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,
2010





or





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


For the
transition period from _____to  _____





Commission
file number 0-7441





SIERRA
MONITOR CORPORATION


(Exact
name of registrant as specified in its charter)





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





1991
Tarob Court


Milpitas,
California 95035




(Address
and zip code of principal executive offices)





(408)
262-6611




(Registrant's
telephone number, including area code)





Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days.


Yes
      x       No
       ̈





Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§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 o      No
      x


The
number of shares outstanding of the issuer's common stock, as of August 12, 2010
was 11,446,076.





PART I:  FINANCIAL
INFORMATION




ITEM 1.  FINANCIAL
STATEMENTS




SIERRA MONITOR
CORPORATION




Condensed Balance
Sheets





June30,2010
                                        (unaudited)
                                      
                                      
                                      December31,
                                        2009AssetsCurrent
      assets:Cash
                                      
                                      $
                                      1,794,787
                                      
                                      
                                      $
                                      2,203,018Trade
      receivables, less allowance for doubtful accounts of approximately
      $85,000 and $70,000, respectively
                                      
                                      
                                      2,073,465
                                      
                                      
                                      
                                      1,354,775Inventories,
      net
                                      
                                      
                                      1,906,242
                                      
                                      
                                      
                                      1,892,313Prepaid
      expenses
                                      
                                      
                                      168,986
                                      
                                      
                                      
                                      240,204Income
      tax deposits
                                      
                                      
                                      5,848
                                      
                                      
                                      
                                      -Deferred
      income taxes – current
                                      
                                      
                                      259,855
                                      
                                      
                                      
                                      259,855Total
      current assets
                                      
                                      
                                      6,209,183
                                      
                                      
                                      
                                      5,950,165Property
      and equipment, net
                                      
                                      
                                      291,596
                                      
                                      
                                      
                                      238,377Other
      assets
                                      
                                      
                                      135,346
                                      
                                      
                                      
                                      167,615Total
      assets
                                      
                                      $
                                      6,636,125
                                      
                                      
                                      $
                                      6,356,157Liabilities and Shareholders'
      EquityCurrent
      liabilities:Accounts
      payable
                                      
                                      $
                                      538,090
                                      
                                      
                                      $
                                      523,763Accrued
      compensation expenses
                                      
                                      
                                      468,879
                                      
                                      
                                      
                                      372,035Other
      current liabilities
                                      
                                      
                                      99,949
                                      
                                      
                                      
                                      73,351Income
      taxes payable
                                      
                                      
                                      45,598
                                      
                                      
                                      
                                      34,251Total
      current liabilities
                                      
                                      
                                      1,152,516
                                      
                                      
                                      
                                      1,003,400Deferred
      tax liability
                                      
                                      
                                      14,575
                                      
                                      
                                      
                                      14,575Total
      liabilities
                                      
                                      
                                      1,167,091
                                      
                                      
                                      
                                      1,017,975Commitments
      and contingenciesShareholders'
      equity:Common
      stock, $0.001 par value; 20,000,000 shares authorized; 11,446,076 and
      11,438,212 shares issued and outstanding, respectively
                                      
                                      
                                      11,446
                                      
                                      
                                      
                                      11,438Additional
      paid-in capital
                                      
                                      
                                      3,648,340
                                      
                                      
                                      
                                      3,595,202Retained
      earnings
                                      
                                      
                                      1,809,248
                                      
                                      
                                      
                                      1,731,542Total
      shareholders' equity
                                      
                                      
                                      5,469,034
                                      
                                      
                                      
                                      5,338,182Total
      liabilities and shareholders’ equity
                                      
                                      $
                                      6,636,125
                                      
                                      
                                      $
                                      6,356,157





See
accompanying notes to the unaudited interim condensed financial
statements.


