CORPORATE BACKGROUND

Patron Systems, Inc., a Delaware corporation ("Systems") was formed in April 2002 to provide comprehensive, end-to-end information security solutions to global corporations and government institutions. Systems' business plan was to acquire and operate high profit potential companies with technologies in information and homeland security applications for businesses and government institutions.

On October 11, 2002, Combined Professional Services, Inc. ("CPS"), Systems and the stockholders of Systems consummated a share exchange ("Share Exchange") pursuant to an Amended and Restated Share Exchange Agreement, whereby CPS issued to each Systems stockholder, on a one-for-one basis and in exchange for all of the outstanding shares of Systems' capital stock, an aggregate of 25,400,000 shares of its common stock. Upon the closing of the Share Exchange, the Systems stockholders held approximately 85% of the outstanding capital stock of CPS, and Systems became a wholly owned subsidiary of CPS. The former stockholders of Systems became the majority owners of CPS following the completion of the Shares Exchange. Accordingly, Systems was deemed to be the acquirer of CPS for accounting purposes and the transaction was accounted for as a reverse merger and recapitalization of Systems.

On November 22, 2002, CPS announced that it changed its name to Patron Holdings, Inc. ("Holdings"), effective as of November 21, 2002, and that it would trade on the OTC Bulletin Board under the symbol "PAHG."

On March 27, 2003, Holdings merged with and into Systems for the purpose of changing its state of incorporation from Nevada to Delaware ("Redomestication Merger"). Systems was the surviving corporation of the Redomestication Merger, and its Second Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws and Board of Directors became the governing documents and governing body, respectively, of the surviving corporation. The surviving corporation is referred to herein as "we," "us," the "Company" or "Patron." In connection with the Redomestication Merger, Patron filed with the SEC a successor entity report on Form 8K-12g-3, whereby Patron succeeded to the reporting obligations of Holdings under the Exchange Act.

Subsequent to the Redomestication Merger and prior to the acquisitions we consummated on February 25, 2005 and March 30, 2005 (described below), we had minimal business operations. As of September 25, 2003, all of our employees except for our Chief Executive Officer had resigned. Upon the resignation of our Chief Executive Officer on January 21, 2004, we had no employees and only one Director, the non-executive Chairman of the Board.

In April of 2004, we failed to meet the reporting requirements under the Exchange Act. As a result, we were de-listed from NASDAQ's Over-the-Counter Bulletin Board quotation system. During 2005, we completed the filing of a Form 10-KSB covering the period from April 30, 2002 (inception) to December 31, 2004, completed the filing of Forms 10-QSB for the periods ending March 31, 2005, June 30, 2005 and September 30, 2005 and filed a Form 8-K covering each of the acquisitions completed on February 25, 2005 and March 30, 2005. We are current with all SEC filings as of December 31, 2005. Since November 14, 2005 our listing has been reinstated on NASDAQ's Over-the-Counter Bulletin Board quotation system.

On February 25, 2005, we consummated the acquisitions of Complete Security Solutions, Inc. and LucidLine, Inc. pursuant to the filings of Agreements and Plans of Merger with the Secretaries of State of the States of Delaware and Illinois, respectively. On February 28, 2005, we consummated a private placement with accredited investors in the amount of $3.5 million. On March 30, 2005, we consummated the acquisition of Entelagent Software Corp. pursuant to the filing of an Agreement and Plan of Merger with the Secretary of State of the State of California. We discuss these transactions in further detail in this report.

Our acquisitions have allowed us to offer a set of software applications designed to solve a set of enterprise-level customer problems associated with electronic message management, whether in the form of e-mail, eforms or instant messaging. Our software and services solutions are designed to help our customers create, manage and apply complex rule sets that support business policies, enhance work flow processes, enforce regulatory compliance, and reduce the time, cost and overhead of message management. Our suite of products addresses e-mail policy management, e-mail retention policies, archiving and electronic discovery ("eDiscovery"), proactive e-mail supervision, and the protection of messages and their attachments in motion and at rest. Our eforms solution enables customers to quickly and easily create forms, capture, share, and manage data in an industry standard format.

PATRON'S BUSINESS PLAN

PATRON'S STRATEGY

Patron's strategic mission is to solve a set of enterprise-level customer problems associated with electronic message management, whether in the form of e-mail, eforms or instant messaging. Our software and services solutions are designed to help our customers create, manage and apply complex rule sets that support business policies, enhance work flow processes, enforce regulatory compliance, and reduce the time, cost and overhead of message management. Our suite of products addresses mailbox management, e-mail policy management, e-mail retention policies, archiving and eDiscovery, proactive e-mail supervision, and the protection of messages and their attachments in motion and at rest. Our eforms solution enables customers to quickly and easily create forms, capture, share, and manage data in an industry standard format.

