UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10 - Q





(Mark
One)





x Quarterly
report pursuant to section 13 or 15(d) of the Securities Exchange Act of
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 0-7441





SIERRA
MONITOR CORPORATION




(Exact
name of registrant as specified in its charter)





California
                
                95-2481914(State
      or other jurisdiction of incorporation or organization)
                
                (I.R.S.
      Employer Identification
No.)





1991
Tarob Court


Milpitas,
California 95035


(Address
and zip code of principal executive offices)





(408)
262-6611


(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
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
last 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 (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files).  Yes  ̈  No
 ̈





Indicate
by check mark whether the 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 companyx





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





The
number of shares outstanding of the registrant’s common stock, par value $0.001
per share, was 11,446,076, as of November 4, 2010.







PART I:  FINANCIAL
INFORMATION




ITEM 1.  FINANCIAL
STATEMENTS




SIERRA MONITOR
CORPORATION




Condensed Balance
Sheets





September 30,2010
                              
                              
                              December 31,(unaudited)
                              
                              
                              2009AssetsCurrent
      assets:Cash
                              
                              $
                              2,168,533
                              
                              
                              $
                              2,203,018Trade
      receivables, less allowance for doubtful accounts of approximately $74,000
      and $70,000, respectively
                              
                              
                              2,209,120
                              
                              
                              
                              1,354,775Inventories,
      net
                              
                              
                              2,081,497
                              
                              
                              
                              1,892,313Prepaid
      expenses
                              
                              
                              119,514
                              
                              
                              
                              240,204Income
      tax deposits
                              
                              
                              104,327
                              
                              
                              
                              -Deferred
      income taxes - current
                              
                              
                              259,855
                              
                              
                              
                              259,855Total
      current assets
                              
                              
                              6,942,846
                              
                              
                              
                              5,950,165Property
      and equipment, net
                              
                              
                              293,062
                              
                              
                              
                              238,377Other
      assets
                              
                              
                              138,552
                              
                              
                              
                              167,615Total
      assets
                              
                              $
                              7,374,460
                              
                              
                              $
                              6,356,157Liabilities and Shareholders'
      EquityCurrent
      liabilities:Accounts
      payable
                              
                              $
                              894,933
                              
                              
                              $
                              523,763Accrued
      compensation
                              
                              
                              451,534
                              
                              
                              
                              372,035Other
      current liabilities
                              
                              
                              85,994
                              
                              
                              
                              73,351Income
      taxes payable
                              
                              
                              202,095
                              
                              
                              
                              34,251Total
      current liabilities
                              
                              
                              1,634,556
                              
                              
                              
                              1,003,400Deferred
      tax liability
                              
                              
                              14,575
                              
                              
                              
                              14,575Total
      liabilities
                              
                              
                              1,649,131
                              
                              
                              
                              1,017,975Shareholders'
      equity:Common
      stock, $0.001 par value; 20,000,000 shares authorized; 11,446,076 and
      11,438,212 shares issued and outstanding, respectively
                              
                              
                              11,446
                              
                              
                              
                              11,438Additional
      paid-in capital
                              
                              
                              3,669,889
                              
                              
                              
                              3,595,202Retained
      earnings
                              
                              
                              2,043,994
                              
                              
                              
                              1,731,542Total
      shareholders' equity
                              
                              
                              5,725,329
                              
                              
                              
                              5,338,182Total
      liabilities and shareholders’ equity
                              
                              $
                              7,374,460
                              
                              
                              $
                              6,356,157





See
accompanying notes to the unaudited interim condensed financial
statements.


Page
2 of 18




SIERRA MONITOR
CORPORATION




Condensed Statements of
Operations




(Unaudited)





Three months ended
                  September 30,
                
                
                Nine months ended
                  September 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Net
      sales
                
                $
                3,752,014
                
                
                $
                3,323,758
                
                
                $
                10,172,826
                
                
                $
                9,530,536Cost
      of goods sold
                
                
                1,526,581
                
                
                
                1,289,377
                
                
                
                4,183,066
                
                
                
                3,895,118Gross
      profit
                
                
                2,225,433
                
                
                
                2,034,381
                
                
                
                5,989,760
                
                
                
                5,635,418Operating
      expensesResearch
      and development
                
                
                496,273
                
                
                
                516,794
                
                
                
                1,483,203
                
                
                
                1,500,472Selling
      and marketing
                
                
                847,190
                
                
                
                825,279
                
                
                
                2,521,680
                
                
                
                2,526,805General
      and administrative
                
                
                491,853
                
                
                
                473,180
                
                
                
                1,467,197
                
                
                
                1,460,6971,835,316
                
                
                
                1,815,253
                
                
                
                5,472,080
                
                
                
                5,487,974Income
      from operations
                
                
                390,117
                
                
                
                219,128
                
                
                
                517,680
                
                
                
                147,444Interest
      income
                
                
                1,126
                
                
                
                -
                
                
                
                3,074
                
                
                
                -Income
      before income taxes
                
                
                391,243
                
                
                
                219,128
                
                
                
                520,754
                
                
                
                147,444Income
      tax provision
                
                
                156,497
                
                
                
                87,651
                
                
                
                208,302
                
                
                
