UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)





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


For the
quarterly period endedSeptember 30, 2009





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





Commission
file number: 1-9043





B.H.I.T.
      Inc.(Exact
      name of registrant as specified in its
charter)





Delaware
                  
                  36-3361229(State
      of incorporation)
                  
                  (I.R.S.
      Employer Identification
No.)





2255
      Glades Road, Suite 342-W, Boca Raton, Florida 
  33431(Address
      of principal executive offices)561-997-7775(Registrant’s
      telephone number)





Indicate
by a check mark whether the registrant: (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 registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes þ   No  ̈





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





Indicate
by a check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.





Large
      Accelerated Filer   ̈
            Accelerated
      Filer   ̈Non-Accelerated
      Filer   ̈
            Smaller
      Reporting Company  þ





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





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: 29,171,385 shares of common stock,
$0.01 par value per share, as of December 9, 2009.










Table
of Contents





Part I — Financial
    Information
                  1Item
      1.      Financial Statements
                  1Item
      2.      Management’s Discussion and Analysis
      of Financial Condition and Results of Operations
                  1Forward
      Looking Statements
                  1Overview
                  1Wood
      Energy
                  2Recent
      Events
                  2Proposed
      Amendments to Certificate of Incorporation
                  2Our
      History
                  3Results
      of Operations
                  3Results
      of Operations — Actual
                  3Comparison
      of Three Months Ended September 30, 2009 and 2008
                  4Comparison
      of Nine Months Ended September 30, 2009 and 2008
                  5Financial
      Condition and Liquidity
                  5Off-Balance
      Sheet Arrangements
                  6Results
      of Operation — Pro Forma with Wood Energy
                  6Pro
      Forma for the Three Months Ended September 30, 2009 Compared to Three
      Months Ended September 30, 2008
                  8Pro
      Forma for the Nine Months Ended September 30, 2009 Compared to Nine Months
      Ended September 30, 2008
                  9Recent
      Accounting Pronouncements
                  10How
      to Learn More About BHIT
                  11Item
      4(T).Controls and
      Procedures
                  11Part II — Other Information
                  12Item
      1.      Legal Proceedings
                  12Item
      2.      Unregistered Sales of Equity
      Securities and Use of Proceeds
                  12Item
      3.      Defaults Upon Senior
      Securities
                  13Item
      4.      Submission of Matters to a Vote of
      Security Holders
                  13Item
      5.      Other Information
                  13Item
      6.      Exhibits
                  13Signatures
                  14Financial Statments
                  F-1





Part
I — Financial Information




Item
      1.
            Financial
      Statements





Our
September 30, 2009 unaudited consolidated financial statements follow this
quarterly report beginning on page F-1.




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





Forward
Looking Statements




Some of
the statements that we make in this report, including statements about our
confidence in BHIT’s prospects and strategies, are forward-looking statements
within the meaning of § 21E of the Securities Exchange Act. Some of these
forward-looking statements can be identified by words like “believe,” “expect,”
“will,” “should,” “intend,” “plan,” or similar terms; others can be determined
by context. Statements contained in this report that are not historical facts
are forward-looking statements. These statements are necessarily estimates
reflecting our best judgment based upon current information, and involve a
number of risks and uncertainties. Many factors could affect the accuracy of
these forward-looking statements, causing our actual results to differ
significantly from those anticipated in these statements. While it is impossible
to identify all applicable risks and uncertainties, they include our ability
to:




·
            successfully
      operate Wood Energy;




·
            execute
      our acquisition/expansion plan by identifying and acquiring additional
      operating companies;




·
            obtain
      appropriate financing to complete potential
  acquisitions;




·
            generate
      adequate revenue to service our debt;
and




·
            comply
      with SEC regulations and filing requirements applicable to us as a public
      company.





You
should not place undue reliance on our forward-looking statements, which reflect
our analysis only as of the date of this report. The risks and uncertainties
listed above and elsewhere in this report and other documents that we file with
the Securities and Exchange Commission, including our annual report on Form
10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K,
particularly the Form 8-K/A filed December 10, 2009 regarding our acquisition of
Wood Energy, must be carefully considered by any investor or potential investor
in BHIT.





Overview




In
September 2009, BHIT acquired The Wood Energy Group, Inc., a Missouri based
company engaged in the business of railroad tie reclamation and disposal (“Wood
Energy”). Prior to acquiring Wood Energy, BHIT was a shell company without
significant operations or sources of revenues other than its investments. Our
management team continues to investigate acquisition opportunities and
additional sources of financing. Currently we are focusing our efforts on
railroad track construction, repair and maintenance businesses, but may explore
potential acquisitions in other industries as well.


1





Wood
Energy




Wood
Energy, headquartered in St. Louis, Missouri, is one of the nation’s largest
railroad tie recovery/energy generation companies. Founded in 2001, we provide
railroad tie pickup, reclamation and disposal services primarily to Class 1
railroads (defined by the American Association of Railroads as a railway company
with annual operating revenue over $346.8 million) and industrial customers. We
currently operate in Texas, Louisiana and Mississippi.





Our
services include picking up scrap railroad ties for major Class I railroads and
disposing of the ties by selling them to the landscape tie market or having the
ties ground to create chipped wood for sale as biomass fuel to the co-generation
market. In 2008, we recovered over 900,000 railroad ties, 67% of which were used
by the co-generation market, 28% for the landscape market and 5% went to
landfill. In addition, Wood Energy has recently begun processing other wood
products for a major forest products company for additional sources of biomass
fuel.





Recent
Events




Proposed
Amendments to Certificate of Incorporation




On
September 18, 2009, our board of directors approved certain amendments to our
certificate of incorporation and recommended adoption of the amendments to our
stockholders. To avoid the significant costs and delays associated with holding
a meeting, our board elected to seek approval of the amendments by written
consent. On October 5, 2009, the holders of an aggregate of 16,706,491 shares of
our common stock, which represented approximately 57.3% of the shares entitled
vote on the amendments to the certificate, consented in writing to the
amendments. As a result, no further vote was required.





On
October 14, 2009, we distributed an information statement to our stockholders
describing the proposed amendments. Briefly, the amendments would:





·
            change
      the name of the company to Banyan Rail Services
  Inc.,




·
            authorize
      1.0 million shares of “blank check” preferred stock,
  and




·
            effectuate
      a one-for-ten reverse stock split of BHIT’s common
  stock.





The name
change, authorization of preferred stock and the reverse stock split will become
effective when we file a certificate of amendment for each of the amendments to
our certificate of incorporation with the Delaware Secretary of State. We
anticipate filing the amendments some time in the first quarter of 2010.
However, our board of directors retains discretion under Delaware law to delay
or not to implement the amendments. If our board determines not to implement any
or all of the amendments, the name change, authorization of blank check
preferred stock and reverse stock split will not be effected.


2


Our
History
  The
Company was originally organized under the laws of the State of Massachusetts in
1985, under the name VMS Hotel Investment Trust, for the purpose of investing in
mortgage loans, principally to entities affiliated with VMS Realty Partners.
These loans were collateralized by hotel and resort properties. From 1989 to
1992 we experienced severe losses as a result of a decline in real estate values
and the resulting defaults on the mortgages we held.  The company was
reorganized as a Delaware corporation in 1987 and changed its name to B.H.I.T.
Inc. in 1998.
 
 On
January 24, 2007, a group of private investors purchased 41.7% of our
outstanding shares held by our largest shareholder at the time, Summa Holdings,
Inc. As a result of the transaction, James Benenson, Jr. and John V. Curci each
resigned as directors and officers of the Company and new directors were
appointed to fill vacancies in the board.
 
 Because
members of our new management team have experience with the railroad industry,
we began investigating acquisitions of companies in the rail industry. In 2007,
we were presented with the opportunity to purchase L.A. Colo, LLC, a railroad
maintenance and construction company. The transaction was terminated by us in
October 2008 due to the performance of Colo, resulting in arbitration
proceedings over funds we had placed in escrow. The arbitration was recently
resolved in favor of Colo and its sellers. For more information about Colo and
the arbitration, please turn to the section of this report captioned “Legal
Proceedings” on page 12.
 
 In the
spring of 2009, we entered negotiations with the owners of Wood Energy to
acquire the company. As a result of the acquisition of Wood Energy, BHIT is no
longer a shell company and is now engaged in the business of railroad tie
reclamation and disposal.
 
 Results
of Operations
  Our
discussion and analysis of our financial condition and results of operations is
based upon consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and disclosure of contingent assets and liabilities, if
any, at the date of the financial statements. We base our estimates on
historical experience and various other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ from these
estimates. Please see a complete list of significant accounting policies in Note
3 of the notes to our consolidated financial statements included with this
report.
 
 Results
of Operations — Actual
  We
acquired Wood Energy effective September 1, 2009 and our operating results
discussed on pages 4 and 5 include only the results of Wood Energy from that
date, or for one month of the quarter and nine month period ended September 30,
2009, and not at all in 2008. For a comparison of Wood Energy’s results of
operations, please turn to “Results of Operations — Pro Forma with Wood Energy”
on page 6. Prior to acquiring Wood Energy, BHIT was a shell company without
significant operations or sources of revenues other than its
investments.
  3
 
 Comparison
of Three Months Ended September 30, 2009 and 2008
  Revenues
for the three months ended September 30, 2009 were $377,126, consisting of
revenues from our newly acquired tie pick-up operation. The gross margin in 2009
was 55.1% of revenue related to the acquired tie pick-up operation. This gross
margin is higher than the historical gross margin of Wood Energy (approximately
30% - 35%) primarily due to the elimination of lease expense after the
acquisition by BHIT, as the leases were all paid off, as well as a reduction in
trucking expense.  We had no revenues or gross margin in 2008. Our gross
margin will fluctuate depending upon a number of factors including geographical
location of our projects, trucking, travel and fuel costs, and other factors. In
addition, depreciation expense has been classified as part of cost of sales,
whereas depreciation had formerly been classified by Wood as a separate item on
the statement of operations.
 
 Selling,
general and administrative expenses were $113,235 in 2009, an increase of
$82,897 or 273.2%, compared to $30,338 in 2008. This increase is primarily due
to $95,828 of selling, general and administrative expenses for Wood Energy for
the month ended September 2009.
 
 In 2009
we incurred $100,354 of expenses in connection with the acquisition of Wood
Energy.
 
