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Plan of Operation

For the next 12 months we intend to focus our efforts on implementing the following business strategy:

Settlement of All pending Litigation and Outstanding Secured Indebtedness to Trafalgar.  

On March 25, 2011, NAS, together with Intecon, Inc., and Intuitive Systems Solutions, Inc., have settled all pending litigation and mutually agreed to end and drop all claims between NAS and Trafalgar Capital Specialized Investment Fund, Luxembourg, Trafalgar Capital Sarl, Trafalgar Capital Advisors (collectively, "Trafalgar") regarding all debt, equity and financing agreements and any and all existing liens, covenants, conditions and encumbrances between National Automation Services, Inc. and Trafalgar Capital. Under the terms of the settlement, effective March 2011, NAS will remove all Trafalgar debt from its books and all liens on its assets shall be released in consideration for a payment of $300,000 dollars in cash, a promissory note for $200,000 dollars and approximately seven million shares of restricted NAS stock to Trafalgar Capital. Per the terms of the agreement, the UCC-1 filings against the Company’s asset’s will be lifted in ninety one (91) days after settlement, so long as NAS does not declare bankruptcy during such ninety one day period.  (For additional information, see also Item 1A, Risk Factors – Continuation as Going Concern; We Need Substantial Additional Capital.)  

Raise Additional Capital.  

We currently have a cash shortage, and our operating revenues are insufficient to fund our operations, primarily due to our past encumbered litigation with Trafalgar Capital which was settled on March 25, 2011.  Consequently, our audited financial statements contain, in Note 3, an explanatory paragraph to the effect that our ability to continue as a going concern is dependent on our ability to increase our revenue, eliminate our recurring net losses, eliminate our working capital deficit, and realize additional capital; and we can give no assurance that our plans and efforts to do so will be successful (see Item 8, Financial Statements and Supplementary Data).  Therefore, we require additional funds to finance our business activities on an ongoing basis and to implement our acquisition strategy portraying our company as one able to provide a target company not only with cost savings resulting from centralized estimating, accounting and other corporate functions but also with additional working capital to finance and grow its business.  Accordingly, we intend to seek additional financing.  Any additional funding sought would likely result in a material and substantial dilution of the equity interests of our current shareholders and could potentially, scale back or terminate our acquisition efforts as well as our own business activities, which would have a material adverse effect on the company and its viability and prospects.  (See also Item 1A, Risk Factors – Continuation as Going Concern; We Need Substantial Additional Capital; and Operating Losses, Layoffs and Cutbacks.)

Improve Existing Operations.

Our operating results have been unsatisfactory.  We had a working capital deficit of $(6,278,876) at December 31, 2010. We also have experienced recurring losses.  Although in each of the following periods our revenues have increased over the corresponding period in the prior year, our revenues for 2010 decreased due primarily to our encumbrance with Trafalgar and the inability to service our customers. For the fiscal year end December 31, 2010, we had an operating loss of $(2,306,574) and a net loss of $(2,888,633); and for the year ended December 31, 2009, we had an operating loss of $(3,125,188), and a net loss of $(4,887,646).  In addition, as a result of insufficient cash flow we had to lay-off 50% of our operations staff and impose a temporary 20% salary reduction on our employees and a temporary 50% salary reduction on our senior management, and at April 14, 2011 our cash on hand, most of which was obtained from recent private placements of our common stock, was a negligible $2,700. On September 30, 2010, we were forced to reduce operations in our Nevada subsidiary, and lay-off the remaining staff. We have since consolidated operations for Nevada to our Arizona subsidiary for the interim period until we can assess the Nevada market.

We are working to improve the existing operations by removing the burdens and obstacles that we believe are impeding our operations. With Trafalgar litigation settled we intend to expand our operations while carefully managing our overhead to attempt to increase revenue and improve cash flow. Our plan is to increase our revenue by increasing our visibility and the awareness of our company, and our products and services, by hiring sales persons in Arizona and California and engaging our estimating department in actively calling on potential clients. In general, we will strive to engage in more aggressive sales, marketing, and advertising activity.  We intend to further develop and implement strategies to market ongoing maintenance and service contracts to our current as well as our past customers, and we plan to package these continuing services as part of our industrial automation design and manufacturing services.  We also commit to further implemented cost reduction synergies such as centralizing procurement and estimating activities at our corporate hub using dedicated teams of trained employees. We feel ultimately that having these tasks performed at our branch offices could provide reduced overall overhead and greater corporate control of pricing. To increase revenue and cash flow position, we intend to begin our acquisition strategy, and plan to acquire companies which support our overall corporate structure (See Effect Strategic Acquisitions).

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Effect Strategic Acquisitions.

We intend to expand our operations into other markets in the continental United States and to reduce our concentration in municipal water management/waste water treatment by acquiring select small to medium sized privately-held automation companies which principally perform work for industrial applications.

We use the following principal criteria to evaluate acquisition opportunities:

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Established businesses with a proven track record: We seek established businesses with a proven operating track record strong financial performance, positive operating results, established or growing contract backlogs, and/or the potential for positive operating cash flow.  We consider the experience and skill of management and whether other talented personnel exist within the company or the local market.

·

Opportunity for growth of our industrial business: We look for businesses with an established base of industrial end users, to provide us an opportunity to increase our diversification outside of the water treatment/wastewater jobs which we have had such a large concentration of our business in the past.

·

Opportunity to expand into new geographical markets: We seek businesses that have an established presence in local metropolitan markets in which we have no presence and which preferably are near our existing regional footprint.  We also examine the likelihood of the target being able to obtain water treatment/wastewater jobs based on our existing expertise, as well as our ability to obtain new business in our pre-existing markets by promoting the target company’s industry-specific experience and expertise.

The criteria identified above are not intended to be exhaustive. Any evaluation relating to the merits of a particular business combination will be based, to the extent relevant, on the above factors as well as other considerations deemed relevant by our management in effecting a business combination consistent with our business objectives. Accordingly, we may enter into a business combination that does not meet any or all of these criteria if we believe that it has the potential to create significant stockholder value.

We intend to effect our acquisitions by structuring the transaction to require us to pay the purchase price principally by issuing shares of our common stock to the owners of the target company.  If cash is required, we intend to use cash on hand and, if our cash resources are insufficient, either to draw down on our existing, or to seek to obtain new, credit facilities or to raise cash in private offerings of debt or equity securities.  

Director Qualifications and Board of Directors Role

Our Company’s Board of Director qualifications, to date, have been members of the ownership of our Company. As owners of the Company who now sit on the board, their fundamental role has been to guide the Company’s success in its current operations, to oversee the management and executive levels of the Company and to ensure that the Company complies with the rules and regulations of a public or traded company. Management has traditionally had a broad discretion to adjust the application and allocation of our cash and other resources as they are also a part of the ownership and Board of Directors team. With the effective status of our registration statement, the Company has started implementing “key” business concepts and fundamental strategies in order to further “separate” the Board functions from those of management. Our primary goal is to have our Corporate Governance rules and regulations implemented to start these strategies. The Board of Directors role in the next six to twelve months will move from its existing blend of management and direct dependence on ownership to one of independence set forth in our Governance charter as noted on our website and other disclosed documentation. These principals also adhere to the Company’s code of conduct (ethics) which is also noted on the Company’s website and exhibited hereto on this annual filing.

Acquisitions Effected

Intuitive System Solutions, Inc.

To implement our desire to discontinue our status as a public “shell”, on October 2, 2007, we acquired 100% of the outstanding capital stock of Intuitive System Solutions, Inc. (“ISS”), a Nevada corporation headquartered in Henderson, Nevada, which was formed on April 30, 2001 and engages in the business of designing, producing, installing specialized mechanical and electric automation systems built to operate and control machinery and processes with a minimum of human interaction.  To acquire ISS we issued an aggregate of 39,999,999 shares of our common stock, which shares represented approximately 99.6% of our outstanding common stock on a fully diluted basis.  (For accounting purposes this acquisition has been treated as a reverse merger, with ISS as the acquirer; and therefore our historical financial statements prior to October 2, 2007 are those of ISS.)  Accordingly, pursuant to the Stock Purchase and Plan of Reorganization Agreement among us, ISS,

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Messrs. Jody R. Hanley (“Hanley”), Robert W. Chance (“Chance”) and Manuel Ruiz (“Ruiz”) (collectively, the “ISS Owners”), TBeck Capital, Inc. (“TBeck”), a Florida corporation, and 3 JP Inc., a California corporation, we issued to the ISS Owners an aggregate of 21,999,999 “restricted” shares of our common stock as follows:  Hanley: 7,333,333 shares; Chance: 7,333,333 shares; and Ruiz: 7,333,333 shares.  Messrs. Chance, Ruiz and Hanley, who now control our Board of Directors and are our senior Management, also executed a lockup agreement in which each agreed not to sell any of the 7,333,333 shares he received in that transaction for two years, other than in a private sales transaction approved in advance by Ronald Williams (the President of T-Beck, who died in March 2009) or Joseph Pardo, the President of 3 JP.  After the closing, we relocated our executive offices to the offices of ISS in Henderson, Nevada.  