We serve customers in highly regulated industries such as financial services, legal, public safety and law enforcement, healthcare and pharmaceuticals. The market demand for our offerings grows with each new breach of data security, each new regulation enacted to protect information, and each civil or criminal legal proceeding whose outcome hinges on the production of electronic communications. Policy management of information security and regulatory compliance has been called "Y2K without an end" and Patron Systems is committed to serving this market for the duration.

We also offer a range of services to corporate and government entities utilizing fiber optics and data replication technologies to provide secure robust off-site data backup, recovery, restoration, and retrieval services coupled with high-speed data communication turnkey solutions. Our secure and scalable high-speed data communication solutions facilitate seamless instantaneous backup of mission critical business data and enable immediate access to data and real time restoration of critical business functionality in the event of a crisis or disaster.

PATRON'S MARKETPLACE

E-mail is becoming the standard form of internal company and business-to-business communications. AIIM International and Kahn Consulting released a 2003 report revealing the ubiquitous nature of e-mail usage for critical business communications. E-mail is being used to transmit and collaborate on the most sensitive corporate and customer identifying information. In 2003, ASIS International released a report discussing the impact of proprietary

information loss or theft from within or outside the network. The participating Fortune 1000 companies recorded the cost of intellectual property losses between $53 and $59 billion in 2001. Although it is believed that the greatest perceived threat is from outside the enterprise, as the Federal Bureau of Investigation has noted, the simple fact is that approximately 70% of IT damage and theft comes from inside an organization. Forty percent of reported incidents of known or suspected losses involved the most business critical and regulated information: customer data, strategic plans, financial data, and R & D.

Legislation such as the Sarbanes-Oxley Act, the Health Insurance Portability and Accountability Act (HIPAA), Gramm-Leach-Bliley, the USA PATRIOT Act, the California Security Breach Law, and the Securities and Exchange Commission rule 17a-4 is creating a regulatory imperative to force corporations and government enterprises to adopt critical compliance measures in order to not run afoul of the new regulatory requirements for information integrity and security. Current legislation poses serious challenges to information security strategy and experience tells us that future legislative actions will not reduce the regulatory burden on corporate information security strategy, but rather will be increasing that regulatory burden.

A March 2005 IDC research report noted that the global market for compliance information management will grow at 22% a year through 2009.

The review of e-mail for compliance with corporate policies and the archival of messages necessary to comply with the various regulations noted above is a rapidly growing marketplace. An April 2005 Gartner study of the e-mail active archiving marketplace noted that the market for e-mail archiving and message management solutions is growing at 58% a year through 2009 with a market size of $883 million in 2009.

Critical to the successful implementation of an e-mail archival system is the ability to utilize the system's query and reporting tools to enable eDiscovery. Corporations are utilizing archival and eDiscovery software applications to reduce their litigation support costs. Law firms and litigation consultants are utililzing archival and eDiscovery software to participate in the rapidly growing market of electronic discovery of documents, e-mail, etc. in support of lawsuits of all types. A study by EDDix LLC has indicated that the market for eDiscovery is growing at 35% a year and is currently a $2 billion marketplace.

OUR BUSINESS MODEL

Our business strategy is to develop products and technologies that will enable us to close gaps in the management of an organization's messaging environment. We believe that the products we intend to develop, when used in conjunction with products that already exist in the marketplace, will enable us to enhance the design and operating effectiveness of existing messaging systems and enable compliance with governance guidelines and standards, administrative policies and codes of conduct and provide expedited support in litigation situations. We believe that our value proposition is in our ability to design a comprehensive messaging protection, supervision, archival and , discovery solution that integrates our products with existing products.

As described above, we acquired in early 2005 certain businesses that have developed software products and also provide various business and professional services specifically designed and adapted to meet these goals. Such products and services consist of unique electronic messaging surveillance, electronic forms delivery and management and data backup, retrieval and restoration technologies as well as the associated assessment, implementation, training and operation tools, methodologies and materials. These products and services are used in a variety of financial, healthcare, commercial and government entities. A brief description of these acquired businesses and their areas of specialization are as follows:

Entelagent Software Corp.: Entelagent Software Corp. ("Entelagent"), through the PolicyBridge(TM) message management product suite, provides flexible and scalable real-time content-aware e-mail monitoring and post-event review of e-mail messages and their attachments as well as infrastructure for knowledge management of archived e-mail messages and attachments in all media. Entelagent's e-mail content monitoring technology addresses the need for comprehensive internal security measures to safeguard company intellectual capital. Entelagent's content management solutions work in compliance with regulatory and legislative drivers including SEC and HIPAA mandates.

