UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-Q




x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
quarterly period ended September 30, 2010.




OR




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




For the
transition period from ____________ to ____________




Commission
      File Number 001-8635




AMERICAN
MEDICAL ALERT CORP.


(Exact
Name of Registrant as Specified in its Charter)




New
      York
              
              11-2571221(State
      or other jurisdiction of
              
              (I.R.S.
      Employerincorporation
      or organization)
              
              Identification
      Number)





3265
Lawson Boulevard, Oceanside, New York 11572


(Address
of principal executive offices)


(Zip
Code)




(516)
536-5850


(Registrant’s
telephone number, including area code)




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





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





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 on the Exchange Act).


Yes  ̈   No
x




Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: 9,568,179 shares of $.01 par value
common stock as of November 12, 2010.





AMERICAN
MEDICAL ALERT CORP. AND SUBSIDIARIES




INDEX
                                                              
                                                              PAGEPart
      I   Financial InformationReport
      of Independent Registered Public Accounting Firm
                                                              
                                                              1Condensed
      Consolidated Balance Sheets for September 30, 2010 and
      December 31, 2009
                                                              
                                                              2Condensed
      Consolidated Statements of Income for theNine Months Ended
      September 30, 2010 and 2009
                                                              
                                                              3Condensed
      Consolidated Statements of Income for theThree Months Ended
      September 30, 2010 and 2009
                                                              
                                                              4Condensed
      Consolidated Statements of Cash Flows forthe Nine Months Ended
      September 30, 2010 and 2009
                                                              
                                                              5Notes
      to Condensed Consolidated Financial Statements
                                                              
                                                              7Management’s
      Discussion and Analysis ofFinancial Condition and Results of
      Operations
                                                              
                                                              16Quantitative
      and Qualitative Disclosures About Market Risk
                                                              
                                                              36Controls
      and Procedures
                                                              
                                                              37Part
      II Other Information
                                                              
                                                              37







Report of
Independent Registered Public Accounting Firm





Board of
Directors and Shareholders


American
Medical Alert Corp. and Subsidiaries


Oceanside,
New York





We have
reviewed the accompanying condensed consolidated balance sheet of American
Medical Alert Corp. and Subsidiaries (the “Company”) as of September 30, 2010
and the related condensed consolidated statements of income for the nine-month
and three-month periods ended September 30, 2010 and 2009 and cash flows for the
nine-months ended September 30, 2010 and 2009. These interim financial
statements are the responsibility of the Company's management.





We
conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.





Based on
our reviews, we are not aware of any material modifications that should be made
to the condensed consolidated interim financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America.





We have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
American Medical Alert Corp. and Subsidiaries as of December 31, 2009, and the
related consolidated statements of income, shareholders’ equity and cash flows
for the year then ended (not presented herein), and in our report dated March
31, 2010 we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2009 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.





/s/
Margolin, Winer & Evens LLP





Margolin,
Winer & Evens LLP


Garden
City, New York





November
15, 2010


1


PART
I - FINANCIAL INFORMATION


Item
1. Financial
Statements.




AMERICAN
MEDICAL ALERT CORP. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS




September 30,
                                  2010 (Unaudited)
                                
                                
                                Dec. 31, 2009ASSETSCURRENT
      ASSETSCash
                                
                                $
                                3,698,075
                                
                                
                                $
                                5,498,448Accounts
      receivable (net of allowance for doubtful accounts of $598,000 and
      $582,500)
                                
                                
                                6,544,740
                                
                                
                                
                                6,277,247Inventory
                                
                                
                                1,127,382
                                
                                
                                
                                1,105,727Prepaid
      income taxes
                                
                                
                                297,858
                                
                                
                                
                                134,081Prepaid
      expenses and other current assets
                                
                                
                                405,762
                                
                                
                                
                                345,465Deferred
      income taxes
                                
                                
                                248,000
                                
                                
                                
                                419,000Total
      Current Assets
                                
                                
                                12,321,817
                                
                                
                                
                                13,779,968FIXED
      ASSETS(net
      of accumulated depreciation and amortization)
                                
                                
                                7,573,791
                                
                                
                                
                                8,756,827OTHER
      ASSETSIntangible
      assets (net of accumulated amortization of $6,746,542 and
      $6,080,825)
                                
                                
                                1,650,294
                                
                                
                                
                                2,026,011Goodwill
      (net of accumulated amortization of $58,868)
                                
                                
                                10,742,493
                                
                                
                                
                                10,255,983Investment
      in limited liability company
                                
                                
                                3,642,824
                                
                                
                                
                                -Other
      assets (including inventory of $361,205 in 2010)
                                
                                
                                1,301,219
                                
                                
                                
                                1,009,83517,336,830
                                
                                
                                
                                13,291,829TOTAL
      ASSETS
                                
                                $
                                37,232,438
                                
                                
                                $
                                35,828,624LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIES:Current
      portion of long-term debt
                                
                                $
                                660,000
                                
                                
                                $
                                1,301,667Accounts
      payable
                                
                                
                                896,429
                                
                                
                                
                                621,235Accrued
      expense – acquisitions
                                
                                
                                103,600
                                
                                
                                
                                35,048Accrued
      expenses
                                
                                
                                1,915,370
                                
                                
                                
                                1,698,320Dividends
      payable
                                
                                
                                -
                                
                                
                                
                                950,364Deferred
      revenue
                                
                                
                                265,389
                                
                                
                                
                                227,004Total
      Current Liabilities
                                
                                
                                3,840,788
                                
                                
                                
                                4,833,638DEFERRED
      INCOME TAX LIABILITY
                                
                                
                                1,064,000
                                
                                
                                
                                1,235,000LONG-TERM
      DEBT, Net of Current Portion
                                
                                
                                2,330,001
                                
                                
                                
                                1,195,000CUSTOMER
      DEPOSITS
                                
                                
                                111,524
                                
                                
                                
                                126,449ACCRUED
      RENTAL OBLIGATION
                                
                                
                                561,492
                                
                                
                                
                                522,154ACCRUED
      EXPENSE – ACQUISITIONS
                                
                                
                                96,400
                                
                                
                                
                                -TOTAL
      LIABILITIES
                                
                                
                                8,004,205
                                
                                
                                
                                7,912,241COMMITMENTS
      AND CONTINGENT LIABILITIES
                                
                                
                                -
                                
                                
                                
                                -SHAREHOLDERS’
      EQUITYPreferred
      stock, $.01 par value – authorized, 1,000,000 shares; none issued and
      outstanding
                                
                                
                                -
                                
                                
                                
                                -Common
      stock, $.01 par value – authorized 20,000,000 shares; issued 9,610,723
      shares in 2010 and 9,568,087 shares in 2009
                                
                                
                                96,107
                                
                                
                                
                                95,681Additional
      paid-in capital
                                
                                
                                16,541,573
                                
                                
                                
                                16,296,615Retained
      earnings
                                
                                
                                12,727,130
                                
                                
                                
                                11,660,66426,364,810
                                
                                
                                
                                28,052,960Less
      treasury stock, at cost (48,573 shares in 2010 and 2009)
                                
                                
                                (136,577
                                )
                                
                                
                                (136,577
                                )Total
      Shareholders’ Equity
                                
                                
                                29,228,233
                                
                                
                                
                                27,916,383TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
                                
                                $
                                37,232,438
                                
                                
                                $
                                35,828,624





See
accompanying notes to condensed financial statements.


2


AMERICAN
MEDICAL ALERT CORP. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


(Unaudited)




Nine Months Ended September 30,2010
                
                
                2009Revenues:Services
                
                $
                29,070,455
                
                
                $
                28,862,812Product
      sales
                
                
                562,325
                
                
                
                723,63829,632,780
                
                
                
                29,586,450Costs
      and Expenses (Income):Costs
      related to services
                
                
                13,342,562
                
                
                
                13,519,360Costs
      of products sold
                
                
                260,253
                
                
                
                335,692Selling,
      general and administrative expenses
                
                
                12,134,682
                
                
                
                12,238,349Interest
      expense
                
                
                45,258
                
                
                
                61,632Equity
      in net loss from investment in limited liability company
                
                
                507,512
                
                
                
                -Other
      income
                
                
                (77,468
                )
                
                
                (172,363
                )Income
      before Provision for Income Taxes
                
                
                3,419,981
                
                
                
                3,603,780Provision
      for Income Taxes
                
                
                1,402,000
                
                
                
                1,478,000NET
      INCOME
                
                $
                2,017,981
                
                
                $
                2,125,780Net
      income per share:Basic
                
                $
                .21
                
                
                $
                .22Diluted
                
                $
                .21
                
                
                $
                .22Weighted
      average number of common shares outstanding:Basic
                
                
                9,544,931
                
                
                
                9,472,938Diluted
                
                
                9,842,901
                
                
                
                9,689,676





See
accompanying notes to condensed financial statements.


3




AMERICAN
MEDICAL ALERT CORP. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


(Unaudited)




Three Months Ended September 30,2010
                
                
                2009Revenues:Services
                
                $
                9,805,692
                
                
                $
                9,846,058Product
      sales
                
                
                203,696
                
                
                
                292,09710,009,388
                
                
                
                10,138,155Costs
      and Expenses (Income):Costs
      related to services
                
                
                4,464,062
                
                
                
                4,533,987Costs
      of products sold
                
                
                92,423
                
                
                
                136,558Selling,
      general and administrative expenses
                
                
                4,369,598
                
                
                
                4,245,159Interest
      expense
                
                
                18,991
                
                
                
                17,330Equity
      in net loss from investment in limited liability company
                
                
                391,385
                
                
                
                -Other
      income
                
                
                (17,777
                )
                
                
                (56,024
                )Income
      before Provision for Income Taxes
                
                
                690,706
                
                
                
                1,261,145Provision
      for Income Taxes
                
                
                283,000
                
                
                
                517,000NET
      INCOME
                
                $
                407,706
                
                
                $
                744,145Net
      income per share:Basic
                
                $
                .04
                
                
                $
                .08Diluted
                
                $
                .04
                
                
                $
                .08Weighted
      average number of common shares outstandingBasic
                
                
                9,559,005
                
                
                
                9,495,036Diluted
                
                
                9,858,343
                
                
                
                9,756,468





See
accompanying notes to condensed financial statements.





4


AMERICAN
MEDICAL ALERT CORP. AND SUBSIDIARIES





CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Nine Months Ended September 30,2010
                          
                          
                          2009Cash
      Flows From Operating Activities:Net
      income
                          
                          $
                          2,017,981
                          
                          
                          $
                          2,125,780Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                          
                          
                          2,794,776
                          
                          
                          
                          3,058,536Loss
      on write off of fixed assets
                          
                          
                          -
                          
                          
                          
                          (11,409
                          )Stock
      compensation charge
                          
                          
                          197,990
                          
                          
                          
                          318,805Equity
      in net loss from investment in limited liability company
                          
                          
                          507,512
                          
                          
                          
                          -Decrease
      (increase) in:Accounts
      receivable
                          
                          
                          (252,729
                          )
                          
                          
                          (176,098
                          )Inventory
                          
                          
                          (277,384
                          )
                          
                          
                          (450,461
                          )Prepaid
      income taxes
                          
                          
                          (163,777
                          )
                          
                          
                          (25,823
                          )Prepaid
      expenses and other current assets
                          
                          
                          (104,251
                          )
                          
                          
                          81,646Increase
      (decrease) in:Accounts
      payable, accrued expenses and other
                          
                          
                          516,657
                          
                          
                          
                          892,717Deferred
      revenue
                          
                          
                          38,385
                          
                          
                          
                          15,105Net
      Cash Provided by Operating Activities
                          
                          
                          5,275,160
                          
                          
                          
                          5,828,798Cash
      Flows From Investing Activities:Expenditures
      for fixed assets
                          
                          
                          (913,151
                          )
                          
                          
                          (897,072
                          )Repayment
      of notes receivable
                          
                          
                          -
                          
                          
                          
                          21,117Deposit
      on equipment
                          
                          
                          -
                          
                          
                          
                          (142,369
                          )Purchase
      of Alpha Message Center, Inc.
                          