In addition, we issued to T-Beck and its designees an aggregate 18,000,000 shares because T-Beck (1) was the owner, in escrow, of 1,126,745 shares of ISS common stock issued in consideration for T-Beck having paid to ISS an aggregate of $506,000 in cash and agreeing verbally to pay to ISS after the closing an additional $244,000 in cash to be used for working capital, and (2) allegedly paid the $250,000 required to effectuate the transaction.  (T-Beck never executed a promissory note to memorialize this future funding obligation, and it never paid us or ISS the promised $244,000.)  In addition, T-Beck and its President Ronald Williams had advised ISS and Messrs. Chance, Hanley and Ruiz that being acquired by NAS, despite its deregistration of its securities under the Securities Exchange Act of 1934, as amended (“Exchange Act”), would be the best route to take ISS public while also providing financing to ISS. Of these 18,000,000 shares, 4,000,000 were “restricted” shares and were issued as follows:  3 JP Inc. – 1,975,000 shares; Stingray Investments, Inc. – 1,975,000 shares; and Hoss Capital – 50,000 shares; and 14,000,000 were “free trading” shares issued pursuant to an opinion of counsel relying upon the exemptions from registration available under Rule 504 under the Securities Act of 1933, as amended, and under the securities laws of the State of Texas, as follows: T-Beck – 2,000,000 shares; Victoria Financial Consultants, LLC – 2,000,000 shares; Warren Street Investments, Inc. – 1,000,000 shares; BGW Enterprises, Inc. – 1,898,147 shares; Blake Williams – 1,101,853 shares; South Bay Capital, Inc. – 3,000,000 shares; and Michelle Rice – 3,000,000 shares.  We now believe that Stingray Investments, T-Beck and Warren Street Investments were affiliates of Ronald Williams (Ronald Williams was the President of T-Beck, and he died in March 2009); BGW Enterprises and Victoria Financial Consultants were affiliates of Blake Williams, the adult son of Ronald Williams; and South Bay Capital was an affiliate of 3 JP, and that both were affiliates of Joseph Pardo.  Accordingly, Ronald Williams, Blake Williams and Joseph Pardo all may be deemed to have become promoters as of the closing of the ISS reverse merger (see Item 13, Certain Relationships and Related Transactions, and Director Independence – Promoters and Certain Control Persons).  

After giving effect to the ISS transaction, we had issued and outstanding 40,125,181 shares of common stock, which were owned as follows:  Messrs. Hanley, Chance and Ruiz owned 21,999,999 shares, representing approximately 54.8%, or 7,333,333 shares each, representing approximately 18.3% each; T-Beck and its designees owned 18,000,000 shares, representing approximately 44.9% (including (a) 4,975,000 shares, representing approximately 12.4%, owned by persons we now believe were affiliates of Joseph Pardo, (b) 4,975,000 shares, representing approximately 12.4%, owned by T-Beck and other persons we now believe were affiliates of Ronald Williams and (c) 4,000,000 shares, representing approximately 10%, owned by Blake Williams and persons we now believe were his affiliates); and the public owned 125,082 shares, representing approximately 0.3%.  

Intecon, Inc.

On December 26, 2007, we acquired 100% of the outstanding capital stock of Intecon, Inc. (“Intecon”), an Arizona corporation headquartered in Tempe, Arizona, which conducts an automation control systems business similar to ours except that Intecon specializes in water management/wastewater treatment projects awarded by municipalities.  Pursuant to a Stock Purchase Agreement among us, Brandon A. Spiker (“Spiker”), David Marlow (“Marlow”) and Frank Brown (“Brown”), we issued an aggregate of 300,000 “restricted” shares of our common stock (valued at $42,000), and paid an aggregate of $300,000 in cash when we paid the unsecured 60-day, 5% Promissory Notes we issued at the closing to the sellers, as follows: Spiker: 120,000 shares and a $120,000 Note; Marlow: 90,000 shares and a $90,000 Note; and Brown: 90,000 shares and a $90,000 Note.  In addition, we agreed to pay up to $150,000 (we actually paid $250,000) of Intecon’s outstanding indebtedness the repayment of which had been guaranteed by Spiker and Marlow.  On March 25, 2008, as part of the overall Intecon acquisition, we issued an additional 1,500,000 “restricted” shares of common stock, valued as of the December 26, 2007 acquisition date at $210,000, to each of Messrs. Spiker and Marlow as a retention bonus in consideration for him entering into an employment agreement with Intecon expiring on December 31, 2010.  (For more information about such employment agreements, see Item 11 – Executive Compensation.)

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identical panels from project to project and end user to end user. These panels may be incorporated into system design projects for which our services have been retained, or on occasion we may sell them to original equipment manufacturer (“OEM”) clients who then will incorporate our panels into the manufacture of their own systems and products.

A Typical Project – From Concept to Operational Control Panels

We are currently working on the Glendale Oasis Zone 4 Ground Water Treatment Plant and Well Sites project for The City of Glendale, Arizona The project includes the automation of six well sites and one fully automated state-of-the-art treatment facility.  The facilities were implemented to reclaim used water and clean it in such cases as to not only satisfy the EPA standards but also remove the impurities or the reclaimed water for other uses.  This is a construction manager at risk project. NAS was chosen for award of this project based on our reputation and completeness of our Scope of Work proposal.  NAS was hired to design and install control panels and field instrumentation to automate the ground water treatment system.

Our first task in implementing the project was to assemble a project team.  The team consisted of a project manager, project engineer, field installation manager, and technicians.  The project team first developed field instrument specifications, control panel specifications, electrical loop drawings, and operations and maintenance manuals for the consulting engineering firm to review. Once approved, our procurement department sourced all the components required for the job.  Once the components were located and ordered, we began fabrication of the PLCs and control panels according to project drawings.  When the components are delivered and installed, we ship the completed control panels to the field. Our field installation manager coordinates the control panel installation with the other contractors working on the project: the field technicians install all components devices; the electrical contractor wires all PLCs, HMIs, and other components; and the technicians and project engineer conducts field calibrations and start-up.  

Our project manager has overseen all phases of the project and attended project coordination meetings with the client and its contractors. Once the project is finished, these facilities can run 24 hours per day, seven days per week, with minimal human intervention.

Customers; Contracts; Concentration; Seasonality

Our customer base consists primarily of contractors and electrical subcontractors who have been awarded projects requiring the installation of automation controls systems. Our business depends principally on our being awarded projects by those contractors or subcontractors through a competitive bidding process, although a relatively small number of jobs are obtained through negotiation.  As for 2010 and 2009 approximately 65% of our projects have involved water reservoir management and waste water treatment facilities operated by municipalities, although we also have been retained by contractors and subcontractors to provide automated control systems or components for use in industrial applications.

Typically, the material terms of our fixed-price contracts are: (1) progress based, (2) invoicing terms, (3) deadlines for submittals, (4) wage rates and (5) start time.  For time and material contracts, our material terms involve:  (a) the start/end date and (b) price quotes for materials and percentage of labor allocated for the job.  

Our business does not experience seasonal fluctuations.

Our Market

The automation/control industry in the United States has been approximated to exceed over $500 billion in revenues per year. The automation industry is segmented, consisting of automation control and system divisions in companies that expand over various markets (Aerospace, Robotics, Transportation, Process, Security, Automotive, etc.). We estimate, based on various external sources, the total automation/control market consists of over 21,000 publically and privately held companies operating both domestically and internationally.

Historically we have viewed and confined our marketplace, for the most part, to the Southwestern United States; specifically in Arizona and Nevada. The main industries served have been water/wastewater, mining, and light manufacturing.

We are also looking to provide automation into new vertical markets such as security, machine building, on Original Equipment Manufacturers (“OEM’s”), and Heating, Ventilating, and Air Conditioning (“HVAC”) industries. Since August of 2009 we have looked to California for organic growth in our current markets of water/wastewater, mining, and light manufacturing but also expanding into new markets available in California such as food processing, oil and gas, and automation of shipping ports. California has an abundant amount of OEM’s that can use our contract manufacturing skills and

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engineering know-how at the competitive rates of Arizona and Nevada. Additionally since 2001, the Security Industry Market has also been growing at our sea ports, airports, and on our borders, making this another market that is highly profitable allowing us to capitalize on industry demands.

Our focus in 2011 and beyond, will be to expand our market via inorganic growth mainly through Mergers and Acquisitions into other regions of the United States, solidifying our position as a leading System Integrator and becoming the provider of choice for a wider range of industries and territories served, allowing for the growth and sustainability in unpredictable market trends.

Competitive Business Conditions; Competitive Position; Methods of Competition

 Competition

The automation control industry is intensely competitive.  A few large automation control companies, such as Emerson Electric Company, Rockwell Automation, Inc. and Honeywell International, Inc., dominate the industry as they offer national as well as worldwide support for the corporate and government clients they serve. Many of our competitors have longer operating histories, and virtually all have greater name recognition, larger customer and end user bases and significantly greater financial, technical and sales and marketing resources than we do.  As noted above, 65% of our revenue is derived from water management/waste water treatment jobs awarded by municipalities in the Southwestern United States.  Our most significant competitor for this market niche is Fluid IQs Inc. (formerly known as Control Manufacturing Company), which is based in Napa, California, with regional offices in Arizona, Nevada, New York, Southern California and Utah, and is a subsidiary of Glenmore Global Solutions.  Fluid IQs, which has been in business for 28 years, states on its website that it is one of a very select number of certified system integrators listed by Control System Integrators (“CSIA”); certified member status with the CSIA is achieved by meeting stringent performance standards, as measured in an intensive audit process conducted by an independent third-party consulting firm, in general management, financial management, project management, quality management, technical management, human resources, and business development; and certified members are re-audited every three years to the current performance standards.  

