UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q

FORM 10-Q


o	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

	For the quarterly period ended March 31, 2010.

o	Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

	For the transition period _____________ to ______________.

o	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended September 30, 2009.
o	Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period _____________ to ______________.

Commission File Number 333-133936

VISUAL MANAGEMENT SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Commission File Number 333-133936

VISUAL MANAGEMENT SYSTEMS, INC. (Exact name of registrant as specified in its charter)


Nevada	68-0634458
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)

1000 Industrial Way North, Suite C Toms River, New Jersey 08755 (Address of principal executive offices)

(732) 281-1355
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Check whether the registrant (1) 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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its website, if any, every Interactive Data File required to be submitted and posted pursuant to rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes x o No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer, large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer o (Do not check if a smaller reporting company) Smaller 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 o No x

~~Indicate~~As ~~by check~~of ~~mark~~May ~~whether~~17, 2010, ~~the~~there ~~registrant~~were is147,612,526 ashares ~~shell company (as defined in Rule 12b-2~~ of the ~~Exchange~~registrant’s ~~Act).~~common stock outstanding.

Yes o No x

As of November 23, 2009, there were 105,622,526 shares of the registrant’s common stock outstanding.

VISUAL MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INDEX

			Page No.
PART I. Financial Information			3
	Item 1.	Financial Statements	3
		Condensed Consolidated Balance Sheets as of September 30, 2009 (Unaudited) and December 31, 2008 (Audited)	4
		Condensed Consolidated Balance Sheets (Unaudited) as of March 31, 2010 and 2009	3
		Condensed Consolidated Statements of Operations (Unaudited) for the Nine and Three Months Ended September 30, 2009 and 2008	5
		Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2010 and 2009	4
		Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2009 and 2008	6
		Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2010 and 2009	5
		Notes to Condensed Consolidated Financial Statements	86
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1512
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	1714
	Item 4.	Controls and Procedures	1714
PART II. Other Information			20
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2016
	Item 3.	Defaults upon Senior Securities	2016
	Item 6.	Exhibits	2117
SIGNATURES			2118

PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Visual Management Systems, Inc. and Subsidiaries Condensed Consolidated Balance Sheets


	March 31, 2010			December 31, 2009
	(unaudited)
Assets

Current assets
Cash	$	59,985		$	24,884
Accounts receivable, net		121,233			90,286
Inventory		97,635			46,462
Prepaid expenses		37,152			27,584

Total current assets		316,005			189,216

Property and equipment - net		164,619			192,958
Capitalized software-net		135,086			144,092
Deposits and other assets		176,807			148,431
Software-net		684,129			729,738
Deferred financing costs-net		133,215			322,853


Total Assets	$	1,609,861		$	1,727,288


Liabilities and Stockholders’ Deficit

Current liabilities
Accounts payable	$	1,624,178		$	1,664,913
Accrued expenses and other current liabilities		3,259,677			2,885,414
Customer deposits		164,525			68,394
Sales tax payable		168,648			145,159
Bank line of credit		41,951			45,283
Short term notes payable		499,814			504,303
Convertible notes payable		319,546			289,046
Current portion of long-term debt		109,740			115,321
Current portion of obligations under capital leases		105,889			105,889
Current portion of convertible notes payable (net of unamortized discount of $123,333 and $198,333)		5,579,409			5,504,409


Total current liabilities		11,873,377			11,328,131

Long-term debt - net of current portion		93,913			101,745
Commitments and contingencies

Stockholders’ deficit
Preferred stock		1			1
Common stock		143,563			129,264
Additional paid-in-capital		20,998,018			20,822,226
Accumulated deficit		(31,349,011	)		(30,504,079	)
Treasury stock, at cost		(150,000	)		(150,000	)

Total stockholders’ deficit		(10,357,429	)		(9,702,588	)


Total Liabilities and Stockholder’s Deficit	$	1,609,861		$	1,727,288

The accompanying notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

Visual Management Systems, Inc. and Subsidiaries Condensed Consolidated ~~Balance~~Statements ~~Sheets~~of Operations For the Three Months Ended March 31, 2010 and 2009 (Unaudited)

	September 30, 2009			December 31, 2008
	Three Months Ended March 31
	(unaudited)			(audited)
	2010			2009
Assets
Revenues - net	$	440,867		$	851,360
Current assets
Cost of revenues		215,910			405,878
Cash	$	11,222		$	16,186
Gross profit		224,957			445,482
Accounts receivable, net		135,897			230,339
Operating expenses		616,270			919,589
Inventory		142,960			340,650
Loss from operations		(391,313	)		(474,107	)
Prepaid expenses		33,248			177,450
Other (income) expenses
Total current assets		323,327			764,625
Interest expense		453,618			206,789
Property and equipment - net		338,414			533,912
Net loss	$	(844,931	)	$	(680,896	)
Capitalized software-net		153,098			180,115
Net Loss applicable to common stockholders	$	(844,931	)	$	(680,896	)
Deposits and other assets		146,227			146,227
Per share data - basic and fully diluted	$	(0.01	)	$	(0.06	)
Investment in joint venture		5,000			5,000
Weighted average number of common shares outstanding		135,043,637			11,007,833
Software-net		775,346			912,172
Deferred financing costs-net		514,444			1,089,322
Total Assets	$	2,255,856		$	3,631,373
Liabilities and Stockholders’ Deficit
Current liabilities
Accounts payable	$	1,730,148		$	1,708,861
Accrued expenses and other current liabilities		2,332,600			2,312,843
Customer deposits		75,865			195,976
Sales tax payable		151,488			136,745
Bank line of credit		46,649			49,981
Short term notes payable		726,557			756,387
Current portion of long-term debt		154,584			100,738
Current portion of obligations under capital leases		105,889			110,212
Current portion of convertible notes payable (net of unamortized discount of $198,333 and $423,333)		5,470,909			4,870,667
Total current liabilities		10,794,689			10,242,410
Convertible notes payable		—			—
Long-term debt - net of current portion		120,433			234,248
Obligations under capital leases - net of current portion		—			13,500
Other long term liabilities		27,257			54,523
Commitments and contingencies
Stockholders’ deficit
Preferred stock		1			—
Common stock		91,423			10,808
Additional paid-in-capital		19,959,030			14,205,834
Accumulated deficit		(28,586,977	)		(20,979,950	)
Treasury stock, at cost		(150,000	)		(150,000	)
Total stockholders’ deficit		(8,686,523	)		(6,913,308	)
Total Liabilities and Stockholder’s Deficit	$	2,255,856		$	3,631,373

The accompanying notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

Visual Management Systems, Inc. and Subsidiaries Condensed Consolidated Statements of ~~Operations~~Cash Flows For the ~~Nine and~~ Three Months Ended ~~September~~March 3031, ~~2009~~2010 and ~~2008~~2009 (Unaudited)

	Nine Months Ended September 30						Three Months Ended September 30
	2010			2009
	2009			2008			2009			2008
Cash flows from operating activities
Revenues - net	$	2,141,323		$	4,992,691		$	559,012		$	1,779,866
Net loss	$	(844,931	)	$	(680,896	)
Cost of revenues		1,124,257			2,785,996			313,137			1,132,500
Adjustments to reconcile net loss to net cash used by operating activities
Gross profit		1,017,066			2,206,695			245,875			647,366
Depreciation and amortization		287,250			345,291
Operating expenses		2,667,362			6,594,611			746,226			1,669,678
Non-cash interest expense		149,635			190,702
Loss from operations		(1,650,296	)		(4,387,916	)		(500,351	)		(1,022,312	)
Restricted registration penalty		(2,891	)		(114,135	)
Other (income) expenses
Bad debt expense		—			32,472
Interest expense		1,007,362			449,886			268,627			152,852
Payment of stock for services		—			34,100
Miscellaneous loss (income)		5,361			(52,749	)		5,031			(53,054	)
Stock-based compensation		11,772			40,350
		1,012,723			397,137			273,658			99,798
(Increase) decrease in operating assets
Net loss	$	(2,663,019	)	$	(4,785,053	)	$	(774,009	)	$	(1,122,110	)
Accounts receivable		(30,947	)		15,707
Deemed dividend on convertible preferred		4,944,009			—			1,192,566			—
Inventory		(51,173	)		52,221
Net Loss applicable to common stockholders	$	(7,607,028	)	$	(4,785,053	)	$	(1,966,575	)	$	(1,122,110	)
Prepaid expenses and other assets		(9,568	)		54,867
Per share data - basic and fully diluted	$	(0.18	)	$	(0.60	)	$	(0.02	)	$	(0.13	)
Deposits and other assets		(28,376	)		—
Weighted average number of common shares outstanding		42,982,182			7,984,506			80,812,881			8,482,107
Increase (decrease) in operating liabilities
Accounts payable		(40,735	)		31,520
Accrued expenses and other current liabilities		377,154			25,296
Sales tax payable		23,489			(1,294	)
Customer deposits		96,131			12,179
Net cash used from operating activities		(63,190	)		38,380
Cash flows from investing activities
Purchases of property and equipment		—			—
Net cash used by investing activities		—			—
Cash flows from financing activities
Repayment of capital leases		—			(7,330	)
Repayment of short term notes		—			(19,075	)
Proceeds from convertible notes (net of $11,340 of issuance costs)		124,160			—
Repayment on bank line of credit		(3,332	)		—
Principal repayments of long-term debt		(13,413	)		—
Repayment of loans payable - stockholders		(9,123	)		(2,868	)
Net cash provided by financing activities		98,292			(29,273	)
Change in cash		35,102			9,107
Cash
Beginning of period		24,884			16,186
End of period	$	59,986		$	25,293
Supplemental Disclosure of Cash Flow Information
	2010			2009
Cash paid for taxes		—			313
Cash paid for interest		9,661			3,362

The accompanying notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

Visual Management Systems, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements ofMarch ~~Cash Flows For the Nine Months Ended September 30~~31, ~~2009 and 2008 (Unaudited)~~2010