                          
                          (577,977
                          )
                          
                          
                          -Purchase
      – other
                          
                          
                          -
                          
                          
                          
                          (23,167
                          )Payment
      of Investment in limited liability company
                          
                          
                          (4,150,336
                          )
                          
                          
                          -Proceeds
      from sales of fixed assets
                          
                          
                          -
                          
                          
                          
                          11,800Decrease
      in other assets
                          
                          
                          4,798
                          
                          
                          
                          (56,644
                          )Net
      Cash Used In Investing Activities
                          
                          
                          (5,636,666
                          )
                          
                          
                          (1,086,335
                          )Cash
      Flows From Financing Activities:Proceeds
      from long-term debt
                          
                          
                          2,000,000
                          
                          
                          
                          -Repayment
      of long-term debt
                          
                          
                          (1,506,666
                          )
                          
                          
                          (1,518,282
                          )Payment
      of accrued expense - acquisitions
                          
                          
                          (73,346
                          )
                          
                          
                          (151,600
                          )Proceeds
      upon exercise of stock options
                          
                          
                          47,394
                          
                          
                          
                          -Payment
      of loan financing costs
                          
                          
                          (4,370
                          )
                          
                          
                          -Dividends
      paid
                          
                          
                          (1,901,879
                          )
                          
                          
                          -Net
      Cash Used In Financing Activities
                          
                          
                          (1,438,867
                          )
                          
                          
                          (1,669,882
                          )





See
accompanying notes to condensed financial statements.


5


AMERICAN
MEDICAL ALERT CORP. AND SUBSIDIARIES





CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)


(Unaudited)





Nine Months Ended September 30,2010
                
                
                2009Net
      Increase (decrease) in Cash
                
                $
                (1,800,373
                )
                
                $
                3,072,581Cash,
      Beginning of Period
                
                
                5,498,448
                
                
                
                2,473,733Cash,
      End of Period
                
                $
                3,698,075
                
                
                $
                5,546,314SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:CASH
      PAID DURING THE PERIOD FOR INTEREST
                
                $
                42,699
                
                
                $
                60,473CASH
      PAID DURING THE PERIOD FOR INCOME TAXES
                
                $
                1,551,769
                
                
                $
                1,201,969SUPPLEMENTAL
      SCHEDULE OF NONCASH INVESTING  AND FINANCING
      ACTIVITIES:Accrued
      Expense – acquisitions / additional goodwill-
      American Mediconnect Inc.
                
                $
                38,298
                
                
                $
                226,140-
      Alpha Message Center, Inc.
                
                
                200,000
                
                
                
                -Other
      assets, deposits on equipment transferred to fixed assets
                
                $
                21,875
                
                
                $
                221,719Other
      assets, deposits on product transferred to inventory
                
                $
                105,476
                
                
                $
                -





See
accompanying notes to condensed financial statements.


6


AMERICAN
MEDICAL ALERT CORP. AND SUBSIDIARIES




Notes to
Condensed Consolidated Financial Statements


(Unaudited)




1.
            General:




These
financial statements should be read in conjunction with the financial statements
and notes thereto for the year ended December 31, 2009 included in American
Medical Alert Corp.’s Annual Report on Form 10-K for the year ended December 31,
2009.




2.
            Results
      of Operations:




The
accompanying condensed consolidated financial statements include the accounts of
American Medical Alert Corp. and its wholly-owned subsidiaries; together the
“Company.”  All material inter-company balances and transactions have
been eliminated.




In the
opinion of management, the accompanying unaudited condensed financial statements
contain all adjustments (consisting only of normal recurring accruals) necessary
to present fairly the financial position as of September 30, 2010 and the
results of operations and cash flows for the nine months ended September 30,
2010 and 2009.




The
accounting policies used in preparing these financial statements are the same as
those described in the December 31, 2009 financial statements except as noted
below.




The
Company owns a minority interest of approximately 10% in an unconsolidated
limited liability company.  The Company’s investment in the
unconsolidated limited liability company is recorded using the equity method of
accounting, whereby the original investment is recorded at cost and subsequently
adjusted for contributions, distributions, and net income (loss) attributable to
such limited liability company.  All income and loss are allocated to
the limited liability company members in accordance with the terms of the
limited liability company agreement.




Certain
amounts in the 2009 condensed consolidated financial statements have been
reclassified to conform to the 2010 presentation.




The
results of operations for the nine and three months ended September 30, 2010 are
not necessarily indicative of the results to be expected for any other interim
period or for the full year.




3.
            Recent
      Accounting Pronouncements:




During
the third quarter of 2009, the Company adopted ASC Topic 105, Generally Accepted
Accounting Principles, which establishes the FASB Accounting Standards
Codification (“ASC”) as the sole source of authoritative generally accepted
accounting principles ("GAAP") to be applied by nongovernmental entities. Rules
and interpretive releases of the Securities and Exchange Commission ("SEC")
under authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. The codification did not change GAAP but reorganizes
the literature. References for FASB guidance throughout this document have been
updated for the codification.


7


4.
            Accounting
      for Stock-Based Compensation:




Stock
based compensation is recorded in accordance with ASC Topic 718 (formerly SFAS
No. 123 (R), Share-Based Payment), which requires the measurement and
recognition of compensation expense for all share-based payments to employees,
including grants of stock and employee stock options, based on estimated fair
values.




No
options were granted during the
nine month period ended September 30, 2010 and the Company granted
options to purchase 15,000 shares of common stock during the nine month period
ended September 30, 2009.




The following tables summarize stock
option activity for the nine months ended September 30, 2010 and
2009.




2010WeightedAverageWeighted
                      
                      
                      Remaining
                      
                      
                      AggregateNumber
      of
                      
                      
                      Average
                      
                      
                      Contractual
                      
                      
                      IntrinsicOptions
                      
                      
                      Option
      Price
                      
                      
                      Term
      (years)
                      
                      
                      ValueBalance
      at January 1
                      
                      
                      894,785
                      
                      
                      $
                      4.29Granted
                      
                      
                      -
                      
                      
                      
                      -Exercised
                      
                      
                      (11,513
                      )
                      
                      
                      4.12Expired/Forfeited
                      
                      
                      (30,000
                      )
                      
                      
                      6.49Balance
      at September 30
                      
                      
                      853,272
                      
                      
                      $
                      4.22
                      
                      
                      
                      1.82
                      
                      
                      $
                      1,669,401Vested
      and exercisable
                      
                      
                      825,572
                      
                      
                      $
                      4.16
                      
                      
                      
                      1.74
                      
                      
                      $
                      1,662,347




8








2009WeightedAverageWeighted
                          
                          
                          Remaining
                          
                          
                          AggregateNumber of
                          
                          
                          Average
                          
                          
                          Contractual
                          
                          
                          IntrinsicOptions
                          
                          
                          Option Price
                          
                          
                          Term (years)
                          
                          
                          ValueBalance
      at January 1
                          
                          
                          877,235
                          
                          
                          $
                          4.25Granted
                          
                          
                          15,000
                          
                          
                          
                          5.72Exercised
                          
                          
                          -
                          
                          
                          
                          -Expired/Forfeited
                          
                          
                          (6,975
                          )
                          
                          
                          5.30Balance
      at September 30
                          
                          
                          885,260
                          
                          
                          $
                          4.27
                          
                          
                          
                          2.73
                          
                          
                          $
                          1,553,992Vested
      and exercisable
                          
                          
                          874,260
                          
                          
                          $
                          4.25
                          
                          
                          
                          2.70
                          
                          
                          $
                          1,552,122


The
aggregate intrinsic value of options exercised during the nine months ended
September 30, 2010 was $29,074. No options were exercised during the nine months
ended September 30, 2009.  There were 27,700 and 11,000 nonvested
stock options outstanding as of September 30, 2010 and 2009,
respectively.





The
following table summarizes stock-based compensation expense related to all
share-based payments recognized in the condensed consolidated statements of
income.





Three Months
                
                
                Three
      MonthsEnded September 30,
                
                
                Ended September 302010
                
                
                2009Stock
      options
                
                $
                8,000
                
                
                $
                -Stock
      grants – other
                
                
                64,663
                
                
                
                77,053Service
      based awards
                
                
                32,037
                
                
                
                33,845Performance
      based awards
                
                
                (67,129
                )
                
                
                29,400Tax
      benefit
                
                
                (15,393
                )
                
                
                (57,526
                )Stock-based
      compensation expense, net of tax
                
                $
                22,178
                
                
                $
                82,772





Nine Months
                
                
                Nine
      MonthsEnded September 30,
                
                
                Ended September 302010
                
                
                2009Stock
      options
                
                $
                8,000
                
                
                $
                6,250Stock
      grants – other
                
                
                86,422
                
                
                
                122,820Service
      based awards
                
                
                96,109
                
                
                
                101,535Performance
      based awards
                
                
                7,459
                
                
                
                88,200Tax
      benefit
                
                
                (81,165
                )
                
                
                (130,750
                )Stock-based
      compensation expense, net of tax
                
                $
                116,825
                
                
                $
                188,055





Stock
Grants - Other





Effective
January 1, 2010, the non-employee members of the Board of Directors have an
option to elect at the beginning of each calendar year to
receive either shares of common stock or cash as compensation for services
provided, at the end of each quarter, as members of the Board of Directors
and other committees. Prior to 2010, the non-employee members of the Board
of Directors were granted shares of common stock at the end of each quarter as
compensation for services provided as members of the Board of Directors and
other committees.  Share grants issued vest immediately, but are
subject to a one year restriction on transfer.  In addition, stock
grants may be issued to employees at the Board of Directors’
discretion.


9


Service
Based Awards





In
January 2006, May 2007 and January 2009 the Company granted 50,000, 22,000 and
12,000 (net of 9,500 shares waived by an executive) restricted shares,
respectively, to certain executives in respect of services rendered but at no
monetary cost.  These shares vest over periods ranging from 3 to 5
years, on December 31 of each year.  The Company records the
compensation expense on a straight-line basis over the vesting
period.  Fair value for restricted stock awards is based on the
Company's closing common stock price on the date of grant.As
of September 30, 2010 and 2009 there were 63,000 and 41,000 shares vested,
respectively.  The aggregate grant date fair value of restricted stock
grants was $547,660.As
of September 30, 2010 and 2009, the Company had $34,154 and $200,326,
respectively, of total unrecognized compensation costs related to nonvested
restricted stock units expected to be recognized over a weighted average period
of three months.





Performance
Based Awards





In
January 2006 and May 2007, respectively, the Company granted share awards for
90,000 shares (up to 18,000 shares per year through December 31, 2010) and
46,000 shares (up to 11,500 shares per year through December 31, 2010) to
certain executives.  Vesting of such shares is contingent upon the
Company achieving certain specified consolidated gross revenue and Earnings
before Interest and Taxes (“EBIT”) objectives in each of the next four fiscal
years ending December 31. The fair value of the performance shares (aggregate
value of $909,400) is based on the closing trading value of the Company’s stock
on the date of grant and assumes that performance goals will be
achieved.  The fair value of the shares is expensed over the
performance period for those shares that are expected to ultimately
vest.  If such objectives are not met, no compensation cost is
recognized and any recognized compensation cost is reversed. As
of September 30, 2010 and 2009, 57,250 and 29,750 shares were vested,
respectively.  As of September 30, 2010 and 2009, there was $37,294
and $177,000, respectively, of total unrecognized compensation costs related to
nonvested share awards; that cost is expected to be recognized over a period of
three months.