                58,978Net
      income
                
                $
                234,746
                
                
                $
                131,477
                
                
                $
                312,452
                
                
                $
                88,466Net
      income available to common shareholders per common shareBasic:
                
                $
                0.02
                
                
                $
                0.01
                
                
                $
                0.03
                
                
                $
                0.01Diluted:
                
                $
                0.02
                
                
                $
                0.01
                
                
                $
                0.03
                
                
                $
                0.01Weighted
      average number of common shares used in per share
    computationsBasic:
                
                
                11,446,076
                
                
                
                11,438,212
                
                
                
                11,441,707
                
                
                
                11,432,656Diluted:
                
                
                11,575,782
                
                
                
                11,764,928
                
                
                
                11,666,895
                
                
                
                11,767,161




See
accompanying notes to the unaudited interim condensed financial
statements.


Page
3 of 18




SIERRA MONITOR
CORPORATION




Condensed Statements of Cash
Flows


(Unaudited)





Nine months ended
                  September 30,2010
                
                
                2009Cash
      flows from operating activities:Net
      income
                
                $
                312,452
                
                
                $
                88,466Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                
                
                179,354
                
                
                
                214,666Provision
      for bad debt expense
                
                
                4,005
                
                
                
                23,081Provision
      for inventory losses
                
                
                20,000
                
                
                
                (8,000
                )Stock
      based compensation expense
                
                
                74,695
                
                
                
                76,589Loss
      on disposal of assets
                
                
                -
                
                
                
                1,737Changes
      in operating assets and liabilities:Trade
      receivables
                
                
                (858,350
                )
                
                
                (64,372
                )Inventories
                
                
                (209,184
                )
                
                
                123,890Prepaid
      expenses
                
                
                120,690
                
                
                
                (1,336
                )Income
      tax deposit
                
                
                (104,327
                )
                
                
                (31,255
                )Deferred
      income taxes
                
                
                -
                
                
                
                1,979Accounts
      payable
                
                
                371,170
                
                
                
                48,058Accrued
      compensation
                
                
                79,499
                
                
                
                (16,167
                )Income
      taxes payable
                
                
                167,844
                
                
                
                54,457Other
      current liabilities
                
                
                12,643
                
                
                
                4,093Net
      cash provided by operating activities
                
                
                170,491
                
                
                
                515,886Cash
      flows from investing activities:Purchase
      of property and equipment
                
                
                (185,924
                )
                
                
                (96,507
                )Purchase
      of other long-term assets
                
                
                (19,052
                )
                
                
                -Net
      cash used in investing activities
                
                
                (204,976
                )
                
                
                (96,507
                )Cash
      flows from financing activities:Proceeds
      from exercise of stock options
                
                
                -
                
                
                
                6,000Net
      cash provided by financing activities
                
                
                -
                
                
                
                6,000Net
      (decrease) increase in cash
                
                
                (34,485
                )
                
                
                425,379Cash
      at beginning of period
                
                
                2,203,018
                
                
                
                1,338,647Cash
      at end of period
                
                $
                2,168,533
                
                
                $
                1,764,026Supplemental
      cash flow informationCash
      paid for income taxes
                
                $
                140,258
                
                
                $
                31,248




See
accompanying notes to the unaudited interim condensed financial
statements.


Page
4 of 18


SIERRA MONITOR
CORPORATION


Notes to
the Unaudited Interim Condensed Financial Statements





September
30, 2010




Basis of
Presentation




The
accompanying unaudited interim condensed financial statements have been prepared
by Sierra Monitor Corporation (the “Company”), pursuant to the rules and
regulations of the Securities and Exchange Commission (the
“SEC”).  Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been omitted
pursuant to such SEC rules and regulations; nevertheless, the Company believes
that the disclosures are adequate to make the information presented not
misleading.  Amounts related to disclosure of December 31, 2009
balances within these interim condensed financial statements were derived from
the audited 2009 financial statements and notes thereto.  These
financial statements and the notes hereto should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2009, which was filed with the SEC
on March 25, 2010.  In the opinion of the Company, all adjustments,
including normal recurring adjustments necessary to present fairly the financial
position, results of operations, and cash flows of the Company for the interim
period have been included.  The results of operations for the interim
period are not necessarily indicative of the results for any subsequent interim
period or for the full year.




Summary of
Business




The
Company was formed in 1978 and delivers information technology for environment
measurement and control by developing specialized embedded software that is
deployed on proprietary hardware platforms. Embedded software enables data
transfer between subsystems using protocol and physical medium
translation.  Proprietary hardware platforms allow the Company to increase
the value proposition while protecting its intellectual property.




The
Company’s hardware platforms include original equipment modules for installation
in customer devices and controllers, gateway boxes generally used by integrators
for machine to machine (“M2M”) protocol translation, and multi-component safety
systems generally focused on gas and fire detection.  Each of the hardware
platforms utilize the Company’s proprietary data handling software allowing
communication from lower level sensor systems through to the highest levels of
Internet Protocol (“IP”) networks.