As discussed above, our contracts typically are awarded on a competitive bid basis. Unlike Fluid IQs, our company is not a certified systems integrator listed by CSIA, and we do not consider this to be a material competitive disadvantage. While our competitive position varies, we believe we are progressing to be a significant competitor in the markets we serve principally as a result of our design capabilities and the total equipment life cycle we provide, our ability to meet the delivery schedule, and also because of our reputation, experience and safety record.

Backlog

Our backlog represents contracts that we have started or have been awarded, but which have not been completed or signed, respectively, and it excludes the portion of orders already included in revenue on the basis of percentage of completion.  Our backlog as of December 31, 2010 and December 31, 2009 was $400,000 and $2,486,992 respectively. Our backlog generally runs off within 12 months from the date of contract signing.

Since projects take several months to complete, we generally show a large backlog of work as new projects begin. As the projects are completed, backlog is realized.  During fiscal 2010 we realized $1,758,494 (71%) of the backlog existing at December 31, 2009; and at fiscal 2009, we realized $1,753,645 (75%) of the backlog existing at December 31, 2008. A small portion of unrealized backlog reflects project contracts that involve extended or ongoing service that will be realized when the service is provided or completed.

Raw Materials and Components

We do not purchase any raw materials. We do purchase components used to manufacture our control panels, on an as-needed basis after we are retained for a project and after we assess the components that will be needed for that particular project.  

We order components from third-party distributors and manufacturers, including General Electric, Rockwell Automation’s Allen-Bradley division, Siemens Energy & Automation, Schneider Electric’s Modicon division, Wonderware, Intellution and Walters Electric. These components are off-the-shelf items and are available from multiple sources, and our need for particular components depends on the requirements of a particular project; however, where we can do so we order components from those manufacturers and distributors who we believe will give us notice of new projects on which we would

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have an opportunity to a bid or otherwise obtain work.  We integrate these components into our control panels, using the software that is provided with these components or, where applicable, we program the software to operate within the specific SCADA interface we designed. We have a high concentration of purchases from a single supplier or limited numbers of suppliers in the automation industry; however, even if one of these suppliers was to go out of business we would be able to obtain supplies and materials from other vendors in such a manner as to be minimally affected.

Environmental Matters

We are subject to environmental regulation by federal, state and local authorities in the United States. Although we believe we are in substantial compliance with all applicable environmental laws, rules and regulations (“laws”), the field of environmental regulation can change rapidly with the enactment or enhancement of laws and stepped up enforcement of these laws, either of which could require us to change or discontinue our control panel manufacturing activities.  At present, we are not involved in any material environmental matters and are not aware of any material environmental matters threatened against us.

Proprietary Rights

We do not own or license any patents or trademarks, and we have no immediate plans to do so. We have not filed, and do not intend to file, any application with any government agency for protection or registration of these rights. We rely upon a combination of nondisclosure and other contractual arrangements to protect our proprietary rights.

Distribution Methods of our Service

Sales, Marketing and Advertising

We typically get business by biding for projects, and in order to learn of the existence of contracts for which we might be interested in bidding we monitor the public forums where municipalities post the water management/waste water treatment projects for which they are seeking bids and where industrial projects are listed.    

We usually must be pre-qualified by the municipality or company who is the end user.  When we find a suitable project we submit our pre-qualification packages and once our qualification have been established we submit our best price in bid form.

We also generate direct sales by utilizing our sales specialists to contact electrical contractors in a position to hire us for projects they have been awarded. Before qualifying a sales specialist, management in our local offices requires that such sales specialists have at least five years’ industry experience, proficient knowledge in controls and instrumentation in a variety of vertical markets such as water management/wastewater treatment and food and beverage production, a college degree and good communication skills.

We also seek and receive referrals of job opportunities from the automation hardware and software manufacturers and distributors whose products we purchase, including but not limited to Siemens Energy & Automation, General Electric, Rockwell Automation’s Allen-Bradley division, Schneider Electric’s Modicon division, Wonderware, Intellution and Walter Electric.  

We currently advertise nationwide in automation controls systems trade journals and in local publications in Nevada and Arizona. We plan to advertise in national publications such as Control Engineering, Automation.com. WEFTEC, and Construction Notebook, which is a public bid repository publication, and to attend trade shows to increase our visibility and attract new customers.

We have also developed a “Brand Standards Manual” to help with the implementation and use of logos, letterhead and other products that seek to brand all our subsidiary companies under the name “National Automation Services, Inc.”

Number of employees

As of April 14, 2011, we had 15 employees, all of which are full-time, including two electrical engineers, three control engineers, two estimating engineers, two sales engineers, one technicians, one project managers, and four support staff (accounting, office clerical, marketing).  

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Fluctuations in Operating Results

We expect quarterly and annual operating results to fluctuate, depending primarily on the following factors:

·

Timely payment of our accounts receivable;

·

Our ability to obtain new business;

·

Our ability to generate significantly greater revenues than we have been able to generate to date, and to have revenues in such amount as to be able to satisfy our  operational overhead, which now is not being met;

·

Our ability to reduce selling, general and administrative cash expenses,

particularly payroll compensation, by issuing stock to alleviate cash constraints, especially considering that our planned expansion by acquisition of other companies will result in increases in operating expenses, including, without limitation, as a result of the employment contracts we seek to enter into with the former owners of these companies;

·

The cost of components used for the production of control panels; and

·

The cost of attracting and hiring qualified employees.

Risks of Expansion by Acquisition

Our business strategy depends in large part on our ability to identify and acquire suitable companies, to expand our current expertise into the markets of our acquired companies, and to capitalize on the expertise of these companies to obtain new business in our current markets.  Delays or failures in acquiring new companies would materially and adversely affect our planned growth.

The success of this proposed strategy will depend on numerous factors, some of which are beyond our control, including the following:

·

securing any required approvals from our lender(s) and others;

·

our ability to effectively integrate an acquired company, including its information systems and personnel;

·

our ability to retain the services of the key employees of the acquired company;

·

availability of additional qualified operating personnel;

·

necessary or unavoidable increases in wages, or unanticipated operating costs;

·

the possibility of unforeseen events affecting the region particularly in which an acquired company operates;

·

adverse effects on existing business relationships resulting from the performance of an acquired company; and

·

diversion of management’s attention from operating our business.

The acquisition transactions may also result in the following:

·

issuance of additional stock that would further dilute our current stockholders’ percentage ownership;

·

incurring debt;

·

assumption of unknown or contingent liabilities; or

·

negative effects on reported operating results from acquisition-related charges and

·

amortization of acquired technology, goodwill and other intangibles.

Therefore, our business strategy may not have the desired result, and notwithstanding effecting numerous acquisitions we still may be unable to achieve profitability or, if profitability should be achieved, to sustain it.

Impairment of Goodwill and/or Intangible Assets May Occur

Goodwill resulting from our acquisitions of other companies and other intangible assets represented a significant portion of our assets. As of December 31, 2010 and December 31, 2009, we had goodwill and other identifiable intangible assets of $0 and $36,034, respectively. We review these assets for impairment at least annually or whenever events or circumstances indicate the carrying amount of an asset may not be recoverable. If we were to determine that a significant

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impairment in value of our goodwill or unamortized intangible assets had occurred, we would be required to write off a substantial portion of such assets, which would negatively affect our results of operations and financial condition, and it could adversely impact our stock price.

Management of Growth

Our strategy anticipates significant growth in the diversity of our operations and in our business, which would place demands on our management and our limited financial and other resources.  To manage any such growth, we would be required to attract and train additional qualified managerial, engineering, technical, marketing and financial personnel. If we are unable to effectively manage any such growth, our business, operating results and financial condition could be materially adversely affected.

Dependence on Qualified Professionals

Our business depends on our ability to hire and retain engineers and technicians with highly specialized skills and experience. Many engineers and technicians obtain post-graduate or professional degrees, and the increased educational time required at the post-graduate level further restricts the pool of engineers and technicians available for employment.  Our success also depends in large part upon our ability to attract and retain qualified management, marketing and sales personnel.  We compete for all such personnel with other automation companies.  There can be no assurance that we will be successful in hiring or retaining such qualified personnel. If we are not able to hire and retain qualified people to fill these positions, our competitive position would be adversely affected, which would have a material adverse effect on our business, financial condition and results of operations.

Backlog Not Indicative of Future Results

Our backlog consists of contracts that we have received but not yet signed or started, and projects we have started but which have not been completed. We cannot guarantee the revenue projected in our backlog will be realized, or if realized, that it will generate profits.

Contractors, subcontractors or end users may cancel or delay a project for reasons beyond our control. The majority of our contracts allow for a cancellation under certain terms and conditions. In the event of a project cancellation, we generally would be reimbursed for our costs, but typically we would have no contractual right to the total revenue expected from any such project as reflected in our backlog. In addition, projects may remain in our backlog for extended periods of time. The current credit and economic environment could significantly impact the financial condition of some end users, resulting in greater risk of delay or cancellation of projects. If we were to experience significant cancellations or delays of projects in our backlog, our results of operations and financial condition would be adversely affected.