 With
respect to expenses incurred for an acquisition not completed, on November 18,
2008, Colo and Iron Rail instituted arbitration proceedings before the American
Arbitration Association under the terms of the escrow agreement against BHIT and
the escrow agent to obtain the remaining contents of the escrow in an action
captioned L.A. Colo, LLC and
Iron Rail Group LLC v. B.H.I.T. Inc. and Kohrman Jackson & Krantz
PLL. The parties had a binding arbitration in July 2009 to resolve this
matter. As a result of the arbitration BHIT was required to disburse the escrow
proceeds to Colo as well as pay interest and legal costs. We recorded a
write-off totaling $508,349 for the three months ended September 30, 2009. In
the third quarter of 2008, we expensed $355,898 in connection with the Colo
acquisition.
 
 Interest
income for the quarter ended September 30, 2009 was $2,255, compared to $10,539
for the same period in 2008, a decrease of $8,284, or 78.6%. Interest income
decreased as the result of a decrease in invested funds as well as lower
interest rates earned on invested funds.
 
 Interest
expense was $36,543 in 2009 in connection with financing related to the Wood
acquisition, consisting primarily of interest on the term loan, interest on the
convertible debentures, amortization of loan costs and amortization of the
beneficial conversion feature related to the convertible debentures. There was
no interest expense in 2008.
 
 Income
tax expense of $30,000 was recorded in 2009, compared to $0 in 2008. The
computation of income tax expense is based on the expected effective tax rate
for each full fiscal year (5.5% in 2009 and 0% in 2008). The difference in the
effective tax rate is due to the acquisition of Wood Energy.
  4
  Comparison
of Nine Months Ended September 30, 2009 and 2008
  Revenues
for the nine months ended September 30, 2009 were $377,126, consisting of
revenues from our acquired tie pick-up operation. The gross margin in 2009 was
55.1% of revenue related to the acquired tie pick-up operation. This gross
margin is higher than the historical gross margin of Wood Energy (approximately
30% - 35%) primarily due to the elimination of lease expense after the
acquisition by BHIT, as the leases were all paid off, as well as a reduction in
trucking expense.  We had no revenues or gross margin in 2008. Our gross
margin will fluctuate depending upon a number of factors including geographical
location of our projects, trucking, travel and fuel costs, and other factors. In
addition, depreciation expense has been classified as part of cost of sales,
whereas depreciation had formerly been classified by Wood as a separate item on
the statement of operations.
 
 Selling,
general and administrative expenses were $266,746 in 2009, an increase of
$120,473 or 82.4%, compared to $146,272 in 2008. This increase is primarily due
to $95,828 of selling, general and administrative expenses for Wood Energy for
the month of September 2009.
 
 Stock
based compensation was $87,500 for stock options issued to BHIT’s officers and
directors in the 2009 period, whereas no stock options were issued in the 2008
period.
 
 In 2009,
we incurred $100,354 of expenses in connection with the acquisition of Wood
Energy.
 
 With
respect to expenses incurred for an acquisition not completed, on November 18,
2008, Colo and Iron Rail instituted arbitration proceedings before the American
Arbitration Association under the terms of the escrow agreement against BHIT and
the escrow agent to obtain the remaining contents of the escrow in an action
captioned L.A. Colo, LLC and
Iron Rail Group LLC v. B.H.I.T. Inc. and Kohrman Jackson & Krantz
PLL. The parties had a binding arbitration in July 2009 to resolve this
matter. As a result of the arbitration BHIT was required to disburse the escrow
proceeds to Colo as well as pay interest and legal costs. We recorded a
write-off totaling $508,349 for the nine months ended September 30, 2009. In the
nine months ended 2008, we expensed $355,898 in connection with the Colo
acquisition.
 
 Interest
income for the nine months ended September 30, 2009 was $11,725, compared to
$39,695 for the same period in 2008, a decrease of $27,970, or 70.5%. Interest
income decreased as the result of a decrease in invested funds as well as lower
interest rates earned on invested funds.
 
 Interest
expense was $36,543 in 2009 in connection with financing related to the Wood
acquisition, consisting primarily of interest on the term loan, interest on the
convertible debentures, amortization of loan costs and amortization of the
beneficial conversion feature related to the convertible debentures. There was
no interest expense in 2008.
 
 Income
tax expense of $30,000 was recorded in 2009 compared to $0 in 2008. The
computation of income tax expense is based on the expected effective tax rate
for each full fiscal year (3.8% in 2009 and 0% in 2008). The difference in the
effective tax rate is due to the acquisition of Wood Energy.
 
 Financial
Condition and Liquidity
  Cash and
cash equivalents consist of cash and short-term investments. Our cash and cash
equivalents balance at September 30, 2009 was $403,944, a decrease of $1,209,229
from $1,613,173 at December 31, 2008. Cash and cash equivalents decreased in the
first nine months of 2009 primarily as the result of our acquisition of Wood
Energy, our net loss for the period and the purchase of 250,000 shares of
treasury stock for $62,500 in the first quarter.
  5
 
 To
finance the acquisition of Wood Energy, we entered a five-year senior secured
term loan in the amount of $3.0 million with Fifth Third Bank. BHIT guaranteed
the loan and Wood Energy is the borrower. Payments of principal and interest are
due monthly. Therefore the term loan will increase our need for liquidity on an
ongoing basis throughout the year. To obtain additional funds for the
acquisition, BHIT also issued Series A Convertible Debentures bearing interest
at the rate of 10%, payable semi-annually. We raised $1,525,000 through the
issuance of the debentures. The debentures are due in five years, and are
convertible into shares of common stock of BHIT at a conversion price of $0.20 a
share.
 
 In
connection with the acquisition of Wood Energy, we also obtained two credit
lines in the amounts of $500,000 and $1.5 million from Fifth Third Bank for
working capital and capital expenditures, respectively. Draws on the working
capital line are based on specific percentages of eligible working capital
amounts, including accounts receivable and inventory. Draws on the capital
expenditures line are based on 80% of the cost of such capital
assets.
 
 Based on
our cash balances and borrowing capacity under our working capital and capital
expenditures lines of credit, we believe these funds will be sufficient to meet
our working capital needs in the near term. However, we cannot guarantee we will
not require additional funds for ongoing operations or other
acquisitions.
 
 Off-Balance
Sheet Arrangements
  We do not
have any material off-balance sheet arrangements.
 
 Results
of Operation — Pro Forma with Wood Energy
  Our
actual results of operations for the three month and nine month periods ended
September 30, 2009 and 2008 do not provide a very meaningful basis for
comparison since we have only been an operating company since we acquired Wood
Energy effective September 1, 2009. To provide a more complete view of the
combined operating results of BHIT together with those of Wood Energy for the
three and nine month periods ended September 30, 2009 and 2008, we prepared the
following selected pro forma financial information combining BHIT and Wood
Energy’s unaudited results, as if BHIT had acquired Wood Energy as of January 1,
2008.
  6
 B.H.I.T.
Inc. and Subsidiary
 Unaudited
Pro Forma Condensed Combined Income Statement
 Three and
Nine Months Ended September 30, 2009 and 2008
 
 Three
      Months Ended September 30,
                                        
                                        
                                        Nine
      Months Ended September 30,2009
                                        
                                        
                                        2008
                                        
                                        
                                        2009
                                        
                                        
                                        2008Revenues
                                        
                                        $
                                        1,277,648
                                        
                                        
                                        $
                                        1,562,202
                                        
                                        
                                        $
                                        3,897,576
                                        
                                        
                                        $
                                        3,884,711Cost
      of sales
                                        
                                        
                                        838,330
                                        
                                        
                                        
                                        1,121,511
                                        
                                        
                                        
                                        2,621,710
                                        
                                        
                                        
                                        2,478,152Gross
      profit
                                        
                                        
                                        439,318
                                        
                                        
                                        
                                        440,691
                                        
                                        
                                        
                                        1,275,866
                                        
                                        
                                        
                                        1,406,559Selling,
      general and administrative expenses
                                        
                                        
                                        310,404
                                        
                                        
                                        
                                        310,823
                                        
                                        
                                        
                                        977,429
                                        
                                        
                                        
                                        905,780Stock
      based compenstation
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        87,500
                                        
                                        
                                        
                                        -Acquisition
      expenses for Wood Energy
                                        
                                        
                                        100,354
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        100,354
                                        
                                        
                                        
                                        -Write
      off of expenses for acquistion not completed
                                        
                                        
                                        508,349
                                        
                                        
                                        
                                        355,898
                                        
                                        
                                        
                                        508,349
                                        
                                        
                                        
                                        355,898Depreciation
                                        
                                        
                                        140,000
                                        
                                        
                                        
                                        156,667
                                        
                                        
                                        
                                        420,000
                                        
                                        
                                        
                                        470,000Loss
      from operations
                                        
                                        
                                        (619,789
                                        )
                                        
                                        
                                        (382,697
                                        )
                                        
                                        
                                        (817,766
                                        )
                                        
                                        
                                        (325,119
                                        )Other
      income (expenses):Interest
      income
                                        
                                        
                                        2,255
                                        
                                        
                                        
                                        10,539
                                        
                                        
                                        
                                        11,725
                                        
                                        
                                        
                                        47,615Interest
      expense
                                        
                                        
                                        (164,161
                                        )
                                        
                                        
                                        (143,382
                                        )
                                        
                                        
                                        (419,396
                                        )
                                        
                                        
                                        (430,146
                                        )Loss
      before income taxes
                                        
                                        
                                        (781,695
                                        )
                                        
                                        
                                        (515,540
                                        )
                                        
                                        
                                        (1,225,437
                                        )
                                        
                                        
                                        (707,650
                                        )Income
      taxes
                                        
                                        
                                        (30,000
                                        )
                                        
                                        
                                        (10,000
                                        )
                                        
                                        
                                        (48,000
                                        )
                                        
                                        
                                        (13,000
                                        )Net
      loss
                                        
                                        $
                                        (811,695
                                        )
                                        
                                        $
                                        (525,540
                                        )
                                        
                                        $
                                        (1,273,437
                                        )
                                        
                                        $
                                        (720,650
                                        )Weighted
      average number of shares outstanding - basic
                                        
                                        
                                        29,171,385
                                        
                                        
                                        
                                        29,421,385
                                        
                                        
                                        
                                        29,249,852
                                        
                                        
                                        
                                        29,421,385Weighted
      average number of shares outstanding - diluted
                                        
                                        
                                        37,921,385
                                        
                                        
                                        
                                        29,421,385
                                        
                                        
                                        
                                        37,999,852
                                        
                                        
                                        
                                        29,421,385Basic
      and diluted net loss per share of common stock
                                        
                                        $
                                        (0.03
                                        )
                                        
                                        $
                                        (0.02
                                        )
                                        
                                        $
                                        (0.04
                                        )
                                        
                                        $
                                        (0.02
                                        )
  7
  Pro
Forma for the Three Months Ended September 30, 2009 Compared to Three Months
Ended September 30, 2008
  Revenues
for the three months ended September 30, 2009 were $1,277,648, a reduction of
$284,554 or 18.2%, compared to revenues of $1,562,202 for the three months ended
September 30, 2008. The decrease is due principally to the timing of
revenue recognition for work in process at the end of each
period.
 
 Gross
margins in 2009 were 34.4% of revenues as compared to 28.2% in 2008. The
increase in the margin is principally due to an increase in the margin for the
one month in 2009 subsequent to Wood’s acquisition by BHIT as equipment rental
obligations were terminated as of the acquisition date. Our gross margin will
fluctuate depending upon a number of factors including geographical location of
our projects, trucking, travel and fuel costs, and other factors.
 
 Selling,
general and administrative expenses of $310,404 in 2009 are comparable to
$310,823 of selling, general and administrative expenses in 2008.
 
 In 2009,
we incurred $100,354 of expenses in connection with the acquisition of Wood
Energy.
 
 With
respect to expenses incurred for an acquisition not completed, on November 18,
2008, Colo and Iron Rail instituted arbitration proceedings before the American
Arbitration Association under the terms of the escrow agreement against BHIT and
the escrow agent to obtain the remaining contents of the escrow in an action
captioned L.A. Colo, LLC and
Iron Rail Group LLC v. B.H.I.T. Inc. and Kohrman Jackson & Krantz
PLL. The parties had a binding arbitration in July 2009 to resolve this
matter. As a result of the arbitration BHIT was required to disburse the escrow
proceeds to Colo as well as pay interest and legal costs. We recorded a
write-off totaling $508,349 for the three months ended September 30, 2009. In
2008, we expensed $355,898 in connection with this same
acquisition.
 
 Depreciation
expense of $140,000 in 2009 is comparable to $156,667 of depreciation expense in
2008.
 
 Interest
income for the quarter ended September 30, 2009 was $2,255, compared to $10,539
for the same period in 2008, a decrease of $8,284, or 78.6%. Interest income
decreased as the result of a decrease in invested funds as well as lower
interest rates earned on invested funds.
 
 Interest
expense for the quarter ended September 30, 2009 was $164,161, compared to
$143,382 for the same period in 2008, an increase of $20,779, or 14.5%. Interest
expense increased as the result of higher outstanding debt, and amortization of
loan costs and the beneficial conversion feature for the 2009 period as compared
to the 2008 period due to the acquisition of Wood Energy.
 
 Income
tax expense of $30,000 was recorded in 2009, compared to $10,000 in 2008. The
computation of income tax benefit is based on the expected effective tax rate
for each full fiscal year, which is comparable each year (3.8% in 2009 and 1.9%
in 2008).
  8
 
 Pro
Forma for the Nine Months Ended September 30, 2009 Compared to Nine Months Ended
September 30, 2008
  Revenues
of $3,897,576 in 2009 are comparable to revenues of $3,884,711 in
2008.
 
 Gross
margins in 2009 were 32.7% of revenues as compared to 36.2% in 2008. The
decrease in the margin is due to higher equipment repairs, travel and trucking
expense, offset by a reduction in fuel expense and equipment rental in the 2009
period as compared to 2008. Our gross margin will fluctuate depending upon a
number of factors including geographical location of our projects, trucking,
travel and fuel costs, and other factors.
 
 Selling,
general and administrative expenses of $977,429 in 2009 is comparable to
selling, general and administrative expenses of $905,780 in 2008.
 
 Stock
based compensation was $87,500 for stock options issued to BHIT’s officers and
directors in the 2009 period, whereas no stock options were issued in the 2008
period.
 
 In 2009,
we incurred $100,354 of expenses in connection with the acquisition of Wood
Energy.
 
 With
respect to expenses incurred for an acquisition not completed, on November 18,
2008, Colo and Iron Rail instituted arbitration proceedings before the American
Arbitration Association under the terms of the escrow agreement against BHIT and
the escrow agent to obtain the remaining contents of the escrow in an action
captioned L.A. Colo, LLC and
Iron Rail Group LLC v. B.H.I.T. Inc. and Kohrman Jackson & Krantz
PLL. The parties had a binding arbitration in July 2009 to resolve this
matter. As a result of the arbitration BHIT was required to disburse the escrow
proceeds to Colo as well as pay interest and legal costs. We recorded a
write-off totaling $508,349 for the three months ended September 30, 2009. In
2008, we expensed $355,898 in connection with this same
acquisition.
 
 Depreciation
expense of $420,000 in 2009 is comparable to $470,000 of depreciation expense in
2008.
 
 Interest
income for 2009 was $11,725, compared to $47,615 in 2008, a decrease of $35,890,
or 75.4%. Interest income decreased as the result of a decrease in invested
funds as well as lower interest rates earned on invested funds.
 
 Interest
expense of $419,396 in 2009 is comparable to $430,146 in 2008.
 
 Income
tax expense of $48,000 was recorded in 2009, compared to $13,000 in 2008. The
computation of income tax expense is based on the expected effective tax rate
for each full fiscal year, which is comparable each year (3.8% in 2009 and 1.9%
in 2008).
  9
  Recent
Accounting Pronouncements
 
 FASB
Accounting Standards Codification
 (Accounting
Standards Update (“ASU”) 2009-01)
 
 In June
2009, the Financial Accounting Standards Board (“FASB”) issued the FASB
Accounting Standards Codification (the “Codification”) as the single source of
authoritative nongovernmental GAAP. All existing accounting standard documents,
such as FASB, American Institute of Certified Public Accountants, Emerging
Issues Task Force and other related literature, excluding guidance from the
Securities and Exchange Commission (“SEC”), have been superseded by the
Codification. All other non-grandfathered, non-SEC accounting literature not
included in the Codification has become nonauthoritative. The Codification did
not change GAAP, but instead introduced a new structure that combines all
authoritative standards into a comprehensive, topically organized online
database. The Codification is effective for interim or annual periods ending
after September 15, 2009, and impacts the Company’s financial statements as all
future references to authoritative accounting literature will be referenced in
accordance with the Codification. There have been no changes to the content of
the Company’s financial statements or disclosures, except changes to references
as required, as a result of implementing the Codification during the nine months
ended September 30, 2009.
 
 As a
result of the Company’s implementation of the Codification during the nine
months ended September 30, 2009 and 2008, previous references to new accounting
standards and literature are no longer applicable. The Company will provide
reference to both new and old guidance to assist in understanding the impacts of
recently adopted accounting literature, particularly for guidance adopted since
the beginning of the current fiscal year.
 
 Fair
Value Measurements
 (Included
in ASC 825 “Financial Instruments”, previously FAS No. 157 “Fair Value
Measurements”)
 
 In
September 2006, the FASB issued FAS Statement No. 157, “Fair Value Measurements”
(“FAS No. 157”). This standard provides guidance for using fair value to measure
assets and liabilities. Under FAS No. 157, fair value refers to the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants in the market in which the reporting
entity transacts. In this standard, the FASB clarifies the principle that fair
value should be based on the assumptions that market participants would use when
pricing the asset or liability. In support of this principle, FAS No. 157
establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. The fair value hierarchy gives the highest priority
to quoted prices in active markets and the lowest priority to unobservable data,
for example, the reporting entity’s own data. Under the standard, fair value
measurements would be separately disclosed by level within the fair value
hierarchy. The adoption of FAS No. 157 did not have an impact on the Company’s
financial position, results of operations or cash flows. FASB Staff Position
(“FSP”) FAS 157-2, “Effective Date of FASB Statement No. 157,” issued in
February 2008, provides a one-year deferral to fiscal years beginning after
November 15, 2008 of the effective date of FAS No. 157 for nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed in
financial statements at least annually at fair value on a recurring basis. The
Company’s adoption of the remaining provisions of FAS No. 157 did not have an
impact on the Company’s financial position, results of operations or cash
flows.
  10
 
 Fair
Value Measurement and Disclosures Topic 820 – Measuring Liabilities at Fair
Value
  In
August 2009, the FASB issued the FASB Accounting Standards Update No.
2009-05 “Fair Value Measurement and Disclosures Topic 820 – Measuring
Liabilities at Fair Value” which provides amendments to subtopic 820-10, Fair
Value Measurements and Disclosures – Overall, for the fair value measurement of
liabilities.  This update provides clarification that in circumstances in
which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using one or
more of the following techniques: 1. A valuation technique that uses: a. The
quoted price of the identical liability when traded as an asset, or b. Quoted
prices for similar liabilities or similar liabilities when traded as assets. 2.
Another valuation technique that is consistent with the principles of topic 820;
two examples would be an income approach, such as a present value technique, or
a market approach, such as a technique that is based on the amount at the
measurement date that the reporting entity would pay to transfer the identical
liability or would receive to enter into the identical liability.  The
amendments in this update also clarify that when estimating the fair value of a
liability, a reporting entity is not required to include a separate input or
adjustment to other inputs relating to the existence of a restriction that
prevents the transfer of the liability.  The amendments in this update also
clarify that both a quoted price in an active market for the identical liability
when traded as an asset in an active market when no adjustments to the quoted
price of the asset are required are Level 1 fair value measurements.  The
Company does not expect the adoption of this update to have a material impact on
its financial position, results of operations or cash flows. This standard is
effective beginning in the first reporting period after issuance of the
standard, January 1, 2010 for the Company.
 
 How
to Learn More About BHIT
  We file
annual, quarterly and current reports and other information with the SEC. Our
SEC filings are available to the public on the internet at the SEC’s web site at
SEC.gov. To learn more about BHIT you can also contact our CEO, Gary O. Marino,
at 561-443-5300.
  Item
4(T). Controls and Procedures
 
 Under the
direction of our chief executive officer and chief financial officer, management
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Exchange Act Rule 13a-15(e)). Based on
this evaluation, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures were effective as of
September 30, 2009. Further, except that we have instituted new controls over
the internal control systems of Wood Energy, such as hiring a controller,
instituting segregation of duties and improving management oversight, there have
been no changes in our internal control over financial reporting during the
quarter ended September 30, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting (as defined in Exchange Act Rule 13a-15(f)).
  11
 
 Part
II — Other Information
  Item
      1.
              Legal
      Proceedings
 
 On July
24, 2008, we entered into an asset purchase agreement with L.A. Colo, LLC and
Iron Rail Group, LLC, the owner of Colo, pursuant to which we agreed to purchase
substantially all of the assets of Colo for $15.0 million, subject to
adjustment. Colo provides railroad maintenance and construction services to
short line railroads and industrial customers. The transaction was delayed due
to deteriorating financial and economic conditions and was ultimately terminated
by us due to a reported reduction in the financial results of Colo, which were
contrary to prior representations of Colo as to their financial
performance.
 
 Upon
termination, Colo and Iron Rail demanded payment of the $350,000 that had been
placed into escrow. We authorized the distribution of $10,000 of the escrow to
Iron Rail on October 31, 2008, but because of the nature of the circumstances
surrounding the termination of the acquisition we disputed that Colo and Iron
Rail were entitled to the remaining $340,000. On November 18, 2008, Colo and
Iron Rail instituted arbitration proceedings before the American Arbitration
Association under the terms of the escrow agreement against BHIT and the escrow
agent to obtain the remaining contents of the escrow in an action captioned
L.A. Colo, LLC and Iron Rail
Group LLC v. B.H.I.T. Inc. and Kohrman Jackson & Krantz PLL. The
parties had a binding arbitration in July 2009 to resolve this matter. A final
decision was reached on September 2, 2009. The arbitration panel awarded Colo
and Iron Rail the $340,000 in escrow as well as attorneys’ fees, interest and
costs. The arbitration award and other costs totaling $508,349 are reflected as
an expense in our financial statements for the third quarter of
2009.
 
 We are
not aware of any other pending legal proceedings involving BHIT, nor were any
proceedings terminated in the quarter ended September 30, 2009. We are not aware
of any pending legal proceedings involving Wood Energy. Wood Energy settled a
workman’s compensation lawsuit in the quarter ended September 30, 2009 prior to
our acquisition of Wood Energy. The former shareholders of Wood Energy agreed to
indemnify BHIT against any costs, including legal fees, which may be incurred
relating to any aspect of this lawsuit.
  Item
      2.
              Unregistered
      Sales of Equity Securities and Use of
Proceeds
 
 In
connection with our acquisition of Wood Energy, we issued 3,333,334 shares of
our common stock to the sellers of Wood Energy in payment of a portion of the
purchase price. We also conducted a private placement of Series A Convertible
Debentures to raise capital for the cash portion of the Wood Energy purchase
price. The debentures bear interest at the rate of 10%, payable semi-annually.
Each debenture is convertible at the holder’s option into shares of common stock
of BHIT at a conversion price of $0.20 per share. We agreed that if we conduct a
registered offering of securities following the private placement, we will
register the shares of common stock issued to the sellers of Wood Energy and
underlying the debentures.
  12
  Through
this private placement, debentures were issued in the amount of $1,525,000. The
issuance of shares to the sellers and the private placement of debentures were
made in reliance on Section 4(2) of the Securities Act of 1933 for the offer and
sale of securities not involving a public offering and Rule 506 of Regulation D
of the Securities Act. For additional information on the characteristics of the
debentures and our common stock, please see the caption “Description of
Securities” under Item 2.01 of our current report on Form 8-K/A filed December
10, 2009.
  Item
      3.
              Defaults
      Upon Senior Securities
 
 Not
applicable.
  Item
      4.
              Submission
      of Matters to a Vote of Security
Holders
 
 Not
applicable.
  Item
      5.
              Other
      Information
 
 For
information regarding proposed changes in our certificate of incorporation,
please turn to “Recent Events” on page 2.
  Item
      6.
              Exhibits
 
 10.1
              Contract
      for Work or Services between The Wood Energy Group, Inc. and Union Pacific
      Railroad Company
 
 31.1
              Rule
      13a-14(a)/15d-14(a) Certification of Principal Executive Officer Pursuant
      to § 302 of the Sarbanes-Oxley Act of
2002
 
 31.2
              Rule
      13a-14(a)/15d-14(a) Certification of Principal Financial Officer Pursuant
      to § 302 of the Sarbanes-Oxley Act of
2002
 
 32
              Rule
      13a-14(b)/15d-14(b) Certification Pursuant to § 906 of the Sarbanes-Oxley
      Act of 2002
  13
  Signatures
 
 In
accordance with the requirements of the Securities Exchange Act of 1934,
B.H.I.T. Inc. has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
 
 B.H.I.T.
      Inc.Date:
      December 15, 2009
                /s/ Gary O. MarinoBy
      Gary O. MarinoChairman
      and Chief Executive
Officer
  14




B.H.I.T.
Inc. and Subsidiary


Balance
Sheets


September
30, 2009 and December 31, 2008





September 30, 2009
                
                
                December 31, 2008(Consolidated Unaudited)
                
                
                (Stand-alone)ASSETSCurrent
      assetsCash
      and cash equivalents
                
                $
                403,944
                
                
                $
                1,613,173Interest
      receivable on cash and cash equivalents
                
                
                -
                
                
                
                107Accounts
      receivable
                
                
                615,942
                
                
                
                -Cost
      incurred related to deferred revenue
                
                
                89,307
                
                
                
                -Prepaid
      expenses and other current assets
                
                
                19,093
                
                
                
                9,750Total
      current assets
                
                
                1,128,286
                
                
                
                1,623,030Property
      and equipment, net
                
                
                1,808,095
                
                
                
                -Other
      assetsDeferred
      loan costs
                
                
                198,450
                
                
                
                -Intangible
      assets
                
                
                2,000,000
                
                
                
                -Goodwill
                
                
                3,833,511
                
                
                
                -Deposit
                
                
                -
                
                
                
                340,0006,031,961
                
                
                
                340,000Total
      assets
                
                $
                8,968,342
                
                
                $
                1,963,030LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable and accrued expenses
                
                $
                835,980
                
                
                $
                10,303Income
      taxes payable
                
                
                55,200
                
                
                
                -Deferred
      revenue
                
                
                103,047
                
                
                
                -Current
      portion of long-term debt
                
                
                600,000
                
                
                
                -Total
      current liabilities
                
                
                1,594,227
                
                
                
                10,303Deferred
      income taxes
                
                
                1,100,000
                
                
                
                -Long-term
      debt
                
                
                2,400,000
                
                
                
                -Convertible
      debentures
                
                
                396,020
                
                
                
                -Total
      liabilities
                
                
                5,490,247
                
                
                
                10,303Stockholders'
      equityCommon
      stock, $0.01 par value. 75,000,000 shares
      authorized.  29,454,142 shares issued at September 30, 2009 and
      26,120,808 at December 31, 2008, respectively
                
                
                294,541
                
                
                
                261,208Additional
      paid-in capital
                
                
                91,897,973
                
                
                
                89,533,389Accumulated
      deficit
                
                
                (88,643,730
                )
                
                
                (87,833,681
                )Treasury
      stock, at cost, for 282,757 and 32,757 shares at September 30, 2009 and
      December 31, 2008, respectively
                
                
                (70,689
                )
                
                
                (8,189
                )Total
      stockholders' equity
                
                
                3,478,095
                
                
                
                1,952,727Total
      liabilities and stockholders' equity
                
                $
                8,968,342
                
                
                $
                1,963,030





See
accompanying notes to financial statements


F-1





B.H.I.T.
Inc. and Subsidiary


Balance
Sheet





PredecessorDecember 31, 2008ASSETSCurrent
      assetsCash
      and cash equivalents
                
                $
                2,175Accounts
      receivable
                
                
                319,582Cost
      incurred related to deferred revenue
                
                
                870,879Total
      current assets
                
                
                1,192,636Property
      and equipment, net
                
                
                818,262Total
      assets
                
                $
                2,010,898LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      liabilitiesAccounts
      payable and other accrued expenses
                
                $
                397,261Income
      taxes payable
                
                
                25,200Deferred
      revenue
                
                
                1,389,924Loans
      payable
                
                
                500,000Current
      portion of long-term capital lease obligations
                
                
                170,042Current
      portion of long-term debt
                
                
                42,964Total
      current liabilities
                
                
                2,525,391Capital
      lease obligations, less current portion
                
                
                282,831Long-term
      debt, less current portion
                
                
                58,429Total
      liabilities
                
                
                2,866,651Stockholders'
      deficitCommon
      stock, $1.00 par value. 30,000 shares authorized;  1000 shares
      issued and outstanding
                
                
                1,000Stockholders'
      loans
                
                
                (111,000
                )Accumulated
      deficit
                
                
                (745,753
                )Total
      stockholders' deficit
                
                
                (855,753
                )Total
      liabilities and stockholders' deficit
                
                $
                2,010,898





See
accompanying notes to financial statements


F-2





B.H.I.T.
Inc. and Subsidiary


Statements
of Operations


Three
and Nine Months Ended September 30, 2009 and 2008


(Unaudited)





Three Months Ended September 30,
                  
                  
                  Nine Months Ended September 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Revenues
                  
                  $
                  377,126
                  
                  
                  $
                  -
                  
                  
                  $
                  377,126
                  
                  
                  $
                  -Cost
      of sales
                  
                  
                  169,407
                  
                  
                  
                  -
                  
                  
                  
                  169,407
                  
                  
                  
                  -Gross
      profit
                  
                  
                  207,718
                  
                  
                  
                  -
                  
                  
                  
                  207,718
                  
                  
                  
                  -Selling,
      general and administrative expenses
                  
                  
                  113,236
                  
                  
                  
                  30,338
                  
                  
                  
                  266,746
                  
                  
                  
                  146,272Stock
      based compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  87,500
                  
                  
                  
                  -Acquisition
      expenses for Wood Energy
                  
                  
                  100,354
                  
                  
                  
                  -
                  
                  
                  
                  100,354
                  
                  
                  
                  -Write
      off of expenses for acquistion not completed
                  
                  
                  508,349
                  
                  
                  
                  355,898
                  
                  
                  
                  508,349
                  
                  
                  
                  355,898Loss
      from operations
                  
                  
                  (514,221
                  )
                  
                  
                  (386,236
                  )
                  
                  
                  (755,231
                  )
                  
                  
                  (502,170
                  )Other
      income (expenses)Interest
      income
                  
                  
                  2,255
                  
                  
                  
                  10,539
                  
                  
                  
                  11,725
                  
                  
                  
                  39,695Interest
      expense
                  
                  
                  (36,543
                  )
                  
                  
                  -
                  
                  
                  
                  (36,543
                  )
                  
                  
                  -Loss
      before income taxes
                  
                  
                  (548,509
                  )
                  
                  
                  (375,697
                  )
                  
                  
                  (780,049
                  )
                  
                  
                  (462,475
                  )Income
      taxes
                  
                  
                  30,000
                  
                  
                  
                  -
                  
                  
                  
                  30,000
                  
                  
                  
                  -Net
      loss
                  
                  $
                  (578,509
                  )
                  
                  $
                  (375,697
                  )
                  
                  $
                  (810,049
                  )
                  
                  $
                  (462,475
                  )Weighted
      average number of  common shares outstanding
                  
                  
                  26,925,007
                  
                  
                  
                  24,988,051
                  
                  
                  
                  26,281,482
                  
                  
                  
                  24,988,051Basic
      and diluted net loss per share of common stock
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.02
                  )Basic
      and diluted net loss per share of common stock
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.02
                  )





See
accompanying notes to financial statements


F-3





B.H.I.T.
Inc. and Subsidiary


Statements
of Operations


(Unaudited)





PredecessorStatementofOperationsTwo Months Ended
                
                
                Three Months Ended
                
                
                Eight Months Ended
                
                
                Nine Months EndedAugust31,2009
                
                
                September30,2008
                
                
                August31,2009
                
                
                September30,2008Revenues
                
                $
                900,522
                
                
                $
                1,562,202
                
                
                $
                3,520,450
                
                
                $
                3,884,711Cost
      of sales
                
                
                723,710
                
                
                
                1,292,532
                
                
                
                2,598,559
                
                
                
                2,828,767Gross
      profit
                
                
                176,812
                
                
                
                269,670
                
                
                
                921,891
                
                
                
                1,055,944Selling,
      general and administrative expenses
                
                
                153,418
                
                
                
                181,947
                
                
                
                560,684
                
                
                
                725,442Depreciation
                
                
                75,500
                
                
                
                89,571
                
                
                
                225,678
                
                
                
                199,403Income
      (loss) from operations
                
                
                (52,106
                )
                
                
                (1,848
                )
                
                
                135,529
                
                
                
                131,099Other
      income (expenses)Interest
      expense
                
                
                (6,838
                )
                
                
                (21,389
                )
                
                
                (45,971
                )
                
                
                (54,652
                )Income
      (loss) before income taxes
                
                
                (58,944
                )
                
                
                (23,237
                )
                
                
                89,558
                
                
                
                76,447Income
      tax expense (benefit)
                
                
                30,400
                
                
                
                (6,000
                )
                
                
                36,600
                
                
                
                21,000Net
      income (loss)
                
                $
                (89,344
                )
                
                $
                (17,237
                )
                
                $
                52,958
                
                
                $
                55,447





See
accompanying notes to financial statements


F-4





B.H.I.T.
Inc. and Subsidiary


Statements
of Cash Flows


Nine
Months Ended September 30, 2009 and 2008


(Unaudited)





2009
                
                
                2008Operating
      activitiesNet
      loss
                
                $
                (810,049
                )
                
                $
                (462,475
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                
                
                21,405
                
                
                
                -Stock
      compensation expense
                
                
                87,500Amortization
      of loan cost
                
                
                3,364
                
                
                
                -Amortization
      of discount on convertible debenture
                
                
                14,770
                
                
                
                -Changes
      in assets and liabilities net of the effect of the business
      acqusition:
                
                
                
                
                
                
                -Increase
      in accounts receivable
                
                
                (102,149
                )
                
                
                1,453Increase
      in costs incurred related to deferred revenue
                
                
                (89,307
                )
                
                
                -Decrease
      in prepaid expenses and other current assets
                
                
                28,538
                
                
                
                13,786Increase
      in accounts payable and accrued expenses
                
                
                56,828
                
                
                
                51,811Income
      taxes payable
                
                
                30,000
                
                
                
                -Increase
      in deferred revenue
                
                
                103,047
                
                
                
                -Net
      cash used in operating activities
                
                
                (656,053
                )
                
                
                (395,425
                )Investing
      ActivitiesAcquisition
      of property and equipment
                
                
                (29,500
                )
                
                
                -Purchase
      of net assets in the acqusition of Wood, net of cash
    acquired
                
                
                (4,724,362
                )
                
                
                -Deferred
      acqusition costs
                
                
                340,000
                
                
                
                (340,000
                )Net
      cash used in investing
                
                
                (4,413,862
                )
                
                
                (340,000
                )Financing
      ActivitiesProceeds
      from convertible debentures
                
                
                1,125,000
                
                
                
                -Proceeds
      from long-term debt
                
                
                3,000,000
                
                
                
                -Deferred
      loan costs
                
                
                (201,814
                )
                
                
                -Purchase
      of treasury stock
                
                
                (62,500
                )
                
                
                -Net
      cash used in financing activities
                
                
                3,860,686
                
                
                
                -Net
      decrease in cash
                
                
                (1,209,229
                )
                
                
                (735,425
                )Cash
      and cash equivalents, beginning of period
                
                
                1,613,173
                
                
                
                2,269,054Cash
      and cash equivalents, end of period
                
                $
                403,944
                
                
                $
                1,533,629Supplemental
      disclosure of cash flow information:Cash
      paid during the year for:Interest
                
                $
                36,543
                
                
                $
                -Taxes
                
                $
                -
                
                
                $
                -Supplemental
      cash flow information:Issuance
      of convertible debentures for purchase of Wood
                
                $
                400,000
                
                
                $
                -Issuance
      of common stock for purchase of Wood
                
                $
                1,166,667
                
                
                $
                -





See
accompanying notes to financial statements


F-5





B.H.I.T.
Inc. and Subsidiary


Statements
of Cash Flows


(Unaudited)





PredecessorEight Months Ended
                
                
                Nine Months EndedAugust 31, 2009
                
                
                September30,2008Cash
      flow from operating activitiesNet
      income
                
                $
                52,958
                
                
                $
                55,447Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
                
                
                225,678
                
                
                
                199,403Changes
      in assets and liabilities:Increase
      in accounts receivable
                
                
                (194,105
                )
                
                
                (398,635
                )Decrease
      in costs incurred related to deferred revenue
                
                
                321,625
                
                
                
                122,532Increase
      in accounts payable and accrued expenses
                
                
                337,496
                
                
                
                235,716Increase
      in income taxes payable
                
                
                36,600
                
                
                
                21,000(Decrease)
      increase  in cash overdraft
                
                
                -
                
                
                
                (66,937
                )Decrease
      in deferred revenue
                
                
                (513,219
                )
                
                
                (186,785
                )Net
      cash provided by operating activities
                
                
                267,033
                
                
                
                (18,260
                )Cash
      flow from investing activities:Acquisition
      of property and equipment
                
                
                (205,830
                )
                
                
                (17,000
                )Net
      cash used in investing activities
                
                
                (205,830
                )
                
                
                (17,000
                )Cash
      flow from financing activities:Proceeds
      from long-term debt
                
                
                88,274
                
                
                
                17,000Payments
      on long-term debt
                
                
                (32,684
                )
                
                
                (45,298
                )Payments
      on capital leases
                
                
                (96,665
                )
                
                
                (123,092
                )Proceeds
      from loans payable
                
                
                -
                
                
                
                1,067,321Payments
      on loans payable
                
                
                -
                
                
                
                (880,671
                )Net
      cash (used in) provided by financing activities
                
                
                (41,075
                )
                
                
                35,260Net
      increase in cash and cash equivalents
                
                
                20,128
                
                
                
                -Cash
      and cash equivalents at beginning of year
                
                
                2,175
                
                
                
                -Cash
      and cash equivalents at end of year
                
                $
                22,303
                
                
                $
                -Supplemental
      disclosure of cash flow information:Cash
      paid during the year for:Interest
                
                $
                45,971
                
                
                $
                54,652Taxes
                
                $
                -
                
                
                $
                -





See
accompanying notes to financial statements


F-6




B.H.I.T.  Inc.
and Subsidiary


Notes to
Consolidated Financial Statements


September
30, 2009




Note
1.  Nature of Operations





B.H.I.T.
Inc. (“BHIT,” “we,” “our” or the “Company”) was originally organized under the
laws of the State of Massachusetts in 1985, under the name VMS Hotel Investment
Trust, for the purpose of investing in mortgage loans, principally to entities
affiliated with VMS Realty Partners. The Company was subsequently reorganized as
a Delaware corporation in 1987. We changed our name from Banyan Hotel Investment
Fund to B.H.I.T. Inc. in 1998.





BHIT was
a shell company without significant operations or sources of revenues other than
interest on its investments. On September 4, 2009, the Company purchased The
Wood Energy Group, Inc. (“Wood”) pursuant to a Stock Purchase Agreement (the
“Agreement”). The Company purchased all of the issued and outstanding common
stock of Wood for a purchase price of $5.4 million in cash and $1.0 million in
shares of common stock of the Company, or 3,333,334 shares, plus customary
working capital adjustments. The number of shares of common stock of the Company
was determined by the market value of the shares based on the average closing
price of the stock for the five business days prior to June 1, 2009, the date
the Agreement was signed. Wood engages in the business of railroad tie
reclamation and disposal.





The
Agreement contains non-solicitation and noncompetition provisions pursuant to
which the sellers agree not to solicit any employee or affiliate of Wood or
engage in competitive business for a period of two years after the date of
closing of the transaction. The Agreement also contains customary
representations, warranties, covenants and indemnification
provisions.





Note
2.  Basis of Presentation





We have
prepared the accompanying consolidated financial statements pursuant to the
rules and regulations of the Securities and Exchange Commission. In the opinion
of management, these financial statements give effect to all normal recurring
adjustments necessary to present fairly the financial position and results of
operations and cash flows of the Company and Wood, its wholly owned subsidiary,
for the period during which the Company owned Wood. Pro forma consolidated
financial information, reflecting the ownership of Wood as if it had been owned
on the first day of the financial periods presented, is included in Footnote 5.
Because Wood is deemed to be a predecessor to the Company, the financial
statements of Wood for operations prior to the acquisition are presented. Our
results of operations on a consolidated basis subsequent to the acquisition of
Wood are not comparative to the stand alone financial statements of the acquired
business because the acquired assets and liabilities have been adjusted to fair
value pursuant to ASC 805 “Business Combinations”.





Although
we believe that the disclosures included in our consolidated financial
statements are adequate to make the information presented not misleading,
certain information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. Accordingly, the accompanying consolidated
financial statements should be read in conjunction with the Company’s latest
annual report on Form 10-K for the year ended December 31, 2008 and the Form
8-K/A filed with the Securities and Exchange Commission (the “SEC”) on December
10, 2009.





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates.





The
results of operations for the nine months ended September 30, 2009 are not
necessarily indicative of the results to be expected for the full 2009
year.


F-7


B.H.I.T.  Inc.
and Subsidiary


Notes to
Consolidated Financial Statements


September
30, 2009





Note
3.  Summary of Significant Accounting Policies




Revenue
Recognition




The
Company utilizes the completed contract method of accounting for revenue
recognition. The Company recognizes revenue for the pick-up and disposal of used
railroad ties upon the completion of the scope of work required under its
contracts, which is when the Company considers amounts to be earned (evidence of
an arrangement has been obtained, services are delivered, fees are fixed or
determinable and collectibility is reasonably assured). Accordingly, billings
related to the services for which contracts have not been completed have been
recorded as deferred revenue. Direct costs, including payroll, fuel, equipment
rental, trucking expense and steel strapping costs that are related to the
pick-up and disposal of used railroad ties are deferred until the related
revenue recognition process is complete. The Company also receives revenue from
the sale of a portion of the reclaimed ties. These revenues are recorded when
the ties are sold to a third party.




Use of
Estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from those
estimates.  Significant estimates included deferred revenue, costs
incurred related to deferred revenue, and the useful life of property and
equipment.




Cash and Cash
Equivalents




The
Company considers all cash and bank deposits to be cash
equivalents.




Accounts
Receivable




Trade
accounts receivable are recorded net of an allowance for expected losses. An
allowance is estimated from historical performance and projections of trends.
Bad debt expense is charged to operations if write offs are deemed necessary. As
of September 30, 2009 and December 31, 2008 no allowance is provided as all
accounts receivable are deemed collectible.




Property and
Equipment




Property
and equipment owned and under capital leases are carried at cost. Depreciation
of property and equipment is provided using the straight line method for
financial reporting purposes at rates based on the following estimated useful
lives:




YearsMachinery
      and equipment
                    5-7Furniture
      and fixtures
                    5




Expenditures
for major renewals and betterments that extend the useful lives of property and
equipment are capitalized. Expenditures for maintenance and repairs are charged
to expense as incurred.


F-8


B.H.I.T.  Inc.
and Subsidiary


Notes to
Consolidated Financial Statements


September
30, 2009





Valuation of Long-Lived
Assets





The
Company reviews long-lived assets for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.  In evaluating the fair value and future benefits of
its assets, management performs an analysis of the anticipated undiscounted
future net cash flows of the individual assets over the remaining amortization
period or an appraisal of market value is obtained.





Fair Value of Financial
Instruments





Recorded
financial instruments consist of cash, accounts receivable, accounts payable and
long-term debt obligations as of September 30, 2009 and December 31,
2008.  The related fair values of these financial instruments
approximated their carrying values due to the short-term nature of these
instruments and the interest rates currently available to the
Company.





Income
Taxes





We
account for income taxes in accordance with ASC 740, Accounting for Income
Taxes, as clarified by ASC 740-10, Accounting for Uncertainty in Income
Taxes.  Under this method, deferred income taxes are determined based on
the estimated future tax effects of differences between the financial statement
and tax basis of assets and liabilities given the provisions of enacted tax
laws. Deferred income tax provisions and benefits are based on changes to the
assets or liabilities from year to year. In providing for deferred taxes, we
consider tax regulations of the jurisdictions in which we operate, estimates of
future taxable income, and available tax planning strategies. If tax
regulations, operating results or the ability to implement tax-planning
strategies vary, adjustments to the carrying value of deferred tax assets and
liabilities may be required. Valuation allowances are recorded related to
deferred tax assets based on the “more likely than not” criteria of ASC
740.





ASC
740-10 requires that we recognize the financial statement benefit of a tax
position only after determining that the relevant tax authority would more
likely than not sustain the position following an audit. For tax positions
meeting the “more-likely-than-not” threshold, the amount recognized in the
financial statements is the largest benefit that has a greater than
50 percent likelihood of being realized upon ultimate settlement with the
relevant tax authority.





Note
4.  New Accounting Pronouncements





FASB
Accounting Standards Codification


(Accounting
Standards Update (“ASU”) 2009-01)





In June
2009, the Financial Accounting Standards Board (“FASB”) issued the FASB
Accounting Standards Codification (“the Codification”) as the single source of
authoritative nongovernmental GAAP. All existing accounting standard documents,
such as FASB, American Institute of Certified Public Accountants, Emerging
Issues Task Force and other related literature, excluding guidance from the
Securities and Exchange Commission (“SEC”), have been superseded by the
Codification. All other non-grandfathered, non-SEC accounting literature not
included in the Codification has become nonauthoritative. The Codification did
not change GAAP, but instead introduced a new structure that combines all
authoritative standards into a comprehensive, topically organized online
database. The Codification is effective for interim or annual periods ending
after September 15, 2009, and impacts the Company’s financial statements as all
future references to authoritative accounting literature will be referenced in
accordance with the Codification. There have been no changes to the content of
the Company’s financial statements or disclosures, except changes to references
as required, as a result of implementing the Codification during the nine months
ended September 30, 2009.





As a
result of the Company’s implementation of the Codification during the nine
months ended September 30, 2009 and 2008, previous references to new accounting
standards and literature are no longer applicable. The Company will provide
reference to both new and old guidance to assist in understanding the impacts of
recently adopted accounting literature, particularly for guidance adopted since
the beginning of the current fiscal year.


F-9


B.H.I.T.  Inc.
and Subsidiary


Notes to
Consolidated Financial Statements


September
30, 2009





Fair
Value Measurements


(Included
in ASC 825 “Financial Instruments”, previously FAS No. 157 “Fair Value
Measurements”)





In
September 2006, the FASB issued FAS Statement No. 157, “Fair Value Measurements”
(“FAS No. 157”). This standard provides guidance for using fair value to measure
assets and liabilities. Under FAS No. 157, fair value refers to the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants in the market in which the reporting
entity transacts. In this standard, the FASB clarifies the principle that fair
value should be based on the assumptions that market participants would use when
pricing the asset or liability. In support of this principle, FAS No. 157
establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. The fair value hierarchy gives the highest priority
to quoted prices in active markets and the lowest priority to unobservable data,
for example, the reporting entity’s own data. Under the standard, fair value
measurements would be separately disclosed by level within the fair value
hierarchy. The adoption of FAS No. 157 did not have an impact on the Company’s
financial position, results of operations or cash flows. FASB Staff Position
(“FSP”) FAS 157-2, “Effective Date of FASB Statement No. 157,” issued in
February 2008, provides a one-year deferral to fiscal years beginning after
November 15, 2008 of the effective date of FAS No. 157 for nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed in
financial statements at least annually at fair value on a recurring basis. The
Company’s adoption of the remaining provisions of FAS No. 157 did not have an
impact on the Company’s financial position, results of operations or cash
flows.





Fair
Value Measurement and Disclosures Topic 820 – Measuring Liabilities at Fair
Value




In
August 2009, the FASB issued the FASB Accounting Standards Update No.
2009-05 “Fair Value Measurement and Disclosures Topic 820 – Measuring
Liabilities at Fair Value” , which provides amendments to subtopic 820-10, Fair
Value Measurements and Disclosures – Overall, for the fair value measurement of
liabilities.  This Update provides clarification that in circumstances
in which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using one or
more of the following techniques: 1. A valuation technique that uses: a. The
quoted price of the identical liability when traded as an asset, or b. Quoted
prices for similar liabilities or similar liabilities when traded as assets. 2.
Another valuation technique that is consistent with the principles of topic 820;
two examples would be an income approach, such as a present value technique, or
a market approach, such as a technique that is based on the amount at the
measurement date that the reporting entity would pay to transfer the identical
liability or would receive to enter into the identical liability.  The
amendments in this Update also clarify that when estimating the fair value of a
liability, a reporting entity is not required to include a separate input or
adjustment to other inputs relating to the existence of a restriction that
prevents the transfer of the liability.  The amendments in this Update
also clarify that both a quoted price in an active market for the identical
liability when traded as an asset in an active market when no adjustments to the
quoted price of the asset are required are Level 1 fair value
measurements.  The Company does not expect the adoption of this update
to have a material impact on its financial position, results of operations or
cash flows. This standard is effective beginning in the first reporting period
after issuance of the standard, January 1, 2010 for the Company.





Note
5.  Acquisition of The Wood Energy Group, Inc.





On
September 4, 2009, the Company purchased all of the issued and outstanding
common stock of Wood for a purchase price of $5,366,844 in cash and $1,000,000
in shares of common stock of the Company, or 3,333,334 shares, plus customary
working capital adjustments. The number of shares of common stock of the Company
was determined by the market value of the shares based on the average closing
price of the stock for the five business days prior to June 1, 2009, the date
the Agreement was signed.




The
following unaudited pro forma condensed combined statements of income for the
three and nine months ended September, 2009 and 2008 are derived from the
historical financial statements of the Company and Wood for the nine months
ended September 30, 2009 and 2008, respectively. The assumptions, estimates and
adjustments herein have been made solely for purposes of developing these pro
forma combined financial statements.


F-10


B.H.I.T.  Inc.
and Subsidiary


Notes to
Consolidated Financial Statements


September
30, 2009





The
unaudited pro forma condensed combined income statement for the nine months
ended September 30, 2009 and 2008 gives effect to the purchase of Wood’s common
stock as if it had occurred on January 1, 2009 and 2008.


The
unaudited pro forma condensed combined financial statements do not include any
adjustments regarding liabilities incurred or cost savings achieved resulting
from integration of the two companies, as management is in the process of
assessing what, if any, future actions are necessary. However, additional
liabilities ultimately may be recorded for other costs associated with removing
redundant operations that could affect amounts in these pro forma condensed
combined financial statements, and their effects may be material.




