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, 2012



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 preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.

Yesx    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).

Yesx    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 ̈ Nox



The number of shares
outstanding of the issuer's common stock, as of August 10, 2012 was 9,901,177.





Page 1 of 16







PART
I: FINANCIAL INFORMATION

ITEM
1. FINANCIAL STATEMENTS

SIERRA
MONITOR CORPORATION



Condensed
Balance Sheets



|Assets                                                                                                                                                                   |  | June 30, 2012 |           |  | December 31, |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | --------- |  | ------------ | -
|                                                                                                                                                                         |  | (unaudited)   |           |  | 2011         |  
|Current assets:                                                                                                                                                          |  |               |           |  |              |  
|Cash                                                                                                                                                                     |  | $             | 2,132,296 |  |              | $
|Trade receivables, less allowance for doubtful accounts of approximately $71,000 and $65,000 at
    June 30, 2012 and December 31, 2011, respectively                    |  |               | 2,455,633 |  |              |  
|Inventories, net                                                                                                                                                         |  |               | 3,008,785 |  |              |  
|Prepaid expenses                                                                                                                                                         |  |               | 232,319   |  |              |  
|Income tax deposits                                                                                                                                                      |  |               | 172,883   |  |              |  
|Deferred income taxes - current                                                                                                                                          |  |               | 366,618   |  |              |  
|Total current assets                                                                                                                                                     |  |               | 8,368,534 |  |              |  
|                                                                                                                                                                         |  |               |           |  |              |  
|Property and equipment, net                                                                                                                                              |  |               | 367,440   |  |              |  
|Other assets                                                                                                                                                             |  |               | 113,718   |  |              |  
|Total assets                                                                                                                                                             |  | $             | 8,849,692 |  |              | $
|Liabilities and Shareholders' Equity                                                                                                                                     |  |               |           |  |              |  
|Current liabilities:                                                                                                                                                     |  |               |           |  |              |  
|Accounts payable                                                                                                                                                         |  | $             | 1,097,247 |  |              | $
|Accrued compensation expenses                                                                                                                                            |  |               | 532,253   |  |              |  
|Other current liabilities                                                                                                                                                |  |               | 99,709    |  |              |  
|Income taxes payable                                                                                                                                                     |  |               | -         |  |              |  
|Total current liabilities                                                                                                                                                |  |               | 1,729,209 |  |              |  
|                                                                                                                                                                         |  |               |           |  |              |  
|Deferred tax liability                                                                                                                                                   |  |               | 108,337   |  |              |  
|Total liabilities                                                                                                                                                        |  |               | 1,837,546 |  |              |  
|                                                                                                                                                                         |  |               |           |  |              |  
|Commitments and contingencies                                                                                                                                            |  |               |           |  |              |  
|Shareholders' equity:                                                                                                                                                    |  |               |           |  |              |  
|Common stock, $0.001 par value; 20,000,000 shares authorized; 9,901,177 and 9,896,942 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively |  |               | 9,901     |  |              |  
|Additional paid-in capital                                                                                                                                               |  |               | 2,818,895 |  |              |  
|Retained earnings                                                                                                                                                        |  |               | 4,183,350 |  |              |  
|Total shareholders' equity                                                                                                                                               |  |               | 7,012,146 |  |              |  
|Total liabilities and shareholders’ equity                                                                                                                               |  | $             | 8,849,692 |  |              | $





See accompanying notes to the unaudited interim condensed financial
statements.



Page 2 of 16







SIERRA
MONITOR CORPORATION



Condensed
Statements of Operations



(Unaudited)



|                                                                        |  | Three months ended June 30, |            |  | Six months ended June 30, |  
|----------------------------------------------------------------------- |  | --------------------------- | ---------- |  | ------------------------- | -
|                                                                        |  | 2012                        |            |  | 2011                      |  
|Net sales                                                               |  | $                           | 4,665,279  |  |                           | $
|Cost of goods sold                                                      |  |                             | 1,960,702  |  |                           |  
|Gross profit                                                            |  |                             | 2,704,577  |  |                           |  
|Operating expenses                                                      |  |                             |            |  |                           |  
|Research and development                                                |  |                             | 544,975    |  |                           |  
|Selling and marketing                                                   |  |                             | 1,050,539  |  |                           |  
|General and administrative                                              |  |                             | 551,466    |  |                           |  
|                                                                        |  |                             | 2,146,980  |  |                           |  
|Income from operations                                                  |  |                             | 557,597    |  |                           |  
|Interest income                                                         |  |                             | 31         |  |                           |  
|Income before income taxes                                              |  |                             | 557,628    |  |                           |  
|Income tax  provision                                                   |  |                             | 222,753    |  |                           |  
|Net income                                                              |  | $                           | 334,875    |  |                           | $
|Net income available to common shareholders per common share            |  |                             |            |  |                           |  
|Basic:                                                                  |  | $                           | 0.03       |  |                           | $
|Diluted:                                                                |  | $                           | 0.03       |  |                           | $
|Weighted average number of common shares used in per share computations |  |                             |            |  |                           |  
|Basic:                                                                  |  |                             | 9,901,177  |  |                           |  
|Diluted:                                                                |  |                             | 10,118,965 |  |                           |  



See accompanying notes to the
unaudited interim condensed financial statements.





Page 3 of 16







SIERRA
MONITOR CORPORATION



Condensed
Statements of Cash Flows



(Unaudited)



|                                                                                  |  | Six months ended June 30, |          
|--------------------------------------------------------------------------------- |  | ------------------------- | ---------
|                                                                                  |  | 2012                      |          
|Cash flows from operating activities:                                             |  |                           |          
|Net income                                                                        |  | $                         | 907,931  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                           |          
|Depreciation and amortization                                                     |  |                           | 148,034  
|Provision for bad debt expense                                                    |  |                           | 6,350    
|Provision for inventory loss                                                      |  |                           | 23,356   
|Stock based compensation expense                                                  |  |                           | 43,645   
|Changes in operating assets and liabilities:                                      |  |                           |          
|Trade receivables                                                                 |  |                           | (814,035 
|Inventories                                                                       |  |                           | 886,020  
|Prepaid expenses                                                                  |  |                           | (8,957   
|Other assets                                                                      |  |                           |          
|Income tax deposit                                                                |  |                           | (162,228 
|Income tax payable                                                                |  |                           | 11,362   
|Accounts payable                                                                  |  |                           | 178,541  
|Accrued compensation expenses                                                     |  |                           | 35,056   
|Other current liabilities                                                         |  |                           | (223,405 
|Net cash provided by operating activities                                         |  |                           | 1,008,946
|Cash flows from investing activities:                                             |  |                           |          
|Purchase of property and equipment                                                |  |                           | (89,076  
|Purchase of other assets                                                          |  |                           | -        
|Net cash used in investing activities                                             |  |                           | (89,076  
|Net increase (decrease) in cash                                                   |  |                           | 919,870  
|Cash at beginning of period                                                       |  |                           | 1,212,426
|Cash at end of period                                                             |  | $                         | 2,132,296
|Supplemental cash flow information                                                |  |                           |          
|Cash paid for income taxes                                                        |  | $                         | 778,893  



See accompanying notes to the unaudited interim condensed financial
statements.





Page 4 of 16









SIERRA MONITOR CORPORATION



Notes to the Interim Condensed Financial
Statements

(Unaudited)

June 30, 2012



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,
2011 balances within these interim condensed financial statements were derived from the audited 2011 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, 2011, which was filed with the SEC
on March 22, 2012. 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.



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.





Page 5 of 16







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



Accounting Policies



| | a) | Revenue Recognition
| | -- | -------------------



A
detailed discussion of our revenue recognition policies is contained in Item 2 (Management’s Discussion and Analysis
of Financial Condition and Results of Operations) under Critical Accounting Policies below. The discussion is incorporated herein
by reference.



| | b) | Recent Accounting Pronouncements
| | -- | --------------------------------



Recent
accounting pronouncements discussed in the notes to the December 31, 2011 audited financial statements, filed previously with the
SEC in our Annual Report on Form 10-K on March 22, 2012, that are required to be adopted during the year ended December 31, 2011,
did not have or are not expected to have a significant impact on the Company’s 2012 financial statements.



| | c) | Employee Stock-Based Compensation
| | -- | ---------------------------------



The Company initially
reserved 500,000 shares of common stock for issuance under the 2006 Stock Plan of which 289,820 shares were available for grant
at June 30, 2012. Options are granted under our 2006 Stock Plan at the fair market value of our common stock at the grant date,
typically vest ratably over 4 years, and expire 10 years from the grant date.



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 six-month periods ended June 30, 2012 and 2011, general and administrative expenses included stock based compensation expense
of $43,645 and $39,410, respectively, decreasing the Company's income before provision for income taxes and net income 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 six-month periods ended June 30, 2012 and 2011.



| | d) | Subsequent Events
| | -- | -----------------



Management
has evaltext-indent: 0.3inuated events subsequent to June 30, 2012 through the date that the accompanying condensed financial statements were filed
with the Securities and Exchange Commission for transactions and other events which may require adjustment of and/or disclosure
in such financial statements.





Page 6 of 16







Inventories



A summary of inventories follows:



|                                         |  | June 30, 2012 |           |   | December 31, 2011 |  
|---------------------------------------- |  | ------------- | --------- | - | ----------------- | -
|Raw materials                            |  | $             | 1,190,295 |   |                   | $
|Work-in-process                          |  |               | 916,033   |   |                   |  
|Materials at vendor                      |  |               | 504,281   |   |                   |  
|Finished goods                           |  |               | 497,041   |   |                   |  
|Less: Allowance for obsolescence reserve |  |               | (98,865   | ) |                   |  
|                                         |  | $             | 3,008,785 |   |                   | $

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, 2012 and 2011, outstanding options to acquire 185,000 and 192,000, shares of common stock, respectively, were not considered
potentially dilutive common shares due to the exercise price of such options being higher than the stock price used in the EPS
calculation.



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,
2012 and 2011, respectively:



|                                                                                               |  | Three months ended |            |  | Six months ended | 
|---------------------------------------------------------------------------------------------- |  | ------------------ | ---------- |  | ---------------- | 
|                                                                                               |  | June 30, 2012      |            |  | June 30, 2011    | 
|Basic EPS – weighted-average number of common shares outstanding                               |  |                    | 9,901,177  |  |                  | 
|Effect of dilutive potential common shares – stock options outstanding                         |  |                    | 217,788    |  |                  | 
|Diluted EPS – weighted-average number of common shares and potential common shares outstanding |  |                    | 10,118,965 |  |                  | 



Concentrations



One
customer made up more than 10% of accounts receivable at June 30, 2012 and no customer made
up more than 10% of accounts receivable at December 31, 2011. Also the same customer made up more than 10% of net sales for the
six month period ended June 30, 2012 and no customer made up more than 10% of net sales for the six month period ended June 30,
2011. The single customer that made up more than 10 percent of sales and receivables is a large, financially stable architectural
and engineering firm (A&E) undertaking a construction project in the Middle East. The customer is considered reliable and has
previously made payment to Sierra Monitor in the correct amount and on time.



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 $1,882,000 and $962,000
were in excess of such insured amounts at June 30, 2012 and December 31, 2011, respectively.





Page 7 of 16







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, |  
|----------------------- |  | --------------------------- | --------- |  | ------------------------- | -
|                        |  | 2012                        |           |  | 2011                      |  
|Gas detection devices   |  | $                           | 2,131,097 |  |                           | $
|Environment controllers |  |                             | 186,407   |  |                           |  
|FieldServers            |  |                             | 2,347,775 |  |                           |  
|                        |  | $                           | 4,665,279 |  |                           | $



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 2012 and there were no outstanding balances at June 30, 2012 and December
31, 2011. As of June 30, 2012, the Company was in compliance with covenants required by the line of credit.



Stock Option Grants



A total of 60,000 stock
options were granted during the three and six-month periods ended June 30, 2012. A total of 143,000 stock options were granted
during the three and six-month periods ended June 30, 2011.



Stock Option Exercise and Expiration



No stock options were
exercised in the six-month period ended June 30, 2012. During the same period, 9,000 options expired.



A total of 4,235 shares
of common stock were issued as a result of employee net exercises of stock options in the six-month period ended June 30, 2011.
During the same period, 2,000 options expired.



Commitments and Contingencies



From time to time,
the Company is subject to legal proceedings and claims that arise in the normal course of business. While the outcome of these
proceedings and claims cannot be predicted, we currently are not a party to any legal proceedings, the adverse outcome of which,
in management’s opinion, individually or in the aggregate, is expected to have a material adverse effect on the Company’s
financial position or results of operations.





Page 8 of 16







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, 2011, 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, 2012, Sierra Monitor Corporation (“we” or the “Company”) reported net sales of $4,665,279
compared to $3,984,361 for the three-month period ended June 30, 2011. For the six-month period ended June 30, 2012, net sales
were $10,867,215 compared with $8,152,778 for the six-month period ended June 30, 2011. The sales results for the three and six-month
periods ended June 30, 2012 represent increases of 17% and 33%, respectively, compared to the same periods in 2011.