5.
            Earnings
      Per Share:




Earnings
per share data for the nine and three months ended September 30, 2010 and 2009
is presented in conformity with ASC Topic 250 (formerly SFAS No. 128, Earnings
Per Share).





10




The
following table is a reconciliation of the numerators and denominators in
computing earnings per share:


Income
                                                  
                                                  
                                                  Shares
                                                  
                                                  
                                                  Per-ShareNine
      Months Ended September 30,
2010
                                                  
                                                  (Numerator)
                                                  
                                                  
                                                  (Denominator)
                                                  
                                                  
                                                  AmountsBasic
      EPS - Income available to common stockholders
                                                  
                                                  $
                                                  2,017,981
                                                  
                                                  
                                                  
                                                  9,544,931
                                                  
                                                  
                                                  $
                                                  .21Effect
      of dilutive securities - Options and warrants
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  297,970Diluted
      EPS - Income available to common stockholders and assumed
      conversions
                                                  
                                                  $
                                                  2,017,981
                                                  
                                                  
                                                  
                                                  9,842,901
                                                  
                                                  
                                                  $
                                                  .21Three
      Months Ended September 30,
2010Basic
      EPS -Income available to common stockholders
                                                  
                                                  $
                                                  407,706
                                                  
                                                  
                                                  
                                                  9,559,005
                                                  
                                                  
                                                  $
                                                  .04Effect
      of dilutive securities - Options and warrants
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  299,338Diluted
      EPS - Income available to common stockholders and assumed
      conversions
                                                  
                                                  $
                                                  407,706
                                                  
                                                  
                                                  
                                                  9,858,343
                                                  
                                                  
                                                  $
                                                  .04Nine
      Months Ended September 30,
2009Basic
      EPS - Income available to common stockholders
                                                  
                                                  $
                                                  2,125,780
                                                  
                                                  
                                                  
                                                  9,472,938
                                                  
                                                  
                                                  $
                                                  .22Effect
      of dilutive securities - Options
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  216,738Diluted
      EPS - Income available to common stockholders and assumed
      conversions
                                                  
                                                  $
                                                  2,125,780
                                                  
                                                  
                                                  
                                                  9,689,676
                                                  
                                                  
                                                  $
                                                  .22Three
      Months Ended September 30,
2009Basic
      EPS -Income available to common stockholders
                                                  
                                                  $
                                                  744,145
                                                  
                                                  
                                                  
                                                  9,495,036
                                                  
                                                  
                                                  $
                                                  .08Effect
      of dilutive securities - Options
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  261,432Diluted
      EPS - Income available to common stockholders and assumed
      conversions
                                                  
                                                  $
                                                  744,145
                                                  
                                                  
                                                  
                                                  9,756,468
                                                  
                                                  
                                                  $
                                                  .08




11


6.
            Acquisition:





On
September 29, 2010, the Company acquired substantially all of the assets of
Alpha Message Center, Inc. (collectively “Alpha”),a
New Jersey based company, provider of telephone after-hours answering and pager
services. The purchase price of this acquisition consists of an initial cash
payment of $577,977 and an accrual of $200,000 for estimated additional purchase
price consideration to be paid over the next two years, based upon fourteen
percent (14%) of the cash collected by the Company, excluding sales taxes,
from certain revenue generated from Alpha.The Company also incurred
finder and professional fees of approximately $57,000, which are
included in selling, general and administrative expenses.  The results
of operations of Alpha are included in the Telephone Based Communications
Services (“TBCS”) segment as of the date of acquisition.





The
following table summarizes the fair values of the assets acquired and
liabilities assumed at the date of acquisition.





Account
      Receivable
                  
                  $
                  14,765Fixed
      assets
                  
                  
                  25,000Non-compete
      agreement
                  
                  
                  15,000Customer
      list
                  
                  
                  275,000Goodwill
                  
                  
                  448,212Cost
      to acquire Alpha
                  
                  $
                  777,977





The
purchase price of the acquisition exceeded the fair value of the identifiable
net assets acquired inasmuch as the acquisition was consummated to enable the
Company to strengthen its position in the area where it was already
operating.  Furthermore, the acquisition was done for the business'
future cash flows and net earnings as opposed to solely for the identifiable
tangible and intangible assets.





On a pro
forma basis, had Alpha acquisition taken place as of the beginning of the
periods presented, our results of operations for those periods would not have
been materially affected.




7.
            Goodwill:





Changes
in the carrying amount of goodwill, all of which relates to the Company’s TBCS
segment, for the nine months ended September 30, 2010 and 2009 are as
follows:





Nine Months Ended September 30,
      2010Balance
      as of January 1, 2010
                              
                              $
                              10,255,983Additional
      Goodwill
                              
                              
                              486,510Balance
      as of September 30, 2010
                              
                              $
                              10,742,493Nine Months Ended September 30,
      2009Balance
      as of January 1, 2009
                              
                              $
                              9,996,152Additional
      Goodwill
                              
                              
                              226,140Balance
      as of September 30, 2009
                              
                              $
                              10,222,292


12


The
addition to goodwill during the nine months ended September 30, 2010 consists of
$448,212 which relates to the acquisition of Alpha Message Center,
Inc.  in September 2010 and $38,298 which relates to the additional
purchase price of American Mediconnect, Inc. based on the cash receipts from the
clinical trials portion of the business.  The addition to goodwill
during the nine months ended September 30, 2009 relates to the additional
purchase price of American Mediconnect, Inc. based on the cash receipts from the
clinical trials portion of the business.





8.
            Investment
      in limited liability company:





On May
12, 2010, the Company entered into a limited liability company agreement with
Hughes Telematics, Inc. and Qualcomm Incorporated to design, develop, finance
and operate a mobile PERS system.  The Company invested $4,000,000 and
incurred $150,336 in professional fees to acquire a minority interest in the new
company, Lifecomm LLC (“Lifecomm”). As part of this transaction, the Company
borrowed $2,000,000 from its bank to partially finance this
transaction.  See Note 9 below.





The
Company recorded a loss from investment in limited liability company of $507,512
for the nine months ended September 30, 2010.





In
addition, pursuant to the limited liability company agreement, the Company has
agreed to fund its share ($200,000) of a stand-by equity commitment for
Lifecomm’s benefit, if required.





In
connection with the formation of Lifecomm, the Company entered into a Value
Added Reseller Agreement (“VAR Agreement”) with Lifecomm.  Under the
VAR Agreement, the Company will be a reseller of the Mobile PERS Solution in the
United States, as well as a preferred provider of the emergency assistance call
center (“EACC”) component of the Mobile PERS Solution provided by Lifecomm to
customers.  The Company will be the sole provider of the EACC to the
customers to whom it resells the Mobile PERS Solution.  The term of
the VAR Agreement is perpetual, subject to termination as set forth
therein.  The VAR Agreement contains standard indemnification
provisions for agreements of this nature.





9.
            Long-term
      Debt:





The
Company had a credit facility arrangement for $4,500,000 which included a
revolving credit line which permitted borrowings of $1,500,000 (based on
eligible receivables as defined) and a $3,000,000 term loan payable. The term
loan is payable in equal monthly principal installments of $50,000 over five
years commencing January 2006.  This term loan was paid in full during
the second quarter of 2010 without any prepayment charge.  The
revolving credit line was set to mature in May 2008.


13


In March
2006 and December 2006, the credit facility was amended whereby the Company
obtained an additional $2,500,000 and $1,600,000 of term loans, the proceeds of
which were utilized to finance certain acquisitions.  These term loans
are payable over five years in equal monthly principal installments of
$41,666.67 and $26,666.67, respectively. Additionally, certain of the covenants
were amended.  The term loan which was entered into in March 2006 was
paid in full during the second quarter of 2010 without any prepayment
charge.




In
December 2006, the credit facility was amended to reduce the interest rates
charged by the bank such that borrowings under the term loan will bear interest
at either (a) LIBOR plus 2.00% or (b) the prime rate or the federal funds
effective rate plus .5%, whichever is greater, and the revolving credit line
will bear interest at either (a) LIBOR plus 1.75% or (b) the prime rate or the
federal funds effective rate plus .5%, whichever is greater.  The LIBOR
interest rate charge shall be adjusted in .25% intervals based on the Company’s
ratio of Consolidated Funded Debt to Consolidated EBITDA. In the third quarter
of 2007, the interest rate was reduced by .25% based on this
ratio.  The Company has the option to choose between the two interest
rate options under the amended term loan and revolving credit
line.  Borrowings under the credit facility are collateralized by
substantially all of the assets of the Company.




On April
30, 2007, the Company amended its credit facility whereby the term of the
revolving credit line was extended through June 2010 and the amount of credit
available under the revolving credit line was increased to
$2,500,000.  In June 2010, the term of the revolving credit line was
extended through June 2013.




On May
12, 2010, the Company’s credit facility was amended whereby the Company obtained
an additional $2,000,000 in the form of a term loan, the proceeds of which were
utilized to partially finance an investment relating to the development of a
mobile PERS system.  See Note 8 above.  This term loan is
payable over five years in equal monthly principal installments of $33,333.33,
commencing June 1, 2010.  The interest rate is consistent with the
previous term loans secured by the Company.





As of
September 30, 2010, June 30, 2010 and March 31, 2010, the Company was in
compliance with its financial covenants in its loan agreement.  As of
September 30, 2009, June 30, 2009 and March 31, 2009, the Company was in
compliance with its financial covenants in its loan agreement.





10.
            Dividends:





On
December 16, 2009, the Company declared a dividend in the amount of $0.10 per
share, or $950,364, which was accrued as of December 31, 2009.  The
dividend was payable to the shareholders of record as of December 28,
2009.  The dividend was paid on January 15, 2010.





On July
19, 2010, the Company declared a dividend in the amount of $0.10 per share, or
$951,515, which was payable to the shareholders of record as of September 13,
2010.  The dividend was paid on September 29, 2010.




11.
            Segment  Reporting:





The
Company has two reportable segments, (i) Health and Safety Monitoring Systems
(“HSMS”) and (ii) Telephone Based Communication Services
(“TBCS”).


