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 June 30, 2009



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 filed 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 [X]    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 company [X]        



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

Yes [   ]   No [X]



The number of shares outstanding of the issuer's common stock, as of August 13, 2009 was 11,438,212.



Page 1 of 21

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PART I:  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

SIERRA MONITOR CORPORATION

Condensed Balance Sheets





|                                                              |                                                                                                                                     |  |           |           |                           |  |           |                   |  |  |  |  |  | 
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------- |  | --------- | --------- | ------------------------- |  | --------- | ----------------- |  |  |  |  |  | 
|                                                              | Assets                                                                                                                              |  |           |           | June 30, 2009 (unaudited) |  |           | December 31, 2008
|Current Assets:                                               |                                                                                                                                     |  |           |           |                           |  |           |                  
|                                                              | Cash                                                                                                                                |  | $         | 1,244,948 |                           |  | $         | 1,338,647         | 
|                                                              | Trade Receivables, less allowance for doubtful accounts of approximately $85,000 and $110,000, respectively                         |  |           | 1,964,232 |                           |  |           | 1,661,846         | 
|                                                              | Inventories, net                                                                                                                    |  |           | 1,867,297 |                           |  |           | 1,968,006         | 
|                                                              | Prepaid expenses                                                                                                                    |  |           | 164,467   |                           |  |           | 189,389           | 
|                                                              | Income tax deposits                                                                                                                 |  |           | 62,695    |                           |  |           | 48,295            | 
|                                                              | Deferred income taxes  current                                                                                                     |  |           | 321,814   |                           |  |           | 299,421           | 
|                                                              | Total current assets                                                                                                                |  |           | 5,625,453 |                           |  |           | 5,505,604         | 
|                                                              |                                                                                                                                     |  |           |           |                           |  |           |                  
|Property and equipment, net                                   |                                                                                                                                     |  | 304,835   |           |                           |  | 380,987   |                  
|Other assets                                                  |                                                                                                                                     |  | 166,291   |           |                           |  | 185,015   |                  
|                                                              | Total assets                                                                                                                        |  | $         | 6,096,579 |                           |  | $         | 6,071,606         | 
|                                                              |                                                                                                                                     |  |           |           |                           |  |           |                   | 
|                                                              | Liabilities and Shareholders Equity                                                                                                |  |           |           |                           |  |           |                   |  | 
|Current liabilities:                                          |                                                                                                                                     |  |           |           |                           |  |           |                  
|                                                              | Accounts Payable                                                                                                                    |  | $         | 523,466   |                           |  | $         | 521,823           | 
|                                                              | Accrued compensation expenses                                                                                                       |  |           | 426,203   |                           |  |           | 385,306           | 
|                                                              | Other current liabilities                                                                                                           |  |           | 72,936    |                           |  |           | 104,604           | 
|                                                              | Total current liabilities                                                                                                           |  |           | 1,022,605 |                           |  |           | 1,011,733         | 
|                                                              |                                                                                                                                     |  |           |           |                           |  |           |                  
|Deferred tax liabilities                                      |                                                                                                                                     |  | 42,498    |           |                           |  | 42,498    |                  
|Total liabilities                                             |                                                                                                                                     |  | 1,065,103 |           |                           |  | 1,054,231 |                  
|                                                              |                                                                                                                                     |  |           |           |                           |  |           |                  
|Commitments and contingencies                                 |                                                                                                                                     |  |           |           |                           |  |           |                  
|Shareholders equity:                                         |                                                                                                                                     |  |           |           |                           |  |           |                  
|                                                              | Common stock, $0.001 par value; 20,000,000 shares authorized; 11,438,212 and 11,428,212 shares issued and outstanding, respectively |  |           | 11,438    |                           |  |           | 11,428            | 
|                                                              | Additional paid-in capital                                                                                                          |  |           | 3,543,065 |                           |  |           | 3,485,964         | 
|                                                              | Retained Earnings                                                                                                                   |  |           | 1,476,973 |                           |  |           | 1,519,983         | 
|                                                              | Total shareholders equity                                                                                                          |  |           | 5,031,476 |                           |  |           | 5,017,375         | 
|                                                              | Total liabilities and shareholders equity                                                                                          |  | $         | 6,096,579 |                           |  | $         | 6,071,606         | 
|                                                              |                                                                                                                                     |  |           |           |                           | 
|See accompanying notes to the condensed financial statements.