By
providing an intelligent interface, the Company’s products enable various
machines, devices, systems and people to reliably communicate useful information
for the measurement and control of various environments including buildings,
plants, factories and over the Internet.  By delivering the data on various
communication levels, including Ethernet, Internet, LONworks, Profibus, and
others, the Company’s products make it possible for data to be accessed at more
appropriate levels, such as control rooms or remote locations.




The
Company’s products, including gas detection systems, environment controls for
remote telephone company structures and protocol gateways, are based on complex
proprietary software developed by the Company.  The software, embedded
in each of the Company’s product groups, provides key functions including sensor
management, utilization of data for alarm and control purposes and delivery of
data across various networks including the Internet.


Page
5 of 18




Gas
monitoring products manufactured by the Company are sold for a variety of safety
applications including oil, gas and chemical processing plants, wastewater
treatment facilities, alternate fuel vehicle maintenance garages and other users
or producers of hazardous gases.  Environment controllers, which
provide management of environmental conditions in small structures such as local
DSL distribution nodes and buildings at cell tower sites, are sold to
telecommunication companies and their suppliers.  The Company’s
FieldServer products are sold generally to integration companies that implement
building and plant automation projects and to manufacturers of equipment for the
same industry.




The
Company’s common stock is quoted on the OTC Bulletin Board under the symbol
“SRMC.OB”.




Accounting
Policies




a)
            Revenue
      Recognition




The
Company recognizes revenues when all of the following conditions
exist:  a) persuasive evidence of an arrangement exists in the form of
an accepted purchase order; b) delivery has occurred, based on shipping terms,
or services have been rendered; c) the Company’s price to the buyer is fixed or
determinable, as documented on the accepted purchase order; and d)
collectability is reasonably assured.  By product and service type,
revenues are recognized when the following specific conditions are
met:





Gas Detection and
Environment Control Products




Gas
Detection and Environment Control products are sold as off-the-shelf products
with prices fixed at the time of order. Orders delivered to the Company by
phone, fax, mail or email are considered valid purchase orders and once accepted
by the Company are deemed to be the final understanding between us and our
customer as to the specific nature and terms of the agreed-upon sale
transaction.  Products are shipped and are considered delivered when
(a) for FOB factory orders, they leave our shipping dock or (b) for FOB customer
dock orders, upon confirmation of delivery.  The creditworthiness of
customers is generally assessed prior to the Company accepting a customer’s
first order. The Company purchases credit insurance through the Export-Import
Bank of the United States to insure payment of small international orders that
are released on open credit.  Larger international orders and
customers who have developed a history of payment problems are generally
required to prepay or pay through a letter-of-credit.





Gas Detection and
Environment Control Services




Gas
Detection and Environment Control services consist of field service orders
(technical support) and training, which are provided separate from product
orders.  Orders are accepted in the same forms as discussed under
Gas Detection and Environment
Control Products above with hourly prices fixed at the time of order.
Revenue recognition occurs only when the service activity is
completed.  Such services are provided to current and prior customers,
and, as noted above, creditworthiness has generally already been assessed. In
cases where the probability of receiving payment is low, a credit card number is
collected in advance of the provision of services for immediate
processing.


Page
6 of 18





FieldServer
Products




FieldServer
products are sold in the same manner as Gas Detection and Environment Control
products (as discussed above) except that the products contain embedded
software, which is integral to the operation of the device.  The software
embedded in FieldServer products includes two items:  (a) a compiled
program containing (i) the basic operating system for FieldServers, which is
common to every unit, and (ii) the correct set of protocol drivers based on the
customer order (see FieldServer Services below for more
information); and (b) a configuration file that identifies and links each
data point as identified by the customer.  The Company does not deem
the hardware, operating systems with protocol drivers and configuration files to
be separate units of accounting because the Company does not believe that they
have value on a stand-alone basis.  The hardware is useless without
the software, and the software is only intended to be used in FieldServer
hardware.  Additionally, the software included in each sale is deemed
to not require significant production, modification or customization, and
therefore the Company recognizes revenues upon the shipment or delivery of
products (depending on shipping terms), as described in Gas Detection and Environment
Control Products above.





FieldServer
Services




FieldServer
services consist of orders for custom development of protocol drivers. 
Generally customers place orders for FieldServer products concurrently with
their order for protocol drivers.  However if custom development of
the protocol driver is required, the product order is not processed until
development of the protocol driver is complete. Orders are received in the same
manner as described in FieldServer Products above,
but due to the non-recurring engineering aspect of the customized driver
development the Company is more likely to have a written evidence trail of a
quotation and a hard copy order.  The driver development involves further
research after receipt of order, preparation of a scope document to be approved
by the customer and then engineering time to write, test and release the driver
program.  When development of the driver is complete the customer is
notified and can proceed with a FieldServer product (see FieldServer Products
above).  Revenues for driver development are billed and recognized upon
shipment or delivery of the related product that includes the developed protocol
drivers (as noted in FieldServer Products above).
Collectability is reasonably assured as described in FieldServer Products
above.