14




The table
below provides a reconciliation of segment information to total consolidated
information for the nine and three months ended September 30, 2010 and
2009:





2010HSMS
                            
                            
                            TBCS
                            
                            
                            ConsolidatedNine Months Ended September 30,
      2010Revenue
                            
                            $
                            15,412,503
                            
                            
                            $
                            14,220,277
                            
                            
                            $
                            29,632,780Income
      before provision for income taxes
                            
                            
                            2,148,705
                            
                            
                            
                            1,271,276
                            
                            
                            
                            3,419,981Total
      assets
                            
                            
                            17,823,172
                            
                            
                            
                            19,409,266
                            
                            
                            
                            37,232,438





HSMS
                            
                            
                            TBCS
                            
                            
                            ConsolidatedThree Months Ended September 30,
      2010Revenue
                            
                            $
                            5,178,607
                            
                            
                            $
                            4,830,781
                            
                            
                            $
                            10,009,388Income
      before provision for income taxes
                            
                            
                            242,563
                            
                            
                            
                            448,143
                            
                            
                            
                            690,706





2009HSMS
                                
                                
                                TBCS
                                
                                
                                ConsolidatedNine Months Ended September 30,
      2009Revenue
                                
                                $
                                15,439,122
                                
                                
                                $
                                14,147,328
                                
                                
                                $
                                29,586,450Income
      before provision for income taxes
                                
                                
                                2,433,580
                                
                                
                                
                                1,170,200
                                
                                
                                
                                3,603,780Total
      assets
                                
                                
                                15,509,415
                                
                                
                                
                                20,842,515
                                
                                
                                
                                36,351,930





HSMS
                            
                            
                            TBCS
                            
                            
                            ConsolidatedThree Months Ended September 30,
      2009Revenue
                            
                            $
                            5,303,770
                            
                            
                            $
                            4,834,385
                            
                            
                            $
                            10,138,155Income
      before provision for income taxes
                            
                            
                            788,403
                            
                            
                            
                            472,742
                            
                            
                            
                            1,261,145




15


12.
            Commitments
      and Contingencies:





The
Company is aware of various threatened or pending litigation claims against the
Company relating to its products and services and other claims arising in the
ordinary course of its business.  The Company has given its insurance
carrier notice of such claims and it believes there is sufficient insurance
coverage to cover any such claims.   Currently, there are no
litigation claims for which an estimate of loss, if any, can be reasonably made
as they are in the preliminary stages and therefore, no liability or
corresponding insurance receivable has been recorded.





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




The
following discussion and analysis provides information which management of
American Medical Alert Corp. (referred to herein as “AMAC”, the “Company”, “we”,
“our” or “us”) believes is relevant to an assessment and understanding of our
results of operations and financial condition.  This discussion and
analysis should be read in conjunction with the consolidated financial
statements contained in our latest Annual Report on Form 10-K for the year ended
December 31, 2009, as well as the quarterly Condensed Consolidated Financial
Statements and notes thereto which appear elsewhere in this Quarterly Report on
Form 10-Q.




Statements
contained in this Quarterly Report on Form 10-Q include “forward-looking
statements” within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act, including, in particular and without limitation,
statements contained herein under the heading “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations.”  Forward-looking statements involve known and unknown
risks, uncertainties and other factors which could cause our actual results,
performance and achievements, whether expressed or implied by such
forward-looking statements, not to occur or be realized. These include
uncertainties relating to government regulation, our ability to keep up with
technological changes, our expansion plans and product liability
risks.  Such forward-looking statements generally are based upon our
best estimates of future results, performance or achievement, based upon current
conditions and the most recent results of operations.  Forward-looking
statements may be identified by the use of forward-looking terminology such as
“may,” “will,” “expect,” “believe,” “estimate,” “project,” “anticipate,”
“continue” or similar terms, variations of those terms or the negative of those
terms.




You
should carefully consider such risks, uncertainties and other information,
disclosures and discussions which contain cautionary statements identifying
important factors that could cause actual results to differ materially from
those provided in the forward-looking statements. Readers should carefully
review the risk factors and any other cautionary statements contained in the
Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and other
public filings.  The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.


16


Overview:





The
Company’s primary business is the provision of healthcare communication services
through (1) the development, marketing and monitoring of health and safety
monitoring systems (HSMS) that include personal emergency response systems,
medication management systems and objective and subjective data/ telehealth/
monitoring systems; and (2) telephony based communication services and solutions
primarily for the healthcare community (“TBCS”).  The Company’s
products and services are primarily marketed to the healthcare community,
including hospitals, home care, durable medical equipment, medical facility,
hospice, pharmacy, managed care, pharmaceutical companies and other healthcare
oriented organizations.  The Company also offers certain products and
services directly to consumers.





About
HSMS:





Personal
Emergency Response Systems (PERS)





The
Company’s core business is the sales and marketing of our Personal Emergency
Response System. The system consists of a console unit and a wireless activator
generally worn as a pendant or on the wrist by the client. In the event of an
emergency, the client is able to summon immediate assistance via the two-way
voice system that connects their home telephone with the Company’s Response
Center. The Company sells three PERS devices for use in either private homes or
independent and assisted living facilities. The Company’s PERS is sold through
its primary brand VoiceCare® and direct to consumer under Walgreens Ready
ResponseTM, Response CallTM, and most recently ApriaAlertTM.





MedSmart





The
second component of AMAC’s remote patient monitoring (“RPM”) platform addresses
another serious healthcare need-medication adherence. During 2009, the Company
commercially released AMAC’s new monitored medication management tool,
MedSmartTM. MedSmart is a system that organizes, reminds and dispenses pills in
accordance with prescribed treatment regimens. With MedSmart‘s event reporting
and notification option, family caregivers and healthcare professionals can
monitor a client’s adherence to their medication regimen. MedSmart’s docking
base serves as the gateway for remote programming and event reporting. When
connected to a household phone, MedSmart transmits device and dispensing history
to a secure server supported with a web application for review by authorized
individuals. Through AMAC’s personalized notification system, alerts can be sent
to track adherence, address dosing errors and predict refill requirements. The
Company plans to market MedSmart directly to consumers and through its national
business to business network.





Telehealth
systems





Rounding
out AMAC’s RPM portfolio is AMAC’s telehealth delivery capability. As a
distributor of the Health Buddy® System, many of the Company’s customers have
successfully demonstrated the value proposition of incorporating telehealth
technologies into a patient’s plan of care.  Later this year, AMAC
plans to release a new low-cost telehealth solution that combines vital sign
reporting and personalized questions about the patient’s health.  This
AMAC operated telehealth platform is directed toward providers who require a
low-cost solution, easy installation, reliable transmission of vital sign data
in real-time and ease of use on the patient side. Moving forward, AMAC plans to
integrate its telehealth monitoring and medication management reporting feature
sets to deliver the most robust solution for our customers.


17


About
TBCS





Telephony
Based Communication Services (TBCS)




AMAC’s
TBCS division offers call center solutions that enhance the patient/provider
communication experience. As part of our business development strategy,
management continues to employ advanced telephony technology and information
systems to develop services. In addition to technology, a critical component for
expansion is the Company’s professionally trained call agent
staff.  The overall infrastructure has allowed AMAC to expand its
services beyond traditional telephone answering services to provide more
innovative, clinically oriented call center offerings.  For the nine
months ended September 30, 2010, the TBCS segment accounted for 48% of the
Company’s gross revenues.  The Company’s TBCS division is comprised of
three service offerings:





After
Hours Answering Services





AMAC’s
after hours services are classified as essential call center services. Basic
services in this offering include traditional after hour answer and customized
message delivery options, contact lists and on-call schedule management, all of
which can be updated at the client’s convenience using the OnCall web
portal.  Through this portal, clients can also access the account’s
call history, specifications and messages. Enhanced a la carte services
including daytime overflow and broadcast messaging services which have proven to
enhance value and facilitate stronger patient provider relations.





Concierge
Services/Non-traditional Daytime Solutions





AMAC’s
Concierge Services focus on the delivery of non-traditional enhanced
communications and help to streamline workflow within provider organizations.
These solutions primarily serve hospitals and health plans. Services range from
supporting insurance eligibility verification programs; to enhancing patient
self care activities via post discharge follow-up programs, to specialized
Emergency Department programs with strict reach guidelines to facilitate better
treatment and care. Through more efficient and effective call processing, these
solutions improve patient satisfaction, reduce cost, and increase revenue by
maximizing the ratio of patients to available resources.





Pharmaceutical
Support and Clinical Trial Recruitment Services





Our
PhoneScreen clinical trial solutions service is an integral component of our
overall growth strategy to drive revenue enhancement and expand our visibility.
PhoneScreen is a leader in the field of patient recruitment, retention and
contact center services.  Using centralized telephone screening of
potential clinical trial study subjects, PhoneScreen provides valuable data to
inform advertising and patient recruitment strategies.


18


In 2009,
the TBCS division commenced new relationships with two premiere pharmaceutical
companies. We anticipate our pharmaceutical support programs will be utilized to
deliver enhanced patient-centric healthcare communication experiences on behalf
of certain brands. Based upon new demand, we are recruiting for nurses, health
educators and other healthcare professionals that will allow us to provide
additional turn-key solutions for our clients.





The
Company has completed eleven acquisitions to date to facilitate growth within
the TBCS division. For the remainder of 2010, the Company will focus on growing
this segment through internally driven sales and marketing efforts and will also
continue to search for additional acquisition opportunities.




Operating
Segments




For the
nine months ended September 30, 2010, HSMS accounted for 52% of the Company’s
revenue and TBCS accounted for 48% of the Company’s revenue.  The
Company believes that the overall mix of cash flow generating businesses from
HSMS and TBCS, combined with its emphasis on developing products and services to
support demand from customers and the emerging, home-based monitoring market,
provides the correct blend of stability and growth opportunities. The Company
believes this strategy will enable it to maintain and increase its role as a
national healthcare communications provider.  Based on the Company’s
growth strategy and the complementary nature of if its operating divisions,
management believes the Company’s outlook is very positive. Management also
believes that while the details of the newly enacted healthcare legislation is
awaiting regulation, the Company’s products and services should be in greater
demand over the next several years.





19




Components of Statements of
Income by Operating Segment


The
following table shows the components of the Statement of Income for the nine and
three months ended September 30, 2010 and 2009.




Three
      Months Ended September 30,
                  
                  
                  Nine
      Months Ended September 30,In
      thousands (000’s)
                  
                  2010
                  
                  
                  %
                  
                  
                  2009
                  
                  
                  %
                  
                  
                  2010
                  
                  
                  %
                  
                  
                  2009
                  
                  
                  %RevenuesHSMS
                  
                  
                  5,178
                  
                  
                  
                  52
                  %
                  
                  
                  5,304
                  
                  
                  
                  52
                  %
                  
                  
                  15,413
                  
                  
                  
                  52
                  %
                  
                  
                  15,439
                  
                  
                  
                  52
                  %TBCS
                  
                  
                  4,831
                  
                  
                  
                  48
                  %
                  
                  
                  4,834
                  
                  
                  
                  48
                  %
                  
                  
                  14,220
                  
                  
                  
                  48
                  %
                  
                  
                  14,147
                  
                  
                  
                  48
                  %Total
      Revenues
                  
                  
                  10,009
                  
                  
                  
                  100
                  %
                  
                  
                  10,138
                  
                  
                  
                  100
                  %
                  
                  
                  29,633
                  
                  
                  
                  100
                  %
                  
                  
                  29,586
                  
                  
                  
                  100
                  %Cost
      of Services and Goods SoldHSMS
                  
                  
                  1,969
                  
                  
                  
                  38
                  %
                  
                  
                  2,152
                  
                  
                  
                  41
                  %
                  
                  
                  6,037
                  
                  
                  
                  39
                  %
                  
                  
                  6,438
                  
                  
                  
                  42
                  %TBCS
                  
                  
                  2,587
                  
                  
                  
                  54
                  %
                  
                  
                  2,519
                  
                  
                  
                  52
                  %
                  
                  
                  7,566
                  
                  
                  
                  53
                  %
                  
                  
                  7,417
                  
                  
                  
                  53
                  %Total
      Cost of Services and Goods Sold
                  
                  
                  4,556
                  
                  
                  
                  46
                  %
                  
                  
                  4,671
                  
                  
                  
                  46
                  %
                  
                  
                  13,603
                  
                  
                  
                  46
                  %
                  
                  
                  13,855
                  
                  
                  
                  47
                  %Gross
      ProfitHSMS
                  
                  
                  3,209
                  
                  
                  
                  62
                  %
                  
                  
                  3,152
                  
                  
                  