Page 2 of 21

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SIERRA MONITOR CORPORATION

Condensed Statements of Operations

(Unaudited)



|                                                                        |                               |   |                             |           |   |                           |           |   |            |           |   |            |          
|----------------------------------------------------------------------- | ----------------------------- | - | --------------------------- | --------- | - | ------------------------- | --------- | - | ---------- | --------- | - | ---------- | ---------
|                                                                        |                               |   | Three months ended
June 30, |           |   | Six months ended
June 30,
|                                                                        |                               |   | 2009                        |           |   | 2008                      |           |   | 2009       |           |   | 2008      
|Net sales                                                               |                               | $ | 2,936,722                   |           | $ | 3,466,426                 |           | $ | 6,206,778  |           | $ | 6,603,224 
|Cost of goods sold                                                      |                               |   | 1,186,272                   |           |   | 1,457,333                 |           |   | 2,605,741  |           |   | 2,666,424 
|                                                                        | Gross profit                  |   |                             | 1,750,450 |   |                           | 2,009,093 |   |            | 3,601,037 |   |            | 3,936,800
|Operating expenses                                                      |                               |   |                             |           |   |                           |           |   |            |           |   |           
|Research and development                                                |                               |   | 503,175                     |           |   | 441,741                   |           |   | 983,677    |           |   | 967,546   
|Selling and marketing                                                   |                               |   | 840,505                     |           |   | 820,978                   |           |   | 1,701,526  |           |   | 1,636,334 
|General and administrative                                              |                               |   | 485,225                     |           |   | 520,215                   |           |   | 987,517    |           |   | 977,254   
|                                                                        |                               |   |                             | 1,828,905 |   |                           | 1,782,934 |   |            | 3,672,720 |   |            | 3,581,134
|                                                                        | Income (loss) from operations |   |                             | (78,455)  |   |                           | 226,159   |   |            | (71,683)  |   |            | 355,666  
|Income tax provision (benefit)                                          |                               |   | (31,382)                    |           |   | 89,709                    |           |   | (28,673)   |           |   | 155,398   
|                                                                        | Net income (loss)             |   | $                           | (47,073)  |   | $                         | 136,450   |   | $          | (43,010)  |   | $          | 200,268  
|Net income (loss) available to common shareholders per common share     |                               |   |                             |           |   |                           |           |   |            |           |   |           
|Basic:                                                                  |                               | $ | 0.00                        |           | $ | (0.01)                    |           | $ | 0.00       |           | $ | 0.02      
|Diluted:                                                                |                               | $ | 0.00                        |           | $ | (0.01)                    |           | $ | 0.00       |           | $ | 0.02      
|Weighted average number of common shares used in per share computations |                               |   |                             |           |   |                           |           |   |            |           |   |           
|Basic:                                                                  |                               |   | 11,431,545                  |           |   | 11,295,192                |           |   | 11,429,879 |           |   | 11,225,192
|Diluted:                                                                |                               |   | 11,431,545                  |           |   | 11,671,162                |           |   | 11,429,879 |           |   | 11,686,482
|                                                                       
|See accompanying notes to the unaudited condensed financial statements.





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SIERRA MONITOR CORPORATION

Condensed Statements of Cash Flows

(Unaudited)