Collection Uncertainties on Accounts Receivable

We are paid as the work we perform on a project progresses toward completion. The current credit and economic environment has significantly impacted the ability of our contractors to pay amounts due to us, or the ability of end users to pay our contractors, in a timely manner. Although we have had nominal increases in our reserve for doubtful accounts, payments of our accounts receivable have slowed, and our collections currently are averaging 60 to 90 days after billing. Additionally, on a majority of our jobs we are required to advance the funds to purchase components or other materials prior to our receipt of an interim progress payment. If we do so, and the project is terminated or our contract is cancelled, we may have difficulty recovering those expenditures from our contractor, subcontractor, or end user. If a contractor, subcontractor or end user becomes insolvent or files for bankruptcy protection, the amount recoverable may be less than the amount owed to us, in which case the project could generate a loss instead of a gross profit for us.  To try to minimize these collection risks, when we receive a contract we place a lien against the project in order to obtain collateral security for the payments of our receivables; however, we might not have a first priority position, and the value of the collateral could be insufficient to satisfy all lien creditors, which would limit the amount of our recovery.  Although on most of the jobs we receive our contractors or subcontractors are required to post a bond to secure the payments to which we become entitled as a result of the services we perform, there can be no assurance that we will be able to collect from the bonding company.  

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Fixed-Price Contracts

Approximately 90% of our revenues, including larger engineered systems projects, are performed under fixed-price contracts.  We are responsible for all cost overruns, other than those resulting from customer-approved change orders and certain force majeure (natural disaster) situations. Our actual costs may exceed, and gross profit realized may be less than, the estimates derived from our contract prices, for various reasons, including, for example, errors in estimates or bidding; changes in availability and cost of labor and component parts; and reduced productivity. These variations and the risks inherent in engineered systems projects may result in reduced profitability or losses. Depending on the size of a project, variations from estimated contract performance could have a significant negative impact on our operating results and our financial condition.

The following table represents the amounts of our revenues which are generated by each of fixed-price and time and materials contacts, and the percentage of our revenues attributable to these contract types:  

Typically, the material terms of our fixed-price contracts are: (1) progress based, (2) invoicing terms, (3) deadlines for submittals, (4) wage rates and (5) start time.  For time and material contracts, our material terms involve:  (a) the start/end date and (b) price quotes for materials and percentage of labor allocated for the job.  

Revenue from Contracts Realized over Several Months

Our revenues are substantially derived from significant contracts that typically are performed over periods of two to four quarters. As a result, our revenue and cash flow may fluctuate significantly from quarter to quarter, depending upon our ability to replace existing contracts with new orders and the extent of the delays, if any, which we may encounter in performing our contacts.

Liability for Product Warranties

We typically warrant the workmanship and materials used in the equipment and systems we manufacture and install. Failure of the system or equipment to operate properly or to meet specifications may increase our costs by requiring additional engineering resources, replacement of parts or equipment, or service or monetary reimbursement to the end user. To the extent we are unable to make a corresponding warranty claim against the manufacturer of the subject component or software we purchased and installed.

Competition

We face a variety of competitive challenges from other automation companies, many of whom have greater financial and marketing resources than we do and may be able to adapt to changes in consumer preferences or retail requirements more quickly, devote greater resources to the marketing and sale of their products or adopt more aggressive pricing policies than we can.

Contracts for our products and services are generally awarded on a competitive basis. Historically, our markets have been very competitive in terms of the number of suppliers providing alternative products and technologies. The most important factors considered by our customers in awarding contracts include price, the availability and capabilities of our equipment, our ability to meet the project schedule, our reputation and name recognition, our experience and our safety record. If our competitors can overshadow us in these respects, or possess industry certifications (such as a “control system integrator” as awarded by the CSIA, a certification we do not have) we may be at a disadvantage when bidding on a project, and our operating results could suffer.

Control by Management; Anti-Takeover Considerations

Our company is effectively controlled by Management, specifically Messrs. Robert W. Chance, Jody R. Hanley, Manuel Ruiz, Brandon Spiker, David Marlow, and Jeremy Briggs (“Management”), who collectively own approximately 24% (as of April 14, 2011) of our outstanding common stock.  While we intend to pursue our business strategy as set forth herein,

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Management has broad discretion to adjust the application and allocation of our cash and other resources, whether in order to address changed circumstances and opportunities or otherwise.  As a result of such discretion, our success is substantially dependent upon their judgment.  In addition, Management is able to elect our board of directors and to cause the directors to declare or refrain from declaring dividends, to increase our authorized capital, to authorize one or more series of preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights holders of our common stock, issue additional shares of capital stock and generally to direct our affairs and the use of all funds available to us.  Any such preferred stock also could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company.  Any issuance of common or preferred stock could substantially dilute the percentage ownership of the company held by our current stockholders.  Such concentration of ownership may have the additional effect of delaying, deferring or preventing a change of control of the company. Also, this controlling interest may have a negative impact on the market price of our common stock by discouraging third-party investors.

Dependence on Management

Our success is dependent upon the active participation of our Management.  We have entered into employment agreements (i) with Mr. Chance, for an initial two-year term which expired February 14, 2009, and such agreements now are in their successive automatic one-year renewal periods, and each employee may elect not to renew his contract on notice given to us at least 30 days before the renewal date, (ii) with Mr. Marlow which expire on December 31, 2010, such agreements now are in their successive renewal periods and each employee may elect not to renew his contract on notice given to us at least 30 days before the renewal date, and (iii) with Mr. Spiker as of February 28, 2011, the Company reduced his full-time status to part-time status until such time as our cash constraints and operations can be corrected. In addition, we do not maintain any "key man" insurance on any of their lives.  In the event we should lose the services of any of their people, our business would suffer materially.  There can be no assurance that we would be able to employ qualified person(s) on acceptable terms to replace them.

Dependence on Leases of Space and Manufacturing Equipment and Space

All of our offices and other facilities now are, and hereafter likely will be, leased from third parties. These leases are for fixed terms or month-to-month, and the fixed term leases contain limited renewal options with escalating or fair market renewal clauses. There can be no assurance that these leases can be continued or renewed or, if they are renewed, that the renewals can be obtained at lease rates that permit our facilities to be operated at a profit. Relocation of these facilities would likely be costly, and such expenses could limit our profitability.

Dependence on Third-Party Suppliers

Our manufacturing processes require that we buy a high volume of components from third party suppliers. Our reliance on these suppliers involves certain risks, including:

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The cost of these items might increase, for reasons such as inflation and increases in the price of the precious metals, if any, or other internal parts used to make such items, which could cause our costs to complete a job to exceed the estimate we used to create our bid;

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Poor quality could adversely affect the reliability and reputation of our control panels; and

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A shortage of components could adversely affect our manufacturing efficiencies and delivery capabilities, which could prevent us from obtaining, or hinder our ability to obtain, new business, which could jeopardize our ability to comply with the requirements of our contracts.

Any of these uncertainties also could adversely affect our business reputation and otherwise impair our profitability and ability to compete.

Sensitivity to Economic and Other Trends in the Southwestern United States

Our operations will be limited by the conditions and trends in the areas in which we operate, and currently we only conduct business in the southwestern United Sates, particularly in Nevada, Arizona, and Utah.  As a result, we are particularly susceptible to adverse trends and economic conditions in this area, including its economic and labor markets. In addition, because we purchase components from suppliers located throughout the United States, other regional occurrences such as local strikes, energy shortages or increases in energy prices, droughts, hurricanes, fires or other natural disasters, as well as general economic trends and credit conditions, could have a material adverse effect on our business and operations.

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Concentrations of Credit and Business Risk

Financial instruments that are potentially subject to a concentration of business risk consist of accounts receivable. The majority of accounts receivable and all contract work in progress are from clients in various industries and locations. Most contracts require milestone payments as the projects progress. We generally do not require collateral, but in most cases can place liens against the property, plant or equipment constructed or terminate the contract if a material default occurs.

Allowance for Doubtful Accounts

As required by the Receivables Topic of FASB ASC, the Company is required to use a predetermined method in calculating the current value for its bad debt on overall accounts receivable.

We estimate our accounts receivable risks to provide allowances for doubtful accounts accordingly. We believe that our credit risk for accounts receivable is limited because of the way in which we conduct business largely in the areas of contracts. Accounts receivable includes the accrual of work in process for project contracts and field service revenue. We recognize that there is a potential of not being paid in a 12 month period. Our evaluation includes the length of time receivables are past due, adverse situations that may affect a contract’s scope to be paid, and prevailing economic conditions. We assess each and every customer to conclude whether or not remaining balances outstanding need to be placed into allowance and then re-evaluated for write-off. We review all accounts to ensure that all efforts have been exhausted before noting that a customer will not pay for services rendered. The evaluation is inherently subjective and estimates may be revised as more information becomes available.

Potential Derivative Instruments

We periodically assess our financial and equity instruments to determine if they require derivative accounting. Instruments which may potentially require derivative accounting are conversion features of debt and common stock equivalents in excess of available authorized common shares.

We have determined that the conversion features of our debt instruments are not derivative instruments because they are conventional convertible debt.

Revenue Recognition

As required by the Revenue Recognition Topic of FASB ASC, the Company is required to use predetermined contract methods in determining the current value for revenue.

