UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  FORM
10-K
 [Mark
One]
 x
                ANNUAL REPORT UNDER
      SECTION 13 OR 15(d) OF THE
                  SECURITIES
      EXCHANGE ACT OF 1934
  For
the fiscal year ended December 31, 2008
  OR
  o
                TRANSITION REPORT UNDER
      SECTION 13 OR 15(d) OF THE
                  SECURITIES
      EXCHANGE ACT OF 1934
  For
the transition period from ____________ to ____________
 
 Commission
File Number: 001-10927
 
 Simtrol,
      Inc.(Name
      of small business issuer in its charter)Delaware
                
                
                
                58-2028246(State or other jurisdiction of incorporation or organization)
                
                
                
                (I.R.S.
      Employer
                  Identification
      No.)520
      Guthridge Court, Suite 250, Norcross,
    Georgia  30092(Address
      of principal executive offices) (Zip Code)Issuer’s
      telephone number:  (770)
242-7566
 
 Securities
registered pursuant to section 12(b) of the Exchange Act:
 None
  Securities
registered pursuant to section 12(g) of the Exchange Act:
 Common
Stock, $.001 par value per share
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
 Yes  ̈ No x
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes  ̈ No x
 
 Check
whether the issuer (1) has filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No  ̈
 
 Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  ̈
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
accelerated
filer                                                                                      Accelerated
filer
 
 Non-accelerated
filer (Do not check if a smaller reporting company)  Smaller reporting
company  x
  
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes  ̈ No x
  The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, on June 30,
2008 as reported on the Over the Counter Bulletin Board was approximately
$2,414,000.
  As of
March 26, 2009, there were 10,857,882 shares of common stock, par value of
$0.001 per share, outstanding.
 
 DOCUMENTS
INCORPORATED BY REFERENCE
 
 The
Registrant incorporates by reference portions of its Definitive Proxy Statement
for the 2009 Annual Meeting of Stockholders, which is expected to be filed no
later than April 30, 2009, into Part III of this Form 10-K to the extent stated
herein.
 
 2
  PART
I
 
 FORWARD-LOOKING
STATEMENTS
 
 This
annual report on Form 10-K (this “Annual Report”), including “Management’s
Discussion and Analysis or Plan of Operation,” contains certain “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934, that represent our
expectations, anticipations or beliefs about future events, including our
operating results financial condition, liquidity, expenditures, and compliance
with legal and regulatory requirements. For this purpose, any statements that
are not statements of historical fact may be deemed to be forward-looking
statements. These statements involve risks and uncertainties that could cause
actual results to differ materially depending on a variety of important
factors.  Factors that might cause or contribute to such differences
include, but are not limited to, those set forth in the “Factors Affecting
Future Performance” section below and elsewhere in this Annual Report and in our
other reports on Forms 8-K, 10-Q and 10-K that we file with the Securities
Exchange Commission (“SEC”) from time to time.  With respect to such
forward-looking statements, we claim protection under the Private Securities
Litigation Reform Act of 1995. Our SEC filings are available from us, and also
may be examined at public reference facilities maintained by the SEC or, to the
extent filed via EDGAR, accessed through the website of the SEC
(http://www.sec.gov). In addition, factors that we are not currently aware of
could harm our future operating results.  You are cautioned not to
place undue reliance on forward-looking statements, which speak only as of the
date of this Annual Report.  We undertake no obligation to make any
revisions to the forward-looking statements or reflect events or circumstances
after the date of this Annual Report.  References to “Simtrol,” the
“Company,” “we,” “us” or “our” made herein from time to time shall mean
“Simtrol, Inc.”
  Part IItem
      1.
                              Business
                              4Item
      2.
                              Description
      of Property
                              8Item
      3.
                              Legal
      Proceedings
                              8Item
      4.
                              Submission
      of Matters to a Vote of Security Holders
                              8Part IIItem
      5.
                              Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                              8Item
      7.
                              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                              10Item
      8.
                              Financial
      Statements and Supplementary Data
                              15Item
      9.
                              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                              15Item
      9A(T).
                              Controls
      and Procedures
                              15Item
      9B.
                              Other
      Information
                              17Part IIIItem
      10.
                              Directors,
      Executive Officers and Corporate Governance
                              17Item
      11.
                              Executive
      Compensation
                              17Item
      12.
                              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                              17Item
      13.
                              Certain
      Relationships and Related Transactions and Director
      Independence
                              17Item
      14.
                              Principal
      Accounting Fees and Services
                              17Part IVItem
      15.
                              Exhibits
      and Financial Statement Schedules
                              18Signatures
                              
                              19
  3
  ITEM
1.  DESCRIPTION OF BUSINESS.
 
 History
 
 We were
incorporated under the laws of the State of Delaware on September 19, 1988. From
1990 to 2001, we primarily designed, manufactured, marketed and supported
hardware-based command and control systems, including videoconferencing
systems.  In September 2001 we changed our name from VSI Enterprises,
Inc. to Simtrol, Inc.
 
 General
 
 We
develop, market and sell software that centrally manages otherwise incompatible
electronic devices in education, government and corporations.  These
markets share several characteristics that make them suitable targets for our
solution.  They have large installed bases of unmanaged devices, the
number of devices being installed is growing rapidly, and there is mounting
pressure within these markets to reduce the cost to operate, support and
maintain these devices.  Organizations in these three markets segments
use our software to:
 
 ·
                Decrease
      the cost to operate, support and maintain these
  devices
 ·
                Improve
      the effective use of these devices
 ·
                Increase
      useful asset life of devices
 ·
                Decrease
      the energy costs associated with powering these
  devices
 
 We are
concentrating our sales efforts on the education market.  In
education, our classroom control software manages devices that drive learning in
the classroom: projectors, interactive whiteboards, document cameras, DVRs and
video cameras.  Our software resides on a PC in the classroom and can
be addressed either from the PC or an interactive whiteboard.  In
addition, our software can be installed at the school and district administrator
level to monitor, manage, and report on devices in individual
classrooms.
 
 The
education market is well-defined, under extreme pressure to reduce costs and is
experiencing rapid adoption of interactive whiteboard technology.  The
mass adoption of interactive whiteboards presents an opportunity for us to gain
access to school district buying cycles.  Additionally, we have
established an exclusive partnership with Promethean, Inc., a rapidly growing,
interactive whiteboard company that specializes in the education
market.
 
 Government
(local, state and Federal) markets share several of the same characteristics
with education. Some of
the other devices our software can manage that are more prevalent in government
are: videoconferencing systems, security cameras, digital and analog displays,
digital kiosks and digital signage.  We also have well-defined
vertical applications for the corrections market focused on the emerging digital
video visitation and arraignment markets.
 
 For the
corporate market, we have primarily focused on providing comprehensive digital
signage device management.  As retail businesses are pressured to
reduce store costs they are increasingly turning to digital signage and kiosks
to provide customer service, support, consumer education and
advertising.  The company’s Device ManagerTM
solution is well-suited to provide central management of these devices across
large retail chains.  Our solution provides centralized, remote
monitoring, control and asset management of devices to reduce maintenance costs,
energy costs and assure display uptime.
 
 Our
principal executive offices are located at 520 Guthridge Court, Suite 250,
Norcross, Georgia 30092 and our telephone number is (770) 242-7566.
  4
  Recent
Developments
 
 Funding
of Operations
 
 We
require substantial amounts of capital to fund current operations and the
continued development and deployment of our Device ManagerTM
(formerly named ONGOER®) product line.  On January 23, 2008, we
completed the sale of $1,500,000 of convertible notes payable in a private
placement. These notes and $72,750 of accrued interest were exchanged into
Series C Convertible Preferred Stock in connection with a private placement on
June 30, 2008.  We raised an additional $1,027,264 from the equity
offering on that date and an additional $1,373,570 (net of offering costs) on
September 26, 2008. We used the proceeds of the convertible notes and
convertible preferred stock private placements for working capital
purposes.  We will likely require additional funding to fund our
development and operating activities during the second quarter of 2009 and are
currently attempting to raise an additional $1.0 million to $2.0 million in debt
and/or equity financing to continue our efforts to gain end user acceptance of
our software. However, there can be no assurance that we will be able to obtain
such financing if and when needed, or that if obtained, such financing will be
sufficient or on terms and conditions acceptable to us. If we are unable to
obtain this additional funding, our business, financial condition and results of
operations would be adversely affected.
 
 As we
have not been profitable during any year in our history and have not generated
positive cash flows from operations, these matters raise substantial doubt about
our ability to continue as a going concern.  The accompanying
consolidated financial statements have been prepared on a going concern basis,
which contemplate the realization of assets and satisfaction of liabilities in
the normal course of business. The consolidated financial statements do not
include any adjustments relating to the recoverability of the recorded assets or
the classification of the liabilities that might be necessary should we be
unable to continue as a going concern.
 
 Products
 
 Historically,
device control and monitoring solutions have been driven by closed-architecture
hardware-based solutions. Based on open software architecture and standard
hardware platforms, our products provide the market better pricing, more choices
and are simpler to deploy without sacrificing functionality. With several years
of software development, a growing track record of clients, and an increasing
number of industry alliances, we are positioned to lead the paradigm shift away
from proprietary hardware solutions towards open architecture
software.
 
 Current
market solutions use expensive proprietary hardware. Our device management and
control software is based on an open platform that allows control of devices
with an industry standard platform – the PC – that is easily understood by IT
professionals. The breadth and depth of our software gives our products the
scalability and flexibility to control thousands of dissimilar devices – each
with varying control protocols – in virtually an unlimited number of
locations.
 
 Product
Summary: Device Manager
 
 Device
Manager is Simtrol’s device management and control software. The software allows
any PC or server running Windows to network and communicate with thousands of
proprietary AV and IT devices built by hundreds of
manufacturers.  Specifically, Device Manager can control, manage,
monitor, diagnose and schedule any device.
  IT
professionals have long managed corporate assets such as PCs, servers and
routers.  During the past few years, most AV products became IP
addressable – a requirement from IT professionals that wish to manage the AV
devices with the same power and flexibility they use to manage IT assets. IT
departments demand that these devices tie into their existing IT network and
wish to use global IT tools such as IBM’s NetView, HP’s OpenView, or Computer
Associates’ Unicenter to monitor and manage them.  Device Manager
complements OpenView, NetView and Unicenter by passing valuable health/status
information to them.  IT professionals need a product to control the
devices locally and remotely and a product to monitor/manage/diagnose the
devices remotely.  Our products support these needs while using
industry standard PC technology.
 
 The
hardware supported by our software is based on the open PC market and comes from
a variety of companies.  Our integration and OEM partners choose from
many familiar brands to receive high quality and competitive pricing and our
approach takes advantage of this high-quality, low-price, and easily available
hardware.  PC equipment vendors are able to offer tremendous value
because of the enormous economies of scale inherent in the PC
marketplace.  Our partners are not locked into expensive, proprietary
controllers, touch panels and connectivity hardware from industry leading
control system providers.
 
 Device
Manager is computer-based general-purpose device control middleware running as a
system service on a Windows 2000 and onward platform. It can control any device
using a variety of interfaces, including TCP/IP, IR, IO, Relays, Serial (RS232,
RS422 and RS485), Lanc, and USB. With Device Manager, users can leverage
commodity, off-the-shelf PC hardware to create high-quality, affordable
solutions.
  5
  Device
Manager control software communicates with the devices in the meeting room as
well as monitoring assets from the server.  Devices are controlled
locally as part of the room application or remotely as a help desk
application.  Health and status information of all devices is tracked
real time and proactive alarms (email or text pages to wireless devices such as
pagers or cell phones) are sent to service personnel.
 
 Our
software-based approach allows flexibility regarding hardware and development
environment. Architecturally, application developers have the capability to
write their graphical user interfaces or applications in various programming
environments such as .NET, Visual Basic, C++, C#, Flash 8, Java, or Builder
(Simtrol’s development environment for simple solutions). The application or GUI
is then displayed on a commodity touch screen and/or mobile device for end-user
use. Because Device Manager uses TCP/IP for command and control signaling,
administrative and diagnostic functions are available via network-based
diagnostics tools.
 