Page 2 of
17




SIERRA MONITOR
CORPORATION




Condensed Statements of
Operations




(Unaudited)





Three months ended June 30,
                          
                          
                          Six months ended June 30,2010
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2009Net
      sales
                          
                          $
                          3,517,732
                          
                          
                          $
                          2,936,722
                          
                          
                          $
                          6,420,812
                          
                          
                          $
                          6,206,778Cost
      of goods sold
                          
                          
                          1,432,443
                          
                          
                          
                          1,186,272
                          
                          
                          
                          2,656,485
                          
                          
                          
                          2,605,741Gross
      profit
                          
                          
                          2,085,289
                          
                          
                          
                          1,750,450
                          
                          
                          
                          3,764,327
                          
                          
                          
                          3,601,037Operating
      expensesResearch
      and development
                          
                          
                          503,908
                          
                          
                          
                          503,175
                          
                          
                          
                          986,930
                          
                          
                          
                          983,677Selling
      and marketing
                          
                          
                          842,514
                          
                          
                          
                          840,505
                          
                          
                          
                          1,674,490
                          
                          
                          
                          1,701,526General
      and administrative
                          
                          
                          489,104
                          
                          
                          
                          485,225
                          
                          
                          
                          975,343
                          
                          
                          
                          987,5171,835,526
                          
                          
                          
                          1,828,905
                          
                          
                          
                          3,636,763
                          
                          
                          
                          3,672,720Income
      (loss) from operations
                          
                          
                          249,763
                          
                          
                          
                          (78,455
                          )
                          
                          
                          127,564
                          
                          
                          
                          (71,683
                          )Interest
      income
                          
                          
                          900
                          
                          
                          
                          -
                          
                          
                          
                          1,947
                          
                          
                          
                          -Income
      (loss) before income taxes
                          
                          
                          250,663
                          
                          
                          
                          (78,455
                          )
                          
                          
                          129,511
                          
                          
                          
                          (71,683
                          )Income
      tax  provision (benefit)
                          
                          
                          99,851
                          
                          
                          
                          (31,382
                          )
                          
                          
                          51,805
                          
                          
                          
                          (28,673
                          )Net
      income (loss)
                          
                          $
                          150,812
                          
                          
                          $
                          (47,073
                          )
                          
                          $
                          77,706
                          
                          
                          $
                          (43,010
                          )Net
      income (loss) available to common shareholders per common
      shareBasic:
                          
                          $
                          0.01
                          
                          
                          $
                          0.00
                          
                          
                          $
                          0.01
                          
                          
                          $
                          0.00Diluted:
                          
                          $
                          0.01
                          
                          
                          $
                          0.00
                          
                          
                          $
                          0.01
                          
                          
                          $
                          0.00Weighted
      average number of common shares used in per share
    computationsBasic:
                          
                          
                          11,448,045
                          
                          
                          
                          11,431,545
                          
                          
                          
                          11,443,129
                          
                          
                          
                          11,429,879Diluted:
                          
                          
                          11,602,565
                          
                          
                          
                          11,431,545
                          
                          
                          
                          11,606,530
                          
                          
                          
                          11,429,879




See
accompanying notes to the unaudited interim condensed financial
statements.


Page 3 of
17




SIERRA MONITOR
CORPORATION




Condensed Statements of Cash
Flows




(Unaudited)





Six
      months ended June 30,2010
                    
                    
                    2009Cash
      flows from operating activities:Net
      income (loss)
                    
                    $
                    77,706
                    
                    
                    $
                    (43,010
                    )Adjustments
      to reconcile net income (loss) to net cash used in operating
      activities:Depreciation
      and amortization
                    
                    
                    126,162
                    
                    
                    
                    147,365Provision
      for bad debt expense
                    
                    
                    15,000
                    
                    
                    
                    13,350Provision
      for inventory loss
                    
                    
                    5,000
                    
                    
                    
                    (8,000
                    )Stock
      based compensation expense
                    
                    
                    53,146
                    
                    
                    