Project Contracts Project revenue is recognized on a progress-basis - the Company invoices the client when it has completed the specified portion of the agreement, thereby, ensuring the client is legally liable to the Company for payment of the invoice. On progress-basis contracts, revenue is not recognized until this criteria is met. The Company generally seeks progress-based agreements when a job project takes longer than 30 days to complete.

Service Contracts Service revenue is recognized on a completed project basis - the Company invoices the client when it has completed the services, thereby, ensuring the client is legally liable to the Company for payment of the invoice. On service contracts, revenue is not recognized until the services have been performed. The Company generally seeks service based agreements when project based contracts have been completed.

In all cases, revenue is recognized as earned by the Company. Though contracts may vary between a progress-basis and completed project basis, as the client becomes liable to the Company for services provided, as defined in the agreement, the client is then invoiced and revenue is accordingly recognized and recorded.  The Company does not recognize or record any revenues for which it does not have a legal basis for invoicing or legally collecting.

Stock-Based Compensation

As required by the Stock-based Compensation Topic of FASB ASC, transactions in which the Company exchanges its equity instruments for goods or services is accounted for using authoritative guidance for stock based compensation. This guidance also addresses transactions in which the Company incurs liabilities in exchange for goods or services that are based on the fair value of the Company’s equity instruments or that may be settled by the issuance of those equity instruments.

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If the Company issues stock for services which are performed over a period of time, the Company capitalizes the value paid in the equity section of the Company’s financial statements as it’s a non-cash equity transaction. The Company accretes the expense to stock based compensation expense on a monthly basis for services rendered within the period.

We use the fair value method for equity instruments granted to non-employees and will use the Black-Scholes model for measuring the fair value of options, if issued. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods.

If shares are issued for services to be performed over a period by a vendor, we capitalize the value paid and amortize the expense in association with services actually rendered.

Shares issued to employees are expensed upon issuance.

Results of Operations for the Fiscal Years Ended December 31, 2010 and 2009

Summary of Consolidated Results of Operations

Operating Loss; Net Loss

Our decrease in revenue of $(1,779,321) or (48)%, over the prior year is a result of the downturn within our industry. We were unable to increase our contracts and services due to our inability to purchase parts for the Company. Our decrease in cost of revenue (goods sold) of $(1,575,543) or (44)% over the prior year due to the decrease in our production and labor costs. Our operating loss decreased by $(818,614), or (26)%, to $(2,306,574) and our net loss decreased by $(1,999,013), or (41)%, to $(2,888,633).  As discussed below, we attribute these decreases in our net losses over the prior period to the following: the $(238,001) or (14)% decrease in our selling, general and administrative expense with the reduction of staff; the $(796,381) or (98)% decrease in our consulting fees.   

Revenue.  Our consolidated 2010 revenue decreased by $(1,779,321), or (44)%, to $1,958,404 compared to $3,737,725 for the year ended December 31, 2009, due to loss of business, which is attributable to an decrease in (1) the number of new jobs we received and commenced, (2) inability to purchase parts for current customers, and (3) work performed on existing jobs included in our December 31, 2009 backlog of $2,486,992, with no addition to the backlog.  We expect to increase service related revenue by our sales efforts and through our acquisition strategy, whereby we can increase our regional footprint and thus provide additional local service related contracts.

Cost of Revenues; Gross Profit.  Our cost of revenue is comprised of direct materials, direct labor, manufacturing overhead and other job related costs.  Our consolidated 2010 cost of revenue decreased by $(1,575,543) or (44)%, to $1,993,746, due to the decrease in our consolidated revenues and labor cutbacks since June 2009.  Our 2010 consolidated gross profit decreased by $(203,778), or (121)%, to $(35,342), primarily due to our reduction in revenue on new jobs as well as work performed on our existing backlog.

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Operating Expenses

Our consolidated operating expenses for 2010 decreased by $(1,022,392), or (31)%, to $2,271,232, which resulted in an operating loss of $(2,306,574), compared to 2009 operating expenses of $3,293,624, and an operating loss of $(3,125,188).  The $(818,614) decrease (26)% in our operating loss is due to the following factors:  the $(238,019) decrease in our selling, general and administrative expense with the reduction of staff (due to our salary reduction in our Nevada subsidiary in September of 2010, and the loss of 2 additional staff members in our Intecon subsidiary); the $(796,381) or (98)% decrease in our consulting fees (we did not enter into any additional contracts for the fiscal year end).

Selling, General and Administrative Expenses.  Consolidated selling, general and administrative expenses decreased by $(238,019), or (14)%, to $1,485,276 for the year ended December 31, 2010, due to the reduction of staff (due to our salary reduction in our ISS subsidiary in September of 2010, and the loss of 2 additional staff members in our Intecon subsidiary).

Consulting fees.  Our consulting fees, which are attributable to investor relations services, decreased by $(796,381) or (98)% , to $17,095 for the fiscal year ended December 31, 2010. We did not enter into any additional contracts with new consulting groups due to our impending litigation of Trafalgar. Trafalgar has hampered our efforts in the past year to promote our business on any National level.

Professional Fees and Related Expenses.  Professional fees, which principally represent costs for legal and accounting fees and expenses, and corporate, operations and acquisitions advisory services rendered stayed relatively the same.

Interest Expense; Net.  Interest expense, net decreased by $(1,037,198), or (64)%, to $582,059, and is primarily attributable to the interest expense on our secured debt to Trafalgar; including the non-cash accretion of all debt discounts of $787,216 under our loan and credit agreements with Trafalgar due to the default notice we received from Trafalgar in July 2009.  At December 31, 2010 we owed Trafalgar an aggregate of $3,105,399, including $758,398, net outstanding under our December 2008 secured revolving note all of our secured indebtedness to Trafalgar which was in default. As of March 25, 2011, the Company has settled its litigations with Trafalgar (For additional details see Item 3: Legal).

Financial Condition

Summary of Consolidated Balance Sheets

Assets.  At December 31, 2008, our consolidated total assets decreased by $(181,639), or (17)%, to $859,679, is due to the following; (1) less cash as of December 31, 2010 (2) to our total amortization of our Intangible assets as of December 31, 2010 (3) reduction of inventory due to our inability to purchase parts (4) reduction in our accounts receivable due to our loss of new customers and inability to service our current customers.  

Liabilities.  At December 31, 2010, our consolidated total liabilities increased by $1,296,330, or 23%, to $6,973,742, attributable principally to our Trafalgar interest and our accrual of payroll liabilities.

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Stockholders’ Deficit.  Our consolidated stockholders’ deficit increased by $1,477,969, or 32%, to $6,114,063 primarily due to the Company’s stock issuance in efforts to raise capital and our net loss for our fiscal year ending December 31, 2010.

Revenue by Service Type

Project Contracts Project revenue is recognized on a progress-basis - the Company invoices the client when it has completed the specified portion of the agreement, thereby, ensuring the client is legally liable to the Company for payment of the invoice. On progress-basis contracts, revenue is not recognized until this criteria is met. The Company generally seeks progress-based agreements when a job project takes longer than 30 days to complete.

Service Contracts Service revenue is recognized on a completed project basis - the Company invoices the client when it has completed the services, thereby, ensuring the client is legally liable to the Company for payment of the invoice. On service contracts, revenue is not recognized until the services have been performed. The Company generally seeks service based agreements when project based contracts have been completed.

In all cases, revenue is recognized as earned by the Company. Though contracts may vary between a progress-basis and completed project basis, as the client becomes liable to the Company for services provided, as defined in the agreement, the client is then invoiced and revenue is accordingly recognized and recorded.  The Company does not recognize or record any revenues for which it does not have a legal basis for invoicing or legally collecting.

Even with the overall revenue less than the prior fiscal year of 2009, our revenue mix for the fiscal year 2010 shows an increase in our service related revenues. As we have stated previously, we expect to increase service related revenue by our sales efforts and through our acquisition strategy, whereby we can increase our regional footprint and thus provide additional local service related contracts.

Commitment and Contingencies

On June 9, 2010, a writ of garnishment was filed against our subsidiary Intecon’s bank account for our outstanding balanced owed to one of our vendors, Summit Electric. Our current outstanding balance owed to Summit Electric is $61,000. This writ was established to collect funds from us by garnishing money in our subsidiaries bank accounts. At the time of the court ordered garnishment the accounts held a balance of $1,200 and have been sent to Summit Electric under the writ. To date we still have an outstanding balance with Summit Electric and are working towards payment to this vendor.

On October 2, 2010, a writ of garnishment was filed against our subsidiary Intecon’s bank account for our outstanding balanced owed to one of our vendors, Border States. This writ was established to collect funds from us by garnishing money in our subsidiaries bank accounts. At the time of the court ordered garnishment the accounts held a balance of $90,000 which was sent to Border States under the writ on October 15, 2010. As of December 31, 2010, our outstanding balance owed to Border State was $91,000. As of April 4, 2011, the Company has repaid this vendor in full.

Off-Balance Sheet Arrangements

At December 31, 2010, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our condensed consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.

