earnings and earnings per share as if FAS No. 123 had been adopted as well as certain other information.

Stock options granted to non-employees are recorded at their fair value, as determined in accordance with SFAS No. 123 and Emerging Issues Task Force Consensus No. 96-18, and recognized over the related service period. Deferred charges for options granted to non-employees are periodically re-measured until the options vest.

1. Stock-based Compensation (continued)

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation. Although it does not require use of fair value method of accounting for stock-based employee compensation, it does provide alternative methods of transition. It also amends the disclosure provisions of SFAS No.123 and APB No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. SFAS No. 148's amendment of the transition and annual disclosure requirements is effective for fiscal years ending after December 15, 2002. The amendment of disclosure requirements of APB No. 28 is effective for interim periods beginning after December 15, 2002. We adopted SFAS No. 148 and APB No.28 on January 1, 2003.

FASB Statement 123, "Accounting for Stock-Based Compensation," requires the Company to provide pro forma information regarding net income (loss) and income
(loss) per share as if compensation cost for the Company's stock option issuances had been determined in accordance with the fair value based method prescribed in FASB Statement 123. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in fiscal 2003 and 2002: dividend yield of 0%, risk-free interest rate of 3.38%, expected lives of eight years, and expected volatility of 120%. Under the accounting provisions of SFAS Statement 123, the Company's net loss and loss per share for the 2003 Quarter and the 2002 Quarter would have been the pro forma amounts indicated below:

                                                                                    Three Months Ended
                                                                             -------------------------------
                                                                                       September 30,
                                                                             -------------------------------
Net loss:                                                                        2003                 2002
                                                                             ----------           ----------
     As reported                                                             $ (438,457)          $ (716,781)
     Add: Stock based employee compensation expense
        included in reported net loss                                                 -                    -
     Deduct: Total stock based employee compensation expense
        determined under the fair value based method for all awards             (25,365)            (152,503)
                                                                             ----------           ----------
                                                                             $ (463,822)          $ (869,284)
                                                                             ==========           ==========
Loss per share, basic and diluted:
     As reported                                                             $    (0.02)          $    (0.04)
     Proforma                                                                $    (0.03)          $    (0.07)

Foreign Currency Translation

The functional currency of the Company's UK subsidiary is the local currency. Accordingly, the Company translates all assets and liabilities into U.S. dollars at current rates. Revenues, costs, and expenses are translated at average rates during each reporting period. Gains and losses resulting from the translation of the consolidated financial statements are excluded from results of operations and are reflected as a translation adjustment and a separate component of stockholders' deficit. Gains and losses resulting from foreign currency transactions are recognized in the consolidated statement of operations in the period they occur.

2. Note Payable - Bank

Prior to June 1, 2002, the Company had a bank credit agreement pursuant to which it could borrow up to $400,000 with interest at the bank's price plus 1%. On June 1, 2002, the available credit was reduced to $200,000 and the interest rate was increased to the bank's prime rate plus 2.5%. The Note was secured by substantially all of the assets of the Company, and personal assets and a guaranty of the chief executive officer. The bank also required the Company to maintain average monthly compensating balances of $60,000 and assessed additional interest at the prime rate plus 2.5% (7.25% at June 30, 2002) on any shortfall. The credit facility expires on November 1, 2002, when all unpaid principal and interest became due in full. The unpaid principal and interest was paid in December 2002. To date, management has been unable to renew or to replace the line with alternative financing on similar terms.

3. Note Payable - CEO/stockholder

This amount represents a note payable to the Company's chief executive officer and includes deferred salary of $168,899 and accrued interest of $82,855 based on an interest rate of 5% per annum. The Note is secured by substantially all of the assets of the Company and is due on demand.