LucidLine, Inc.: LucidLine, Inc. ("LucidLine") is a provider of bundled and branded high speed Internet access and synchronized remote data back-up, retrieval, and restoration services.

Complete Security Solutions, Inc.: Prior to being acquired by us, Complete Security Solutions, Inc. ("CSSI") consummated a merger with IDK Enterprises, Inc. d.b.a. NETdelivery ("IDK/NETdelivery") pursuant to which CSSI acquired all of the outstanding common stock of IDK/NETdelivery. We believe IDK/NETdelivery was one of the first United States based companies to create software that supported real-time secure collection, delivery and sharing of field-based report information for public safety agencies. Based on the latest e-forms (electronic forms) technology, we believe IDK/NETdelivery's FormStream(TM)messaging solutions give law enforcement and other justice agencies secure, real-time access to field reporting data for use inside a department or in a multi-jurisdictional information sharing system. We believe IDK/NETdelivery addresses the urgency of Homeland Security initiatives by enforcing data transfer standards such as Global Justice XML. We believe that this technology provides a platform to facilitate real time data collection and information sharing between disparate agencies in a timely and accurate fashion.

With these products and services, and our expertise in information security, we expect to generate revenue in the following two areas:

o PolicyBridge and FormStream software product licenses (described below) that will be licensed on a perpetual right to use or a finite term basis. Pricing will be based on the number of users.

o Databackup and storage services provided by us, which typically will consist of (i) an initial installation, training and setup/delivery charge, (ii) a monthly fee for a defined level of storage/services and (iii) potential additional fees based on additional services and storage above base monthly charge levels.

POLICYBRIDGE

PolicyBridge is an enterprise class "e-mail policy manager" which empowers enterprises to:

o Ensure compliance with external government regulations

o Enforce internal administrative policies

o Enable corporate governance

o Expedite litigation support

o Eliminate reputation damage caused by the loss of nonpublic customer or patient information

o Guard corporate trade secrets

The core of PolicyBridge is our "Policy Library" with its collection of customizable policy templates to manage all aspects of e-mail archiving, discovery, supervision, and protection. Currently in release 6.0, PolicyBridge is packed with customer-driven features which have been incorporated as a result of installations in a variety of industries.

PolicyBridge's basic capability provides message archive and discovery for regulatory compliance and litigation assistance. Its powerful and feature rich integrated archive query process drastically reduces the time and cost of message retrieval for audit or legal discovery.

At a higher level PolicyBridge empowers managers to choose from a library of e-mail policies that address a broad range of executive level concerns ranging from protection of customer or patient private information and corporate intellectual property, to employee conduct, to improper use of corporate computer and network assets. PolicyBridge not only protects from risk of loss and litigation but enables new, secure communication channels with customers and partners.

Flexibility and speed of policy application are hallmarks of PolicyBridge. Our policy library comes complete with purpose built policies which are constructed using various attributes such as:

o Word, phrase, or pattern matching within the subject, body or attachment

o Sender-receiver combinations such as user names, user group, and domains

o Attachment type or size

PolicyBridge provides a range of "policy actions" that can be applied to e-mail and attachments, including:

o BLOCK from leaving the enterprise, i.e. protection from loss of intellectual property, company confidential information, and trade secrets

o RETURN to the sender with pre-scripted message, i.e. a warning or explanatory message allowing for the on-going security and compliance training which is required by each of the regulations that affect corporations

o QUARANTINE for administrative review

o ROUTE to administrator, supervisor or appropriate subject matter expert; and

o SELECTIVELY WRAP in an electronic envelope that protects the contents with encryption and rights management rules that persist even after the recipient has accessed the e-mail. Wrapping is perfect to protect intellectual property or regulated content embedded in documents such as credit applications, customer lists, registration documents, and spreadsheets whether they are stored locally during creation, in transit, or archived on a network server.

PolicyBridge provides a message archive and discovery agent for secure e-mail storage and retrieval. It supports a wide range of storage device types and is hierarchical storage manager independent. PolicyBridge provides a powerful and feature rich integrated archive query process that drastically reduces the time and cost of e-mail retrieval for audit or legal discovery.