Liquidity and Capital Resources/ Plan of Operation for the Next Twelve Months

The economic downturn has had a severe effect on us.  Although for the year ended December 31, 2010, our accounts receivable were $307,622, a decrease of $59,476, or 16%, due to a decrease in invoiced revenue, compared to December 31, 2009, at April 14, 2011 our cash on hand was $2,700.  In addition, we have experienced insufficient cash flow resulting from much slower payments from the contractors and others for whom we work (our receivables are now being paid within 60 to 90

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days).  We also noted in 2010, that the Company, due to its encumbrances with Trafalgar, has had limited ability to service its customers. As a consequence we had to renegotiate with some of our customers in order for them to purchase parts from our vendors. At December 31, 2010, we had approx. $160,000 in receivables which will be paid directly to our vendors once the customer initiates payment. We will not receive these funds directly, but will reduce our obligations once we have been informed that payment has been made. Accordingly, we continued our imposed temporary 20% salary reduction on our employees and a 50% salary reduction on our senior management (we have paid such cash reductions in shares of our common stock up to June 30, 2009 and have accrued for the remainder of the salary on our financial statements). As of March 31, 2011, the Company has repaid a portion of reimbursement to the employees in the form of stock in order to retain existing employees and reduce our overall payroll accrual.

We intend to try to improve our cash and cash flow from operations by encouraging faster payments, and if necessary granting discounts for prompt payment, of our receivables while simultaneously delaying payments to our vendors.  We also hope to increase our revenue by engaging in more aggressive sales, marketing and advertising activity designed to increase our visibility and the awareness of our company, and our products and services.  We intend to develop and implement strategies to market ongoing maintenance and service contracts to our current as well as our past customers, and we plan to package these continuing services as part of our industrial automation design and manufacturing services.  We also intend to implement cost reduction synergies such as centralizing procurement and estimating activities at our corporate hub using dedicated teams of trained employees, rather than having these tasks performed at our branch offices. Such centralization in a single location also would provide greater corporate control of pricing while relieving local office engineers and other personnel of those responsibilities and enabling them to devote all of their time to operational activities.  

Also during 2010, we entered into promissory note agreements with three employees of the Company as a part of reimbursable expenses.  We originally entered into these agreements with the anticipation of paying them back in a very short term.  As of March 31, 2011, the Company still holds five outstanding related party loan agreements

On April 7, 2010, the Company entered into a Securities Purchase Agreement with Ascendiant Capital Group, LLC (“Ascendiant”), pursuant to which Ascendiant agreed to purchase up to $5,000,000 worth of shares of our common stock from time to time over a 24-month period. In this equity purchase agreement, the Company has established a new relationship with a funding group. The relationship between the Company and this lending group was intended to provide the Company with additional cash financing for operational and acquisition funding. As of March 18, 2011, the Company has cancelled its agreement with Ascendiant. The company has returned to Treasury the 70,000,000 shares of stock held in escrow and has expensed the deferred financing fees in the amount of $125,000 in the first quarter of 2011.

Summary of Consolidated Cash Flow for the year ended December 31, 2010 and 2009 (rounded)

Our total cash and cash equivalents decreased approximately by $31,000, or 73%, to $11,400 for the year ended December 31, 2010, compared to $42,400 for the year ended December 31, 2009. Our consolidated cash flows for the years ended December 31, 2010 and 2009 were as follows:

Operating Activities

Our total cash (used) by operating activities decreased by $(729,900), or (49)%, to $(770,400) for the year ended December 31, 2010, compared to $(1,500,300) for the year ended December 31, 2009.

For the fiscal year ended December 31, 2010, we had less stock issued for services compared to December 31, 2009. We expect future cash (used) provided by operating activities to fluctuate, primarily as a result of fluctuations in our operating results, receivables collections, inventory management and timing of vendor payments. We noted the impairment of our goodwill due to our reoccurring net losses from our Arizona subsidiary, and deferred revenue from our Nevada subsidiary at fiscal year ended December 31, 2009. We still continue to issue stock for services rendered by employees and consultants. Large fluctuations in our operating cash position will continue until we can stabilize our cash funding for operations and future acquisitions. We had no significant unusual cash outlays related to our operating activities during fiscal 2010.

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However, beneficial ownership, affiliate status and knowledge each is a question of fact, and in determining that we were not required to place a restrictive legend and “stop transfer” on any of these 14,000,000 shares we do not know what investigation or inquiry, if any, was made by such counsel or by Mr. Talarico.  If in connection with the issuance of these free-trading shares it is believed that either (a) the issuance of such shares did not comply with or satisfy the terms of the exemptions from registration relied upon and that therefore such shares were issued in violation of federal and/or state securities laws or (b) we failed to impose any required restrictive legend, the purchasers of these free-trading shares from the initial recipients thereof, as well as the Securities and Exchange Commission (“SEC”), could commence an action against us.  For example, the SEC could allege that we violated Sections 5(a) and 5(c) of the Securities Act by offering and selling securities when no registration statement had been filed or was in effect as to such securities, and for which there was no exemption from registration available under the Securities Act.  State regulatory authorities also might commence similar enforcement actions.  Any such regulatory enforcement action brought against us might be civil or criminal in nature.  If an enforcement action was to be commenced against us, the defenses we would assert might be unsuccessful.  If such purchasers and/or the SEC or other federal or state regulatory authorities were successful, we would face severe financial demands that would have a material adverse effect on us and our shareholders.  (See also, Item 1, Business - Acquisitions Effected - Intuitive System Solutions, Inc.)

Limitations upon Broker-Dealers Effecting Transactions in "Penny Stocks"

Trading in our common stock is subject to material limitations as a consequence of regulations which limits the activities of broker-dealers effecting transactions in "penny stocks."

Pursuant to Rule 3a51-1 under the Exchange Act, our common stock is a "penny stock" because it (i) is not listed on any national securities exchange or The NASDAQ Stock Market™, (ii) has a market price of less than $5.00 per share, and (iii) its issuer (the Company) has net tangible assets less than $2,000,000 (if the issuer has been in business for at least three (3) years) or $5,000,000 (if the issuer has been in business for less than three (3) years).

Rule 15g-9 promulgated under the Exchange Act imposes limitations upon trading activities on "penny stocks", which makes selling our common stock more difficult compared to selling securities which are not "penny stocks."  Rule 15a-9 restricts the solicitation of sales of "penny stocks" by broker-dealers unless the broker first (i) obtains from the purchaser information concerning his financial situation, investment experience and investment objectives, (ii) reasonably determines that the purchaser has sufficient knowledge and experience in financial matters that the person is capable of evaluating the risks of investing in "penny stocks", and (iii) delivers and receives back from the purchaser a manually signed written statement acknowledging the purchaser's investment experience and financial sophistication.

Rules 15g-2 through 15g-6 promulgated under the Exchange Act require broker-dealers who engage in transactions in "penny stocks" first to provide their customers with a series of disclosures and documents, including (i) a standardized risk disclosure document identifying the risks inherent in investing in "penny stocks", (ii) all compensation received by the broker-dealer in connection with the transaction, (iii) current quotation prices and other relevant market data, and (iv) monthly account statements reflecting the fair market value of the securities.

There can be no assurance that any broker-dealer which initiates quotations for the Common Stock will continue to do so, and the loss of any such broker-dealer likely would have a material adverse effect on the market price of our common stock.

Fluctuations in Stock Price

Our common stock has been quoted on the Pink Sheets since October 12, 2007. Since that date, our common shares have traded on the Pink Sheets between a low of $0.01 per share and a high of $0.56 per share. The market price of our common stock may change significantly in response to various factors and events beyond our control, including but not limited to the following: (i) the risk factors described herein; (ii) a shortfall in operating revenue or net income from that expected by securities analysts and investors; (iii) changes in securities analysts’ estimates of our financial performance or the financial performance of our competitors or companies in our industry generally; (iv) general conditions in the economy as a whole; (v) general conditions in the securities markets; (vi) our announcements of significant contracts, milestones, acquisitions; (vii) our relationship with other companies; (viii) our investors’ view of the sectors and markets in which we operate; or (ix) additions or departures of key personnel. Some companies that have volatile market prices for their securities have been subject to security class action suits filed against them. If a suit were to be filed against us, regardless of the outcome, it could result in substantial costs and a diversion of our management’s attention and resources. This could have a material adverse effect on our business, results of operations and financial condition.

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Report of Independent Registered Public Accounting Firm

To the Board of Directors of

National Automation Services, Inc.:

We have audited the accompanying consolidated balance sheets of National Automation Services, Inc. as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the two years ended December 31, 2010 and 2009.  National Automation Services’ management is responsible for these financial statements.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluation the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of National Automation Services, Inc. as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the two years ended December 31, 2010 and 2009, in conformity with generally accepted accounting principles in the United States.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 3 to the financial statements, the Company has working capital deficiencies and continued net losses.  This raises substantial doubt about its ability to continue as a going concern.  Management’s plan in regard to these matters is also described in Note 3.   The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Lynda R. Keeton CPA, LLC

Lynda R. Keeton CPA, LLC

Henderson, NV

April 11, 2011

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

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

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NATIONAL AUTOMATION SERVICES, INC.,

STATEMENT OF STOCKHOLDERS’ DEFICIT

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

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

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NATIONAL AUTOMATION SERVICES, INC.,

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: Organization and basis of presentation

Basis of Financial Statement Presentation

We were originally incorporated on January 27, 1997 in Nevada under the name E-Biz Solutions, Inc., and on March 27, 1998, we changed our name to Jaws Technologies, Inc.  On July 7, 2000, we reincorporated in Delaware, and on September 29, 2000 we changed our name to Jawz Inc.  On March 6, 2007, we filed with the Securities and Exchange Commission (“SEC”) a Form 15-12G voluntarily terminating the registration of our common stock and our reporting obligations under federal securities laws.  On June 13, 2007, we changed our name to Ponderosa Lumber, Inc.  As Ponderosa Lumber, Inc., we were a public “shell” company with nominal assets and no operations, and our sole objective was to identify, evaluate, and acquire an operating business which wanted to become a publicly held entity.  On June 25, 2007, we reincorporated as a Colorado corporation under the name Timeshare Rescue, Inc. On October 2, 2007, we changed our name to National Automation Services, Inc. in connection with our reverse merger with an operating entity named Intuitive System Solutions, Inc., as described below.  On December 28, 2007, we reincorporated as a Nevada corporation under the name National Automation Services, Inc. On August 6, 2009, we filed our Form 10 registration statement with the SEC to reinstate our reporting obligations under federal securities laws. The Form 10 became effective 60 days after submission on October 6, 2009 and cleared its limited comment review as of March 8, 2010.