	2009			2008
Cash flows from operating activities
Net loss	$	(2,663,019	)	$	(4,785,053	)
Adjustments to reconcile net loss to net cash used by operating activities
Depreciation and amortization		925,131			752,384
Non-cash interest expense		566,689			323,217
Bad debt expense		56,136			—
Payment of stock for services		34,100			766,034
Stock-based compensation		71,543			311,059
Loss on disposition of assets (net)		9,553			249
(Increase) decrease in operating assets
Accounts receivable		38,306			12,409
Inventory		197,690			87,150
Prepaid expenses and other assets		144,201			(33,974	)
Deposits and other assets		—			(45,637	)
Increase (decrease) in operating liabilities
Accounts payable		26,952			749,166
Accrued expenses and other current liabilities		342,903			918,630
Sales tax payable		14,744			76,317
Customer deposits		(120,112	)		135,508
Net cash used from operating activities		(355,183	)		(732,541	)
Cash flows from investing activities
Purchases of property and equipment		—			(59,394	)
Capitalized software		—			(132,923	)
Proceeds from disposition of assets		3,715			12,145
Investment in joint venture		—			(5,000	)
Net cash used by investing activities		3,715			(185,172	)
Cash flows from financing activities
Repayment of capital leases		(7,330	)		(42,060	)
Repayment of short term notes		(29,500	)		(68,000	)
Proceeds from convertible notes (net of $4,150 of issuance costs)		37,350			—
Proceeds from the exercise of warrants		—			124,922
Proceeds from short term notes payable (net of $15,200 of issuance costs)		—			480,261
Proceeds from the issuance of preferred stock, net of issuance costs of $33,300		429,188			—
Repayment on bank line of credit		(3,332	)		—
Principal repayments of long-term debt		(59,968	)		(85,437	)
Repayment of loans payable - stockholders		(19,904	)		—
Net cash provided by financing activities		346,504			409,686
Change in cash		(4,964	)		(508,027	)
Cash
Beginning of period		16,186			707,025
End of period	$	11,222		$	198,998

The accompanying notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

Supplemental Disclosure of Cash Flow Information	2009			2008
Issuance of a short term note to refinance existing long term note		—			267,192
Issuance of convertible note for IDS Acquisition for acquisition of software assets and net working capital		—			1,544,000
Issuance of note payable for IDS Acquisition		—			42,000
Increase in inventory due to IDS asset acquisition		—			6,841
Increase in assets under capitalized leases		—			95,391
Increase in accrued interest due to reclass from capitalized leases		10,493			—
Cash paid for interest		30,269			89,921
Increase in inventory for reclassification from fixed assets		—			38,990
Change in accrued expenses due to reclass from long term liabilities		(27,266	)		—
Increase in prepaid expenses assocaited with issuance of stock and debt for investor relations services		—			194,016
Decrease in accrued expenses for issuance of stock to pay liquidated damages		—			387,050
Issuance of shares for liquidated damages penalty		4,663			—
Issuance of Preferred B shares for vendor payments		4,680			—
Issuance of Preferred B shares to reduce accrued wages		22,000			—
Issuance of Preferred B shares as a finders fee		4,000			—
Issuance of Preferred B shares to reduce shareholder loan		2,093			—
Issuance of Preferred B shares as compensation		5,000			—
Deemed dividend on convertible preferred		4,944,009			—
Decrease in accrued expenses and accounts payable to adjust shareholder loan balance		(1,484	)		—
Increase in Convertible Debt for interest and penalty		333,742			—

The accompanying notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

Visual Management Systems, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements September 30, 2009

1. Basis of Presentation and Nature of Business Operations

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the requirements of Form 10-Q and ~~Item~~Article ~~310~~8 of Regulation S-BX of the Securities and Exchange Commission (the “Commission”) and include the results of Visual Management Systems, Inc., Visual Management Systems ~~Holding, Inc., Visual Management Systems~~ LLC and Intelligent Product Development Group, LLC~~. formerly known as Visual Management Systems PDG~~, ~~LLC,~~ its wholly-owned subsidiaries (the “Subsidiaries”), which are collectively referred to as the “Company”. Accordingly, certain information and footnote disclosures required in the unaudited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for the fair presentation of the Company’s consolidated financial position as of ~~September~~March 3031, ~~2009~~2010, and the results of its operations ~~for~~ for the ~~nine and~~ three month periods ended ~~September~~March 3031, ~~2009 and 2008~~2010, and are not necessarily indicative of results that may be expected for the entire year. These unaudited condensed financial statements should be read in conjunction with the audited financial statements and related notes included in the Company’s Annual Report for the year ended December 31, ~~2008~~2009 on Form 10-K.

The Company designs and sells computer-based video protective technology solutions, including digital video recorders and other surveillance products. The Company is New Jersey-based and began operations in June 2003.

Summary of Significant Accounting Policies

Debt instruments and the features/instruments contained therein

Deferred financing costs are amortized over the term of the associated debt instrument. The Company evaluates the terms of the debt instruments to determine if any embedded derivatives or beneficial conversion features exist. The Company allocates the aggregate proceeds of the notes payable between the warrants and the notes based on their relative fair values. The fair value of the warrants issued to note holders or placement agents are calculated utilizing the Black-Scholes option-pricing model.

Intangible assets

Intangible assets acquired by the Company from Intelligent Digital System LLC as(“IDS”) ~~described~~as described in Note 4 have been valued using the income method, based on future ~~economic~~ economic benefits expected on a net present value basis. Values assigned to ~~intangible~~ intangible assets are being amortized over the estimated useful lives of the ~~respective~~ respective intangible assets. Values assigned to intangible assets acquired and ~~their~~ their useful lives will be reviewed no less frequently then on an annual basis to to determine if there has been any impairment to the then carrying value of the assets or if a change in amortization period is required, as prescribed by FASB ASC 350-20-35.

Capitalized Software Development Costs

Capitalization of computer software development costs begins upon the establishment of technological feasibility, as defined in FASB ASC 985-20-25. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized computer software development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological feasibility, anticipated future gross revenue, estimated economic life and changes in software and hardware technology. As of ~~September~~March 3031, 2010 and December 31, 2009, the Company has capitalized approximately $180,000 of software development costs relating to new products. ~~There was approximately $180,000 of software development cost capitalized as of December 31, 2008.~~

Amortization is provided on a product-by-product basis. The annual amortization is the greater of the amount computed using (a) the ratio that current gross revenue for a product bears to the total of current and anticipated future gross revenue for that product, or (b) the straight-line method over the remaining estimated economic life of the product. Amortization will start when (a) the product is available for general release to customers and (b) all research and development activities relating to the other components of the product are completed. At ~~September~~March 3031, ~~2009~~2010, the Hybrid DVR software and DVR software ~~products~~ products under development were generally available to customers and as a result, there was ~~were~~ approximately $~~27,017 and $~~9,006 of amortization charges for the ~~nine and~~ three months ended March ~~September 30~~31, ~~2009~~2010 for those products. There was no$9,006 of amortization ~~for~~charges for the same ~~periods~~period in ~~2008~~2009.

The Company performs reviews of the recoverability of such capitalized software development costs at each balance sheet date. At the time a determination is made that capitalized amounts are not recoverable based on the estimated cash flows to be generated from the applicable software, the capitalized cost of each software product is then valued at the lower of its remaining unamortized costs or net realizable value.

Inventory

Inventory, which consists of digital video recorders and related components, security cameras and related installation materials, is stated at the lower of cost or market value. Cost is computed on the first-in, first-out method. The Company reviews inventory for slow moving and obsolete inventory during each reporting period to determine if a reserve is required. Based on the review conducted as of ~~September~~March 3031, ~~2009~~2010, management does not believe any reserve is required.

The Company’s inventory consisted of a total of $~~142~~97,~~960~~635 (approximately $2010,~~900~~190 of raw materials and $~~122~~87,~~060~~445 of finished goods) at ~~September~~March 3031, ~~2009~~2010 as compared to to inventory of $~~340~~46,~~650~~460 (approximately $5020,000 of raw materials and $~~290~~26,~~650 of~~460 of finished goods) at December 31, ~~2008~~2009.

New Accounting Pronouncements

In ~~June~~January ~~2009~~2010, the FASB issued ~~authoritative~~amended ~~guidance on accounting~~ standards ~~codification~~ ~~and~~that ~~the~~require ~~hierarchy~~additional offair value ~~generally accepted accounting principles~~disclosures.~~” The~~ ~~FASB~~These ~~Accounting~~disclosure ~~Standards~~requirements ~~Codification™~~are ~~(“Codification”)~~effective ~~has~~in ~~become~~two ~~the~~phases. ~~source~~Effective ofin ~~authoritative~~our ~~accounting~~fiscal ~~principles~~year ~~recognized~~beginning byJanuary ~~the~~1, ~~FASB~~2010, ~~to be applied by nongovernmental entities in~~ the ~~preparation~~amended ~~of financial statements~~standards inwill ~~accordance~~require ~~with~~enhanced ~~GAAP.~~disclosures ~~All~~about ~~existing~~inputs ~~accounting standard documents are superseded by the Codification~~ and ~~any~~valuation ~~accounting~~techniques ~~literature~~used ~~not included in~~to ~~the~~measure ~~Codification~~fair ~~will~~value ~~not~~as bewell ~~authoritative.~~as ~~However,~~disclosures ~~rules~~about ~~and~~significant ~~interpretive~~transfers between ~~releases~~categories of the ~~Securities~~fair ~~Exchange~~value ~~Commission~~measurement ~~(“SEC”) issued under the authority of federal securities laws will continue to be sources of authoritative GAAP for SEC registrants~~hierarchy. ~~The~~Effective ~~FASB~~in ~~authoritative~~our ~~guidance is~~fiscal ~~effective~~year ~~for~~beginning ~~interim~~January ~~and annual reporting periods ending after September 15~~1, ~~2009.~~ ~~Therefore~~2011, ~~beginning with~~ the ~~Company’s~~amended ~~quarter~~standards ~~ending~~will ~~September~~require ~~30,~~presentation ~~2009,~~of ~~all~~disaggregated ~~references~~activity ~~made~~within bythe itreconciliation tofor ~~GAAP~~fair invalue ~~its consolidated financial~~measurements ~~statements~~using ~~now~~significant ~~use~~unobservable ~~the~~inputs ~~new~~(Level ~~Codification numbering system~~3). ~~The~~These ~~Codification~~amended ~~does not~~standards ~~change~~do ~~or alter existing GAAP and, therefore, it does~~ not significantly ~~have an~~ impact ~~on the~~our ~~Company’s~~consolidated financial ~~position, results of operations and cash flows~~statements.

