Company Background. We founded our business in January 2001 and incorporated on January 16, 2002 as a Delaware corporation. Prior to our incorporation, our business plan was to provide vulnerability assessments and emergency communications systems to schools and government facilities. Our goal was to improve public safety emergency communications and allow seamless communication between police, fire and emergency medical personnel responding to an emergency at a school or other government facility. Our first wireless product, the Aegis SafetyNet™ RadioBridge™, is a portable device that provides radio interoperability for emergency responders.  Recent events have directed enormous attention to the needs of this market, and demand currently exceeds effective solutions.  In the near future we expect demand for a new generation of wireless security solutions to grow in adjacent markets as well, including commercial facilities.

Our Business.  The ability of first responders to access information and communicate as soon as they arrive at an emergency site is vital. Fires, earthquakes, major electrical power interruptions, floods and other natural and man-made disasters can disrupt emergency life safety and communications systems and interfere with the ability of first responders to protect lives and property. Unfortunately, when agencies from multiple jurisdictions need to coordinate emergency response, they may not be able to talk to each other via their radios because their radio equipment is incompatible.

Communications interoperability among first responders is a high priority for the Department of Homeland Security (“DHS”). With 18,000 state and local law enforcement agencies, 26,000 fire departments, 6,000 emergency medical responders and several thousand utility and infrastructure public agencies, the number of potential users of our products is immense. The RadioBridge TM was referenced in the April 22, 2004 issue of the Congressional Quarterly as one of the new types of “patch devices” that are part of a major initiative by the DHS to provide immediate radio interoperability to first responders, which has become a national emergency preparedness priority.  

We are also partnered with the National Institute of Justice's Office of Law Enforcement Technology Commercialization and are listed on the Responder Knowledge Base, a national information resource for emergency responders hosted on the Department of Homeland Security's website. Our focus is now on productizing our wireless communications technologies and selling our products to both the government and private sectors. Our first product, the Aegis SafetyNet RadioBridge™, allows most two-way radios to be interconnected regardless of frequency, modulation or encryption scheme.

The Aegis SafetyNet RadioBridge™.  The only product we are currently marketing and manufacturing is the SafetyNet RadioBridge, which provides radio interoperability for emergency responders.  A major problem for first responders, particularly when multiple jurisdictions must work together, is the lack of interoperable radio equipment.  Fire, police, emergency medical personnel or other responders often have handheld radios that cannot communicate with other agencies because each agency’s radios are set to operate on different frequencies or modulations. The Aegis SafetyNet RadioBridge allows two-way radios (HF and VHF/UHF) and various other communication devices, such as cellular telephones, to be interconnected regardless of frequency, modulation or encryption. The lightweight, portable device provides immediate on-site interoperability between multiple radio systems operating on different frequencies for first responders, commercial facilities and government agencies.  The RadioBridge allows the incident commander to control communications at the scene by assigning up to 4 independent talk groups. An audio output allows incident communications to be recorded.  

The Guardian™ System.  The effectiveness of public safety agencies responding to an emergency at a high-rise building or other commercial facility is highly dependent upon the integration of public and private emergency systems.  The SafetyNet Guardian™ System is a portable wireless tracking device that uses radio-frequency identification (RFID) technology to monitor the location and physical condition of emergency personnel at the scene of an emergency incident.  RFID technology uses radio-transmitting interrogators to send out radio waves to preprogrammed receiver computer chips which respond to the radio query with another radio signal.  If the frequency is not correct, the receiver or interrogator will not recognize it.  The SafetyNet Guardian™ System includes helmet-mounted RFID tags that can be programmed to transmit personnel information including: name, rank, training, and other department-specific information.  Features currently in development include bio-sensor monitors for heart rate, body temperature, and blood oxygen levels.

The Guardian™ System also uses wireless remote stations that are placed in high rise buildings or other large commercial infrastructure locations to provide facility managers and emergency responders with a reliable wireless emergency management and communications system.  The remote stations can include broadband video, audio, two-way radio as well as chemical and air flow data from life safety devices that can be used to monitor, direct, communicate and share with public safety agencies

For high-rise stairwells, the Guardian™ System provides infrared as well as regular imaging so that first responders can determine where to concentrate rescue personnel.  The system for a particular building can be programmed to include a building floor plan and utility schematics to coordinate gas and electricity shut offs and the approach to emergency events.

Helping to accelerate the potential adaptation of the Guardian™ System will be the growing codification of ordinances for in-building communication.  An important lesson learned in the 1993 bombing of the World Trade Center (WTC) was that communication was impeded by the steel and concrete in the structure of the buildings, making coordination impossible.  In the case of the WTC, a series of ratio repeaters were installed in the complex to facilitate communication of emergency responders.  Since building codes are generally enacted at the local level, a national trend has yet to be established.  However, first mover communities, including Scottsdale, Arizona, have enacted in-building communication ordinances.  The intent of these ordinances is to insure the ability to receive and

transmit emergency response radio from any place in the building.  These ordinances are aimed at high-rise buildings and facilities with large areas to be monitored.