These financial statements have been presented in accordance with the rules governing a smaller reporting company for both periods of December 31, 2010 and December 31, 2009.

Business Overview

National Automation Services, Inc. is a holding company formed to acquire and operate specialized automation control companies located in the Southwestern United States. Currently, the Company owns 100% of the capital stock of two operating subsidiaries: (1) ISS, a Nevada corporation, based in Henderson, Nevada and (2) Intecon, an Arizona corporation, based in Tempe, Arizona.

We conduct our business and operations through these two wholly-owned subsidiaries. Overall, the Company serves a diverse set of industries which utilize automation systems and controls, including water valley waste and treatment facilities, entertainment, hospitality, mining, medical, and manufacturing.

Since the acquisition of its current operating subsidiaries, the Company has strived to position itself as a leading system integrator and certified Underwriters Laboratories panel fabrication facility. The Company currently focuses on two distinct lines of business: (1) industrial automation and control and (2) automation manufacturing, which comprises the bulk of contracts that the Company currently maintains under its building contracts. The Company’s management runs the company as one unit and does not have two distinct business segments. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.

Concentrations of Credit and Business Risk

Financial instruments that are potentially subject to a concentration of business risk consist of accounts receivable. The majority of accounts receivable and all contract work in progress are from clients in various industries and locations. Most contracts require milestone payments as the projects progress. We generally do not require collateral, but in most cases can place liens against the property, plant or equipment constructed or terminate the contract if a material default occurs.

Potential Derivative Instruments

We periodically assess our financial and equity instruments to determine if they require derivative accounting. Instruments which may potentially require derivative accounting are conversion features of debt and common stock equivalents in excess of available authorized common shares.

We have determined that the conversion features of our debt instruments are not derivative instruments because they are conventional convertible debt.

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NOTE 1: Organization and basis of presentation (continued)

Inventories

Inventory is stated at the lower cost or market, we use the weighted average cost method and consists of materials for contracted jobs, manufacturing supplies and equipment (small tools which are purchased for specific contracts and the related costs are associated with the contract). We constantly review inventory for obsolescence and write off obsolete items at the time of physical count. As of December 31, 2010 and December 31, 2009, the Company noted obsolete items in inventory due to technical obsolesce and expensed $0 and $93,498 to cost of goods sold, respectively.

Property & Equipment

Property and equipment are stated at historical cost less accumulated depreciation.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is generally five years for vehicles, two to three years for computer software/hardware and office equipment and three to seven years for furniture, fixtures and office equipment. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives. Upon the sale or retirement of property or equipment, the cost and related accumulated depreciation or amortization is removed from the Company’s financial statements with the resulting gain or loss reflected in the Company’s results of operations. Repairs and maintenance costs are expensed as incurred.

Intangible Assets- Goodwill

Goodwill represents the excess of purchase price over tangible and other intangible assets acquired less liabilities assumed arising from business acquisitions. On December 31, 2009, as required by the Intangible topic of Financial Accounting Standards Board Accounting Standards Council (“FASB ASC”), the Company conducted an analysis of the goodwill determined on December 26, 2007 with the acquisition of Intecon. For the fiscal year ending December 31, 2009, our valuation assessment for impairment found that due to net carrying loss for the Company and the continued going concern of the Company’s financials, we could no longer carry the value of our goodwill; we therefore impaired the entire amount of goodwill and brought the value to zero as of December 31, 2009.

Allowance for Doubtful Accounts

As required by the Receivables Topic of FASB ASC, the Company is required to use a predetermined method in calculating the current value for its bad debt on overall accounts receivable.

We estimate our accounts receivable risks to provide allowances for doubtful accounts accordingly. We believe that our credit risk for accounts receivable is limited because of the way in which we conduct business largely in the areas of contracts. Accounts receivable includes the accrual of work in process for project contracts and field service revenue. We recognize that there is a potential of not being paid in a 12 month period. Our evaluation includes the length of time receivables are past due, adverse situations that may affect a contract’s scope to be paid, and prevailing economic conditions. We assess each and every customer to conclude whether or not remaining balances outstanding need to be placed into allowance and then re-evaluated for write-off. We review all accounts to ensure that all efforts have been exhausted before noting that a customer will not pay for services rendered. The evaluation is inherently subjective and estimates may be revised as more information becomes available.

Revenue Recognition

As required by the Revenue Recognition Topic of FASB ASC, the Company is required to use predetermined contract methods in determining the current value for revenue.

Project Contracts Project revenue is recognized on a progress-basis - the Company invoices the client when it has completed the specified portion of the agreement, thereby, ensuring the client is legally liable to the Company for payment of the invoice. On progress-basis contracts, revenue is not recognized until this criteria is met. The Company generally seeks progress-based agreements when a job project takes longer than 30 days to complete.

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NOTE 1: Organization and basis of presentation (continued)

Service Contracts Service revenue is recognized on a completed project basis - the Company invoices the client when it has completed the services, thereby, ensuring the client is legally liable to the Company for payment of the invoice. On service contracts, revenue is not recognized until the services have been performed. The Company generally seeks service based agreements when project based contracts have been completed.

In all cases, revenue is recognized as earned by the Company. Though contracts may vary between a progress-basis and completed project basis, as the client becomes liable to the Company for services provided, as defined in the agreement, the client is then invoiced and revenue is accordingly recognized and recorded.  The Company does not recognize or record any revenues for which it does not have a legal basis for invoicing or legally collecting.

Income Taxes

As required by the Income Tax Topic of FASB ASC, income taxes are provided for using the liability method of accounting in accordance with the new codification standards. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The computation of limitations relating to the amount of such tax assets, and the determination of appropriate valuation allowances relating to the realizing of such assets, are inherently complex and require the exercise of judgment. As additional information becomes available, we continually assess the carrying value of our net deferred tax assets.

Stock Based Compensation

Stock based compensation is accounted for using the Equity-Based Payments to Non-Employee Topic of the FASB ASC, which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. We determine the value of stock issued at the date of grant. We also determine at the date of grant the value of stock at fair market value or the value of services rendered (based on contract or otherwise) whichever is more readily determinable.

Earnings (loss) per share basic and diluted

Earnings per share is calculated in accordance with the Earnings per Share Topic of the FASB ASC. The weighted-average number of common shares outstanding during each period is used to compute basic earnings (loss) per share. Diluted earnings per share is computed using the weighted average number of shares plus dilutive potential common shares outstanding.

Potentially dilutive common shares consist of employee stock options, warrants, and other convertible securities, and are excluded from the diluted earnings per share computation in periods where the Company has incurred net loss. During years ended December 31, 2010 and 2009, respectively, the Company incurred a net loss, resulting in no potentially dilutive common shares.

Fair Value Accounting

As required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions (For additional information see Note 10: Fair value).

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NOTE 1: Organization and basis of presentation (continued)

The three levels of the fair value hierarchy are described below:

Level 1

     Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2

     Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3

     Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

NOTE 2: Recently adopted and recently issued accounting guidance

Adopted

In February 2010, the FASB issued amended guidance on subsequent events to alleviate potential conflicts between FASB guidance and SEC requirements. Under this amended guidance, SEC filers are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. This guidance was effective immediately and we adopted these new requirements for the year ended December 31, 2010. The adoption of this guidance did not have a material impact on our financial statements.

In June 2009, the FASB issued changes to the accounting for transfers of financial assets. These changes remove the concept of a qualifying special-purpose entity and remove the exception from the application of variable interest accounting to variable interest entities that are qualifying special-purpose entities; limits the circumstances in which a transferor derecognizes a portion or component of a financial asset; defines a participating interest; requires a transferor to recognize and initially measure at fair value all assets obtained and liabilities incurred as a result of a transfer accounted for as a sale; and requires enhanced disclosure; among others. We adopted these new requirements as of December 31, 2010, and did not have a material impact on our financial statements.

Issued

In January 2010, the FASB issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance will become effective for the Company with the reporting period beginning July 1, 2011. The adoption of this guidance will not have a material impact on the Company's consolidated financial statements.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to, have a material impact on the Company's present or future consolidated financial statements

NOTE 3: Going concern

The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. Our operating revenues are insufficient to fund our operations and our assets already were pledged to Trafalgar as collateral for our outstanding $3,700,000 (including interest) of indebtedness (For additional information on Trafalgar See Note 15: Subsequent events). The Company has experienced reoccurring net losses, had a net loss of $(2,888,633) for the year ended December 31, 2010, and $(4,887,646) for the year ended December 31, 2009, and a working capital deficiency of $(6,278,876) at December 31, 2010.