In May 2009, the FASB issued ASC 855 (formerly Statement No. 165), “Subsequent Events”. ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. ASC 855 is effective for interim or annual periods ending after June 15, 2009. We adopted the new disclosure requirements in our June 30, 2009 condensed financial statements. The adoption of this provision does not have a material effect on our financial position, results of operations and cash flows.

In June 2009, the FASB issued FAS 167, “Amendments to FASB Interpretation No. 46(R)” (“FAS 167”). FAS 167 is effective for interim and annual reporting periods ending after November 15, 2009. FAS 167 amends certain guidance in FIN 46(R) to eliminate the exemption for special purpose entities, require a new qualitative approach for determining who should consolidate a variable interest entity and change the requirement for when to reassess who should consolidate a variable interest entity. We plan to adopt FAS 167 effective January 1, 2010, and we do not expect it to have any impact on our financial position or results of operations. FAS 167 has not yet been codified.

In June 2009, the FASB issued FAS 166 “Accounting for Transfers of Financial Assets - an amendment of FAS Statement No. 140” (“FAS 166”). FAS 166 is effective for interim and annual reporting periods ending after November 15, 2009 and must be applied to transfers occurring on or after the effective date. FAS 166 clarifies that the objective of paragraph 9 of Statement 140 is to determine whether a transferor and all of the entities included in the transferor’s financial statements being presented have surrendered control over transferred financial assets. We plan to adopt FAS 166 effective January 1, 2010, and we do not expect it to have a material impact on our financial position or results of operations. FAS 166 has not yet been codified.

In October 2009, the FASB issued authoritative guidance in the form of Accounting Standards Update 2009-14 – Software (Topic 985) on revenue recognition that will become effective for us beginning January 1, 2011, with earlier adoption permitted. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. We believe adoption of this new guidance will not have a material impact on our financial statements.

In August 2009, the FASB issued the FASB Accounting Standards Update No. 2009-04 “Accounting for Redeemable Equity Instruments - Amendment to Section 480-10-S99” which represents an update to section 480-10-S99, distinguishing liabilities from equity, per EITF Topic D-98, Classification and Measurement of Redeemable Securities. The Company does not expect the adoption of this update to have a material impact on its consolidated financial position, results of operations or cash flows.

In September 2009, the FASB issued the FASB Accounting Standards Update No. 2009-08 “Earnings Per Share – Amendments to Section 260-10-S99”,which represents technical corrections to topic 260-10-S99, Earnings per share, based on EITF Topic D-53, Computation of Earnings Per Share for a Period that includes a Redemption or an Induced Conversion of a Portion of a Class of Preferred Stock and EITF Topic D-42, The Effect of the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock. The Company does not expect the adoption of this update to have a material impact on its consolidated financial position, results of operations or cash flows.

The FASB has issued Accounting Standards Update (“ASU”) 2009-13, Multiple Deliverable Revenue Arrangements. ASU 2009-13 replaces EITF 00-21, and clarifies the criteria for separating revenue between multiple deliverables. This statement is effective for new revenue arrangements or materially modified arrangements in periods subsequent to adoption. Adoption is required for fiscal years beginning on or after June 15, 2010, but early adoption is allowed. We anticipate adopting ASU 2009-13 as of January 1, 2011 for new commercial revenue arrangements that fall within the scope of this Update. The adoption of the standard is not expected to have a significant impact on the company’s consolidated financial statements.

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

2. Going Concern

The accompanying financial statements have been prepared assuming the Company is a going concern, which assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has suffered recurring losses from operations, including a loss from operations of approximately $1850,~~650,300~~000 ~~and $500,350~~ for the ~~nine and~~ three months ended ~~September~~ 30March 31, ~~2009~~2010 as compared to approximately $4680,~~387,920~~000 ~~and $1,022,310~~ for the same ~~periods~~ period in the prior year. The Company’s cash used for operations was approximately $~~355~~63,~~180~~000 for the ~~nine~~three months ended March ~~September 30~~31, ~~2009~~2010 as compared to cash ~~used~~generated ~~for~~from operations of approximately $~~732~~ $38,~~540~~000 for the same period in the prior year.

These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount of liabilities that might be necessary should the Company be unable to continue in existence. The Company’s ability to continue in business depends ~~upon~~ upon the continued cooperation of its creditors, its ability to generate cash ~~flow~~ flow to meet its continuing obligations on a timely basis, its ability to ~~further~~ further reduce costs and its ability to obtain additional financing. Current liabilities at ~~September~~March 3031, ~~2009~~2010 were approximately $~~10,794,690~~11.9 million and current assets were approximately $~~323,330~~0.3 million. The difference of approximately $~~10,471,360~~11.6 million is a working capital deficit, which is primarily the result of current ~~debt~~ debt obligations and amounts due vendors. The Company can give no assurance that it will raise sufficient capital to eliminate its working capital deficit or that its creditors will not seek to enforce their remedies against it, which ~~include~~ include the imposition of insolvency proceedings. See “Note 6. Legal Proceedings.”

The Company’s future operations pursuant it to its ongoing business plan are dependent upon management’s ability to either generate sufficient cash flow in excess of the items necessary to maintain operations as detailed above or find sources of additional capital. The Company needs to raise additional financing to continue to develop its proprietary technology, and re-establish and grow its sales and marketing efforts. Without the money to fund these components of the business the Company’s competitive position may never mature to a point where the business plan will be attainable, and further retrenchment of management’s plans may be necessary. If the Company is unsuccessful in obtaining such profitability, raising funds or additionally curtailing expenses, the Company may be required to cease operations or file for bankruptcy.

3. Commitments and Contingencies

Chase Loan

We are a party to a $50,000 term loan agreement with JPMorgan Chase Bank, N.A. which provides for interest at a rate of 8.5% per annum and which is payable in equal monthly installments through October 2013. As of March 31, 2010, $29,341 was outstanding under the loan agreement compared to $31,651 at December 31, 2009.

Chase Line of Credit

We are a party to a $50,000 line of credit with JPMorgan Chase Bank, N.A. which as of March 31, 2010 provided for interest at a rate of 4.75% per annum and which is payable in variable monthly installments. As of March 31, 2010, the outstanding balance on the line of credit was $41,951, which automatically renews every year until paid in full. At December 31, 2009, the outstanding balance was $45,283.

Auto Loans

We had $174,312 in principal balance on auto loans outstanding as of March 31, 2010, as compared to $185,415 at December 31, 2009. These loans, which bear interest at rates ranging from 3.9% to 8.69%, mature at various dates through November 2012.

Capital Leases

We entered into capital leases in the ordinary course of business for office equipment and computer software, and other equipment. The outstanding amount due for leased equipment as of March 31, 2010 and December 31, 2009 was $105,889.

Loan from Former Chief Operating Officer

In 2008 Caroline Gonzalez our former Chief Operating Officer, and the wife of our Chief Executive Officer loaned us $97,420 via extension of lines of credit on personal credit cards issued to her by traditional unsecured consumer credit providers. Since the date of the loan we have been making monthly payments pursuant to the relevant card terms, which include interest rates ranging from 9.49% to 27.99%. As of March 31, 2010 the outstanding balance on these accounts was $58,622 as compared to $63,111 at December 31, 2009.

Original Issue Discount Notes

Between April and September 2008, we issued a series of original issue discount notes to individual investors. These notes totaled $499,450 in face value, and yielded net proceeds to us of $414,950 after fees paid to consultants and placement agents. $99,450 in total face value of the OID Notes was retired via payments to the holders made in June 2008 and October 2008. $250,000 in total face value of the OID notes was retired via conversion into $229,046 of 12% one-year convertible notes (which included accrued and unpaid interest) and cash payments of $29,500. The remaining $150,000 in total face value of OID notes remain unpaid, and are past due. At March 31, 2010 and December 31, 2009, the face value of these notes was $150,000.

November 2007 Debentures

On On November 30, 2007, ~~the~~we ~~Company~~ entered into a securities purchase agreement ~~with~~ with three affiliated institutional investors for the sale of original issue discount 5% senior secured convertible debentures and common stock purchase warrants. We ~~This~~refer ~~transaction~~to isthis ~~known~~transaction as ~~the~~our ~~Company’s~~ November 2007 Private Placement. In this transaction, ~~the~~we ~~Company~~ issued an aggregate of $3.75 million principal amount of debentures at an original issue discount of 20% and warrants to purchase an aggregate of 11,250,000 shares of our common stock. The warrants expire in November 2014 ~~were~~and ~~issued~~initially ~~with~~had an exercise price of $1.15 per share, subject to adjustment, including full ratchet anti-dilution protection.