The
unaudited pro forma condensed combined financial statements should be read in
conjunction with the historical audited financial statements and related notes
of the Company, “Management’s Discussions and Analysis or Plan of Operation”
contained in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008, as well as the historical financial statements and related
notes of Wood for the year ended December 31, 2008 contained in the Company’s
current report on Form 8-K/A filed with the SEC on December 10, 2009. The
unaudited pro forma condensed combined financial statements are not intended to
represent or be indicative of the results of operations of the Company that
would have been reported had the acquisition of Wood been completed as of the
dates presented, and should not be construed as representative of the future
results of operations or financial condition after such acquisition.





The
purchase price is allocated as follows:




Purchase
      price
                    
                    $
                    6,533,511Estimated
      working capital adjustment
                    
                    
                    (220,180
                    )6,313,331Allocated
      to:Intangible
      assets
                    
                    
                    (2,000,000
                    )Property
      and equipment
                    
                    
                    (1,800,000
                    )Deferred
      income taxes
                    
                    
                    1,100,000Current
      assets acquired
                    
                    
                    (535,989
                    )Current
      liabilities acquired
                    
                    
                    756,169Goodwill
                    
                    $
                    3,833,511


F-11


B.H.I.T.  Inc.
and Subsidiary


Notes to
Consolidated Financial Statements


September
30, 2009




B.H.I.T.
Inc. and Subsidiary
 Unaudited
Pro Forma Condensed Combined Income Statement
 Three and
Nine Months Ended September 30, 2009 and 200





Three Months Ended September 30,
                  
                  
                  Nine Months Ended September 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Revenues
                  
                  $
                  1,277,648
                  
                  
                  $
                  1,562,202
                  
                  
                  $
                  3,897,576
                  
                  
                  $
                  3,884,711Cost
      of sales
                  
                  
                  838,330
                  
                  
                  
                  1,121,511
                  
                  
                  
                  2,621,710
                  
                  
                  
                  2,478,152Gross
      profit
                  
                  
                  439,318
                  
                  
                  
                  440,691
                  
                  
                  
                  1,275,866
                  
                  
                  
                  1,406,559Selling,
      general and administrative expenses
                  
                  
                  310,404
                  
                  
                  
                  310,823
                  
                  
                  
                  977,429
                  
                  
                  
                  905,780Stock
      based compenstation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  87,500
                  
                  
                  
                  -Acquisition
      expenses for Wood Energy
                  
                  
                  100,354
                  
                  
                  
                  -
                  
                  
                  
                  100,354
                  
                  
                  
                  -Write
      off of expenses for acquistion not completed
                  
                  
                  508,349
                  
                  
                  
                  355,898
                  
                  
                  
                  508,349
                  
                  
                  
                  355,898Depreciation
                  
                  
                  140,000
                  
                  
                  
                  156,667
                  
                  
                  
                  420,000
                  
                  
                  
                  470,000Loss
      from operations
                  
                  
                  (619,789
                  )
                  
                  
                  (382,697
                  )
                  
                  
                  (817,766
                  )
                  
                  
                  (325,119
                  )Other
      income (expenses):Interest
      income
                  
                  
                  2,255
                  
                  
                  
                  10,539
                  
                  
                  
                  11,725
                  
                  
                  
                  47,615Interest
      expense
                  
                  
                  (164,161
                  )
                  
                  
                  (143,382
                  )
                  
                  
                  (419,396
                  )
                  
                  
                  (430,146
                  )Loss
      before income taxes
                  
                  
                  (781,695
                  )
                  
                  
                  (515,540
                  )
                  
                  
                  (1,225,437
                  )
                  
                  
                  (707,650
                  )Income
      taxes
                  
                  
                  (30,000
                  )
                  
                  
                  (10,000
                  )
                  
                  
                  (48,000
                  )
                  
                  
                  (13,000
                  )Net
      loss
                  
                  $
                  (811,695
                  )
                  
                  $
                  (525,540
                  )
                  
                  $
                  (1,273,437
                  )
                  
                  $
                  (720,650
                  )Weighted
      average number of shares outstanding - basic
                  
                  
                  29,171,385
                  
                  
                  
                  29,421,385
                  
                  
                  
                  29,249,852
                  
                  
                  
                  29,421,385Weighted
      average number of shares outstanding - diluted
                  
                  
                  37,921,385
                  
                  
                  
                  29,421,385
                  
                  
                  
                  37,999,852
                  
                  
                  
                  29,421,385Basic
      and diluted net loss per share of common stock
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.04
                  )
                  
                  $
                  (0.02
                  )




F-12




B.H.I.T.  Inc.
and Subsidiary


Notes to
Consolidated Financial Statements


September
30, 2009





Pro forma
adjustments are necessary to adjust amounts to reflect the debt raised and the
Company’s subsequent purchase of Wood. The pro forma adjustments included in the
unaudited pro forma condensed combined financial statements are as
follows:





- Entries
to record estimated deal costs and professional fees not already
recorded.





-Entries
to record interest expense, amortization of debt costs and amortization of the
beneficial conversion feature on the senior secured debt and convertible
debentures issued as part of this transaction. This includes debt financing
consisting of (i) a five year $3,000,000 senior secured, term loan with a bank
bearing interest at prime plus 5% or Libor (2.0% floor) plus 4.5%, and (ii)
$1,525,000 of convertible debentures bearing interest at 10% per annum and
payable in five years, less bank fees and costs of $213,812. Because the
convertible debenture includes a beneficial conversion feature, $381,250 is
initially classified as debt, and $1,143,750 is initially classified as equity.
The debt discount is being amortized as interest expense over the five year term
of the debenture.   For each 0.125% increase in the interest rate
on the bank term loan, interest expense will increase $3,750 annually. A
deferred tax liability for the beneficial conversion feature has been
recorded as an offset to the deferred tax assets of the Company.





- Entries
to adjust depreciation as a result of the change in the cost of the property and
equipment to the appraised value over an estimated useful life of 5 years, and
the amortization of identifiable intangible assets over an estimated useful life
of 10 years. The amount of the purchase price allocated to property and
equipment of $1,800,000 is based upon an independent third party appraisal. The
purchase price exceeded the fair value of net assets acquired by $5,746,841, of
which $2,000,000 has been allocated to identifiable intangible assets and
$3,746,841 allocated to goodwill based upon preliminary estimates. The Company
has not yet completed an assessment of the identifiable intangible
assets.  The amount allocated to the identifiable intangible assets
will be based upon an independent third party appraisal which has yet to be
completed. Accordingly, the portion of the purchase price allocated to the
identifiable intangible assets and goodwill may change.





- Entries
to remove equipment rental and interest expense for equipment leases and debt
that was paid off by the Sellers at closing.





- Entries
to provide for (i) an initial deferred tax liability of $1,100,000 as a result
of asset basis differences resulting from the purchase accounting entry and
estimated identifiable intangible assets arising from the acquisition, and (ii)
an income tax expense or benefit as a result of the transaction based upon the
estimated effective tax rate for the full year.





Pro forma
net income (loss) per share is based on the weighted average shares of the
Company’s common stock outstanding during the period after giving effect to the
shares of common stock issued to the Sellers, as if such shares were issued at
the beginning of each period. Diluted earnings per share have been computed as
if the convertible debentures were converted to common stock at the beginning of
the period. Basic and fully diluted weighted average shares outstanding were
calculated as follows:


F-13


B.H.I.T.  Inc.
and Subsidiary


Notes to
Consolidated Financial Statements


September
30, 2009





NineMonthsEndedSeptember30,2009
                                      
                                      
                                      2008(Unaudited)
                                      
                                      
                                      (Unaudited)Basic:Reflects
      the outstanding commonstock
      of BHIT
                                      
                                      
                                      29,249,852
                                      
                                      
                                      
                                      26,088,051Reflects
      the issuance of sharespursuant
      to the Agreement
                                      
                                      
                                      -
                                      
                                      
                                      
                                      3,333,33429,249,852
                                      
                                      
                                      
                                      29,421,385Diluted:Reflects
      the outstanding common stock of BHIT
                                      
                                      
                                      29,249,852
                                      
                                      
                                      
                                      26,088,051Reflects
      the issuance of shares pursuant to the Agreement
                                      
                                      
                                      -
                                      
                                      
                                      
                                      3,333,334Reflects
      the conversion of convertible debentures issued
                                      
                                      
                                      7,625,000
                                      
                                      
                                      
                                      -Reflects
      the exercise of "in the money" options
                                      
                                      
                                      1,125,000
                                      
                                      
                                      
                                      -37,999,852
                                      
                                      
                                      
                                      29,421,385





As
defined by ASC 805 “Business Combinations” acquisition related costs the
acquirer incurs to effect a business combination are expensed in the period in
which the costs were incurred and the services were received. As this relates to
the acquisition of Wood, these costs totaled $100,354 for the nine months ended
September 30, 2009.





Note
6.  Property and Equipment




Property
and equipment consist of the following:




September 30,
                    
                    
                    December 31,2009
                    
                    
                    2008(Unaudited)Machinery
      and equipment
                    
                    $
                    1,829,500
                    
                    
                    $
                    -1,829,500
                    
                    
                    
                    -Accumulated
      depreciation
                    
                    
                    (21,405
                    )
                    
                    
                    -$
                    1,808,095
                    
                    
                    $
                    -




Prior to
2009 the Company had no property and equipment. Depreciation expense was $21,405
for the nine months ended September 30, 2009.


F-14


B.H.I.T.  Inc.
and Subsidiary


Notes to
Consolidated Financial Statements


September
30, 2009





Note
7.  Long-term Debt




Long-term
debt consists of the following:





September30,
                          
                          
                          December31,2009
                          
                          
                          2008(Unaudited)Prime
      plus 5% or Libor (2.0% floor) plus 4.5% (6.5% as of September 30, 2009)
      senior secured term loan with a bank, monthly payments of principal and
      accrued interest throughout the five-year term and a payment of 75% of any
      excess cash flow (as defined in the loan and security agreement) for the
      fiscal year ending 2009. For subsequent years, Wood will be required to
      make excess cash flow payments only if certain conditions are not met for
      such year. Secured by all of Wood's assets, including a pledge of
      outstanding stock and guaranteed by BHIT, due September
    2014
                          
                          
                          $
                          3,000,000
                          
                          
                          $
                          -





The
following is a summary of principal maturities of long-term debt as of September
30, 2009 during the next five years:





2010
                          
                          $
                          600,0002011
                          
                          
                          600,0002012
                          
                          
                          600,0002013
                          
                          
                          600,0002014
                          
                          
                          600,000$
                          3,000,000




In
addition, the Company has two credit lines from a bank in the amounts of
$500,000 and $1,500,000 for working capital and capital expenditures,
respectively. Draws on the working capital line are based on specific
percentages of eligible working capital amounts, including accounts receivable
and inventory. As of September 30, 2009 approximately $430,000 was available on
the working capital line.  Draws on the capital expenditures line are
based on 80% of the cost of such capital assets.





