QUALSEC - FORM 10-K/A - October 22, 2009

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EX-32 - QUALSEC	ex32.htm
EX-31 - QUALSEC	ex31amd1.htm
EX-10 - QUALSEC	formoptionagreement.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A

(Mark One)

[x]

Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 For the fiscal year ended December 31, 2008

[ ]

Transition Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 For the transition period from __________to _________

QUALSEC

(Exact name of registrant as specified in its charter)

Wyoming

20-5776355

(State or other jurisdiction of

(IRS Employer Identi-

incorporation or organization)

fication No.)

1829 East Franklin Street, Chapel Hill, NC

27514

(Address of principal executive offices)

(Zip Code)

Issuer's telephone number: (435) 713-0566

Securities registered pursuant to Section 12(b)of the Exchange Act: None

Securities registered pursuant to Section 12(g) of the Exchange Act: no par value common stock

Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-

K is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-KS or any amendment to this Form 10-K. [ X ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a small reporting company. See definition of “large accelerated filer”, “accelerated filer” and “small reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Small reporting company [ X ]

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]

State issuer's revenues for its most recent fiscal year: $0

The aggregate market value of the voting stock held by non-affiliates of the registrant as of December 31, 2008 was $6,900,000 based on the last sale price of $.23.

The number of shares outstanding of the issuer's classes of Common Stock as of March 24, 2009:

Common Stock, no Par Value –

170,000,000 Shares

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

We have made forward-looking statements in this Annual Report on Form 10-K, including in the sections entitled "Description of Business," "Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations," that are based on our management's beliefs and assumptions and on information currently available to our management. Forward-looking statements include, among others, the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities, potential operating performance improvements, the effects of competition, and the effects of future legislation or regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words "believe," "expect," "plan," "intend," "anticipate," "estimate," "predict," "potential," "continue," "may," "should," or the negative of these terms or similar expressions.

Forward-looking statements involve risks, uncertainties, and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. You should not put undue reliance on any forward-looking statements. We do not have any intention or obligation to update forward-looking statements after we file this report except as required by law.

PART I

Item 1.

DESCRIPTION OF BUSINESS

When used in this Form 10-K, the words "expects," "anticipates," "estimates" and similar expressions are intended to identify forward-looking statements. Such statements are subject to risks and uncertainties, including those set forth below under "Risks and Uncertainties," that could cause actual results to differ materially from those projected. These forward-looking statements speak only as of the date hereof. QualSec expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based. This discussion should be read together with the financial statements and other financial information included in this Form 10-K.

Background

QualSec, a Wyoming corporation (the “Company” or “QualSec”) was incorporated on October 18, 2006 to develop and market an electronic olfactory device. The executive offices of the Company are located at 1829 East Franklin Street, Chapel Hill, NC 27514. Our telephone number is (435) 713-0566.

Plan of Operation – General

QualSec intends to develop and market an electronic olfactory device. We believe we can design and manufacture (or cause to be manufactured on a contract basis) this device to be portable to the extent it will be handheld. A working prototype has been developed. The electronic olfactory device detects minute quantities of chemical compounds in minutes and provides an electronic report to the user in real time.

The product consists of four discrete functions: air circulation over the testing substrate; interaction of the testing compound with the airborne chemicals; analysis of the test results; and reporting of results to the user. A fan assists the device in sampling air. The air can be collected from the area surrounding the subject (person or item) or from breath. The air is analyzed using proprietary technology and the results are stored on the device (such as by flash cards) and reported via an LCD screen to the user or outputted to other devices such as a notebook computer. The product is about the size of a large portable audio compact disk player.

The testing substrate includes multiple nano structures. Nanostructures are larger than molecules but are submicroscopic or from .1 to 100 nanometers. Nanostructure sensing compounds are placed on the polycarbonate disk such as those used in a CD player. For Homeland Security applications, the sensing compounds are well known and already in use in the industry. For other applications, such as detection of illegal drugs or disease, many of the sensing compounds are known, and the others can be developed by QualSec for the specific application. When the airborne chemical compound comes in contact with the sensing compound on the disk, it causes a chemical reaction which changes the physical shape of the sensing compound. In layman’s terms, it distorts the sensing compound. This distortion can be read by a laser similar to the manner in which the laser in an audio CD player reads the audio track. An electronic circuit and software in our device interprets the laser signals into a measurement of the airborne compound, which is output in user-friendly terms to a liquid crystal display screen, or to a USB port (USB stands for universal serial bus and a USB port is a standard interface for personal computers) or to a portable memory (smart) card such as used in a digital camera. The smart card can be read by a card reader and the data transferred to a computer.

Our olfactory sensing device can be manufactured for a variety of applications, including Homeland Security (explosives), law enforcement (illegal drugs), or medical (lung cancer or certain epidemic diseases). Our hand-held device will be designed to be universally used for all applications, while the disk will be customized for each application and will program the device for that application via software embedded in its programmable chip. The revenue stream for QualSec can include sales or leasing of the sensing device and sales of the sensing disks.

The only modification needed to use the device for all these applications will be a simple programming change. For example, if the device is being used for Homeland Security, the program (burned in on a programmable computer chip or on a smart card) will know that track 1 on the testing disk is sensitive for nitroglycerin, track 2 is sensitive for hexamethylene triperoxide diamine, and so on for all the tracks on the disk. The program will also have the algorithm to interpret the testing results for each track so as to give the parts per billion in the sample and set the threshold levels for alerts. If the device is used for law enforcement drug testing, there will be a separate track for each drug to be tested. Correspondingly, the testing CD for each type of test will have to be provided. QualSec can buy the polycarbonate disks from any one of hundreds of suppliers, and apply the gel, track by track, with a simple machine similar to a labeling machine.

For applications other than for Homeland Security, such as detection of avian flu, we will need to develop the appropriate sensing compound using principles of organic chemistry. Certain compounds have been developed to date. The development of sensing compounds is not overly complex. Because of the need to improve homeland security, the development of artificial nose technology by universities, government laboratories, large corporations, and startup companies has been heavily funded by governments, industry, and venture capital. More than a dozen universities, two dozen companies, and half-dozen national laboratories, domestic and foreign, are or have been involved in the development of artificial nose technologies. This has resulted in a very rapid advance of technologies, but also numerous and different approaches that must be confusing to funding agencies and potential investors.

The rapid advance of technology has, in the opinion of management, rendered most of these approaches technically obsolete and many of the ongoing projects have dead-ended. While the R&D efforts have resulted in many commercial E-nose products, benchtop and portable, most have languished in the market or been abandoned altogether. Some of these products have found niche markets and continue to be sold.

All of the current approaches are limited by more than one of the following problems:

Cost;

Selectivity;

Resolution;

Noise;

Reversibility;

Limited number of sensors in array (discrimination)

Type of sensor

Redundancy of sensors;

Drift (the tendency of output devices to not measure consistently)

Instrument instability

Sensor recovery, memory;

Reproducibility;

Effects of environment (humidity, temperature, vibration, CO₂, ethanol, etc.;

High power consumption;

Portability (size, weight, controlled environment, etc.);

Requirement for skilled operator;

Frequent calibration;

Inability to detect important odor components, e.g. small amines, etc.;

Discrimination – ability to detect the target odor in a complex odor background;

Failure to implement multidimensional analysis of data, e.g. response of each sensor as function of time and amount of exposure.

Many of these problems tend to be solved by miniaturization with a technical and commercial trend to smaller and smaller sensor arrays. Multiple sensors with integrated circuitry can be incorporated into a single chip for low-cost, high-volume production with existing manufacturing resources. Reduction to nanoscale (atomic dimensions) can further provide enhanced chemical and physical properties, e.g. in some applications, single molecules can be detected with a large signal/noise ratio. Consequently, recent R&D has focused on development of nanotech sensors and arrays to develop the ultimate artificial nose technology (nanotechnology is the natural limit to size reduction).

The rapid and dramatic advances to the limit of miniaturization with a large and growing technical data base offer new opportunities for small companies to develop new sensors and sensor arrays.

QualSec intends to exploit such opportunities through unique application of existing technologies combined with proprietary chemistries to be incorporated into nanosize structures. Our approach allows for many different type sensors and redundancy. We believe that our approach will meet current and future needs for odor recognition. Our objectives are:

A single, low-cost, universal instrument suitable for a variety of applications;

An easily insertable disk that will be customized for each application and will program the instrument for the application, analysis of data, and display of results (new and updated applications can be accommodated without changes to the instrument);

Large sensor array (many different sensor types with redundancy can be accommodated on a small disk because of the nanoscale size of the sensors);

Highly sensitive – low parts-per-billion measurement (an advantage of nanosensor characteristics)

Reliable: few moving parts, off-the-shelf components;

Able to discriminate target odors in the presence of interfering background odors (different sensor types, redundancy, spacio-temporal analysis of data);

System resistant to:

Temperature & humidity variations (sensor design supplemented by programming);

Sensor drift prevention & compensation (advantage of nanosensor & advanced data analysis);

Sensor poisoning, e.g. a new, low-cost disk can be as easily and quickly inserted as a CD

Real-time results in seconds (fast response time is an advantage of nanosensors)

Handheld instrument (small size possible because of technical approach and nanoscale sensors);

User friendly (disk will program for operation, analysis of date, and display of results – just point and press the start button).

Our competitors may decide in the future to copy QualSec’s approach, and since all of our competitors have more money and resources than QualSec, competing could be difficult.