Based on the above facts, management determined that there was substantial doubt about the Company’s ability to continue as a going concern.

               We continue to seek sources of additional capital. We intend to try to improve our cash and cash flow from operations by encouraging faster payments, and if necessary granting discounts for prompt payment, of our receivables while simultaneously delaying payments to our vendors.  Also we plan to increase our revenue by increasing our visibility and the awareness of our Company, and our products and services, by engaging in more aggressive sales, marketing and advertising activity. 

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NOTE 3: Going concern (continued)

We intend to develop and implement strategies to market ongoing maintenance and service contracts to our current as well as our past customers, and we plan to package these continuing services as part of our industrial automation design and manufacturing services. We also intend to implement cost reduction synergies such as centralizing procurement and estimating activities at our corporate hub using dedicated teams of trained employees, rather than having these tasks performed at our branch offices.

NOTE 4: Accounts receivable, net

 Included in our accounts receivable account balance is our customer retention account which accounts for the remaining 10% of revenue on all building contracts that the Company enters into. For each invoice sent to the customer, 10% of the invoice total is held in retention until the job is completed. Once completed the Company issues a final invoice which accounts for the remaining balance unpaid and any and all retention in which the customer owes the Company. Retention revenue is recognized when earned.

In 2010, the Company noted due to its encumbrance with Trafalgar, we had limited ability to service our customers. As a consequence we had to work with some of our customers in order for them to purchase parts from our vendors. As such, at December 31, 2010, we had approx. $160,000 in receivables which will be paid directly to our vendors once the customer initiates payment. We will not receive these funds directly, but we will reduce our obligations once we have been informed that payment has been made. As of December 31, 2010, the $160,000 remains a part of our accounts receivable.

NOTE 5: Property and equipment, net

Property and equipment consists of the following:

Depreciation expense for the year ended December 31, 2010 was $93,225 and for the year ended December 31, 2009 was $94,433.

NOTE 6: Loans, Capital lease

The following tables represent the outstanding balance of loans for the Company as of December 31, 2010, and December 31, 2009.

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NOTE 6: Loans, Capital lease (continued)

On January 15, 2009, the Company entered into a fair market value capital lease with Konika Copiers. The lease is over a 60 month period; with present lease payments exceeding 90% of fair market value of the property (see Note 12: Commitments).

On April 1, 2009, the Company entered into a revolving line of credit with Dell Financial in the amount of $25,000. The Company’s current outstanding balance on the line of credit as of December 31, 2009 was $7,287.

NOTE 7: Deferred financing fees

On April 7, 2010, the Company entered into a Securities Purchase Agreement with Ascendiant Capital Group, LLC (“Ascendiant”), pursuant to which Ascendiant agreed to purchase up to $5,000,000 worth of shares of our common stock from time to time over a 24-month period upon approval of the Company’s Form S-1 registration statement. The Company issued to Ascendiant Capital 1,470,589 share of common stock valued at $125,000 or $0.08 per share as a commitment fee based on the security agreement (see Note 14: Stockholders’ deficit). The commitment fees have been deferred until the terms of the agreement have been met which include the acceptance of the Company’s S-1 registration statement. The Company filed an S-1 on June 24, 2010, amended on June 30, 2010, and amended July 30, 2010. Once the acceptance of the Form S-1 was considered by the SEC the deferred financing fees will be amortized over the life of the agreement indicated at 24 months. As of August 31, 2010, the Form S-1 was withdrawn based upon a decision made by Management (For additional details see Note 15: Subsequent events).

NOTE 8: Secured redeemable debentures

On March 26, 2008, the Company entered into a secured redeemable debenture agreement with Trafalgar, for a total financing package of redeemable debentures up to $10,000,000. On March 26, 2008, the Company borrowed $1,500,000 and on July 21, 2008 the Company borrowed $750,000.

Upon entering into the agreements with Trafalgar, the Company capitalized the financing fees over the life of the loans. The $775,353 is the sum of the value of the warrants ($10,353), the value of the stock issued ($540,000) and the value of the 15% principal redemption/repayment premium on the $1,500,000 loan ($225,000) (For additional details see Note 15: Subsequent events).

On December 19, 2008, the Company entered into the ABL agreement which restructured the debenture agreements and reduced certain terms over the life of the loans without triggering debt extinguishment. The total value of the ABL agreement as of December 31, 2010 is $758,398. As of December 31, 2010, the Company had not requested additional debt under this agreement.

As of December 31, 2010, the Company had not requested additional debt under this agreement which did not triggered the remaining $7,750,000 in debentures from Trafalgar. The Trafalgar debenture agreements had a premium and discount term associated. Debt premiums/discounts, typically fees paid by the debtor to the creditor(s) as part of the issuance of debt, are accounted for as a direct reduction of or addition to the face amount of the debt (valuation account) as the discount or premium is inseparable from the debt giving rise to it.

The debt premium/discount was amortized to interest expense over the life of the related debt. At December 31, 2009 the remaining premium/discount of $772,328 was fully amortized in association with out deferred financing fees. The following table represents the remaining current and long term portion of the total debt as of December 31, 2010 and December 31, 2009.

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NOTE 9: Related party transactions

On December 31, 2010, the Company entered into a promissory note with an officer of the Company, for $13,000. The terms of the loan were to repay of the loan in the amount of $13,000 with a 10% annual interest to start as of December 31, 2010.

On December 31, 2010, the Company entered into a promissory note with an officer of the Company, for $9,760. The terms of the loan were to repay of the loan in the amount of $9,760 with a 10% annual interest to start as of December 31, 2010.

On December 31, 2010, the Company entered into a promissory note with an employee of the Company, for $9,500. The terms of the loan were to repay of the loan in the amount of $9,500 with a 10% annual interest to start as of December 31, 2010.

On April 1, 2009 we modified the verbal loan agreement entered into on June 30, 2008 with a director of the Company, which had a balance of $50,000 as of December 31, 2008, by making it a formal promissory note, capitalizing accrued interest into the principal ($36,000) and including an annual interest rate of 10%.  As of December 31, 2010, we owed $86,000 plus accrued interest in the amount of $15,050.  

On November 5, 2008, the Company entered into agreement promissory note with a director of the Board, for $77,000. The terms of the loan were to repay of the loan in the amount of $72,000 with the addition of a $5,000 fee for interest or incur a $250 a day late fee if paid after December 5, 2008. On April 1, 2009 the loan agreement was modified to remove the $250 a day late fees and add an annual interest rate of 10%.  As of December 31, 2010, we owed $79,913 plus accrued interest in the amount of $42,801.

NOTE 10: Convertible notes

During the quarter ended December 31, 2010, we issued to three individuals convertible debentures in the total amount of $255,000. Two notes bear interest at the rate of 20% per year and the third note bears an interest rate of 40% per year, all notes mature in six (6) months on varying dates starting with March 1, 2011. The notes are convertible into the Company’s common stock at a fixed value of $0.05 per share. The following table represents the Beneficial Conversion Feature (“BCF”) on the various notes:

As of December 31, 2009, we issued to four individuals convertible debentures for $126,000. The note had an interest rate of 20% per year and matured in six (6) months starting on May 7, 2010. The notes were converted into the Company’s common stock at a fixed value of $0.05 per share as of December 31, 2010. The Company had converted all of the notes totaling $126,000 and issued to those four individuals collectively 2,640,000 shares of the Company’s common stock (see Note 14: Stockholders’ deficit).

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NOTE 11: Fair Value

In accordance with authoritative guidance, the table below sets forth the Company's financial assets and liabilities measured at fair value by level within the fair value hierarchy. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

NOTE 12: Commitments

Capital leases

On July 17, 2008, the Company entered into a Capital lease with Dell Computers. The lease is over a 48 month period with a Bargain Purchase Option at the end of the lease for $1.00, and an interest rate of 5% on any payments over five (5) days late. See table for future payments to the Capital lease:

On January 15, 2009, the Company entered into a capital lease for office equipment. The lease is over a 60 month period, with present lease payments exceeding 90% of fair market value of the property. The capital lease is a five (5) year lease at $481 per month.

Operating leases

On December 26, 2007, the Company acquired its wholly owned subsidiary Intecon, Inc. which has an operating lease for its office and manufacturing services located in Tempe, Arizona. This operating lease is with a non-related third party for $6,974 per month with an annual increase. Future minimum payments for office rent are:

* Rent per square foot for this lease increases May of each year.

As of January 1, 2011, the Company renegotiated its lease and now is on a month-to-month basis.

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NOTE 12: Commitments (continued)

On September 1, 2008, the Company leased office space for sales in Tuscon, Arizona on a month-to-month basis in the amount of $500 per month under operating lease agreements with original lease periods of up to five (5) years.

On February 1, 2009, the Company entered into an operating lease for machinery and equipment located at our subsidiary in Henderson, Nevada. This operating lease is with a principal shareholder, and director of the Company. The operating lease is a month-to-month lease for $600 per month with no annual increase. As of December 31, 2010, the Company cancelled its operating lease for machinery.

On February 10, 2009, the Company entered into an operating lease for our corporate offices located in Henderson, Nevada. This operating lease is a three (3) year lease with a non-related third party for $2,635 per month with a 4% annual increase. Future payments to office rent are: