UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q


(Mark
One)





[X]
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period  ended September
      30, 2009








[X]
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
      the Transition period from __________ to
  ____________




Commission
File No. 33-55254-38


General
Environmental Management, Inc.


(Exact
name of Small Business Issuer as specified in its charter)





NEVADA
              
              87-0485313(State
      or other jurisdiction of
                incorporation
      or organization)
              
              (I.R.S.
      Employer
                Identification
      Number)





3191
      Temple Ave., Suite 250, Pomona CA, 91768(Address
      of principal executive offices, Zip
      Code)





(909)
      444-9500Issuer’s telephone
      number, including area
code





Indicate
by check mark whether the Issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Issuer was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.


[X]
Yes  [  ] No





Indicate
by check mark whether the registrant has submitted electronically and posted on
it corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulations 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] No





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




Large
      accelerated filer
                              (  
      )
                              
                              Accelerated
      filer
                              (  
      )Non-accelerated
      filer
                              (  
      )
                              
                              Smaller
      reporting company
                              (X)(Do
      not check if a smaller reporting company)




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




APPLICABLE
ONLY TO CORPORATE ISSUERS




State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practical date.  As of September 30, 2009, there were
14,557,653 shares of the issuer’s $.001 par value common stock issued and
outstanding.




1





GENERAL
ENVIRONMENTAL MANAGEMENT, INC.


QUARTERLY
REPORT ON FORM 10-Q


FOR
THE QUARTER ENDED SEPTEMBER 30, 2009





TABLE
OF CONTENTS








PagePart
      1
                  Financial
      InformationItem
      1
                  Financial
      Statements (Unaudited)
                  3Condensed
      Consolidated Balance Sheets  as of  September 30, 2009
      (Unaudited)and
      December 31, 2008
                  3Condensed
      Unaudited Consolidated Statements of Operations for the Three
      Months  and nine Months ended September 30, 2009 and
      2008
                  5Condensed
      Unaudited Consolidated Statement of Stockholders’ Deficiency for the
      Nine   Months Ended September 30, 2009
                  6Condensed
      Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended
      September 30, 2009 and 2008
                  7Notes
      to the Unaudited Condensed Consolidated Financial
    Statements
                  9Item
      2
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
                  33Item
      3
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  42Item
      4
                  Controls
      and Procedures
                  42Part
      II
                  Other
      InformationItem
      1
                  Legal
      Proceedings
                  43Item
      1A
                  Risk
      Factors
                  43Item
      2
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  43Item
      3
                  Defaults
      Upon Senior Securities
                  43Item
      4
                  Submission
      of Matters to a Vote of Security Holders
                  43Item
      5
                  Other
      Information
                  43Item
      6
                  Exhibits
      and Reports on Form 8K
                  44Signatures
                  45CEO
      Certifications
                  AttachedCFO
      Certifications
                  Attached





2




PART
1 - FINANCIAL INFORMATION





Item
1.  Financial Statements.





GENERAL
ENVIRONMENTAL MANAGEMENT, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS




September
      30,
                    
                    
                    December
      31,2009
                    
                    
                    2008(Unaudited)ASSETSCURRENT
      ASSETS:Cash
                    
                    $
                    39,676
                    
                    
                    $
                    375,983Accounts
      receivable, net of allowance for doubtful accounts
                      of
      $121,972 and $174,834, respectively
                    
                    
                    2,989,745
                    
                    
                    
                    6,729,743Prepaid
      expenses and other current assets
                    
                    
                    768,852
                    
                    
                    
                    537,289Total
      Current Assets
                    
                    
                    3,798,273
                    
                    
                    
                    7,643,015Property
      and Equipment – net of accumulated depreciation
                      $2,761,186
      and $2,917,056,  respectively
                    
                    
                    5,191,212
                    
                    
                    
                    7,783,208Restricted
      cash
                    
                    
                    900,039
                    
                    
                    
                    1,199,784Intangible
      assets, net
                    
                    
                    547,232
                    
                    
                    
                    864,781Deferred
      financing fees
                    
                    
                    369,015
                    
                    
                    
                    513,412Deposits
                    
                    
                    191,686
                    
                    
                    
                    291,224Goodwill
                    
                    
                    84,505
                    
                    
                    
                    946,119Net
      assets of operations held for sale
                    
                    
                    1,089,341
                    
                    
                    
                    -TOTAL
      ASSETS
                    
                    $
                    12,171,303
                    
                    
                    $
                    19,241,543(Continued)





3




GENERAL
ENVIRONMENTAL MANAGEMENT, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS (Continued)





September
      30,
                            
                            
                            December
      31,2009
                            
                            
                            2008(Unaudited)LIABILITIES
      AND STOCKHOLDERS’ DEFICIENCYCURRENT
      LIABILITIES:Accounts
      payable
                            
                            $
                            4,082,904
                            
                            
                            $
                            3,499,178Accrued
      expenses
                            
                            
                            2,405,394
                            
                            
                            
                            2,620,224Accrued
      disposal costs
                            
                            
                            536,519
                            
                            
                            
                            743,474Payable
      to related party
                            
                            
                            741,719
                            
                            
                            
                            706,868Deferred
      rent
                            
                            
                            35,254
                            
                            
                            
                            41,202Derivative
      liabilities
                            
                            
                            4,931,579
                            
                            
                            
                            -Current
      portion of financing agreement
                            
                            
                            4,858,771
                            
                            
                            
                            10,366,544Current
      portion of long term obligations
                            
                            
                            -
                            
                            
                            
                            794,278Current
      portion of capital lease obligations
                            
                            
                            277,372
                            
                            
                            
                            623,007Liabilities
      of discontinued operations
                            
                            
                            -
                            
                            
                            
                            -Total
      Current Liabilities
                            
                            
                            17,869,512
                            
                            
                            
                            19,394,775LONG-TERM
      LIABILITIES :Financing
      agreement, net of current portion
                            
                            
                            5,425,678
                            
                            
                            
                            -Long
      term obligations, net of current portion
                            
                            
                            1,758,473
                            
                            
                            
                            1,025,294Capital
      lease obligations, net of current portion
                            
                            
                            734,430
                            
                            
                            
                            1,751,854Total
      Long-Term  Liabilities
                            
                            
                            7,918,581
                            
                            
                            
                            2,777,148STOCKHOLDERS’
      DEFICIENCYCommon
      stock, $.001 par value, 1,000,000,000 shares
                              authorized,
      14,557,653 and 12,691,409 shares issued
                              and
      outstanding
                            
                            
                            14,570
                            
                            
                            
                            12,692Additional
      paid in capital
                            
                            
                            54,450,995
                            
                            
                            
                            53,585,035Accumulated
      deficit
                            
                            
                            (68,082,355
                            )
                            
                            
                            (56,528,107
                            )Total
      Stockholders' Deficiency
                            
                            
                            (13,616,790
                            )
                            
                            
                            (2,930,380
                            )TOTAL
      LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
                            
                            $
                            12,171,303
                            
                            
                            $
                            19,241,543See
      accompanying notes to the condensed consolidated financial
      statements.




4




GENERAL
ENVIRONMENTAL MANAGEMENT, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)




Nine
      months ended
                                
                                
                                Three months
      endedSeptember30,
                                  2009
                                
                                
                                September
      30,
                                  2008
                                
                                
                                September
      30,
                                  2009
                                
                                
                                September
      30,
                                  2008REVENUES
                                
                                $
                                12,589,161
                                
                                
                                $
                                17,217,566
                                
                                
                                $
                                4,046,961
                                
                                
                                $
                                5,540,990COST
      OF REVENUES
                                
                                
                                12,906,589
                                
                                
                                
                                15,548,592
                                
                                
                                
                                3,839,343
                                
                                
                                
                                4,981,391GROSS
      PROFIT (LOSS)
                                
                                
                                (317,428
                                )
                                
                                
                                1,668,974
                                
                                
                                
                                207,618
                                
                                
                                
                                559,599OPERATING
      EXPENSES
                                
                                
                                6,607,657
                                
                                
                                
                                5,104,099
                                
                                
                                
                                2,351,196
                                
                                
                                
                                1,667,630OPERATING
      LOSS
                                
                                
                                (6,925,085
                                )
                                
                                
                                (3,435,125
                                )
                                
                                
                                (2,143,578
                                )
                                
                                
                                (1,108,031
                                )OTHER
      INCOME (EXPENSE):Interest
      income
                                
                                
                                19,403
                                
                                
                                
                                15,894
                                
                                
                                
                                18,794
                                
                                
                                
                                6,082Interest
      and financing costs
                                
                                
                                (3,724,968
                                )
                                
                                
                                (3,655,714
                                )
                                
                                
                                (1,800,800
                                )
                                
                                
                                (2,058,799
                                )Gain
      on disposal of fixed assets
                                
                                
                                66,050
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Gain
      on derivative financial instruments
                                
                                
                                988,342
                                
                                
                                
                                -
                                
                                
                                
                                2,688,452
                                
                                
                                
                                -Loss
      on extinguishment of debt
                                
                                
                                (4,039,358
                                )
                                
                                
                                -
                                
                                
                                
                                (1,858,007
                                )
                                
                                
                                -Other
      non-operating income
                                
                                
                                27,758
                                
                                
                                
                                35,173
                                
                                
                                
                                8,569
                                
                                
                                
                                18,479LOSS
      FROM CONTINUING OPERATIONS
                                
                                
                                (13,587,858
                                )
                                
                                
                                (7,039,772
                                )
                                
                                
                                (3,086,570
                                )
                                
                                
                                (3,142,269
                                )GAIN
      (LOSS) FROM DISCONTINUED OPERATIONS
                                
                                
                                1,077,337
                                
                                
                                
                                2,351,962
                                
                                
                                
                                (68,561
                                )
                                
                                
                                1,004,679NET
      LOSS
                                
                                $
                                (12,510,521
                                )
                                
                                $
                                (4,687,810
                                )
                                
                                $
                                (3,155,131
                                )
                                
                                $
                                (2,137,590
                                )Loss
      per common share, basic and diluted:Continuing
      operations
                                
                                $
                                (1.02
                                )
                                
                                $
                                (.56
                                )
                                
                                $
                                (0.22
                                )
                                
                                $
                                (.25
                                )Discontinued
      operations
                                
                                
                                .08
                                
                                
                                
                                0.19
                                
                                
                                
                                -
                                
                                
                                
                                .08Net
      loss
                                
                                $
                                (.94
                                )
                                
                                $
                                (.37
                                )
                                
                                $
                                (.22
                                )
                                
                                $
                                (.17
                                )Weighted
      average shares of common stock
                                  outstanding,
      basic and diluted
                                
                                
                                13,348,530
                                
                                
                                
                                12,673,885
                                
                                
                                
                                14,283,470
                                
                                
                                
                                12,673,885




See
accompanying notes to the condensed consolidated financial
statements




5




GENERAL
ENVIRONMENTAL MANAGEMENT, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY (UNAUDITED)


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009





AdditionalCommon
      Stock
                    
                    
                    Paid-in
                    
                    
                    AccumulatedShares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Deficit
                    
                    
                    TotalBalance,
      December  31, 2008
                    
                    
                    12,691,409
                    
                    
                    $
                    12,692
                    
                    
                    $
                    53,585,035
                    
                    
                    $
                    (56,528,107
                    )
                    
                    $
                    (2,930,380
                    )Cumulative
      effect of change in accounting principle
                      January
      1, 2009 reclassification of embedded
                      featureof
      equity linkedfinancial
      instruments
                      to
      derivative liabilities
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (1,674,036
                    )
                    
                    
                    956,273
                    
                    
                    
                    (717,763
                    )Stock
      compensation cost for value of vested options
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    642,843
                    
                    
                    
                    
                    
                    
                    
                    642,843Issuance
      of shares on exercise of  options
                    
                    
                    250
                    
                    
                    
                    
                    
                    
                    
                    187
                    
                    
                    
                    
                    
                    
                    
                    187Issuance
      of shares on exercise of warrants
                    
                    
                    6,250
                    
                    
                    
                    6
                    
                    
                    
                    3,744
                    
                    
                    
                    
                    
                    
                    
                    3,750Issuance
      of shares on conversion of debt
                    
                    
                    1,009,744
                    
                    
                    
                    1,022
                    
                    
                    
                    639,456
                    
                    
                    
                    
                    
                    
                    
                    640,478Issuance
      of shares to secured lender
                    
                    
                    600,000
                    
                    
                    
                    600
                    
                    
                    
                    449,400
                    
                    
                    
                    
                    
                    
                    
                    450,000Issuance
      of warrants on conversion of interest
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    231,140
                    
                    
                    
                    
                    
                    
                    
                    231,140Fair
      value of warrants for services
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    458,476
                    
                    
                    
                    
                    
                    
                    
                    458,476Issuance
      of shares for services
                    
                    
                    250,000
                    
                    
                    
                    250
                    
                    
                    
                    114,750
                    
                    
                    
                    
                    
                    
                    
                    115,000Net
      loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (12,510,521
                    )
                    
                    
                    (12,510,521
                    )Balance,
      September 30,  2009
                    
                    
                    14,557,653
                    
                    
                    $
                    14,570
                    
                    
                    $
                    54,450,995
                    
                    
                    $
                    (68,082,355
                    )
                    
                    $
                    (13,616,790
                    )





See
accompanying notes to the condensed consolidated financial
statements




6




GENERAL
ENVIRONMENTAL MANAGEMENT, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)





Nine Months
      EndedSeptember 30,2009
                        
                        
                        2008OPERATING
      ACTIVITIESNet
      Loss
                        
                        $
                        (12,510,521
                        )
                        
                        $
                        (4,687,810
                        )Gain
      from discontinued operations
                        
                        
                        (1,077,337
                        )
                        
                        
                        (2,351,962
                        )Net
      loss from continuing operations
                        
                        
                        (13,587,858
                        )
                        
                        
                        (7,039,772
                        )Adjustments
      to reconcile net loss to cash provided by
                          (used
      in) operating activitiesDepreciation
      and amortization
                        
                        
                        738,534
                        
                        
                        
                        420,294Amortization
      of discount on financing agreement
                        
                        
                        1,657,287
                        
                        
                        
                        2,141,610Fair
      value of vested options
                        
                        
                        642,843
                        
                        
                        