                  59
                  %
                  
                  
                  9,376
                  
                  
                  
                  61
                  %
                  
                  
                  9,001
                  
                  
                  
                  58
                  %TBCS
                  
                  
                  2,244
                  
                  
                  
                  46
                  %
                  
                  
                  2,315
                  
                  
                  
                  48
                  %
                  
                  
                  6,654
                  
                  
                  
                  47
                  %
                  
                  
                  6,730
                  
                  
                  
                  47
                  %Total
      Gross Profit
                  
                  
                  5,453
                  
                  
                  
                  54
                  %
                  
                  
                  5,467
                  
                  
                  
                  54
                  %
                  
                  
                  16,030
                  
                  
                  
                  54
                  %
                  
                  
                  15,731
                  
                  
                  
                  53
                  %Selling,
      General & Administrative
                  
                  
                  4,370
                  
                  
                  
                  44
                  %
                  
                  
                  4,245
                  
                  
                  
                  42
                  %
                  
                  
                  12,135
                  
                  
                  
                  41
                  %
                  
                  
                  12,238
                  
                  
                  
                  41
                  %Interest
      Expense
                  
                  
                  19
                  
                  
                  
                  -
                  %
                  
                  
                  17
                  
                  
                  
                  -
                  %
                  
                  
                  45
                  
                  
                  
                  -
                  %
                  
                  
                  62
                  
                  
                  
                  -
                  %Equity
      in net loss from investment in limited liability company
                  
                  
                  391
                  
                  
                  
                  4
                  %
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  507
                  
                  
                  
                  2
                  %
                  
                  
                  -
                  
                  
                  
                  -Other
      Income
                  
                  
                  (18
                  )
                  
                  
                  -
                  %
                  
                  
                  (56
                  )
                  
                  
                  (1
                  )%
                  
                  
                  (77
                  )
                  
                  
                  -
                  %
                  
                  
                  (173
                  )
                  
                  
                  (1
                  )%Income
      before Income Taxes
                  
                  
                  691
                  
                  
                  
                  7
                  %
                  
                  
                  1,261
                  
                  
                  
                  12
                  %
                  
                  
                  3,420
                  
                  
                  
                  12
                  %
                  
                  
                  3,604
                  
                  
                  
                  12
                  %Provision
      for Income Taxes
                  
                  
                  283
                  
                  
                  
                  
                  
                  
                  
                  517
                  
                  
                  
                  
                  
                  
                  
                  1,402
                  
                  
                  
                  
                  
                  
                  
                  1,478Net
      Income
                  
                  
                  408
                  
                  
                  
                  
                  
                  
                  
                  744
                  
                  
                  
                  
                  
                  
                  
                  2,018
                  
                  
                  
                  
                  
                  
                  
                  2,126





Results of
Operations:





The
Company has two distinct operating business segments, which are HSMS and
TBCS.





Three Months Ended September
30, 2010 Compared to Three Months Ended September 30, 2009





Revenues:





HSMS





Revenues,
which consist primarily of monthly rental revenues, decreased approximately
$126,000, or 2%, for the three months ended September 30, 2010 as compared to
the same period in 2009.  The decrease is primarily attributed to the
following factors:





§
            The
      Company realized a decrease in product sales of approximately $88,000 as
      compared to the same period in 2009.  Due to the general decline
      in the economy, the Company recorded fewer sales of its senior living
      products of approximately $33,000 and decreased sales of its pill
      dispensers of approximately $55,000 as compared to the same quarter in
      prior year.  The Company commenced a direct to consumer
      advertising campaign for its MedSmart device and it is anticipated that
      increased revenue will be generated from the sale of this product moving
      forward.


20





§
            The
      Company realized a decrease in service revenue of approximately $59,000
      from a managed care organization as a result of state funding being
      cancelled under their program.  Nevertheless, the Company has
      been able to maintain many of the existing subscribers who were associated
      with this organization at reduced rates.  This decrease was
      partially offset by the continued increase in service revenue generated
      from its agreement with Walgreen to provide the Company’s PERS product
      under the Walgreen brand name directly to the consumers.  The
      revenue increase from this program was approximately $37,000 during the
      three months ended September 30, 2010 as compared to the same period in
      2009.  As the Company believes that greater revenue growth can
      be facilitated from private label marketing channels, the Company
      continues to pursue opportunities in the private label program similar to
      Walgreen and is launching an advertising campaign under the Walgreen brand
      name.





TBCS





The
decrease in revenues of approximately $3,000, or less than 1%, for the three
months ended September 30, 2010 as compared to the same period in 2009 was
primarily due to:





§
            The
      Company realized a decrease in revenue from its traditional after-hours
      service of approximately $367,000 for the three months ended September 30,
      2010 as compared to the same period in prior year due to customer
      attrition resulting primarily from general  economic conditions
      and certain service issues.  The Company has been performing
      certain restructuring and reorganizational procedures and strategies to
      reduce and stabilize customer
attrition





§
            This
      decrease was partially offset by an increase in revenue within its
      non-traditional day-time service offering of approximately $345,000 for
      the three months ended September 30, 2010 as compared to the same period
      in prior year primarily due to certain hospital organizations expanding
      their services.  Based on a recently executed agreement with a
      new hospital organization and through further service expansion from
      existing hospital solution customers, the Company anticipates it will
      continue to realize growth in this area in the remainder of 2010 and into
      2011.





While the
Company realized minimal growth within its pharmaceutical support offerings
for the three months ended September 30, 2010 as compared to the same period in
2009, the Company has executed certain agreements with pharmaceutical companies
whereby projects will commence in the fourth quarter of 2010 and into 2011; and
as a result, revenue is anticipated to increase in this
area.


21


Costs Related to Services
and Goods Sold:





HSMS





Costs
related to services and goods sold decreased by approximately $183,000 for the
three months ended September 30, 2010 as compared to the same period in 2009, a
decrease of 9%, primarily due to the following:





·
            Product
      costs decreased by approximately $44,000 as compared to the same quarter
      in prior year primarily due to a corresponding reduction in sales of its
      senior living products.





§
            The
      Company’s depreciation expense decreased by approximately $39,000
      primarily as a result of the Company purchasing its PERS equipment at
      reduced prices through an alternative supplier as well as purchasing less
      PERS equipment in the current and prior
years.





·
            The
      Company realized a decrease of approximately $41,000 in payroll expense
      associated with field technicians and emergency response center
      personnel.  This was a result of the Company incurring a reduced
      number of installations and fewer services required by field
      technicians.  In addition, as part of the Company’s
      continuing effort to evaluate its operational efficiencies and structuring
      of its emergency response centers, the Company has been able to reallocate
      and reduce the number of personnel required to operate its call centers.
      The Company will continue to evaluate personnel levels and based on the
      operational needs will adjust its resources
  accordingly.




TBCS





Costs
related to services and goods sold increased by approximately $68,000 for the
three months ended September 30, 2010 as compared to the same period in 2009, an
increase of 3%, primarily due to the following:





§
            The
      Company recognized an increase in payroll and related expenses of
      approximately $30,000 during the three months ended September 30, 2010 as
      compared to the same period in prior year.  This was primarily a
      result of an increase in payroll expense associated with non-traditional
      day time service due to a corresponding increase in call volume and
      revenue in this area. As the Company continues to grow revenues in this
      area, the personnel requirements will continue to be closely monitored to
      perform these services effectively.  The Company also incurred
      increased payroll with respect to account programming which was partially
      offset by a decrease in the payroll associated with the traditional day
      time service.




§
            The
      Company incurred costs of approximately $76,000 in developing reports with
      certain requirements relating to a specific project for a new
      customer within the pharmaceutical support service area. The project
      commenced in third quarter of 2010.




22


These
increases were partially offset by a decrease in communication expense of
approximately $15,000 which was primarily due to the Company performing a
detailed analysis with respect to its pager services resulting in reduced costs
for pager expense which was partially offset by an increase in telephone expense
primarily due to the increase in non-traditional business.  In
addition, TBCS recorded a decrease in rent expense of approximately $17,000
during the third quarter of 2010 as compared to the same period in the prior
year as a result of the TBCS division allocating a portion of its rent expense
to the HSMS division.   In the last quarter of 2009, the Company
relocated the HSMS Customer Service and Emergency Response Center (“ERC”)
employees to floor space within the TBCS rented space.  The space
previously occupied by the HSMS employees was sublet to an independent third
party.




Selling, General and
Administrative Expenses:





Selling,
general and administrative expenses increased by approximately $125,000 for the
three months ended September 30, 2010 as compared to the same period in 2009, an
increase of 3%.  The increase was primarily attributable to the
following:





§
            The
      Company realized an increase in sales and marketing salaries of
      approximately $202,000 during the third quarter of 2010 as compared to the
      same period in 2009 primarily due to the Company’s expansion of its sales
      and marketing team during 2010 in an effort to facilitate sales
      growth.





§
            The
      Company recorded an increase of advertising expense of approximately
      $295,000 during the third quarter of 2010 as compared to the same period
      in 2009.  This was primarily as a result of the Company
      commencing an advertising campaign for its MedSmart product during third
      quarter of 2010.  The Company anticipates that this advertising
      campaign will continue for the remainder of 2010 and into
      2011.





These
increases were partially offset by the following:





§
            As
      part of certain executive’s employment agreements, there are provisions
      which call for different levels of cash and stock performance incentives
      to be paid based on corresponding levels of Earnings before Interest and
      Taxes (EBIT) thresholds being met.  In connection with the
      Company’s investment in a limited liability company, it is required to
      record its share of income or losses from this investment. As a result of
      the losses recorded to date and the current trend of the losses to be
      recorded for the remainder of the year, the company adjusted its EBIT
      estimates downward resulting in a decrease in stock incentive
      expense of approximately $98,000 during the three months ended
      September 30, 2010 as compared to the same period in the prior
      year.





§
            The
      Company realized a decrease in consulting expense of approximately $34,000
      for the three months ended September 30, 2010 as compared to the same
      period in 2009.  During 2009, the Company engaged outside
      consultants for sales promotion and public relations, which were not
      utilized to the same extent during
2010.


23





§
            The
      Company recognized a decrease in commission expense of approximately
      $41,000 for the three months ended September 30, 2010 as compared to the
      same period in 2009 primarily due to less commission related referrals
      related to the PERS product in 2010 as compared to prior
    year.





§
            The
      Company recorded a decrease in amortization expense of approximately
      $39,000 for the three months ended September 30, 2010 as compared to the
      same period in 2009 primarily due to certain intangible assets associated
      with previous telephone answering service acquisitions and a license
      agreement being fully amortized.





§
            The
      Company realized a decrease in bad debt expense of approximately $40,000
      for the three months ended September 30, 2010 as compared to the same
      period in 2009 primarily due to the Company tightening its policies with
      respect to collections as well as recovery of certain amounts previously
      written off.





§
            The
      Company realized a decrease in administrative salaries of approximately
      $45,000 as there was a reduction of personnel at the senior level of the
      Company’s administration department at the end of
  2009.




Interest
Expense:





Interest
expense for the three months ended September 30, 2010 and 2009 was approximately
$19,000 and $17,000, respectively.  The increase of $2,000 was as a
result of the Company obtaining an additional loan in May 2010 for the partial
funding of the investment in limited liability company offset by the pay down of
its existing term loans.





Equity in Net Loss from
Investment in Limited Liability Company:





Equity in
net loss from investment in limited liability company for the three months ended
September 30, 2010 of approximately $391,000 was related to the Company’s May
2010 investment in Lifecomm.  This loss represents the Company’s
equity share of research and development cost as well as other selling, general
and administrative expenses incurred for the development of the next generation
mobile PERS.  The Company anticipates that its share of equity loss over
the next several quarters will increase and continue over the next twelve to
fifteen months, at which time it is anticipated that the next generation mobile
PERS will be completed and commercialized.