FORMSTREAM

FormStream provides a complete solution for the collection, distribution, management, and analysis of form-based public safety, government and corporate information. Based on the latest eforms technology, XML and Global Justice XML, a powerful routing capability, and an open-standards approach, our field reporting and analysis tools allow an organization to easily create forms that replicate their present ones, routes these forms to the appropriate people and allow secure analysis of that information. FormStream gives law enforcement, EMS, fire and other organizations real-time access to field reporting data for use inside a department or in a multi-jurisdictional information sharing system.

FormStream provides a complete electronic forms solution that enables easy filing of incident reports from vehicles using computers with wireless network connectivity or in situations where network connections are not available. It also offers a comprehensive secure e-mail solution to eliminate sensitive case information leakage. It provides a secure "electronic case file" solution and a high-availability and redundant solution for the storage and back up of public safety data.

FormStream provides secure electronic form creation, movement, and management. FormStream makes fillable electronic forms creation easy. Once created, forms can be published to internal or external users. If forms are pre-populated with FormStream registration information or external databases, organizations can automatically capture form data and extract it into existing databases and legacy systems. FormStream provides powerful functionality to further streamline processes, such as attaching payments and routing forms.

FormStream integrates with a wide range of computer-aided dispatch and records management systems that have been utilized in a number of large city and metropolitan area law enforcement applications.

COMPETITION

We believe the products offered by our recently acquired subsidiaries will enable us to provide a unique suite of software applications that will be attractive to corporations and governmental enterprises increasingly confronted with the need to establish functional business practices in compliance with regulatory standards.

The number of competitors for our FormStream and PolicyBridge products has risen in the past few years and we expect the intensity of competition in the market segments we intend to serve to continue to increase in the future as existing competitors enhance and expand their product offerings and as new participants enter these market segments. Many of our potential competitors have longer operating histories, greater name recognition, large customer bases and significantly greater financial, technical, sales, marketing and other resources. In addition, some of our potential competitors currently combine their products with other companies' e-mail messaging, networking and security products. These potential competitors also often combine their sales and marketing efforts. Such activities may result in reduced prices, lower gross and operating margins and longer sales cycles for the products we and our recently acquired subsidiaries currently offer and intend to offer. If any of our larger potential competitors were to commit greater technical, sales, marketing and other resources to the markets we intend to serve, or reduce prices for their products over a sustained period of time, our ability to successfully sell the products we intend to offer or increase revenue could be adversely affected.

PATRON'S SUBSIDIARIES

We believe the products offered by our recently acquired subsidiaries will enable us to provide a unique suite of software applications that will be attractive to corporations and governmental enterprises increasingly confronted with the need to establish functional business practices in compliance with regulatory standards.

ENTELAGENT - We believe e-mail is the primary corporate communication vehicle through which the vast majority of sensitive data is shared. Entelagent provides flexible and scalable real-time content-aware monitoring and pre- and post-event review of e-mail messages and their attachments as well as infrastructure for knowledge management of archived e-mail messages and attachments in all media.

Entelagent's PolicyBridge e-mail content monitoring technology addresses the need for comprehensive internal security measures to safeguard company intellectual capital. Entelagent's PolicyBridge e-mail management solution works in full compliance with regulatory and legislative drivers including SEC and HIPAA mandates. Entelagent's enterprise-wide e-mail management solution empowers organizations to reduce or eliminate costly risks, efficiently manage incidents, and increase employee productivity. We believe the solution also provides Human Resource departments the tools needed to reduce and eliminate potentially significant and costly risks related to e-mail abuse through racist, sexist or otherwise inappropriate e-mail.

Entelagent's clientele consist of banking and financial service organizations including Goldman Sachs, JPMorgan Chase / BrownCo and Edward Jones, among others.

We completed the acquisition of Entelagent on March 30, 2005.

LUCIDLINE - LucidLine is a provider of bundled and branded high speed Internet access and synchronized remote data back-up, retrieval, and restoration services.

LucidLine leverages fiber optics and data replication technologies to provide secure robust off-site data backup, recovery, restoration, and retrieval services coupled with high-speed data communication turnkey solutions. LucidLine's secure and scalable high speed data communication solutions facilitate seamless instantaneous backup of mission critical business data and enable immediate access to data and real time restoration of critical business functionality in the event of a crisis or disaster.

LucidLine has established a number of contractual relationships with financial services, healthcare and commercial entities.

We completed the acquisition of LucidLine, Inc. on February 25, 2005.

CSSI - Prior to being acquired by us, Complete Security Solutions, Inc. ("CSSI") consummated a merger with IDK/NETdelivery, a provider of information technology products and services that help law enforcement agencies and the justice community operate more efficiently. We believe IDK/NETdelivery was one of the first companies in the United States to create software that supported real-time secure collection, delivery and sharing of field-based report information for public safety agencies.