                        634,213Issuance
      of shares and warrants for services
                        
                        
                        573,476
                        
                        
                        
                        57,405Amortization
      of discount on notes
                        
                        
                        137,393
                        
                        
                        
                        210,281Amortization
      of deferred financing fees
                        
                        
                        144,397
                        
                        
                        
                        410,127Cost
      to induce conversion of debt
                        
                        
                        388,333
                        
                        
                        
                        -Gain
      on change in derivative instruments
                        
                        
                        (988,342
                        )
                        
                        
                        -Loss
      on extinguishment of debt
                        
                        
                        4,039,358
                        
                        
                        
                        -Changes
      in assets and liabilities:Accounts
      Receivable
                        
                        
                        2,187,903
                        
                        
                        
                        2,162,436Prepaid
      and other current assets
                        
                        
                        (275,303
                        )
                        
                        
                        (198,422
                        )Deposits
      and restricted cash
                        
                        
                        352,840
                        
                        
                        
                        (52,526
                        )Accounts
      Payable
                        
                        
                        914,314
                        
                        
                        
                        (1,598,916
                        )Accrued
      interest on related party notes
                        
                        
                        35,340
                        
                        
                        
                        -Accrued
      interest on notes payable
                        
                        
                        224,896
                        
                        
                        
                        28,141Accrued
      expenses and other liabilities
                        
                        
                        (169,057
                        )
                        
                        
                        (368,949
                        )NET
      CASH USED IN CONTINUING OPERATIONS
                        
                        
                        (2,983,646
                        )
                        
                        
                        (3,194,078
                        )NET
      CASH PROVIDED BY DISCONTINUED OPERATIONS
                        
                        
                        3,366,451
                        
                        
                        
                        2,147,483NET
      CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
                        
                        
                        382,805
                        
                        
                        
                        (1,046,595
                        )INVESTING
      ACTIVITIESAcquisitions,
      net of cash received, and notes payable issued to seller
                        
                        
                        -
                        
                        
                        
                        (2,150,000
                        )Proceeds
      from sale of property and equipment
                        
                        
                        30,674
                        
                        
                        
                        -Additions
      to property and equipment
                        
                        
                        -
                        
                        
                        
                        (76,598
                        )NET
      CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES OF CONTINUING
      OPERATIONS
                        
                        
                        30,674
                        
                        
                        
                        (2,226,598
                        )NET
      CASH USED IN INVESTING ACTIVITIES OF DISCONTINUED
    OPERATIONS
                        
                        
                        (269,571
                        )
                        
                        
                        (214,348
                        )NET
      CASH USED IN INVESTING ACTIVITIES
                        
                        
                        (238,897
                        )
                        
                        
                        (2,440,946
                        )FINANCING
      ACTIVITIESNet
      advances from notes payable – financing agreement
                        
                        
                        (132,581
                        )
                        
                        
                        4,511,596Advances
      from related parties
                        
                        
                        204,943
                        
                        
                        
                        505,101Proceeds
      from exercise of options and warrants
                        
                        
                        3,937
                        
                        
                        
                        -Payment
      for deferred financing fees
                        
                        
                        
                        
                        
                        
                        (147,607
                        )Payment
      of notes payable
                        
                        
                        (37,500
                        )
                        
                        
                        (1,302,500
                        )Repayment
      of convertible notes
                        
                        
                        -
                        
                        
                        
                        -Payment
      on capital leases
                        
                        
                        (202,142
                        )
                        
                        
                        (164,631
                        )NET
      CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES OF CONTINUING
      OPERATIONS
                        
                        
                        (163,343
                        )
                        
                        
                        3,401,959NET
      CASH USED IN FINANCING ACTIVITIES OF DISCONTINUED
    OPERATIONS
                        
                        
                        (316,872
                        )
                        
                        
                        (264,473
                        )NET
      CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
                        
                        
                        (480,215
                        )
                        
                        
                        3,137,486DECREASE  IN
      CASH AND CASH EQUIVALENTS
                        
                        
                        (336,307
                        )
                        
                        
                        (350,055
                        )(continued)




7




GENERAL
ENVIRONMENTAL MANAGEMENT, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)


(UNAUDITED)




Nine Months
      EndedSeptember 30,2009
                                      
                                      
                                      2008Cash
      at beginning of period
                                      
                                      
                                      375,983
                                      
                                      
                                      
                                      954,581CASH
      AT END OF PERIOD
                                      
                                      $
                                      39,676
                                      
                                      
                                      $
                                      604,526SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for:Interest
      Expense
                                      
                                      $
                                      1,075,928
                                      
                                      
                                      $
                                      852,648SUPPLEMENTAL
      DISCLOSURE OF NON – CASH INVESTING AND
                                        FINANCING
      ACTIVITIES:Acquisition
      of leased equipment and capital lease obligations
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      1,658,066Conversion
      of debt to common stock
                                      
                                      
                                      483,284
                                      
                                      
                                      
                                      -Issuance
      of common stock to related party for extension of debt
                                      
                                      
                                      -
                                      
                                      
                                      
                                      220,000Issuance
      of note payable on acquisition
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,250,000Valuation
      of warrants allocated to deferred fees
                                      
                                      
                                      -
                                      
                                      
                                      
                                      179,982Fair
      value of warrants and valuation discount after
modification
                                      
                                      
                                      8,826,697
                                      
                                      
                                      
                                      -Fair
      value of warrants issued to related party for extension of
      debt
                                      
                                      
                                      -
                                      
                                      
                                      
                                      222,500Closing
      fees due to related party included as deferred financing
    fees
                                      
                                      
                                      -
                                      
                                      
                                      
                                      250,000Cumulative
      effect of adoption of accounting principle and establishment
                                        of
      derivative liability on:Notes
      payable
                                      
                                      
                                      1,408,828
                                      
                                      
                                      
                                      -Stockholders’
      deficiency
                                      
                                      
                                      717,763
                                      
                                      
                                      
                                      -See
      accompanying notes to the condensed consolidated financial
      statements




8





GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)






1.
            ORGANIZATION
      AND PRINCIPAL ACTIVITIES





ORGANIZATION
AND DESCRIPTION OF BUSINESS





Ultronics
Corporation  ( “the Company”)  was incorporated in the state
of Nevada on March 14, 1990 to serve as a vehicle to effect a merger, exchange
of capital stock, asset acquisition or other business combination with a
domestic or foreign private business.  On February 14, 2005 the
Company acquired all of the outstanding shares of General Environmental
Management, Inc (“GEM”), a Delaware Corporation.  The acquisition was
accounted for as a reverse merger (recapitalization) with GEM deemed to be the
accounting acquirer, and Ultronics Corporation the legal
acquirer.  Subsequent to the acquisition, the Company changed its name
to General Environmental Management, Inc.





GEM is a
fully integrated environmental service firm structured to provide EHS compliance
services, field services, transportation, off-site treatment, and on-site
treatment services.  Through its services GEM assists clients in
meeting regulatory requirements for the disposal of hazardous and non-hazardous
waste.




BASIS OF
PRESENTATION





The
condensed consolidated interim financial statements included herein have been
prepared by the Company, pursuant to the rules and regulations of the Securities
and Exchange Commission, in the opinion of management, include all adjustments
which, except, as described elsewhere herein, are of a normal recurring nature,
necessary for a fair presentation of the financial position, results of
operations, and cash flows for the period presented. The financial statements
presented herein should be read in conjunction with the financial statements
included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2008 filed with the Securities and Exchange Commission.





The
results for the interim periods are not necessarily indicative of results for
the entire year.





GOING
CONCERN





The  accompanying
condensed consolidated financial statements have been prepared assuming the
Company will continue as a going concern. The Company incurred a net loss of
$12,510,521 during the nine months  ended September 30, 2009, and as
of September 30, 2009  the Company had current liabilities
exceeding current assets by $14,071,239 and had a stockholders’ deficiency of
$13,616,790. These matters raise substantial doubt about the Company’s ability
to continue as a going concern.





Management
is executing a plan to divest certain parts of the business in order to satisfy
obligations of its senior lender.  In conjunction with that strategy,
the assets of GEM Mobile Treatment Services (GEM MTS) on August 17, 2009 GEM MTS
was sold to MTS Acquisition Company, Inc., a holding company, and will be owned
and operated by two former senior executives of GEM.  Consideration for the
sale was in the form of promissory notes in the aggregate amount of $5.6
million, the assignment of approximately $1.0 million of accounts payable and
possible future royalties.  The consideration was immediately assigned
to CVC California, LLC, ("CVC") GEM's senior secured lender.  As the
notes are paid to CVC, GEM's indebtedness to CVC will be reduced. Total
reduction in indebtedness to CVC could amount to more than $7
million.




9


GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)


The
Company’s current source of cash is borrowings on its revolving line of credit
with the senior lender.  The collateral for the line is accounts
receivable.  Based on a borrowing formula supported by collections of
accounts receivable, the Company borrows cash to support
operations.  In conjunction with the agreements renegotiated as
described in Note 8, interest and principal on outstanding notes has been
deferred.  These borrowings are impacted by changes in accounts
receivable as a result of revenue fluctuations, economic trends and collection
activities. However, there can be no assurances that the Company will be
successful in this regard or will be able to eliminate its working capital
deficit or operating losses. The accompanying condensed consolidated financial
statements do not contain any adjustments which may be required as a result of
this uncertainty.




2.   SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES




(a)  Principles
of Consolidation





The
consolidated financial statements include the accounts of General Environmental
Management, Inc., a Nevada corporation, and it’s wholly owned subsidiaries,
General Environmental Management, Inc., a  Delaware corporation, GEM
Mobile Treatment Services, Inc., a California corporation, Island Environmental
Services, Inc., a California corporation and General Environmental Management of
Rancho Cordova, LLC. Inter-company accounts and transactions have been
eliminated.





(b)  Use
of estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the Company’s
management to make certain estimates and assumptions.  These estimates
and assumptions affect the reported amounts of assets and liabilities and
disclosure of the contingent assets and liabilities at the date of the financial
statements.  These estimates and assumptions will also affect the
reported amounts of certain revenues and expenses during the reporting
period.  Actual results could differ materially based on any changes
in the estimates and assumptions that the Company uses in the preparation of its
financial statements that are reviewed no less than annually.  Actual
results could differ materially from these estimates and assumptions due to
changes in environmental-related regulations or future operational plans, and
the inherent imprecision associated with estimating such future
matters.





(c)
Revenue Recognition





The
Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the price is fixed or
determinable, and collection is reasonably assured.





The
Company is a fully integrated environmental service firm structured to provide
field services, technical services, transportation, off-site treatment, on-site
treatment services, and environmental health and safety (“EHS”) compliance
services.  Through our services, we assist clients in meeting
regulatory requirements from the designing stage to the waste disposition stage.
The technicians who provide these services are billed at negotiated rates.
Transportation is provided to a regulated disposal site or the Company’s
regulated consolidation site.  The Company provides comprehensive
services including documentation and logistics. These services are billed and
revenue recognized when the service is performed and completed. When the service
is billed, client costs are accumulated and accrued.




10




GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)






Our field
services consist primarily of handling, packaging, and transporting a wide
variety of liquid and solid wastes of varying amounts. We provide the fully
trained labor and materials to properly package hazardous and non-hazardous
waste according to requirements of the Environmental Protection Agency and the
Department of Transportation. Small quantities of laboratory chemicals are
segregated according to hazard class and packaged into appropriate containers or
drums. Packaged waste is profiled for acceptance at a client’s selected
treatment, storage and disposal facility (TSDF) and tracked electronically
through our systems. Once approved by the TSDF, we provide for the
transportation of the waste utilizing tractor-trailers or bobtail trucks. The
time between picking up the waste and transfer to an approved TSDF is usually
less than 10 days.  The Company recognizes revenue for waste picked up
and received waste at the time pick up or receipt occurs and recognizes the
estimated cost of disposal in the same period. For the Company’s TSDF located in
Rancho Cordova, CA, costs to dispose of waste materials located at the Company’s
facilities are included in accrued disposal costs.  Due to the limited
size of the facility, waste is held for only a short time before transfer to a
final treatment, disposal or recycling facility.





(d)
Concentrations of Credit Risks





The
Company’s financial instruments that are exposed to concentrations of credit
risk consist principally of cash and trade receivables.  The Company
places its cash in what it believes to be credit-worthy financial
institutions.  However, cash balances have exceeded FDIC insured
levels at various times.  The Company has not experienced any losses
in such accounts and believes it is not exposed to any significant risk in
cash.





The
Company’s trade receivables result primarily from removal or transportation of
waste, and the concentration of credit risk is limited to a broad customer base
located throughout the Western United States.





During
the nine months ended September 30, 2009 and 2008, one customer accounted
for 6% and 13% of revenues, respectively. During the three months ended
September 30, 2009 and 2008, one customer accounted for 16% and 9% of revenue.
As of September 30, 2009 there was one customer that accounted for 22% of
accounts receivable.





(e) Fair
Value of Financial Instruments





Fair
Value Measurements are adopted by the Company based on the authoritative
guidance provided by the Financial Accounting Standards Board , with the
exception of the application of the statement to non-recurring, non-financial
assets and liabilities as permitted. The adoption based on the authoritative
guidance provided by the Financial Accounting Standards Board did not have a
material impact on the Company's fair value measurements. Based on the
authoritative guidance provided by the Financial Accounting Standards Board
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants at the
measurement date. FASB authoritative guidance establishes a fair value
hierarchy, which prioritizes the inputs used in measuring fair value into three
broad levels as follows:





Level 1-
Quoted prices in active markets for identical assets or
liabilities.


Level 2-
Inputs, other than the quoted prices in active markets, that are observable
either directly or indirectly.


Level 3-
Unobservable inputs based on the Company's assumptions.




FASB
issued authoritative guidance that requires the use of observable market data if
such data is available without undue cost and effort.




11


GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)


The
following table presents certain investments and liabilities of the Company’s
financial assets measured and recorded at fair value on the Company’s condensed
consolidated balance sheets on a recurring basis and their level within the fair
value hierarchy as of September 30, 2009 (unaudited):





Level 1
                  Level 2
                  Level 3
                  TotalFair
      value of warrants
                    and
      embedded
                    derivatives
                  -
                  -
                  $    4,931,579
                  $    4,931,579




See Notes
7 and 11 for more information on these financial instruments.