                    51,111Changes
      in operating assets and liabilities:Trade
      receivables
                    
                    
                    (733,690
                    )
                    
                    
                    (315,736
                    )Inventories
                    
                    
                    (18,929
                    )
                    
                    
                    108,709Prepaid
      expenses and other current assets
                    
                    
                    71,218
                    
                    
                    
                    24,922Income
      tax deposit
                    
                    
                    (5,848
                    )
                    
                    
                    (14,400
                    )Income
      tax payable
                    
                    
                    11,347
                    
                    
                    
                    (22,393
                    )Accounts
      payable
                    
                    
                    14,327
                    
                    
                    
                    1,643Accrued
      compensation expenses
                    
                    
                    96,844
                    
                    
                    
                    40,897Other
      current liabilities
                    
                    
                    26,598
                    
                    
                    
                    (31,668
                    )Net
      cash used in operating activities
                    
                    
                    (261,119
                    )
                    
                    
                    (47,210
                    )Cash
      flows from investing activities:Purchase
      of property and equipment
                    
                    
                    (147,112
                    )
                    
                    
                    (52,489
                    )Net
      cash used in investing activities
                    
                    
                    (147,112
                    )
                    
                    
                    (52,489
                    )Cash
      flows from financing activities:Proceeds
      from exercise of stock options
                    
                    
                    -
                    
                    
                    
                    6,000Net
      cash provided by financing activities
                    
                    
                    -
                    
                    
                    
                    6,000Net
      decrease in cash
                    
                    
                    (408,231
                    )
                    
                    
                    (93,699
                    )Cash
      at beginning of period
                    
                    
                    2,203,018
                    
                    
                    
                    1,338,647Cash
      at end of period
                    
                    $
                    1,794,787
                    
                    
                    $
                    1,244,948Supplemental
      cash flow informationCash
      paid for income taxes
                    
                    $
                    41,258
                    
                    
                    $
                    14,393





See
accompanying notes to the unaudited interim condensed financial
statements.


Page 4 of
17


SIERRA MONITOR
CORPORATION




Notes to
the Interim Condensed Financial Statements


(Unaudited)


June 30,
2010




Basis of
Presentation




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




Summary of
Business




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




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




By
providing an intelligent interface, the Company’s products enable various
machines, devices, systems and people to reliably communicate useful information
for the measurement and control of various environments including buildings,
plants, factories and over the Internet.  By delivering the data on various
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
17




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




Accounting
Policies




a)
            Revenue
      Recognition




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





Gas Detection and
Environment Control Products




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




Gas Detection and
Environment Control Services




Gas
detection and environment control services consist of field service orders
(technical support) and training, which are provided separate from product
orders.  Orders are accepted in the same forms as discussed under
Gas Detection and Environment
Control Products above with hourly prices fixed at the time of order.
Revenue recognition occurs only when the service activity is
completed.  Such services are provided to current and prior customers,
and, as noted above, creditworthiness has generally already been assessed. In
cases where the probability of receiving payment is low, a credit card number is
collected 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 6 of
17





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)
            Recent
      Accounting Pronouncements




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




c)
            Employee
      Stock-Based Compensation




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




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




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.


Page 7 of
17


For the
six-month periods ended June 30, 2010 and 2009, general and administrative
expenses included $53,146 and $51,111, respectively, resulting from the
recognition of compensation expense associated with employee stock options.
There was no material impact on the Company's basic and diluted net income per
share as a result of recognizing the employee stock-based compensation expense.
The Company did not modify the terms of any previously granted stock options
during the six-month periods ended June 30, 2010 and 2009.