|                                                                        |                                                                                                    |                                                     |          |                           |           |          
|----------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | --------------------------------------------------- | -------- | ------------------------- | --------- | ---------
|                                                                        |                                                                                                    |                                                     |          | Six months ended June 30,
|                                                                        |                                                                                                    |                                                     |          | 2009                      |           | 2008     
|Cash flows from operating activities:                                   |                                                                                                    |                                                     |          |                          
|                                                                        | Net income (loss)                                                                                  | $                                                   | (43,010) | $                         | 200,268  
|                                                                        | Adjustments to reconcile net income (loss) to net cash provided (used in) by operating activities: |                                                     |          |                           |          
|                                                                        |                                                                                                    | Depreciation and amortization                       |          | 147,365                   |           | 118,254  
|                                                                        |                                                                                                    | Provision for bad debt expense                      |          | 13,350                    |           | 23,681   
|                                                                        |                                                                                                    | Provision for inventory loss                        |          | (8,000)                   |           | -        
|                                                                        |                                                                                                    | Stock based compensation expense                    |          | 51,111                    |           | 53,310   
|                                                                        |                                                                                                    | Changes in operating assets and liabilities:        |          |                           |           |          
|                                                                        |                                                                                                    | Trade receivables                                   |          | (315,736)                 |           | (75,034) 
|                                                                        |                                                                                                    | Inventories                                         |          | 108,709                   |           | 63,342   
|                                                                        |                                                                                                    | Prepaid expenses and other current assets           |          | 24,922                    |           | (67,335) 
|                                                                        |                                                                                                    | Income tax deposit                                  |          | (14,400)                  |           | (57,286) 
|                                                                        |                                                                                                    | Deferred income taxes                               |          | (22,393)                  |           | (3,539)  
|                                                                        |                                                                                                    | Accounts payable                                    |          | 1,643                     |           | (25,249) 
|                                                                        |                                                                                                    | Accrued compensation expenses                       |          | 40,897                    |           | 71,496   
|                                                                        |                                                                                                    | Other current liabilities                           |          | (31,668)                  |           | (194,584)
|                                                                        |                                                                                                    | Net cash (used in) provided by operating activities |          | (47,210)                  |           | 107,324  
|Cash flows from investing activities:                                   |                                                                                                    |                                                     |          |                          
|                                                                        | Property and equipment                                                                             |                                                     | (52,489) |                           | (153,552)
|                                                                        |                                                                                                    | Net cash used in investing activities               |          | (52,489)                  |           | (153,552)
|Cash flows from financing activities:                                   |                                                                                                    |                                                     |          |                          
|                                                                        | Proceeds from exercise of stock options                                                            |                                                     | 6,000    |                           | 2,800    
|                                                                        |                                                                                                    | Net cash provided by financing activities           |          | 6,000                     |           | 2,800    
|Net decrease in cash                                                    |                                                                                                    | (93,699)                                            |          | (43,428)                 
|Cash at beginning of period                                             |                                                                                                    | 1,338,647                                           |          | 675,108                  
|Cash at end of period                                                   | $                                                                                                  | 1,244,948                                           | $        | 631,680                  
|Supplemental cash flow information                                      |                                                                                                    |                                                     |          |                          
|Cash paid for income taxes                                              | $                                                                                                  | 14,393                                              | $        | 399,120                  
|                                                                        |                                                                                                    |                                                     |          |                          
|See accompanying notes to the unaudited condensed financial statements.





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SIERRA MONITOR CORPORATION

Notes to the Interim Condensed Financial Statements

(Unaudited)

June 30, 2009

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 (GAAP) 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, 2008 balances within these interim consolidated financial statements were derived from the audited 2008 consolidated 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, 2008, which was filed with the SEC on March 26, 2009.  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 communications 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.



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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 telecommunications 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.

Significant Accounting Policies

a)

Revenue Recognition

The Company recognizes revenues in accordance with Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, 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 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.



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



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separate units of accounting, as defined in Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, 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, as described in Statement of Position (SOP) 97-02, Software Revenue Recognition, as amended, 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 ordering 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). 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 Standards

Recent accounting pronouncements discussed in the notes to the December 31, 2008 audited financial statements, filed previously with the SEC in our Annual Report on Form 10-K on March 26, 2009, that are required to be adopted during the year ending December 31, 2009, did not have or are not expected to have a significant impact on the Companys 2009 financial statements, except for the following.

In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles  a Replacement of FASB Statement No, 162, The Hierarchy of Generally Accepted Accounting Principles. This statement establishes the FASB Accounting Standards Codification (the Codification) as the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants.  All guidance contained in the Codification carries an equal level of authority.  Following this Statement, the Board will not issue new standards in the forms of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts.  Instead, it will issue Accounting Standard Updates that will serve only to update the Codification.  SFAS No, 168 is effective for the financial statements issued for interim and annual periods ending after September 15, 2009 and is not anticipated to have any impact on the Companys consolidated financial statements.