4. Loss Per Share

The Company calculates earnings per share in accordance with SFAS No. 128, Earnings Per Share, and SEC Staff Accounting Bulletin No. 98. Accordingly, basic and diluted loss per share is computed using the weighted average number of shares of common stock outstanding and excludes all common stock equivalents outstanding during the period. Common stock equivalents consist of shares issuable upon the exercise of stock options and warrants using the treasury stock method. Stock options and preferred stock that are convertible into common stock based on the Company's attainment of performance goals are not includible in the calculation of earnings per share until the specified targets are met. The following securities have been excluded from the diluted computation for the three months ended September 30, 2003 and September 30, 2002 because they are contingently issuable and/or antidilutive:

                                               Three Months Ended
                                           --------------------------
                                                  September 30,
                                           --------------------------
                                             2003             2002
                                           ---------        ---------

Series A Convertible Preferred Stock       3,500,000        3,500,000
Series B Convertible Preferred Stock       1,500,000        1,500,000
Stock options                              1,992,500        1,783,000
Warrants                                     400,000          400,000

5. Consulting Agreements

In July 2003 the Company formalized consulting contracts with Michael Farkas and two additional financial consultants relating to acquisition services, financial public relations and operational performance services. In connection therewith the Company granted a total of 2,600,000 fully vested options, including 1,700,000 options granted to Michael Farkas, to purchase shares of common stock at prices ranging from $.10 per share to $1.00 per share. These options were valued at $137,060 using the Black-Scholes option-pricing model and are being amortized over the six month life of the contracts. The Company has expensed $75,206 related to these options for the three months ended September 30, 2003. As of September 30, 2003 the consultants have exercised 1,960,000 options for a total amount of $525,000, including 1,700,000 options exercised by Michael Farkas for $400,000.

5. 2003 Stock Incentive Plan

As of July 3, 2003 our board of directors adopted the 2003 Stock Incentive Plan (the "2003 Plan") which provided for the grant of non-qualified stock options to purchase a maximum of 320,000 shares of common stock or the grant of shares to directors, employees, officers, agents, consultants and independent contractors who perform services for the Company. As of the date of this quarterly report on Form 10-QSB, stockholder approval of the 2003 Plan has not been obtained.

6. Income taxes

The Company did not incur any income tax liabilities during the three-month periods ended September 30, 2003 and 2002 due to operating losses. As of September 30, 2003, the Company has increased its tax valuation allowance to offset the deferred tax benefits of net operating losses and other temporary differences arising during the September 2003 quarter because management is uncertain as to their ultimate realization.

7. Legal Matters

Litigation

Settled matters

On or about May 25, 2001, an action was commenced against CCS in the United States District Court for the Southern District of New York, captioned Shenzen Newtek v. CCS International Ltd. The plaintiff had sought to recover $91,500, which was paid to CCS in connection with a distributorship agreement between the parties, plus costs and interest. On July 10, 2002, the Company and Shenzhen Newtek entered into a Settlement Agreement under which SIT issued 67,000 shares of its common stock in full settlement, subject to certain terms, of the $67,000 claim.

The Settlement Agreement granted Shenzhen Newtek a price guarantee upon sale of the shares and, alternatively, the option after July 10, 2003 to return the 67,000 shares to the Company in lieu of a cash payment of $35,000. In August 2003 Shenzhen Newtek returned the 67,000 shares to the Company however to date, no cash payment has been made.

Pending Matters

In June 1998, a photographer and model formerly retained by CCS filed suit in U. S. District Court for the Southern District of New York captioned Ross & Vassilkioti v. CCS International, Ltd. seeking damages for alleged copyright infringement and other claims. The judge in the case has granted the plaintiff partial summary judgment as to the copyright infringement. On June 18, 2003, a jury awarded the plaintiffs $350,000 on the copyright infringement portion of the case. Under federal judicial rules, the Company is unable to contest the granting of partial summary judgment until a final judgment has been rendered. The Company believes that it has meritorious and substantial defenses against the additional claims asserted in the lawsuit and a valid basis for appeal of the jury award of $350,000 and any additional adverse verdicts that may occur in this case. A trial date for the remaining counts in the case has been delayed while the parties attempt to reach a settlement.

On November 1, 2002, a former Company supplier filed suit in the United States District Court for the District of Maryland, captioned Micronel Safety, Inc. v. CCS International Ltd. seeking damages of $242,400 for breach of contract to purchase certain products. CCS has denied the material allegations of the plaintiff's claim and has raised affirmative defenses thereto. The Company believes that it has valid defenses to the claim.