Other
Income:





Other
income for the three months ended September 30, 2010 and 2009 was approximately
$18,000 and $56,000, respectively, which primarily consists of miscellaneous
income.


24


Income Before Provision for
Income Taxes:





The
Company’s income before provision for income taxes for the three months ended
September 30, 2010 was approximately $691,000 as compared to $1,261,000 for the
same period in 2009. The decrease of $570,000 for the three months ended
September 30, 2010 primarily resulted from the equity in net loss from
investment in limited liability company and an increase in selling, general and
administrative costs.





Nine Months Ended September
30, 2010 Compared to Nine Months Ended September 30, 2009





Revenues:





HSMS





Revenues,
which consist primarily of monthly rental revenues, decreased approximately
$26,000, or less than 1%, for the nine months ended September 30, 2010 as
compared to the same period in 2009.  The decrease was primarily
attributed to the following factors:





§
            The
      Company sold less of its senior living products by approximately $154,000
      as compared to the same period in the prior year which was primarily due
      to the general decline in the economy.  This decrease was
      partially offset by an increase in sales of its MedSmart medication
      medical system which the Company commercialized in 2009.  The
      Company commenced a direct to consumer advertising campaign for its
      MedSmart device and it is anticipated that increased revenue will be
      generated from the sale of this product moving
  forward.





§
            The
      Company experienced revenue growth in its PERS business-to-business
      service of approximately $346,000 primarily from its existing third party
      reimbursement and long-term care programs as well as execution of new
      agreements.  This increase in service revenue was primarily
      partially offset by a decrease of approximately $326,000 in service
      revenue from a managed care organization as a result of state funding
      being cancelled under their program.  The Company has been able
      to maintain many of the existing subscribers who were associated with this
      organization at reduced rates.





§
            The
      Company continued to realize increased revenue from its agreement with
      Walgreen to provide the Company’s PERS product under the Walgreen brand
      name directly to the consumers.  The revenue increase from this
      program accounted for approximately $151,000 during the nine months ended
      September 30, 2010 as compared to the same period in 2009.  As
      the Company believes that greater revenue growth can be facilitated from
      private label marketing channels, the Company continues to pursue other
      opportunities in the private label program such as Walgreen as well as
      launching an advertising campaign under the Walgreen brand
      name.





TBCS





The
increase in revenues of approximately $73,000, or 1%, for the nine months ended
September 30, 2010 as compared to the same period in 2009 was primarily due
to:


25




§
            The
      Company realized an increase in revenue within its non-traditional
      day-time service offering of approximately $1,099,000 for the nine months
      ended September 30, 2010 as compared to the same period in the prior year
      primarily due to certain hospital organizations expanding their services
      with us.  Based on a recently executed agreement with a new
      hospital organization and through further service expansion from existing
      hospital solution customers, the Company anticipates it will continue to
      realize growth in this area in the remainder of 2010 and into
      2011.





§
            This
      increase in revenue was partially offset by a decrease in revenue from its
      traditional after-hours service of approximately $921,000 for the nine
      months ended September 30, 2010 as compared to the same period in the
      prior year due to customer attrition which was primarily the result of the
      general economic conditions and certain service issues.  The
      Company has been performing certain restructuring and reorganizational
      procedures and strategies to reduce and stabilize the
      attrition.  In addition, the Company was awarded a one-time
      project from a state program in the prior year whereby the Company
      generated approximately $119,000 in revenue which the Company did not
      perform in the current year.





While the
Company realized minimal growth within its pharmaceutical offerings for the
nine months ended September 30, 2010 as compared to the same period in 2009, the
Company has executed certain agreements with pharmaceutical companies whereby
projects will commence in the fourth quarter of 2010 and into 2011; and as a
result, revenue is anticipated to increase in this area.





Costs Related to Services
and Goods Sold:





HSMS





Costs
related to services and goods sold decreased by approximately $401,000 for the
nine months ended September 30, 2010 as compared to the same period in 2009, a
decrease of 6%, primarily due to the following:





§
            Product
      costs decreased by approximately $75,000 primarily due to a reduction in
      sales of its enhanced senior living products, partially offset by an
      increase in cost of products sold related to MedSmart medication
      management system which was commercialized in
  2009.





§
            The
      Company recorded a decrease in depreciation expense by approximately
      $123,000 primarily as a result of the Company purchasing its PERS
      equipment at reduced prices through an alternative supplier as well as
      purchasing less PERS equipment in the current and prior
    years.





·
            The
      Company realized a decrease of approximately $86,000 in payroll associated
      with field technicians.  This was a result of the Company
      incurring reduced number of installations and less services required by
      field technicians.


26




·
            As
      part of the Company’s continuing effort to evaluate its operational
      efficiencies and structuring of its emergency response centers, the
      Company has been able to reallocate and reduce the number of personnel
      required to operate its call centers.  As a result of realizing
      these efficiencies, the Company has reduced its payroll expense in this
      area by approximately $64,000 in 2010.  The Company will
      continue to evaluate personnel levels and based on the operational needs
      will adjust its resources
accordingly.





·
            In
      addition, the HSMS division recorded a decrease in rent expense of
      approximately $40,000 during the nine months ended September 30, 2010 as
      compared to the same period in the prior year as a result of the HSMS
      division relocating the HSMS Customer Service and Emergency Response
      Center (“ERC”) employees to floor space within the TBCS rented space The
      space previously occupied by the HSMS employees was sublet to an
      independent third party.




These
decreases were partially offset by an increase in the payroll costs associated
with the Company’s IT personnel in the amount of approximately
$88,000.  As the Company looks to update its current systems and to
develop new systems, both internally and for clients, the Company has hired
additional personnel and reallocated personnel to this division to help
facilitate this process.  The Company believes this effort will
benefit the Company.





TBCS:





Costs
related to services increased by approximately $149,000 for the nine months
ended September 30, 2010 as compared to the same period in 2009, an increase of
2%, primarily due to the following:





§
            The
      Company recognized an increase in payroll and related expenses of
      approximately $216,000 during the nine months ended September 30, 2010 as
      compared to the same period in prior year.  This was primarily a
      result of an increase in payroll associated with non-traditional day time
      service due to a corresponding increase in call volume and revenue in this
      area.  As the Company continues to grow in this area, the
      personnel requirements will continue to be closely monitored to perform
      these services effectively.  The Company also incurred increased
      payroll with respect to account programming which was partially offset by
      a decrease in the payroll associated with the traditional after-hours
      service.




§
            The
      Company incurred costs of approximately $76,000 in developing reports with
      certain requirements relating to a specific project for a new
      customer within the pharmaceutical support service area. The project
      commenced in the third quarter
2010.




27


These
increases were partially offset by a decrease in communication expense of
approximately $51,000 which primarily due to the Company performing a detailed
analysis with respect to its pager services resulting in reduced costs for pager
expense which was partially offset by an increase in telephone expense primarily
due to the increase in non-traditional business.  In addition, the
TBCS division recorded a decrease in rent expense of approximately $67,000
during the nine months ended September 30, 2010 as compared to the same period
in the prior year as a result of the TBCS division allocating a portion of its
rent expense to the HSMS division.   In the last quarter of 2009,
the Company relocated the HSMS Customer Service and Emergency Response Center
(“ERC”) employees to floor space within the TBCS rented space.  The
space previously occupied by the HSMS employees was sublet to an independent
third party.





Selling, General and
Administrative Expenses:





Selling,
general and administrative expenses decreased by approximately $103,000 for the
nine months ended September 30, 2010 as compared to the same period in 2009, a
decrease of 1%.  The decrease is primarily attributable to the
following:





§
            The
      Company realized a decrease in consulting expense of approximately
      $251,000 for the nine months ended September 30, 2010 as compared to the
      same period in 2009.  During 2009, the Company engaged outside
      consultants for sales promotion and public relations, which were not
      utilized to the same extent during
2010.





§
            The
      Company recognized a decrease in commission expense of approximately
      $124,000 for the nine months ended September 30, 2010 as compared to the
      same period in 2009 primarily due to less commission related referrals
      related to our PERS product in 2010 as compared to prior
    year.





§
            The
      Company recorded a decrease in amortization expense of approximately
      $158,000 for the nine months ended September 30, 2010 as compared to the
      same period in 2009 primarily due to certain intangible assets associated
      with previous telephone answering service acquisitions and a license
      agreement being fully amortized.





§
            The
      Company recorded a decrease in research and development expense of
      approximately $132,000 primarily as a result of the Company incurring
      charges relating to the research and development with respect to its
      MedSmart medication management system during 2009. No such costs were
      recorded in 2010 as such research and development work had been completed
      in 2009 and MedSmart has been
commercialized.





§
            As
      part of certain executive’s employment agreements, there are provisions
      which call for cash and stock performance incentives to be paid based on
      corresponding levels of Earnings before Interest and Taxes (EBIT)
      thresholds being met.  In connection with the Company’s
      investment in limited liability company, it is required to record its
      share of income or losses from this investment. As a result of the losses
      recorded to date and the current trend of the losses to be recorded for
      the remainder of the year, the Company adjusted its EBIT estimates
      downward resulting in a decrease in stock incentive expense of
      approximately $86,000 during the nine months ended September 30, 2010 as
      compared to the same period in the prior
year.


28





§
            The
      Company realized a decrease in administrative salaries of approximately
      $135,000 as there was a reduction of personnel at the senior level of the
      Company’s administration department at the end of
  2009.





The
decreases were partially offset by the following items:





·
            An
      increase in sales and marketing salaries of approximately $472,000 during
      the nine months ended September 30, 2010 as compared to the same period in
      2009 primarily due to the Company expanding its sales and marketing team
      during 2010 in an effort to facilitate sales
  growth.





·
            An
      increase in advertising expense of approximately $327,000 during the nine
      months ended September 30, 2010 as compared to the same period in 2009
      primarily due to the Company commencing an advertising campaign for its
      MedSmart products during third quarter of 2010.  The Company
      anticipates that this advertising campaign will continue for the remainder
      of 2010 and into 2011.





Interest
Expense:





Interest
expense for the nine months ended September 30, 2010 and 2009 was approximately
$45,000 and $62,000, respectively.  The decrease of $17,000 was as a
result of the Company’s loan balance being less in the early part of current
year as compared to the same period in prior year primarily due to the Company
paying down its term loan.  The Company obtained an additional loan in
May 2010 for the partial funding of the investment in a limited liability
company and as a result interest expense is expected to increase.





Equity in Net Loss from
Investment in Limited Liability Company:





Equity in
net loss from investment in limited liability company for the nine months ended
September 30, 2010 of approximately $507,000 was related to the Company’s May
2010 investment in Lifecomm LLC.  This loss represents the Company’s
equity share of research and development cost as well as other selling, general
and administrative expenses incurred for the development of the next generation
mobile PERS for the nine months ended September 30, 2010.  The Company
anticipates its share of equity loss over the next several quarters will
increase and continue over the next twelve to fifteen months, at which time it
is anticipated that the next generation mobile PERS will be completed and
commercialized.





Other
Income:





Other
income for the nine months ended September 30, 2010 and 2009 was approximately
$77,000 and $173,000, respectively. The decrease in other income was primarily
the result of the Company receiving approximately $73,000 with respect to a
training incentive from the State of New Mexico for hiring and training
employees within the State and an economic development incentive through the
City of Clovis during the nine months ended September 30, 2009.  These
incentives were not provided for in the period in 2010.