Since January 1, 2008, ~~the~~we ~~Company~~have ~~has~~ been required to make quarterly payments of ~~interest~~ interest under the convertible debentures issued in ~~the~~our ~~Company’s~~ November 2007 Private Placement. None ~~The~~of ~~Company~~such ~~has~~payments ~~also~~have been made since August 2008. We have also been required to make monthly principal payments in the aggregate of $208,333 since November 2008. InNone of such payments have been made. On August 28, 2008, ~~the~~we ~~Company~~ entered into an Amendment and Waiver Agreement with each of the holders of of these debentures pursuant to which the debenture holders have:

- waived ~~the~~our ~~Company’s~~ compliance with the provisions of the debentures which require itus to have a registration statement covering the shares issuable upon the ~~conversion~~ conversion of the debentures declared effective under the Securities Act of 1933 and maintain the effectiveness of such registration statement;

- waived the anti-dilution provisions of the debentures which, as a result of prior transactions, would ~~otherwise~~ have otherwise resulted in an adjustment to the conversion price of the debentures to $.40 per share;

10 - waived certain provisions of the agreement pursuant to which the debentures were issued which restrict our ability to issue common stock and securities convertible into or exercisable for common stock;

- waived ~~certain~~all ~~provisions~~registration ofrights previously granted to the ~~agreement~~debenture ~~pursuant~~holders with respect to ~~which~~the shares issuable upon the conversion of the debentures and ~~were~~exercise of the warrants issued ~~which~~to ~~restrict~~the debenture holders in connection with the transaction, ~~Company’s~~provided ~~ability~~that we do not fail to ~~issue~~satisfy ~~common~~the ~~stock~~current ~~and~~public ~~securities~~information ~~convertible~~requirements ~~into~~under orRule ~~exercisable~~144(c) of the Securities Act of 1933 for ~~common~~a period ~~stock;~~of three (3) consecutive trading days or more. In the event of such a public information failure we will be required to file a registration statement covering the shares issuable upon the debentures and warrants and will be subject to monetary penalties if it fails to obtain and maintain the effectiveness of the registration statement.

- waived all registration rights previously granted to the debenture holders with respect to the shares issuable upon the conversion of the debentures and exercise of the warrants issued to the debenture holders in connection with the transaction, provided that the Company does not fail to satisfy the current public information requirements under Rule 144(c) of the Securities Act of 1933 for a period of three (3) consecutive trading days or more. In the event of such a public information failure the Company will be required to file a registration statement covering the shares issuable upon the debentures and warrants and will be subject to monetary penalties if it fails to obtain and maintain the effectiveness of the registration statement.8

In consideration of the waivers and in lieu of (i) $250,000 of liquidated damages that the debenture holders alleged were owed as a result of the ~~Company’s~~ our failure to register the shares underlying the debentures and warrants for public resale and (ii) $46,875 of accrued and unpaid interest owed to the debenture holders, we ~~the Company~~ agreed to issue shares of ~~the~~our ~~Company’s~~ common stock valued at $296,875 (based upon a per share price equal to 80% of the average of the value weighted average price of the common stock for the 20 trading days prior to the date of the amendment and waiver) to the debenture holders pro-rata according to their percentage ownership of the debentures. ~~The Company~~We agreed to register the new shares for resale under the Securities Act of 1933, as amended. Failure to file and have the registration statement declared effective within a specified time frame would subject the Company to liquidated damages. The Company has not filed a registration statement in compliance with its August 2008 Amendment and Waiver Agreement, and has received no formal written waiver of such obligation; however the holders of the debentures have advised the Company that that they will not require it to file a registration statement.

The exercise price of the warrants was also adjusted to $.40 per share~~, pursuant to the terms of the amendment and waiver agreement~~.

OnIn ~~the~~August ~~first~~2009, ~~day~~we ofentered ~~each~~into ~~month~~an ~~since~~additional ~~December~~Amendment 1,and ~~2008~~Waiver ~~the~~Agreement ~~Company’s monthly~~with ~~redemptions~~each of ~~principal for~~ the ~~debentures~~holders ~~have become due. Each~~ of ~~these monthly redemption amounts totals $208,333 and each has not been paid by~~ the ~~Company.~~ ~~Additional~~debentures ~~redemption~~pursuant ~~payments~~to ~~will~~which: ~~also come due on the first day of each calendar month until May 2011.~~

~~Quarterly~~- ~~interest~~Our ~~payments~~default ~~owed~~for bypast ~~the~~incidents ~~Company to the holders~~ of ~~the~~non-payment ~~debentures in the amount~~ of ~~$46,875~~interest ~~also~~and ~~came~~principal ~~due~~ on ~~October 1, 2008 January 1, 2009, April 1,~~the ~~2009~~debentures ~~and~~was ~~July 1, 2009, October 1, 2009 and were also not paid by the Company~~waived.

In- ~~August~~The ~~2009,~~total ~~the~~outstanding ~~Company~~principal ~~entered~~balance ~~into~~of anthe ~~Amendment~~debentures ~~and~~was ~~Waiver~~increased ~~Agreement with~~from ~~each~~$3,750,000 ofto ~~the~~$4,083,742, ~~holders~~representing of the ~~November~~inclusion ~~2007~~of ~~debentures~~accrued ~~pursuant~~interest. ~~to which:~~

- The conversion price of the debentures was adjusted to $0.10 per share of the Company’s ~~default~~common ~~for~~stock. ~~past~~As ~~incidents~~of January 1, 2010 the conversion price became the lesser of ~~non-payment~~$0.10 or 80% of ~~interest~~the ~~and~~lowest daily volume weighted average price during ~~principal~~the on20 Trading Days immediately prior to the ~~debentures~~applicable ~~was~~Conversion ~~waived~~Date, but in no case less than $0.00625.

- The ~~total~~conversion ~~outstanding~~price ~~principal~~of ~~balance~~warrants ofissued to the ~~Debentures~~holders ~~was~~of ~~increased~~the ~~from~~debentures at the ~~$3,750,000~~time toof ~~$4,083,742,~~their ~~representing~~original ~~the~~investment ~~inclusion~~was ofadjusted ~~accrued~~to ~~interest~~$0.12 per share.

-Since ~~The~~entering ~~conversion~~into ~~price~~this ofagreement ~~the~~monthly ~~Debentures~~redemptions ~~was~~of ~~adjusted~~principal tofor ~~$0.10 per share of~~ the ~~Company’s~~debentures ~~common~~have ~~stock~~became due. ~~After~~Each ~~January~~of 1,these ~~2010~~monthly ~~the~~redemption ~~conversion~~amounts ~~price shall be the~~totals ~~lesser of~~ $~~0.10~~208,333 orand ~~80%~~has ofnot ~~the~~been ~~lowest~~paid ~~daily~~by ~~volume~~us. ~~weighted~~Additional ~~average~~redemption ~~price~~payments ~~during~~will also ~~the~~come 20due ~~Trading~~on ~~Days immediately prior to~~ the ~~applicable~~first ~~Conversion~~day ~~Date,~~of ~~but~~each ~~in no~~calendar ~~case~~month ~~less~~through ~~than~~May $02010.~~00625.~~

-Quarterly ~~The~~interest ~~conversion~~payments ~~price~~owed ofby ~~warrants~~us ~~issued~~subsequent to the ~~holders~~waiver agreement to the holders of the ~~Debentures~~debentures atin the ~~time~~ amount of ~~their~~approximately ~~original~~$51,000 ~~investment~~also ~~was~~have ~~adjusted~~come due and were also not paid by us except for those payments in stock pursuant to ~~$0.12~~a Waiver ~~per~~and ~~share~~Amendment, and a payment in May 2008 of $62,500.

~~The~~Non-payment ~~Company~~of ~~has~~these ~~made~~amounts, noand ~~payments~~the failure to file an appropriate registration statement may be considered default events under the relevant agreements between us and the holders of the ~~Debentures~~debentures, ~~since~~but ~~execution~~ no formal notice of default or request for remedies in the ~~August~~case ~~2009~~of ~~Amendment~~default ~~and~~have ~~Waiver~~been ~~Agreement,~~issued ~~and~~to ~~remains~~the inus ~~communication~~by the holders. As a ~~with~~result of default, the holders ~~towards~~have the ~~goal~~right to demand payment of approximately ~~obtaining~~$5,300,000 a(representing ~~more~~130% ~~long~~of ~~term~~the ~~solution~~principal toamount of the debentures ~~Company’s~~currently outstanding), as well as all accrued and unpaid interest. We continue to communicate with the holders and are seeking a resolution to the non-payment situation.

~~Financing of the~~ IDS Asset Purchase Convertible Note

In connection with the April 3, 2008 purchase of substantially all the assets of ~~Intelligent Digital Systems, LLC (the “Asset Purchase” and “~~IDS”), ~~the~~we ~~Company~~ issued to IDS an unsecured convertible note in the principal amount of $1.54 million, bearing no interest until April 3, 2011. ~~According~~If ~~to its terms, if~~ not converted, or paid within 30 days of maturity, then from and after the maturity date, the convertible note will bear annual interest ofat 12%. The convertible note is convertible at the discretion of IDS into shares of ~~the Company’s~~our common stock after May 31, 2010, or upon the approval of a majority in interest of the holders of ~~the Company’s~~ our then outstanding 5% secured convertible debentures, or any securities issued on conversion thereof., ~~The~~ at an initial conversion price ~~was~~of $1.15 per share~~, but according to its terms has adjusted to $0~~.12 ~~based~~We ~~on issuances of equity or equity equivalents subsequent~~have ~~to the issuance of the convertible note. The Company has~~ agreed to register the shares issuable upon the conversion of the note for public resale.

As of ~~September~~March 3031, ~~2009~~2010, $24,000 of payments ~~was~~were past due under the note issued to to IDS. In April 2009, IDS, and its principal ~~member~~shareholder ~~and former member of the Company’s Board of Directors, Jay Russ,~~ instituted an action seeking to collect the entire $1,544,000 due under the note as well as $206,250 remaining due under the consulting agreement entered into in connection with the Asset Purchase. See “Note 6. Legal Proceedings.”

under the note as well as $287,500 remaining due under the consulting agreement with Jay Russ entered into in connection with the Asset Purchase. See “Note 6. Legal Proceedings.”