7. Legal Matters (continued)

Litigation (continued)

Pending Matters (continued)

On or about March 13, 2003, an action was commenced against CCS and its subsidiary in the Circuit Court of the 11th Judicial Circuit, Miami-Dade County, FL captioned Welcome Publishing Company, Inc. v. CCS International, Ltd. and Counter Spy Shop of Mayfair Ltd., Inc. seeking damages of $140,430 for an alleged breach of an advertising contract. CCS has denied the material allegations of the plaintiff's claim and has raised affirmative defenses thereto. The Company believes that it has valid defenses to the claim. A non-binding mediation took place on October 9, 2003 during which the parties discussed a settlement but were unable to reach an agreement.

The Company is also the defendant in 3 actions arising out of our distributor agreements. On or about May 11, 2000 an action was commenced against CCS in the Supreme Court, New York County, captioned Ergonomic Systems Philippines Inc. v. CCS International Ltd. The plaintiff seeks to recover $81,000, which was paid to CCS in connection with a distributorship agreement between the parties, plus costs and interest. CCS has denied the material allegations of the claim and has raised affirmative defenses thereto. The Company believes that it has valid defenses to the claim.

On or about October 12, 2001, an action was commenced against CCS in the United States District Court for the Southern District of New York, captioned China Bohai Group Co., Ltd. and USA International Business Connections Corp. v. CCS International, Ltd. The plaintiff seeks to recover $250,000 paid to CCS in connection with a distributorship agreement between the parties, plus $5,000,000 of punitive damages and costs and interest. CCS has denied the material allegations of the plaintiff's claim and has raised affirmative defenses thereto. CCS has asserted a counterclaim seeking damages in the approximate amount of $1,150,000 based upon the plaintiff's alleged breach of the parties' distributorship agreement. The Company believes that it has valid defenses to the claim.

On December 3, 2002 EHS Elektronik Sistemleri ("EHS") submitted a demand for binding arbitration to the American Arbitration Association in NY, NY claiming CCS breached a joint venture agreement it had entered into with CCS in 1994 and seeking a refund of the $200,000 it had paid to CCS. A hearing date has been set for December 22 and 23, 2003. The Company believes that it has valid defenses to the claim.

On July 1, 2002, the Company's London subsidiary, Counter Spy Shop of Mayfair Limited ("CSS"), entered into an agreement to assume the business operations of another UK corporation ("Predecessor") for nominal consideration. The Predecessor is a defendant in ongoing litigation brought by a former customer, who has sued for breach of a contract executed in 1998 and is seeking a refund of approximately $293,000 in products and services purchased from the Predecessor. Due to the business transfer, there is a possibility that the plaintiff could name CSS as a defendant in the case. The Company, in consultation with counsel, believes that the Predecessor has valid defenses to the claim, and that CSS has valid defenses against any action that may be brought against it.

7. Legal Matters (continued)

Litigation (continued)

Pending Matters

Given that litigation is subject to many uncertainties, it is not possible to predict the outcome of the litigation pending against the Company. However, it is possible that the Company's business, results of operations, cash flows or financial position could be materially affected by an unfavorable outcome of certain pending litigation in amounts in excess of those that the Company has recognized. All such cases are being, and will continue to be vigorously defended, and the Company believes that it has meritorious and valid defenses against all such litigation, as well as a valid basis for appeal of any adverse verdicts, should they result.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion should be read in conjunction with the financial statements and notes thereto of the Company. Such financial statements and information have been prepared to reflect the Company's financial position as of September 30, 2003 and June 30, 2003.

Historical results and trends should not be taken as indicative of future operations. Management's statements contained in this report that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results may differ materially from those included in the forward-looking statements. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of complying with those safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," "prospects" or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Information concerning the Company and its business, including the risks faced by us described herein and in our most recent annual report on Form 10-KSB could materially affect the Company's financial results. The Company disclaims any obligation to update or announce revisions to any forward-looking statements to reflect actual events or developments.

Critical accounting policies

The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America. Preparing financial statements in accordance with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The following paragraphs include a discussion of some of the significant accounting policies and methods applied to the preparation of the Company's consolidated financial statements. Review Note 1 to the financial statements for further discussion of significant accounting policies.

The Company recognizes revenue from store sales upon the delivery of merchandise to a customer. Non-refundable advance payments received under marketing and distribution arrangements are deferred and either applied as payments towards customer purchases made pursuant to the terms of the respective agreements, or recognized as income at the termination of the agreement if specified purchase quotas have not been met by the customer. Customer deposits are initially recorded as liabilities and recognized as revenue when the related goods are shipped.