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In May 2009, the FASB issued SFAS No. 165, Subsequent Events. The objective of SFAS No. 165 is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  In particular, SFAS No. 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financials statements, and the disclosures that an entity should make about events or transactions occurred after the balance sheet date.  SFAS No. 165 is effective for financial statements issued for interim and annual periods ending after June 15, 2009 and did not have any impact on the Companys consolidated financial statements.  The Company evaluated subsequent events through the filing date of our quarterly 10-Q with the Securities and Exchange Commission on August 13, 2009.

The Companys financial instruments include cash, accounts receivable, prepaid expenses, security deposits, accounts payable and accrued expenses.  Management believes that the fair value of these financial instruments approximates their carrying amounts based on current market indicators, such as prevailing interest rates and the short-term maturities of such financial instruments.

The Company does not have any assets or liabilities that are measured at fair value on a recurring basis, and, during the six months ended June 30, 2009 and the year ended December 31, 2008, did not have any assets or liabilities that were measured at fair value on a nonrecurring basis.  The measurements cited in the preceding sentence refer to those set forth in SFAS No. 157 Fair Value Measurements, as amended.

c)

Employee Stock-Based Compensation

As of June 30, 2009, 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, the Company accounted for grants for these plans under Accounting Principals Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees ("APB 25") and related interpretations, and applied SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, for disclosure purposes only. Under APB 25, 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.

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share Based Payment, which revises SFAS No. 123 and supersedes APB 25. SFAS No. 123(R) requires that all share-based payments to employees be 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 under SFAS No. 123(R). The Company considers many factors when estimating expected forfeitures, including types of awards, employee class and historical experience. The statement was adopted using the modified prospective method of application which requires compensation expense to be recognized in the financial statements for all unvested stock options beginning in the quarter of adoption. No adjustments to prior periods have been made as a result of adopting SFAS No. 123(R). Under this transition method, compensation expense for share-based awards granted prior to January 1, 2006, but not yet vested as of January 1, 2006, is recognized in the Company's financial statements over their remaining service period. The cost is based on the grant date fair value estimated in accordance with the original provisions of SFAS



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No. 123. As required by SFAS No. 123(R), compensation expense recognized in future periods for share-based compensation granted prior to adoption of the standard will be adjusted for the effects of estimated forfeitures.

For the six-month periods ended June 30, 2009 and 2008, the impact of adopting SFAS No. 123(R) on the Company's condensed statements of operations was an increase in general and administrative expenses of $51,111 and $53,310, respectively, with a corresponding decrease in the Company's income from operations, and net income resulting from the recognition of compensation expense associated with employee stock options. The Company did not modify the terms of any previously granted stock options during the six-month periods ended June 30, 2009 and 2008.

Inventories

A summary of inventories at September 30, 2008 follows:

|                                         |               |           |                   |   |          
|---------------------------------------- | ------------- | --------- | ----------------- | - | ---------
|                                         | June 30,
2009 |           | December 31,
2008
|Raw materials                            | $             | 815,263   |                   | $ | 809,507  
|Work-in-process                          |               | 764,094   |                   |   | 742,478  
|Material at vendor                       |               | 157,923   |                   |   | 290,557  
|Finished goods                           |               | 239,190   |                   |   | 234,637  
|Less: Allowance for obsolescence reserve |               | (109,173) |                   |   | (109,173)
|                                         | $             | 1,867,297 |                   | $ | 1,968,006

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 stock issuable upon exercise of stock options using the treasury stock method.  No adjustments to earnings were made for purposes of per share calculations.

At June 30, 2009, outstanding options to acquire 17,000 shares of common stock were not considered potentially dilutive common shares due to the exercise price being higher than the stock price used in the EPS calculation.  At June 30, 2008, there were no common shares that had an exercise price higher than the stock price used in the EPS calculation.

The Company has reported a net loss for the three and six-month periods ended June 30, 2009.  As a result, 349,480 and 352,731 shares of common stock issuable upon exercise of stock options have been excluded from the calculation of diluted loss per share for both the three and six month periods ended June 30, 2009, respectively, because their inclusion would be anti-dilutive.