Inventories




A summary
of inventories follows:


June 30, 2010
                        
                        
                        December 31, 2009Raw
      materials
                        
                        $
                        840,134
                        
                        
                        $
                        823,789Work-in-process
                        
                        
                        726,452
                        
                        
                        
                        655,205Material
      at vendor
                        
                        
                        263,803
                        
                        
                        
                        271,635Finished
      goods
                        
                        
                        190,026
                        
                        
                        
                        250,857Less:
      Allowance for obsolescence reserve
                        
                        
                        (114,173
                        )
                        
                        
                        (109,173
                        )$
                        1,906,242
                        
                        
                        $
                        1,892,313




Net Income (Loss) 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, 2010 and 2009, outstanding options to acquire 233,500 and 17,000, 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
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, 2010 and 2009,
respectively:




Three months ended
                
                
                Six months endedJune 30, 2010
                
                
                June 30, 2009
                
                
                June 30, 2010
                
                
                June 30, 2009Basic
      EPS – weighted-average number of common shares outstanding
                
                
                11,448,045
                
                
                
                11,431,545
                
                
                
                11,443,129
                
                
                
                11,429,879Effect
      of dilutive potential common shares – stock options
      outstanding
                
                
                154,520
                
                
                
                -
                
                
                
                163,401
                
                
                
                -Diluted
      EPS – weighted-average number of common shares and potential common shares
      outstanding
                
                
                11,602,565
                
                
                
                11,431,545
                
                
                
                11,606,530
                
                
                
                11,429,879




Concentrations




One
customeraccounted
for more than 10% of accounts receivable at June 30, 2010 and at December 31,
2009.  No customer individually made up more than 10% of net sales for the
three and six-month periods ended June 30, 2010 and June 30,
2009.


Page 8 of
17




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 $1,545,000 and $1,953,000
were in excess of such insured amounts at June 30, 2010 and December 31, 2009,
respectively.




Segment
Information




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




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





Three months ended June 30,
                
                
                Six months ended June 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Gas
      detection devices
                
                $
                1,498,549
                
                
                $
                1,432,823
                
                
                $
                2,775,988
                
                
                $
                3,270,460Environment
      controllers
                
                
                226,429
                
                
                
                135,298
                
                
                
                484,616
                
                
                
                337,807FieldServers
                
                
                1,792,754
                
                
                
                1,368,601
                
                
                
                3,160,208
                
                
                
                2,598,511$
                3,517,732
                
                
                $
                2,936,722
                
                
                $
                6,420,812
                
                
                $
                6,206,778




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 2010 and
there were no outstanding balances at June 30, 2010 and December 31,
2009.  As of June 30, 2010, the Company was in compliance with
covenants required by the line of credit.




Stock Option
Grants




No stock
options were granted during the six-month periods ended June 30, 2010 and
2009.




Stock Option Exercise and
Expiration




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




In the
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.


Page 9 of
17




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




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




Results of
Operations




For the
three-month period ended June 30, 2010, Sierra Monitor Corporation (“we” or the
“Company”) reported net sales of $3,517,732 compared to $2,936,722 for the
three-month period ended June 30, 2009.  For the six-month period
ended June 30, 2010, net sales were $6,420,812 compared with $6,206,778 for the
six-month period ended June 30, 2009.   The sales results for the
three and six-month periods ended June 30, 2010 represent increases of 20% and
3%, respectively, compared to the same periods in 2009.  Our backlog, which grew by
approximately $900,000 during the first quarter of 2010, remained unchanged at
the end of the second quarter of 2010.  The backlog includes released
orders, unreleased project orders and long term blanket
orders.




For the
three-month period ended June 30, 2010, sales of our gas detection products,
including industrial accounts and military sales, were approximately $1,499,000
compared to $1,433,000 in the three-month period ended June 30,
2009.  For the six-month period ended June 30, 2010, sales of our gas
detection products, including industrial accounts and military sales, were
approximately $2,776,000 compared to $3,270,000 in the same period in
2009.  These results represent a 5% year-over-year increase in the
second quarter and a 15% year-over-year decrease in the year-to-date
period.   Although our second quarter sales to industrial
accounts increased by 12% compared to the prior year, our six month year to date
industrial account sales remain 12% lower than the prior year due to our weak
sales in the first quarter of 2010.  Military sales decreased 48% in
the second quarter and 35% year-to-date compared to the prior
year.  Military sales cycles are unpredictable because they are
dependent upon US Navy purchases of gas detection systems for new ships and
spare part purchase cycles.