Discounts and
Allowances




Discounts
are applied at time of order entry and sales are processed at net
pricing.  No allowances are offered to customers.




b)
            Recent
      Accounting Pronouncements




Recent
accounting pronouncements discussed in the notes to the December 31, 2009
audited financial statements, filed previously with the SEC in our Annual Report
on Form 10-K on March 25, 2010, that are required to be adopted during the year
ended December 31, 2009, did not have or are not expected to have a significant
impact on the Company’s 2010 financial statements.




c)
            Employee
      Stock-Based Compensation




As of
September 30, 2010, the Company had one approved stock-based employee
compensation plan for issuing stock options, the 2006 Stock Plan.  The
Company’s 1996 Stock Plan expired by its terms in March 2006, but the 1996 Stock
Plan will continue to govern awards previously granted thereunder that have not
expired or otherwise terminated.




Under the
2006 Stock Plan, the Company initially reserved 500,000 shares of common stock
for issuance. Stock options are granted under the 2006 Stock Plan at the fair
market value of the Company's common stock at the grant date, vest ratably over
4 years, and expire 10 years from the grant date. Prior to January 1, 2006,
stock-based compensation cost related to stock options was not recognized in net
income since the stock options underlying those plans had exercise prices
greater than or equal to the market value of the underlying stock on the date of
the grant.


Page
7 of 18




All
share-based payments to employees (incentive stock options) are recognized in
the financial statements based on their fair values at the date of
grant.  The calculated fair value is recognized as expense (net of any
capitalization) over the requisite service period, net of estimated forfeitures,
using the straight-line method.  The Company considers many factors
when estimating expected forfeitures, including types of awards, employee class
and historical experience.  The modified prospective method of
application requires compensation expense to be recognized in the financial
statements for all unvested stock options beginning in the quarter of
award.  The cost is based on the grant date fair value of the stock
option.  Compensation expense recognized in future periods for
share-based compensation will be adjusted for the effects of estimated
forfeitures.




For the
nine-month periods ended September 30, 2010 and 2009, general and administrative
expenses included $74,695 and $76,589, respectively, resulting from the
recognition of compensation expense associated with employee stock options.
There was no material impact on the Company's basic and diluted net income per
share as a result of recognizing the employee stock-based compensation expense.
The Company did not modify the terms of any previously granted stock options
during the nine-month periods ended September 30, 2010 and 2009.




Inventories




A summary
of inventories follows:




September 30, 2010
                        
                        
                        December 31, 2009Raw
      materials
                        
                        $
                        817,280
                        
                        
                        $
                        823,789Work-in-process
                        
                        
                        712,795
                        
                        
                        
                        655,205Material
      at vendor
                        
                        
                        454,770
                        
                        
                        
                        271,635Finished
      goods
                        
                        
                        225,825
                        
                        
                        
                        250,857Less:
      Allowance for obsolescence reserve
                        
                        
                        (129,173
                        )
                        
                        
                        (109,173
                        )$
                        2,081,497
                        
                        
                        $
                        1,892,313




Net Income Per
Share




Basic
earnings per share (“EPS”) is computed using the weighted average number of
common shares outstanding during the period.  Diluted EPS is computed
using the weighted average number of common and dilutive potential common shares
outstanding during the period.  Dilutive potential common shares
consist of common shares issuable upon exercise of stock options using the
treasury stock method.  No adjustments to earnings were made for
purposes of per share calculations.




For the
year-to-date period ended September 30, 2010, options to acquire 458,500 common
shares were not considered dilutive potential common shares as their exercise
prices were greater than the average market price of the Company’s common stock
during that same period.




For the
year-to-date period ended September 30, 2009, options to acquire 17,000 common
shares were not considered dilutive potential common shares as their exercise
prices were greater than the average market price of the Company’s common stock
during that same period.




The
following is a reconciliation of the shares used in the computation of basic and
diluted EPS for the three and nine month periods ended September 30, 2010 and
2009, respectively:


Page
8 of 18




Three months ended
                            
                            
                            Nine months endedSeptember 30, 2010
                            
                            
                            September 30, 2009
                            
                            
                            September 30, 2010
                            
                            
                            September 30, 2009Basic
      EPS – weighted-average number of common shares outstanding
                            
                            
                            11,446,076
                            
                            
                            
                            11,438,212
                            
                            
                            
                            11,441,707
                            
                            
                            
                            11,432,656Effect
      of dilutive potential common shares – stock options
      outstanding
                            
                            
                            129,706
                            
                            
                            
                            326,716
                            
                            
                            
                            225,188
                            
                            
                            
                            334,505Diluted
      EPS – weighted-average number of common shares and potential common shares
      outstanding
                            
                            
                            11,575,782
                            
                            
                            
                            11,764,928
                            
                            
                            
                            11,666,895
                            
                            
                            
                            11,767,161




Concentrations




One
customer accounted for more than 10% of accounts receivable at September 30,
2010 and at December 31, 2009.  No customers contributed
more than 10% of sales for each of the three and
nine-month periods ended September 30, 2010 and September 30,
2009.




The
Company currently maintains substantially all of its day to day operating cash
with a major financial institution.  At times, cash balances may be in
excess of the amounts insured by the Federal Deposit Insurance
Corporation.  Cash balances of approximately $1,919,000 and $1,953,000
were in excess of such insured amounts at September 30, 2010 and December 31,
2009, respectively.