Markets

The following discussion of our products focuses on the RadioBridge TM because we believe that product will account for most of our revenues over the next fiscal year.

There are two types of systems being offered in the area or radio interoperability.  The first is patchwork interoperability, where radios are connected through a system such as the RadioBridge™. This is generally the most cost effective and quickest way to achieve interoperability. The second is a standards-based shared system that encompasses different systems working on a shared infrastructure, with various agencies working on their own frequencies and being able to switch to a shared network.  This larger system change would take years to implement, requires extensive programming, and is estimated to cost billions of dollars nationwide. The RadioBridge TM is a practical solution to radio interoperability for the next seven to ten years because the alternate strategies for radio interoperability will require extensive infrastructure and still face budgetary, political and technical difficulties.

In the 2006 DHS Budget, a major focus of local and State homeland security grants continued to be interoperability.  The DHS is making communications between first responders a high priority.  This means that a significant portion of interoperable communications equipment for first responders will be funded largely by federal grants to state and local governments.  

 A prominent initiative is Project Safecom, a multi-agency initiative to improve the interoperability of wireless systems for first responders.  One estimate of the market size is gained from statements made by our largest competitor, JPS Communications, a unit of Raytheon Corporation. JPS has indicated that patchwork interoperability, the kind of system sold by Aegis and JPS, could be provided to the major metropolitan areas in the United States for approximately $350 million; however, DHS representatives have questioned this figure. Another recent study on the Homeland Security market indicates that the potential market for response equipment may be as high as $1.75 Billion.  The Public Safety Wireless Network Estimates the cost to replace all of the first responder radio systems to provide compatibility range as high as $18 Billion.  

Recent Events

The lack of radio interoperability for first responders gained national prominence with the onslaught of a series of natural disasters, including a period of high hurricane activity, a cycle scientists expect to last at least another 10 years. The theoretical cause of this increased activity is a rise in ocean temperatures and a decrease in the amount of disruptive vertical wind shear that tears hurricanes apart.

In 2005 the Gulf Coast was pummeled by a series of major tropical storms and hurricanes, the most on record in a single season. For the first time ever, the World Meteorological Organization, responsible for naming tropical storms and hurricanes, ran out of names, and began dubbing new storms Alpha, Beta, etc. By July 2005, one month into the season, there were seven named tropical storms – Arlene, Brett and Cindy, hurricanes Dennis and Emily, and tropical storms Franklin and Gert.  Of these, hurricane Dennis was the worst, battering coastal Alabama, the Florida panhandle and much of the Caribbean and causing at least 32 deaths. The end of August brought Hurricane Katrina, which will go down as one of the worst natural disasters in our nation’s history. Impacting an area of 90,000 square miles – roughly the size of Great Britain – Katrina left a vital, thriving region in desolation and ruin.

According to the DHS, in the days and weeks following Katrina, more than 49,000 people were rescued and hundreds of thousands more were safely evacuated. Law enforcement forces on the ground assisted mightily in these efforts. However, the lack of radio interoperability hampered these rescue efforts, and tremendous national attention was again directed to this problem.  

In September 2005, hurricanes Maria, Nate, Ophelia, Philippe and Rita again battered the Gulf region.  The federal government response, particularly the response of FEMA, was the subject of extensive criticism in the media and in government circles.

On October 18, 2005, Homeland Security Secretary Michael Chertoff announced increased funding and changes to the DHS’s organization during a ceremony at the White House where President Bush signed the FY 2006 Homeland Security Appropriations Act. In addition to certain organizational adjustments, the Department’s FY 2006 Appropriations provides increased funding for 1,000 new Border Patrol Agents, greater explosive detection technology across transportation networks, and an integrated Preparedness Directorate to enhance coordination and deployment of preparedness assets and training.

The Department of Homeland Security FY 2006 Budget included more than $30.8 billion in net discretionary spending -- a 4.7 percent increase over FY 2005. In total, with mandatory and fee-based programs, the DHS budget for FY 2006 is $40.6 billion.