Promissory Note

On June 10, 2008, ~~the~~we ~~Company~~ issued a promissory note (the “New Note”) in the ~~principal~~ principal amount of $267,192 to the Russ & Russ PC Defined Benefit Pension Plan - a pension plan formed for the benefit of ~~Jay~~Mr. Russ - in exchange for the ~~surrender~~ surrender of a promissory note in the principal amount of $250,000 (the “Old Note”) which was issued by ~~the~~us ~~Company~~ to an individual lender in October 2007 and assigned to the pension plan before the exchange. At the time of the exchange, accrued and unpaid interest under the Old Note, which was past due, was $17,192. The New Note provided for interest at a rate of 10% per annum and became due on December 10, 2008. As further consideration for entering into the exchange transaction, the Company issued to Mr. Russ options to acquire 20,000 shares of the its common stock under the Company’s Equity Incentive plan at an exercise price of $0.40 per share. In April 2009, IDS and its principal shareholder instituted an action seeking to collect the entire principal amount of the New Note plus all accrued interest. See “Note 6. Legal Proceedings.”

As further consideration for entering into the exchange transaction, we issued to Mr. Russ options to acquire 20,000 shares of the our common stock under the Company’s Equity Incentive plan at an exercise price of $0.40 per share. We have not paid the holder of the note.

IDS, its principal shareholder and the holder of the New Note have instituted an action seeking to collect the past due amount. See “Note 6. Legal Proceedings.”

4. Acquisition of IDS Assets

Intangible assets acquired by the Company in connection with the IDS acquisition have been valued using the income method, based on future economic benefits expected on a net present value basis. Values assigned to intangible assets are being amortized over the estimated useful lives of the respective intangible assets. Values assigned to intangible assets acquired and their useful lives will be reviewed no less frequently then on an annual basis to determine if there has been any impairment to the carrying value of the assets or if a change in amortization period is required, as prescribed by FASB ASC 350-35-28. The Company performed a review of the fair value of the intangible assets at March ~~September~~31, 302010, ~~2009~~ and determined no charge to amortization was required.

The fair value hierarchy defines the three levels as follows:

Level 1: Valuations based on quoted prices (unadjusted) in an active market that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Valuations based on observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in inactive markets; or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data.

Level 3: Valuations based on unobservable inputs are used when little or no market data is available. The fair value hierarchy gives lowest priority to Level 3 inputs.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk (or other parties such as counterparty in a swap) in its assessment of fair value

The amount of $1,562,692 was assigned to intangible assets. The intangible assets consist of the DVR Software and Hybrid DVR Software and are being amortized over their estimated useful lives of 1 and 5 years respectively.

The following table summarizes the estimated fair values of the assets acquired at the date of acquisition:


	Fair Value Measurement Using:

	Quoted Market Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Input (Level 3)		Total

DVR Software		—		—	$	28,555	$	28,555
Hybrid DVR Software		—		—	$	1,534,137		1,534,137

Total		—		—	$	1,562,692	$	1,562,692

The intangible software assets were valued using the income method, using the company’s best estimates of future cash flows from the sales of the products including the software, a 40% tax rate and discount rates between 15 and 20%.

Intangible Assets	As of ~~September~~March 3031, ~~2009~~2010				As of December 31, ~~2008~~2009
Amortized Intangible Assets	Gross Carrying Amount		Accumulated Amortization*		Gross Carrying Amount		Accumulated Amortization
DVR Software	$	28,555	$	28,555	$	28,555	$	28,555
Hybrid DVR
Hybrid DVR Software		1,534,137		850,008		1,534,137		804.339
Software		1,534,137		758,791		1,534,137		621,965
Total	$	1,562,692	$	878,563	$	1,562,692	$	832,954
Total	$	1,562,692	$	787,346	$	1,562,692	$	650,520

* Includes impairment of $636,242 relating to fair value revaluation of intangible assets during 2008 and amortization of $136,826 and $45,609 associated with Hybrid DVR software charged to cost of goods sold during the nine and three months ended September 30, 2009.10

13* Includes impairment of $636,242 relating to fair value revaluation of intangible assets during 2008 and amortization of $45,609 associated with Hybrid DVR software charged to cost of goods sold during the three months ended March 31, 2010.

Aggregate amortization expense for nine months ended 9/30/2009			$	136,825
Aggregate amortization expense for three months ended 3/31/2010		$	45,609
Estimated amortization expense for the 12 months ending September 30:
Estimated amortization expense for the 12 months ending March 31:
	2009		$	182,435
2011		$	182,435
	2010			182,435
2012			182,435
	2011			182,435
2013			182,435
	2012			182,435
2014			136,824
	2013			45,606

5. Equity Based Compensation, Warrants to Purchase Common Stock

NoDuring ~~equity~~the ~~based~~three ~~compensation~~months ~~was~~ended March 31, 2010. warrants to purchase 342,000 shares of the Company’s common stock were issued ~~during~~to a placement agent in connection with the ~~period~~issuance ~~covered~~of byconvertible ~~this~~notes. ~~report~~These warrants were issued at exercise prices ranging from $0.01 to $0.04 and have a five year life. In connection with the issuance of these warrants, the Company recorded $3,318 to deferred financing costs.

6. Legal Proceedings.

On March 27, 2009, ~~the~~we ~~Company~~were ~~was~~ served with a summons and a complaint in which ~~the~~ ~~Company~~we, ~~its~~ our CEO Jason Gonzalez, ~~the~~our ~~Company’s~~ current Board members Robert Moe, Martin McFeely, Michael Ryan and Col. Jack Jacobs (ret.), and ~~the Company’s~~our former CFO Howard Herman were named as defendants in a suit filed by Mr. Jay Russ, IDS and the Russ & Russ PC Defined Benefit Pension Plan. In the complaint, which was filed in the United States District Court for the Eastern District of New York, the plaintiffs allege, among other things, misrepresentation, securities fraud and breach of duty by the defendants, pertaining to, among other things, ~~the Company’s~~ our restatement of financial results for the periods ended August 31, 2007 and September 30, 2007, and the Asset Purchase. The Complaint also asserts claims regarding non-payment of amounts allegedly due to the ~~Plaintiffs~~plaintiffs pursuant to agreements entered into in connection with the Asset Purchase and the issuance of a note to Russ and Russ PC Defined Benefit Pension Plan. ~~The~~We ~~Company~~believe ~~believes~~ that the ~~Plaintiffs’~~ plaintiffs’ claims regarding misrepresentation, securities fraud and breach of duty are entirely without merit and ~~intend~~are to vigorously ~~defend~~defending against them. The plaintiffs seek compensatory and punitive damages in a number of their claims. If the plaintiffs succeed in any of their claims and obtain a judgment against ~~the Company~~us, payment of that judgment would have a material adverse effect on ~~the~~ ~~Company’s~~ our financial condition and results of operations. The filing of this lawsuit, substantial ~~substantially~~ reduces the likelihood of ~~the~~us ~~Company~~ ever receiving any return on ~~the Company’s~~ our investment in ~~the~~our ~~Company’s~~ joint venture with IDS.

~~The~~On ~~Company~~January ~~has~~2, ~~been~~2010, ~~named~~in asresponse to our motion, the ~~defendant~~Court in athis ~~number~~matter ofissued ~~lawsuits~~an Order ~~pertaining~~dismissing tothe securities claims in the Complaint on the grounds that the ~~vendor~~note ~~lines~~issued ofto ~~credit,~~IDS ~~service~~was ~~contracts~~not ~~and~~a ~~leases~~security. ~~which~~This ~~have~~also ~~gone~~invalidated ~~beyond~~the jurisdiction ~~permitted~~of ~~amounts~~the ~~and~~Complaint ~~terms.~~as ~~These~~no ~~suits~~federal ~~seek~~subject ~~judgment~~matter ~~ranging~~remained, inbut ~~value~~Plaintiff ~~from~~was ~~approximately~~granted ~~$4,000~~leave to ~~approximately~~amend ~~$120,000~~to plead diversity jurisdiction. NoAt ~~individual~~the ~~lawsuit~~same time the ~~represents~~Court aruled ~~substantial~~on ~~risk~~Plaintiff’s motion to attach our and the ~~Company~~named individual defendant’s New ~~ongoing~~York ~~operations~~assets. The Court denied the attachment of the individual defendant’s assets on the grounds that plaintiffs had not established the required probability of success, but ~~taken~~granted ~~in whole~~the ~~they~~attachment ~~pose~~against our assets on the grounds that a ~~potentially~~judgment ~~very~~on ~~serious~~the ~~risk~~claims tofor non-payment was probable. On April 9, 2010, that attachment was issued against our New York assets. It is our position that the ~~Company’s~~attachment ~~ongoing~~of our New York assets is not material to us, ~~operations~~because we have no New York assets.

We have been named as the defendant in a number of lawsuits pertaining to vendor lines of credit which have gone beyond permitted amounts and terms. These suits seek judgment ranging in value from approximately $4,000 to $200,000. Only the largest of these individual lawsuits represents a substantial risk to our ongoing operations, but taken in whole they are likely to have a material adverse effect on our financial conditions and results of operations.

We are the Defendant in a lawsuit filed in New Hampshire by PC Connection, our former vendor. The complaint seeks approximately $30,000. The case is pending.

We are the Defendant in a lawsuit filed in California by Northern Video, our former vendor. The complaint seeks approximately $67,000. The case is pending.

We are the Defendant in a lawsuit filed in New Jersey by American Express, our former provider of charge card services. The complaint seeks approximately $80,000. The case is pending.

We are the Defendant in a lawsuit filed in New Jersey by Anixter, our former vendor. The complaint seeks approximately $120,000. The case is pending.

We are the Defendant in a lawsuit filed in New Jersey by CIT, our former provider of credit for the purchase of business management software. The complaint seeks approximately $120,000. The case is pending.

We are the Defendant in a lawsuit filed in New Jersey by ACIC, our former bonding company for government contract work for the East Brunswick, NJ Board of Education, Pleasantville, NJ Public Schools, and Raritan Valley Community College. The complaint seeks approximately $200,000. The case is pending.

7. Convertible Security Transactions

Convertible Preferred Stock Conversions

During ~~July,~~January ~~August~~ and ~~September~~March of ~~2009~~2010, ~~25.6~~19 shares of Series AB Convertible Preferred Stock were converted into common stock. These shares were converted at $0.005 and resulted in the issuance of 123,800,000 shares of the Company’s common stock. In connection with the conversion, the Company recorded a deemed dividend of approximately $780,262 for the excess of the fair value of the converted shares as compared to the carrying value of the preferred, net of dividends booked in prior periods.