Page 10
of 17




Sales of
Environment Controllers to the telecommunications industry in the three-month
period ended June 30, 2010 were approximately $226,000 compared to approximately
$135,000 in the three-month period ended June 30, 2009.  In the
six-month period ended June 30, 2010 sales of Environment Controllers were
approximately $485,000 compared to $338,000 in the same period in
2009.  The improvement in sales in both periods is due to a small
increase in the number of environment controllers sold for new underground
telecommunications vaults combined with improved demands for retro-fit
controllers for older telecommunications vaults.




In the
three-month period ended June 30, 2010, sales of FieldServer products were
approximately $1,793,000, representing a 31% increase, compared to $1,369,000 in
the same period in 2009. In the six-month period ended June 30, 2010, sales of
our FieldServer products were approximately $3,160,000, representing a 22%
increase, compared to $2,599,000 in the same period in
2009.  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 29% in the three-month period ended June 30, 2010 on a
year-over-year basis.  The increase in sales of box products is due,
primarily, to strong demand in international accounts including a single order
for over $150,000 for a major fire panel integration project in Saudi
Arabia.  OEM module sales increased approximately 34% in the
three-month period ended June 30, 2010 as compared to the same period in 2009,
and 17% on a year-to-date basis in 2010 compared to the prior year
period.  The higher level of sales in each of the three and six-month
periods ended June 30, 2010 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, 2010 was $2,085,289 or 59% of
sales compared to $1,750,450, or 60% of sales, in the same period in the
previous year.  Gross profit for the six-month period ended June 30,
2010 was $3,764,327, or 59% of sales, compared to $3,601,037, or 58% of sales,
in the same period in the previous year.  Although gross profit varies
by product group and by the channel of distribution, the range of gross profit
between 58% and 60% is consistent with our historical
experience.  There have been no major changes in selling prices and no
significant changes in materials or labor costs during calendar year 2009 and
year to date 2010.




Expenses
for research and development, which include new product development and
engineering to sustain existing products, were $503,908, or 14% of sales, for
the three-month period ended June 30, 2010 compared to $503,175, or 17% of
sales, in the comparable period in 2009.  In the six-month periods
ended June 30, 2010 and June 30, 2009, research and development expenses were
$986,930, or 15% of sales, and $983,677, or 16% of sales,
respectively.  We have maintained our investments in developing new
products and writing new protocol drivers and there have been no significant
changes in engineering expenses in the three and six-month reporting periods
ended June 30, 2010.




Selling
and marketing expenses, which consist primarily of salaries, commissions and
promotional expenses, were $842,514, or 24% of sales for the three-month period
ended June 30, 2010, compared to $840,505, or 29% of sales, in the comparable
period in the prior year.  For the six-month periods ended June 30,
2010 and June 30, 2009, selling and marketing expenses were $1,674,490, or 26%
of sales, and $1,701,526, or 27% of sales, respectively.  Lower salary
and benefit expenses, due to a temporarily lower number of field sales personnel
were generally offset by increases in other sales and marketing expenses
including representative commissions, travel, communications and
depreciation.




General
and administrative expenses, which consist primarily of salaries, building rent,
insurance expenses and fees for professional services, were $489,104 or 14% of
sales, for the three-month period ended June 30, 2010 compared to $485,225 or
17% of sales, in the three-month period ended June 30, 2009.  For the
six-month periods ended June 30, 2010 and June 30, 2009, general and
administrative expenses were $975,343, or 15% of sales, and $987,517, or 16% of
sales, respectively.  Higher variable compensation expenses due to
higher sales levels were generally offset by lower external service fees
including Sarbanes Oxley auditing and information technology
support.