Recent Developments in Radio Interoperability.  Major suppliers in the public safety radio market, such as Motorola, have proposed a solution to alleviate over-crowding on the radio spectrum by replacing the analog radio networks currently in use with more sophisticated digital 1 “trunked” radio systems, 2  which would require major infrastructure upgrades.  Most of these trunked systems operate in the 800 MHz radio band, which is in the Ultra High Frequency band. Instead of the user clicking through channels until he finds an open channel, a trunked radio system is a computer-controlled network that searches for an available clear channel and routes the transmission to that channel. At the same time, it sends a “talk permission” signal back to the user’s radio (typically a light and a “beep”), indicating that a channel has been allocated.  This process takes place so fast that it is appears almost instantaneous to the user. When the user pushes the transmit button, the radio beeps, and the user begins to talk. 3  However, 800-MHz radio systems are subject to failure due to interference. Interference in the 800 MHz band is primarily caused by the mixture of incompatible “high-site” technology used by public safety, business, industrial, land transportation and conventional Specialized Mobile Radio (SMR) service with “low-site” cellular technology employed by Enhanced Specialized Mobile Radio (ESMR) services like Nextel Communications, Inc. (Nextel) and cellular telephone licensees.

1 Digital networks translate all communications into a unified digital code before routing them through the network. On the receiving end, bits are translated back into, for example, voice communication. The advantage of employing such a digital code is that the network can manage it easily. This is why most proposed interoperable public service networks are based on digital technology.

2  Digital “trunked” networks are so named because they have a strong trunk, or center, managing them. Digital technology also permits the compression of voice transmissions. Compressed transmissions in turn decrease the amount of data that needs to be transferred for the same communication, and less data requires smaller channels (less frequency bandwidth), for example by compressing voice into a 6.25 kHz instead of a 25 kHz channel. Therefore, more channels can be fit into a given frequency band.

3 This is in essence what cellular phone networks do today. Only a limited number of channels are available, and the network automatically assigns them to users requesting to communicate.

The Federal Communications Commission (FCC) has addressed this problem by a plan to “reband” the spectrum. Band reconfiguration will alleviate this problem by spectrally separating these incompatible technologies. Known as the Consensus Plan, the rebanding strategy is supported by most public-safety organizations. It calls for Nextel to move from its interleaved 800 MHz spectrum to a continuous block within the band, and to exchange 700 MHz and 900 MHz frequencies for a block of 1.9 GHz spectrum. Nextel also has pledged to pay $850 million to absorb the costs of relocating and re-tuning other 800 MHz users to a contiguous block elsewhere in the band. Opponents of this plan argue that the three-and-a-half years needed to implement such a spectrum shuffle means the interference problems would continue. Nextel filed a letter with the FCC February 7, 2005 confirming that Nextel accepted all the terms and conditions of the solution. Various interested parties filed petitions for reconsideration and waiver requests with the FCC. The FCC issued a Memorandum Opinion and Order adopted October 3, 2005 and released October 5, 2005 which, among other things, reaffirmed the FCC’s authority to grant Nextel spectrum rights to ten megahertz of spectrum in the 1.9 GHz band; clarified the definitions of “unacceptable interference”; and further delineated the relocation rights of 800 MHz incumbent licensees.

Costs of Replacing Radios is Prohibitive. The FCC was not the only federal agency to address the issue of interoperable public safety communications. The Public Safety Wireless Network (PSWN) identified funding as the primary obstacle to radio interoperability and stated: “Funding for the development of new public safety radio systems or the replacement of existing systems is virtually unattainable.” A study by management consulting firm Booz-Allen & Hamilton on behalf of PSWN estimated that it will cost $18.3 Billion to replace the existing national emergency communications infrastructure, with 80% of those costs borne by local agencies ($15.4 Billion), compared with $1.2 Billion for federal and $1.7 Billion for state agencies. 1  And these staggering sums are for equipment only – additional monies must be allocated for training and practice 2 .

Because replacing the entire radio infrastructure in the United States will be a costly and time-consuming undertaking, and considering the significant political, economic and technical obstacles to providing a true national emergency radio interoperable system, we believe that our RadioBridge TM and related technologies are the only realistic way to provide first responders with interoperable radio communications for at least the next seven to ten years.

1 See PSWN, LMR Replacement Cost Study Report (June 1998), p. 5.

2 “For interoperability to be implemented, all existing radio communications infrastructure used by public service agencies must be substituted with new equipment. This involves more than just replacing the hundreds of thousands of radio sets currently in use. Every one of these agencies also operates a small radio network consisting of dispatcher stations, transmitters, and relay stations to link the individual radio sets with each other and with the command post, and this network infrastructure needs to be replaced as well. In addition to the new hardware (i.e., the radio sets and networks) hundreds of thousands of users may need to be trained to use the new equipment. Finally, this transition must take place in real time, while emergencies continue to happen that require first responders to be in active communication.” - Viktor Mayer-Schonberger, “Emergency Communications: The Quest for Interoperability in the United States and Europe, Ibid.