QualSec intends to file for patent protection of the overall design and the technology which has been developed in building the prototype. Our basic technology was developed by management prior to incorporation of the company in October 2006, and contributed to QualSec by the founders. No other person other than QualSec has any rights in the technology. Presently, QualSec’s technology is not protected by patent but certain aspects of the technology are being maintained as a trade secret.

Testing material is designed specifically for the target spectrum of volatile organic compounds (VOCs), which is sought to be tested. The specific testing nanosensors are deposited on a substrate similar to a music CD or video DVD. For example, the test materials for explosive organic compounds are very well known in the industry. These compounds will not require development by QualSec, but other testing materials, e.g., for avian flu, will need to be developed. Note that the test disks will need to be manufactured separately. Test disks will be single application, but the device can be used to test for as many different applications as can be imagined, by utilizing the appropriate disk.

After the testing nanosensors interact with the atmosphere, the results are read by a laser beam similar to that used in a CD player. Proprietary software will compile the results from scanning the test disk, and output the results to an LCD (liquid crystal display such as used by a digital watch) screen and/or permanent memory. Development of a working model is not expected to present any novel engineering or design issues. QualSec will endeavor to produce a design which is durable, reliable, aesthetically pleasing and ergonomic for a low per unit cost.

The device will be designed for the spectrum of specific volatile organic compounds (VOCs) which are being measured. With respect to Homeland Security applications such as detection of explosives, these materials are already standardized and are in use. QualSec will design a software interface to report the test results to the user. We believe that the same device can be customized for various applications by using the disk to program the software in the device with different formulations for different applications. This flexibility will permit the use of different nanosensor arrays (type & number) on the disk, as well as allow updates to programs developed for each application.

QualSec intends to work on completion but has not had any discussions with any manufacturer. The search for a suitable manufacturer will be made by reviewing trade publications, personal references, internet searches, and similar means.

An additional $3,000,000 in financing will be required by QualSec for manufacturing design, component sourcing, manufacturing of testing disks and regulatory compliance (e.g. documentation of FDA good manufacturing practices). A final amount of $1,500,000 is estimated to be required at 18 months following initial funding for marketing, quality control, and establishing a custom service system. QualSec does not have any agreements in place to provide the financing, although management believes that completion of a working model and perhaps some purchase orders will enable QualSec to obtain such financing.

Market

QualSec intends to sell its artificial olfactory device in several industries including medical and agricultural diagnostics, homeland security, the food and beverage industries, environmental monitoring, detection and monitoring of malodorants (chemicals which when aspired causes incapacitation), processing monitoring, Quality Assurance/Quality Control, and several other commercially important applications.

Two of the most attractive potential markets for QualSec’s artificial nose are medical diagnostics and homeland security. Hundreds of volatile organic compounds are exhaled in human breath. These have been studied by many investigators over several years using sophisticated laboratory instruments. Such studies have shown that several diseases might be rapidly diagnosed by screening for particular volatile organic compounds spectrums in breath. Since the use of these sophisticated laboratory instruments requires expensive instrumentation and skilled operators, a relatively inexpensive, easy-to-use, low-cost, and effective artificial nose could be exceptionally useful in screening patients for several diseases, and would have the important benefits of being non-invasive and providing immediate results. It would facilitate early detection of such diseases as lung cancer, especially among smokers. Of particular importance is the likelihood of screening for early-stage (latent period) viral diseases. An effective artificial nose could screen travelers, medical personnel, and others to help control and effectively treat a pandemic or victims of a terrorist attack. Various highly-infective and deadly viruses have been identified by homeland security as potential terrorist weapons of mass destruction. Determining an outbreak and extent of an epidemic is time critical. Early-stage treatment dramatically increases survival rates, while early identification of an outbreak would limit spread of the disease potentially saving thousands or even millions of lives. Detection of explosives and nerve gases for homeland security also presents opportunities for QualSec’s product. While this market is highly competitive, the potential low-cost and ability to discriminate target spectra within a complex volatile organic compounds background will be significant competitive advantages for QualSec.

Although medical diagnostics and homeland security are major potential markets, several other very large markets could be targeted by QualSec. A marketing study will be necessary to determine which markets and in what order those markets will be pursued. In agricultural uses, for example, the device could test for nutritional deficiencies or disease in livestock in a quick, cost-effective, and non-invasive manner by sampling breath. An effective artificial nose owes many of its potential applications to the lack of dependability of the human nose (subjectivity, health, fatigue, effect of previous exposure to odors, labor expense, time-of-day, etc.). In attempts to reduce variability in odor assessment, various artificial noses, benchtop and portable, have been evaluated for a variety of potential applications. Some of these applications have been successful and some unsuccessful. Odor assessment by artificial nose has been investigated for beer; wine; distilled spirits; milk; soymilk; fruits; vegetables; olive oil & vegetable fats; cosmetics; packaging (off-odors); bacterial fermentation; interior & exterior automobile odors; exhaust monitoring; malodors from animal facilities, wastewater treatment plants, & composting facilities; illegal drug manufacture; detection of buried bodies; etc. QualSec’s management believes that successful development of its nanotech based artificial nose will allow the Company to penetrate most of these markets.

QualSec plans to market its products worldwide through established distributors in each industry and market segment.

The food processing industry could utilize our device to check for spoilage and other quality control issues. We believe that law enforcement, Coast Guard and U.S. customs agencies can use our device very effectively for illegal drug detection and to quickly screen for drug use by suspects. Finally, business and environmental agencies can use the device to quickly detect the leakage of harmful substances into the environment.

Competition

QualSec’s management expects that competition in the artificial nose business will be based on price, ease-of-use, portability, available applications, and, in particular, technical advantages. As stated above, QualSec is targeting a price of about $1,000 for its artificial nose instrument. This target is based on management’s plans to use mostly off-the-shelf, inexpensive, proven components and to manufacture a single instrument for all applications. Competitor’s prices begin at about $5,000 to $20,000 for a portable instrument, while sophisticated benchtop instruments are considerably more expensive ranging into the hundreds of thousands of dollars. QualSec’s business strategy is to keep the cost of the instrument low, while selling its disks at market value, which is presently estimated to be about fifteen times direct cost. The minimum price is expected to be no less than three to five times direct cost. While there are many variations in product features that are currently on the market, QualSec has set objectives for its instrument (see foregoing discussion) that are superior to the collection of features of any particular competitor.

As previously discussed, earlier technologies and their products are being made obsolete by technical advances. While some E-nose products may survive and prosper in niche markets, QualSec management believes that most of the potential applications in medical diagnostics, homeland security, and other large markets will eventually be served by products based on nanotechnology because of its many technical advantages and potential for lower cost. Further, QualSec’s management believes that continued obsolescence based on size reduction is unlikely because nanotechnology is the practical lower limit for molecular detection.

Thus, our potential competitors include those companies that are developing or are likely to develop nanosensors. At present, QualSec is aware of only three nanotechnologies that are useful for development of nanosensors for VOCs. These and companies known to be exploiting them are as follows:

Carbon Nanotubes

Nanomix

Carbon Nanowires

Nanosys

Quantum Dots

Invitrogen (acquired Quantum Dot Corp.)

Evident Technologies

Nanomix is aggressively developing nanotube sensors for industrial and medical applications. A nanotube sensor system, however, has some significant problems that include:

extreme sensitivity to the environment – chemical and biological species in the vicinity of the nanotubes are likely to alter the electronic signal;

cost – each analyte requires a separate silicon chip transistor resulting in a practical limit to the size of the array;

the nanotubes currently use existing, off-the-shelf coatings (metal oxides, polymers, etc.), which have known problems, e.g. sensitivity, selectivity, sensitivity to humidity and other gases, stability, robustness, reversibility, etc.

QualSec Management believes that Nanomix could be its major competitor. Nanomix is one of the leading companies in the nanotechnology field, appears to be well financed and has many products under development.

Nanosys is developing nanowire sensors. However, these sensors suffer the same problems as nanotube sensors, and Nanosys is known to be focused on developing other nanotechnologies for large market applications including flexible electronics, non-volatile memory (memory that survives the shut down of a computer or other device), fuel cells, solar cells and biological research materials. Nanosys has been involved in nanotechnology for several years, is a medium sized competitor which, to the knowledge of QualSec, is adequately funded and well respected, although QualSec does not have information on the products of Nanosys that will compete directly with QualSec.

Invitrogen and Evident Technologies are known to be developing quantum dot technologies. Quantum Dots are nanosize crystals that can emit many different colors when excited by ultraviolet light. QualSec management does not know if either company is actively developing sensors for VOCs. Evident Technologies is developing its EviFluors™ Technology, which uses antibodies modified to quantum dots. Using a single ultraviolet light excitation source, their quantum dots can be used to track a number of different proteins simultaneously in one sample. They have received a National Institute of Health grant to develop a quantitative assay to detect breast cancer. Such pursuits do not predict commercial competition. Invitrogen is a public company traded on NASDAQ under the symbol IVGN and a market capitalization of over $3 billion. It appears to be well established and well financed. Evident Technologies is a medium sized private company and a leader in the quantum dot industry. QualSec has no knowledge of Evident’s financial condition, and to QualSec’s knowledge has no product under development similar to QualSec, although Evident probably could produce such a product.