 Device
Manager connects via standard TCP/IP networking and monitors devices at remote
locations and displays information about device health and status via a standard
browser interface. Technicians may log in from any place at any time using
standard web browsers to view the entire device control network at a
glance.
 
 Product
Summary: Digital Arraignment and Video Visitation
 
 Current
video arraignment solutions are highly fragmented with a focus mainly on the
audiovisual AV component of the application, separate from the considerable
workflow, record tracking, and document retrieval requirements of the
courts.  Other software systems address the court workflow but lack
two essential or critical items: the video arraignment and court recording
functionality.  We believe that CuriaxTM is the
first product to provide a unified documentation and AV
solution.  Following extensive end user research, the OakVideo
solution (from which Curiax is derived) was designed, developed, and implemented
by law enforcement and judicial experts from Oakland County,
Michigan.  The result is a robust, fully implemented system that has
garnered attention from counties around the United States as well as from legal
systems around the world.
 
 Curiax
ArraignerTM is a
web-based client-server, document management system tailored for law enforcement
and judicial system users, with a unique videoconferencing and device control
and monitoring element. Overcrowded courts create dangerous, costly logistical
problems for transporting prisoners and inefficient systems prevent police from
being on the street protecting citizens.  Curiax Arraigner allows
jurisdictions to avoid the need to transport prisoners to courthouse for
arraignment by integrating multipoint videoconferencing, court recording, and
data workflow and document management into a unified platform.  We
released additional integrated software products during 2008 including Curiax
Video VisitationTM and
Curiax Court RecordingTM.  Video
Visitation automates the prisoner visitation process in correctional facilities
and reduces the personnel resources required to facilitate the visitation
process.
 
 Protection
of Intellectual Property Rights
 
 We have
implemented both legal (copyright) and practical protective measures to protect
our intellectual property rights in our Device Manager, Curiax Arraigner, Curiax
Video Visitation, and Curiax Court Recording software.  We claim
copyright protection in all software and manuals that we create.  We
also derive considerable practical protection by supplying and licensing only a
non-modifiable run-time version to our customers and keeping confidential all
versions that can be modified.  By licensing the software rather than
transferring title we, in most cases, have been able to incorporate restrictions
in the licensing agreements, which impose limitations on the disclosure and
transferability of the software.  No determination has been made as to
the legal or practical enforceability of these restrictions, or the extent of
customer liability for violations.
 
 Product
Development Strategies
 
 The AV
world and the IT world are converging, with more and more devices becoming
network enabled. Like PCs and servers, we believe IT departments will demand AV
products (projectors, audio processors, video codecs, video switchers, cameras,
electronic whiteboards, etc.) be accessible on a corporate network, where they
can be controlled, managed and monitored from centralized and/or remote
locations. Device Manager installs on PCs and servers, and supports a product
architecture that allows them to control, monitor and manage any device
connected to them via the network.
  6
  Markets
 
 As
connected devices proliferate and become more functional, the issue of
controlling, monitoring and maintaining them becomes increasingly complex and
costly.  These devices include interactive whiteboards, projectors,
document cameras, videoconferencing systems and PCs. Currently there are no
comprehensive, software-based systems in place to manage these devices at an
enterprise level across school districts. The addressable U.S. market in K-12
education is approximately three million classrooms across 15,000 school
districts.  The typical classroom has from one to four disparate
digital devices.
 
 In the
healthcare sector, Simtrol’s core value to operating room companies is the
replacement of proprietary architecture with open PC architecture to control and
monitor all operating room (OR) devices.  This provides more technical
flexibility, better scalability and a simpler design while lowering
costs.
 
 Pre-trial
proceedings involve the costly and dangerous logistical problems of transporting
prisoners and moving documents across multiple agencies using antiquated methods
that can result in lost documentation, risk to public safety, and inefficiency
at taxpayer expense. Curiax Arraigner helps law enforcement officials avoid
transporting prisoners to the courthouse for arraignment by integrating
multipoint videoconferencing, court recording, data workflow, and document
management into a unified platform.
 
 Our Video
Visitation product allows corrections facilities to reduce the personnel
requirements required to staff visitation areas and lower the potential for
dangerous logistical problems resulting from the transport of
prisoners.
 
 Competition
 
 We
primarily compete with two companies in the AV control and monitory market, both
of which have significantly greater resources and market share. Both companies
offer control solutions based on proprietary hardware and software. We offer
control solutions utilizing open PC technology.  Our two major
competitors in the AV control systems market are AMX and Crestron, who combined
currently have close to 100% of the sales in this market.
  AMX,
headquartered in Richardson, Texas, offers control applications such as control
and automation systems for corporate boardrooms, meeting facilities,
professional sporting arenas, museums, hospital operating rooms, transportation
systems, schools and residences.  Headquartered in Rockleigh, New
Jersey, Crestron designs and manufactures control and automation systems for
corporate, industrial, educational, and residential markets.
  Both
Crestron and AMX offer hardware-based control systems, the cores of which are
proprietary controllers fitted with proprietary cards and connectors
manufactured by or for them, and running proprietary software
systems.  These proprietary controllers communicate with controlled
devices by means of code written in proprietary software languages (each company
has developed its own).  Integrators who re-sell systems from each of
these companies must send their technical personnel to training courses offered
by the companies themselves and by several independent
organizations.
  Because
Device Manager is a software-based control system designed to run on commodity
PC hardware, we believe we have several advantages over AMX and
Crestron.  The PC industry is a vast marketplace with enormous
economies of scale.  Computer hardware including touch screens,
interactive whiteboards, wireless smart displays, and serial ports are extremely
powerful and inexpensive.  Innovative and wireless network-enabled
devices are regularly introduced into the mass PC market.  There are
advantages for end customers in familiarity and cost compared to proprietary,
hardware-based control systems.
 
 End
customers are also demanding a new breed of proactively monitored control
solutions.  Traditional control systems companies are reacting by
introducing PC-like services and interfaces to PCs and innovative PC wireless
smart displays.  These PC-like services cannot compete in terms of
price and performance with the much larger PC marketplace.
  7
  Traditional
control systems position themselves to be the central technology and view the PC
as an "important device."  We believe the PC is the central technology
and view traditional hardware control boxes as a declining
technology.
 
 Research
and Development
 
 Our
product engineering, including our costs associated with design and
configuration of fully developed systems for particular customer applications,
is accounted for in our financial statements as research and development
expenses. During the year ended December 31, 2008 our expenditures for research
and development of new products or new components for our Device Manager and
Curiax products totaled $1,250,209, an increase of 51% from the total
expenditures of $828,564 in 2007.  Our increased expenses from 2007 to
2008 resulted primarily from personnel we hired throughout the
periods.  Our research and development efforts have concentrated on
expanding the control and monitoring aspects of our software as well as
improving user interfaces to facilitate ease of use of our
software.  Due to current capital resource constraints and
concentration of our efforts on gaining wider adoption of our software by end
users, we do not anticipate a similar increase in expense during
2009.
 
 Employees
 
 As of
December 31, 2008, we employed twenty persons full time, including two executive
officers. Of the full-time employees who were not executive officers, nine were
engaged in research and development and operations, seven in sales and service,
and one each in information systems and administrative activities. Employee
relations are considered good and we have no collective bargaining contracts
covering any of our employees.
 
 ITEM
2.  DESCRIPTION OF PROPERTY.
 
 We
maintain our executive and sales offices in 10,000 square feet of leased office
space in Norcross, Georgia, under a 60-month lease which expires in October
2012.  Current monthly rent is approximately $11,800 including common
area maintenance charges, taxes, and insurance.
 
 We
believe that our current facilities are adequate for our current
requirements.
 
 ITEM
3.  LEGAL PROCEEDINGS.
 
 We are
not party to any pending legal proceedings.
 
 ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
 No
matters were submitted to a vote of security holders during the fourth quarter
of 2008.
  PART
II
 
 ITEM
5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
 From
January 1, 2002 to May 21, 2003, our Common Stock traded on the OTC Bulletin
Board under the symbol “SMOL.”  Our Common Stock traded on the Pink
Sheets under the symbol “SMOL” from May 22, 2003 to May 6, 2004.  From
May 7, 2004 to June 17, 2004, our Common Stock traded on the Pink Sheets under
the symbol “SMRL.”  On June 18, 2004, our Common Stock began trading
on the OTC Bulletin Board under the symbol “SMRL,” where it currently
trades.
  The
following table sets forth the quarterly high and low bid quotations per share
of Common Stock on the OTC Bulletin Board and the Pink Sheets as reported for
the periods indicated. These prices also represent inter-dealer quotations
without retail mark-ups, markdowns, or commissions and may not necessarily
represent actual transactions.
  HIGH
                      
                      
                      LOWFISCAL
      YEAR ENDED DECEMBER 31, 2007First
      Quarter
                      
                      $
                      2.80
                      
                      
                      $
                      0.27Second
      Quarter
                      
                      
                      2.25
                      
                      
                      
                      1.01Third
      Quarter
                      
                      
                      1.55
                      
                      
                      
                      0.90Fourth
      Quarter
                      
                      
                      1.30
                      
                      
                      
                      0.60FISCAL
      YEAR ENDED DECEMBER 31, 2008First
      Quarter
                      
                      $
                      0.95
                      
                      
                      $
                      0.60Second
      Quarter
                      
                      
                      0.65
                      
                      
                      
                      0.21Third
      Quarter
                      
                      
                      0.65
                      
                      
                      
                      0.36Fourth
      Quarter
                      
                      
                      0.43
                      
                      
                      
                      0.18
  8
  As of
March 25, 2009, there were approximately 293 holders of record and approximately
2,500 beneficial holders of our Common Stock.
 
 We have
never paid cash dividends on our Common Stock and have no plans to pay cash
dividends in the foreseeable future.  The policy of our Board of
Directors is to retain all available earnings for use in the operation and
expansion of our business.  Whether dividends may be paid in the
future will depend upon our earnings, capital requirements, financial condition,
prior rights of any preferred stockholders, and other relevant
factors.
  The
following table provides information as of December 31, 2008 regarding the
Company’s compensation plans and arrangements:
 
 Equity
Compensation Plan Information
 
 Plan category
                      
                      Number of
                        securities to be
                        issued upon exercise
                        of outstanding
                        options, warrants
                        and rights
                        (a)
                      
                      
                      Weighted-
                        average exercise
                        price of
                        outstanding
                        options, warrants
                        and rights
                        (b)
                      
                      
                      Number of securities
                        remaining available for
                        future issuance under equity
                        compensation plans
                        (excluding securities
                        reflected in column (a)
                        (c)Equity
      compensation plans approved by security holders
                      
                      
                      6,000,000
                      
                      
                      $
                      0.67
                      
                      
                      
                      -Equity
      compensation plans not approved by security holders
                      
                      
                      29,423,724
                      (1)
                      
                      $
                      0.52
                      
                      
                      
                      480,800Total
                      
                      
                      35,423,724
                      
                      
                      $
                      0.63
                      
                      
                      
                      480,800
 
 (1)
                Includes
      1,420,950 options granted to employees and consultants and 28,002,774
      warrants to purchase common stock.
 
 See
Note 12 to the consolidated financial statements for a description of the
Company's 2002 Equity Incentive Plan.
 
 Recent
Sales of Unregistered Securities
  On
December 31, 2008, we issued 6,750 shares of Common Stock to three members of
our Board of Directors in lieu of cash fees for attendance at Board meetings
during the three months ended December 31, 2008.  The offer and sale
of the shares were exempt from the registration requirements of the Securities
Act of 1933 (the “Act”) pursuant to Rule 506 and Section 4(2) of the
Act.  In connection with the sales, we did not conduct any general
solicitation or advertising, and we complied with the requirements of Regulation
D relating to the restrictions on the transferability of the shares
issued.
  9
 
 ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
 
 The
following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Form 10-K.
 