For
the three-month period ended June 30, 2012, sales of our gas detection products, including industrial accounts and military sales,
were approximately $2,131,000 compared to $1,923,000 in the three-month period ended June 30, 2011. For the six-month period ended
June 30, 2012, sales of our gas detection products, including industrial accounts and military sales, were approximately $5,976,000
compared to $3,646,000 in the same period in 2011. These results represent an 11% year-over-year increase in the second quarter
and a 64% year-over-year increase in the year-to-date period. The improvement in sales in the second quarter was due, in part,
to an increase in military sales compared to the second quarter of the prior year. Military sales cycles are unpredictable because
they are dependent upon US Navy purchases of gas detection systems for new ships and related spare part purchase cycles. The increase
in sales in the first half of the year is primarily the result of the first quarter, 2012,shipment of a single order with
a value exceeding $2,000,000. The order was sold to an architectural and engineering firm (A&E) undertaking construction of
a petroleum pipeline booster station in the Middle East.



Sales
of Environment Controllers to the telecommunications industry in the three-month period ended June 30, 2012 were approximately
$186,000 compared to approximately $227,000 in the three-month period ended June 30, 2011. In the six-month period ended June 30,
2012 sales of Environment Controllers were approximately $453,000 compared to $563,000 in the same period in 2011.The results
for the three and six-month periods ended June 30, 2012 represent decreases of 18% and 20%, respectively, compared to the same
periods in 2011. There were no significant telephone company infrastructure
project shipments during the second quarter of 2012 and most of the sales were for spare parts and the retro-fit of older control
systems.





Page 9 of 16







In the three-month
period ended June 30, 2012, sales of FieldServer products were approximately $2,348,000 compared to $1,835,000 in the same period
in 2011, representing a 28% increase. In the six-month period ended June 30, 2012, sales of our FieldServer products were approximately
$4,438,000 compared to $3,945,000 in the same period in 2011, representing a 13% increase. 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
7% in the three-month period ended June 30, 2012 on a year-over-year basis. Box product sales decreased approximately 5% in the
six-month period ended June 30, 2012 compared to the same period in the prior year. Although year over year unit shipments of box
products have increased by 15%, the introduction in 2011 of a new FieldServer product has suppressed margins and contributed to
the lower year-to-date revenue. The new product is expected to have broader market acceptance resulting in ongoing unit volume
increases. OEM module sales increased approximately 53% in the three-month period ended June 30, 2012 as compared to the same period
in 2011, and 32% on a year-to-date basis in 2012 compared to the prior year period. The higher level of sales in each of the three
and six-month periods ended June 30, 2012 reflect sustained deliveries to mature accounts, continued improvements in run rates
for recent adopter customers and incremental sales to new customers.



Gross profit for the
three-month period ended June 30, 2012 was approximately $2,705,000 or 58% of net sales compared to $2,356,000, or 59% of net sales,
in the same period in the previous year. Gross profit for the six-month period ended June 30, 2012 was $5,864,000, or 54% of net
sales, compared to $4,865,000, or 60% of net sales, in the same period in the previous year. In the first quarter of 2012 our gross
margin was lower than historical levels as a result of discounted pricing for a single large order. The highly competitive selling
environment for large projects commands lower selling prices. While we have increased our list prices for gas detection products,
we anticipate generally lower margins due to increases in material and labor costs along with the impact of potential additional
large projects.



Expenses for research
and development, which include new product development and engineering to sustain existing products, were $545,000, or 12% of net
sales, for the three-month period ended June 30, 2012 compared to $550,000, or 14% of net sales, in the comparable period in 2011.
In the six-month periods ended June 30, 2012 and June 30, 2011, research and development expenses were $1,118,000, or 10 % of net
sales, and $1,095,000, or 13% of net sales, respectively. There have been no significant changes in engineering expenses in the
three and six-month reporting periods ended June 30, 2012.



Selling and marketing
expenses, which consist primarily of salaries, commissions and promotional expenses were $1,051,000, or 23% of net sales for the
three-month period ended June 30, 2012, compared to $918,000, or 23% of net sales, in the comparable period in the prior year.
For the six-month periods ended June 30, 2012 and June 30, 2011, selling and marketing expenses were $2,089,000, or 19% of net
sales, and $1,802,000, or 22% of net sales, respectively. Our ongoing selling and marketing expenses have increased as a result
of the early 2012 opening and continued operation of sales offices in Berlin and Singapore. Other selling and marketing expenses,
including sales commissions, are consistent with historical levels.