With respect to the Homeland Security applications, our principal competition consists of GE Security and Smiths Detection, a unit of London-based Smiths Group PLC , which manufactures the large “puffer portals” found at airport security checkpoints to check passengers. These machines are large enough that they need to be stationary, cost about $160,000, and test for a limited range of compounds. A few portable and handheld E-nose instruments are commercially available in the price range of about $5,000 to $20,000. In addition to high cost, all have more than one of the problems previously discussed. We expect our device to be fully portable, cost less than $1,000 and test many times greater number of compounds. Smith’s Group PLC is very large and one of the dominant players in their field. To QualSec’s knowledge Smith’s Group PLC have unlimited funding available.

The TSA also employs Explosive Trace Detection Machines (“ETD”s) to check suspicious items at security checkpoints. The following is quoted from a notice for a June 29, 2006 U.S. House Aviation Subcommittee hearing: “ETD machines are roughly the same size as a common laser printer and cost only a few thousand dollars. ETD machines can detect minute traces of explosive residue, which may have been transferred to baggage surfaces through direct or indirect contact. While the ETD machines themselves have extremely high detection rates and very low false-positive rates, the process for collecting trace samples is slow, very labor intensive, and highly susceptible to human error. Currently, there are over 7,400 ETD machines deployed.” QualSec believes that its device will be less costly, costing less than $1,000, and be much quicker and more reliable because our device can sample air from specific areas and does not need swiping of specific areas.

QualSec understands that a technology being developed by New York-based L-3 Communications Holdings Inc. would check for explosives by analyzing material on traveler's skin and clothing when they push a short swinging gate. L-3 Communications Holdings is listed on the New York Stock Exchange under the symbol LLL and is one of the world’s largest defense and aerospace contractors.

Osmetech’s SAW detection systems detects volatile chemicals emitted by bacteria and is being marketed to detect early stage pneumonia, urinary tract infections and bacterial infections. We believe our device will be more accurate and less costly. Osmetech is listed on the London Stock Exchange under the symbol OMH and is a medium sized company with adequate access to financing. Osmetech does not have competing products but probably could develop such products.

Innovative Biosensors Inc. of Rockville, Maryland has reportedly licensed technology called “PANTHER” from MIT which is claimed to be capable of detecting airborne pathogens within 3 minutes. The product, which is marketed under the name “Bioflash” claims to detect 24 pathogens, including anthrax, plague, smallpox, tularemia and E. coli, using just a few dozen particles in a liter of air. The sensor uses modified human immune cells, called B cells, to detect the pathogens. QualSec believes its technology is far better because it is capable of detecting the same and many more pathogens in a matter of seconds, and uses non-perishible sensing media. In contrast, Bioflash requires the human immune cells for its testing, which cells must be refrigerated near the testing area.

Most of QualSec’s potential competitors are larger, better financed, and many have established markets and market relationships. Most, however, have multiple product lines and do not focus their resources entirely on their artificial nose products. Further, only a few competitors offer handheld or portable instruments. Most of these employ older, obsolete technologies. QualSec’s management believes that a market opportunity exists for its proposed artificial nose product. QualSec’s management believes that its artificial nose product will compete on the basis of price, ease-of-use, portability, available applications, and, in particular, technical advantages.

Employees

We currently have only one employee, our President. We intend to hire one person in administration and two in research and development when we receive additional funding. All of these employee estimates are assuming a full time basis. We have no firm plans on incentive or benefit plans but we have a stock option plan. We believe these employee levels will be sufficient for the next 12 months. In addition, some of our research and development has been outsourced to independent consultants.

Intellectual Property

Our technology is proprietary. We filed for patent protection on our technology in March 2008 and we believe our patent position is strong. The inventors of the patent are our officer and director and the research consultant, who will assign all rights to the patent application and other intellectual property rights to QualSec. We will also rely on trade secrets and other confidential information developed in the future. Employees, contract researchers and suppliers will be required to sign confidentiality and work-for-hire agreements to safeguard our proprietary technology.

Governmental Regulation.

The Homeland Security product is not subject to any governmental regulation, but the marketing of the device for medical diagnostic use will require approval of the FDA. The FDA classifies medical devices as either Class I, Class II or Class III devices. Most Class I devices are exempt from the FDA approval process. Class II devices cannot be marketed unless in an exempt subclass or unless the manufacturer provides a 90 day notification process with the FDA (known as a 510(k) filing) and Class III need pre-market approval (PMA) before marketing. In any event, FDA regulations require medical devices to be safe, effective, and to be manufactured in accordance with certain quality standards, and requires that compliance with FDA standards be documented. We believe that our device will be classified as a Class I or Class I device and will only need to comply with the 510(k) procedure. More information about the FDA’s requirements can be found at the FDA’s website at http://www.fda.gov/cdrh/ode/index.html.

Item 1A. RISK FACTORS.

Potential investors should consider the following special risk factors which pertain to the Company.

There are three types of risks to investing in our common stock, the first risk being risks related to the development of our products and the second type of risk relates to the structure of the offering; and the final risk is related to the uniqueness of the device.

Risks Related to Development of our Device

We may not be able to have our device manufactured or we may not be able to have it manufactured on a timely basis or cost effectively.

If the device is not manufactured, QualSec will not enjoy any sales revenue. We have not identified the persons who will manufacture the device in commercial quantities and cannot engineer the design for manufacturing until the prototype is completed. We may not be able to find a suitable manufacturer. The manufacturer may not be able to obtain raw materials or complete manufacture at a price which is economically feasible. We may be unable to engineer the design for manufacture or be able to manufacture the device on a timely, efficient basis with sufficient quality control. There could arise unforeseeable problems with the manufacture, including problems with quality control, inability of the manufacturer to produce finished product timely and in accordance with the specifications, or with obtaining components. Thus, even if we can design the device and can find a market for the device we may not be able to have it efficiently and timely manufactured, leading to a total loss of your investment.

We could be subject to product liability claims.

Currently diagnostic and sensory devices are not generally subject to product liability claims for errors or inaccuracies. For example, under QualSec's understanding of product liability law, if our device is used to screen for lung cancer, and returns a false negative as the result (the patient had lung cancer but the device was unable to detect it), QualSec would not be liable for product liability claims. This is due to public policy which recognizes that first, it is impossible to produce a 100% accurate testing device, second, that fact is recognized and so medical professionals use not only one test but a complex of factors in making a diagnosis, and finally because should the law impose product liability for inaccurate test results, no manufacturer would supply testing equipment and no lab would perform tests. However, new laws or judicial decisions could be enacted imposing such liability. Also, the device will use chemicals suspended in gel and placed on a polycarbonate disk as the testing medium. It is possible that some person, perhaps a toddler, will attempt to remove the gel from a testing disk and ingest the gel, resulting in injury or poisoning, and a court of law could hold QualSec liable under product liability theory. QualSec does not currently have any product liability insurance and may not obtain such insurance, so that any legal judgment and the legal defense costs could seriously and adversely affect QualSec.

Our device's competitive advantage, if any, will be primarily based on the technology we have and will develop. Competitors may develop technology which is superior or believed to be superior.

Although QualSec has filed a patent application and may file additional patent applications on certain aspects of its technology, such patent applications may not be approved, may be contested by competitors or may be infringed upon. Any patent application we file is subject to review by the U.S. Patent Office and may not be approved. If our patent applications are not approved, competitors can copy our technology with impunity. We may lack funds for any patent litigation, even if patent applications are granted. Further, technological advances or elevated customer expectations may render our device obsolete.

We have not secured orders for the sale of the device and cannot do so until we have completed a working model and can be sure we can supply the device in commercial quantities.

If we cannot obtain buyers for the device we will not be able to continue in business. Even if we secure orders, we may not attain profitability and will be unable to maintain operations unless we are able to obtain additional financing. Such financing may be impossible to find on terms satisfactory to QualSec.

Risks Related to the Common Stock

There is only a limited public trading market for the common stock.

Investors may not be able to resell their common stock for a profit, if at all, and thus could lose all or part of their investment. Our common stock will be a “penny stock” (as defined in Exchange Act Rule 3a-51) for the foreseeable future which means that brokers can only buy or sell the common stock on an unsolicited basis. The penny stock rule and similar regulations will reduce the likelihood that a liquid trading market will arise for the common stock. The common stock may trade at less than the offering price. Because our stock will be a “penny stock” a shareholder may find it more difficult to dispose of, or to obtain accurate quotations as to the price of, QualSec's common stock.

In the absence of a security being quoted on NASDAQ, or the Company having $2,000,000 in net tangible assets, trading in the Common Stock is covered by Rule 15c2-6 promulgated under the Securities Exchange Act of 1934 for non-NASDAQ and non-exchange listed securities. Under such rule, broker/dealers who recommend such securities to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or an annual income exceeding $200,000 or $300,000 jointly with their spouse) must make a special written suitability determination for the purchaser and receive the purchaser's written agreement to a transaction prior to sale. Securities are also exempt from this rule if the market price is at least $5.00 per share, or for warrants, if the warrants have an exercise price of at least $5.00 per share.