 FORWARD-LOOKING
STATEMENTS
 
 Certain
statements contained herein are “forward-looking statements” within the meaning
of the Private Securities Litigation Reform Act of 1995, such as statements
relating to financial results and plans for future sales and business
development activities, and are thus prospective. Such forward-looking
statements are subject to risks, uncertainties and other factors, which could
cause actual results to differ materially from future results expressed or
implied by such forward-looking statements. Potential risks and uncertainties
include, but are not limited to, economic conditions, competition, our ability
to complete the development of and market our new Device Manager product line
and other uncertainties detailed from time to time in our Securities and
Exchange Commission (“the SEC”) filings, including our Annual Report on Form
10-K and our quarterly reports on Form 10-Q.
 
 Overview
 
 As of
December 31, 2008, the Company had cash and cash equivalents totaling
$997,048.  Due to a net loss and cash used in operating activities of
$4,879,582 and $3,143,747, respectively, during 2008, an accumulated deficit of
approximately $79.2 million at December 31, 2008, and our inability to date to
obtain sufficient financing to support current and anticipated levels of
operations, there is a substantial doubt about the Company’s ability to continue
as a going concern. We have relied on periodic issuances of common stock,
convertible preferred stock and convertible debt to sustain our
operations.
 
 We used
$3,143,747 in cash from operating activities in 2008, primarily due to our loss
of $4,879,582 during 2008, and we used $2,625,253 in cash from operating
activities in 2007, primarily due to our loss of $4,905,483 during
2007.  Our cash used from operations increased during 2008 primarily
due to an increase in personnel costs during the year to accelerate our product
development and sales and marketing efforts.  Due to the significant
number of employees we added throughout calendar 2007, we had significantly
higher personnel costs during 2008, although our year-end employee totals were
substantially the same.
 
 During
2008, we used $11,418 in investing activities, primarily due to purchases of new
computer equipment of $35,924, offset partially by proceeds from the partial
redemption of a certificate of deposit of $24,506.  During 2007, we
used $225,677 in investing activities, comprising $125,677 for purchases of
equipment and leasehold improvements on our current office space that we
occupied in October 2007 and $100,000 for purchase a certificate of
deposit.  We delivered to the landlord a standby, irrevocable letter
of credit for $100,000 as a security deposit with the letter of credit amount
reducing $20,000 for each year of the lease as long as the lease is not in
default.  Also, we were required to collateralize the letter of credit
with a $100,000 one-year certificate of deposit.  In 2008, the letter
of credit amount was reduced to $80,000 per the terms of the lease and we
collateralized the letter of credit with an $80,000 certificate of deposit.
Leasehold improvements are amortized over the shorter of the estimated useful
life or the life of our new office lease and computer equipment is depreciated
over estimated useful lives, on a straight-line basis. We also issued $26,000
and $26,000 in 2008 and 2007, respectively, of our common stock in conjunction
with the acquisition of the remaining 50% interest in a joint venture that we
did not previously own (see Note 11 to the consolidated financial
statements).  Cash received from financing activities during 2008
included the sale of $1,500,000 of convertible notes payable in a private
placement. These notes and $72,750 of accrued interest were exchanged into
Series C Convertible Preferred Stock in connection with a private placement on
June 30, 2008.  We raised an additional $1,027,264 (net of offering
costs) from the equity offering on that date and an additional $1,373,570 (net
of offering costs) on September 26, 2008.  See Notes 6 and 7 to our
consolidated financial statements.
 
 Our total
assets increased approximately 119% to $1,457,152 at December 31, 2008 from
$665,117 at December 31, 2007. The increase in assets was primarily due to the
proceeds from issuance of our Series C convertible preferred stock in June and
September 2008 in a private placement (see Note 7 to our consolidated financial
statements), partially offset by cash used to fund operations during the
period.
  10
  Current
liabilities decreased $41,000, or 13%, due primarily to the payment of accounts
payable and accrued expenses at December 31, 2007 with proceeds of our private
placements during 2008.
  LIQUIDITY
AND SOURCES OF CAPITAL
 
 General
 
 We
currently require substantial amounts of capital to fund current operations and
the continued development and deployment of our Device ManagerTM and
CuriaxTM product
lines.  On January 23, 2008, we completed the sale of $1,500,000 of
convertible notes payable in a private placement. These notes and $72,750 of
accrued interest were exchanged into Series C Convertible Preferred Stock in
connection with a private placement on June 30, 2008.  We raised an
additional $1,027,264 (net of offering costs) from the equity offering on that
date and an additional $1,373,570 (net of offering costs) on September 26, 2008.
We will likely require additional funding to fund our development and operating
activities during the second quarter of 2009 and are currently attempting to
raise an additional $1.0 million to $2.0 million in debt and/or equity financing
to continue our efforts to gain end user acceptance of our software. However,
there can be no assurance that we will be able to obtain such financing if and
when needed, or that if obtained, such financing will be sufficient or on terms
and conditions acceptable to us.  Also, anti-dilution provisions of
our existing Series A, B, and C Convertible Preferred stock might result in
additional dilution to existing common shareholders if such financing results in
adjustments to the conversion terms of the convertible preferred
stock.  If we are unable to obtain this additional funding, our
business, financial condition and results of operations would be adversely
affected. We used the proceeds of our private placements primarily for operating
activities.
 
 We expect
to spend less than $100,000 on capital expenditures in 2009.
 
 Critical
Accounting Estimates
 
 We
prepare our consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America. As such, we are
required to make certain estimates, judgments and assumptions that we believe
are reasonable based upon the information available. These estimates and
assumptions affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the periods presented. The significant accounting estimates that we
believe are the most critical to aid in fully understanding and evaluating our
reported financial results include the following:
 
 ·
                Revenue
      recognition.We follow the guidance of the Securities and Exchange Commission’s
      Staff Accounting Bulletin 104 (“SAB 104”) for revenue
      recognition.  We adhere strictly to the criteria outlined in SAB
      104, which provides for revenue to be recognized when (i) persuasive
      evidence of an arrangement exists, (ii) delivery or installation has been
      completed, (iii) the customer accepts and verifies receipt, and (iv)
      collectability is reasonably assured.  Certain judgments affect
      the application of our revenue policy.  Revenue consists of the
      sale of device control software and related maintenance contracts on these
      systems.  Revenue on the sale of hardware is recognized upon
      shipment.  We recognize revenue from Device Manager software
      sales upon shipment as we sell the product to audiovisual integrators, net
      of estimated returns and discounts.  Revenue on maintenance
      contracts is recognized over the term of the related
    contract.
 
 ·
                Capitalized
      software and research and development costs. Our policy on
      capitalized software and research and development costs determines the
      timing of our recognition of certain development costs. In addition, this
      policy determines whether the cost is classified as development expense or
      is capitalized. Software development costs incurred after technological
      feasibility has been established are capitalized and amortized, commencing
      with product release, using the greater of the income forecast method or
      on a straight-line basis over the useful life of the product. Management
      is required to use professional judgment in determining whether research
      and development costs meet the criteria for immediate expense or
      capitalization. We did not capitalize any software and research and
      development costs during either 2008 or 2007 and all assets were fully
      amortized by December 31, 2006.  Our research and development
      efforts during 2007 and 2008 primarily involved product improvements to
      our Device Manager product to improve its functionality and ease of use
      for end users.  Total capitalized software and research and
      development costs are $2,208,070 and all amounts were previously
      amortized.
  11
  ·
                Impairment
      of Long-Lived Assets. We record impairment losses on assets when
      events and circumstances indicate that the assets might be impaired and
      the undiscounted cash flows estimated to be generated by those assets are
      less than the carrying amount of those items. Our cash flow estimates are
      based on historical results adjusted to reflect our best estimate of
      future market and operating conditions. The net carrying value of assets
      not recoverable is reduced to fair value. Our estimates of fair value
      represent our best estimate based on industry trends and reference to
      market rates and transactions.  We recorded an impairment of
      approximately $76,000 in 2008 to lower the carrying value of our right to
      license intellectual property based on estimated future gross profit from
      sales of our Curiax Arraigner software product.  No impairment
      was recorded in 2007.  See note 12 to our consolidated financial
      statements.
 
 ·
                Stock-Based
      Compensation.  Stock
      option awards are granted with an exercise price equal to or greater than
      the market price of our stock on the date of the grant in accordance with
      the our 2002 Equity Incentive Plan.  The options generally have
      five-year contractual terms for directors and 10 years for employees, and
      vest immediately for directors and over four years for employees. We
      implemented Financial Accounting Standards Board (“FASB”) Statement of
      Financial Accounting Standards (”SFAS”) No. 123R, "Share Based Payment",
      in the first quarter of 2006. The statement requires companies to expense
      the value of employee stock options and similar awards. Under SFAS 123R,
      share-based payment awards result in a cost that will be measured at fair
      value on the awards’ grant date based on the estimated number of awards
      that are expected to vest. Compensation costs for awards that vest will
      not be reversed if the awards expire without being
      exercised.  We use historical data to estimate option exercise
      and employee termination within the valuation model and historical stock
      prices to estimate volatility.
 
 New
Accounting Pronouncements
 
 In
September 2006, the FASB issued SFAS No. 157 that provides a single definition
of fair value and a hierarchical framework for measuring it, as well as
establishing additional disclosure requirements about the use of fair value to
measure assets and liabilities. SFAS No. 157 is effective as of the beginning of
fiscal years beginning after November 15, 2007. In February 2008, the FASB
released FASB Staff Position (“FSP”), SFAS No. 157-2, or FSP FAS No. 157-2,
which delayed the effective date of SFAS No. 157 for all non-financial assets
and non-financial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually),
to fiscal years beginning after November 15, 2008. In October 2008, the FASB
released FSP FAS No. 157-3, which clarifies the application of SFAS No. 157 in a
market that is not active. FSP FAS No. 157-3 applies to financial assets within
the scope of accounting pronouncements that require or permit fair value
measurements in accordance with SFAS No. 157 and was effective upon issuance for
future periods and prior periods for which financial statements have not been
issued. The adoption of SFAS No. 157 for our financial assets and liabilities
did not have a material impact on our consolidated financial statements. The
application of FSP FAS No. 157-3 for financial assets in a market that is not
active did not have a material impact on our consolidated financial statements.
We do not believe the adoption of SFAS No. 157 for our non-financial assets and
liabilities, effective January 1, 2009, will have a material impact on our
consolidated financial statements.
 
 In
December 2007, the FASB issued SFAS No. 141(R),”Business Combinations”, which
replaces SFAS No. 141, “Business Combinations.” SFAS No. 141(R) retains the
underlying concepts of SFAS No. 141 in that all business combinations are still
required to be accounted for at fair value under the acquisition method of
accounting, but SFAS No. 141(R) changed the method of applying the acquisition
method in a number of significant aspects. SFAS No. 141(R) is effective on a
prospective basis for all business combinations for which the acquisition date
is on or after the beginning of the first annual period subsequent to December
15, 2008, with the exception of the accounting for valuation allowances on
deferred taxes and acquired tax contingencies under SFAS No. 109. SFAS No.
141(R) amends SFAS No. 109 such that adjustments made to valuation allowances on
deferred taxes and acquired tax contingencies associated with acquisitions that
closed prior to the effective date of SFAS No. 141(R) would also apply the
provisions of SFAS No. 141(R). Early adoption is not allowed. The adoption of
SFAS No. 141(R) could have a significant impact on how we allocate the purchase
price of an acquired business. The impact will be limited to future
acquisitions.
 
