FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The words "believe," "expect," "anticipate," "project," "target," "optimistic," "intend," "aim," "will" or similar expressions are intended to identify forward-looking statements. Such statements include, among others, those concerning our expected financial performance and strategic and operational plans, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. These statements are based on the beliefs of our management as well as assumptions made by and information currently available to us and reflect our current view concerning future events. As such, they are subject to risks and uncertainties that could cause our results to differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties include, among many others: our significant operating losses; uncertainty of capital resources; the speculative nature of our business; our ability to successfully implement new strategies; present and possible future governmental regulations; operating hazards; competition; the loss of key personnel; any of the factors in the "Risk Factors" section of the Company's Annual Report on Form 10-K; other risks identified in this Report; and any statements of assumptions underlying any of the foregoing. You should also carefully review other reports that we file with the SEC. We assume no obligation and do not intend to update these forward-looking statements, except as required by law.

The following discussion should be read in conjunction with our financial statements, together with the notes to those statements, included elsewhere in this report. Our actual results may differ materially from those discussed in these forward-looking statements because of the risks and uncertainties inherent in future events.

We are a software developer, publisher, and systems integrator in the IBM midrange market. Our flagship product, MarkMagicTM, is an online bar code software product for IBM System i (formerly known as the AS/400) computers. This software lets businesses design and print all types of documents, such as bar code labels, radio frequency identification ("RFID") tags, e-forms, and other media, using live data, with little or no programming necessary. MarkMagic's "what-you-see-is-what-you-get" design component, JMagic, was developed in Java specifically in order to be deployed across the Internet, as well as on diverse computing platforms, including Windows, UNIX and Linux.

Our newest product, EdgeMagic®, released in February 2008, is an RFID control solution for IBM System i customers that is capable of deployment on other platforms and is highly scalable. It is designed to manage edge readers and analog control devices; commission, read, filter and verify RFID tags to comply with Electronic Product Code (EPC) compliance mandates; and integrate with popular System i ERP and Warehouse Management application packages.

Comparison of the three and nine months ended September 30, 2009 to the three and nine months ended September 30, 2008.

The following table summarizes certain aspects of our results of operations for the three and nine months ended September 30, 2009 to the three and nine months ended September 30, 2008.

                           Three months ended September 30,                                         Nine months ended September 30,
                              2009                   2008            Change $       Change %            2009                 2008           Change $       Change %
Revenues
Products                $        105,065       $        179,639     $  (74,574 )          -42 %   $        491,207       $     524,923     $  (33,716 )           -6 %
Services                         175,333                148,934         26,399             18 %            514,044             434,594         79,450             18 %
Total Revenues                   280,398                328,573        (48,175 )          -15 %          1,005,251             959,517         45,734              5 %

Direct Costs
Equipment Purchases     $         19,486       $         22,693     $   (3,207 )          -14 %   $        163,985       $     120,110     $   43,875             37 %
Royalties &
Consulting                         9,374                 29,049        (19,675 )          -68 %             39,576              50,586        (11,010 )          -22 %

Total Direct Costs      $         28,860       $         51,742     $  (22,882 )          -44 %   $        203,561       $     170,696     $   32,865             19 %
% of total revenues                   10 %                   16 %                                               20 %                18 %

Gross margin            $        251,538       $        276,831     $  (25,293 )           -9 %   $        801,690       $     788,821     $   12,869              2 %
% of total revenues                   90 %                   84 %                                               80 %                82 %

Research and
development costs       $         49,308       $        123,594     $  (74,286 )          -60 %   $        150,441       $     505,513     $ (355,072 )          -70 %
% of total revenues                   18 %                   38 %                                               15 %                53 %

Sales and marketing
expenses                $         26,271       $         60,123     $  (33,852 )          -56 %   $        101,340       $     204,399     $ (103,059 )          -50 %
% of total revenues                    9 %                   18 %                                               10 %                21 %

General and
administrative
expenses                $        316,020       $        362,530     $  (46,510 )          -13 %   $      1,008,094       $   1,111,849     $ (103,755 )           -9 %
% of total revenues                  113 %                  110 %                                              100 %               116 %

Interest expense        $         53,754       $        198,112     $ (144,358 )          -73 %   $        353,944       $     538,485     $ (184,541 )          -34 %
% of total revenues                   19 %                   60 %                                               35 %                56 %

Other Income
(Expenses)              $         (5,033 )     $            224     $   (5,257 )        -2347 %   $        (58,450 )     $       4,215     $  (62,665 )        -1487 %
% of total revenues                   -2 %                    0 %                                               -6 %                 0 %

Loss Before Taxes       $       (198,848 )     $       (467,304 )   $  268,456            -57 %   $       (870,579 )     $  (1,567,210 )   $  696,631            -44 %


Income Taxes
(Benefit)               $              -       $              -     $        -              0 %   $              -       $    (356,193 )   $  356,193           -100 %
Effective tax rate                     0 %                    0 %                                                0 %                23 %

Net loss                $       (198,848 )     $       (467,304 )   $  268,456            -57 %   $       (870,579 )     $  (1,211,017 )   $  340,438            -28 %
% of total revenues                  -71 %                 -142 %                                              -87 %              -126 %

Revenues

The decrease in total revenues in absolute dollars for the three months ended September 30, 2009, as compared to the same three months in 2008, is primarily due to less demand for hardware. Demand for services has increased for the period. The increase in total revenues for the nine months ended September 30, 2009 compared to the same period in 2008 is due to an increase in sales of hardware during the first quarter and an increase in services during the second quarter as well as an increase in prices for software. We also started selling a new product called WOW in the second quarter, which increased our revenues. We expect that our revenues for the fourth quarter of 2009 will be about the same as 2008 fourth quarter revenues. New MarkMagic features that we released in the third quarter met with positive reception from new and existing customers, which we believe will allow revenues to remain stable despite the general economic downturn.