The following is a reconciliation of the shares used in the computation of basic and diluted EPS for the three and six month periods ended June 30, 2009 and 2008, respectively:



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|                                                                                               |  |                                  |  |                                |  |                                  |  |                               
|---------------------------------------------------------------------------------------------- |  | -------------------------------- |  | ------------------------------ |  | -------------------------------- |  | ------------------------------
|                                                                                               |  | Three months ended
June 30, 2009 |  | Six months ended
June 30, 2009 |  | Three months ended
June 30, 2008 |  | Six months ended
June 30, 2008
|Basic EPS  weighted-average number of common shares outstanding                               |  | 11,431,545                       |  | 11,429,879                     |  | 11,295,192                       |  | 11,225,192                    
|Effect of dilutive potential common shares  stock options outstanding                         |  | -                                |  | -                              |  | 375,970                          |  | 461,290                       
|Diluted EPS  weighted-average number of common shares and potential common shares outstanding |  | 11,431,545                       |  | 11,429,879                     |  | 11,671,162                       |  | 11,686,482                    

Comprehensive Income

The Company has no components of other comprehensive income and, accordingly, comprehensive income is the same as net income for all periods presented.

Concentrations

No customer accounted for more than 10% of accounts receivable at June 30, 2009 or December 31, 2008.  No customers individually made up more than 10% of net sales for the three and six month periods ended June 30, 2009 and June 30, 2008.

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 $995,000 and $1,090,000 were in excess of such insured amounts at June 30, 2009 and December 31, 2008, 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
June 30, |           | Six months ended
June 30,
|                        | 2009                        |           | 2008                      |   | 2009      |  | 2008
|Gas detection devices   | $                           | 1,432,823 |                           | $ | 1,967,942 |  | $    | 3,270,459 |  | $ | 3,380,873
|Environment controllers |                             | 135,298   |                           |   | 260,285   |  |      | 337,807   |  |   | 470,818  
|FieldServers            |                             | 1,368,601 |                           |   | 1,238,199 |  |      | 2,598,511 |  |   | 2,751,533
|                        | $                           | 2,936,722 |                           | $ | 3,466,426 |  |      | 6,206,778 |  | $ | 6,603,224



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Line-of-Credit

The Company maintains a line of credit with its commercial bank in the maximum amount of $1,000,000.  No borrowings have been made under the Companys line of credit during the first six months of fiscal year 2009 and there were no outstanding balances at June 30, 2009 and December 31, 2008.  As of June 30, 2009, the Company is in compliance with covenants required by the line of credit.

Stock Option Grants

No stock options were granted during the six-month period ended June 30, 2009.  A total of 14,000 stock options were granted during the six-month period ended June 30, 2008, under the Companys 2006 Stock Plan with an exercise price of $1.50.  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.  Such stock options had a per-share grant date fair value of $1.48, as calculated by the Black-Scholes option pricing model using the following assumptions: expected life of 8 years; estimated volatility of 177%; risk-free interest rate of 2.8%; and no expected dividends. Stock-based compensation expense related to these 14,000 stock options was immaterial for the six months ended June 30, 2008 and is included in the previously disclosed amount of employee stock-based compensation.

Stock Option Exercise and Expiration

In the six-month period ended June 30, 2009, a total of 10,000 stock options were exercised by an employee to purchase shares of the Companys common stock resulting in cash proceeds of $6,000.  During the same period, 1,000 stock options expired.



In the six-month period ended June 30, 2008, a total of 5,000 stock options were exercised by an employee to purchase shares of the Companys common stock resulting in cash proceeds of $2,800.  In addition, a total of 263,020 shares of common stock were issued as a result of employee net exercises of stock options.  During the same period, 27,750 options expired.



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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 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, 2008, 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 June 30, 2009, Sierra Monitor Corporation reported net sales of $2,936,722 compared to $3,466,426 for the three-month period ended June 30, 2008.  For the six-month period ended June 30, 2009, net sales were $6,206,778 compared with $6,603,224 in the prior year six-month period.   The sales results for the three and six month periods ended June 30, 2009 represent decreases of 15% and 6%, respectively, compared to the same periods in 2008.