The Securities Enforcement and Penny Stock Reform Act of 1990 require additional disclosures related to the market for penny stocks and for trades in any stock defined as a penny stock. The Commission's regulations under such Act define a penny stock to be any NASDAQ or non-NASDAQ equity security that has a market price or exercise price of less than $5.00 per share and allow for the enforcement against violators of the proposed rules. In addition, unless exempt, the rules require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule prepared by the Commission explaining important concepts involving the penny stock market, the nature of such market, terms used in such market, the broker/dealer's duties to the customer, a toll-free telephone number for inquiries about the broker/dealer's disciplinary history, and the customer's rights and remedies in case of fraud or abuse in the sale. Disclosure also must be made about commissions payable to both the broker/dealer and the registered representative, current quotations for the securities, and if the broker/dealer is the sole market-maker, the broker/dealer must disclose this fact and its control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

While many NASDAQ stocks are covered by the proposed definition of penny stock, transactions in NASDAQ stock are exempt from all but the sole market-maker provision for (i) issuers who have $2,000,000 in tangible assets ($5,000,000 if the issuer has not been in continuous operation for three years), (ii) transactions in which the customer is an institutional accredited investor and (iii) transactions that are not recommended by the broker/dealer. In addition, transactions in a NASDAQ security directly with the NASDAQ market-maker for such securities, are subject only to the sole market-maker disclosure, and the disclosure with regard to commissions to be paid to the broker/dealer and the registered representatives.

In order to provide the additional $4,500,000 required to complete development, manufacture and market the device, QualSec will need to offer additional shares of its common stock or offer other securities.

QualSec cannot predict the terms of these offerings nor the price at which shares of common stock may be offered. If we do not obtain the additional $4,500,000 required to complete development, manufacture and market the device, we will not be able to complete development, manufacture the device, market it or even remain in operations, resulting in a loss of all or most of your investment. QualSec is required to raise an additional $4,500,000 in order to design the prototype for manufacture, manufacture the device, market the device, and pay for general and administrative expenses on a day to day basis. The investor should bear in mind that $4,500,000 is a significant amount of money. We might have to raise this $4,500,000 in one or more stages or offerings, each with its own terms and dilution to existing shareholders. Such an offering might require the participation of institutional investors, which are more likely to demand more stringent terms for any placement. QualSec has not determined the terms for any offering. Any future offering may be for common stock, or may be for a security with rights superior to that of the common stock. In connection with any offering, QualSec may be required to add investor’s representatives to the Board of Directors, or may be required to commit to other conditions. If other conditions are not met, existing investors could have their rights or equity ownership substantially diluted. We cannot at this time determine the terms of any follow-on offering or whether it will ever occur.

Item 1B. UNRESOLVED STAFF COMMENTS

We have no unresolved staff comments.

Item 2.

DESCRIPTION OF PROPERTY

We are currently renting office space in Chapel Hill, NC for $250 per month. We believe this space is sufficient for the foreseeable future.

Item 3.

LEGAL PROCEEDINGS

Not Applicable.

Item 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2008.

PART II

Item 5.

MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information and Sales of Unregistered Securities.

The Company's Common Stock has traded on the OTC Electronic Bulletin Board under the symbol QLSC.OB since June 30, 2008. From May 29, 2008 to June 29, 2008 the Common Stock traded on the Pink Sheets LLC under the symbol QLSC.PK. The following table sets forth the high and low trading prices for the Common Stock in 2008. Trading in the Common Stock has been limited and sporadic and does not constitute an established public trading market. The last sale price was $.25.

Quarter ended

High

Low

June 30, 2008

$.42

$.04

September 30, 2008

$.35

$.21

December 31, 2008

$.20

$.25

As of December 31, 2008 there were approximately 50 record holders of Company common stock. The Company has not paid any dividends on its common stock. The Company currently intends to retain any earnings for use in its business, and therefore does not anticipate paying cash dividends in the foreseeable future.

Report of Offering of Securities and Use of Proceeds Therefrom.

Our Offering Statement on Form 1-A, file number 024-10160, was declared qualified by the Securities and Exchange Commission on June 13, 2007. The Offering Statement qualified the sale of up to 30 million shares of common stock, on a straight best efforts, no minimum basis, at a price of $.01 per share, or $300,000 if all the offering was sold. No underwriter was employed. No commissions or finder’s fees were paid. During the year ended December 31, 2007, we sold $114,500 of this offering (11,450,000 shares). The remainder of the offering was sold after December 31, 2007.

As disclosed in the Offering Circular, our President agreed to loan up to $300,000 to Qualsec in order to provide for our cash needs, such loaned amounts to be repaid from the offering. That officer did loan Qualsec $200,000 in the year ended December 31, 2007, of which $185,500 (the amount raised after year end) was repaid to him. In the year ended December 31, 2007, the offering proceeds of $114,500 plus the proceeds of the officer loan were used to pay offering expenses of $1,086, research and development expenses of $140,000, officer salary and related payroll taxes totaling $77,232, and general and administrative expenses of $44,791. Of the above expenditures, all were made to non-affiliates except for the officer salary.

Company repurchases of common stock during the year ended December 31, 2008.

There were no Company repurchases of common stock during the year ended December 31, 2008.

Equity Compensation Plans

Equity Compensation Plan Information as of December 31, 2008

Number of Securities

remaining available

(a)

(b)

for future issuance

Number of Securities

Weighted Average

under equity

To be issued upon

exercise price of

compensation plans

exercise of existing

outstanding option(excluding Securities

Options, warrants

warrants and

reflected in

Plan Category

and rights

rights

column (a)

Equity compensation

4,000,000

$.01

16,000,000

Plans approved by

Security holders

Equity compensation

Plans not approved

By Security holders

Total

4,000,000

16,000,000

The Board of Directors and Majority Shareholders have adopted and approved a stock option plan (the “Plan”) dated the 16th day of October, 2006. The purpose of the Plan is to enable the Company to offer its officers, directors, employees and consultants and advisors performance-based incentives and other equity interests in the Company, thereby attracting, retaining, and rewarding such personnel. There is reserved for issuance under the Plan an aggregate of 20,000,000 shares of Common Stock, and no options have been granted. All of such shares may, but need not, be issued pursuant to the exercise of incentive stock options. Options granted under the Plan may be either “incentive stock options,” as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), or non-statutory stock options. In addition, awards of or rights to purchase shares of Common Stock (“Stock Rights”) may be granted under the Plan.

Sales of Unregistered Securities during the year ended December 31, 2008.

In October, 2008, the Company sold 109,400,000 shares of common stock to an investor group for $200,000 cash. The two officers and directors each cancelled 54,700,000 shares in connection with the financing; therefore the total shares outstanding were unchanged.

Securities and Exchange Commission Rule 15g

Our Company’s shares are covered by Rule 15g of the Securities and Exchange Act of 1934, as amended that imposes additional sales practice requirements on broker/dealers who sell such securities to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouses). For transactions covered by the Rule, the broker/dealer must make a special suitability determination for the purchase and have received the purchaser’s written agreement to the transaction prior to the sale. Consequently, the Rule may affect the ability of broker/dealers to sell our securities and also may affect your ability to sell your shares in the secondary market.

Section 15(g) of the Exchange Act also imposes additional sales practice requirements on broker/dealers who sell penny securities. These rules require a one-page summary of certain essential items. The items include the risk of investing in penny stocks in both public offerings and secondary marketing; terms important in understanding of the function of the penny stock market, such as “bid” and “offer” quotes, a dealers “spread” and

broker/dealer compensation; the broker/dealer compensation, the broker/dealers duties to its customers, including the disclosures required by any other penny stock disclosure rules; the customers rights and remedies in causes of fraud in penny stock transactions; and, the NASD’s toll free telephone number and the central number of the North American Administrators Association, for information on the disciplinary history of broker/dealers and their associated persons.”

Change of Control.

There have been no changes of control.

PART III

Item 6.

SELECTED FINANCIAL DATA

As a smaller reporting company we are not required to respond to this item.

Item 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

In 2007, we raised $113,401 in a Regulation A Offering and obtained $120,000 from a loan provided by an officer and director with loan proceeds as of December 31, 2007 totaling $200,000. The remaining portion of the offering was sold in January 2008 for proceeds of $184,500, which was used to repay the loan in part. The remaining $15,500 owed to the officer and director, plus accrued simple interest ($13,833 as of December 31, 2007) is payable with interest at 8% convertible into common stock at 75% of the average trading price of the common stock for the first 10 days of trading, or $.206625 per share. In November 2008, Qualsec began to repay the loan and interest on the $15,500 owed. As of December 31, 2008, there is $6,900 still owed to the officer.

We borrowed $30,000 from an investment fund on March 12, 2008 under a convertible promissory note due December 31, 2008, and bearing 8% interest. The note is convertible into common stock at $.01 per share. An additional $100,000 was loaned on the same terms on May 27, 2008. The fund is controlled by the brother of an officer/director. Interest of $6,653 was accrued and unpaid on the notes as of December 31, 2008. In October, 2008, the Company sold 109,400,000 shares of common stock to an investor group for $200,000 cash. The two officers and directors each cancelled 54,700,000 shares in connection with the financing; therefore the total shares outstanding were unchanged.

Our operations have been limited to development of our technology. We have no sales or contracts for sales and have performed only preliminary marketing. Homeland Security sales will be dependent on the government procurement cycle, which in general involves a one-year lead time from awarding contracts until sales can be made. Other sensing applications will not have these time constraints. We believe that receipt of an additional $4.3 million in financing will be required to reach sales and a break even point. If we encounter a long delay in obtaining governmental contracts for our device this date will be accordingly pushed back. We are engaged in discussions with several potential purchasers of our sensing product, but have not entered into any definitive agreement. We had approximately $150,000 in cash as of December 31, 2008. We believe that this amount is sufficient to maintain a minimal level of development and pay our operating expenses until the end of calendar 2009. Should we succeed in obtaining a contract for our product, we may need additional funding. We do not have any agreements or understandings for any such additional financing.