(f)  Derivative
Financial Instruments




The
Company does not use derivative instruments to hedge exposures to cash flow,
market or foreign currency risks. The Company evaluates all of its financial
instruments to determine if such instruments are derivatives or contain features
that qualify as embedded derivatives. For derivative financial instruments that
are accounted for as liabilities, the derivative instrument is initially
recorded at its fair value and is then re-valued at each reporting date, with
changes in the fair value reported in the condensed consolidated statements of
operations.  For stock-based derivative financial instruments, the
Company uses the Black-Scholes option pricing model to value the derivative
instruments at inception and on subsequent valuation dates.  The
classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is evaluated at the end of each
reporting period.  Derivative instrument liabilities are classified in
the balance sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument could be required within 12 months of
the balance sheet date.




(g) Stock
Compensation Costs





The
Company periodically issues stock options and warrants to employees and
non-employees in capital raising transactions, for services and for financing
costs.  Stock-based compensation is measured at the grant date, based
on the fair value of the award, and is recognized as expense over the requisite
service period.  Options vest and expire according to terms
established at the grant date.





(h) Net
Loss per Share





The
Financial Accounting Standard Board, requires presentation of basic earnings per
share ("Basic EPS") and diluted earnings per share ("Diluted
EPS").  Basic income (loss) per share is computed by dividing income
(loss) available to common stockholders by the weighted average number of common
shares outstanding during the period.  Diluted earnings per share
gives effect to all dilutive potential common shares outstanding during the
period.




These
potentially dilutive securities were not included in the calculation of loss per
share for the three months and nine months ended September 30, 2009 and 2008
because the Company incurred a loss during such periods and thus their effect
would have been anti-dilutive.  Accordingly, basic and diluted loss
per share is the same for the three and nine months ended September 30, 2009 and
2008.





At
September 30, 2009 and 2008, potentially dilutive securities consisted of
convertible securities, outstanding common stock purchase warrants and stock
options to acquire an aggregate
of 25,174,401 shares and 16,233,735 shares,
respectively.




12


GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)


(i)
Recent Accounting Pronouncements




In June
2009, the FASB issued authoritative guidance on accounting standards
codification and the hierarchy of generally accepted accounting principles.” The
FASB Accounting Standards CodificationTM (“Codification”) has become the source
of authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
accordance with GAAP. All existing accounting standard documents are superseded
by the Codification and any accounting literature not included in the
Codification will not be authoritative. However, rules and interpretive releases
of the Securities Exchange Commission (“SEC”) issued under the authority of
federal securities laws will continue to be sources of authoritative GAAP for
SEC registrants. The FASB authoritative guidance is effective for interim and
annual reporting periods ending after September 15, 2009. Therefore, beginning
with our quarter ending September 30, 2009, all references made by it to GAAP in
its consolidated financial statements now use the new Codification numbering
system. The Codification does not change or alter existing GAAP and, therefore,
it does not have an impact on our financial position, results of operations and
cash flows.





On July
1, 2009, the Company adopted authoritative guidance issued by the FASB on
business combinations. The guidance retains the fundamental requirements that
the acquisition method of accounting (previously referred to as the purchase
method of accounting) be used for all business combinations, but requires a
number of changes, including changes in the way assets and liabilities are
recognized and measured as a result of business combinations. It also requires
the capitalization of in-process research and development at fair value and
requires the expensing of acquisition-related costs as incurred. We will apply
this guidance to business combinations completed after July 1,
2009.  Adoption of the new guidance did not have a material impact on
our financial statements.





In
October 2009, the FASB issued authoritative guidance on revenue recognition that
will become effective for the Company beginning July 1, 2010, 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 May
2009, the FASB issued new requirements for reporting subsequent events. These
requirements set forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. Disclosure of the date through which an
entity has evaluated subsequent events and the basis for that date is also
required.





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.




13


GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)


3.  
ACQUISITION




On August
31, 2008, the Company entered into a stock purchase agreement with Island
Environmental Services, Inc. of Pomona, California ("Island"), a privately held
company, pursuant to which the Company acquired all of the issued and
outstanding common stock of Island, a California-based provider of hazardous and
non-hazardous waste removal and remediation services to a variety of private and
public sector establishments. In consideration of the acquisition of the issued
and outstanding common stock of Island, the Company paid $2.25 million in cash
to the stockholders of Island and issued $1.25 million in three year promissory
notes (“Notes”, see note 9).  Other consideration is payable based on
the performance of the acquired entity.  The Notes bear interest at
8%, payable quarterly, and the entire principal is due 36 months after closing.
As a result of the agreement, Island becomes a wholly-owned subsidiary of the
Company.





The terms
of purchase agreement included an accelerated note payment of $750,000 due in
September, 2009 if certain events occurred.  In conjunction with the
restructuring of the senior securities, the Company’s senior lender required
that this payment be deferred.  Per an amendment to the two promissory
notes issued for the transaction, all current and future quarterly interest
payments and the payment of $750,000 in principal owing under the notes will be
payable on August 31, 2011.





14


GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)


The
following sets out the pro forma operating results for the three and nine months
ended September 30, 2008 for the Company had the acquisition occurred as of
January 1, 2008:




Unaudited


Three and
Nine months ended September 30, 2008


Proforma
(Unaudited)




Nine
                            months
                            ended
                          
                          
                          Three
                            months
                            endedSeptember
      30,
                            2008
                          
                          
                          September
      30, 2008Net
      sales
                          
                          $
                          24,515,085
                          
                          
                          $
                          10,038,594Cost
      of sales
                          
                          
                          20,081,827
                          
                          
                          
                          7,754,888Gross
      profit (Loss)
                          
                          
                          4,433,258
                          
                          
                          
                          2,283,706Operating
      expenses
                          
                          
                          9,164,204
                          
                          
                          
                          4,367,031Operating
      loss
                          
                          
                          (4,730,946
                          )
                          
                          
                          (2,083,325
                          )Other
      income (expense):Interest
      income
                          
                          
                          52,922
                          
                          
                          
                          28,424Interest
      expense and amortization of deferred financing costs
                          
                          
                          (3,662,522
                          )
                          
                          
                          (2,062,208
                          )Other
      non-operating income
                          
                          
                          113,188
                          
                          
                          
                          77,929Loss
      from operations
                          
                          
                          (8,227,358
                          )
                          
                          
                          (4,039,180
                          )Gain
      (loss) from discontinued operations
                          
                          
                          2,351,965
                          
                          
                          
                          1,004,679Net
      Loss
                          
                          $
                          (5,875,393
                          )
                          
                          $
                          (3,034,501
                          )Loss
      per weighted average share, basic and diluted
                          
                          $
                          (.46
                          )
                          
                          $
                          (.24
                          )





15


GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)


4.   DISCONTINUED
OPERATIONS





On August
17, 2009, the Company entered into a Stock Purchase
Agreement  ("Agreement") with MTS Acquisition Company ("MTS"), a
privately held company, pursuant to which the Company sold all of the issued and
outstanding common stock of GEM Mobile Treatment Services, Inc. (“GEM MTS”). GEM
MTS  is a provider of mobile wastewater treatment and vapor recovery
services with locations in California and Texas.





GEM MTS
was purchased by MTS, a corporation owned by two former senior executives of the
Company.  Consideration for the sale was in the form of a promissory
note in the aggregate amount of $5.6 million, the assumption by MTS of
approximately $1.0 million of accounts payable and possible future
royalties.  The consideration was immediately assigned by Company to
CVC California, LLC, ("CVC") GEM's senior secured lender.  As the
notes are paid to CVC, GEM's indebtedness to CVC will be reduced. At the time of
the sale, the net assets of MTS were $1,089,341.





The
promissory note for $5,600,000 bears interest at 8%.  On the first day
of each calendar month commencing September 1, 2009 through and including August
1, 2010, accrued interest on the outstanding principal is due and
payable.  Thereafter, principal and interest under this Note is
payable in thirty-six (36) consecutive equal monthly installments of principal
and interest of $174,321.50 each, with the first installment due and payable on
September 1, 2010, and with subsequent installments due and payable on the first
day of each calendar month thereafter through and including August 1, 2013. All
or any portion of the unpaid principal balance of this note, together with all
accrued and unpaid interest on the principal amount being prepaid, may at the
MTS’s option be prepaid in whole or in part, without premium or penalty. The
Note is secured by liens on substantially all of assets and properties of
MTS.





Concurrent
with the closing of the sale of GEM MTS, the Company assigned with full recourse
and full representation and warranty of title and ownership the promissory note
to the Company’s senior lender (See Note 8). The Company also entered into a
subordinated collateral agreement with GEM MTS in order to secure potential
obligations related to indemnification payments it may hereafter become
obligated to make to MTS in accordance with the Agreement.




The
transaction resulted in the Company receiving $4,510,659 excess of consideration
($5.6 million note) over the $1,089,341 of net assets to be disposed. The
Company analyzed the current accounting guidance and determined that the gain
included in this transaction shouldnot be
recognized in the current period.  In making  this
decision the Company determined that the buyers initial investment did not
qualify for recognition of profit by the full accrual method as the company did
not receive sufficient cash proceeds upon the consummation of the transaction,
and collection of the amounts due
are uncertain.  Under this method the note receivable has not
been recorded, and no profit will be recognized until cash payments by the buyer
exceed the sellers cost of the assets.  The transaction will be
reassessed in the future to determine if it has met the criteria for the full
accrual method, and at that time any unrecognized income will be recognized in
the income statement. The Company has reflected the $1,089,341 of net assets of
MTS sold at the date of the transaction as Net Assets of Operations Held for
Sale on the accompanying September 30, 2009 balance sheet.




16


GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)


The
operating results of the discontinued operations for the three and nine months
ended September 30, 2009 and 2008 were as follows:




Nine
      months ended
                
                
                Three months
      endedSeptember30,
                  2009
                
                
                September
      30,
                  2008
                
                
                September
      30,
                  2009
                
                
                September30,
                  2008Net
      sales
                
                $
                7,124,237
                
                
                $
                7,771,644
                
                
                $
                661,195
                
                
                $
                3,089,985Cost
      of sales
                
                
                5,432,842
                
                
                
                4,779,397
                
                
                
                635,180
                
                
                
                1,878,884Gross
      profit (Loss)
                
                
                1,691,395
                
                
                
                2,992,247
                
                
                
                26,015
                
                
                
                1,211,101Operating
      expenses
                
                
                524,816
                
                
                
                547,007
                
                
                
                81,726
                
                
                
                177,548Operating
      profit (loss)
                
                
                1,166,579
                
                
                
                2,445,240
                
                
                
                (55,711
                )
                
                
                1,033,553Other
      income (expense):Interest
      income
                
                
                151
                
                
                
                -
                
                
                
                -
                
                
                
                -Interest
      expense and financing costs
                
                
                (89,068
                )
                
                
                (93,278
                )
                
                
                (12,850
                )
                
                
                (28,874
                )Gain
      on disposal of fixed assets
                
                
                (325
                )
                
                
                -
                
                
                
                -
                
                
                
                -Gain
      (loss) from discontinued operations
                
                $
                1,077,337
                
                
                $
                2,351,962
                
                
                $
                (68,561
                )
                
                $
                1,004,679




17


GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)


5.   PROPERTY
AND EQUIPMENT




Property
and Equipment consists of the following at:




September
      30,
                              2009
                            
                            
                            December
      31,
                              2008(Unaudited)Land
                            
                            $
                            905,000
                            
                            
                            $
                            905,000Building
      and improvements
                            
                            
                            1,140,656
                            
                            
                            
                            1,140,656Vehicles
                            
                            
                            2,518,815
                            
                            
                            
                            2,687,128Equipment
      and furniture
                            
                            
                            422,240
                            
                            
                            
                            411,064Warehouse
      equipment
                            
                            
                            2,719,960
                            
                            
                            
                            5,277,892Leasehold
      improvements
                            
                            
                            209,881
                            
                            
                            
                            242,678Asset
      retirement obligations
                            
                            
                            35,846
                            
                            
                            
                            35,8467,952,398
                            
                            
                            
                            10,700,264Less
      accumulated depreciation and amortization
                            
                            
                            2,761,186
                            
                            
                            
                            2,917,056Property
      and equipment net of accumulated depreciation
                              and
      amortization
                            
                            $
                            5,191,212
                            
                            
                            $
                            7,783,208




Property
and equipment includes assets under capital lease with a cost of $1,840,561 and
$3,248,546 and accumulated amortization of $744,509 and $805,912 as of September
30, 2009 and December 31, 2008, respectively.





Depreciation
and amortization expense was $738,534 and $420,294 for the nine months
ended September 30, 2009 and 2008 respectively.




18


GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)


6.
            GOODWILL
      AND INTANGIBLE ASSETS





The
Company accounts for goodwill and intangible assets in accordance with guidance
of the FASB as such,   intangibles with definite
lives  amortized on a straight-line basis over the lesser of their
estimated useful lives or contractual terms. Goodwill and intangibles with
indefinite lives are evaluated at least annually for impairment by comparing the
asset’s estimated fair values with its carrying value, based on cash flow
methodology.





Intangible
assets consist of the following at:





September
      30,
                    2009
                  
                  
                  December
      31,
                    2008(Unaudited)Rancho
      Cordova acquisition – permit
                  
                  $
                  475,614
                  
                  
                  $
                  475,614Prime
      acquisition – customers
                  
                  
                  400,422
                  
                  
                  
                  400,422GMTS  acquisition
      – customers
                  
                  
                  -
                  
                  
                  
                  438,904GMTS  acquisition
      – permits
                  
                  
                  -
                  
                  
                  
                  27,090Accumulated
      amortization
                  
                  
                  (328,804
                  )
                  
                  
                  (477,249
                  )$
                  547,232
                  
                  
                  $
                  864,781





Permit
costs have been capitalized and are being amortized over the life of the permit,
including expected renewal periods.  Customer Lists acquired are being
amortized over their useful life.






7.  
RELATED PARTY TRANSACTIONS





The
Company has entered into several transactions with General Pacific Partners
(“GPP”), a company operated by a prior member of the Board of Directors of the
Company’s wholly owned subsidiary, General Environmental Management, Inc. of
Delaware. GPP owns 5% of the Company’s common stock at September 30,
2009.