For the three-month period ended June 30, 2009, sales of our gas detection products were approximately $1,436,000 compared to $1,968,000 in the three-month period ended June 30, 2008.  For the six-month period ended June 30, 2009, our gas detection product sales were approximately $3,216,000 compared to $3,381,000 in the same period in 2008.  These results represent a 27% year-over-year decrease in the second quarter and a 5% year-over-year decrease in the year-to-date period.   Our gas detection sales include systems and  spare parts that are sold to the U.S. Navy.  In the three month period ended June 30, 2009 our sales to the Navy were approximately $330,000 lower than in the same quarter in the previous year.  The decrease in sales to the Navy is the primary reason for the significant decline in year over year sales of gas detection products.  Sales of commercial gas detection systems were below the prior year level as a result of the generally weak economy.

Sales of Environment Controllers to the telecommunications industry in the three-month period ended June 30, 2009 were approximately $136,000 compared to $260,000 in the three-month period ended June 30, 2008.  In the six-month period ended June 30, 2009 sales of Environment Controllers were approximately $332,000 compared to $471,000 in the same period in 2008.  This decrease in sales is due, primarily, to generally weak demand for infrastructure products by the telecommunications industry and delay of purchases of new inventory by at least one of our customers in order to reduce their operating inventory.

In the three-month period ended June 30, 2009, sales of FieldServer products were approximately $1,365,000, a 10% increase, compared to $1,238,000 in the same period in 2008. In the six-month period ended June 30, 2009, sales of our FieldServer products were approximately $2,658,000, a 3% decrease, compared to $2,752,000 sales reported in the same period in 2008.  FieldServer products include box products and original equipment manufacturer (OEM) modules.  Box products provide a platform for delivery and operation of our software for building automation integration and are generally sold to integrators.  Box product sales increased approximately 12% in the three-month period ended June 30, 2009 on a year-over-year basis.  The increase in sales of



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box products is due, primarily, to strong demand in international accounts including a single order for over $100,000 for a major integration company in Brazil.  OEM module sales increased approximately 7% in the three-month period ended June 30, 2009 as compared to the same period in 2008, and 5% on a year-to-date basis in 2009 compared to the prior year period.  The higher level of sales in each of the three and six-month periods ended June 30, 2009 reflect continued improvements in run rates for early adopter customers and incremental sales to new customers.

Gross profit of $1,750,450 for the three-month period ended June 30, 2009 was 60% of sales compared to $2,009,093, or 58% of sales, in the same period in the previous year.  Gross profit for the six-month period ended June 30, 2009 was $3,601,037, or 58% of sales, compared to $3,936,800, or 60% of sales, in the same period in the previous year.  Gross profit varies by product group and by the channel of distribution.  We expect our gas detection products to generate relatively high gross profits because they are generally sold through Manufacturers Representatives.  Manufacturers Representatives are paid commissions that are recorded as sales expenses.  Our other products are generally sold through direct, or distributor channels.   Distributors pay discounted prices causing lower gross profit.  There is no equivalent commission expense for the distributor channel.  The range of gross profit between 58% and 60% is consistent with our historical experience.

Expenses for research and development, which include new product development and engineering to sustain existing products, were $503,175, or 17% of sales, for the three month period ended June 30, 2009 compared to $441,741, or 13% of sales, in the comparable period in 2008.  In the six-month periods ended June 30, 2009 and June 30, 2008, research and development expenses were $983,677, or 16% of sales, and $967,546, or 15% of sales, respectively.   We have continued our investment in new product development including a new central controller for gas detection systems and several new FieldServer and ProtoCessor products.  The increase in research and development expenses is due, primarily to the cost of projects related to the new product development.  We currently plan to continue the higher level of research and development activity to capitalize on identified opportunities.