Segment
Information




The
Company operates in one segment, industrial instrumentation.  The
Company’s chief operating decision maker, the Chief Executive Officer (“CEO”),
evaluates the performance of the Company and makes operating decisions based on
financial data consistent with the presentation in the accompanying unaudited
condensed financial statements.




In
addition, the CEO reviewed the following information on revenues by product
category for the following periods:


Three months ended
                    September 30,
                  
                  
                  Nine months ended
                    September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Gas
      detection devices
                  
                  $
                  1,724,487
                  
                  
                  $
                  1,531,506
                  
                  
                  $
                  4,500,248
                  
                  
                  $
                  4,800,952Environment
      controllers
                  
                  
                  213,320
                  
                  
                  
                  236,540
                  
                  
                  
                  698,091
                  
                  
                  
                  574,604FieldServers
                  
                  
                  1,814,207
                  
                  
                  
                  1,555,712
                  
                  
                  
                  4,974,487
                  
                  
                  
                  4,154,980$
                  3,752,014
                  
                  
                  $
                  3,323,758
                  
                  
                  $
                  10,172,826
                  
                  
                  $
                  9,530,536




Line-of-Credit




In August 2010, the
Company extended the term of its $1,000,000 line of credit with a commercial
bank until September 2011 under substantially the same
terms.No borrowings have been made under the Company’s line
of credit during the first nine months of fiscal year 2010 and there were no
outstanding balances at September 30, 2010 and December 31, 2009.  As
of September 30, 2010, the Company was in compliance with covenants required by
the line of credit.




Stock Option
Grants




No stock
options were granted during the three and nine-month periods ended September 30,
2010 and September 30, 2009.  Stock options are granted under the 2006
Stock Plan at the fair market value of the Company’s common stock at the grant
date, vest ratably over 4 years, and expire 10 years from the grant
date.


Page
9 of 18




Stock Option Exercise and
Expiration




In the
nine-month period ended September 30, 2010, a total of 7,864 shares of common
stock were issued as a result of employee net exercises of stock
options.  During the same period, 15,500 options expired.




In the
nine-month period ended September 30, 2009, a total of 10,000 stock options were
exercised by employees to purchase shares of the Company’s common stock
resulting in cash proceeds of $6,000.    During the same
period 3,000 stock options expired.


Page
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ITEM
2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS




This
Form 10-Q contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended.  Statements that are not statements
of historical fact may be deemed to be forward-looking
statements.  The words “believe,” “expect,” “intend,” “plan,”
“project,” “will,” and similar words and phrases as they relate to us also
identify forward-looking statements.  Such forward-looking statements
include any expectations of operating and non-operating expense, including
research and development expense, sufficiency of resources, including cash and
accounts receivable, estimates of allowances for doubtful accounts, credit lines
or other financial items; any statements of the plans, strategies and objectives
of management for future operations and identified opportunities; any statements
concerning proposed new products, services, developments and related research
and development activities; any statements related to the Company’s positioning
to support current and near term levels of business; any statements of belief;
and any statement of assumptions underlying any of the foregoing. Such
statements reflect our current views and assumptions and are not guarantees of
future performance.  These statements are subject to various risks and
uncertainties.  Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, without limitation, those issues described under the heading
“Critical Accounting Policies,” and those risk factors indentified in Item1A,
Risk Factors, of our Annual Report on Form 10-K for our fiscal year ended
December 31, 2009, as such section may be updated in our subsequent Forms 10-K,
10-Q and 8-K filed with, or furnished to, the SEC and elsewhere.  We
urge you to review and consider the various disclosures made by us from time to
time in our filings with the SEC that attempt to advise you of the risks and
factors that may affect our future results.  We expressly disclaim any
obligation to release publicly any updates or revisions to any forward-looking
statement to reflect any changes in expectations, or any change in events or
circumstances on which those statements are based, unless otherwise required by
law.




Results of
Operations




For the
three-month period ended September 30, 2010, Sierra Monitor Corporation (“we” or
the “Company”) reported net sales of $3,752,014 compared to $3,323,758 for the
three-month period ended September 30, 2009.  For the nine-month
period ended September 30, 2010, net sales were $10,172,826 compared with
$9,530,536 in the prior year nine-month period of 2009.  The sales
results for the three and nine-month periods ended September 30, 2010 represent
increases of 13% and 7%, respectively, compared to the same periods in
2009.




For the
three-month period ended September 30, 2010, sales of our gas detection products
were approximately $1,724,000 compared to $1,532,000 in the three-month period
ended September 30, 2009.  For the nine-month period ended September
30, 2010, our gas detection product sales were approximately $4,500,000 compared
to $4,801,000 in the same period in 2009.  These results represent a
13% year-over-year increase in the third quarter and a 6% year-over-year
decrease in the year-to-date period.  Our gas detection sales include
specialized products that are sold to the US Navy for shipboard toxic gas
monitoring.  Sales to the Navy, which are dependent upon new ship
construction and budgets for maintenance and spare parts, were significantly
lower in both the third quarter and year-to-date periods of 2010 compared to the
prior year.  Sales of gas detection products and systems to domestic
and international accounts increased by approximately 30% in the third quarter
2010.  This third quarter increase in gas detection sales is primarily
the result of increases in domestic and international sales, offset by the
decrease in Navy sales.   The year-to-date decrease in gas
detection sales is primarily the result of the decrease in Navy
sales.