Stock-based Compensation

The Company periodically grants stock options to employees in accordance with the provisions of its stock option plans, with the exercise price of the stock options being set at the closing market price of the common stock on the date of grant. The Company accounts for stock-based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and accordingly accounts for employee stock-based compensation utilizing the intrinsic value method. FAS No. 123, "Accounting for Stock-Based Compensation", establishes a fair value based method of accounting for stock-based compensation plans. The Company has adopted the disclosure only alternative under FAS No. 123, which requires disclosure of the pro forma effects on earnings and earnings per share as if FAS No. 123 had been adopted as well as certain other information. Stock options granted to non-employees are recorded at their fair value, as determined in accordance with SFAS No. 123 and Emerging Issues Task Force Consensus No. 96-18, and recognized over the related service period. Deferred charges for options granted to non-employees are periodically re-measured until the options vest.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation. Although it does not require use of fair value method of accounting for stock-based employee compensation, it does provide alternative methods of transition. It also amends the disclosure provisions of SFAS No.123 and APB No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. SFAS No. 148's amendment of the transition and annual disclosure requirements is effective for fiscal years ending after December 15, 2002. The amendment of disclosure requirements of APB No. 28 is effective for interim periods beginning after December 15, 2002. We adopted SFAS No. 148 and APB No.28 on January 1, 2003.

Income taxes

The Company uses the liability method to determine its income tax expense. Under this method, deferred tax assets and liabilities are computed based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that all or some portion of the deferred tax assets will not be realized. The ultimate realization of the deferred tax asset depends on the Company's ability to generate sufficient taxable income in the future.

RESULTS OF OPERATIONS - Three Months Ended September 30, 2003 and 2002

Revenues. Revenues for three months ended September 30, 2003 (the "2003 Quarter") were $936,686 a decrease of $80,525 or 7.9%, from revenues of $1,017,211 for the three months ended September 30, 2002 (the "2002 Quarter"). The decrease is primarily a result of a decreased marketing effort caused by our limited resources. In particular, we decreased our advertising and promotional expenditures and attended fewer international trade shows. As long as we do not have the resources to market our products effectively, we will have a difficult time increasing our revenues. In addition, our financial condition and losses may have affected the willingness of customers to purchase products from us.

Cost of Sales. Cost of sales decreased by $33,820 or 8.4%, to $367,370 in the 2003 Quarter from $401,190 in the 2002 Quarter. Cost of sales as a percentage of product sales decreased to 39.2% in the 2003 Quarter from 39.4% in the 2002 Quarter reflecting an improvement in product mix.

Professional fees and legal matters. Professional fees and legal matters increased by $34,478, or 42.0% to $116,672 in the 2003 Quarter from $82,194 in the 2002 Quarter. Based on a review of outstanding legal matters and unpaid settlements, we have established, in consultation with outside counsel, reserves for litigation costs that are probable and can be reasonable estimated. We can provide no assurance, however, that such reserves will be sufficient to absorb actual losses that may result from unfavorable outcomes. Moreover, it is possible that the resolution of litigation contingencies will have a material adverse impact on our consolidated financial condition, results of operations, and cash flows. We also expect that we will continue to incur attorneys' fees and the use of management resources to defend pending litigation and creditor nonpayment claims during fiscal 2004.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased by $40,672, or 7.7% to $489,899 in the 2003 Quarter from $530,571 in the 2002 Quarter. The significant changes were primarily due to (i) a decrease in advertising expense of $77,491, or 88.4% to $10,223 in the 2003 Quarter from $87,714 in the 2002 Quarter, (ii) a decrease in telephone expense of $13,859, or 30.0% to $32,989 in the 2003 Quarter from $46,848 in the 2002 Quarter, due to lower rates charged by new service providers and (iii) a decrease in shipping costs of $7,464, or 36.7% to $12,856 in the 2003 Quarter from $20,320 in the 2002 Quarter all partially offset by an increase in amortization of deferred compensation relating to stock options we have granted of $73,207.

Unrealized (gain) loss on financial guarantees. Unrealized (gain) loss on financial guarantees is attributable to the increase or decrease in market value relating to our price guarantees on common stock which we have issued in payment of trade payables. Unrealized (gain) loss on financial guarantees decreased $369,830, or 320.5% to a gain of $254,440 in the 2003 Quarter from a loss of $115,390 in the 2002 Quarter.