General and administrative
expenses, which consist primarily of salaries, building rent, insurance expenses, information technology expenses and fees for
professional services, were $551,000 or 12% of net sales, for the three-month period ended June 30, 2012 compared to $510,000 or
13% of net sales, in the three-month period ended June 30, 2011. For the six-month periods ended June 30, 2012 and June 30, 2011,
general and administrative expenses were $1,144,000, or 11% of net sales, and $1,062,000, or 13% of net sales, respectively. Increases
in depreciation expenses due to information technology upgrades, higher salary and benefit costs and higher travel expenses contributed
to the increase in general and administrative expenses in both periods compared to the respective prior year periods. Our G&A
expenses as a percent of net sales are lower for year to date 2012 than the same period in 2011 due to the higher level of sales.





Page 10 of 16







In the three-month
period ended June 30, 2012, our income from operations was $558,000, representing an increase of $180,000 compared to our income
from operations of $378,000 in the three-month period ended June 30, 2011. In the six-month period ended June 30, 2012, our income
from operations was $1,513,000 representing an increase of $607,000 compared to our income from operations of $906,000 in the six-month
period ended June 30, 2011. The higher sales levels in both the three and six-month periods ended June 30, 2012 were sufficient
to overcome lower margins and still produce improved income from operations over the corresponding periods in 2011. The lower margins
were experienced primarily in the first quarter of 2012 as a result of the large single order in the Middle East.



After interest and
tax provisions, our net income for the three-month period ended June 30, 2012 was $335,000 compared to net income of $227,000 in
the same period of 2011. For the six-month period ended June 30, 2012, our net income was $908,000 compared to a net income of
$544,000 in the same period of 2011.



Liquidity and Capital Resources



During the six months
ended June 30, 2012, net cash provided by operating activities was approximately $1,009,000 compared to net cash provided of approximately
$262,000 for the same period in 2011. Working capital was approximately $6,639,000 at June 30, 2012, an increase of approximately
$1,011,000 from December 31, 2011. At June 30, 2012, our balance sheet reflected approximately $2,132,000 of cash and $2,456,000
of net trade receivables. At December 31, 2011, our total cash on hand was approximately $1,212,000 and our net trade receivables
were $1,648,000.



At June 30, 2012, 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 which matures on September 9, 2012. 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 June 30, 2012, the Company was in compliance with the financial covenants and there
were no borrowings on this line of credit.



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 January 1, 2013. 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.





Page 11 of 16







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 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 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 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 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.





Page 12 of 16







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).
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) | 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 dictates 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 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 utilize 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 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.





Page 13 of 16







ITEM
4: CONTROLS AND PROCEDURES



Disclosure Controls
and Procedure.As of the end of the period covered by this Quarterly Report on Form 10-Q, our management, with the participation
of Gordon R. Arnold, our principal executive and principal financial officer, carried out an evaluation of the effectiveness of
the design and operation of the Company’s disclosure controls and procedures, pursuant to Exchange Act Rules 13a-15(e) and
15d-15(e), which includes inquiries made to certain other employees. Based upon that evaluation, Mr. Arnold concluded that, as
of June 30, 2012, the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange
Act) were effective.



Management’s
Report on Internal Control over Financial Reporting.Our management is responsible for establishing and maintaining adequate
internal control over our financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles in the United States
of America, and includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations
of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on our financial statements.



Because of its inherent
limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.



In order to evaluate
the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management
conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission in its report, Internal Control-Integrated Framework. No material
weaknesses were identified and management concluded that our internal control over financial reporting was effective as of June
30, 2012.



This Quarterly Report
on Form 10-Q does not include an attestation report of the Company’s registered public accounting firm regarding internal
control over financing reporting. Management’s report was not subject to attestation by the Company’s registered public
accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this quarterly
report.



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.





Page 14 of 16







PART II: OTHER INFORMATION



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 Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 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 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
1350, 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 10, 2012 | By: | /s/ Gordon R. Arnold       | 
|                         |     | Gordon R. Arnold           | 
|                         |     | President                  | 
|                         |     | Chief Executive Officer    | 
|                         |     | Chief Financial Officer    | 





Page 15 of 16







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 Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 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 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
1350, 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.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





Page 16 of 16