We could encounter delays in obtaining FDA clearance for our device if we cannot prepare the required documentation for filing of the 510(k).

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Contractual Obligations

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.

Quantitative and Qualitative Disclosures About Market Risk.

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

Information included in this annual report includes forward looking statements, which can be identified by the use of forward-looking terminology such as may, expect, anticipate, believe, estimate, or continue, or the negative thereof or other variations thereon or comparable terminology. The statements in "Risk Factors" and other statements and disclaimers in this registration statement constitute cautionary statements identifying important factors, including risks and uncertainties, relating to the forward-looking statements that could cause actual results to differ materially from those reflected in the forward-looking statements.

Since we have not yet generated any revenues, we are a development stage company as that term is defined in paragraphs 8 and 9 of SFAS No. 7. Our activities to date have been limited to seeking capital; seeking supply contracts and development of a business plan. Our auditors have included an explanatory paragraph in their report on our financial statements as of December 31, 2007 filed within our 10-KSB, relating to the uncertainty of our business as a going concern, due to our lack of operating history or current revenues, its nature as a start up business, management's limited experience and limited funds. We do not believe that conventional financing, such as bank loans, is available to us due to these factors. We have no bank line of credit available to us. Management believes that it will be able to raise the required funds for operations from one or more future offerings, in order to effect our business plan.

Our future operating results are subject to many facilities, including:

o our success in developing our technology;

o our ability to obtain customers for our sensing device;

o the effects of competition;

o our ability to obtain additional financing; and

o other risks which we identify in future filings with the SEC.

Any or all of our forward looking statements in this annual report and in any other public statement we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Consequently, no forward looking statement can be guaranteed. In addition, we undertake no responsibility to update any forward-looking statement to reflect events or circumstances which occur after the date of this report.

Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Our financial statements are appended to the end of this report and include the following:

Report of Independent Registered Public Accounting Firm

Balance Sheets as of December 31, 2008 and 2007

Statement of Income for the years ended December 31, 2008 and 2007 and the period inception (October 18, 2006) to December 31, 2008

Statement of Cash Flows for the years ended December 31, 2008 and 2007 and the period inception (October 18, 2006) to December 31, 2008

Statement of Stockholders’ Deficit for the period inception (October 18, 2006) to December 31, 2008

Notes to Financial Statements.

Item 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On September 25, 2008 the Registrant's dismissed its former independent accountant De Joya, Griffith & Co., LLC ("De Joya"). The report by De Joya on the financial statements of the Registrant dated March 18, 2008, including balance sheets as of December 31, 2007 and 2006 and the statements of operations, cash flows and statement of stockholders' equity for the years ended December 31, 2007 and 2006 and the period inception (October 18, 2006) through December 31, 2007 did not contain an adverse opinion or a disclaimer of opinion, nor was qualified or modified as to uncertainty, audit scope or accounting principles. During the period covered by the financial statements through the date of dismissal of the former accountant, there were no disagreements with the former accountant on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.

During the fiscal years ended December 31, 2007 and 2006 and through September 25, 2008, there were no “reportable events” with respect to the Company as that term is defined in Item 304(a)(1)(v) of Regulation S-K.On September 25, 2008, the Registrant engaged The Blackwing Group. LLC as its independent auditor. This engagement was approved by the Board of Directors. During the two fiscal years ended December 31, 2007, and the interim period until the engagement of The Blackwing Group, LLC, the Registrant did not consult with The Blackwing Group LLC on the application of accounting principles to any specific transaction nor the type of audit opinion that might be rendered on the Registrant's financial statements. Further, The Blackwing Group did not provide any written or oral advice that was an important factor considered by us in reaching a decision as to any such accounting, auditing or financial reporting or any matter being the subject of disagreement or "reportable event" or any other matter as defined in Regulation S-K, Item 304 (a)(1)(iv) or (a)(1)(v).

Item 9(T).

CONTROLS AND PROCEDURES

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2008 using the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control over financial reporting as of December 31, 2008, we determined that our internal controls and disclosure controls and procedures were not effective to enable us to accurately record, process, summarize and report certain information required to be included in the Companys periodic SEC filings within the required time periods. The reason for our disclosure controls and procedures were not deemed effective is that this Annual Report, when originally filed, did not include managements report on internal controls over financial reporting, but only its report on disclosure controls.

This annual report does not include an attestation report of the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.

Item 9B.

OTHER INFORMATION

Not applicable

Item 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The members of the Board of Directors of the Company serve until the next annual meeting of stockholders, or until their successors have been elected. The officers serve at the pleasure of the Board of Directors. Information as to the directors and executive officers of the Company is as follows.

Commencing in September, 2006, Mr. Joel Hand, age 48, has devoted his efforts full time to the development of QualSec. He has also been the director, President and Chief Financial Officer since inception of QualSec in October 2006. Prior to that, and since 1990, Mr. Hand has been a practicing attorney in La Jolla, California and Chapel Hill, North Carolina, advising development stage companies in financing, intellectual property and corporate governance. Mr. Hand received a JD from Loyola University School of Law in 1988 and a BA from Occidental College in 1985.

Code of Ethics

We have not adopted a code of ethics which applies to the chief executive officer, or principal financial and accounting officer, because of our level of operations at this time. We intend to adopt a code of ethics before December 31, 2009.

Audit Committee Financial Expert

QualSec does not have an audit committee. QualSec does not have a financial expert on its audit committee, because of the difficulty encountered by all small public companies in obtaining outside board members. We cannot predict when, if ever, we will be able to attract a person to the board of directors who is a financial expert.

Item 11. EXECUTIVE COMPENSATION

The following table sets forth the cash compensation of QualSec's executive officers and directors during each of the three years since inception. Only one month’s compensation was paid or accrued in 2006, as QualSec was incorporated in October 2006. Dr. Kelton resigned in August 2008. The remuneration described in the table does not include the cost of benefits

which may be furnished to the named executive officers, including premiums for health insurance and other benefits provided to such individuals that are extended in connection with the conduct of our business. Such amounts are less than $10,000 per year per employee.

	2006	2006	2007	2007	2008	2008
Name and Office	Salary	Deferred Salary	Salary	Deferred Salary	Salary	Deferred Salary

Joel Hand, President
And Chief Financial Officer	$ -	$ 12,500	$ -	$ 150,000	$ -	$ 150,000

Dr. Arden A. Kelton	$ 6,000	$ 6,500	$ 72,000	$ 78,000	$ 30,000	$ 70,000

Chief Operating Officer

Option/SAR Grants in Year ended December 31, 2008 to Named Executive Officers

Number of

% of Total

Securities

Options/SARs

Underlying

Granted to

Options/SARs

Employees in

Exercise or Base

Expiration

Name

Granted (#)

Fiscal Year

Price ($/Sh)

Date

Arden Kelton, PhD.

1,000,000

25%

$.01

5/1/2013

Joel Hand

1,000,000

25%

$.01

5/1/2013

Aggregated Option/SAR Exercises and Fiscal Year End Option/SAR Values

Number of

Securities

Value of

Underlying

Unexercised

In-the-Money

Options/SARs at

Fiscal Year End

Shares Acquired

Exercisable/

Name

on Exercise (#)

Value Realized ($)

Unexercisable

Arden Kelton PhD. -

377,778/1,000,000

$83,111/$220,000

Joel Hand

377,778/1,000,000

$83,111/$220,000

QualSec has no long term incentive plans other than the plan described below.

Dr. Kelton and Mr. Hand each have an employment agreement dated effective November 27, 2006. The substantive terms of the agreements are almost identical. The term of the agreements is three years with automatic renewals for additional one year terms. Compensation is $12,500 per month, with $6,500 of Dr. Kelton’s salary and all of Mr. Hand’s salary to be deferred until such time as QualSec obtains additional funding. In the year ended December 31, 2006, Dr. Kelton received $6,000 and Mr. Hand received $0. If mutually agreed QualSec can pay employment compensation in QualSec common stock, at a value to be agreed upon. The employment agreement may be terminated by QualSec for Cause, as defined. If terminated other than for Cause, the employee is entitled to receive the greater of (i) fifty percent of the total aggregate remaining unpaid portion of his then current salary and benefits as specified under the agreement due for its remaining term, or (ii) employee’s then current salary for a period equal to twelve months, plus pay any earned bonus and continue to pay the employee’s benefits for twelve months. QualSec may terminate the employment agreements after November 2008 if a manufacturing prototype has not been produced and manufacturing agreements have not been secured by that time. In March 2008, Dr. Kelton agreed to defer an additional $4,000 per month in salary.

By agreement dated August 21, 2008, executed and delivered on August 26 , 2008, but effective August 16, 2008, Dr. Arden A. Kelton resigned as an officer and director of Qualsec. Dr. Kelton was not a member of any Board committees.

Under a Release and Settlement Agreement, Dr. Kelton agreed to terminate his Employment Agreement; resigned as an officer and director; entered into a Consulting Agreement with Qualsec; transferred 54,700,000 of his shares of Qualsec common stock (retaining ownership of 15,300,000 shares) to Qualsec Partners, LLC; and retained his employee stock options to purchase 1,000,000 shares. The Registrant’s obligations for deferred salary owed to Dr. Kelton were not cancelled by the Release and Settlement Agreement. Dr. Kelton agreed to lock up his remaining 15,300,000 shares for 365 days.