During
February and March 2008, General Pacific Partners made two unsecured advances to
the Company totaling $472,500. The proceeds were used for working capital
purposes. The rate of interest on the advances is 10% per annum. The funds were
originally due six months from the date of issuance. On June 30, 2008, the
maturity date was extended an additional six months to February 14, 2009 and
March 19, 2009. In connection with the note extension the Company issued (i)
200,000 shares of its common stock valued at $220,000 and, (ii) a warrant to
purchase up to 225,000 shares of its common stock at a price of $0.60 for a
period of seven (7) years. The Company valued the warrants at $222,500 using a
Black - Scholes option pricing model.  For the Black - Scholes
calculation, the Company assumed no dividend yield, a risk free interest rate of
4.78 %, expected volatility of 75.88 % and an expected term for the warrants of
7 years.  The value of the common shares of $220,000 and value of the
warrants of $222,500 has been reflected by the Company as a valuation discount
at issuance and offset to the face amount of the Notes.  The Valuation
discount is being amortized to interest expense over the life of the loan based
upon the effective interest method. Finance costs for the nine months ended
September 30, 2009 includes $109,324 for amortization of this discount. The
valuation discount was fully amortized at September 30, 2009.  On
February 13, 2009 the maturity date was extended until March 31, 2010. As of
September 30, 2009, $534,219 remained outstanding (including accrued interest of
$61,719).




19


GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)


In 2008,
GPP provided services related to the financing completed with CVC California,
LLC. Pursuant to these services the Company agreed to pay GPP $250,000. The cash
paid has been reflected as part of deferred financing fees on the accompanying
balance sheet at June 30, 2009 and December 31, 2008. During the six months
ended June 30, 2009 GPP agreed to convert $150,000 of the cash owed to them into
250,000 shares of the Company’s common stock. The balance due to GPP as of
September 30, 2009 is $100,000. During the nine months ended September 30, 2009,
the Company incurred $164,756 for other fees and costs, for which the Company
issued 274,594 shares of its common stock in settlement for amounts
due.





During the
nine months ended September 30, 2009 a related individual made an
unsecured advance with no formal terms of repayment to the Company totaling
$115,000. The proceeds were used for working capital purposes. During the nine
months ended September 30, 2009 the Company made payments on the advance
totaling $7,500. At September 30, 2009 the balance due on the advance was
$107,500.





Letter of Credit
Services





On July
1, 2008 the Company entered into an agreement with GPP wherein GPP would provide
letters of credit to support projects contracted to GEM. The fees under the
agreement consisted of (i) a commitment fee of 2% of the value of the letter of
credit, (ii) interest at a rate to be negotiated, and (iii) a seven year warrant
to purchase shares of the Company’s common stock at $0.60 per
share.




Software
Support





In 2008,
the Company entered into a three year agreement with Lapis Solutions, LLC,
(Lapis) a company managed by a prior member of the Board of Directors of the
Company’s wholly owned subsidiary, General Environmental Management, Inc. of
Delaware, wherein Lapis would provide support and development services for the
Company’s proprietary software GEMWARE. Services costs related to the agreement
total $10,800 per month. As of September 30, 2009 and December 31, 2008,
$283,840 and $92,555 respectively, of the fees had been prepaid to Lapis and
included in the accompanying condensed balance sheets as part of prepaid
expenses. These balances will be amortized over the next three quarters as Lapis
provides services related to special projects in process for the
Company.





Related Party Lease
Agreement




During
the third quarter ended September 30, 2007, the Company entered into a lease for
$180,846 of equipment with current investors of the Company.  The
lease transaction was organized by General Pacific Partners, a related party,
with these investors.  The lease has been classified as a capital
lease and included in property and equipment (See note 10) and requires payments
of $4,000 per month beginning August 1, 2007 through 2012.  As an
inducement to enter into the lease, the Company issued the leasing entity
100,000 two year warrants to purchase common stock at $1.20. These warrants were
valued at $187,128 using the Black - Scholes valuation model and such cost is
being amortized to expense over the life of the lease.  For the Black
- Scholes calculation, the Company assumed no dividend yield, a risk free
interest rate of 4.78 %, expected volatility of 56.60 % and an expected term for
the warrants of 2 years.




20


GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)


8.
            SECURED
      FINANCING AGREEMENTS





During
the period 2008 through 2009, the Company entered into a series of financings
with CVC California,
LLC (“CVC”). The amounts due under these financings at September 30, 2009 and December
31, 2008 are as follows:





September
      30,
                      
                      
                      December
      31,2009
                      
                      
                      2008(Unaudited)Secured
      Notes from CVC California
                      
                      $
                      13,579,328
                      
                      
                      $
                      13,547,909Valuation
      Discount
                      
                      
                      (3,294,879
                      )
                      
                      
                      (3,181,365
                      )10,284,449
                      
                      
                      
                      10,366,544Less
      current portion
                      
                      
                      (4,858,771
                      )
                      
                      
                      (10,366,544
                      )Financing
      agreement, net of current portion
                      
                      $
                      5,425,678
                      
                      
                      $
                      -




Note Agreements with CVC
California





On
September 4, 2008 General Environmental Management, Inc. (the “Company”) entered
into a series of agreements with CVC California, LLC, a Delaware limited
liability company (“CVC”), each dated as of August 31, 2008, whereby the Company
issued to CVC (i) a secured convertible term note ("Note") in the principal
amount of $6.5 million and (ii) a secured non-convertible revolving credit note
("Revolving Note") of up to $7.0 million; (iii) 6 year warrants  to
purchase 1,350,000 shares of our common stock at a price of $0.60 per share;
(iv) 6 year warrants to purchase 1,350,000 shares of our common stock at a price
of $1.19 per share; and, (v) 6 year warrants to purchase 300,000 shares of our
common stock at a price of $2.25 per share.   The principal
amount of the Note carried an interest rate of nine and one half percent,
subject to adjustment, with interest initially payable monthly commencing
October 1, 2008. The Note further provided that commencing on April 1, 2009, the
Company was to make monthly principal payments in the amount of $135,416 through
August 31, 2011. Although the stated principal amount of the Term Loan was
$6,500,000, the Lender was only required to fund $5,000,000, with the difference
being treated as a discount to the note.





(i). The
principal amount of the Note and accrued interest thereon was initially
convertible into shares of our common stock  at a price of $3.00 per
share, subject to anti-dilution adjustments. Under the terms of the Note, the
monthly principal payment amount of approximately $135,416 plus the monthly
interest payment  (together, the "Monthly Payment"), was payable in
either cash or, if certain criteria are met, including the effectiveness of a
current registration statement covering the shares of our common stock into
which the Note is convertible, through the issuance of our common stock. The
Company has agreed to register all of the shares that are issuable upon
conversion of the Note and exercise of warrants. As of December 31, 2008 the
Company had an outstanding balance of $6,500,000 under the note.





(ii). The
revolving note allowed the Company to borrow a maximum amount of $7,000,000,
based on a borrowing base of 90% of all eligible receivables, which are
primarily accounts receivables under 90 days. The interest rate on this line of
credit is in the amount of prime plus 2.0%, but in no event less than 7% per
annum. The Revolving Note was secured by all assets of the Company and is
subject to the same security agreement as discussed below. The note is due
August 31, 2011. As of December 31, 2008 the Company had an outstanding balance
of $7,047,909 (including accrued interest) under the revolving note. This note
was subsequently exchanged and modified during 2009 as discussed
below.




21


GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)


The
Company was subject to various negative covenants with respect to the Revolving
Credit and Term Loan Agreement (the "Agreement") with CVC California, LLC (the
"Lender").





However,
during the year the Company was not in compliance with certain covenants. The
Agreement provided that upon the occurrence of any Event of Default, and at all
times thereafter during the continuance thereof: (a) the Notes, and any and all
other Obligations, shall, at the Lender’s option become immediately due and
payable, both as to principal, interest and other charges, (b) all outstanding
Obligations under the Notes, and all other outstanding Obligations, shall bear
interest at the default rates of interest provided in certain promissory Notes
(the "Notes"), (c) the Lender may file suit against the Company on the Notes and
against the Company and the Subsidiaries under the other Loan Documents and/or
seek specific performance or injunctive relief thereunder (whether or not a
remedy exists at law or is adequate), (d) the Lender shall have the right, in
accordance with the Security Documents, to exercise any and all remedies in
respect of such or all of the Collateral as the Lender may determine in its
discretion (without any requirement of marshalling of assets or other such
requirement, all of which are hereby waived by the Company), and (e) the
Revolving Credit Commitment shall, at the Lender’s option, be immediately
terminated or reduced, and the Lender shall be under no further obligation to
consider making any further Advances.




The Company
had discussions with CVC to obtain a waiver of the Default and continued to
operate in the normal course of business and receive advances under the
Revolving Credit Commitment facility.  On June 1, 2009, the Company
and CVC entered into an Amendment to the Agreement to modify the terms of the
agreement and relieve the events of default.  CVC waived the Events
of  Default consisting of the non-payment by the Company of the
principal installments due under the Term Note on May 1, 2009 and June 1, 2009,
and further waived  the Events of Default consisting of the failure of
the Company to comply with Section 6.18 of the Loan Agreement for the periods
ended December 31, 2008 and March 31, 2009, and waived all rights to collect the
increased interest chargeable under the Notes by reason of the foregoing Events
of Default.





The
Company paid a fee in consideration of the waivers and amendments which
consisted of issuing  to CVC, (a) 600,000 shares of its Common Stock
valued at $450,000, and (b) issuing to  CVC a promissory note in the
principal amount of $164,000, bearing interest at the rate of 7% per annum
(which interest shall be payable monthly in arrears on the first day of each
calendar month commencing June 1, 2009) and maturing in full on August 31,
2011.





On September 4, 2009, the
Company entered into a series of agreements with CVC that amended these
agreements, including an Amended and Restated Revolving Credit and Term Loan
Agreement, an Amended and Restated Revolving Credit Note, an Amended and
Restated Convertible Term Note, a new Term Note, and Amended and Restated
Warrants to purchase shares of the Company's common stock. Pursuant to the
Amended and Restated Revolving Credit and Term Loan Agreement, (the "Amended
Agreement") dated as of September 4, 2009 the Company issued to
CVC:




(i) an Amended and
Restated secured convertible term note (“ Convertible Note”) in the principal
amount of
$6,314,700. The principal amount of the Convertible Note bears an
interest rate of fourteen percent, subject to adjustment, with interest payable
monthly commencing November 1, 2009. The principal of the convertible Note is
payable on demand or, in the absence of demand, (i) in seven (7) equal monthly
installments of $138,000 each, due and payable on the first day of each calendar
month commencing December 1, 2009 and continuing through and including June
1, 2010, and (ii) a final installment due and payable on June 30, 2010 in
an amount equal to the entire remaining principal balance of this
note.  In the event of a prepayment of the Convertible Note, the
Company must pay a prepayment premium in an amount equal to (a)
two (2%) percent of the principal amount being prepaid if the prepayment is made
on or prior to February 28, 2010, and (b) one (1%) percent of the principal
amount being prepaid if such prepayment is made subsequent to February 28, 2010
and prior to August 1, 2011, unless the prepayment is  made with the
proceeds received from the sale of any business unit or units of the
Company.  The balance of the note outstanding at September 30, 2009
was $6,314,700.




22




GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)






The
principal amount of the Convertible Note and accrued interest thereon is
convertible into shares of the Company's common stock at a price of $0.60 per
share, subject to anti-dilution adjustments. The Company has agreed to register
all of the shares that are issuable upon conversion of the Convertible
Note.





(ii) an
Amended and Restated  Secured Non-convertible Revolving Credit Note in
the principal amount of up to $1.7 million (the " Revolving
Note").  The principal amount of the Revolving Note bears interest at
the rate of 10% per annum and is payable on demand (or, in the absence of
demand, on August 31, 2011, or sooner by reason of an Event of Default or other
mandatory prepayment event. The balance of the note outstanding at September 30,
2009 was $1,664,627.





The
Revolving Note, amended and restated and superseded in its entirety the
Revolving Credit Note dated August 31, 2008 in the maximum principal amount of
$7,000,000 issued by the Company to CVC, but did not effect a novation of the
outstanding obligations of the Revolving Credit Note of August 31,
2008.





(iii) a
Term Note (“Term Note ”) in the principal amount of  $5.6 million. The
principal amount of the Term Note bears interest at the rate of 8% per annum and
is payable as follows: on the first day of each calendar month commencing
October 1, 2009 through and including August 1, 2010, accrued Interest on the
outstanding principal shall be due and payable.  Thereafter, principal
and interest is payable in thirty-six (36) consecutive equal monthly
installments of principal and interest of $174,321.50 each, with the first
installment due and payable on September 1, 2010, and with subsequent
installments due and payable on the first day of each calendar month thereafter
through and including August 1, 2013.  There is no pre-payment penalty
in the event of a pre-payment.





On August
17, 2009, the Company had entered into a Stock Purchase Agreement with MTS
Acquisition Company ("MTS"), pursuant to which the Company sold all of the
issued and outstanding common stock of GEM Mobile Treatment Services, Inc. (“GEM
MTS”). Consideration for the sale of GEM MTS was in the form of a promissory
note (“the MTS Note") in the aggregate amount of $5.6 million, (payable on the
same dates and terms as the Term Note), the assignment of approximately
$1.0 million of accounts payable and possible future royalties.  The
consideration was immediately assigned to CVC.  As the MTS Note is
paid to CVC by MTS, the Company's indebtedness to CVC will be reduced (See Note
4).





(iv)
an Amended and Restated Warrant  to purchase Two Million Seven Hundred
Thousand (2,700,000) fully paid and non-assessable shares (the “Warrant Shares”)
of the Company’s common stock, for cash at a price of $0.01 per share at any
time and from time to time from and after the date hereof and until 5:00 p.m.
(Pacific time) on August 31, 2014.





CVC  shall
also  have the right and option, exercisable effective at any time
upon or after the consummation of a Sale of the Company’s revenue-generating
business units, or upon and after the occurrence and during the continuance of
an Event of Default or any other event or circumstance which causes, effects or
requires any payment in full under the Loan Agreement and until the Expiration
Date, to require the Company to redeem and purchase any or all Warrant Shares or
rights to purchase Warrant Shares hereunder, for a cash purchase price of $0.75
per Warrant Share or per right to purchase a Warrant Share hereunder, such
option purchase price to be subject to adjustment from time to time in respect
of certain events.  The total value of the put if all shares are
redeemed would be $2,025,000.