 Effective
January 1, 2008, the Company adopted SFAS No. 159, “The Fair Value Option for
Financial Assets and Liabilities.”  SFAS No. 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value.  The Company did not elect the fair value reporting option for
any assets or liabilities not previously recorded at fair value.
  12
  In
December 2007, the FASB issued SFAS No.160, “Noncontrolling Interests in
Consolidated Financial Statements – An Amendment of ARB No. 51”. SFAS 160
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary (previously referred to as minority interests). SFAS 160 also
requires that a retained noncontrolling interest upon the deconsolidation of a
subsidiary be initially measured at its fair value. Upon adoption of SFAS 160,
the Company would be required to report any noncontrolling interests as a
separate component of consolidated stockholders’ equity. The Company would also
be required to present any net income allocable to noncontrolling interests and
net income attributable to the stockholders of the Company separately in its
consolidated statements of operations. SFAS 160 is effective for fiscal years,
and interim periods within those fiscal years, beginning on or after December
15, 2008. SFAS 160 requires retroactive adoption of the presentation and
disclosure requirements for existing minority interests. All other requirements
of SFAS 160 shall be applied prospectively. SFAS 160 would have an impact on the
presentation and disclosure of the noncontrolling interests of any non
wholly-owned businesses acquired in the future.
 
 In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities—an amendment of FASB Statement
No. 133”. SFAS 161 changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity
uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance and cash
flows.  The guidance in SFAS 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15,
2008, with early application encouraged. This Statement encourages, but does not
require, comparative disclosures for earlier periods at initial adoption.
 At this time, management is evaluating the implications of SFAS 161 and
its impact on the financial statements has not yet been determined.
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles." SFAS 162 identifies the sources of accounting principles
and the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with United States Generally Accepted Accounting Principles (“GAAP”).
SFAS 162 directs the GAAP hierarchy to the entity, not the independent auditors,
as the entity is responsible for selecting accounting principles for financial
statements that are presented in conformity with GAAP. SFAS 162 is effective
November 15, 2008. The adoption of this Statement did not have any impact
on the Company’s financial position and results of operations.
 
 In May
2008, the FASB issued FSP APB 14-1, “Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”
(“FSP APB 14-1”). FSP APB 14-1 specifies that for convertible debt instruments
that may be settled in cash upon conversion, issuers of such instruments should
separately account for the liability and equity components in the statement of
financial condition. The excess of the initial proceeds of the convertible debt
instrument over the amount allocated to the liability component creates a debt
discount which should be amortized as interest expense over the expected life of
the liability. FSP APB 14-1 is effective for financial statements issued for
fiscal years and interim periods beginning after December 15, 2008 and is
to be applied retrospectively. The Company is currently evaluating the impact of
adopting FSP APB 14-1 on its financial position and results of
operations.
 
 In June
2008, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 07-5,
“Determining Whether an Instrument (or an Embedded Feature) Is Indexed to
an Entity's Own Stock” (“EITF 07-5”). EITF 07-5 provides that an entity
should use a two step approach to evaluate whether an equity-linked
financial instrument, or embedded feature, is indexed to its own stock,
including evaluating the instrument's contingent exercise and settlement
provisions. It also clarifies on the impact of foreign currency denominated
strike prices and market-based employee stock
option valuations. EITF 07-5 is effective for fiscal years
beginning after December 15, 2008 and interim periods within those fiscal
years. The adoption of EITF 07-5 is not expected to have a material impact
on the Company’s consolidated financial position and results of
operations.
 
 In June
2008, the FASB issued EITF Issue No. 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities” (“EITF
03-6-1”).  EITF 03-6-1 addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting
and, therefore, need to be included in the earnings allocation in computing
earnings per share (EPS) under the two-class method described in paragraphs 60
and 61 of FASB No. 128, “Earnings per Share”.  EITF 03-6-1 is
effective for fiscal years beginning after December 15, 2008 and is to be
applied retrospectively.  The adoption of EITF 03-6-1 is not expected
to have a material impact on the Company’s consolidated financial position and
results of operations.
  13
  Comparison
of Year Ended December 31, 2008 to Year Ended December 31, 2007
 
 Results
of Operations
 
 Revenues
 
 Revenues
were $294,695 and $191,053 in 2008 and 2007, respectively. The 54% increase in
revenues from 2007 to 2008 was primarily due to increased software license
revenue of $64,399 as we had software license revenues from our new video
visitation software during 2008, and increased service revenues during 2008 of
$39,243 due primarily to application development for one customer in the
operating room market.  Due to our small customer base, we face the
risk of fluctuating revenues should any of our customers discontinue using our
products.
 
 We
anticipate significantly increased revenues during 2009 due to our sales and
product development efforts in 2008 that resulted in our partnership with
Promethean in 2008 and installation of our software in classrooms in
2009.  Also, we anticipate that additional functionality we add to our
video visitation software in 2009 will further increase the productivity of end
users of the product and enable wider adoption of the software in additional
correctional facilities.
 
 Cost
of Revenues and Gross Profit
 
 Gross
profit as a percentage of revenues was approximately 81% and 73% in 2008 and
2007, respectively.  The higher gross profit as a percentage of
revenues during 2008 resulted primarily from a higher mix of higher margin
software license sales compared to 2007.  We anticipate that gross
profit as a percentage of revenues will increase in the future as our mix of
software licenses versus service revenues increases.  Additionally, we
will no longer pay a cash royalty license fee for use of certain licensed
software in our Device Manager product.
 Selling,
General & Administrative Expenses
 
 Selling,
general and administrative expenses were $3,257,486 and $2,907,218 for 2008 and
2007, respectively. The increase in 2008 compared to 2007 resulted primarily
from higher stock-based compensation during the current year of approximately
$537,000 due to the stock option grant for 2,000,000 shares to our new Chief
Executive Officer (three year vesting) and grants made to consultants with
instant vesting, as well as increased expenses related to the hiring of
consultants for business development, marketing, website development, and
finance, offset partially by decreased stock payments made to Triton Value
Partners during 2008 due to the timing of certain share issuances to them as
well as a lower average stock price for our common stock during 2008 compared to
2007.
 
 Research
and Development Expenses
 
 We charge
research and development costs to expense as incurred until technological
feasibility of a software product has been established. Software development
costs incurred after technological feasibility has been established are
capitalized and amortized, commencing with product release, using the greater of
the income forecast method or on a straight-line basis over the useful life of
the product. These expensed costs were $1,250,209 and $828,564 for 2008 and
2007, respectively.  The increase in expense was due mainly to the
hiring of additional software development personnel including a new Chief
Technology Officer, increased stock-based compensation due to additional option
grants made to employees, as well as the increased use of third-party
development personnel and outsourced software development services during the
current period.  Due to current capital resource constraints and
concentration of our efforts on gaining wider adoption of our software by end
users, we do not anticipate a similar increase in expense during
2009.
 During
2008 and 2007, respectively, stock-based compensation of $174,179 and $98,883
was included in research and development expense to record the amortization of
the estimated fair value of the portion of previously granted stock options that
vested during the current period.
  14
  Other
income/(expense)
 Other
expense during 2008 of $611,262 consisted primarily of $532,076 to amortize debt
discount and the value of warrants granted to the convertible note holders in
January 2008, $78,894 to record the interest accrued on the convertible notes
prior to their exchange into the Series C convertible stock offering and
repayment, and debt offering costs of $21,579 amortized over the term of the
notes, partially offset by interest earned on our cash balances during the
year.
 
 Other
expense of $1,308,441 for 2007 consisted primarily of the $772,655 expense to
record the value of warrants to purchase 710,200 shares of common stock granted
to noteholders as an inducement for the conversion of their notes for Series B
preferred stock, $578,611 of expense recorded due to the increased fair value of
the warrants modified in September 2007, partially offset by interest earned on
cash balances during the year.
 
 Net
Loss and Net Loss Attributable to Common Stockholders
 
 Net loss
for 2008 was $4,879,582 compared to a net loss of $4,905,483 for
2007.  Operating expenses increased by $771,913 during the current
year due primarily to higher stock-based compensation of $596,933 due to the
greater number of option outstanding during the current year and the higher
number of options granted with immediate vesting.  The higher
operating expenses were primarily offset by decreased other expenses during 2008
as in 2007 we recorded  $772,655 for the value of warrants issued in
conjunction with the exchange of notes payable for Series B Preferred stock and
the $578,611 warrant modification expense in 2007, partially offset by $532,076
to record debt discounts during the current year,.
 
 Net loss
attributable to common stockholders of $7,366,588 and $6,444,518 for 2008 and
2007, respectively, included $511,408 and $599,917 to record the value of
preferred stock dividends paid in the form of common stock on June 30 and
December 31 each year to Convertible Preferred Stock holders and $1,975,598 and
$939,118 to record the deemed preferred dividend on the Series C Convertible
Preferred Stock issued in 2008 and Series B Convertible Preferred Stock in
2007.
 
 Off
Balance Sheet Arrangements
 
 We do not
have any off-balance sheet arrangements.
 
 ITEM 8.  FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA.
 
 The
information required by this Item 8 is hereby incorporated by reference to our
Consolidated Financial Statements beginning on page 21 of this Annual Report on
Form 10-K.
  ITEM 9.CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
 Not
applicable.
 
 ITEM
9A(T). CONTROLS AND PROCEDURES
 
 Evaluation
of Disclosure Controls and Procedures
  This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting.  Management’s report was not subject to
attestation by the Company’s independent registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management reports in this annual
report.
 
 The
Company maintains a system of internal controls designed to provide reasonable
assurance that transactions are executed in accordance with management’s general
or specific authorization; transactions are recorded as necessary to (1) permit
preparation of financial statements in accordance with accounting principles
generally accepting in the United States of America, and (2) maintain
accountability for assets.  Access to assets is permitted only in
accordance with management’s general or specific authorization.  In
2007, the Company adopted and implemented the control requirements of Section
404 of the Sarbanes-Oxley Act of 2002 (the “Act”).
 15
  It is the
responsibility of the Company’s management to establish and maintain adequate
internal control over financial reporting.  However, due to its
limited financial resources, there is only limited segregation of duties within
the accounting function, leaving most significant aspects of financial reporting
in the hands of the Chief Financial Officer.
 
 A
significant deficiency is defined as a deficiency, or a combination of
deficiencies, in internal control over financial reporting that is less severe
than a material weakness, yet important enough to merit attention by those
responsible for oversight of a registrant’s financial reporting.
 
 A
material weakness is a significant deficiency (or a combination of significant
deficiencies) that result in a more-than-remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.
 
 The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Securities Exchange Act reports
is recorded, processed, summarized, and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to our management, including the Company’s Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.  The Company previously disclosed that it
had difficulty in evaluating, applying, and documenting complex accounting
principles, and in preparing a complete report without major errors, within our
accounting function and reported that a material weakness existed within its
system of controls.
 
 Our
management, including the Company’s Chief Executive Officer and Chief Financial
Officer, evaluated as of December 31, 2008, the effectiveness of the design and
operation of our disclosure controls and procedures. In their evaluation, our
Chief Executive Officer and Chief Financial Officer identified the changes and
enhancements in our control environment, as described below, that we have
implemented prior to December 31, 2008, that remedied our previously
disclosed material weaknesses.  Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer has concluded that the Company's
disclosure controls and procedures were effective as of the end of the period
covered by this report to provide reasonable assurance that information required
to be disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms
and that such information is accumulated and communicated to the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, to allow timely decisions regarding required disclosure.
 
 The
Company implemented additional procedures at December 31, 2008, regarding the
review and preparation of the accounting related to complex accounting
principles and the Company’s reports.  On an as-needed basis, the
Company will use outside consultants to assist in the preparation of the
Company’s financial accounting records and financial reports.  No such
assistance was deemed to be required as of December 31, 2008.
 