Based on the latest electronic forms technology, IDK/NETdelivery's proven FormStream solutions give law enforcement and other justice agencies real-time access to field reporting data for use inside a department or in a multi-jurisdictional information sharing system.

IDK/NETdelivery addresses the urgency of Homeland Security initiatives by enforcing data transfer standards such as Justice XML, to facilitate real time data collection and information sharing between disparate agencies in a timely and accurate fashion. In an effort to promote the U.S. Department of Justice's efforts to support and drive information sharing between criminal justice and public safety entities, IDK/NETdelivery is working with the Syracuse Police department and the National Law Enforcement and Corrections Technology Center (NLECTC) to develop one of the first functional process automation solutions based on the Global Justice XML standard.

Current clients include the City of Syracuse, NY; the Colorado Bureau of Investigation; Douglas County Sheriffs Dept. (Colorado); the Colorado AMBER Alert System; and the University of Colorado Police Dept., among others.

We completed the acquisition of CSSI on February 25, 2005.

PATRON'S TARGET ALLIANCE PARTNERSHIPS

In conjunction with the Company's efforts to grow the business and access new markets, management will pursue alliances with companies possessing complimentary technologies and strong relationships in target vertical markets. In all cases, one of the key objectives of these relationships is to reduce customer acquisition costs. Examples of potential relationships include the following:

SYSTEM INTEGRATION COMPANIES: Patron's technologies (both FormStream and PolicyBridge) can be integrated into broader solutions for public safety, commercial and compliance markets. Organizations that integrate multiple technologies may possess unique market access and domain knowledge about these markets, increasing Patron's opportunities where such alliances are formed.

TECHNOLOGY HARDWARE COMPANIES: Patron's Active Message Management solutions drive the need and use of certain hardware technologies, particularly data storage solutions. It is management's belief that joint-marketing alliances into vertical segments requiring e-mail management solutions (and large demands for storage capacity) could open up new opportunities for Patron.

INDEPENDENT SOFTWARE VENDORS: There are a number of software companies providing solutions that compliment both the FormStream and PolicyBridge message management solutions. Provided the technologies are more complimentary than competing, there is an opportunity to partner with third party software companies to provide a more complete solution to potential customers. Such alliances with other software vendors could take the form of an OEM relationship, a joint-marketing initiative, or a hosted delivery model.

CONSULTING COMPANIES: There are many consulting organizations specializing in practice areas important to Patron's solutions. These include compliance, eDiscovery, litigation, human resources, regulation of broker/dealers, and public safety/first-responder practice areas. Organizations delivering consulting services in these areas market themselves as subject matter experts, recommending both services and technology solutions that reduce the risk and improve the productivity of their clients. Management believes that PolicyBridge and FormStream can be presented as differentiated solutions where partners in the consulting business deem appropriate. The result could be an effective selling model, where Patron solutions are introduced by relevant, subject matter experts.

SALES, MARKETING AND TECHNICAL SUPPORT

We market and sell our products and services through our direct sales force and other resellers. Our sales force and our sales engineers and technical support personnel provide ongoing interaction with current and future customers which allows us to provide a high level of service and support and to strengthen customer relationships. We utilize a variety of marketing strategies and programs to support the Company's product and service offerings. These include the enhancement of the Company's web-site, the development of whitepaper reports on client success stories and critical issues related to the market focus for our products, web-based seminars and webcasts, participation in major trade shows and conferences, e-mail-based marketing campaigns, telemarketing programs and industry and technology analyst briefings.

RESEARCH AND DEVELOPMENT

The Company's research and development efforts are focused on the maintenance, enhancement and extension of our current FormStream and PolicyBridge products. Due to our limited capital resources, we have not had the resources to address more extensive research and development initiatives. We will continue to review marketplace opportunities to acquire carefully selected companies that have developed (or are developing) potentially high profit products in the area of messaging management.

CUSTOMERS

During the year ended December 31, 2005, the Company's top five customers accounted for 14%, 8%, 8%, 7% and 6% of consolidated net revenues.

EMPLOYEES

As of December 31, 2005, we employed a total of 28 full-time, principally salaried, employees. Our employees are not covered by a collective bargaining agreement. We believe we have a satisfactory relationship with our employees.

GEOGRAPHIC AREAS

We operate our business and sell our products and services to businesses in the United States. Some of our U.S. based clients operate our software in locations outside of the United States.