23


GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)


The
Convertible Note and the Revolving Note, are secured by all of our assets and
the assets of our direct subsidiary, General Environmental Management, Inc.
(Delaware) and its direct subsidiaries, General Environmental Management of
Rancho Cordova LLC, a California Limited Liability Company (including the real
property owned by General Environmental Management of Rancho Cordova LLC),
Island Environmental Services, Inc. as well as by a pledge of the equity
interests of General Environmental Management, Inc. (Delaware), General
Environmental Management of Rancho Cordova LLC, and Island Environmental
Services, Inc.





The
Amended Agreement also provided that in the event that and at such time as the
Company or any of its subsidiaries or stockholders enters into a binding
agreement with respect to any sale of all or any material portion of the
Company’s assets or the sale of a majority of the outstanding capital stock or
(if sooner) on that date which is thirty (30) days prior to any payment or
required payment in full of the outstanding obligations to CVC, CVC shall have
the right and option, exercisable effective at any time upon or after the
consummation of such sale or payment, or upon and after the occurrence and
during the continuance of an event of default, as defined in the Amended
Agreement and the ancillary documents, to require the Company to redeem and
purchase any or all warrant shares or rights to purchase warrant shares
hereunder, for a cash purchase price of $0.75 per warrant share.





The
Amended Agreement requires that EBITDA of the Company not be less than (a) $1.00
for any fiscal quarter ending on or after December 31, 2009.





The
Company incurred expenses of approximately $75,000 to various professional
firms as reimbursement for CVC's due diligence and legal fees and expenses
incurred in connection with the transaction.





The
Company has also agreed to continue to pursue the Company’s plan to restructure
its operations by offering for sale the Company’s revenue-generating business
units at prices and on terms and conditions reasonably acceptable to the Company
and CVC.





Valuation Discount and
Modification of Debt





In
connection with the initial CVC financing during 2008, the Company paid closing
fees of $405,000 and issued warrants to acquire an aggregate of 3,000,000 shares
of our common stock as described above to CVC. The Company calculated that the
fair value of the warrants issued was $1,674,036, based upon the relative value
of the Black Scholes valuation of the warrants and the underlying debt
amount.  For the Black Scholes calculation, the Company assumed no
dividend yield, a risk free interest rate of 4.78%, expected volatility of
78.57% and an expected term for the warrants of 7 years. The closing fees of
$405,000 paid to CVC, the relative value of the warrants of $1,674,036 and the
$1,500,000 discount on issuance was reflected by the Company as a valuation
discount at issuance and offset to the face amount of the Notes. The Valuation
discount is being amortized to interest expense over the life of the loan based
upon the effective interest method.  The Company amortized $397,671 of
note discount during the period ended December 31, 2008, resulting in valuation
discount of $3,181,365 at December 31, 2008.





Concurrent
with the cumulative adjustment as discussed in Note 11, the Company further
recorded valuation discount of $1,408,828 at January 1, 2009. During the period
January 1, 2009 through June 1, 2009, the Company amortized $717,220 of the note
discount, leaving an unamortized note discount of 3,872,973 as of June 1,
2009.




24


GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)


As
discussed above, on June 1, 2009, the Company and CVC entered into an Amendment
to the Agreement to modify the terms of the agreement and relieve the events of
default.  The Company analyzed the current accounting guidance and
determined that the modifications constituted a substantial modification of debt
terms, and thus, has considered the old loan and derivative liabilities to be
extinguished and a new loan and derivative liabilities were
incurred.  As such, the balance of the valuation discount of
$3,872,973 and the fair value of derivative liabilities of $2,299,622 (gain)
that existed on June 1, 2009 before modification, the value of the 600,000
shares valued at $450,000 and the issuance by the Company of a $164,000
promissory note were considered as debt modification expense, resulting in an
aggregate charge of $2,181,351 at June 1, 2009 relating to the net loss on
extinguishment of debt.





Concurrent
with the accounting for the issuance of the new debt after the extinguishment on
June 1, 2009, the Company reflected a new valuation discount of $5,165,720 based
upon the fair value of the derivative liability and warrants (see Note 11).
During the period June 1, 2009 through June 30, 2009, the Company amortized
$191,323 of the new note discount, leaving an unamortized note discount of
$4,974,397 as of June 30, 2009. The
Company further amortized $382,646 of this discount during the period July 1,
2009 to September 4, 2009.





As
discussed above, on September 4, 2009, the Company and CVC entered into a
further Amendment to the Agreement to modify the terms of the agreement and
relieve the events of default.  The Company analyzed the current
accounting guidance and determined that the modifications constituted a
substantial modification of debt terms, and thus, has considered the old loan
and derivative liabilities to be extinguished and a new loan and derivative
liabilities to be incurred.  As such, the balance of the valuation
discount of  $4,591,751 and the fair value of derivative liabilities
of $2,733,744 (gain) that existed on September 4, 2009 before modification were
considered as debt modification expense, resulting in an aggregate charge of
$1,858,007 at  September 4, 2009 relating to the net loss on
extinguishment of debt.





Concurrent
with the accounting for the issuance of the new debt after the extinguishment on
September 4, 2009, the Company reflected a new valuation discount of $3,660,977
based upon the fair value of the derivative liability and warrants (see Note
11). During the period September 4, 2009 through September 30, 2009, the Company
amortized $366,098 of the new note discount, leaving an unamortized note
discount of $3,294,879 as of September 30, 2009.






9.
LONG TERM OBLIGATIONS




Long term
debt consists of the following at September 30, 2009 and December
2008:





September
      30,
                        2009
                      
                      
                      December
      31,
                        2008(Unaudited)(a)
      Vehicle notes
                      
                      $
                      -
                      
                      
                      $
                      12,865(b)
      Equipment notes
                      
                      
                      -
                      
                      
                      
                      67,102(c)
      Notes Payable, Island Acquisition
                      
                      
                      1,250,000
                      
                      
                      
                      1,250,000(d)
      Notes Payable
                      
                      
                      508,473
                      
                      
                      
                      489,6051,758,473
                      
                      
                      
                      1,819,572Less
      current portion
                      
                      
                      -
                      
                      
                      
                      (794,278
                      )Notes
      payable, net of current portion
                      
                      $
                      1,758,473
                      
                      
                      $
                      1,025,294




(a) Note
payable in monthly installments of $815 including interest at 1.9% per annum,
through April 2010. The note is secured by a vehicle. The asset and related note
are a part of GEM Mobile Treatment Services
and are classified in assets of discontinued operations in the accompanying
financial statements.




25


GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)


(b) The
equipment note is for equipment utilized by GEM Mobile Treatment Services. It
requires monthly payments of $3,417 with an interest rate of 12.35% and matures
in October 2010. The note is secured by the equipment. The asset and related
note are a part of GEM Mobile Treatment Services and are classified in assets of
discontinued operations in the accompanying financial statements.





(c) On
August 31, 2008, the Company entered into a stock purchase agreement with Island
Environmental. As part of the consideration for the purchase, the Company issued
two three year promissory notes totaling $1.25 million.





The first
note is payable to the former owners in the amount of $1,062,500.  The
second note is payable to NCF Charitable Trust in the amount of
$187,500.  The notes bear interest at eight percent (8%) with the
entire balance of interest and principal payable August 31, 2011.





In
conjunction with the revision to the agreements with CVC described in Note 8, an
amendment to these notes was executed that all interest payments and principal
payments due pursuant to the notes were deferred until August 31,
2011.





(d) Notes
payable that are due December 31, 2010 and include interest at 10% per annum.
These notes are unsecured.






10.
OBLIGATIONS UNDER CAPITAL LEASES




The
Company has entered into various capital leases for equipment with monthly
payments ranging from $598 to $4,000 per month, including interest, at interest
rates ranging from 8.01% to 13.74% per annum. At September 30, 2009, monthly
payments under these leases aggregated $40,732. The leases expire at various
dates through 2014. The amounts outstanding under the capital lease obligations
were $1,011,802 and $2,374,861 as of September 30, 2009 and December 31, 2008,
respectively.





Minimum
future payments under capital lease obligations are as follows:





Years
      Ending December 31,2009
                                        
                                        
                                        95,4332010
                                        
                                        
                                        376,7602011
                                        
                                        
                                        349,2622012
                                        
                                        
                                        258,9702013
                                        
                                        
                                        138,187Thereafter
                                        
                                        
                                        46,906Total
      payments
                                        
                                        
                                        1,265,518Less:
      amount representing interest
                                        
                                        
                                        (253,716
                                        )Present
      value of minimum lease payments
                                        
                                        
                                        1,011,802Less:
      current portion
                                        
                                        
                                        (277,372
                                        )Non-current
      portion
                                        
                                        $
                                        734,430
  26


GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)


11.
DERIVATIVE LIABILITIES




In June 2008, the FASB finalized its
guidance on “Determining Whether an Instrument (or Embedded Feature) is indexed
to an Entity’s Own Stock.” This guidance instruments which do not have fixed
settlement provisions are deemed to be derivative instruments.  The
conversion feature of the Company’s Secured Financing Agreements (described in
Note 7), and the related warrants, do not have fixed settlement provisions
because their conversion and exercise prices, respectively, may be lowered if
the Company issues securities at lower prices in the future.  The
Company was required to include the reset provisions in order to protect the
note holders from the potential dilution associated with future financings. In
accordance with current guidance, the conversion feature of the notes was
separated from the host contract (i.e., the notes) and recognized as an embedded
derivative instrument.  Both the conversion feature of the notes and
the warrants have been re-characterized as derivative
liabilities.  Current guidance requires that the fair value of these
liabilities be re-measured at the end of every reporting period with the change
in value reported in the statement of operations.




The
derivative liabilities were valued using a probability weighted
Black-Scholes-Merton valuation technique with the following weighted average
assumptions:




September30,
                                          2009
                                        
                                        September4,
                                          2009
                                        
                                        June30,
                                          2009
                                        
                                        June1,
                                          2009
                                        
                                        December31,
                                          2008
                                        
                                        August31,
                                          2008Conversion
      feature:Risk-free
      interest rate
                                        .40%
                                        
                                        .42%
                                        
                                        1.14%
                                        
                                        1.14%
                                        
                                        1.66%
                                        
                                        1.66%Expected
      volatility
                                        133.39%
                                        
                                        115.22%
                                        
                                        88.02%
                                        
                                        88.02%
                                        
                                        78.66%
                                        
                                        78.57%Expected
      life (in years)
                                        0.75
                                        
                                        0.83
                                        
                                        2.17
                                        
                                        2.25
                                        
                                        2.67
                                        
                                        3.00Expected
      dividend yield
                                        0.0%
                                        
                                        0.0%
                                        
                                        0.0%
                                        
                                        0.0%
                                        
                                        0.00%
                                        
                                        0.0%Warrants:Risk-free
      interest rate
                                        -
                                        
                                        -
                                        
                                        2.66%
                                        
                                        2.66%
                                        
                                        4.78%
                                        
                                        4.78%Expected
      volatility
                                        -
                                        
                                        -
                                        
                                        88.02%
                                        
                                        88.02%
                                        
                                        78.66%
                                        
                                        78.57%Expected
      life (in years)
                                        -
                                        
                                        -
                                        
                                        5.17
                                        
                                        5.25
                                        
                                        5.67
                                        
                                        6.00Expected
      dividend yield
                                        -
                                        
                                        -
                                        
                                        0.00%
                                        
                                        0.00%
                                        
                                        0.00%
                                        
                                        0.00%Fair
      Value:Conversion
      feature
                                        $2,906,579
                                        
                                        $1,635,977
                                        
                                        $4,779,927
                                        
                                        $3,637,437
                                        
                                        $624,385
                                        
                                        $1,145,544Warrants
                                        2,025,000
                                        
                                        2,025,000
                                        
                                        1,912,871
                                        
                                        1,528,283
                                        
                                        1,502,205
                                        
                                        2,113,423$4,931,579
                                        
                                        $3,660,977
                                        
                                        $6,692,798
                                        
                                        $5,165,720
                                        
                                        $2,126,590
                                        
                                        $3,258,967




The risk-free interest rate was based
on rates established by the Federal Reserve.  The expected volatility
is based on the Company’s historical volatility for its common
stock.  The expected life of the conversion feature of the notes was
based on the term of the notes and the expected life of the warrants was
determined by the expiration date of the warrants.  The expected
dividend yield was based on the fact that the Company has not paid dividends to
common shareholders in the past and does not expect to pay dividends to common
shareholders in the future.




The value
of the 2.7 million warrants at September 4, 2009 and September 30, 2009 was
based on the put option price of $0.75 per warrant share (see Note
8).




27


GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)


The
change was implemented in the first quarter of 2009 and is reported as a
cumulative change in accounting principles.  The cumulative effect on
the accounting for the conversion feature of the note and the warrants on
January 1, 2009 are as follows:




Additional
                      
                      
                      Accumulated
                      
                      
                      Derivative
                      
                      
                      ConvertibleDerivative
      Instrument:
                      
                      Paid-in
      Capital
                      
                      
                      Deficit
                      
                      
                      Liability
                      
                      
                      NoteConversion
      feature
                      
                      $
                      -
                      
                      
                      $
                      393,875
                      
                      
                      $
                      624,385
                      
                      
                      $
                      (1,018,261
                      )Warrants
                      
                      $
                      (1,674,036
                      )
                      
                      $
                      562,398
                      
                      
                      $
                      1,502,205
                      
                      
                      $
                      (390,567
                      )$
                      (1,674,036
                      )
                      
                      $
                      956,273
                      
                      
                      $
                      2,126,590
                      
                      
                      $
                      (1,408,828
                      )




The
warrants were originally recorded at their relative fair value as an increase in
additional paid-in capital. The change in the accumulated deficit includes gains
resulting from decreases in the fair value of the derivative liabilities through
December 31, 2008.  The derivative liability amounts reflect the fair
value of each derivative instrument as of the January 1, 2009 date of
implementation.  The convertible note amount represents the discount
recorded upon adoption of the accounting.  This discount will be
recognized on a monthly basis through the maturity date of the
notes.