 The
Company’s significant deficiency involves a lack of segregation of duties within
its internal control function. Due to the inherent issue of segregation of
duties in a small company, we have relied heavily on entity or management review
controls to lessen the issue of segregation of duties. Based on this assessment
and those criteria, our management concluded that the Company did maintain
effective internal control over financial reporting as of December 31,
2008.
  Management
is aware that there is a lack of segregation of duties at the Company due to the
small number of employees dealing with general, administrative and financial
matters. This constitutes a significant deficiency in financial reporting.
However, at this time, management has decided that considering the employees
involved and the control procedures in place, the risks associated with such
lack of segregation of duties are insignificant and the potential benefits of
adding additional employees to clearly segregate duties do not justify the
expenses associated with such increases. Management will periodically reevaluate
this situation. If the volume of the business increases and sufficient capital
is secured, it is the Company's intention to further increase staffing to
mitigate the current lack of segregation of duties within the general,
administrative and financial functions.
  Management’s
Annual Report on Internal Control over Financial Reporting
 
 Management
is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d(15(f)) under the
Securities Exchange Act of 1934, as amended).  Our management
including the Company’s Chief Executive Officer and Chief Financial Officer,
evaluated as of December 31, 2008, the effectiveness of our internal control
over financial reporting using the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.  Based on that evaluation, the Company’s Chief
Executive Officer and Chief Financial Officer concluded that our internal
controls, as of December 31, 2008, were effective in providing reasonable
assurances regarding reliability of financial reporting, for the reasons set
forth above in “- Evaluation of Disclosure Controls and
Procedures.”
 
 Changes
in Internal Control Over Financial Reporting
 
 Other
than what has been disclosed above, there have been no significant changes in
internal controls over financial reporting that occurred during the quarter
ended December 31, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial
reporting.
  16
  ITEM
9B. OTHER INFORMATION
 
 On
January 21, 2009 one shareholder converted 8,000 shares of the Company’s Series
A Convertible Preferred Stock to 32,000 shares of the Company’s common
stock.
 
 On March
4, 2009 one shareholder converted 11 shares of the Company’s Series B
Convertible Preferred Stock to 22,000 shares of the Company’s common
stock.
 
 On March
26, 2009 one shareholder converted 10 shares of the Company’s Series B
Convertible Preferred Stock to 20,000 shares of the Company’s common
stock.
 PART
III
 
 ITEM
10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANACE
  The
information required by this Item is contained in our definitive proxy statement
for the 2009 Annual Meeting of Stockholders, which is expected to be filed with
the SEC on or about April 30, 2009, and is incorporated herein by
reference.
  ITEM
11.  EXECUTIVE COMPENSATION.
  The
information required by this Item will be presented in our definitive proxy
statement for the 2009 Annual Meeting of Stockholders, which is expected to be
filed with the SEC on or about April 30, 2009, and is incorporated herein by
reference.
  ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
  The
information required by this Item will be presented in our definitive proxy
statement for the 2009 Annual Meeting of Stockholders, which is expected to be
filed with the SEC on or about April 30, 2009, and is incorporated herein by
reference.
  ITEM
13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
  The
information required by this Item will be presented in our definitive proxy
statement for the 2009 Annual Meeting of Stockholders, which is expected to be
filed with the SEC on or about April 30, 2009, and is incorporated herein by
reference.
  ITEM
14.    PRINCIPAL ACCOUNTING FEES AND SERVICES.
 
 The
Company has engaged Marcum & Kliegman LLP as the Company’s independent
accountants to review and audit the Company’s financial statements for the year
ended December 31, 2008.
 
 Audit Fees.  The
aggregate fees billed by Marcum & Kliegman LLP for professional services
amounted to $108,707 and $119,502 for the audits of the Company’s annual
financial statements for the years ended December 31, 2008 and 2007,
respectively, which services includes the cost of the reviews of the Company’s
condensed consolidated financial statements included in the Company’s Forms 10-Q
for 2008 and 2007.
 
 Audit-Related
Fees.  There were no fees charged during 2008 and 2007 for
audit-related services.
 
 Tax Fees.  No tax
compliance, tax advice, or tax planning services were provided to the Company by
Marcum & Kliegman LLP during 2008 or 2007.
 
 All Other
Fees.  There were no fees charged during 2008 and 2007 for
other services.
 
 All fees
paid to Marcum & Kliegman LLP were, and will continue to be, approved by the
audit committee in accordance with our audit committee charter prior to
commencement of work.
  17
  PART
IV
 
 ITEM
15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
 
 The
following exhibits are filed with or incorporated by reference into this report.
The exhibits which are denominated by an asterisk (*) were previously filed as a
part of, and are hereby incorporated by reference from either (i) the Company’s
Registration Statement on Form SB-2 (File No. 333-128420) filed with the
Securities and Exchange Commission on September 19, 2005, (referred to as “2005
SB-2”), (ii) the Post-Effective Amendment No. 1 to the Company's Registration
Statement on Form S-18 (File No. 33-27040-D) (referred to as “S-18 No. 2”),
(iii) Post-Effective Amendment No. 2 to the Company's Registration Statement on
Form S-18 (File No. 33-27040-D) (referred to as “S-18 No. 3”), (iv) the
Company's Registration Statement Form S-1 (File No. 33-85754) (referred to as
“S-1”); (v) the Company's Annual Report on Form 10-K for the year ended December
31, 1993 (referred to as “1993 10-K”); (vi) the Company's Annual Report on Form
10-K for the year ended December 31, 1994 (referred to as “1994 10-K”); (vii)
the Company’s Annual Report on Form 10-K for the year ended December 31, 1998,
as amended (referred to as “1998 10-K/A”) filed on April 30, 1999 , (viii) the
Company's Form S-8 Registration Statement (File No. 333-148890), (referred to as
“Option Plan S-8”) filed on January 28, 2008, (ix) the Company's Registration
Statement on Form S-3 amended January 31, 1999 (“1999 S-3”), (x) the Company's
Report on Form 8-K filed March 12, 2009 (referred to as “March 12, 2009 8-K”),
(xi) the Company’s Annual Report on Form 10-KSB for the year ended December 31,
2006 (“2006 10-KSB”) filed April 17, 2007, or (xii) the Company’s 2002 proxy
statement on Schedule 14A (referred to as “2002 Proxy Statement”) filed on April
24, 2002.
 
 Exhibit No.
                      
                      Description of Exhibit*3.1
                      
                      Certificate
      of Incorporation of the Company, as amended through March 8, 2007 (2006
      10-KSB)*3.2
                      
                      Amended
      Bylaws of the Company as presently in use (S-18 No. 2, Exhibit
      3.2)4.1
                      
                      Certificate
      of Incorporation of the Company, as amended (filed herewith as Exhibit
      3.1)4.2
                      
                      Amended
      Bylaws of the Company as presently in use (filed herewith as Exhibit
      3.2)*10.3
                      
                      1991
      Stock Option Plan (S-18 No. 3, Exhibit 10.1(a))*10.3.1
                      
                      Amendment
      No. 1 to 1991 Stock Option Plan (1993 10-K)*10.3.2
                      
                      Amendment
      No. 2 to 1991 Stock Option Plan (S-1)*10.3.3
                      
                      Amendment
      No. 3 to 1991 Stock Option Plan (S-1)*10.3.4
                      
                      Amendment
      No. 4 to 1991 Stock Option Plan (Option Plan S-8, Exhibit
    4.5)*10.3.5
                      
                      Amendment
      No. 5 to 1991 Stock Option Plan (1998 10-K/A, Exhibit
    10.3.5)*10.4
                      
                      2002
      Equity Incentive Plan (2002 Proxy Statement)*10.5
                      
                      2002
      Equity Incentive Plan Form S-8 (Option Plan S-8)*
      10.6
                      
                      Technology
      License Agreement between ACIS, Inc. and the Company dated March 5, 2009
      (March 12, 2009 8-K)*10.9
                      
                      Triton
      Value Partners Engagement Agreement dated January 31, 2007 (2006
      10-KSB)
  18
  21.1
                    
                    Subsidiaries
      of the Company23.1
                    
                    Consent
      of Marcum & Kliegman LLP31.1
                    
                    Rule
      13a-14(a)/15d-14(a) Certification of Principal Executive
      Officer31.2
                    
                    Rule
      13a-14(a)/15d-14(a) Certification of Principal Financial
      Officer32.1(1)
                    
                    Section
      1350 Certifications*
      Previously filed
  (1)  In
accordance with Item 601 (B) 32 of Regulation S-K, this Exhibit is not deemed
“filed” for purposes of Section 18 of the Exchange Act or otherwise subject to
the liabilities of that section.  Such certifications will not be
deemed incorporated by reference into any filing under the Securities Act or the
Exchange Act, except to the extent that the registrant specifically incorporates
it by reference.
  SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) 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.
 
 SIMTROL,
      INC.By:
                /s/ Oliver M. Cooper,
IIIDate:  March
      27, 2009
                
                Oliver M. Cooper, III, Chief Executive
Officer
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
 
 Signature
                                      
                                      Title
                                      
                                      Date/s/ Dallas S. Clement
                                      
                                      Chairman
      of the Board
                                      
                                      March
      27, 2009Dallas
      S. Clement/s/ Oliver M. Cooper, III
                                      
                                      Chief
      Executive Officer
                                      
                                      March
      27, 2009Oliver
      M. Cooper, III
                                      
                                      (Principal
      Executive Officer)/s/ Stephen N. Samp
                                      
                                      Chief
      Financial Officer
                                      
                                      March
      27, 2009Stephen
      N. Samp
                                      
                                      (Principal
      Financial andAccounting
      Officer)/s/ Adam D. Senter
                                      
                                      Director
                                      
                                      March
      27, 2009Adam
      D. Senter/s/ Lee D. Wilder
                                      
                                      Director
                                      
                                      March
      27, 2009Lee
      D. Wilder
 
 19
 
 INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Report
      of Independent Registered Public Accounting Firm
                  21Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                  22Consolidated
      Statements of Operations for the Years Ended December 31, 2008 and
      2007
                  23Consolidated
      Statements of Stockholders' Equity/(Deficiency) for the Years Ended
      December 31, 2008 and 2007
                  24Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008 and
      2007
                  25Notes
      to Consolidated Financial Statements
                  26
  20
  REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Audit Committee of the
 Board of
Directors and Shareholders
 of
Simtrol, Inc. and Subsidiaries
 
 We have
audited the accompanying consolidated balance sheets of Simtrol, Inc. and
Subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related
consolidated statements of operations, stockholders’ equity/(deficiency) and
cash flows for the years then ended.  These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement.  The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion.  An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.  We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Simtrol, Inc. and
Subsidiaries, as of December 31, 2008 and 2007, and the consolidated results of
their operations and their cash flows for the years then ended, in conformity
with United States generally accepted accounting principles.
 