The Consulting Agreement provides for Dr. Kelton to perform consulting services to the Registrant on an as needed basis at a compensation of $2,500 per month, but subject to the Registrant receiving continuing funding for its business. The Consulting Agreement may be terminated upon no less than 60 days’ written notice to Dr. Kelton.

QualSec, by resolution of its Board of Directors and stockholders, adopted a 2006 Stock Option Plan (the "Plan") on October 18, 2006. The Plan enables the Company to offer an incentive based compensation system to employees, officers and directors and to employees of companies who do business with the Company.

In the discretion of a committee comprised of non-employee directors (the "Committee"), directors, officers, and key employees or employees of companies with which we do business become participants in the Plan upon receiving grants in the form of stock. A total of 20,000,000 shares are authorized for issuance under the Plan, of which options for 4,000,000 shares have been granted. The Company may increase the number of shares authorized for issuance under the Plan or may make other material modifications to the Plan without shareholder approval. However, no amendment may change the existing rights of any option holder.

Any shares which are subject to an award but are not used because the terms and conditions of the award are not met, or any shares which are used by participants to pay all or part of the purchase price of any option may again be used for awards under the Plan. However, shares with respect to which a stock appreciation right has been exercised may not again be made subject to an award.

Stock options may be granted as non-qualified stock options or incentive stock options, but incentive stock options may not be granted at a price less than 100% of the fair market value of the stock as of the date of grant (110% as to any 10% shareholder at the time of grant); non-qualified stock options may not be granted at a price less than 85% of fair market value of the stock as of the date of grant

Stock options may be exercised during a period of time fixed by the Committee except that no stock option may be exercised more than ten years after the date of grant or three years after death or disability, whichever is later. In the discretion of the Committee, payment of the purchase price for the shares of stock acquired through the exercise of a stock option may be made in cash, shares of Common Stock or by delivery or recourse promissory notes or a combination of notes, cash and shares of the Company's common stock or a combination thereof. Incentive stock options may only be issued to directors, officers and employees.

Directors currently receive no compensation for their duties as directors.

Item 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information relating to the beneficial ownership of Company common stock as of the date of this report by (i) each person known by QualSec to be the beneficial owner of more than 5% of the outstanding shares of common stock (ii) each of QualSec's directors and executive officers, and (iii) all officers and directors as a group. Unless otherwise noted below, QualSec believes that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them. For purposes hereof, a person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from the date hereof upon the exercise of warrants or options or the conversion of convertible securities. Each beneficial owner's percentage ownership is determined by assuming that any warrants, options or convertible securities that are held by such person (but not those held by any other person) and which are exercisable within 60 days from the date hereof, have been exercised. The percentages are based on 170,000,000 shares of Common Stock being outstanding as of March 24, 2009.

Percentage

Name of

Number of

of Outstanding

Stockholder

Shares Owned

Common Stock

Joel Hand(1)(2)

15,677,778

9.2%

President and director

Arden A. Kelton, PhD.(2)

15,677,778

9.2%

Qualsec Partners, LLC

109,400,000

64.3%

All officers and

directors as a group

(1 person)

15,300,000

9.0%

(1) Does not include shares issuable upon conversion of a promissory note in the amount of $6,974 plus accrued interest on this amount and prior amounts outstanding, totaling $0 as of December 31, 2008. The conversion rate is $.03 per share.

(2) Includes vested options to purchase 377,778 shares of common stock granted to this person in April 2008, exercisable at $.01 per share.

Item 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

In connection with organizing the Company, Dr. Kelton and Mr. Hand contributed technology valued at $1 to purchase a total of 140,000,000 shares of Common Stock. Under Rule 405 promulgated under the Securities Act of 1933, Mr. Hand and Dr. Kelton may be deemed to be promoters of the Company. No other persons are known to management which would be deemed to be promoters.

Joel Hand, an officer and shareholder, advanced $3,000 to the Company in November 2006 which was repaid in the same month. The same officer and shareholder loaned $80,000 to the Company on an interest free basis in November 2006, and advanced an additional $120,000 during the year ended December 31, 2007. The loan is represented by a promissory note which is due upon completion of a proposed offering of common stock. Mr. Hand was repaid all but $6,900 of this loan as of December 31, 2008. He is entitled to receive interest of 8% per annum on the note commencing on July 1, 2007, and, to the extent such note is unpaid, it shall be convertible into common stock at 75% of the initial trading price of Company common stock. ($.03). Interest of $8,100 was accrued and paid on the note as of December 31, 2008.

The Company’s common stock is quoted on the OTC Bulletin Board. The OTC Bulletin Board does not impose standards relating to director independence or the makeup of committees with independent directors, or provide definitions of independence. Mr. Hand does not qualify as an independent director under the NASDAQ Marketplace Rules and those standards applicable to companies trading on NASDAQ.

Specifically, in order to qualify as independent, the director must not:

	·	have been any time during the past three years was, employed by the Company or by any parent or subsidiary of the Company;

	·	have accepted or have a family member who accepted any compensation from the Company in excess of $60,000 during any period of twelve consecutive months within the three years preceding the determination of independence, other than compensation for board or board committee service;

	·	be a family member of an individual who is, or at any time during the past three years was, employed by the Company as an executive officer;

	·	be, or have a family member who is, a partner in, or a controlling shareholder or an executive officer of, any organization to which the Company made, or from which the company received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of the recipient's consolidated gross revenues for that year, or $200,000, whichever is more:

	·	be, or have a family member who is, employed as an executive officer of another entity where at any time during the past three years any of the executive officers of the Company serve on the compensation committee of such other entity; or

	·	be, or have a family member who is, a current partner of the Company's outside auditor, or was a partner or employee of the Company's outside auditor who worked on the Company's audit at any time during any of the past three years.

Item 14.

Principal Accountant Fees and Services.

Audit Fees

Our principal accountants, The Blackwing Group. LLC, billed us $250 for review of our quarterly filings in 2008.

Our prior accountants, De Joya Griffith & Company, LLC billed us $13,000 and $8,000, respectively, for audit and review fees during the fiscal years ended December 31, 2008 and 2007.

Audit –related Fees

None.

Tax Fees

None

All other fees

None

Audit Committees pre-approval policies and procedures.

We do not have an audit committee. Our engagement of the above auditors was approved by the Board of Directors. No services described in Item 9(e)(2) through 9(e)(4) of Schedule 14A were performed by our auditors.

PART IV

Item 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The financial statements filed herewith are listed under Item 8. No schedules are required.

These are the exhibits filed herewith:

Exhibit Number

Exhibit

Charter and by-laws

3.1

Articles of Incorporation. (1)(3)

3.2

Bylaws (1) (3)

Material contracts

10.1.

2006 Stock Option Plan (1).(3)

10.2.

Employment Agreement between the small business issuer and Arden A. Kelton, PhD. (2) (3)

10.3

Employment Agreement between the issuer and Joel Hand(2)(3)

10.4

Funding letter from Joel Hand. (2) (3)

10.5

Promissory Note in favor of JK Advisers Hedge Fund dated March 12, 2008.(4)

10.6

Promissory Note in favor of JK Advisers Hedge Fund dated May 27, 2008.(5)

10.7,

Consulting Agreement between Qualsec and Dr. Arden A. Kelton.(6)

10.8

Release and Settlement Agreement between Qualsec and Dr. Arden A. Kelton .(6)

10.9

Stock Agreement. (6)

10.10

Form of Stock Option Agreement with Kelton and Hand with schedule of details.(7)

Exhibit

31, Certification of the Chief Executive and Financial Officer pursuant to Rule 13a-14 of the Securities and Exchange Act of 1934 as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2003. (7)

Exhibit 32, Certification of the Chief Executive and Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003. (7)

(1)

Incorporated by reference with such Exhibit as filed with the original filing of the small business issuer’s Offering Statement on Form 1-A, file number 24-10160 (the “Form 1-A”) and also filed with Amendment 2 to such Offering Statement.

(2)

Incorporated by reference with such Exhibit as filed with the Amendments 1 and 2 of the Form 1-A.

(3)

Incorporated by reference to the exhibit filed with the Registrant's registration statement on Form 10-SB, file number 0-52907..

(4)

Incorporated by reference to such document as filed with the Company’s Quarterly Report for the quarter ended March 31, 2008.

(5)

Incorporated by reference to such document as filed with the Company’s Quarterly Report for the quarter ended June 30, 2008.

(6)

Incorporated by reference to such document as filed with a Current Report on Form 8-K dated August 26, 2008.

(7)

Filed herewith.