As of
September 30, 2009, the derivative liabilities amounted to
$4,931,579.  For the three and nine months ended September 30,
2009, the Company recorded a change in fair value of the derivative liabilities
of $2,688,452 and $988,342. At September 30, 2008, no derivative instruments
were recorded.





As
further discussed in Note 8, concurrent with the accounting for the issuance of
the new debt after the extinguishment on June 1, 2009 and September 4, 2009, the
Company reflected new valuation discount of $5,165,720 and $3,660,977,
respectively, based upon the fair value of the derivative liability and
warrants   as of those dates.








12.
STOCK OPTIONS AND WARRANTS




Options





On March
28, 2007 the Board of Directors approved and implemented the 2007 Stock Option
Plan (the “Plan”).  The plan authorized option grants to employees and
other persons closely associated with the Company for the purchase of up to
5,500,000 shares.  The Board of Directors granted a total of 4,397,500
options to 102 employees and one consultant.  The exercise price of
the options was $1.19.





On
January 2, 2009 the Stock Option Committee approved the issuance of 34,500
options to twenty eight employees. The exercise price for the options was $0.75
per share and was based on the closing market price on the date of issuance. For
the Black - Scholes calculation, the Company assumed no dividend yield, a risk
free interest rate of 4.78 %, expected volatility of 78.66 % and an expected
term for the options of 8 years.




28


GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)


On
January 7, 2009 the Stock Option Committee approved the issuance of 570,000
options to thirteen employees. The exercise price for the options was $0.75 per
share and was based on the closing market price on the date of issuance. For the
Black - Scholes calculation, the Company assumed no dividend yield, a risk free
interest rate of 4.78 %, expected volatility of 78.66 % and an expected term for
the options of 8 years.




A summary
of the option activity during the period is as follows:





Weighted
      Avg.
                    
                    
                    Weighted
      Avg.
                    
                    
                    Weighted
      Avg.Options
                    
                    
                    Exercise
      Price
                    
                    
                    Life
      in YearsOptions
      outstanding, January 1, 2009
                    
                    
                    4,787,340
                    
                    
                    
                    1.64
                    
                    
                    
                    8.36Options
      granted
                    
                    
                    604,500
                    
                    
                    
                    0.75
                    
                    
                    
                    9.33Options
      exercised
                    
                    
                    (250
                    )
                    
                    
                    0.75
                    
                    
                    
                    -Options
      cancelled
                    
                    
                    (786,915
                    )
                    
                    
                    1.65
                    
                    
                    
                    -Options
      outstanding, September 30, 2009
                    
                    
                    4,604,675
                    
                    
                    
                    1.53
                    
                    
                    
                    7.78Options
      exercisable, September 30, 2009
                    
                    
                    3,836,308
                    
                    
                    
                    1.58
                    
                    
                    
                    7.67




The
options had no intrinsic value at September 30, 2009.





For the
nine months ended September 30, 2009 and 2008, the fair value of options vesting
during the period was $642,843 and $634,213 respectively, and has been reflected
as compensation cost. As of September 30, 2009, the Company has unvested options
valued at $544,276 which will be reflected as compensation cost over the
estimated remaining vesting period of 30 months.




Warrants




A summary
of the warrant activity during the period is as follows:





Range
      of
                            exercise
                            prices
                          
                          
                          Weighted
                            Avg. in
                            YearsWarrants
      outstanding, January 1, 2009
                          
                          
                          9,527,894
                          
                          
                          $
                          0.60-$37.50
                          
                          
                          
                          4.86Warrants
      granted
                          
                          
                          4,598,014
                          
                          
                          $
                          0.01-$1.70
                          
                          
                          
                          4.30Warrants
      exercised
                          
                          
                          (6,250
                          )
                          
                          $
                          0.60
                          
                          
                          
                          -Warrants
      expired
                          
                          
                          (4,074,432
                          )
                          
                          $
                          0.60-$37.50
                          
                          
                          
                          -Warrants
      outstanding, September 30, 2009
                          
                          
                          10,045,226
                          
                          
                          $
                          0.01-$37.50
                          
                          
                          
                          4.64




The
aggregate intrinsic value of the 10,045,226 warrants outstanding as of September
30, 2009 was $1,444,276. The aggregate intrinsic value for the warrants is
calculated as the difference between the price of the underlying shares and
quoted price of the Company's common shares for the warrants that were
in-the-money as of September 30, 2009.




29


GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)


13.  
COMMITMENTS AND CONTINGENCIES





Legal
Proceeding





On July
5, 2007, a lawsuit was instituted by Romic Environmental Technologies Corp.
(“RET”) against the Company and four of its senior executives, Namki Yi, the
Vice President of Corporate Development, Betty McKee, the Director of Systems
& Financial Analysis, Mindy Rath, the Director of Sales and Gary
Bowling, the Regional General Manager for Southern CA, all of whom were formerly
employed by RET.  The lawsuit was brought in the Superior Court of the
State of California, County of Los Angeles.  In the lawsuit, RET alleges
that the Company and the four executives are liable to RET for among other
things, Violation of Non-Disclosure Agreements and Termination Protection
Agreements, Intentional Interference with contracts, and Violation of Trade
Secrets and Unfair Competition. Although RET alleges damages of Fifteen Million
Dollars and requests certain injunctive relief, recent settlement discussions
have produced offers substantially less than the original action. The
Company still believes that the lawsuit has no merit, and intends to
vigorously defend the action.






14.
INCOME TAXES





The
Company's net deferred tax assets consisted of the following at September 30,
2009 and


December
31, 2008:





September
      30,
                    2009
                  
                  
                  December
      31, 2008(Unaudited)Deferred
      tax asset, net operating loss
                  
                  $
                  18,180,198
                  
                  
                  $
                  14,184,661Less
      valuation allowance
                  
                  
                  (18,180,198
                  )
                  
                  
                  (14,184,661
                  )Net
      deferred tax asset
                  
                  $
                  -
                  
                  
                  $
                  -





As of
September 30, 2009, the Company had federal net operating loss carry forwards of
approximately $53,471,172 expiring in various years through 2025, which can be
used to offset future taxable income, if any. No deferred asset benefit for
these operating losses has been recognized in the financial statements
due  to the uncertainty as to their realizability in future
periods.





As a
result of the Company's significant operating loss carryforward and the
corresponding valuation allowance, no income tax expense (benefit) has been
recorded at September 30, 2009 or December 31, 2008.




30
 
 GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
 Reconciliation
of the effective income tax rate to the United States statutory income
tax rate for the nine months ended September 30, 2009 and 2008 is as
follows:


Nine
      months ended
                    September
      30,2009
                  
                  2008Tax
      expense at U.S. statutory income tax rate
                  
                  
                  (34.0)
      %
                  
                  
                  (34.0)
      %Increase
      in the valuation allowance
                  
                  
                  34.0
                  
                  
                  34.0Effective
      rate
                  
                  
                  -
                  
                  
                  -




Effective
January 1, 2007, the Company adopted  a new accounting
requirement to Account for Uncertainty in Income Taxes. The
interpretation addresses the determination  of whether tax benefits
claimed or expected to be claimed on a tax return should be recorded in the
financial statements. Under the new accounting requirements, we may recognize
the tax benefit from an uncertain tax position only if it is more likely than
not that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position should be measured
based on the largest benefit that has a greater than fifty percent likelihood of
being realized upon ultimate settlement. The new requirements  also
provides guidance on derecognition, classification, interest and penalties on
income taxes, accounting in interim periods and requires increased disclosures.
At the date of adoption, and as of  September 30, 2009, the Company
did not have a liability for unrecognized tax uncertainties.





The
Company files income tax returns in the U.S. federal jurisdiction and various
states. The Company is subject to U.S. federal or state income tax examinations
by tax authorities for years after 2002. During the periods open to examination,
the Company has net operating loss and tax credit carry forwards for U.S.
federal and state tax purposes that have attributes from closed periods. Since
these NOLs and tax credit carry forwards may be utilized
in future periods, they remain subject to examination.





The
Company’s policy is to record interest and penalties on uncertain tax provisions
as income tax expense. As of September 30, 2009 the Company has no accrued
interest or penalties related to uncertain tax positions.








15.  SUBSEQUENT
EVENTS





The
Company has evaluated subsequent events through November 23, 2009, the date of
issuance.





On
November 13, 2009, Company entered into a Stock Purchase
Agreement  ("Agreement") with United States Environmental Response,
LLC, a California limited liability company (“Seller”) pursuant to which the
Company has purchased all of the issued and outstanding capital stock of
California Living Waters, Incorporated ("CLW"), a privately held
company.  CLW owns all of the issued and outstanding capital stock of
Santa Clara Waste Water Company (SCWW") a California corporation. CLW's only
operating subsidiary is SCWW.  SCWW had unaudited revenues of
$4,581,722 and $7,609,636 in 2007 and 2008 respectively and had revenues of
$4,344,749 for the first 8 months of 2009.  The Agreement is subject
to a rescission if Company does not pay certain indebtedness to its senior
lender by close of business on March 12, 2010.




31


GENERAL
ENVIRONMENTAL MANAGEMENT, INC AND SUBSIDIARIES
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)


SCWW,
located in Ventura County, California, is a waste water management
company  that operates a 12.7 mile pipeline from its facility to the
City of Oxnard water reclamation center. In consideration for the sale, GEM
issued six promissory notes (individually a "Note" and collectively, the
"Notes") in the aggregate principal amount of $9,003,000, and warrants to
purchase 425,000 shares of GEM's common stock. The Notes bear interest at 6.5
per cent per annum. Two of the Notes, totaling $3,778,000 are convertible into a
total of 15% of GEM's common stock on a fully diluted basis.




The Notes
have the following payment provisions:




$2,000,000 Seller's Note--
Payment of the outstanding principal of the Seller's Note is due and payable in
four (4) installments as follows: (A) Two Hundred Fifty Thousand Dollars
($250,000) before March 12, 2010, (B) Five Hundred Thousand Dollars ($500,000)
and accrued interest on June 30 2010; (C) One Million Dollars ($1,000,000) and
accrued interest on January 1, 2011 (D) the balance of all residual principal
and accrued interest on March 31, 2011.




$1,700,000 Note One--
Payment of the outstanding principal of Note One is due and payable in 120
installments commencing on December 1, 2009 and continuing on the first day of
each calendar month through February 1, 2019 .  Installments are
payable in the following amounts (subject to the other terms of this Note):
(A) the amount of principal and accrued interest payable in the first one
hundred nineteen (119) Installments shall be equal Installments of principal and
interest, calculated on the basis of a 30-year amortization of this Note and (B)
the one hundred twentieth (120th) Installment shall be a final, “balloon”
payment.




$1,100,000 Note Two--
Payment of the outstanding principal of this Note Two is be due and payable in
sixty (60) installments commencing on December 1, 2009 and continuing on the
first day of each calendar month through November 1, 2014. Installments are
payable in the following amounts (subject to the other terms of this Note): (A)
the amount of principal and accrued interest payable in the first fifty-nine
(59) Installments shall be equal Installments of principal and interest,
calculated on the basis of a 20-year amortization of this Note; and (B) the
final, “balloon” payment on November 1, 2014.




$424,000 Note Three--
Payment of the outstanding principal of this Note shall be due and payable in
120 installments commencing on December 1, 2009 and continuing on the first day
of each calendar month through November 1, 2019.  Installments are
payable in the following amounts (subject to the other terms of this Note): (A)
the amount of principal and accrued interest payable in the first one hundred
nineteen (119) Installments shall be equal Installments of principal and
interest, calculated on the basis of a 30-year amortization of this Note and (B)
the one hundred twentieth (120th) Installment shall be a final, “balloon”. Note
Three is convertible at any time in full or in part (but if in part, then only
in principal increments of $100,000 or an integral multiple thereof) into shares
of common stock of Company at the conversion rate of Four Dollars ($4.00) per
share, subject to adjustment.




$1,600,000 Note Four--
Payment of the outstanding principal of this Note is due and payable in 41
installments commencing on July 1, 2010 and continuing on the first day of each
calendar month through November 1, 2013. Installments are payable in the
following amounts (subject to the other terms of this Note): (A) the amount
of principal and accrued interest payable in the first forty Installments shall
be equal Installments of principal and interest, calculated on the basis of a
30-year amortization of this Note, provided that the first Installment shall
also include all interest accrued during the first seven months from the
date of this Note Four; and (B) the final, “balloon”, Installment shall be in
the amount of all then-outstanding principal, interest and other amounts then
outstanding. Note Four is convertible into 5% of the common stock of Company on
a fully diluted basis until Company achieves a Capital Restructuring Goal.
Capital Restructuring Goal means the concurrent fulfillment of each of the
following events: (i) the Seller’s Note shall have been fully paid on the terms
thereof as to all theretofore outstanding principal, interest, costs and
expenses; (ii) Company shall have available, as properly reflected in Company’s
books one million dollars ($1,000,000) in uncommitted working capital (not
including any working capital lines of credit); and (iii) Company shall have
invested into SCWW capital of at least one million dollars
$1,000,000.




$2,178,000 Note Five--
Payment of the outstanding principal of this Note is due and payable in 41
installments commencing on July 1, 2010 and continuing on the first day of each
calendar month through November 1, 2013. Installments are payable in the
following amounts (subject to the other terms of this Note): (A) the amount
of principal and accrued interest payable in the first forty Installments shall
be equal Installments of principal and interest, calculated on the basis of a
30-year amortization of this Note, provided that the first Installment shall
also include all interest accrued during the first seven months from the
date of this Note Five; and (B) the final, “balloon”, Installment shall be in
the amount of all then-outstanding principal, interest and other amounts then
outstanding. Note Five is convertible into 10% of the common stock of Company on
a fully diluted basis until Company achieves the Capital Restructuring
Goal.




32


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





FORWARD
LOOKING STATEMENTS





In
addition to historical information, this Quarterly Report contains
forward-looking statements, which are generally identifiable by use
of  the words “believes”, “expects”, “intends”, “anticipates”, “plans
to”, “estimates”, “ projects”, or similar expressions.  These
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those reflected in these
forward-looking statements.  Factors that might cause such a
difference include, but are not limited to, those discussed in the section
entitled “Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Factors That May Affect Future
Results”.  Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management’s opinions only as of the
date hereof.  We undertake no obligation to revise or publicly release
the results of any revision to these forward-looking
statements.  Readers should carefully review the risk factors
described in other documents the company files from time to time with the
Securities and Exchange Commission  ( the “SEC”), including the
Quarterly Reports on form 10-Q filed by us in the fiscal year 2009.