Selling and marketing expenses, which consist primarily of salaries, commissions and promotional expenses, were $840,505, or 29% of sales for the three-month period ended June 30, 2009, compared to $820,978, or 24% of sales, in the comparable period in the prior year.  For the six-month periods ended June 30, 2009 and June 30, 2008, selling and marketing expenses were $1,701,526, or 27% of sales, and $1,636,334, or 25% of sales, respectively.  Higher selling and marketing expenses in each of the three- and six-month periods ended June 30, 2009 are due, in part, to increased salary and benefit expenses as the result of an increase in the number of sales professionals.  The higher  salary and benefit expenses were partially offset by lower marketing expenses because we have reduced our advertising and trade show participation and continued a transition toward increased Internet adverting.

General and administrative expenses, which consist primarily of salaries, building rent, insurance expenses and fees for professional services, were $485,225 or 17% of sales, for the three-month period ended June 30, 2009 compared to $520,215 or 15% of sales, in the three-month period ended June 30, 2008.  For the six-month periods ended June 30, 2009 and June 30, 2008, general and administrative expenses were $987,517, or 16% of sales, and $977,254, or 15% of sales, respectively.  The lower general and administrative expenses in the second quarter of 2009, compared to the same period in the prior year, are the result of a combination of lower variable salary expense, lower professional fees and lower investor relations expenses.  In the year to date period our depreciation expenses and audit expenses are higher in the current year to date period compared with the previous year.



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In the three-month period ended June 30, 2009, our loss from operations was $78,455 representing a decrease of $304,614 compared to the three-month period ended June 30, 2008.  In the six-month period ended June 30, 2009, our loss from operations was $71,683 representing a decrease of $427,349 compared to the six-month period ended June 30, 2008.  The decrease in operating income in both the three and six month periods ended June 30, 2009 is due, primarily, to the lower sales levels in the second quarter.  Although the lower sales levels caused lower gross profit during difficult market conditions we maintained our capacity levels and engineering activities, which resulted in increased inventory as a strategy to assure our ability to respond to future opportunities.  The result of maintaining capacity was that there was no reduction in fixed expenses.

After interest and tax provisions our net loss for the three-month period ended June 30, 2009 was $47,073 compared to net income of $136,451 in the same period of 2008.  For the six-month period ended June 30, 2009, our net loss was $43,010 compared to net income of $200,268 in the same period of 2008.

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 consolidated 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 consolidated financial statements:

a)

Revenue Recognition

The Company recognizes revenues in accordance with Staff Accounting Bulleting (SAB) No. 104, Revenue Recognition, 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) collectibility 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.



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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.



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, as defined in EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, 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, as described in SOP 97-02, Software Revenue Recognition, as amended, 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). Collectibility 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.



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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.

c)

Inventories

Inventories are stated at the lower of cost or estimated market, 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 relies 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 4T:  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 15d-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 ensure 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.

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.





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PART II:  OTHER INFORMATION



ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Annual Meeting of Shareholders of the Company was held on May 13, 2009.

1.  At the Annual Meeting, the following directors were elected to serve for the ensuing year and until their successors are elected:

For

Against

Abstain

Gordon R. Arnold

9,844,767

0

0

C. Richard Kramlich

9,844,667

0

100

Jay T. Last

9,844,667

0

100

Robert C. Marshall

9,844,667

0

100

2.  At the Annual Meeting, the appointment of Squar, Milner, Peterson, Miranda & Williamson, LLP as the Company's independent public accountants for the fiscal year ended December 31, 2009 was ratified by the following votes:

For

Against

Abstain

9,857,067

0

0



ITEM 6.

EXHIBITS

Exhibit

Number

Description

3.1(1)

Articles of Incorporation of the Registrant.

3.2(2)

Bylaws of the Registrant.

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer pursuant to Section 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 350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)

Incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 1989.

(2)

Incorporated by reference to the Companys 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 CORPORATION

Registrant



Date:

August 13, 2009

By:

/s/ Gordon R. Arnold

Gordon R. Arnold

President

Chief Executive Officer

Chief Financial Officer





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Index to Exhibits

Exhibit

Number

Description

3.1(1)

Articles of Incorporation of the Registrant.

3.2(2)

Bylaws of the Registrant.

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer pursuant to Section 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 350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)

Incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 1989.

(2)

Incorporated by reference to the Companys Quarterly Report on Form 10-QSB (File No. 000-07441) filed with the SEC on August 14, 1998.





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