During July, August and September of 2009, 49 shares of Series B Convertible Preferred Stock were converted into common stock. These shares were converted at $0.005 and resulted in the issuance of 9,800,000 shares of the Company’s common stock. In connection with the conversion, the Company recorded a deemed dividend of approximately $412,304 for the excess of the fair value of the converted shares as compared to the carrying value of the preferred, net of dividends booked in prior periods.

Issuance of Convertible Notes

In ~~July~~January, February and ~~August~~March, ~~2009~~2010, the Company issued to unaffiliated individual investors, convertible notes with an aggregate principal value of $41135,500, an interest rate of 12% per annum, and a conversion price of $.01 per share of Visual Management Systems, Inc. common stock. The Company recorded interest expense during the third quarter of $4170,~~500~~000 in connection with the ~~beneficial~~ beneficial conversion feature of these notes. The convertible notes mature on ~~various~~ various dates ~~throughout~~through ~~January~~March ~~2010~~2011.

8. Subsequent Events

For the purposes of these financial statements, the Company has evaluated subsequent events occurring between the end of its fiscal quarter ended September 30, 2009 and November 23, 2009, which is the date these financial statements were issued.

Issuance of Convertible Notes

In ~~October~~April and ~~November~~May ~~2009~~2010, the Company issued to unaffiliated individual investors, convertible notes with an aggregate principal value of $60100,000, an ~~interest~~ interest rate of 12% per annum, and a conversion price of $.01 per share of ~~Visual~~ Visual Management Systems, Inc. common stock. The convertible notes mature on various dates ~~throughout~~through ~~October~~May ~~and November 2010~~2011.

Convertible ~~Preferred~~Note ~~Stock~~ Conversions

During ~~July,~~April ~~October~~ and ~~November~~May of ~~2009~~2010, 28an ~~shares~~aggregate ofprincipal ~~Series~~amount Aof ~~Convertible~~$40,500 ~~Preferred~~of convertible ~~Stock~~notes were converted into common stock. These shares were converted at $0.~~005~~01 and resulted in the issuance of 144,~~000~~050,000 shares of the Company’s common stock.

During October of 2009, 1 share of Series B Convertible Preferred Stock was converted into common stock. These shares were converted at $0.005 and resulted in the issuance of 200,000 shares of the Company’s common stock

Appointment of Chief Operating Officer

On October 12, 2009, the Company’s Board of Directors appointed W. Geoffrey Martin its Chief Operating Officer. Mr. Martin previously served as the Company’s General Counsel, a role which he will continue to fill in addition to his new capacity. The Company’s former Chief Operating Officer was named Operations Manager for its Visual Management Systems, LLC subsidiary.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations for the ~~Nine~~Three ~~months~~Months Ended ~~September~~March 3031, ~~2009~~2010 and ~~2008~~2009

The following discussion and analysis should be read in conjunction with the financial statements, including the notes thereto and other information presented in this report.

Net Revenues

Net revenues decreased approximately $2410,~~851~~000,~~370,~~ or 5748% to about $2441,~~141,320~~ 000 during the three ~~nine~~ months ended ~~September~~March 3031, ~~2009~~2010, from approximately $4851,~~992,690~~ 000 during the same period in the prior year. The decrease in revenues reflects the impact of the economy on the Company’s sales efforts and a reduction in the Company’s sales force.

Cost of Goods Sold

Total cost of goods sold decreased approximately $1190,~~661~~000,~~740,~~ or 6047% to approximately $1216,~~124,260~~000 for the ~~nine~~three months ended ~~September~~March 3031, ~~2009~~2010, from approximately $2406,~~786,~~000 during the same period in the prior year. This decrease was primarily due to decreased material and labor costs and lower revenues as compared to the same period in ~~2008 offset by increased amortization of intangibles to cost of goods sold during~~ 2009.

As a result of the changes described above in revenues and cost of goods sold, gross profit for the ~~nine~~three months ended ~~September~~March 3031, ~~2009~~2010, decreased to approximately $1225,~~017,070~~000 from approximately $2445,~~206,700~~000 for the ~~nine~~three months ~~ended~~ ended September 30, 2008, and gross profit as a percentage ~~increased~~decreased to ~~47.5~~51% for the ~~nine~~ three months ended ~~September~~March 3031, ~~2009~~2010 compared with ~~44.2~~52% for the ~~nine~~same period in the prior year. The decrease in gross profit margin for the three months ended ~~September~~March 3031, 2010 ~~2008.~~is primarily the result of slightly lower margin jobs completed in the current period.

Operating Expenses

Operating expenses decreased approximately $3303,~~927,250~~000 to approximately $2616,~~667,360~~000 for the ~~nine~~three months ended ~~September~~March 3031, ~~2009~~2010, from approximately $6919,~~594,610~~000 for the ~~nine~~ three months ended ~~September~~March 3031, ~~2008~~2009.

15 This decrease was primarily attributable to a decreased wage related items due to lower headcount (approximately $200,000), decreased finance and investor relations costs ($120,000), decreases in depreciation and other costs of $90,000, offset by an increase in charges for late registration penalties of about $110,000.

This decrease was primarily attributable to a decrease in finance and investor relations costs (approximately $800,000), charges for penalties relating to the lack of filing required registration statements, as required by certain agreements, and other general and administrative expenses (approximately $1,300,000), and a decrease in wage related costs due to reduced headcount (approximately $1,800,000).

Interest Expense

Interest expense for the ~~nine~~three months ended ~~September~~March 3031, ~~2009~~2010 increased to approximately $1454,~~007~~000,~~360,~~ from about $~~449~~207,~~890~~000 in the ~~nine~~three months ended ~~September~~March 3031, ~~2008~~2009. ~~The~~ The increase of ~~approximately~~ $~~557~~247,~~480~~000 was primarily the result of (i) additional interest due to beneficial ~~repricing~~conversion of ~~warrants~~convertible ~~relating to~~ debt of approximately $~~290~~120,000 and (ii) interest on amounts relating to late payments of (approximately $~~200~~120,000), ~~(iii)~~and increased interest ~~relating~~due to ~~the~~late ~~beneficial~~payment ~~conversion feature~~ of ~~convertible~~payroll ~~debt of $41,500~~ and ~~(iv)~~other ~~higher~~of ~~original~~about ~~issue discount amortization, totaling approximately~~ $307,000.

Net Loss

As a result of the items discussed above there was a net loss of approximately $2845,~~663,020~~000 for the ~~nine~~three months ended ~~September~~March 3031, ~~2009~~2010 compared with a net loss of approximately $4681,~~785,050~~000 for the ~~nine~~three months ended ~~September~~March 3031, ~~2008. Net loss applicable to stockholders for the nine months ended September 30,~~ 2009 ~~was approximately $7,607,030 as a result of a deemed dividend relating to a beneficial conversion feature on convertible preferred stock issued during the period of approximately $4,944,010~~. ~~Net loss applicable to stockholders during the nine months ended September 30, 2008 was approximately $4,785,050 as there were no deemed dividends during that period.~~

Results of Operations for the Three Months Ended September 30, 2009 and 2008

The following discussion and analysis should be read in conjunction with the financial statements, including the notes thereto and other information presented in this report.

Net Revenues

Net revenues decreased approximately $1,220,860, or 69% to about $559,010 during the three months ended September 30, 2009, from approximately $1,779,870 during the same period in the prior year. The decrease in revenues reflects the impact of the economy on the Company’s sales efforts and a reduction in the Company’s sales force.

Cost of Goods Sold

Total cost of goods sold decreased approximately $819,360, or 72% to approximately $313,140 for the three months ended September 30, 2009, from approximately $1,132,500 during the same period in the prior year. This decrease was primarily due to decreased material and labor costs and lower revenues as compared to the same period in 2008.

As a result of the changes described above in revenues and cost of goods sold, gross profit for the three months ended September 30, 2009, decreased to approximately $245,880 from approximately $647,370 for the three months ended September 30, 2008, and gross profit as a percentage increased to 44.0% for the three months ended September 30, 2009 compared with 36.4% for the three months ended September 30, 2008. The increase in gross profit margin for the three months ended September 30, 2009 is primarily the result of higher margin jobs completed in the current period.

Operating Expenses

Operating expenses decreased approximately $923,450 to approximately $746,230 for the three months ended September 30, 2009, from approximately $1,669,680 for the three months ended September 30, 2008.

This decrease was primarily attributable to a decreased wage related items due to lower headcount (approximately $600,000), charges for penalties relating to the lack of filing required registration statements, as required by certain agreements (approximately $100,000), and a decrease in other general and administrative costs (approximately $200,000).

Interest Expense

Interest expense for the three months ended September 30, 2009 increased to approximately $268,630, from about $152,850 in the three months ended September 30, 2008. The increase of $115,780 was primarily the result of (i) additional interest due to beneficial conversion of convertible debt of approximately $41,500 and (ii) interest on amounts relating to late payments (approximately $90,000).

Net Loss

As a result of the items discussed above there was a net loss of approximately $774,010 for the three months ended September 30, 2009 compared with a net loss of approximately $1,122,110 for the three months ended September 30, 2008. Net loss applicable to

stockholders for the three months ended September 30, 2009 was approximately $1,966,580 as a result of a deemed dividend relating to a beneficial conversion feature on convertible preferred stock issued during the period of approximately $500,000 and $1,192,570 of a deemed dividend relating to conversions of convertible preferred stock during the three months ended September 30, 2009. Net loss applicable to common during the three months ended September 30, 2008 was approximately $1,122,110 as there were no deemed dividends during that period.