29





Income Before Provision for
Income Taxes:





The
Company’s income before provision for income taxes for the nine months ended
September 30, 2010 was approximately $3,420,000 as compared to $3,604,000 for
the same period in 2009. The decrease of $184,000 for the nine months ended
September 30, 2010 primarily resulted from an increase in equity in net loss
from investment in limited liability company and a decrease in other income
which were partially offset by an increase in the Company's revenue as well as a
decrease in the Company’s costs related to services and product sales; and
selling, general and administrative costs.




Liquidity and Capital
Resources




The
Company had a credit facility arrangement for $4,500,000 which included a
revolving credit line which permitted borrowings of $1,500,000 (based on
eligible receivables as defined) and a $3,000,000 term loan payable in equal
monthly principal installments of $50,000 over five years commencing January
2006.  This term loan was paid in full during the second quarter of
2010 without any prepayment charge.




In March
2006 and December 2006, the Company’s credit facility was amended whereby the
Company obtained an additional $2,500,000 and $1,600,000 of term loans, the
proceeds of which were utilized to finance certain
acquisitions.  These term loans are payable over five years in equal
monthly principal installments of $41,666.67 and $26,666.67, respectively.
Additionally, certain of the covenants were amended.  The term loan
which was entered into in March 2006 was paid in full during the second quarter
of 2010 without any prepayment charge.




In
December 2006, the credit facility was amended to reduce the interest rates
charged by the bank such that borrowings under the term loan will bear interest
at either (a) LIBOR plus 2.00% or (b) the prime rate or the federal funds
effective rate plus .5%, whichever is greater, and the revolving credit line
will bear interest at either (a) LIBOR plus 1.75% or (b) the prime rate or the
federal funds effective rate plus .5%, whichever is greater.  The LIBOR
interest rate charge shall be adjusted in .25% intervals based on the Company’s
ratio of Consolidated Funded Debt to Consolidated EBITDA.  In the
third quarter of 2007, the interest rate was reduced by .25% based on this
ratio.  The Company has the option to choose between the two interest
rate options under the amended term loan and revolving credit
line.  Borrowings under the credit facility are collateralized by
substantially all of the assets of the Company.




On April
30, 2007, the Company amended its credit facility whereby the term of the
revolving credit line was extended through June 2010 and the amount of credit
available under the revolving credit line was increased to
$2,500,000.  In June 2010, the term of the revolving credit line was
extended through June 2013.





On May
12, 2010, the Company’s credit facility was amended whereby the Company obtained
an additional $2,000,000 in the form of a term loan, the proceeds of which were
utilized to partially finance the Company’s investment in Lifecomm, as described
in more detail in Note 8 of the Company’s financial statements included in Part
I, Item 1 of this Quarterly Report on Form 10Q.  This term loan is
payable over five years in equal monthly principal installments of $33,333.33,
commencing June 1, 2010.  The interest rate is consistent with the
previous term loans secured by the Company.


30




As of
September 30, 2010 and 2009, the Company was in compliance with its financial
covenants in its loan agreement.





The
following table is a summary of contractual obligations as of September 30,
2010:




Payments Due by PeriodContractual  Obligations
                      
                      Total
                      
                      
                      Less than 1
                        year
                      
                      
                      1-3 years
                      
                      
                      4-5 years
                      
                      
                      After 5 yearsRevolving
      Credit Line
                      
                      $
                      750,000
                      
                      
                      
                      
                      
                      $
                      750,000Debt  (a)
                      
                      $
                      2,240,001
                      
                      
                      $
                      660,000
                      
                      
                      $
                      1,280,000
                      
                      
                      $
                      300,001Operating
      Leases (b)
                      
                      $
                      7,648,747
                      
                      
                      $
                      1,228,020
                      
                      
                      $
                      3,254,886
                      
                      
                      $
                      1,807,750
                      
                      
                      $
                      1,358,091Purchase
      Commitments (c)
                      
                      $
                      745,479
                      
                      
                      $
                      745,479Interest
      Expense (d)
                      
                      $
                      194,651
                      
                      
                      $
                      65,787
                      
                      
                      $
                      124,961
                      
                      
                      $
                      3,903Total
      Contractual Obligations
                      
                      $
                      11,578,878
                      
                      
                      $
                      2,699,286
                      
                      
                      $
                      5,409,847
                      
                      
                      $
                      2,111,654
                      
                      
                      $
                      1,358,091




(a)
              –
      Debt includes the Company’s aggregate outstanding term loans which mature
      in 2013 and 2014.




(b)
              –Operating leases
      include rental of facilities at various locations within the United
      States.  These operating leases include the rental of the
      Company’s call center, warehouse and office facilities.  These
      operating leases have various maturity dates.  The Company
      currently leases office space from the Chairman and principal shareholder
      pursuant to a lease. This lease expires in December 2012.  The
      Company also leases office space from certain telephone answering service
      managers.  The leases with these managers expire in December
      2012 and March 2015,
respectively.




(c)
              –Purchase commitments
      relate to orders for the Company’s traditional PERS system and its
      MedSmart pill dispenser.




(d)
              –
      Interest expense relates to interest on the Company’s revolving credit
      line and debt at the Company’s current rate of
  interest.




31


The
primary sources of liquidity are cash flows from operating activities.  Net
cash provided by operating activities was approximately $5.3 million for the
nine months ended September 30, 2010, as compared to approximately $5.8 million
for the same period in 2009.  During 2010, the cash provided by
operating activities was primarily from net earnings of approximately $2.0
million, depreciation and amortization of approximately $2.8 million and equity
in net loss from investment in limited liability company of approximately $0.5
million.  The components of depreciation and amortization primarily
relate to the purchases of the Company’s traditional PERS equipment and the
customer lists associated with the acquisition of telephone answering service
businesses.  The net loss from investment in limited liability company
represents the Company’s equity share of research and development cost as well
as other selling, general and administrative expenses incurred for the
development of the next generation mobile PERS.  During 2009, the cash
provided by operating activities was primarily from net earnings of
approximately $2.1 million as well as depreciation and amortization of
approximately $3.1 million, and increase in accounts payable and accrued
expenses of $0.9 million. The components of depreciation and amortization
primarily relate to the purchases of the Company’s traditional PERS product and
the customer lists associated with the acquisition of telephone answering
service businesses.  The increase in accounts payable and accrued
expenses is primarily due to the timing of payments of expenses in the ordinary
course of business.




Net cash
used in investing activities was approximately $5.6 million for the nine months
ended September 30, 2010 as compared to approximately $1.1 million for the same
period in 2009.  The primary component of net cash used in investing
activities in 2010 was the $4.1 million investment in a limited liability
company for the development of the next generation mobile PERS system; capital
expenditures of approximately $0.9 million, net of deposits on equipment being
transferred to fixed assets; and $0.6 million for the acquisition of Alpha, a
telephone answering company.  The primary component of net cash used
in investing activities in 2009 was capital expenditures of approximately $0.9
million, net of deposits on equipment being transferred to fixed
assets.  Capital expenditures for both 2010 and 2009 primarily related
to the continued production and purchase of the traditional PERS
systems.




Cash
flows used in financing activities for the nine months ended September 30, 2010
were approximately $1.4 million compared to $1.7 million for the same period in
2009.  The components of cash flow used in financing activities in
2010 were the payment of long-term debt of approximately $1.5 million and the
payment of two special dividends, which were declared on December 16, 2009 and
July 19, 2010, aggregating approximately $1.9 million.  The cash flow
used in financing was partially offset by the proceeds from long-term debt of
$2.0 million which was obtained for the purpose of partially funding the
investment in a limited liability company.  The primary component of
cash flow used in financing activities in 2009 was the payment of long-term debt
of approximately $1.5 million.




During
the next twelve months, the Company anticipates it will make capital
expenditures of approximately $1.25 – $1.75 million for the production and
purchase of traditional PERS systems, telehealth systems, as well as
enhancements to its computer operating systems.  This amount is
subject to fluctuations based on customer demand.  The Company plans
to incur approximately $1.25 - $1.75 million of advertising expense for
promotional campaigns related to its PERS and MedSmart medication management
systems.  The Company also anticipates incurring approximately $0.1 -
$0.2 million of costs primarily relating to research and development of its
telehealth products.


32


As of
September 30, 2010, the Company had approximately $3.7 million in cash and the
Company’s working capital was approximately $8.5 million.  The Company
believes that with its present cash balance and with operations of the business
generating positive cash flow, it will be able to meet its cash flow needs for
working capital and capital expenditures for at least the next twelve months.
The Company also has a revolving credit line, which expires in June 2013 that
permits borrowings up to $2.5 million, of which $750,000 was outstanding at
September 30, 2010.




Off-Balance
Sheet Arrangements:




As of
September 30, 2010, the Company has not entered into any off-balance sheet
arrangements that are reasonably likely to have a current or future effect on
the Company’s financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources  that is material to investors.




Other
Factors:




On
January 14, 2002, the Company entered into an operating lease agreement for
space in Long Island City, New York in order to consolidate its HCI TBCS and
PERS ERC/ Customer Service facilities.  The centralization of the ERC,
Customer Service and H-LINK® OnCall operations has provided certain operating
efficiencies and allowed for continued growth of the H-LINK and PERS
divisions.  The fifteen (15) year lease term commenced in April 2003. 
The lease calls for minimum annual rentals of $307,900, subject to a 3% annual
increase plus reimbursement for real estate taxes.





During
2005, the Company entered into two operating lease agreements for additional
space at its Long Island City, New York location in order to consolidate its
warehouse and distribution center and accounting department into this
location.  The leases, which commenced in January 2006 and expire in
March 2018, call for minimum annual rentals of $220,000 and $122,000,
respectively, and are subject to increases in accordance with the term of the
agreements.  The Company is also responsible for the reimbursement of
real estate taxes.





In
September 2009, the Company sublet a portion of its space under its operating
lease which was entered into in 2005.  The space is being sublet to an
independent third party and calls for minimum annual rentals of $125,000 and is
subject to annual increases in accordance with the terms of the
agreement.  The sublease expires in March 2018.





On May
12, 2010, the Company entered into a limited liability company agreement with
Hughes Telematics, Inc. and Qualcomm Incorporated to design, develop, finance
and operate a mobile PERS system.  The Company invested $4,000,000 to
acquire a minority interest in the new company, Lifecomm LLC. As part of this
transaction, the Company borrowed $2,000,000 from its bank to partially finance
this transaction.


33





The
Company recorded a loss from investment in limited liability company of $507,512
as of September 30, 2010.  This represents the Company’s share, based
on the equity method, of loss relating to this investment.  The loss
primarily relates to research and development as well as other selling, general
and administrative fees incurred for the development of the next generation
mobile PERS.  As the development continues to progress, the Company
expects it will continue to incur losses at greater levels over the next twelve
to eighteen months, at which time it is anticipated the next generation mobile
PERS will be completed and commercialized.





In
addition, pursuant to the limited liability company agreement, the Company has
agreed to fund its share ($200,000) of a stand-by equity commitment for
Lifecomm’s benefit, if required.





In
connection with the formation of Lifecomm, the Company entered into a Value
Added Reseller Agreement (“VAR Agreement”) with Lifecomm.  Under the
VAR Agreement, the Company will be a reseller of the Mobile PERS Solution in the
United States, as well as a preferred provider of the emergency assistance call
center (“EACC”) component of the Mobile PERS Solution provided by Lifecomm to
customers.  The Company will be the sole provider of the EACC to the
customers to whom it resells the Mobile PERS Solution.  The term of
the VAR Agreement is perpetual, subject to termination as set forth
therein.  The VAR Agreement contains standard indemnification
provisions for agreements of this nature.