 The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern.  As discussed in Note 2
to the consolidated financial statements, at December 31, 2008, the Company has
not achieved a sufficient level of revenues to support its business and has
suffered recurring losses from operations.  These factors raise
substantial doubt about the Company’s ability to continue as a going
concern.  Management’s plans regarding those matters are also
described in Note 2.  The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
 
 /s/
Marcum & Kliegman LLP
 
 New York,
New York
 March 27,
2009
 
 21
 
 SIMTROL,
      INC. AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETS
 
 December 31,2008
                                        
                                        
                                        2007ASSETSCurrent
      assetsCash
      and cash equivalents
                                        
                                        $
                                        997,048
                                        
                                        
                                        $
                                        256,358Accounts
      receivable
                                        
                                        
                                        80,015
                                        
                                        
                                        
                                        27,232Inventory
                                        
                                        
                                        28,905
                                        
                                        
                                        
                                        -Prepaid
      expenses and other assets
                                        
                                        
                                        129,873
                                        
                                        
                                        
                                        19,178Total
      current assets
                                        
                                        
                                        1,235,841
                                        
                                        
                                        
                                        302,768Certificate
      of deposit-restricted
                                        
                                        
                                        81,126
                                        
                                        
                                        
                                        101,862Deferred
      financing costs, net
                                        
                                        
                                        -
                                        
                                        
                                        
                                        16,601Property
      and equipment, net
                                        
                                        
                                        101,509
                                        
                                        
                                        
                                        117,285Right
      to license intellectual property, net
                                        
                                        
                                        27,218
                                        
                                        
                                        
                                        115,143Other
      assets
                                        
                                        
                                        11,458
                                        
                                        
                                        
                                        11,458Total
      assets
                                        
                                        $
                                        1,457,152
                                        
                                        
                                        $
                                        665,117LIABILITIES
      AND STOCKHOLDERS’EQUITYCurrent
      liabilitiesAccounts
      payable
                                        
                                        $
                                        188,064
                                        
                                        
                                        $
                                        169,243Accrued
      expenses
                                        
                                        
                                        43,505
                                        
                                        
                                        
                                        122,382Deferred
      revenue
                                        
                                        
                                        19,518
                                        
                                        
                                        
                                        462Common
      stock to be issued
                                        
                                        
                                        26,000
                                        
                                        
                                        
                                        26,000Total
      current liabilities
                                        
                                        
                                        277,087
                                        
                                        
                                        
                                        318,087Common
      stock to be issued, less current portion
                                        
                                        
                                        -
                                        
                                        
                                        
                                        26,000Deferred
      rent payable
                                        
                                        
                                        20,551
                                        
                                        
                                        
                                        16,488Total
      liabilities
                                        
                                        
                                        297,638
                                        
                                        
                                        
                                        360,575Commitments
      and contingenciesStockholders'
      Equity:Preferred
      stock, $.00025 par value; 800,000 shares authorized;Series
      A Convertible: 770,000 shares designated; 688,664 and  728,664
      outstanding; liquidation values of $2,065,992 and
    $2,185,992
                                        
                                        
                                        171
                                        
                                        
                                        
                                        182Series
      B Convertible: 4,700 shares designated; 4,285 and 4,700 outstanding;
      liquidation values of $3,213,750 and $3,525,000
                                        
                                        
                                        1
                                        
                                        
                                        
                                        1Series
      C Convertible: 7,900 shares designated; 5,534 and  0
      outstanding; liquidation values of $4,150,500 and $0
                                        
                                        
                                        14
                                        
                                        
                                        
                                        -Common
      stock, 100,000,000 shares authorized;$.001
      par value; 10,783,882 and 7,314,371 issued and outstanding
                                        
                                        
                                        10,784
                                        
                                        
                                        
                                        7,314Additional
      paid-in capital
                                        
                                        
                                        80,338,073
                                        
                                        
                                        
                                        72,119,986Accumulated
      deficit
                                        
                                        
                                        (79,189,529
                                        )
                                        
                                        
                                        (71,822,941
                                        )Total
      stockholders' equity
                                        
                                        
                                        1,159,514
                                        
                                        
                                        
                                        304,542Total
      liabilities and stockholders’ equity
                                        
                                        $
                                        1,457,152
                                        
                                        
                                        $
                                        665,117
  The
accompanying notes are an integral part of these consolidated financial
statements.
  22
  SIMTROL,
INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 
 For the Years Ended December 31,2008
                                  
                                  
                                  2007RevenuesSoftware
      licenses
                                  
                                  $
                                  161,983
                                  
                                  
                                  $
                                  97,584Service
                                  
                                  
                                  132,712
                                  
                                  
                                  
                                  93,469Total
      revenues
                                  
                                  
                                  294,695
                                  
                                  
                                  
                                  191,053Cost
      of revenuesSoftware
      licenses
                                  
                                  
                                  2,895
                                  
                                  
                                  
                                  2,834Service
                                  
                                  
                                  52,425
                                  
                                  
                                  
                                  49,479Total
      cost of revenues
                                  
                                  
                                  55,320
                                  
                                  
                                  
                                  52,313Gross
      profit
                                  
                                  
                                  239,375
                                  
                                  
                                  
                                  138,740Operating
      expensesSelling,
      general and administrative
                                  
                                  
                                  3,257,486
                                  
                                  
                                  
                                  2,907,218Research
      and development
                                  
                                  
                                  1,250,209
                                  
                                  
                                  
                                  828,564Total operating expenses
                                  
                                  
                                  4,507,695
                                  
                                  
                                  
                                  3,735,782Loss from operations
                                  
                                  
                                  (4,268,320
                                  )
                                  
                                  
                                  (3,597,042
                                  )Other
      income/(expenses)Amortization
      of debt discount and beneficial conversion feature of convertible notes
      payable
                                  
                                  
                                  (532,076
                                  )
                                  
                                  
                                  -Amortization
      of debt issuance costs
                                  
                                  
                                  (21,579
                                  )
                                  
                                  
                                  -Interest
      income
                                  
                                  
                                  23,439
                                  
                                  
                                  
                                  51,716Interest
      expense
                                  
                                  
                                  (81,046
                                  )
                                  
                                  
                                  (8,891
                                  )Increased
      fair value of warrants’ modification
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (578,611
                                  )Finance
      expense on conversion of notes payable
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (772,655
                                  )Total other expense
                                  
                                  
                                  (611,262
                                  )
                                  
                                  
                                  (1,308,441
                                  )Net
      loss
                                  
                                  
                                  (4,879,582
                                  )
                                  
                                  
                                  (4,905,483
                                  )Preferred
      stock dividend
                                  
                                  
                                  511,408
                                  
                                  
                                  
                                  599,917Deemed
      preferred dividend
                                  
                                  
                                  1,975,598
                                  
                                  
                                  
                                  939,118Net
      loss attributable to common stockholders
                                  
                                  $
                                  (7,366,588
                                  )
                                  
                                  $
                                  (6,444,518
                                  )Net
      loss per common share attributable to common stockholders-basic and
      diluted
                                  
                                  $
                                  (0.85
                                  )
                                  
                                  $
                                  (1.04
                                  )Weighted
      average number of common shares outstanding
                                  
                                  
                                  8,696,718
                                  
                                  
                                  
                                  6,204,921
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  23
  SIMTROL,
INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY/(DEFICIENCY)
 For the
Years Ended December 31, 2008 and 2007
 Preferred Stock
                                      
                                      
                                      Common stockNumber of
                                        Shares
                                      
                                      
                                      Par Value
                                      
                                      
                                      Number of
                                        Shares
                                      
                                      
                                      Par value
                                      
                                      
                                      Additional
                                        Paid-in
                                        capital
                                      
                                      
                                      Accumulated
                                        deficit
                                      
                                      
                                      TotalBalance,
      January 1, 2007
                                      
                                      
                                      384,666
                                      
                                      
                                      $
                                      96
                                      
                                      
                                      
                                      4,930,004
                                      
                                      
                                      $
                                      4,930
                                      
                                      
                                      $
                                      63,646,515
                                      
                                      
                                      $
                                      (65,378,423
                                      )
                                      
                                      $
                                      (1,726,882
                                      )Net
      Loss
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (4,905,483
                                      )
                                      
                                      
                                      (4,905,483
                                      )Issuance
      of Series B Preferred Stock
                                      
                                      
                                      4,700
                                      
                                      
                                      
                                      1
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      3,518,793
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      3,518,794Conversion
      of Series A Preferred Stock
                                      
                                      
                                      (40,668
                                      )
                                      
                                      
                                      (10
                                      )
                                      
                                      
                                      162,672
                                      
                                      
                                      
                                      163
                                      
                                      
                                      
                                      (153
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      -Issuance
      of Series A Preferred stock in modification
                                      
                                      
                                      384,666
                                      
                                      
                                      
                                      96
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      523,050
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      523,146Issuance
      of common stock to directors
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      18,431
                                      
                                      
                                      
                                      18
                                      
                                      
                                      
                                      21,432
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      21,450Stock-based
      compensation amortization
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      357,153
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      357,153Warrant
      issued in Series A modification
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      245,620
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      245,620Issuance
      of common stock for purchase of license agreement
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      100,000
                                      
                                      
                                      
                                      100
                                      
                                      
                                      
                                      25.900
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      26,000Write
      off remainder of previously accrued dividend payable
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      403,097
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      403,097Cashless
      warrant exercises
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      713,387
                                      
                                      
                                      
                                      713
                                      
                                      
                                      
                                      (713
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      -Warrants
      issued for notes payable exchange
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      772,655
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      772,655Common
      stock dividend on Series A and B Convertible Preferred
    shares
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      604,977
                                      
                                      
                                      
                                      605
                                      
                                      
                                      
                                      599,312
                                      
                                      
                                      
                                      (599,917
                                      )
                                      
                                      
                                      -Increase
      in fair value of warrants due to modification
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      578,611
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      578,611Issuance
      of common stock for services
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      784,900
                                      
                                      
                                      
                                      785
                                      
                                      
                                      
                                      489,596
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      490,381Deemed
      preferred dividend
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      939,118
                                      
                                      
                                      
                                      (939,118
                                      )
                                      
                                      
                                      -Balance,
      December 31, 2007
                                      
                                      
                                      733,364
                                      
                                      
                                      
                                      183
                                      
                                      
                                      
                                      7,314,371
                                      
                                      
                                      
                                      7,314
                                      
                                      
                                      
                                      72,119,986
                                      
                                      
                                      
                                      (71,822,941
                                      )
                                      
                                      
                                      304,542Net
      Loss
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (4,879,582
                                      )
                                      
                                      
                                      (4,879,582
                                      )Issuance
      of Series C Preferred Stock
                                      
                                      
                                      5,534
                                      
                                      
                                      
                                      14
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      3,973,571
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      3,973,585Conversion
      of Series A Preferred Stock
                                      
                                      
                                      (40,000
                                      )
                                      
                                      
                                      (10
                                      )
                                      
                                      
                                      160,000
                                      
                                      
                                      
                                      160
                                      
                                      
                                      
                                      (150
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      -Conversion
      of Series B Preferred Stock
                                      
                                      
                                      (415
                                      )
                                      
                                      
                                      (1
                                      )
                                      
                                      
                                      830,000
                                      
                                      
                                      
                                      830
                                      
                                      
                                      
                                      (829
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      -Issuance
      of common stock to directors
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      17,376
                                      
                                      
                                      
                                      18
                                      
                                      
                                      
                                      5,832
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      5,850Stock-based
      compensation amortization
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      969,686
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      969,686Issuance
      of common stock for purchase of license agreement
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      100,000
                                      
                                      
                                      
                                      100
                                      
                                      
                                      
                                      25,900
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      26,000Amortization
      of debt discount and beneficial conversion feature of convertible notes
      payable
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      532,076
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      532,076Common
      stock dividend on Series A, B, and C Convertible Preferred
      shares
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      1,926,735
                                      
                                      
                                      
                                      1,927
                                      
                                      
                                      
                                      509,481
                                      
                                      
                                      
                                      (511,408
                                      )
                                      
                                      
                                      -Issuance
      of common stock for services
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      320,400
                                      
                                      
                                      
                                      320
                                      
                                      
                                      
                                      138,787
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      139,107Issuance
      of common stock for consulting services
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      115,000
                                      
                                      
                                      
                                      115
                                      
                                      
                                      
                                      88,135
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      88,250Deemed
      preferred dividend
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      1,975,598
                                      
                                      
                                      
                                      (1,975,598
                                      )
                                      
                                      
                                      -Balance,
      December 31, 2008
                                      
                                      
                                      698,483
                                      
                                      
                                      $
                                      186
                                      
                                      
                                      
                                      10,783,882
                                      
                                      
                                      $
                                      10,784
                                      
                                      
                                      $
                                      80,338,073
                                      
                                      
                                      $
                                      (79,189,529
                                      )
                                      
                                      $
                                      1,159,514
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  24
  SIMTROL,
INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 
 For the Years Ended December 31,2008
                                          
                                          
                                          2007Cash
      flows from operating activitiesNet
      loss
                                          
                                          $
                                          (4,879,582
                                          )
                                          
                                          $
                                          (4,905,483
                                          )Adjustments
      to reconcile net loss to net cash used in operating
    activitiesImpairment
      of right to license intellectual property
                                          
                                          
                                          76,782
                                          
                                          
                                          
                                          -Depreciation
      and amortization
                                          
                                          
                                          62,843
                                          
                                          
                                          
                                          80,080Amortization
      of stock-based compensation
                                          
                                          
                                          975,536
                                          
                                          
                                          
                                          378,603Issuance
      of stock for services
                                          
                                          
                                          139,107
                                          
                                          
                                          