Page 11
of 17




In the
three-month period ended June 30, 2010, our income from operations was $249,763,
representing an increase of $328,218 compared to our loss from operations of
$78,455 in the three-month period ended June 30, 2009.  In the
six-month period ended June 30, 2010, our income from operations was $127,564,
representing an increase of $199,247 compared to our loss from operations of
$71,683 in the six-month period ended June 30, 2009.  The increased
income in the three and six-month periods ended June 30, 2010 is due to higher
sales levels without compromise to gross margins or fixed expenses.




After
interest and tax provisions, our net income for the three-month period ended
June 30, 2010 was $150,812 compared to a net loss of $47,073 in the same period
of 2009.  For the six-month period ended June 30, 2010, our net income
was $77,706 compared to a net loss of $43,010 in the same period of
2009.




Liquidity and Capital
Resources




During
the six months ended June 30, 2010, net cash consumed by operating activities
was approximately $261,000 compared to approximately $47,000 for the same period
in 2009.  Working capital was approximately $5,056,000 at June 30,
2010, an increase of approximately $110,000 from December 31,
2009.  At June 30, 2010, our balance sheet reflected approximately
$1,795,000 of cash and $2,073,000 of net trade receivables. At December 31,
2009, our total cash on hand was approximately $2,203,000 and our net trade
receivables were $1,355,000.




At June
30, 2010, we had no long term liabilities.




We
maintain a $1,000,000 line of credit, secured by certain assets of the Company,
with our commercial bank which matures on July 10, 2010. 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, 2010, 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, 2011. There are no current plans for significant capital
equipment expenditures and no other known demands, commitments, events or
uncertainties that will result in or that are reasonably likely to result in the
Company’s liquidity increasing or decreasing in any material way.




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:


Page 12
of 17


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.





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.


Page 13
of 17




Discounts and
Allowances




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




b)
            Accounts
      Receivable and Related Allowances




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




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




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.


Page 14
of 17


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


Page 15
of 17




PART II:  OTHER
INFORMATION




ITEM
      5.
            OTHER
      INFORMATION




Submission of Matters to a
Vote of Security Holders




The
Annual Meeting of Shareholders of the Company was held on May 13,
2010.




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


For
                    
                    Against
                    
                    AbstainGordon
      R. Arnold
                    
                    8,597,638
                    
                    0
                    
                    1,388C.
      Richard Kramlich
                    
                    8,599,026
                    
                    0
                    
                    0Jay
      T. Last
                    
                    8,599,026
                    
                    0
                    
                    0Robert
      C. Marshall
                    
                    8,599,026
                    
                    0
                    
                    0




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, 2010 was ratified by the following
      votes:


For
                        
                        Against
                        
                        Abstain9,869,402
                        
                        0
                        
                        0




ITEM
      6.
              EXHIBITS




ExhibitNumber
                                
                                
                                Description3.1(1)
                                
                                
                                Articles
      of Incorporation of the Registrant.3.2(2)
                                
                                
                                Bylaws
      of the Registrant.31.1
                                
                                
                                Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
      the Securities Exchange Act of 1934, as amended, as adopted pursuant
      toSection 302
      of the Sarbanes-Oxley Act of 2002.31.2
                                
                                
                                Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
      the Securities Exchange Act of 1934, as amended, as adopted pursuant
      toSection 302
      of the Sarbanes-Oxley Act of 2002.32
                                
                                
                                Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.(1)
                                Incorporated
      by reference to 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 CORPORATIONRegistrantDate:   August 12,
      2010
                
                By:
                /s/
      Gordon R. ArnoldGordon
      R. ArnoldPresidentChief
      Executive OfficerChief
      Financial Officer


Page 16
of 17


Index to
Exhibits





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


Page 17
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