On
September 29, 2010, the Company acquired substantially all of the assets of
Alpha Message Center, Inc.,a
New Jersey based company, provider of telephone after-hour answering and pager
services. The purchase price of this acquisition consists of an initial cash
payment of $577,977 and an accrual of $200,000 for estimated additional purchase
price consideration to be paid over the next two years, based upon fourteen
percent (14%) of the cash collected by the Company, excluding sales taxes,
from certain revenue generated from Alpha.The Company also incurred
finder and professional fees of approximately $57,000, which are
included in selling, general and administrative expenses.




Recent
Accounting Pronouncements:




During
the third quarter of 2009, the Company adopted ASC Topic 105, Generally Accepted
Accounting Principles, which establishes the FASB Accounting Standards
Codification (“ASC”) as the sole source of authoritative generally accepted
accounting principles ("GAAP") to be applied by nongovernmental entities. Rules
and interpretive releases of the Securities and Exchange Commission ("SEC")
under authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. The codification did not change GAAP but reorganizes
the literature. References for FASB guidance throughout this document have been
updated for the codification.


34


Critical
Accounting Policies:





In
preparing the financial statements, the Company makes estimates, assumptions and
judgments that can have a significant impact on our revenue, operating income
and net income, as well as on the reported amounts of certain assets and
liabilities on the balance sheet.  The Company believes that the
estimates, assumptions and judgments involved in the accounting policies
described below have the greatest potential impact on its financial statements
due to the materiality of the accounts involved, and therefore, considers these
to be its critical accounting policies.  Estimates in each of these
areas are based on historical experience and a variety of assumptions that the
Company believes are appropriate. Actual results may differ from these
estimates.





Reserves for Uncollectible Accounts
Receivable


The
Company makes ongoing assumptions relating to the collectability of its accounts
receivable.  The accounts receivable amount on the balance sheet
includes a reserve for accounts that might not be paid.  In
determining the amount of the reserve, the Company considers its historical
level of credit losses.  The Company also makes judgments about the
creditworthiness of significant customers based on ongoing credit evaluations,
and it assesses current economic trends that might impact the level of credit
losses in the future. The Company recorded reserves for uncollectible accounts
receivable of $598,000 as of September 30, 2010, which is equal to 8.4% of total
accounts receivable.  While the Company believes that the current
reserves are adequate to cover potential credit losses, it cannot predict future
changes in the financial stability of its customers and the Company cannot
guarantee that its reserves will continue to be adequate.  For each 1%
that actual credit losses exceed the reserves established, there would be an
increase in general and administrative expenses and a reduction in reported net
income of approximately $71,000. Conversely, for each 1% that actual credit
losses are less than the reserve, this would decrease the Company’s general and
administrative expenses and increase the reported net income by approximately
$71,000.





Fixed
Assets


Fixed
assets are stated at cost.  Depreciation for financial reporting
purposes is being provided by the straight-line method over the estimated useful
lives of the related assets.  The valuation and classification of
these assets and the assignment of useful depreciable lives involves significant
judgments and the use of estimates.  Fixed assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.  Historically,
impairment losses have not been required.  Any change in the
assumption of estimated useful lives could either result in a decrease or
increase to the Company’s financial results.  A decrease in estimated
useful life would reduce the Company’s net income and an increase in estimated
useful life would increase the Company’s net income.  If the estimated
useful lives of the PERS medical device were decreased by one year, the cost of
goods related to services would increase and net income would decrease by
approximately $163,000 per annum.  Conversely, if the estimated useful
lives of the PERS medical device were increased by one year, the cost of goods
related to services would decrease and net income would increase by
approximately $157,000 per annum.


35


Valuation of Goodwill


Goodwill
and indefinite life intangible assets are subject to annual impairment
tests.  To date, the Company has not been required to recognize an
impairment of goodwill. The Company tests goodwill for impairment annually or
more frequently when events or circumstances occur indicating goodwill might be
impaired. This process involves estimating fair value using discounted cash flow
analyses. Considerable management judgment is necessary to estimate discounted
future cash flows. Assumptions used for these estimated cash flows were based on
a combination of historical results and current internal
forecasts.  The Company cannot predict certain events that could
adversely affect the reported value of goodwill, which totaled $10,742,493 and
$10,255,983 at September 30, 2010 and December 31, 2009,
respectively.  If the Company were to experience a significant adverse
impact on goodwill, it would negatively impact the Company’s net
income.





Accounting
for Stock-Based Awards


Stock
based compensation is recorded in accordance with ASC Topic 718 (formerly FASB
Statement No. 123(R), Share-Based Payment), which requires the measurement and
recognition of compensation expense for all share-based payments to employees,
including grants of stock and employee stock options, based on estimated fair
values.




Stock-based
compensation expense recognized during the period is based on the value of the
portion of share-based payment awards that is ultimately expected to vest during
the period.  The Company recorded a pre-tax stock-based compensation
expense which is included in selling, general and administrative expense in its
consolidated financial statements of approximately $198,000 and $319,000 for the
nine months ended September 30, 2010 and 2009, respectively.




The
determination of fair value of share-based payment awards to employees and
directors on the date of grant using the Black-Scholes model is affected by the
Company's stock price as well as assumptions regarding a number of highly
complex and subjective variables. These variables include, but are not limited
to the expected stock price volatility over the term of the awards, and actual
and projected employee stock option exercise behaviors.





Item
3.   Quantitative and Qualitative
Disclosures About Market Risk.





Market
Risk Disclosure





The
Company does not hold market risk-sensitive instruments entered into for trading
purposes, nor does it hold market risk sensitive instruments entered into for
other than trading purposes. All sales, operating items and balance sheet data
are denominated in U.S. dollars; therefore, the Company has no significant
foreign currency exchange rate risk.





In the
ordinary course of its business the Company enters into commitments to purchase
raw materials and finished goods over a period of time, generally six months to
one year, at contracted prices. At September 30, 2010 these future commitments
were not at prices in excess of current market, or in quantities in excess of
normal requirements. The Company does not utilize derivative contracts either to
hedge existing risks or for speculative purposes.


36





Interest
Rate Risk





We are
exposed to market risk from changes in interest rates primarily through our
financing activities.  Interest on the outstanding balances on our
term loans and revolving credit line under our credit facility accrues at a rate
of LIBOR plus 1.75% and LIBOR plus 1.50%, respectively.  As of
September 30, 2010, we had outstanding debt with an aggregate face amount of
approximately $2,990,000, all of which is variable rate
borrowings.  As of September 30, 2010, the hypothetical impact of a
one percentage point increase in interest rates related to our outstanding
variable rate debt would be to increase annual interest expense for the
remainder of fiscal year 2010 by approximately $7,000. Our ability to carry out
our business plan to finance future working capital requirements may be impacted
if the cost of carrying debt fluctuates to the point where it becomes a burden
on our resources.





Item
4.  Controls
and Procedures.




As of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of its Chief Executive Officer
and President and its Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, the Chief Executive Officer and President and the Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company in
the reports filed by it under the Securities and Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and include controls and procedures
designed to ensure that information required to be disclosed by the Company in
such reports is accumulated and communicated to the Company's management,
including the Chief Executive Officer and President and Chief Financial Officer
of the Company, as appropriate to allow timely decisions regarding required
disclosure.





There
were no changes in the Company’s internal control over financial reporting that
occurred during the quarter ended September 30, 2010 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.





PART
II - OTHER INFORMATION





Item
1. Legal
Proceedings.





The
Company is aware of various threatened or pending litigation claims against the
Company relating to its products and services and other claims arising in the
ordinary course of its business.  The Company has given its insurance
carrier notice of such claims and it believes there is sufficient insurance
coverage to cover any such claims.   Currently, there are no
litigation claims for which an estimate of loss, if any, can be reasonably made
as they are in the preliminary stages and therefore, no liability or
corresponding insurance receivable has been recorded.


37


Item1A.  Risk
Factors.




Except as
described below, management believes that there have been no material changes in
the Company’s risk factors as reported in the Annual Report on Form 10-K for the
year ended December 31, 2009, which was filed on March 31, 2010 with the
Securities and Exchange Commission and the Company’s Quarterly Report on Form
10-Q for the quarter ended March 31, 2010, which was filed with the Commission
on May 17, 2010.
 
 If
we fail to successfully manage our new product initiatives, or if we fail to
anticipate the issues associated with such initiatives, our business may
suffer.
 
 The
success of our new product initiatives, including MedSmart and TeleSmart,
depends on a number of factors, including our ability to anticipate and manage a
variety of issues associated with these new products, such as:
 
 ·
              difficulties
      faced in manufacturing ramp;
 ·
              customer
      interest and acceptance;
 ·
              effective
      management of inventory levels in line with anticipated product demand;
      and
 ·
              quality
      problems or other defects in the early stages of new product initiatives
      that were not anticipated in the design of those
  products.
 
 Our
business may suffer if we fail to successfully anticipate and manage these
issues associated with our new product initiatives.
 
 In
addition, we are investing considerable financial and other resources to
introduce new products and product enhancements, in particular, marketing and
advertising related expenses with respect to MedSmart that our customers may not
ultimately adopt.  If our customers do not adopt these new products or
product enhancements due to a preference for alternative products or for other
reasons, we would not recoup any return on our investments in these products,
which may result in charges to our consolidated income statements and have a
materially adverse effect on the future growth of our business.
 
 If
we lose key government customers, or if our key government customers require us
to reduce our prices before we are able to reduce costs, as a result of
budgetary constraints or other reasons, our operating results would likely be
negatively impacted.
 
 Sales to
our government customers collectivelyaccounted for
approximately 12% of our gross revenue for the nine months ended September 30,
2010, and 11% of our gross revenue for the year ended December 31,
2009.  Some of these customers have been experiencing budget cuts and
implementing cost cutting measures, which may cause them to demand price
reductions or, alternatively, result in non-renewals of existing contracts upon
expiration if price reductions are not implemented.  If we lose key
government customers, or if our key government customers require us to reduce
our prices before we are able to reduce costs, as a result of the foregoing or
other reasons, our operating results would likely be negatively
impacted.


Item
6.  Exhibits.





No.
              
              Description10.1
              
              Waiver,
      dated as of September 29, 2010 to the Credit Agreement, dated as of May
      20, 2002, as thereafter amended from time to time, by and between American
      Medical Alert Corp. and JPMorgan Chase Bank, N.A., as
      successor-in-interest to The Bank of New York.15.1
              
              Letter
      from Margolin, Winer & Evens LLP, the independent accountant of the
      Company, acknowledging awareness of the use in a registration statement of
      a report on the unaudited interim financial information in this quarterly
      report.31.1
              
              Certification
      of CEO Pursuant to Section 302 of the Sarbanes Oxley Act of
      200231.2
              
              Certification
      of CFO Pursuant to Section 302 of the Sarbanes Oxley Act of
      200232.1
              
              Certification
      of CEO Pursuant to Section 906 of the Sarbanes Oxley Act of
      200232.2
              
              Certification
      of CFO Pursuant to Section 906 of the Sarbanes Oxley Act of
      2002




38




SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the Company has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.




AMERICAN
      MEDICAL ALERT CORP.Dated:
      November 15, 2010
                  By:
                  /s/ Jack RhianName:
      Jack RhianTitle:
      Chief Executive Officer and
                    PresidentBy:
                  /s/ Richard RalloName:
      Richard RalloTitle:
      Chief Financial
Officer




39