Liquidity and Capital Resources

The Company’s financial statements are prepared on a going concern basis, which assumes that the Company will realize assets and discharge liabilities in the normal course of business. At ~~September~~March 3031, ~~2009~~2010, the Company had cash of approximately $1160,~~220~~000, a working capital deficit of approximately $~~10,471,360,~~11.6 million, stockholders’ deficit of approximately $810.4 million,~~686,520,~~ and an outstanding balance of long term debt of approximately $~~120~~94,~~430~~000 net of current maturities. In In comparison, at December 31, ~~2008~~2009, the Company had cash and equivalents of approximately $1624,~~000~~900, a working capital deficit of approximately $~~9,478,000,~~11.1 million, an outstanding balance of long term debt of approximately $~~234~~102,000, net of current maturities. The Company’s financial condition as of ~~September~~March 3031, ~~2009~~ 2010 raises doubt as to the Company’s ability to continue the Company’s normal business operations as a going concern. If the Company is unable to put into effect certain plans, the Company may be required to restructure, file for bankruptcy or cease operations.

Cash Flows from Operating Activities

Net cash used by operating activities was approximately $~~355~~63,~~180~~000 for the ~~nine~~three months ended ~~September~~March 3031, ~~2009~~2010 compared to cash ~~used~~generated byfrom operations of approximately $~~732~~38,~~540~~400 for the ~~nine~~three months ended ~~September~~March 3031, ~~2008~~2009. Cash used during the ~~nine~~three months ended ~~September~~March 3031, ~~2009~~2010 was primarily the result of the operating loss (net of non-cash operating expenses of approximately $1446,~~653,600~~000) and a reduction in ~~customer~~accounts ~~deposits~~payable ($~~122~~41,~~110~~000) offset by decreases in receivables of approximately $3831,~~310~~000, inventory of approximately $~~197~~51,~~690~~000 and prepaid expenses and deposits of approximately $~~144~~38,~~200~~000 and ~~decreases~~increases in customer deposits of approximately $96,130, accrued expenses totaling approximately $377,000 and sales tax payable of approximately $~~342~~23,~~900~~490. For the three ~~nine~~ months ended ~~September~~March 3031, ~~2008~~2009, cash ~~used~~generated inby operations of approximately $~~732~~38,~~540~~400 was primarily a result of the operating loss incurred during the quarter offset by non cash operating expenses of approximately $2528,~~152~~780,~~690,~~ ~~decreases~~increases in receivables of approximately $1215,~~410~~700, inventory of approximately $8752,~~150~~200 and increases in prepaid expenses and deposits of approximately $7954,~~610~~900, increases in accounts payable and accrued expenses totaling approximately $157,~~667,800~~000 and net increases in customer deposits and sales tax payable of approximately $~~211~~10,~~820~~900.

Cash Flows from Investing Activities

~~Net~~There ~~cash generated from investing activities~~ was ~~approximately~~not ~~$3,700~~any incash ~~the~~used ~~nine months~~for ~~ended~~or ~~September~~generated ~~30, 2009 as a result of proceeds~~ from ~~asset sales, as compared to cash used by~~ investing activities ofin ~~$185,170 during~~ the ~~nine~~ three months ended ~~September~~ 30March 31, ~~2008~~2010 ~~which~~or ~~represented~~March ~~equipment~~31, ~~purchases and capitalized software costs net of proceeds from an asset disposition~~2009.

Cash Flows from Financing Activities

Net cash generated from financing activities was approximately $~~346~~98,~~500~~290 for the ~~nine~~three months ended ~~September~~March 3031, ~~2009~~2010. The cash generated by financing ~~activities~~ activities for the current period was a result of the issuance of convertible ~~preferred~~ ~~stock and convertible~~ notes netting aggregate proceeds of approximately $~~466~~124,~~540~~160 offset by payments of approximately $~~116~~25,~~700~~870 on outstanding loans and capital leases. During the ~~nine months ended September~~three 30, 2008, cash generated from financing activities of approximately $409,690 was primarily the result of proceeds from short term notes of $480,260 offset by payments of approximately $195,500 on outstanding loans and capital leasesmonths

~~Cash decreased from $16,186 at December 31, 2008 to $11,222 at September 30, 2009.~~13

ended March 31, 2009, cash used for financing activities of approximately $29,270 was primarily the result of payments on outstanding loans and capital leases

Cash increased from $24,884 at December 31, 2009 to $59,985 at March 31, 2010.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

The Company believes that the Company’s business operations are not exposed to market risk relating to interest rate, foreign currency exchange risk or commodity price risk.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

As required by Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Report on Form 10-Q, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. This evaluation was carried out under the supervision of and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer. Disclosure controls and procedures are controls and other procedures that are designed to provide reasonable assurance that information required to be disclosed in the Company’s reports filed or submitted under the Securities Exchange Act of 1934 is is recorded, processed, summarized and reported, within the time periods ~~specified~~ specified in the Securities and Exchange Commission’s rules and forms. ~~Disclosure~~ Disclosure controls and procedures include, without limitation, controls and ~~procedures~~ procedures designed to provide reasonable assurance that information required to be disclosed in the Company’s reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

17 The evaluation made by the Company’s Chief Executive Officer and Chief Financial Officer of the Company’s disclosure controls and procedures included a review of the controls’ objectives and design, the Company’s implementation, and the effect of the controls on the information generated for use in this quarterly report and previous reports to the Commission. In the course of the evaluation, the Company sought to identify data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. The overall goals of these various evaluation activities are to monitor the Company’s disclosure controls and procedures and to make modifications as necessary. The Company’s intent in this regard is that the disclosure controls and procedures will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant. Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2010.

communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

The evaluation made by the Company’s Chief Executive Officer and Chief Financial Officer of the Company’s disclosure controls and procedures included a review of the controls’ objectives and design, the Company’s implementation, and the effect of the controls on the information generated for use in this quarterly report and previous reports to the Commission. In the course of the evaluation, the Company sought to identify data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. The overall goals of these various evaluation activities are to monitor the Company’s disclosure controls and procedures and to make modifications as necessary. The Company’s intent in this regard is that the disclosure controls and procedures will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant. Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2009.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the Company’s transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that the Company’s transactions are recorded as necessary to permit preparation of the Company’s financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has evaluated the effectiveness of internal control over financial reporting as of December 31, ~~2008~~2009 based on 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 a 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.

Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer identified a number of material weaknesses in the Company’s internal control over financial reporting. These material weaknesses included:


-	A lack of sufficient resources and an insufficient level of monitoring and oversight, which restricts the Company’s ability to gather, analyze and report information relative to the financial statement assertions in a timely manner.

-	The limited size of the accounting department makes it impracticable to achieve an appropriate segregation of duties and to implement the formal documented closing and reporting calendar and checklists in a timely manner on a consistent basis.

-	There are no formal cash flow forecasts, business plans, and organizational structure documents to guide the employees in critical decision-making processes.

-	Material weaknesses identified in the past including deficiencies in information technology have not been fully remediated.

As a result of the material weaknesses described above, the Company concluded that, as of December 31, ~~2008~~2009, the Company’s internal control over financial reporting was not effective.

Remediation of Material Weaknesses

The Company intends to take action to hire additional staff, implement stronger financial reporting systems and software and develop the adequate policies and procedures with said enhanced staff to ensure all noted material weaknesses are addressed and resolved. However, due to cash flow constraints, the timing of implementing the above has not yet been determined, and may not be possible.

The Company’s management does not expect that the Company’s disclosure controls or the Company’s internal controls over financial reporting will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, but not absolute, assurance that the objectives of a control system are met. Further, any control system reflects limitations on resources, and the benefits of a control system must be considered relative to its costs. These limitations also include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. In addition, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of a control. A design of a control system is also based upon certain assumptions about potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

absolute, assurance that the objectives of a control system are met. Further, any control system reflects limitations on resources, and the benefits of a control system must be considered relative to its costs. These limitations also include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. In addition, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of a control. A design of a control system is also based upon certain assumptions about potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

Changes in Internal Control over Financial Reporting

During the quarter ended ~~September~~March 3031, ~~2009~~2010, no changes were made that impacted ~~internal~~ internal control over financial reporting due to cash flow constraints.

Sobel & Co., LLC was not required to and did not perform a review of the Company’s internal controls over financial reporting.

1915

PART II – OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

InBetween ~~July~~January and ~~August~~May, ~~2009~~2010, the Company issued to unaffiliated individual investors, convertible notes with an aggregate principal value of $41235,500, an interest rate of 12% per annum, and a conversion price of $.01 per share of Visual Management Systems, Inc. common stock. The convertible notes mature on various dates ~~throughout~~through ~~January~~May ~~2010~~2011. The Company relied upon the exemption provided by by Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 ~~thereunder~~ thereunder in connection with the transaction detailed above.

During July, October and November of 2009, 28 shares of Series A Convertible Preferred Stock were converted into common stock. These shares were converted at $0.005 per share and resulted in the issuance of 14,000,000 shares of the Company’s common stock. During October of 2009, one share of Series B Convertible Preferred Stock was converted into common stock. These shares were converted at $0.005 per share and resulted in the issuance of 200,000 shares of the Company’s common stock. The Company relied upon the exemptions provided by Section 3(a)(9) of the Securities Act of 1933,as amended, in connection with making such issuances.