Direct Costs

The costs for hardware and supplies for the three months ended September 30, 2009, were lower, as compared to the same three months in 2008, due to a decrease in hardware sales for this period. The costs for hardware and supplies for the nine months ended September 30, 2009, were higher, as compared to the same nine months in 2008, due to increased hardware sales.

Gross Margin

Gross Margin as a percentage of sales increased in the three months ended September 30, 2009 as compared to the same three months in 2008. Gross Margin as a percentage of sales decreased slightly in the nine months ended September 30, 2009 as compared to the same nine months in 2008. This was due to increased costs of hardware sold to our costumers during the period. We expect that our margins will remain at their current levels throughout the year due to the challenging economic environment that we, and the software industry at large, are experiencing.

Software Development Costs

Software development costs consist primarily of compensation of development personnel, related overhead incurred to develop EdgeMagic and upgrades, and to enhance our current products and fees paid to outside consultants. Substantially all of these expenses have been incurred by us in the United States. Software development costs are accounted for in accordance with Accounting Standards Codification 985-20-25, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, under which we are required to capitalize software development costs between the time technological feasibility is established and the product is ready for general release. Costs that do not qualify for capitalization are charged to research and development expense when incurred. Our EdgeMagic software product was available for general release on September 1, 2008, and all costs after that date have been expensed in accordance with Accounting Standards Codification 985-20-25. During the nine-month periods ended September 30, 2009 and 2008, the software development costs that were expensed were $150,441 and $505,513, respectively. Software development costs decreased in the nine-month period due to reduced spending on consultants and a reduction in personnel as a result of the substantial completion of our EdgeMagic product.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of commissions and advertising and promotional expenses. The decrease in absolute dollars for the three and nine months ended September 30, 2009 as compared to the same three and nine months in 2008 is due to cutbacks in advertising and trade show activity.

General and Administrative Expense

General and administrative expenses consist primarily of costs associated with our executive, financial, human resources and information services functions. General and administrative expenses decreased in absolute dollars for the three and nine months ended September 30, 2009 as compared to the same three and nine months in 2008 primarily due to fewer employees and the attendant reduction in related expenses.

Interest Expense

Interest expense represents interest accrued on, and amortization of deferred financing cost related to, the 8% convertible debentures. Amortization of these deferred finance costs ceased in April 2009 and was partially offset by amounts incurred after the Debenture default on April 10, 2009.

Other Income, Net

Other Income (Expenses) decreased for the three and nine months ended September 30, 2009 as compared to the same three and nine months in 2008 due to the approximate $58,000 loss recorded from the Mandatory Prepayment Amount for Debenture Holders demanding repayment.

Interest and other income, decreased for the three and nine months ended September 30, 2009 as compared to the same three and nine months in 2008. The decrease is due primarily to a decline in interest bearing bank balances.

Provision for Income Taxes

The provision for income taxes consists of provisions for federal and state income taxes.

We recorded no income tax benefit for the three months ended September 30, 2009 and 2008. There were no effective income tax rates for the three months ended September 30, 2009 and 2008. We recorded income tax benefit of $-0- and ($356,193) for the nine months ended September 30, 2009 and 2008. The effective income tax rates were 0% and 23% for the nine months ended September 30, 2009 and 2008. The effective tax rate differs from the statutory U.S. federal income tax rate of 35%, primarily due to state income tax increase in valuation allowance for deferred tax asset and permanent differences between GAAP pre-tax income and taxable income.

Liquidity and Capital Resources

As of September 30, 2009, the Company's principal source of liquidity was cash of $29,421. Our operations used $39,780 in cash during the nine months ended September 30, 2009 as compared to funds used for operations of $942,991 for the nine months ended September 30, 2008.

To sustain operations under our current structure, we need cash of approximately $50,000 per month to fund research and administrative expenses. We believe that we will be able to meet that continuing obligation at our current sales level while continuing to pay down existing trade obligations at a moderate rate.

Our working capital deficiency was approximately $3,950,000 at September 30, 2009. The deficiency in working capital included approximately $2,601,000 in amounts due on 8% convertible debentures, at least $2,290,000 of which is expected to be renegotiated and not require cash settlement as well as $346,000 in deferred revenues that require settlement in future services rather than cash.

During 2009 we issued 60,000 shares of common stock for services.

As of the fourth quarter of 2009, we are operating slightly below break-even on a cash flow basis. This is due to reduced revenue from our OEM channels that have been adversely impacted by general global economic weakness. This trend is not expected to reverse itself before the end of the year. We believe we can sustain our cash flow at slightly below break-even and will seek additional sources of financing for the short term. A number of current investors have indicated to management their willingness to increase their current investment positions to be used for short-term operating capital. As we remain slightly below break-even, we believe that such short-term capital infusion will be adequate to permit us to maintain our operations.