                                          490,381Amortization
      of capitalized stock for services
                                          
                                          
                                          81,687
                                          
                                          
                                          
                                          -Issuance
      of warrants in conversion of notes payable to preferred
    stock
                                          
                                          
                                          -
                                          
                                          
                                          
                                          772,655Increase
      in fair value of warrants’ modification
                                          
                                          
                                          -
                                          
                                          
                                          
                                          578,611Amortization
      of deferred financing costs
                                          
                                          
                                          21,579
                                          
                                          
                                          
                                          -Accrued
      interest converted to convertible preferred stock
                                          
                                          
                                          72,750
                                          
                                          
                                          
                                          5,736Amortization
      of debt discount and beneficial conversion feature of convertible notes
      payable
                                          
                                          
                                          532,076
                                          
                                          
                                          
                                          -Changes
      in operating assets and liabilitiesAccounts
      receivable
                                          
                                          
                                          (52,783
                                          )
                                          
                                          
                                          57,137Inventory
                                          
                                          
                                          (28,905
                                          )
                                          
                                          
                                          -Prepaid
      expenses and other current assets
                                          
                                          
                                          (104,131
                                          )
                                          
                                          
                                          12,129Interest
      on certificate of deposit- restricted
                                          
                                          
                                          (3,770
                                          )
                                          
                                          
                                          (1,862
                                          )Other
      long-term assets
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (11,458
                                          )Accounts
      payable
                                          
                                          
                                          18,821
                                          
                                          
                                          
                                          (98,836
                                          )Accrued
      expenses
                                          
                                          
                                          (78,876
                                          )
                                          
                                          
                                          4,625Deferred
      revenue
                                          
                                          
                                          19,056
                                          
                                          
                                          
                                          462Deferred
      rent payable
                                          
                                          
                                          4,063
                                          
                                          
                                          
                                          11,967Net
      cash used in operating activities
                                          
                                          
                                          (3,143,747
                                          )
                                          
                                          
                                          (2,625,253
                                          )Cash flows from
      investing activitiesPurchases
      of property and equipment
                                          
                                          
                                          (35,924
                                          )
                                          
                                          
                                          (125,677
                                          )Partial
      redemption/ (Purchase) of certificate of deposit
                                          
                                          
                                          24,506
                                          
                                          
                                          
                                          (100,000
                                          )Net
      cash used in investing activities
                                          
                                          
                                          (11,418
                                          )
                                          
                                          
                                          (225,677
                                          )Cash
      flows from  financing activitiesNet
      proceeds from note payable issuance
                                          
                                          
                                          1,500,000
                                          
                                          
                                          
                                          331,000Repayment
      of note payable
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (14,286
                                          )Cash
      overdraft
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (1,420
                                          )Net
      proceeds from stock issuances
                                          
                                          
                                          2,400,834
                                          
                                          
                                          
                                          2,808,594Capitalized
      offering costs
                                          
                                          
                                          (4,979
                                          )
                                          
                                          
                                          (16,600
                                          )Net
      cash provided by financing activities
                                          
                                          
                                          3,895,855
                                          
                                          
                                          
                                          3,107,288Increase
      in cash and cash equivalents
                                          
                                          
                                          740,690
                                          
                                          
                                          
                                          256,358Cash
      and cash equivalents, beginning of the year
                                          
                                          
                                          256,358
                                          
                                          
                                          
                                          0Cash
      and cash equivalents, end of the year
                                          
                                          $
                                          997,048
                                          
                                          
                                          $
                                          256,358Supplementary
      disclosure:Cash
      paid during the year for interest
                                          
                                          $
                                          8,326
                                          
                                          
                                          $
                                          3,085Supplemental
      schedule of non-cash investing and financing activities:Issuance
      of common stock for right to license intellectual property
                                          
                                          $
                                          26,000
                                          
                                          
                                          $
                                          $ 26,000Capitalized
      issuance of common stock for consulting services
                                          
                                          $
                                          88,250
                                          
                                          
                                          $
                                          -Exchange
      of convertible notes payable for Series B Preferred stock
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          710,200Exchange
      of convertible notes payable for Series C Preferred stock
                                          
                                          $
                                          1,572,750
                                          
                                          
                                          $
                                          -Dividend
      on Convertible Preferred Stock paid in common stock
                                          
                                          $
                                          511,408
                                          
                                          
                                          $
                                          599,917Issuance
      of Series A Preferred stock as dividend payment on covenant
      default
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          768,766Issuance
      of warrants as dividend payment on covenant default
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          403,097Deemed
      preferred dividend
                                          
                                          $
                                          1,975,598
                                          
                                          
                                          $
                                          939,118
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  25
  SIMTROL,
INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007
 
 NOTE
1 – Nature of Operations and Basis of Presentation
 
 Simtrol,
Inc., formerly known as VSI Enterprises, Inc., was incorporated in Delaware in
September 1988 and, together with its wholly-owned subsidiaries (the "Company"),
develops, markets, and supports software based audiovisual control systems and
videoconferencing products that operate on PC platforms.  The Company
operates at a single facility in Norcross, Georgia and its sales are primarily
in the United States.
 
 Certain
amounts in the 2007 consolidated financial statements have been reclassified for
comparative purposes to conform to the presentation in the 2008 consolidated
financial statements.  These reclassifications have no effect on
previously reported net loss.
 
 NOTE
2 – Going Concern
 
 As of
December 31, 2008, the Company had cash and cash equivalents totaling $997,048
and working capital of $958,754.  Since inception, the Company has not
achieved a sufficient level of revenue to support its business and incurred a
net loss of $4,879,582 and used net cash of $3,143,747 in operating activities
during 2008. The Company will likely require additional funding to fund its
development and operating activities during the second quarter of 2009 and is
currently attempting to raise an additional $1.0 million to $2.0 million in debt
and/or equity financing to continue its efforts to gain end user acceptance of
its software. However, there can be no assurance that the Company will be able
to obtain such financing if and when needed, or that if obtained, such financing
will be sufficient or on terms and conditions acceptable to the
Company.  Also, anti-dilution provisions of the existing Series A, B,
and C Convertible Preferred stock might result in additional dilution to
existing common shareholders if such financing results in adjustments to the
conversion terms of the convertible preferred stock.  If the Company
is unable to obtain this additional funding, its business, financial condition
and results of operations would be adversely affected.
 
 On
January 23, 2008, the Company completed the sale of $1,500,000 of securities in
a private placement of convertible notes (see Note 6).  On June 30,
2008, these notes were exchanged in a private placement of Series C convertible
preferred stock (see Note 7) and the Company received an additional $1,027,264
(net of offering costs) from additional investors on that date.  On
September 26, 2008, the Company received an additional $1,373,570 (net of
offering costs) from additional investors in a private placement of Series C
convertible preferred stock (see Note 7).  Management of the Company
continues to actively seek additional funding to continue to develop its
products to generate income from operations.  Even if the Company
obtains additional equity capital, the Company may not be able to execute
its current business plan and fund business operations for the period necessary
to achieve positive cash flow.  In such case, the Company might
exhaust its capital and be forced to reduce expenses and cash burn to a material
extent, which would impair its ability to achieve its business
plan.  If the Company runs out of available capital, it might be
required to pursue highly dilutive equity or debt issuances to finance its
business in a difficult and hostile market, including possible equity financings
at a price per share that might be much lower than the per share price invested
by current shareholders.  No assurance can be given that any source of
additional cash would be available to the Company.  If no source of
additional cash is available to the Company, then the Company would be forced to
significantly reduce the scope of its operations or possibly seek court
protection from creditors or cease business operations altogether.
  These
matters raise substantial doubt about the Company’s ability to continue as a
going concern.  The accompanying consolidated financial statements have
been prepared on a going concern basis, which contemplate the realization of
assets and satisfaction of liabilities in the normal course of business. The
consolidated financial statements do not include any adjustments relating to the
recoverability of the recorded assets or the classification of the liabilities
that might be necessary should the Company be unable to continue as a going
concern.
 
 NOTE
3 – Significant Accounting Policies
 
 Principles of
Consolidation
 The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries.  All intercompany transactions and balances
have been eliminated in consolidation.
  26
  SIMTROL,
INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007
 
 Note
3 – Significant Accounting Policies, continued
 
 Loss Per
Share
 Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share",
requires the presentation of basic and diluted earnings per share ("EPS"). Basic
EPS is computed by dividing loss attributable to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
includes the potential
dilution that could occur if options or other contracts to issue common stock
were exercised or converted. The following equity securities are not reflected
in diluted loss per share because their effects would be
anti-dilutive:
 
 December 31, 2008
                        
                        
                        December 31, 2007Options
                        
                        
                        7,420,950
                        
                        
                        
                        4,401,375Warrants
                        
                        
                        28,002,774
                        
                        
                        
                        16,434,774Convertible
      Preferred Stock
                        
                        
                        22,392,656
                        
                        
                        
                        12,314,656Total
                        
                        
                        57,816,380
                        
                        
                        
                        33,150,805
 
 Accordingly,
basic and diluted loss per share are identical.
 
 Stock-Based
Compensation
  On
January 1, 2006, the Company adopted, using the modified prospective
application, SFAS No. 123R, “Accounting for Stock Based Compensation” (“SFAS
123R”), which requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the financial statements based on
their fair values. Under SFAS 123R, share-based payment awards result in a cost
that will be measured at fair value on the awards’ grant date based on the
estimated number of awards that are expected to vest. Compensation costs for
awards that vest will not be reversed if the awards expire without being
exercised.
  Equity-based
compensation expense is measured at the grant date, based on the fair value of
the award, and is recognized over the vesting periods. The expenses are included
in selling, general, and administrative or research and development expense
depending on the grant recipient.
 
 Valuation of Long-Lived
Assets
 
 The
Company records impairment losses on assets when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amount of
those items. The Company’s cash flow estimates are based on historical results
adjusted to reflect the Company’s best estimate of future market and operating
conditions. The net carrying value of assets not recoverable is reduced to fair
value. The Company’s estimates of fair value represent its best estimate based
on industry trends and reference to market rates and
transactions.  The Company recorded an impairment of $76,782 in 2008
to lower the carrying value of its right to license intellectual property to the
amount of gross profit anticipated in the year ending December 31, 2009 from
purchase orders previously received for the Company’s Curiax Arraigner
software.  No impairment was recorded in 2007.
 
 Revenue
Recognition
 
 Revenues
consist of the sale of device management, control, and monitoring software and
digital arraignment software, videoconferencing systems and related maintenance
contracts on these systems.  The Company marketed three products
during 2008 and 2007:  the Company’s control and monitoring software,
Device ManagerTM
(formerly known as
OnGoer®), digital arraignment software called Curiax ArraignerTM, and
video visitation product called Curiax
Video VisitationTM.  Revenue
consists of the sale of device control software and related maintenance
contracts on these systems.  Revenue on the sale of hardware is
recognized upon shipment.  The Company recognizes revenue from
DeviceManager software sales upon shipment as the Company sells the product to
audiovisual integrators, net of estimated returns and
discounts.  Revenue on maintenance contracts is recognized over the
term of the related contract. The
Company had no sales of Curiax products during 2007.  The Company
applies the revenue recognition principles set forth
under SEC Staff Accounting Bulletin 104, (“SAB 104”), with respect to all of its
revenue.  The Company adhered strictly to the criteria outlined in SAB 104,
which provides for revenue to be recognized when (i) persuasive evidence of an
arrangement exists, (ii) delivery or installation has been completed, (iii) the
customer accepts and verifies receipt, and (iv) collectability is reasonably
assured.
  27
  SIMTROL,
INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007
 
 Note
3 – Significant Accounting Policies, continued
 
 Deferred
Revenue
 
 Deferred
revenue consists of payments made by customers in advance of when services are
delivered.  As of December 31, 2008 and 2007, there were $19,518 and
$462, respectively, of deferred revenues.
 