Note
8.  Convertible Debentures





The
Company issued $1,525,000 of convertible debentures bearing interest at 10% per
annum and payable in five years. The convertible debentures are convertible into
the Company’s common stock at $0.20 per share. In accordance with ASC 470 we
determined that the convertible debentures had beneficial conversion features in
that the embedded conversion feature was an “in-the-money” issuance. Therefore
the embedded beneficial conversion feature present in the convertible debentures
was valued separately at issuance. The convertible debentures meet the
definition of “conventional convertible debt” because the number of shares which
may be issued upon the conversion of the debt is fixed. Therefore, the
conversion feature qualifies for equity classification.





The
convertible debentures, which expire five years after issuance, were assigned an
initial value of $381,250, estimated based on the intrinsic value of the
beneficial conversion feature. The amount allocated as a discount on the
convertible debentures for the value of the conversion option will be amortized
to interest expense, using the effective interest method, over the term of the
convertible debentures. A total of $14,770 was expensed for the nine months
ended September 30, 2009. A deferred tax liability for the beneficial conversion
feature has been recorded as an offset to the deferred tax assets of
BHIT.


F-15


B.H.I.T.  Inc.
and Subsidiary


Notes to
Consolidated Financial Statements


September
30, 2009





The
convertible debenture liability is as follows at September 30,
2009:




Convertible
      debentures payable
                    
                    $
                    1,525,000Less:
      unamortized discount on debentures
                    
                    
                    (1,128,980
                    )Convertible
      debentures, net
                    
                    $
                    396,020





Note
9.  Stock-Based Compensation





The
Company has stock option agreements with its directors and officers that provide
for the issuance of a total of 3,000,000 shares of common stock for serving on
the Company’s Board of Directors and as officers. As of September 30, 2009 the
options activity is as follows:





Weighted Average
                            
                            
                            Weighted AverageNumber
                            
                            
                            Exercise Price
                            
                            
                            Remaining
                            
                            
                            IntrinsicDate of Grant
                            
                            of Shares
                            
                            
                            per Share
                            
                            
                            Contractual Life
                            
                            
                            ValueMarch
      2, 2007
                            
                            
                            1,000,000
                            
                            
                            $
                            0.15
                            
                            
                            .4
      years
                            
                            
                            $
                            230,000October
      23, 2007
                            
                            
                            1,000,000
                            
                            
                            
                            0.35
                            
                            
                            1.0
      years
                            
                            
                            
                            30,000November
      14, 2008
                            
                            
                            125,000
                            
                            
                            
                            0.30
                            
                            
                            2.0
      years
                            
                            
                            
                            10,000November
      19, 2008
                            
                            
                            (125,000
                            )
                            
                            
                            0.35
                            
                            
                            Cancelled
                            
                            
                            
                            (3,750
                            )December
      16, 2008
                            
                            
                            125,000
                            
                            
                            
                            0.22
                            
                            
                            2.1
      years
                            
                            
                            
                            20,000June
      1, 2009
                            
                            
                            875,000
                            
                            
                            
                            0.35
                            
                            
                            4.7
      years
                            
                            
                            
                            26,250Outstanding,
      September 30, 2009
                            
                            
                            3,000,000
                            
                            
                            $
                            0.27
                            
                            
                            2.0 years
                            
                            
                            $
                            312,500





The
number of options issued and the grant dates were determined at the discretion
of the Company’s Board. The options vested at the date of grant, and are
exercisable for a period not to exceed five years from the date of grant. No
options were exercised during the nine months ended September 30,
2009.





The stock
options are not considered in calculating diluted earnings per share because
there effect would be anti-dilutive due to the Company’s losses.





The fair
values of the stock options issued during 2009 have been estimated using the
Black-Scholes method, whereby the valuation model takes into account variables
such as estimated volatility, expected holding period, dividend yield, and the
risk free interest rate. Management has determined that the June 1, 2009 options
have a value of $0.10 per share ($87,500 in total), which has been recorded as
compensation expense during the nine months ended September 30,
2009.





Expected
volatility rate was estimated using the average volatility rates of seven public
companies in the railroad industry. The expected lives of the options represents
the period that the options granted are expected to be outstanding. The risk
free rate is based on the yield curve of a zero coupon U.S. Treasury bond over
the term of the expected life. The Company does not expect to pay a dividend on
common stock. The weighted average assumptions used in the option-pricing models
during 2009 were as follows:





Risk free interest
      rate
                  
                  
                  2.55
                  %Expected
      life (years)
                  
                  
                  5Expected
      volatility
                  
                  
                  27.00
                  %Dividend
      yield
                  
                  
                  0


F-16


B.H.I.T.  Inc.
and Subsidiary


Notes to
Consolidated Financial Statements


September
30, 2009





Note
10. Stockholders’ Equity





On March
26, 2009, the Company purchased an aggregate of 250,000 shares of its common
stock in a non-market transaction. The treasury shares were purchased at a price
of $0.25 per share (the market price on the day of the transaction) for a total
of $62,500.





On
September 4, 2009 the Company issued 3,333,334 shares of its common stock in
connection with the acquisition of Wood. The shares were valued at $1,166,667,
the fair market value of the stock on the date of issuance.





Note
11. Income Taxes




The
Company reported a $30,000 tax expense for the nine months ended September 30,
2009 for income taxes
relatedto uncertain tax positions indentified
in ASC 740.The Company reported no tax expense or benefit for the nine
months ended September 30 2008 due to the net operating losses incurred during
the period and a valuation allowance established against 100% of the Company’s
deferred tax assets.





Our
Federal net operating loss (“NOL”) carryforward balance as of December 31, 2008
was $2,684,645. Our NOL carryforwards are scheduled to expire between 2009 and
2028. NOL utilization may be subject to a limitation contained in Internal
Revenue Code Section 382. The purchase of common stock from Summa (a former
significant shareholder) in 2000 and subsequent stock issuances may have
substantially limited or eliminated the opportunity to utilize our NOL
carryforwards. The Company is evaluating the effects of this
limitation.




Management
has assessed the realization of the net deferred tax assets and has determined
that it is more likely than not that the deferred tax assets for BHIT’s net
operating loss carryforwards will not be realized. Due to the uncertainty of
their realization, a valuation allowance of 100% continues to be provided
against those net operating loss carryforwards.




The
Company adopted the provisions of ASC 740, previously FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes, on January 1, 2007. Previously the Company has accounted for tax
contingencies in accordance with Statement of Financial Accounting Standards 5,
Accounting for Contingencies. The statute of limitations is still open on years
2006 and subsequent. The Company recognizes the financial statement benefit of a
tax position only after determining that the relevant tax authority would more
likely than not sustain the position following an audit. For tax positions
meeting the more-likely-than–not threshold, the amount recognized in the
financial statements is the largest benefit that has a greater than 50 percent
likelihood of being realized upon ultimate settlement with the relevant tax
authority. At the adoption date the Company applied ASC 740 to all tax positions
for which the statute of limitations remained open. As a result of the
implementation of ASC 740, the Company did not recognize an increase in the
liability for uncertain tax positions.




As of
September 30, 2009, the balance in unrecognized tax benefits increased to
approximately $40,200.  The increase is a result of management’s assessment
that certain positions taken no longer meet the more likely than not criteria
established in ASC 740.  If these unrecognized tax benefits are ultimately
recognized, they will reduce the Company’s annual effective tax
rate.




The
Company is subject to income taxes in the U.S. federal jurisdiction and a number
of state jurisdictions, including the state of Missouri. The tax regulations
within each jurisdiction are subject to interpretation of related tax laws and
regulations and require significant judgment to apply. With few exceptions, the
Company is no longer subject to U.S. federal, state and local examinations by
tax authorities for the years before 2006.


F-17


B.H.I.T.  Inc.
and Subsidiary


Notes to
Consolidated Financial Statements


September
30, 2009





Note
12. Major Customer




The
Company conducted 70% of its operations under a contract with one major customer
and 15% of its operations under a contract with another major customer for the
nine ended September 30, 2009. The Company had no operations for the nine months
ended September 30, 2008.




Note
13. Contingencies





On July
24, 2008, we entered into an asset purchase agreement with L.A. Colo, LLC
(“Colo”) and Iron Rail Group, LLC (“Iron Rail”), the owner of Colo, pursuant to
which we agreed to purchase substantially all of the assets of Colo for $15.0
million, subject to adjustment. Colo provides railroad maintenance and
construction services to short line railroads and industrial customers. The
transaction was delayed due to deteriorating financial and economic conditions
and was ultimately terminated by us due to a reported reduction in the financial
results of Colo, which were contrary to prior representations of Colo as to
their financial performance.





We had
originally placed $60,000 in a purchase money escrow for the acquisition. On
September 30, 2008, we placed an additional $290,000 in the escrow and paid Colo
$50,000 for the option to extend the proposed closing date of the acquisition.
Colo and Iron Rail demanded payment of the $350,000 in escrow in connection with
the termination of the purchase agreement. We authorized the distribution of
$10,000 of the escrow to Iron Rail on October 31, 2008, but because of the
nature of the circumstances surrounding the termination of the acquisition we
disputed that Colo and Iron Rail were entitled to the remaining $340,000. On
November 18, 2008, Colo and Iron Rail instituted arbitration proceedings before
the American Arbitration Association under the terms of the escrow agreement
against BHIT and the escrow agent to obtain the remaining contents of the escrow
in an action captioned L.A.
Colo, LLC and Iron Rail Group LLC v. B.H.I.T. Inc. and Kohrman Jackson &
Krantz PLL. The parties had a binding arbitration in July 2009 to resolve
this matter. As a result of the arbitration BHIT is required to disburse the
escrow proceeds to Colo as well as pay interest and legal costs. The Company
recorded a write-off totaling $508,349, which expense is included in writeoff of
acquisition expenses for the nine months ended September 30, 2009.




Note
14. Subsequent Events




The
Company evaluated all events and transactions that occurred after September 30,
2009 up through December 15, 2009, the date the Company issued these
consolidated financial statements.


F-18