Depreciation and amortization. Depreciation and amortization decreased by $5,701, or 29.9% to $13,351 in the 2003 Quarter from $19,052 in the 2002 Quarter primarily as a consequence of the certain assets becoming fully-depreciated in fiscal 2003.

Interest expense. Interest expense increased by $3,367, or 20.6% to $19,681 in the 2003 Quarter from $16,314 in the 2002 Quarter as a result of a continued increase in the ordinary course of business of the Company's outstanding debt obligations.

As a result of the forgoing, our net loss decreased by $278,324, or 38.9% to $438,457, $.02 per share, in the 2003 Quarter from $716,781, $.04 per share, in the 2002 Quarter as a result of the factors described above.

LIQUIDITY AND CAPITAL RESOURCES

We require significant working capital to fund our future operations. At September 30, 2003 we had cash of $52,589 and a working capital deficit of $5,661,658. The aggregate amount of accounts payable and accrued expenses at September 30, 2003 was $3,444,091. As a result of our continuing losses, our working capital deficiency has increased. We funded our losses through the issuance of our common stock. We also utilized vendor credit and customer deposits. Because we have not been able to pay our trade creditors in a timely manner, we have been subject to litigation and threats of litigation from our trade creditors and we have used common stock to satisfy our obligations to trade creditors. In many instances when we issue common stock, we have provided that if the stock does not reach a specified price level one year from issuance, we will pay the difference between that price level and the actual price. As a result, we have contingent obligations to our some of these creditors. With respect to 510,000 shares of common stock issued during the fiscal 2003 and 2002, the market value of the common stock on September 30, 2003 was approximately $42,953 less than the guaranteed price.

Our accounts payable and accrued expenses decreased from $3,563,776 at June 30, 2003 to $3,444,091 at September 30, 2003. This decrease consists of an increase in the market value of our common stock held by trade creditors of $254,440 offset by an increase in other accounts payable and accrued expenses of $134,755 reflecting our inability to pay creditors currently. We also had customer deposits and deferred revenue of $2,278,782 which relate to payments on orders which had

We require substantial funds to support our operations. Since the completion of the merger we have sought, and been unsuccessful, in our efforts to obtain adequate funding for our business. Because of our losses, we are not able to increase our borrowing. Our bank facility terminated on November 1, 2002 and to date, we do not have any agreements with any replacement lender. Our failure to obtain a credit facility with another lender could materially impair our ability to continue in operation, and we cannot assure you that we will be able to obtain the necessary financing. Our main source of funds other than the bank facility has been from loans from our chief executive officer, customer deposits and vendor credit. Because of both our low stock price and our losses, we were not been able to raise funds through the sale of our equity securities in fiscal 2002 and 2003. During the 2003 Quarter our stock price increased and we raised $525,000 resulting from the exercise of options to buy our common stock. Management cannot provide any assurance that our stock price will increase or remain at its current level or that we will be able to raise any more money through the sale of our equity securities. We may not be able to obtain any additional funding, and, if we are not able to raise funding, we may be unable to continue in business. Furthermore, if we are able to raise funding in the equity markets, our stockholders might suffer significant dilution and the issuance of securities may result in a change of control. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans with respect to these matters include its attempts to settle vendor payables wherever possible, a reduction in operating expenses, and financing from the chief executive officer in the absence of other sources of funds. Management cannot provide any assurance that its plans will be successful in alleviating its liquidity concerns and bringing the Company to the point of sustained profitability. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Item 3. Controls and Procedures

Our chief executive officer and chief financial officer have supervised and participated in an evaluation of the effectiveness of our disclosure controls and procedures as of a date within 90 days of the date of this report, and, based on their evaluations, they believe that our disclosure controls and procedures (as defined in Rule 13a-14(c) of the Securities Exchange Act of 1934, as amended) are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. As a result of the evaluation, there were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

Item 6. EXHIBITS AND REPORTS OF FORM 8K

(a) Exhibit

None

(b) Reports on Form 8-K

None

                    By: /s/ Ben Jamil
                    ----------------------------------------
                    Ben  Jamil, chief  executive  officer


                    By:  /s/  Chris R. Decker
                    ----------------------------------------
                    Chris R. Decker, chief financial officer

Date:  November 19, 2003