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Sales of
Environment Controllers to the telecommunications industry in the three-month
period ended September 30, 2010 were approximately $213,000 compared to $237,000
in the three-month period ended September 30, 2009.  In the nine-month
period ended September 30, 2010, sales of Environment Controllers were
approximately $698,000 compared to $575,000 in the same period in
2009.  The improvement in sales in the nine-month period is due to a
small increase in the number of environment controllers sold for new underground
telecommunications vaults combined with improved demands for retro-fit
controllers for older telecommunications vaults.




In the
three-month period ended September 30, 2010, sales of FieldServer products were
approximately $1,814,000, compared to $1,556,000 in the same period in 2009. In
the nine-month period ended September 30, 2010, sales of our FieldServer
products were approximately $4,974,000, compared to $4,155,000 in sales reported
in the same period in 2009. These results represent a 17% year-over-year
increase in the third quarter and a 20% year-over-year increase in the
year-to-date period.




FieldServer
sales include both box products and original equipment manufacturer (“OEM”)
modules.  Box products provide a platform for delivery and operation
of our software for integration with building automation systems and are
generally sold to building automation integrators.  Box product sales
increased approximately 2% in the three-month period and 16% in the nine-month
period ended September 30, 2010 on a year-over-year basis.  The
increase in sales of box products is due to generally improved demand for
building automation retrofits combined with a single large shipment in the third
quarter of product to be deployed in a fire detection system on a Navy ship. OEM
module sales increased approximately 46% in the three-month period ended
September 30, 2010 as compared to the same period in 2009, and 26% on a
year-to-date basis in 2010 compared to the prior year period.  Sales
of OEM modules have increased steadily in five of the last six quarters as a
result of increases in the number of manufacturers approving the products and
general increases in unit volumes for maturing customers.




Gross
profit of $2,225,433 for the three-month period ended September 30, 2010 was 59%
of sales compared to $2,034,381, or 61% of sales, in the same period in the
previous year.  Gross profit for the nine-month period ended September
30, 2010 was $5,989,760, or 59% of sales, compared to $5,635,418, or 59% of
sales, in the same period in the previous year.  Gross margins in both
the three month and nine month periods in 2010 are at approximately our target
levels and are consistent with our historical gross margin levels.




Expenses
for research and development, which include new product development and
engineering to sustain existing products, were $496,273, or 13% of sales, for
the three-month period ended September 30, 2010 compared to $516,794, or 16% of
sales, in the comparable period in 2009.  In the nine-month periods
ended September 30, 2010 and September 30, 2009, research and development
expenses were $1,483,203, or 15% of sales, and $1,500,472, or 16% of sales,
respectively.  We maintain product development programs to continually
increase the number and types of products for sale in each of the product
lines.  In addition, our engineering team supports extensive third
party approval programs.  The expenses for each of the reported
periods in 2010 are consistent with the corresponding prior year periods and
reflect our ongoing commitment to continue investment in each of the product
lines.




Selling
and marketing expenses, which consist primarily of salaries, commissions and
promotional expenses were $847,190, or 23% of sales for the three-month period
ended September 30, 2010, compared to $825,279, or 25%, in the comparable period
in the prior year.  For the nine-month periods ended September 30,
2010 and 2009, selling and marketing expenses were $2,521,680, or 25% of sales,
and $2,526,805, or 27%  of sales, respectively.  There were
no significant changes in selling and marketing expenses in the three-month
period ended September 30, 2010 compared to the corresponding period of
2009.


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General
and administrative expenses, which consist primarily of salaries, building rent,
insurance expenses and fees for professional services, were $491,853, or 13% of
sales, for the three-month period ended September 30, 2010 compared to $473,180,
or 14% of sales, in the three-month period ended September 30,
2009.  For the nine-month periods ended September 30, 2010 and 2009,
general and administrative expenses were $1,467,197, or 14% of sales, and
$1,460,697, or 15% of sales, respectively.  While there were no
overall significant changes in general and administrative expenses in these
comparative periods, reductions in depreciation expense and lower SOX compliance
expenses were generally offset by increased information technology support
expenses and higher wage and salary costs in both the three-month and nine-month
periods ended September 30, 2010.




In the
three-month period ended September 30, 2010, our income from operations was
$390,117 representing an increase of $170,989 compared to the three-month period
ended September 30, 2009.  In the nine-month period ended September
30, 2010, our income from operations was $517,680 representing an increase of
$370,236 compared to the nine-month period ended September 30,
2009.  The increases in profit from operations in both the three and
nine-month periods ended September 30, 2010 are generally the result of our
increased sales levels, without significant changes to gross profit margins and
fixed expenses.    During continued difficult market
conditions in the first nine months of 2010, we maintained our factory capacity
levels, maintained the number of sales professionals and continued all
engineering activities.  We believe that our actions have positioned
the Company to be able to support current and near term levels of
business.




After interest income and
tax expenses, our net income for the three-month period ended September 30, 2010
was $234,746 compared to $131,477 in the same period of 2009.  For the
nine-month period ended September 30, 2010
our net income was $312,452 compared to $88,466 in the same period of
2009.