General Competitive Conditions in the Homeland Security Market

Obtaining market share increasingly depends upon agreements with complementary services and products and/or channel partners.  As the government and private industry become increasingly concerned with security issues, the security and anti-terrorism industry has grown accordingly. Competition for government and private contracts are intense among a wide-ranging group of product and service providers, most of which are larger than us and possess significantly greater assets, personnel and financial resources. Many of our competitors also have established lobbyists, which provides them with an advantage in securing government contracts. However, we have been working directly with major public safety agencies and the military to develop our products.  We believe our technology is highly competitive and that we are in a position to compete effectively in the emerging market supplying public safety agencies with affordable mobile wireless communications systems.

In addition to Aegis Assessments, companies selling patchwork solutions include JPS Communications, a unit of Raytheon Corporation; Link Communications, with its Tactical Communication Bridge unit; and the Incident Commander Radio Interface supplied by Communications-Applied technology.  

Sales and Marketing

To reach a scattered market, we intend to take a multi-channel approach to marketing, which will include relationships with value-added resellers, territorial distributors, dealers, and independent sales agents.

2006 Sales and Marketing Activities

In June 2006, we entered into a 5-year distribution agreement with Quala-Tel Enterprises, a leading worldwide distributor to the Fire and Emergency Services Sector headquartered in San Diego, California.  Quala-Tel Enterprises was established in 1989 and is a full service distributor for 'Sigtronics' headsets and emergency vehicle intercoms. Quala-Tel also is the distributor for the intrinsically safe 'Rescom' product line for hardwired rescue communication systems for USAR, industrial maintenance and rescue, fire rescue and other adverse environments, and HALO intrinsically safe radio communication headset systems for adverse environments.

We upgraded our manufacturing capabilities by shifting RadioBridge™ production to CirTran Corporation’s manufacturing facilities in West Valley, Utah, in the greater Salt Lake City area.  CirTran is a full-service electronics contract manufacturer and has an ISO (International Organization for Standardization) 9001:2000 certification.

We have also been engaged in establishing our commercial viability via other means, including:

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Selling RadioBridges™ via internally generated leads.  This has allowed us to gauge the difficulty of the sales process and confirm the market’s acceptance of the $12,500 price point.  

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Demonstrating the RadioBridge™ at trade shows for the fire services, police services, hazardous materials and associated emergency services industries.

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Retaining James Lee Witt Associates, LLC (JLWA) to assist the company with strategic advisory services and help introduce its product to public safety and emergency services organizations. Mr. Witt has over 25 years of disaster management experience, culminating in his appointment as the Director of the Federal Emergency Management Agency, where he served from 1993-2001. In this capacity, he is credited with turning FEMA from an unsuccessful bureaucratic agency to an internationally lauded all-hazards disaster management agency. In 2001, he launched James Lee Witt Associates, a Crisis and Consequence Management Consulting Firm specializing in public safety and emergency services for the public and private sectors. In 2003, he became the Chief Executive Officer of the International Code Council (ICC), a 50,000-member association dedicated to building safety that develops the codes used to construct residential and commercial buildings, including homes and schools.

Quala-tel has dedicated a sales group to offer the SafetyNet™ RadioBridge™ to government agencies and other end-users seeking an affordable solution to the current communication problem faced by public safety agencies caused by not having radio interoperability at the scene of an emergency.  Quala-tel has also begun a national sales

campaign and has already begun marketing the SafetyNet™ RadioBridge™ through its regional sales representatives across the country.

In support of Quala-tel’s sales and marketing plan, we have conducted training seminars on the use, operation and technical details of the RadioBridge for Quala-tel sales staff at their offices in San Diego, California. We have also begun working closely with specific field sales staff in California and Texas to combine our efforts and contacts with potential customers.  

Intellectual Property

We have filed provisional patent applications on the technologies underlying our products and our patent application for the SafetyNet RadioBridge was filed March 31, 2005 and published October 6, 2005. We also use the California trademark “Aegis SafetyNet™”.  The California state trademark expires in seven years.

In addition, we employ several other methods to protect our proprietary rights in our Aegis SafetyNet technologies and related products. The employment agreements we have entered into with our employees, and the consulting agreements we have entered into with consultants, contain non-disclosure provisions for our proprietary and confidential information. We also enter into non-disclosure agreements with third parties, such as distributors of our products and independent sales representatives, who may require access to information we deem proprietary or confidential in order to perform their obligations to the company. However, there can be no assurance that these protections will be adequate or that our actions will be sufficient to prevent imitation or duplication of our products and services by others. 

Research and Development

We are focusing on marketing and sale of the RadioBridge and do not anticipate spending any additional research and development funds on our Guardian products.  

Government Regulation

We do not use toxic substances in our production activities and do not contemplate incurring costs relating to federal, state and local environmental compliance laws. We believe that probable government regulations relating to the homeland security industry, such as the SAFETY Act (which proposes to encourage the development and rapid deployment of anti-terrorism technologies by providing sellers of qualified technologies with limited product liability), will, in sum, be more beneficial to our business operations than detrimental.

Employees

We currently have four full-time employees.