Statements
made in this Form 10-Q (the “Quarterly Report”) that are not historical or
current facts are “forward-looking statements” made pursuant to the safe harbor
provisions of Section 27A of the Securities Act of 1933, as amended (the “Act”),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”).  We intend that such forward-looking statements be
subject to the safe harbors for such statements.  We wish to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made.  Any forward-looking statements
represent management’s best judgment as to what may occur in the
future.  The forward-looking statements included herein are based on
current expectations that involve numerous risks and uncertainties.
 Assumptions relating to the foregoing involve judgments with respect to,
among other things, future economic, competitive and market conditions and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control.  Although we
believe that the assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could be inaccurate and, therefore, there can
be no assurance that the forward-looking statements included in this Quarterly
Report will prove to be accurate.  In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by us
or any other person that our objectives and plans will be
achieved.  We disclaim any obligation subsequently to revise any
forward-looking statements to reflect events or circumstances after the date of
such statement or to reflect the occurrence of anticipated or unanticipated
events.




33





The
words “we,” “us,” “our,” and the “Company,” refer to General Environmental
Management, Inc.  The words or phrases “may,” “will,” “expect,”
“believe,” “anticipate,” “estimate,” “approximate,” or “continue,” “would be,”
“will allow,” “intends to,” “will likely result,” “are expected to,” “will
continue,” “is anticipated,” “estimate,” “project,” or similar expressions, or
the negative thereof, are intended to identify “forward-looking
statements.”  Actual results could differ materially from those
projected in the forward looking statements as a result of a number of risks and
uncertainties, including but not limited to:  (a) our failure to
implement our business plan within the time period we originally planned to
accomplish; and (b) other risks that are discussed in this Quarterly Report or
included in our previous filings with the Securities and Exchange Commission
(“SEC”).




OVERVIEW




Ultronics
Corporation (Ultronics) was a non-operating company formed for the purpose of
evaluating opportunities to acquire an operating company.  On February
14, 2005 Ultronics acquired General Environmental Management, Inc. through a
reverse merger between Ultronics Acquisition Corp., a wholly owned subsidiary of
Ultronics and General Environmental Management, Inc., whereby General
Environmental Management, Inc. (GEM) was the surviving entity.





The
acquisition was accounted for as a reverse merger (recapitalization) with GEM
deemed to be the accounting acquirer, and Ultronics Corporation the legal
acquirer.  Accordingly, the historical financial information presented
in the financial statements is that of GEM as adjusted to give effect to any
difference in the par value of the issuer’s and the accounting acquirer stock
with an offset to capital in excess of par value.  The basis of the
assets, liabilities and retained earnings of GEM, the accounting acquirer, have
been carried over in the recapitalization.  Subsequent to the
acquisition, the Company changed its name to General Environmental Management,
Inc. GEM is a fully integrated environmental service firm structured to provide
EHS compliance services, field services, transportation, off-site treatment, and
on-site treatment services.  Through its services GEM assists clients
in meeting regulatory requirements for the disposal of hazardous and
non-hazardous waste.  GEM provides its clients with access to GEMWare,
an internet based software program that allows clients to maintain oversight of
their waste from the time it leaves their physical control until final
disposition by recycling, destruction, or landfill.  The GEM business
model is to grow both organically and through acquisitions.





During
2003 and 2004 GEM acquired the assets of Envectra, Inc., Prime Environmental
Services, Inc. (Prime) and 100% of the membership interest in Pollution Control
Industries of California, LLC, now named General Environmental Management of
Rancho Cordova, LLC.  The assets of Envectra, Inc. included an
internet based integrated environmental management software now marketed by the
Company as GEMWare.  The acquisition of the assets of Prime resulted
in a significant increase in the revenue stream of the company and a presence in
the Washington State and Alaska markets through Prime’s Seattle
office.  All Prime services are now offered under the GEM
name.  The primary asset of Pollution Control Industries of
California, LLC was a fully permitted Part B Treatment Storage Disposal Facility
(TSDF) in Rancho Cordova, California.  The facility provides waste
management services to field service companies and allows the Company to bulk
and consolidate waste into larger more cost effective containers for outbound
disposal.





During
2006, the Company entered into a stock purchase agreement with K2M Mobile
Treatment Services, Inc. of Long Beach, California ("K2M"), a privately held
company, pursuant to which the Company  acquired all of the issued and
outstanding common stock of K2M. K2M is a California-based provider of mobile
wastewater treatment and vapor recovery services. Subsequent to the acquisition
in March 2006, the Company opened a vapor recovery service division in Houston,
Texas and will be looking to expand its operations in the Gulf coast
area.




34





On August
31, 2008, the Company entered into a stock purchase agreement with Island
Environmental Services, Inc. of Pomona, California ("Island"), a privately held
company, pursuant to which the Company acquired all of the issued and
outstanding common stock of Island, a California-based provider of hazardous and
non-hazardous waste removal and remediation services to a variety of private and
public sector establishments.





On August
17, 2009, the Company divested the assets of GEM Mobile Treatment Services (GEM
MTS). GEM MTS was sold to MTS Acquisition Company, Inc., a holding company, and
will be owned and operated  by two former senior executives of GEM.
Consideration of the sale was in the form of promissory notes in the aggregate
amount of $5.6 million, the assignment of approximately $1.0 million of accounts
payable and possible future royalties. The consideration was immediately
assigned to CVC California, LLC, (“CVC”) GEM’s senior secured lender. As the
notes are paid to CVC, GEM’s indebtedness to CVC will be reduced. Total
reduction in indebtedness to CVC could amount to more than
$7million.





On
November 13, 2009, Company entered into a Stock Purchase
Agreement  ("Agreement") with United States Environmental Response,
LLC, a California limited liability company (“Seller”) pursuant to which the
Company has purchased all of the issued and outstanding capital stock of
California Living Waters, Incorporated ("CLW"), a privately held
company.  CLW owns all of the issued and outstanding capital stock of
Santa Clara Waste Water Company (SCWW") a California corporation. CLW's only
operating subsidiary is SCWW.  SCWW had unaudited revenues of
$4,581,722 and $7,609,636 in 2007 and 2008 respectively and had revenues of
$4,344,749 for the first 8 months of 2009.  The Agreement is subject
to a rescission if Company does not pay certain indebtedness to its senior
lender by close of business on March 12, 2010.





SCWW,
located in Ventura County, California, is a waste water management
company  that operates a 12.7 mile pipeline from its facility to the
City of Oxnard water reclamation center. In consideration for the sale, GEM
issued six promissory notes (individually a "Note" and collectively, the
"Notes") in the aggregate principal amount of $9,003,000, and warrants to
purchase 425,000 shares of GEM's common stock. The Notes bear interest at 6.5
per cent per annum. Two of the Notes, totaling $3,778,000 are convertible into a
total of 15% of GEM's common stock on a fully diluted basis.






COMPARISON OF
THREE  MONTHS ENDEDSEPTEMBER 30, 2009 AND
2008





Revenues





Total
revenues were $4,046,961 for the three months ended September 30, 2009,
representing a decrease of $1,494,029 or 26% compared to the three months ended
September 30, 2008.  The decrease in revenue can be primarily
attributed to the decrease in the field service sector for GEM, Inc of
$2,342,680.  The field service work consists of remediation
projects.  This decrease was due to the reduction in revenue of
$2,455,266 from the loss of competitive bid contracts for field service work in
Alaska.  These decreases were partially offset by an increase in
revenue due to the inclusion of Island Environmental Services in the three
months ended September 30, 2009 of $1,356,206.




35




Cost of
Revenues





Cost of
revenues for the three months ended September 30, 2009 were $3,839,343 or 94% of
revenue, as compared to $4,981,391 or 89% of revenue for the three months ended
September 30, 2008.  The cost of revenues includes disposal costs,
transportation, fuel, outside labor, rent  and operating supplies. The
change in the cost of revenue in comparison to the prior year is primarily due
to (1) the loss of profitable contracts in Alaska which were replaced by less
profitable business at Island Environmental Services which had the effect of
increasing our Cost of Revenue by approximately $736,000, and (2) an increase in
rent of $166,825, primarily attributable to the inclusion of the facility lease
at Island Environmental in 2009.




Operating
Expenses





Operating
expenses for the three months ended September 30, 2009 were $2,351,196 or 58% of
revenue as compared to $1,667,630 or 30% of revenue for the same period in 2008.
Operating expenses include sales and administrative salaries and benefits,
insurance, rent, legal, accounting and other professional fees. The increase in
operating expenses is primarily attributable to (1) an increase in insurance
of$93,377,
(2) an increase in employee stock compensation cost of $232,941 and (3) an
increase due to the inclusion of Island Environmental Services of $54,125, for
the three months ended September 30, 2009.





Depreciation
and Amortization





Depreciation
and amortization expenses for the three months ended September 30, 2009 were
$98,791 or 2.4% of revenue, as compared to $360,765 or 6% of revenue for the
same period in 2008. The decrease in expense is due to additions to property,
plant and equipment and increase of assets acquired under capitalized
leases.


The
reclassification of property, plant and equipment and capitalized leases of GEM
MTS into Assets of Operations held for sale.




Interest
and financing costs





Interest
and financing costs for the three months ended September 30, 2009 were
$1,800,800 or 44% of revenue, as compared to $2,058,799 or 37% of revenue for
the same period in 2008.  Interest expense consists of interest on the
line of credit, short and long term borrowings, and advances to related
parties.  It also includes amortization of deferred finance fees and
amortization of valuation discounts generated from beneficial conversion
features related to the fair value of warrants and conversion features of long
term debt.  The increase in interest and financing costs as a
percentage of revenue was due to (1) an increase in interest expense of $741,343
on the term notes and credit line with CVC, (2) a decrease in valuation
discounts expense of $796,780.





Other
Non-Operating Income





The
Company had other non-operating income for the three months ended September 30,
2009 of $8,569 or 0.1 %
of  revenue, and $18,479  or  0.1% of revenue for
the same period in 2008.  Non-Operating income  for the
three months ended September 30, 2009  and September 30, 2008
consisted of continuing rental income from the lease of warehouse space in Kent,
Washington.




Gain on
derivative financial instruments





In
accordance with a new accounting standard  which was effective at the
end of 2008, the conversion feature of our convertible notes was recognized as
an embedded derivative instrument.  Both the conversion feature of the
notes and the warrants have been  re-characterized as derivative
liabilities. Generally accepted accounting principles  requires that
the fair value of these liabilities be re-measured at the end of every reporting
period with the change in value reported in the statement of
operations.  For the three months ended September 30, 2009, the
Company recorded a gain on derivative financial instruments of
$2,688,452.




36





Net
Loss





The net
loss for the three months ended September 30, 2009 was $3,155,131 or 78% of
revenue as compared to a loss of $2,137,590, or 38% of revenue for the same
period in 2008.  The increased loss is primarily attributable to the
higher cost of revenue and operating expenses discussed above.








COMPARISON OFNINEMONTHS ENDEDSEPTEMBER30, 2009 AND
2008





Revenues





For the
nine months ended September 30, 2009, the Company reported consolidated revenue
of $12,589,161 representing
a decrease of $4,628,405, or 27% compared to the nine months ended
September  30, 2008.  The decrease in revenue can be
primarily attributed to the decrease in the field service sector for GEM, Inc.
of  $7,196,450. This decrease was due in part to (1) a decrease of
$493,851 resulting from the conclusion of a contract with the Defense
Reutilization and Marketing Organization, (2) a decrease of $3,249,426 due to
the loss of competitive bid contracts for field service work in Alaska, and (3)
an overall reduction in field service work due to the current economic
environment. These decreases were partially offset by an increase in revenues of
$2,568,045 for Island Environmental Services for the nine months ended September
30, 2009. (Island
was acquired August 31, 2008).




Cost of
Revenues





Cost of
revenues for the nine months ended September 30, 2009 were $12,906,589 or 102%
of revenue, as compared to $15,548,592 or 90% of revenue for the nine
months ended September 30, 2008.  The cost of revenues includes
disposal costs, transportation, fuel, outside labor, rent  and
operating supplies. The change in the cost of revenue in comparison to the prior
year is primarily due to (1) the loss of profitable contracts in Alaska which
were replaced by less profitable business at Island Environmental Services which
had the effect of increasing our Cost of Revenue by approximately $1,500,000,
(2) an increase in depreciation expense, primarily related to equipment under
capital leases of $483,554, and, (3) an increase in rent of $580,293, primarily
attributable to the facility lease at Island Environmental
($500,625).





Operating
Expenses





Operating
expenses for the nine months ended September 30, 2009 were $6,607,657 or 52% of
revenue as compared to $5,104,099 or 30% of revenue for the same period in 2008.
Operating expenses include sales and administrative salaries and benefits,
insurance, rent, legal, accounting and other professional fees. The increase in
operating expenses is primarily attributable to (1) an increase in insurance
of$290,439,
(2) an increase in employee stock compensation cost of $276,857 and (3) an
increase due to the inclusion of Island Environmental Services, $210,136, for
the nine months ended September 30, 2009. (Island was acquired August 31,
2008).





Depreciation
and Amortization





Depreciation
and amortization expenses for the nine months ended September 30, 2009 were
$738,534 or 8% of revenue, as compared to $420,294 or 4% of revenue for the same
period in 2008. The increase in expense is due to additions to property, plant
and equipment and increase of assets acquired under capitalized
leases.




37




Interest
and financing costs





Interest
and financing costs for the nine months ended September 30, 2009 were $3,724,968
or 30% of revenue, as compared to $3,655,714 or 21% of revenue for the same
period in 2008.  Interest expense consists of interest on the line of
credit, short and long term borrowings, and advances to related
parties.  It also includes amortization of deferred finance fees and
amortization of valuation discounts generated from beneficial conversion
features related to the fair value of warrants and conversion features of long
term debt.  The increase in interest and financing costs was due to
(1) an increase in interest expense of $988,286 on the term notes and credit
line with CVC, and (4) a reduction in valuation discounts expense of
$922,162.