Liquidity and Capital
Resources




During
the nine months ended September 30, 2010, net cash provided by operating
activities was approximately $170,000 compared to approximately $516,000
provided by operating activities for the same period in 2009.  Working
capital was approximately $5,308,000 at September 30, 2010, an increase of
approximately $362,000 from December 31, 2009.  At September 30, 2010,
our balance sheet reflected approximately $2,169,000 of cash and $2,209,000 of
net trade receivables. At December 31, 2009, our total cash on hand was
approximately $2,203,000 and our net trade receivables were $1,355,000. The
increase in trade receivables is attributable to the higher sales level in the
third quarter of 2010 compared with the sales level in the fourth quarter of
2009.




At
September 30, 2010, we had no long term liabilities. We maintain a $1,000,000
line of credit, secured by certain assets of the Company, with our commercial
bank. The line of credit requires annual renewal and compliance with certain
restrictive covenants, including the requirement to maintain a quick ratio of
1.3:1.0 and a profitability test. At September 30, 2010, the Company was in
compliance with the financial covenants and there were no borrowings on this
line of credit during the nine-month period ended September 30,
2010.




We
believe that our present resources, including cash and accounts receivable, are
sufficient to fund the Company’s anticipated level of operations through at
least September 30, 2011. There are no current plans for significant capital
equipment expenditures and no other known demands, commitments, events or
uncertainties that will result in or that are reasonably likely to result in the
Company’s liquidity increasing or decreasing in any material
way.


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Critical Accounting
Policies




The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect the
amounts reported in the Company’s condensed financial statements and the
accompanying notes.  The amounts of assets and liabilities reported on
our balance sheets and the amounts of revenues and expenses reported for each of
our fiscal periods are affected by estimates and assumptions, which are used
for, but not limited to, the accounting for revenue recognition, accounts
receivable, doubtful accounts and inventories.  Actual results could
differ from these estimates.  The following critical accounting
policies are significantly affected by judgments, assumptions and estimates used
in the preparation of the financial statements:




a)
              Revenue
      Recognition




The
Company recognizes revenues when all of the following conditions
exist:  a) persuasive evidence of an arrangement exists in the form of
an accepted purchase order; b) delivery has occurred, based on shipping terms,
or services have been rendered; c) the Company’s price to the buyer is fixed or
determinable, as documented on the accepted purchase order; and d)
collectability is reasonably assured.  By product and service type,
revenues are recognized when the following specific conditions are
met:





Gas Detection and
Environment Control Products




Gas
detection and environment control products are sold as off-the-shelf products
with prices fixed at the time of order. Orders delivered to the Company by
phone, fax, mail or email are considered valid purchase orders and once accepted
by the Company are deemed to be the final understanding between us and our
customer as to the specific nature and terms of the agreed-upon sale
transaction.  Products are shipped and are considered delivered when
(a) for FOB factory orders they leave our shipping dock or (b) for FOB customer
dock orders upon confirmation of delivery.  The creditworthiness of
customers is generally assessed prior to the Company accepting a customer’s
first order. Additionally, international customers and customers who have
developed a history of payment problems are generally required to prepay or pay
through a letter-of-credit.





Gas Detection and
Environment Control Services




Gas
detection and environment control services consist of field service orders
(technical support) and training, which are provided separate from product
orders.  Orders for gas detection and environment control services are
accepted in the same forms as discussed for Gas Detection and Environment
Control Products above with hourly prices fixed at the time of order.
Revenue recognition occurs only when the service activity is
completed.  Such services are provided to current and prior customers,
and, as noted above, creditworthiness has generally already been assessed. In
cases where the probability of receiving payment is low, a credit card number is
collected in advance of the provision of services for immediate
processing.


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FieldServer
Products




FieldServer
products are sold in the same manner as Gas Detection and Environment
Control Products (as discussed above) except that the products contain
embedded software, which is integral to the operation of the device.  The
software embedded in FieldServer products includes two items:  (a) a
compiled program containing (i) the basic operating system for FieldServer
products, which is common to every unit, and (ii) the correct set of protocol
drivers based on the customer order (see FieldServer Services below
for more information); and (b) a configuration file that identifies and
links each data point as identified by the customer.  The Company does
not deem the hardware, operating systems with protocol drivers and configuration
files to be separate units of accounting because the Company does not believe
that they have value on a stand-alone basis.  The hardware is useless
without the software, and the software is only intended to be used in
FieldServer hardware.  Additionally, the software included in each
sale is deemed to not require significant production, modification or
customization, and therefore the Company recognizes revenues upon the shipment
or delivery of products (depending on shipping terms), as described in Gas Detection and Environment
Control Products above.





FieldServer
Services




FieldServer
services consist of orders for custom development of protocol drivers. 
Generally customers place orders for FieldServer products concurrently with
their order for protocol drivers.  However if custom development of
the protocol driver is required, the product order is not processed until
development of the protocol driver is complete. Orders are received in the same
manner as described in FieldServer Products above,
but due to the non-recurring engineering aspect of the customized driver
development, the Company is more likely to have a written evidence trail of a
quotation and a hard copy order.  The driver development involves further
research after receipt of order, preparation of a scope document to be approved
by the customer and then engineering time to write, test and release the driver
program.  When development of the driver is complete the customer is
notified and can proceed with a FieldServer product (see FieldServer Productsabove).  Revenues for driver development are billed and recognized
upon shipment or delivery of the related product that includes the developed
protocol drivers (as noted in FieldServer Products
above).