All other Exhibits called for by Rule 601 of Regulation S-K are not applicable to this filing.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

QUALSEC

Date:

October 22, 2009

By: /s/ Edward Bukstel

President and Chief Financial

Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

QUALSEC

Date:

October 22, 2009

By: /s/ Edward Bukstel

President and Chief Financial

Officer (chief financial officer

and accounting officer and duly

authorized officer)

THE BLACKWING GROUP, LLC

18921G E VALLEY VIEW PARKWAY #325

INDEPENDENCE, MO 64055

816-813-0098

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Qualsec

1829 East Franklin Street

Chapel Hill, NC 27514

We have audited the accompanying balance sheets of Qualsec as of December 31, 2008, and the related statements of operations, stockholders’ equity, and cash flows for the period then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit 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 audit 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of Qualsec as of December 31, 2008, and the results of its operations, changes in stockholders’ equity and its cash flows for the period then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note R to the financial statements, the Company faces competition from existing companies with considerably more financial resources and business connections. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters also are described in Note K. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The Blackwing Group, LLC

Independence, Missouri

March 20, 2009

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

QualSec

North Logan, Utah

We have audited the accompanying balance sheets of QualSec (A Development Stage Company) as of December 31, 2007 and 2006, and the related statements of operations, stockholders’ equity, and cash flows for the years then ended and from inception (October 18, 2006) through December 31, 2007. These financial statements are the responsibility of the Company’s management. 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 evaluating 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 QualSec as of December 31, 2007 and 2006, and the results of its operations and cash flows for the years then ended and from inception (October 18, 2006) through December 31, 2007 in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 6 to the financial statements, the Company has suffered recurring losses from operations, which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 6. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

De Joya Griffith & Company, LLC

/s/ De Joya Griffith & Company, LLC

Henderson, NV

March 18, 2008

QUALSEC [A Development Stage Company]
BALANCE SHEETS
	as of	as of
	31-Dec-08	31-Dec-07

Current Assets
Cash and cash equivalents	$ 150,477	$ 34,724
Total Current Assets	150,477	34,724

Property and equipment, net	5,061	2,942
Other assets
Technology rights	1	1

Total Property and Equipment	5,061	2,943

Total Assets	$ 155,539	$ 37,667

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities
Accounts payable and accrued liabilities	$ 68,616	$ 18,612
Deferred compensation payable - related party	467,000	247,001
Convertible note payable - related party	136,974	200,000
Accrued interest - related party	6,653	13,833

Total Current Liabilities	679,244	479,446

Total Liabilities	679,244	479,446

Stockholders' deficit (Note B)
Preferred stock, no par value; unlimited number of
shares authorized; no shares issued and outstanding	-	-

Common stock, no par value; unlimited number of
shares authorized; 170,000,000 and 151,450,000
shares issued and outstanding	298,902	113,402

Additional paid in capital	229,988	-

Retained Earnings (Accumulated Deficit)	(1,052,595)	(555,181)

Total stockholders' deficit	(523,704)	(441,779)

Total liabilities and stockholders' deficit	$ 155,540	$ 37,667

The accompanying notes are an integral part of the financial statements.

QUALSEC

[A Development Stage Company]

INCOME STATEMENTS

		Year	Year	From Inception
		Ended	Ended	on October 18, 2006
		"Dec. 31	"Dec. 31	Through December
		2008	2007	31, 2008
Total Income		$ -	$ -	$ -

Total Cost of Sales		-	-	-

Gross Margin		-	-	-

Expenses
	General and Administrative	103,164	44,791	153,840
	Compensation Expense	275,454	324,232	626,126
	Research and Development	110,500	140,000	250,500
Total Expenses		489,118	509,023	1,030,468

Net Operating Loss		(489,118)	(509,023)	(1,030,468)

Other Income (Expense)
	Interest Expense - Related Party	(8,295)	(13,833)	(22,127)
Total Other Income (Expense)		(8,295)	(13,833)	(22,127)

Net Income (Loss)		$ 497,413)	$ (522,856)	$ (1,052,595)

Per Share Information:

Net Income (Loss) per share		$ (0.14)	$ (0.00)

Basic weighted average number
	common stock shares outstanding	170,000,000	145,920,137

The accompanying notes are an integral part of the financial statements.

Qualsec
[A Development Stage Company]
STATEMENT OF STOCKHOLDERS' DEFICIT
FROM INCEPTION (OCTOBER 18, 2006) THROUGH DECEMBER 31, 2008

					Addition-al
	Preferred Stock		Common Stock		Paid-In	Accumulated	Total
	Shares	Amt.	Shares	Amount	Capital	Deficit	Capital

Balance, October 18, 2006	-	$ -	-	$ -	$ -	$ -	$ -

October 18, 2006
Stock issued for
Technology rights	-	-	140,000,000	1	-	-	1
Net loss	-	-	-	-	-	(32,325)	(32,325)

Balance, December 31, 2006	-	$ -	140,000,000	$ 1	$ -	$ (32,325)	$(32,324)

September 2007, Issuance of stock for cash	-	-	11,450,000	113,401	-	-	113,401
Net loss	-	-	-	-	-	(522,856)	(522,856)

Balance, December 31, 2007	-	-	151,450,000	$113,402	-	(555,181)	(441,779)

January 2008, stock issued for cash	-	-	18,550,000	185,500		-	185,500

June 2008, stock options issued	-	-	-	-	30,000	-	30,000

September 2008 Reclassification of members'
contribution to additional paid-in capital	-	-	-	-	199,988	-	199,988

Net loss	-	-	-	-	-	(497,413)	(497,413)

Balance, December 31, 2008	-	-	170,000,000	298,902	229,988	(1,052,595)	(523,704)

The accompanying notes are an integral part of the financial statements.

QUALSEC

(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF CASH FLOWS

From Inception

For the Year Ended

(Oct. 18, 2006

December 31,

2008

2007

Dec. 31, 2008

CASH FLOWS FROM OPERATING ACTIVITIES

Net Income (Loss)

(497,413)

(522,856)

(1,052,595)

Adjustments to reconcile net income to net cash provided

By operating activities

Depreciation

1,911

744

2,706

(Increase) decrease in:

Accounts receivable

Prepaid Expenses

500

Increase (decrease) in:

Accounts Payable and Accrued Liabilities

50,004

18,107

68,617

Accrued Interest – Related Party

(7,180)

13,833

6,654

Sales Tax Payable

Deferred Compensation Payable – Related Party

220,000

227,053

467,001

Net Cash Provided (Used) By

Operating Activities

(232,678)

(262,619)

(507,617)

CASH FLOWS FROM INVESTING ACTIVITIES

Fixed Asset Additions

(4,030)

(1,542)

(7,767)

Net Cash (Used) By Investing Activities

(4,030)

(1,542)

(7,767)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds From Convertible Note Payable – Related Party

130,000

120,000

330,000

Payments on Convertible Note Payable – Related Party

(184,500)

Proceeds From Loan – Related Party

3,000

Payments on Loan – Related Party

(8,526)

(11,526)

Stock Issued for Services

30,000

Stock Issued for Cash

385,488

113,402

498,888

Capital Contributions

Net Cash (Used) By Financing Activities

352,461

233,402

665,861

NET INCREASE (DECREASE) IN CASH

115,753

(30,760)

150,477

CASH AT BEGINNING OF PERIOD

34,724

65,484

CASH AT END OF PERIOD

150,477

34,724

150,477

Supplemental Disclosure of Cash Flow Information:

Cash paid during the period for:

Interest

Income taxes

Supplemental Schedule of Non-cash Investing and

Financing Activities:

Issuance of stock for technology right

Offering costs

1,099

The accompanying notes are an integral part to the financial statements.

QUALSEC

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2008

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of significant accounting policies of QualSec (A Development Stage Company) (the Company) is presented to assist in understanding the Company’s financial statements. The accounting policies presented in these footnotes conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the accompanying financial statements. These financial statements and notes are representations of the Company’s management who are responsible for their integrity and objectivity. The Company has not realized revenues from its planned principal business purpose and is considered to be in its development state in accordance with SFAS 7, “Accounting and Reporting by Development State Enterprises.”

Organization – QualSec (the “Company”) was organized under the laws of the State of Wyoming on October 18, 2006. The Company is developing an electronic olfactory device. The Company has not yet generated any revenues from planned principal operations and is considered a development stage company as defined in Statement of Financial Accounting Standards No. 7. The Company has, at the present time, not paid any dividends and any dividends that may be paid in the future will depend upon the financial requirements of the Company and other relevant factors.

Basis of Presentation - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates. Management further acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company’s system of internal accounting control is designed to assure, among other items, that (1) recorded transactions are valid; (2) all valid transactions are recorded and (3) transactions are recorded in the period in a timely manner to produce financial statements which present fairly the financial condition,

Fiscal Year - The Company’s fiscal year-end is December 31.

Cash and Cash Equivalents - The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.

Advertising Costs - Advertising costs are charged to operations when incurred. The Company has not yet incurred any advertising costs.

Stock-Based Compensation - The Company has one stock-based employee compensation plan [See Note 2]. The Company accounts for its plan under the recognition and measurement principles of SFAS 123(R), “Share Based Payment” and related Interpretations. The Company has not issued any options or warrants as of June September 30, 2008.

Offering Costs – Costs of issuing stock are deducted from the proceeds of the issue. These are costs of the Company’s Regulation A Offering. For the year ended December 31, 2007, $1,099 in costs associated with the Company’s Regulation A Offering were deducted from the proceeds. There were no additional offering costs for the amounts raised as of December 31, 2008.

Loss Per Share - The Company computes net loss per share in accordance with SFAS No. 128, “Earnings per Share” (SFAS 128) and SEC Staff Accounting Bulletin No. 98 (SAB 98). Under the provisions of SFAS 128 and SAB 98, basic net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net loss per share gives effect to common stock equivalents; however, potential common shares are excluded if their effect is anti-dilutive. For the period from October 18, 2006 (Date of inception) through December 31, 2008, the Company had no potentially dilutive securities.