Other
Non-Operating Income





The
Company had other non-operating income for the nine months ended September 30,
2009 of $27,758 or .10% of revenue, and $35,173 or .10% of revenue for the same
period in 2008.  Non-Operating income for  the nine months
ended September 30, 2009 and September 30, 2008 consisted of continuing rental
income from the lease of warehouse space in Kent,Washington.





Gain on
derivative financial instruments





In
accordance with current accounting guidance (See Note 11) that became effective
at the end of 2008, the conversion feature of our convertible notes was
recognized as an embedded derivative instrument.  Both the conversion
feature of the notes and the warrants have been  re-characterized as
derivative liabilities.  Generally accepted accounting principles
requires  that the fair value of these liabilities be re-measured at
the end of every reporting period with the change in value reported in the
statement of operations.  For the nine months ended September 30,
2009, the Company recorded a gain on derivative financial instruments of
$988,342.





Net
Loss





The net
loss for the nine months ended September 30, 2009 was $12,510,521 or 99% of
revenue as compared to a loss of $4,687,810, or 27% of revenue for the same
period in 2008.  The higher loss is primarily attributable to
reductions in operating margins over the nine months ended September 30, 2009 of
$3,289,860, and losses on the extinguishment of debt of $2,181,351.




LIQUIDITY
AND CAPITAL RESOURCES





Cash





Our
primary sources of liquidity are cash provided by operating, investing, and
financing activities.  Net cash used in operations for the three
months ended September 30, 2009 was $313,455 as compared to net cash used in
operations of $156,806 for the same period in 2008. Net cash provided by
operations for the nine months ended September 30, 2009 was $382,805 as compared
to net cash used in operations of $1,046,595 for the same period in
2008.





Liquidity





The
accompanying consolidated financial statements have been prepared assuming that
the company will continue as a going concern.  The Company incurred a
net loss of $12,510,521 and provided cash in operating activities of $382,805
during the nine months ended September 30, 2009. As of September 30, 2009
the Company had current liabilities exceeding current assets by $14,071,239,
primarily because of the reclassification of long term debt to current resulting
from covenant provisions under the ComVest notes and had a stockholders’
deficiency of $13,616,790. These matters raise substantial doubt about the
Company’s ability to continue as a going concern.




38





Management
is executing a plan to divest certain parts of the business in order to satisfy
obligations of its senior lender.  In conjunction with that strategy,
the assets of GEM Mobile Treatment Services (GEM MTS) on August 17, 2009 GEM MTS
was sold to MTS Acquisition Company, Inc., a holding company, and will be owned
and operated by two former senior executives of GEM.  Consideration for the
sale was in the form of promissory notes in the aggregate amount of $5.6
million, the assignment of approximately $1.0 million of accounts payable and
possible future royalties.  The consideration was immediately assigned
to CVC California, LLC, ("CVC") GEM's senior secured lender.  As the
notes are paid to CVC, GEM's indebtedness to CVC will be reduced. Total
reduction in indebtedness to CVC could amount to more than $7
million.





The
Company’s current source of cash is borrowings on its revolving line of credit
with the senior lender.  The collateral for the line is accounts
receivable.  Based on a borrowing formula supported by collections of
accounts receivable, the Company borrows cash to support
operations.  In conjunction with the agreements renegotiated as
described in Note 8, interest and principal on outstanding notes has been
deferred.  These borrowings are impacted by changes in accounts
receivable as a result of revenue fluctuations, economic trends and collection
activities.




Cash
Flows for the Nine Months Ended September 30, 2009.





Operating
activities for the nine months ended September 30, 2009 produced $382,805 in
cash. Accounts receivable, net of allowances for bad debts, were reduced by
$2,187,903 as of September 30, 2009 and accounts payable were increased
by $914,314.  Depreciation and amortization for the nine months
ended September 30, 2009 totaled $738,534. The net loss of $12,510,521
included a number of non-cash items incurred by the Company including expenses
of $642,843 representing the fair value of vested options, $1,657,287
representing amortization of discount on financing agreements, $573,476
representing warrants issued for services, $137,393 representing amortization of
note discounts, $144,397 representing amortization of deferred financing fees,
$4,039,358 representing a loss on extinguishment and a derivative gain of
$988,342. Prepaid expenses increased by $275,303 and accrued expenses decreased
by $169,057.





The
Company used cash for investment in plant, property and equipment and deposits
totaling approximately $238,897 for the nine months ended September 30,
2009. Capital expenditures increased due to the acquisition of equipment at GEM
Mobile Treatment Services. Financing activities used $480,215 for the nine
months ended September 30, 2009 to reduce notes payable and make payments on
capital leases.





These
activities resulted in a $336,307 reduction in cash balances from year end
December 31, 2008 to the  end of the quarter September 30,
2009.




39




CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





The
preparation of our consolidated financial statements requires us to make
estimates that affect the reported amounts of assets, liabilities, revenues and
expenses.  The following are the areas that we believe require the
greatest amount of estimates in the preparation of our financial statements:
allowances for doubtful accounts, impairment testing and accruals for disposal
costs for waste received at our TSDF.




(a)
Allowance for doubtful accounts





We
establish an allowance for doubtful accounts to provide for accounts receivable
that may not be collectible. In establishing the allowance for doubtful
accounts, we analyze specific past due accounts and analyze historical trends in
bad debts.  In addition, we take into account current economic
conditions.  Actual accounts receivable written off in subsequent
periods can differ materially from the allowance for doubtful accounts
provided.





(b)
Impairment of Long-Lived Assets





Accounting
for the Impairment or Disposal of Long-Lived Assets establishes guidelines
regarding when impairment losses on long-lived assets, which include property
and equipment, should be recognized and how impairment losses should be
measured.  This statement also provides a single accounting model for
long-lived assets to be disposed of and significantly changes the criteria that
would have to be met to classify an asset as held-for-sale.  The
Company periodically reviews, at least annually, such assets for possible
impairment and expected losses. If any losses are determined to exist they are
recorded in the period when such impairment is determined.




(c)
Revenue Recognition





The
Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the price is fixed or
determinable, and collection is reasonably assured.





The
Company is a fully integrated environmental service firm structured to provide
field services, technical services, transportation, off-site treatment, on-site
treatment services, and environmental health and safety (“EHS”) compliance
services.  Through our services, we assist clients in meeting
regulatory requirements from the designing stage to the waste disposition stage.
The technicians who provide these services are billed at negotiated rates, or
the service is bundled into a service package.  These services are
billed and revenue recognized when the service is performed and completed. When
the service is billed, expected costs are accumulated and accrued.




Our field
services consist primarily of handling, packaging, and transporting a wide
variety of liquid and solid wastes of varying amounts. We provide the fully
trained labor and materials to properly package hazardous  and
non-hazardous waste according to requirements of the Environmental Protection
Agency and the Department of Transportation. Small quantities of laboratory
chemicals are segregated according to hazard class and packaged into appropriate
containers or drums. Packaged waste is profiled for acceptance at a client’s
selected treatment, storage and disposal facility (TSDF) and tracked
electronically through our systems. Once approved by the TSDF, we provide for
the transportation of the waste utilizing tractor-trailers or bobtail trucks.
The time between picking up the waste and transfer to an approved TSDF is
usually less than 10 days.  The Company recognizes revenue for waste
picked up and received waste at the time pick up or receipt occurs and
recognizes the estimated cost of disposal in the same period. For the Company’s
TSDF located in Rancho Cordova, CA, costs to dispose of waste materials located
at the Company’s facilities are included in accrued disposal
costs.  Due to the limited size of the facility, waste is held for
only a short time before transfer to a final treatment, disposal or recycling
facility. Revenue is recognized on contracts with retainage when services have
been rendered and collectability is reasonably assured.




40





(d)
Derivative Financial Instruments




The
Company does not use derivative instruments to hedge exposures to cash flow,
market or foreign currency risks. The Company evaluates all of its financial
instruments to determine if such instruments are derivatives or contain features
that qualify as embedded derivatives. For derivative financial instruments that
are accounted for as liabilities, the derivative instrument is initially
recorded at its fair value and is then re-valued at each reporting date, with
changes in the fair value reported in the condensed consolidated statements of
operations.  For stock-based derivative financial instruments, the
Company uses the Black-Scholes option pricing model to value the derivative
instruments at inception and on subsequent valuation dates.  The
classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is evaluated at the end of each
reporting period.  Derivative instrument liabilities are classified in
the balance sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument could be required within 12 months of
the balance sheet date.




Recent
Accounting Pronouncements




In June
2009, the FASB issued authoritative guidance on accounting standards
codification and the hierarchy of generally accepted accounting principles.” The
FASB Accounting Standards CodificationTM (“Codification”) has become the source
of authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
accordance with GAAP. All existing accounting standard documents are superseded
by the Codification and any accounting literature not included in the
Codification will not be authoritative. However, rules and interpretive releases
of the Securities Exchange Commission (“SEC”) issued under the authority of
federal securities laws will continue to be sources of authoritative GAAP for
SEC registrants. The FASB authoritative guidance is effective for interim and
annual reporting periods ending after September 15, 2009. Therefore, beginning
with our quarter ending September 30, 2009, all references made by it to GAAP in
its consolidated financial statements now use the new Codification numbering
system. The Codification does not change or alter existing GAAP and, therefore,
it does not have an impact on our financial position, results of operations and
cash flows.





On July
1, 2009, the Company adopted authoritative guidance issued by the FASB on
business combinations. The guidance retains the fundamental requirements that
the acquisition method of accounting (previously referred to as the purchase
method of accounting) be used for all business combinations, but requires a
number of changes, including changes in the way assets and liabilities are
recognized and measured as a result of business combinations. It also requires
the capitalization of in-process research and development at fair value and
requires the expensing of acquisition-related costs as incurred. We have applied
this guidance to business combinations completed since July 1,
2009.  Adoption of the new guidance did not have a material impact on
our financial statements.





In
October 2009, the FASB issued authoritative guidance on revenue recognition that
will become effective for the Company beginning July 1, 2010, 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.




41




In May
2009, the FASB issued new requirements for reporting subsequent events. These
requirements set forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. Disclosure of the date through which an
entity has evaluated subsequent events and the basis for that date is also
required.





The
Company does not believe that the adoption of the above recent pronouncements
will have a material effect on the Company’s consolidated results of operations,
financial position, or cash flows.




ITEM
3.  Quantitative and Qualitative Disclosures About Market
Risk




Not
required





ITEM
4. Controls and Procedures





Evaluation of Disclosure Controls and
Procedures




We
carried out an evaluation, under the supervision and with the participation of
our management, including our principal executive officer and principal
financial officer, of the effectiveness of our disclosure controls and
procedures (as defined  in  Rules  13a-15(e) and
15d-15(e) of the  Exchange  Act (defined  below)).
Based upon that evaluation, our principal executive officer and principal
financial officer concluded that, as of the end of the period covered in this
report, our disclosure controls and procedures were effective to ensure that
information required to be disclosed in reports filed under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed,
summarized and reported within the required time periods and is accumulated and
communicated to our management, including our principal executive officer and
principal financial officer, as appropriate to allow timely decisions regarding
required disclosure.





Our
management, including our principal executive officer and principal financial
officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all error or fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints and the benefits of controls must be considered relative to their
costs. Due to the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, have been detected. Accordingly, management
believes that the financial statements included in this report fairly present in
all material respects our financial condition, results of operations and cash
flows for the periods presented.





Changes
in Internal Control Over Financial Reporting





In
addition, our management with the participation of our Principal Executive
Officer and Principal Financial Officer have determined that no change in our
internal control over financial reporting (as that term is defined in Rules
13(a)-15(f) and 15(d)-15(f) of the Securities Exchange Act of 1934) occurred
during or subsequent to the quarter ended September 30, 2009 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.




42




PART
II - OTHER INFORMATION





Item
1.  Legal Proceeding





On July
5, 2007, a lawsuit was instituted by Romic Environmental Technologies Corp.
(“RET”) against the Company and four of its senior executives, Namki Yi, the
Vice President of Corporate Development, Betty McKee, the Director of Systems
& Financial Analysis, Mindy Rath, the Director of Sales and Gary
Bowling, the Regional General Manager for Southern CA, all of whom were formerly
employed by RET.  The lawsuit was brought in the Superior Court of the
State of California, County of Los Angeles.  In the lawsuit, RET alleges
that the Company and the four executives are liable to RET for among other
things, Violation of Non-Disclosure Agreements and Termination Protection
Agreements, Intentional Interference with contracts, and Violation of Trade
Secrets and Unfair Competition. Although RET alleges damages of Fifteen Million
Dollars and requests certain injunctive relief, recent settlement discussions
have produced offers substantially less than the original action. The
Company still believes that the lawsuit has no merit, and intends to
vigorously defend the action.





Item
1A.  Risk Factors





No
material changes from risk factor as previously disclose.





Item
2. Unregistered
Sales of Securities and Use of Proceeds – S-1/A  Registration
Statement
  None





Item 3. Defaults upon Senior
Securities
  None




Item 4. Submission of Matters to a Vote of
Security Holders
  None





Item 5. Other Information
  None
  43




Item
6.  Exhibits and Reports




(a)
              Exhibits
  (b)
              Reports
      on Form 8-K
 
 1.
              Stock
      Purchase agreement Island Environmental Svcs.; filed with the Commission
      on 9/24/08.
 
 2.
              Material
      definitive agreement and Sales of Equity; filed with the Commission on
      9/24/08.
 
 3.
              Amendment
      to Revolving Credit and Term Loan Agreement , filed with the Commission
      6/04/09.
 
 4.
              Material
      definitive agreement and Completion of acquisition or disposition of
      assets, filed with the commission on
8/21/09.
 
 5.
              Material
      definitive agreement and Corporate governance and management, filed with
      the commission on 9/11/2009.


44




SIGNATURES





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





GENERAL
ENVIRONMENTAL MANAGEMENT, INC





Dated:
            November
      23, 2009
            
            /s/
      Timothy J. KoziolTimothy
      J. Koziol, CEO and Chairman of the Board of DirectorsDated:
            November
      23, 2009
            
            /s/
      Brett M. ClarkExecutive
      Vice President of Finance, Chief Financial
  Officer