Discounts and
Allowances




Discounts
are applied at time of order entry and sales are processed at net
pricing.  No allowances are offered to customers.




b)
              Accounts
      Receivable and Related
Allowances




Our
domestic sales are generally made on an open account basis unless specific
experience or knowledge of the customer’s potential inability or unwillingness
to meet the payment terms dictate secured payments.  Our international
sales are generally made based on secure payments including cash wire advance
payments and letters of credit.  International sales are made on open
account terms where sufficient historical experience justifies the credit risks
involved.  In many of our larger sales, the customers are frequently
construction contractors who are in need of our field services to complete their
work and obtain payment.   Management’s ability to manage the
credit terms and take advantage of the leverage provided by the clients’ need
for our services is critical to the effective application of credit terms and
minimization of accounts receivable losses.




We
maintain an allowance for doubtful accounts which is analyzed on a periodic
basis to ensure that it is adequate.  We believe that we have
demonstrated the ability to make reasonable and reliable estimates of allowances
for doubtful accounts based on significant historical
experience.


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c)
              Inventories




Inventories
are stated at the lower of cost or estimated market, with cost being determined
on the first-in, first-out method.  The Company uses an Enterprise
Requirements Planning (“ERP”) software system which provides data upon which
management can rely to determine inventory trends and identify
excesses.  The carrying value of inventory is reduced to market for
slow moving and obsolete items based on historical experience and current
product demand.  We evaluate the carrying value of inventory
quarterly.  The adequacy of these carrying amounts is dependent upon
management’s ability to forecast demands accurately, manage product changes
efficiently, and interpret the data provided by the ERP system.




ITEM 4:  CONTROLS
AND PROCEDURES




Evaluation of disclosure controls
and procedures.Our management evaluated, with the participation of
Gordon R. Arnold, our principal executive and principal financial officer, the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended)
as of the end of the period covered by this Quarterly Report on Form 10-Q. Based
on this evaluation, Mr. Arnold has concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this report to
provide reasonable assurance that information we are required to disclose in
reports that we file or submit under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms, and is accumulated and communicated to
management, including our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure.




Changes in internal control over
financial reporting.There was no change in our internal control over
financial reporting that occurred during the period covered by this Quarterly
Report on Form 10-Q that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.




Inherent Limitations of Internal
Controls.Our management,
including our principal executive and principal financial officer, does not
expect that our disclosure controls and procedures or our internal control over
financial reporting will prevent or detect all error and all fraud.  A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met.  The design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Further, because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within us have been detected.
These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of a simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving our stated goals
under all potential future conditions. Projections of any evaluation of the
effectiveness of controls to future periods are subject to risks. Over time,
controls may become inadequate because of changes in conditions, or the degree
of compliance with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.


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PART II:  OTHER
INFORMATION




ITEM
6.     EXHIBITS




ExhibitNumber
                      
                      Description3.1(1)
                      
                      Articles
      of Incorporation of the Registrant.3.2(2)
                      
                      Bylaws
      of the Registrant.31.1
                      
                      Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
      the Securities Exchange Act of 1934, as amended, as adopted pursuant
      toSection 302
      of the Sarbanes-Oxley Act of 2002.31.2
                      
                      Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
      the Securities Exchange Act of 1934, as amended, as adopted pursuant
      toSection 302
      of the Sarbanes-Oxley Act of 2002.32
                      
                      Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of
2002.




(1)
            Incorporated
      by reference to our Annual Report on Form 10-K for the fiscal year ended
      December 31, 1989.


(2)
            Incorporated
      by reference to our Quarterly Report on Form 10-QSB (File No. 000-07441)
      for the fiscal quarter ended June 30, 1998, filed with the SEC on August
      14, 1998.




SIGNATURES




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




SIERRA MONITOR
  CORPORATIONRegistrantDate:         November
      4, 2010
                      By:
                      /s/ Gordon R. ArnoldGordon
      R. ArnoldPresidentChief
      Executive OfficerChief
      Financial
Officer


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Index to
Exhibits




ExhibitNumber
              
              Description3.1(1)
              
              Articles
      of Incorporation of the Registrant.3.2(2)
              
              Bylaws
      of the Registrant.31.1
              
              Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
      the Securities Exchange Act of 1934, as amended, as adopted pursuant
      toSection 302
      of the Sarbanes-Oxley Act of 2002.31.2
              
              Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
      the Securities Exchange Act of 1934, as amended, as adopted pursuant
      toSection 302
      of the Sarbanes-Oxley Act of 2002.32
              
              Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.




(1)
              Incorporated
      by reference to our Annual Report on Form 10-K for the fiscal year ended
      December 31, 1989.




(2)
              Incorporated
      by reference to our Quarterly Report on Form 10-QSB (File No. 000-07441)
      for the fiscal quarter ended June 30, 1998, filed with the SEC on August
      14, 1998.


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