Item 3. Defaults Upon Senior Securities

OnSince ~~the~~January ~~first~~1, ~~day~~2008, ofwe ~~each~~have ~~month~~been ~~since~~required ~~December~~to 1,make ~~2008~~quarterly payments of interest under the ~~Company’s~~convertible ~~monthly~~debentures issued in our November 2007 Private Placement. ~~redemptions~~None of ~~principal~~such ~~for~~payments ~~the~~have ~~debentures~~been ~~have~~made ~~become~~since ~~due~~August 2008. ~~Each~~We ofhave ~~these~~also been required to make monthly ~~redemption~~principal ~~amounts~~payments ~~totals~~in the aggregate of $208,333 ~~and~~since November ~~each~~2008. ~~has~~None ~~not~~of such payments have been ~~paid~~made. byOn ~~the~~August 28, 2008, we ~~Company.~~entered ~~Additional~~into ~~redemption~~an ~~payments~~Amendment ~~will~~and ~~also~~Waiver ~~come~~Agreement ~~due~~with oneach of the ~~first~~holders ~~day~~ of ~~each~~these ~~calendar~~debentures ~~month~~pursuant ~~until~~to ~~May~~which ~~2011.~~the debenture holders have:

~~Quarterly~~- ~~interest~~waived ~~payments~~our ~~owed~~compliance bywith the ~~Company~~provisions ~~to the holders~~ of the debentures inwhich ~~the amount~~require ofus ~~$46,875~~to have ~~also~~a ~~came~~registration ~~due~~statement oncovering ~~October~~the 1,shares ~~2008~~issuable ~~January~~upon 1,the ~~2009,~~conversion of ~~April~~the ~~1, 2009~~debentures ~~and~~declared ~~July~~effective 1,under ~~2009,~~the ~~October~~Securities 1,Act ~~2009~~of 1933 and maintain ~~were~~the ~~also~~effectiveness ~~not~~of ~~paid~~such byregistration ~~the~~statement; ~~Company.~~

In- ~~August~~waived ~~2009,~~ the ~~Company~~anti-dilution ~~entered~~provisions ~~into~~of anthe ~~Amendment~~debentures ~~and~~which, ~~Waiver~~as ~~Agreement~~a ~~with each~~result of prior ~~the~~transactions, ~~holders~~would ofhave otherwise resulted in an adjustment to the conversion ~~November~~price ~~2007~~of the debentures ~~pursuant~~ to ~~which:~~$.40 per share;

- ~~The~~waived ~~Company’s~~certain ~~default~~provisions ~~for~~of ~~past~~the ~~incidents~~agreement ofpursuant ~~non-payment~~to ofwhich ~~interest~~the debentures were issued which restrict our ability to issue common stock and securities ~~principal~~convertible oninto ~~the~~or ~~debentures~~exercisable ~~was~~for ~~waived.~~common stock;

- ~~The~~waived ~~total~~all ~~outstanding~~registration ~~principal~~rights ~~balance~~previously granted to the debenture holders with respect to the shares issuable upon the conversion of the ~~Debentures~~debentures and exercise of the warrants issued to the debenture holders in connection with the transaction, ~~was~~provided ~~increased~~that ~~from~~we do not fail to satisfy the current public $information requirements under Rule 144(c) of the Securities Act of 1933 for a period of three (3~~,750,000~~) consecutive trading days or more. In the event of such a public information failure we will be required to ~~$4,083,742,~~file ~~representing~~a registration statement covering the ~~inclusion~~shares issuable upon the debentures and warrants and will be subject to monetary penalties if it fails to obtain and maintain the effectiveness of ~~accrued~~the ~~interest~~registration statement.

-In ~~The~~consideration ~~conversion~~of ~~price~~the waivers and in lieu of (i) $250,000 of liquidated damages that the ~~Debentures~~debenture ~~was~~holders ~~adjusted~~alleged towere ~~$0.10~~owed ~~per~~as ~~share~~a result of the our failure to ~~Company’s~~register ~~common~~the ~~stock.~~shares ~~After~~underlying ~~January~~the 1debentures and warrants for public resale and (ii) $46,875 ~~2010~~of ~~the~~accrued ~~conversion~~and ~~price~~unpaid ~~shall~~interest beowed to the debenture holders, ~~lesser~~we agreed to issue shares of our common stock valued at $~~0.10~~296,875 or(based upon a per share price equal to 80% of the ~~lowest~~average ~~daily~~of ~~volume~~the value weighted average price ~~during~~ of the 20common ~~Trading~~stock ~~Days~~for ~~immediately~~the 20 trading days prior to the ~~applicable~~date ~~Conversion~~of ~~Date,~~the ~~but~~amendment and inwaiver) to the debenture holders pro-rata according to their percentage noownership ~~case~~of ~~less~~the ~~than~~debentures. $0We agreed to register the new shares for resale under the Securities Act of 1933, as amended.~~00625.~~

- The exercise ~~conversion~~ price of ~~warrants issued to~~ the ~~holders~~warrants ~~of the Debentures at the time of their original investment~~ was also adjusted to $0.1240 per share.

~~The~~In ~~Company~~August ~~has~~2009, ~~made~~we noentered ~~payments~~into toan ~~the~~additional ~~holders of the Debentures since execution of the August 2009~~ Amendment and Waiver Agreement, ~~and remains in communication~~ with each of the holders ~~towards~~of the ~~goal~~debentures ofpursuant ~~obtaining a more long term solution~~ to ~~the Company’s~~which: ~~non-payment.~~

~~The~~- ~~Company~~Our ~~has~~default ~~not~~for ~~made~~past aincidents ~~series~~ of ~~scheduled~~non-payment ~~payments~~ of ~~amounts~~interest due to Intelligent Digital Systems, LLC (“IDS”) as part of the Company’s purchase of substantially all of IDS’s assets in April 2008, nor has the Company made a series of payments due as part of a related consulting agreement between the Company and ~~IDS’s~~principal ~~sole~~on ~~member Jay Russ, a former member of~~ the ~~Company’s board of~~ ~~directors.~~debentures ~~The~~was ~~Company is currently past due on $24,000 in payments owed to IDS, and past due to Jay Russ for consulting fees as of June 30, 2009 of $62,500~~waived.

~~Non~~-~~payment~~ ofThe ~~these~~total ~~amounts~~outstanding ~~may~~principal bebalance ~~considered default events under the relevant agreements between the Company and IDS and the consulting agreement with Mr. Russ. As a result~~ of ~~default, IDS and Mr. Russ have commenced litigation against~~ the ~~Company~~ ~~seeking~~debentures ~~payment~~was ofincreased ~~the entire~~ from $13,~~544~~750,000 ~~principal amount of the note issued~~ to ~~IDS as primary compensation for its assets and all accrued and unpaid interest thereon~~$4,083,742, asrepresenting ~~well~~the asinclusion ~~payment~~ of ~~the~~accrued ~~aggregate $ 287,500 remaining due under the consulting agreement~~interest.

- The conversion price of the debentures was adjusted to $0.10 per share of the Company’s common stock. As of January 1, 2010 the conversion price became the lesser of $0.10 or 80% of the lowest daily volume weighted average price during the 20 Trading Days immediately prior to the applicable Conversion Date, but in no case less than $0.00625.

On- ~~June~~The ~~10,~~conversion ~~2008,~~price ~~the~~of ~~Company~~warrants issued ato ~~promissory note (~~the ~~“Note”)~~holders ~~in the principal amount~~ of ~~$267,192, with an interest rate of 10% per annum, to a pension plan formed for~~ the ~~benefit~~debentures ofat ~~Jay Russ. Pursuant to its terms,~~ the ~~Note~~time ~~came~~of ~~became~~their ~~due~~original oninvestment ~~December 10, 2008, but~~ was ~~not~~adjusted ~~paid~~to ~~by the Company~~$0.12 ~~Mr. Russ’~~per ~~suit against the Company also includes claims demanding payment of this amount~~share.

Since entering into this agreement monthly redemptions of principal for the debentures have became due. Each of these monthly redemption amounts totals $208,333 and has not been paid by us. Additional redemption payments will also come due on the first day of each calendar month through May 2010, a date upon which the entire principal balance of the debentures will have come due.

Quarterly interest payments owed by us subsequent to the waiver agreement to the holders of the debentures in the amount of approximately $51,000 also have come due and were also not paid by us except for those payments in stock pursuant to a Waiver and Amendment, and a payment in May 2008 of $62,500.

Non-payment of these amounts, and the failure to file an appropriate registration statement may be considered default events under the relevant agreements between us and the holders of the debentures, but no formal notice of default or request for remedies in the case of default have been issued to the us by the holders. As a result of default, the holders have the right to demand payment of approximately $5,300,000 (representing 130% of the principal amount of the debentures currently outstanding), as well as all accrued and unpaid interest. We continue to communicate with the holders and are seeking a resolution to the non-payment situation.

In connection with the April 3, 2008 purchase of substantially all the assets of IDS, we issued to IDS an unsecured convertible note in the principal amount of $1.54 million, bearing no interest until April 3, 2011. If not converted, or paid within 30 days of maturity, then from and after the maturity date, the convertible note will bear annual interest at 12%. The convertible note is convertible at the discretion of IDS into shares of our common stock after May 31, 2010, or upon the approval of a majority in interest of the holders of our then outstanding 5% secured convertible debentures, or any securities issued on conversion thereof, at an initial conversion price of $1.15 per share. We have agreed to register the shares issuable upon the conversion of the note for public resale.

As of March 31, 2010, $24,000 of payments were past due under the note issued to IDS. In April 2009, IDS and its principal shareholder instituted an action seeking to collect the entire $1,544,000 due under the note as well as $206,250 remaining due under the consulting agreement entered into in connection with the asset purchase.

On June 10, 2008, we issued a promissory note (the “New Note”) in the principal amount of $267,192 to the Russ & Russ PC Defined Benefit Pension Plan - a pension plan formed for the benefit of Mr. Russ - in exchange for the surrender of a promissory note in the principal amount of $250,000 (the “Old Note”) which was issued by us to an individual lender in October 2007 and assigned to the pension plan before the exchange. At the time of the exchange, accrued and unpaid interest under the Old Note, which was past due, was $17,192. The New Note provided for interest at a rate of 10% per annum and became due on December 10, 2008. As further consideration for entering into the exchange transaction, we issued to Mr. Russ options to acquire 20,000 shares of the our common stock under the Company’s Equity Incentive plan at an exercise price of $0.40 per share. We have not paid the holder of the note. IDS, its principal shareholder and the holder of the New Note have instituted an action seeking to collect the past due amount.

Item 6. Exhibits


Exhibit No.		Exhibits


31.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		Visual Management Systems, Inc.
		(Registrant)
	By:	/s/ Jason Gonzalez
		Jason Gonzalez
		Chief Executive Officer
Dated: November 23, 2009
Dated: May 20, 2010
	By:	/s/ J.D. Gardner
		J.D. Gardner
		Chief Financial Officer
Dated: November 23, 2009
Dated: May 20, 2010

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