QUALSEC

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2008

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Income Taxes - The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes” [See Note 4].

Accounting Estimates - The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimated.

Financial Instruments - Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2008. The respective carrying value of certain on-balance-sheet financial instruments approximate their fair values. These financial instruments include cash, accounts payable, accrued expenses and notes payable. Fair values were assumed to approximate carrying values for these financial instruments because they are short term in nature and their carrying amounts approximate fair values.

Accrued Vacation Liabilities – Each of the two employees are entitled to three week’s paid vacation per year. The amount of accrued vacation is accrued as a liability pursuant to FAS No. 43, “Accounting for Compensated Absences”. As of December 31, 2008, the amount of accrued vacation was $34,800.

Recently Enacted Accounting Standards – In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (FAS 157), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of FAS 157 became effective as of the beginning of our 2008 fiscal year. The adoption of FAS 157 did not have a significant impact on our financial statements.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108), which addresses how to quantify the effect of financial statement errors. The provisions of SAB 108 became effective as of the end of our 2007 fiscal year. The adoption of SAB 108 did not have a significant impact on our financial statements.

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115” (FAS 159). FAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and establishes presentation and disclosure requirements designed to facilitate comparison between companies that choose different measurement attributes for similar types of assets and liabilities. The provisions of FAS 159 become effective as of the beginning of our 2009 fiscal year. We are currently evaluating the impact that FAS 159 will have on our financial statements.

In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” which applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. The statement is effective for annual periods beginning after December 15, 2008.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133,” (SFAS “161”) as amended and interpreted, which requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. Disclosing the fair values of derivative instruments and their gains and losses in a tabular format provides a more complete picture of the location in an entity’s financial statements of both the derivative positions existing at period end and the effect of using derivatives during the reporting period. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Early adoption is permitted. We are currently evaluating the impact that FAS 161 will have on our financial statements.

QUALSEC

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2008

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recently Enacted Accounting Standards (continued) – In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts – an interpretation of FASB Statement No. 60.” SFAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This Statement also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. Those clarifications will increase comparability in financial reporting of financial guarantee insurance contracts by insurance enterprises. This Statement requires expanded disclosures about financial guarantee insurance contracts. The accounting and disclosure requirements of the Statement will improve the quality of information provided to users of financial statements. SFAS 163 will be effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company does not expect the adoption of SFAS 163 will have a material impact on its financial condition or results of operation.

NOTE 2 - CAPITAL STOCK

Common Stock - The Company has authorized an unlimited number of shares of no par value common stock and preferred stock. In October 2006, in connection with its organization, the Company issued 140,000,000 shares of common stock to two individuals who are officers/shareholders of the Company. The shares were issued for technology rights valued at $1. In July and September 2007, the Company sold 11,450,000 shares in its Regulation A placement at a price of $.01 per share. Net proceeds were $113,401. In January 2008, the Company sold the remaining 18,550,000 shares requested in the offering for proceeds of $185,500.

Stock Option Plan - In October 2006, the Board of Directors adopted and the stockholders at that time approved the 2006 Stock Option Plan (“the Plan”). The Plan provides for the granting of qualified and non-qualified stock options to purchase up to 20,000,000 shares of common stock to directors, officers, advisors and employees of the Company as well as to employees of companies that do business with the Company. Awards under the plan will be granted as determined by the Stock Option Committee of the Board of Directors. The Plan limits awards to directors, officers and employees to $100,000 of compensation per year. The options will expire after 10 years or 5 years if the option holder owns at least 10% of the common stock of the Company. The exercise price of a non-qualified option must be at least 85% of the market price. The exercise price of a qualified option must be at least equal to the market price or 110% of the market price if the option holder owns at least 10% of the common stock of the Company.

At December 31, 2008, fully vested awards consisting of options to purchase 4,000,000 shares at a price of $.01 per share were granted. In accordance with SFAS No. 123 (R), the Company recognized the entire fair value of the options in the statement of operations since they vested immediately. Fair value of $30,000 was determined using the Black Scholes option pricing model based on the following assumptions: risk free interest rate of 2.75%, no dividend yield, volatility of 82% and expected life of the options of 5 years, which are due to expire May 1, 2013. Total awards available to be granted from the Plan amounted to 16,000,000 shares.

QUALSEC

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2008

NOTE 3 - EQUIPMENT

Furniture and equipment consists of the following at December 31, 2008 and 2007:

	2008	2007
Equipment	$ 5,461	$ 2,195
Furniture	2,306	1,542
Less: Accumulated depreciation	(2,706)	(795)
	$ 5,062	$ 2,942

Furniture and equipment are depreciated on a straight line basis over their estimated useful life; 3 years for all equipment and 5 years for the furniture acquired to date.

Depreciation expense for the twelve months ended December 31, 2008 and 2007 was $1,911 and $744, respectively.

NOTE 4 - INCOME TAXES

As of December 31, 2008 and 2007, the Company had a net operating loss carryforwards of approximately $1,052,600 and $555,200 which may be applied against future taxable income and which begins to expire in 2027. Components of net deferred tax assets, including a valuation allowance, are as follows at December 31:

	2008	2007
Deferred tax assets:
Net operating loss carryforward	$ 357,881	$ 187,402
Accrued liabilities	170,610	83,980
Depreciation	210	253
	528,701	271,635

Less: valuation allowance	528,701	271,635

Net deferred tax assets:	$ -	$ -

The valuation allowance for deferred tax assets as of December 31, 2008 and 2007 was $528,701 and $271,635, respectively. In assessing the recovery of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The amount of and ultimate realization of the benefits from the operating loss carryforwards for income tax purposes is dependent, in part, upon the tax laws in effect, the future earnings of the Company, and other future events, the effects of which cannot be determined. Because of the uncertainty surrounding the realization of the net deferred tax assets, the Company has established a valuation allowance equal to their tax effect and, therefore, no deferred tax asset has been recognized as of December 31, 2008 and 2007.

The Financial Accounting Standards Board has published FASB Interpretation 48 (FIN 48), “Accounting for Uncertainty in Income Taxes,” to address the non-comparability in reporting tax assets and liabilities resulting from a lack of specific guidance in FASB Statement of Financial Accounting Standards No. 109 (SFAS 109), “Accounting for Income Taxes,” on the uncertainty in income taxes recognized in an enterprise’s financial statements. Specifically, FIN 48 prescribes (a) a consistent recognition threshold and (b) a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides related guidance on derecognition, classification, interest and penalties, accounting interim periods, disclosure and transition. To the extent interest and penalties would be assessed by taxing authorities of any underpayment of income taxes, such amounts would be accrued and classified as a component of income tax expenses on the statement of operations. FIN 48 will apply to fiscal years beginning after December 15, 2006, with earlier adoption permitted. The Company has completed its evaluation of the effects of FIN 48 and has concluded that the adoption of FIN 48 did not impact the financial statements for the period ended December 31, 2008.

QUALSEC

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2008

NOTE 5 – RELATED PARTY TRANSACTIONS

An officer and shareholder of the Company advanced $3,000 to the Company in November 2006 which was repaid in the same month. The same officer and shareholder loaned $80,000 to the Company on an interest free basis in November 2006, and advanced an additional $120,000 during the year ended December 31, 2007. The loan is represented by a promissory note which is due upon completion of the offering of common stock, which closed in January 2008. The Company repaid $184,500 of the Note in January 2008, and $8,526 in December 2008, leaving a balance of $6,974 as of December 31, 2008. The officer/shareholder is entitled to receive interest of 8% per annum on the note commencing on July 1, 2007, and, to the extent such note is unpaid, it shall be convertible into common stock at 75% of the initial trading price of Company common stock. Interest of $0 (zero) was accrued and unpaid on the note as of December 31, 2008.

The Company determined that the convertible notes do not have a beneficial conversion feature since the market price of the stock is approximately $.01 per share; the conversion price is the same.

Pursuant to three-year employment contracts dated November 27, 2006, the officers are both entitled to compensation of $150,000 per annum; however, the compensation payable to Mr. Hand is deferred until such time as the Company has cash available for paying such compensation, and Dr. Kelton is deferring $78,000 ($6,500 per month) of such annual compensation on the same basis. In March 2008, Dr. Kelton agreed to defer an additional $4,000 per month in salary. On September 1, 2008, Dr. Kelton agreed to defer all of his salary. In September 2008, Dr. Kelton entered into a settlement agreement terminating his employment agreement. As of December 31, 2008, the total deferred compensation was $467,001, including $32,866 for accrued payroll taxes related to the deferred compensation.

NOTE 6 - GOING CONCERN

The accompanying financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which contemplate continuation of the Company as a going concern. However, the Company was only recently formed and has not yet been successful in establishing profitable operations. These factors raise substantial doubt about the ability of the Company to continue as a going concern. In this regard, management is proposing to raise any necessary additional funds not provided by operations through loans or through additional sales of their common stock. There is no assurance that the Company will be successful in raising this additional capital or in achieving profitable operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from this uncertainty.

The Company has experienced losses from operations. For the twelve months ended December 31, 2008 and 2007, the Company incurred net losses of $497,413 and $522,856, respectively. Additionally, the Company has an aggregate accumulated deficit from Inception (October 18, 2006) through December 31, 2008 of $1,052,595.

NOTE 7 – LITIGATION

As of December 31, 2008, the Company is not aware of any current or pending litigation which may affect the Company’s operations.

Attached files

QUALSEC Reports

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