 Cash and Cash
Equivalents
 
 For
financial reporting purposes, the Company considers all highly liquid
investments with a maturity of twelve months or less when purchased to be cash
equivalents.  The Company places its cash deposits and cash
investments with financial institutions. At times, the Company’s cash and cash
equivalents may be uninsured or in deposit accounts that exceed the Federal
Deposit Insurance Corporation (“FDIC”) insurance limits.
 
 Allowance for Doubtful
Accounts
 
 The
allowance for doubtful accounts reflects management’s best estimate of the
probable losses inherent in the account receivable
balance.  Management determines the allowance based on known troubled
accounts, historical experience, and other currently available
evidence.
 
 Inventory
 
 The
Company purchases certain hardware connectivity devices to allow connectivity of
devices with different interfaces in classrooms.  The inventory is
stated at the lower of cost or market value and is recorded at the actual cost
paid to third-party vendors.  The Company accounts for the inventory
using the first-in, first-out (“FIFO”) method of accounting.
 
 Property and
Equipment
 
 Property
and equipment are stated at cost. Depreciation and amortization are provided for
in amounts sufficient to relate the cost of depreciable assets to operations
over the shorter of their estimated useful lives, ranging from 3-10 years on a
straight-line basis.  Leasehold improvements will be amortized over
the shorter of the estimated useful life or over 60 months, the term of the
initial lease on the Company’s facility.
 
 Software Development
Costs
 
 The
Company’s policy on capitalized software development costs determines the timing
of its recognition of certain development costs. In addition, this policy
determines whether the cost is classified as development expense or capitalized.
Software development costs incurred after technological feasibility has been
established are capitalized and amortized, commencing with product release,
using the greater of the income forecast method or on a straight-line basis over
the useful life of the product. Management is required to use professional
judgment in determining whether development costs meet the criteria for
immediate expense or capitalization.
 
 The
Company did not capitalize any software development costs during either 2008 or
2007 and all assets were fully amortized by December 31, 2006.
  28
 
 SIMTROL,
INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007
 
 Note
3 – Significant Accounting Policies, continued
 
 Income
Taxes
 
 Income
tax expense, income taxes payable and deferred tax assets and liabilities are
determined in accordance with SFAS No. 109. Under SFAS No. 109, the deferred tax
liabilities and assets reflect the tax effect of temporary differences between
asset and liability amounts recognized for income tax purposes and the amounts
recognized for financial reporting purposes. Deferred tax assets and liabilities
are measured by applying enacted statutory tax rates applicable to future years
in which the deferred tax assets or liabilities are expected to be settled or
realized. Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized on a more likely than not
basis.
 
 On
January 1, 2007, the Company adopted the Financial Accounting Standards Board
FIN No. 48 which clarifies the accounting for uncertainty in income taxes
recognized in an entity’s financial statements in accordance with FASB No. 109
and prescribes a recognition threshold and measurement attributes for financial
statement disclosures of tax positions taken or expected to be taken on an
income tax return. Under FIN No. 48, the impact of an uncertain income tax
position on the income tax return must be recognized at the largest amount that
is more-likely than not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained. Additionally, FIN No. 48 provides
guidance on derecognition, classification, interest, penalties and
disclosures.
 
 Deferred Offering
Costs
 
 The
Company capitalizes those costs directly associated with convertible debt and
equity offerings including legal costs, securities filing fees, and
miscellaneous offering related expenses.  These amounts are expensed
as finance costs over the term of associated debt and recorded as reductions of
additional paid in capital for equity offerings.
 
 Right to License
Intellectual Property
 
 The
Company evaluates intangible assets for potential impairment indicators whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. The Company records an impairment charge if the estimated fair
value of the intangible asset is less than the carrying value of the intangible
asset and the carrying value of the intangible asset is not deemed
recoverable.  See Note 11.
 
 Fair Value of Financial
Instruments
 
 In
January 2008, the Company adopted the provisions of SFAS No. 157, “Fair Value
Measurements,” (“SFAS 157”), which defines fair value for accounting purposes,
establishes a framework for measuring fair value and expands disclosure
requirements regarding fair value measurements.  The Company’s adoption of
SFAS 157 did not have a material impact on its consolidated financial
statements.  Fair value is defined as an exit price, which is the price
that would be received upon sale of an asset or paid upon transfer of a
liability in an orderly transaction between market participants at the
measurement date.  The degree of judgment utilized in measuring the fair
value of assets and liabilities generally correlates to the level of pricing
observability.  Financial assets and liabilities with readily available,
actively quoted prices or for which fair value can be measured from actively
quoted prices in active markets generally have more pricing observability and
require less judgment in measuring fair value.  Conversely, financial
assets and liabilities that are rarely traded or not quoted have less price
observablility and are generally measured at fair value using valuation models
that require more judgment.  These valuation techniques involve some level
of management estimation and judgment, the degree of which is dependent on the
price transparency of the asset, liability or market and the nature of the asset
or liability.  The Company has categorized its financial assets and
liabilities measured at fair value into a three-level hierarchy in accordance
with SFAS 157.  See Note 11 for a further discussion regarding the
Company’s measurement of financial assets and liabilities at fair
value.
 
 29
 
 SIMTROL,
INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007
 
 Note
3 – Significant Accounting Policies, continued
 
 Management
believes that the carrying amounts of certain financial instruments, including
cash and cash equivalents, certificates of deposit, accounts receivable,
accounts payable and accrued expenses approximate their fair values as of each
balance sheet date given the relatively short maturity of each of these
instruments.
 
 Use of
Estimates
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported
 amounts
of revenue and expenses during the reporting period. Critical estimates include
management's judgments associated with: determination of an allowance for
doubtful accounts receivable, deferred income tax valuation allowance and the
capitalization, depreciation and amortization of certain long-term assets
(primarily software development costs), stock-based compensation, and impairment
of assets.   Actual results could differ from those
estimates.
 
 Recent Accounting
Pronouncements
 
 In
September 2006, the FASB issued SFAS No. 157 that provides a single definition
of fair value and a hierarchical framework for measuring it, as well as
establishing additional disclosure requirements about the use of fair value to
measure assets and liabilities. SFAS No. 157 is effective as of the beginning of
fiscal years beginning after November 15, 2007. In February 2008, the FASB
released FASB Staff Position (“FSP”), SFAS No. 157-2, or FSP FAS No. 157-2,
which delayed the effective date of SFAS No. 157 for all non-financial assets
and non-financial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually),
to fiscal years beginning after November 15, 2008. In October 2008, the FASB
released FSP FAS No. 157-3, which clarifies the application of SFAS No. 157 in a
market that is not active. FSP FAS No. 157-3 applies to financial assets within
the scope of accounting pronouncements that require or permit fair value
measurements in accordance with SFAS No. 157 and was effective upon issuance for
future periods and prior periods for which financial statements have not been
issued. The adoption of SFAS No. 157 for the Company’s financial assets and
liabilities did not have a material impact on the Company’s consolidated
financial statements. The application of FSP FAS No. 157-3 for financial assets
in a market that is not active did not have a material impact on the Company’s
consolidated financial statements. The Company does  not believe the
adoption of SFAS No. 157 for the Company’s non-financial assets and liabilities,
effective January 1, 2009, will have a material impact on the Company’s
consolidated financial statements. See Note 12 for additional information and
related disclosures regarding the Company’s fair value
measurements.
 
 In
December 2007, the FASB issued SFAS No. 141(R),”Business Combinations”, which
replaces SFAS No. 141, “Business Combinations.” SFAS No. 141(R) retains the
underlying concepts of SFAS No. 141 in that all business combinations are still
required to be accounted for at fair value under the acquisition method of
accounting, but SFAS No. 141(R) changed the method of applying the acquisition
method in a number of significant aspects. SFAS No. 141(R) is effective on a
prospective basis for all business combinations for which the acquisition date
is on or after the beginning of the first annual period subsequent to December
15, 2008, with the exception of the accounting for valuation allowances on
deferred taxes and acquired tax contingencies under SFAS No. 109. SFAS No.
141(R) amends SFAS No. 109 such that adjustments made to valuation allowances on
deferred taxes and acquired tax contingencies associated with acquisitions that
closed prior to the effective date of SFAS No. 141(R) would also apply the
provisions of SFAS No. 141(R). Early adoption is not allowed. The adoption of
SFAS No. 141(R) could have a significant impact on how the Company allocates the
purchase price of an acquired business. The impact will be limited to future
acquisitions.
 
 Effective
January 1, 2008, the Company adopted SFAS No. 159, “The Fair Value Option for
Financial Assets and Liabilities.”  SFAS No. 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value.  The Company did not elect the fair value reporting option for
any assets or liabilities not previously recorded at fair value.
  30
  SIMTROL,
INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007
 
 Note
3 – Significant Accounting Policies, continued
 
 In
December 2007, the FASB issued SFAS No.160, “Noncontrolling Interests in
Consolidated Financial Statements – An Amendment of ARB No. 51”. SFAS 160
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary (previously referred to as minority interests). SFAS 160 also
requires that a retained noncontrolling interest upon the deconsolidation of a
subsidiary be initially measured at its fair value. Upon adoption of SFAS 160,
the Company would be required to report any noncontrolling interests as a
separate component of consolidated stockholders’ equity. The Company would also
be required to present any net income allocable to noncontrolling interests and
net income attributable to the stockholders of the Company separately in its
consolidated statements of operations. SFAS 160 is effective for fiscal years,
and interim periods within those fiscal years, beginning on or after December
15, 2008. SFAS 160 requires retroactive adoption of the presentation and
disclosure requirements for existing minority interests. All other requirements
of SFAS 160 shall be applied prospectively. SFAS 160 would have an impact on the
presentation and disclosure of the noncontrolling interests of any non
wholly-owned businesses acquired in the future.
 
 In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities—an amendment of FASB Statement
No. 133”. SFAS 161 changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity
uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance and cash
flows.  The guidance in SFAS 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15,
2008, with early application encouraged. This Statement encourages, but does not
require, comparative disclosures for earlier periods at initial adoption.
 At this time, management is evaluating the implications of SFAS 161 and
its impact on the financial statements has not yet been determined.
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles." SFAS 162 identifies the sources of accounting principles
and the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with United States Generally Accepted Accounting Principles (“GAAP”).
SFAS 162 directs the GAAP hierarchy to the entity, not the independent auditors,
as the entity is responsible for selecting accounting principles for financial
statements that are presented in conformity with GAAP. SFAS 162 is effective
November 15, 2008. The adoption of this Statement did not have any impact
on the Company’s financial position and results of operations.
 
 In May
2008, the FASB issued FSP APB 14-1, “Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”
(“FSP APB 14-1”). FSP APB 14-1 specifies that for convertible debt instruments
that may be settled in cash upon conversion, issuers of such instruments should
separately account for the liability and equity components in the statement of
financial condition. The excess of the initial proceeds of the convertible debt
instrument over the amount allocated to the liability component creates a debt
discount which should be amortized as interest expense over the expected life of
the liability. FSP APB 14-1 is effective for financial statements issued for
fiscal years and interim periods beginning after December 15, 2008 and is
to be applied retrospectively. The Company is currently evaluating the impact of
adopting FSP APB 14-1 on its financial position and results of
operations.
 
 In June
2008, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 07-5,
“Determining Whether an Instrument (or an Embedded Feature) Is Indexed to
an Entity's Own Stock” (“EITF 07-5”). EITF 07-5 provides that an entity
should use a two step approach to evaluate whether an equity-linked
financial instrument, or embedded feature, is indexed to its own stock,
including evaluating the instrument's contingent exercise and settlement
provisions. It also clarifies on the impact of foreign currency denominated
strike prices and market-based employee stock
option valuations. EITF 07-5 is effective for fiscal years
beginning after December 15, 2008 and interim periods within those fiscal
years. The adoption of EITF 07-5 is not expected to have a material impact
on the Company’s consolidated financial position and results of
operations.
  31
  SIMTROL,
INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007
 
 Note
3 – Significant Accounting Policies, continued
 
 In June
2008, the FASB issued EITF Issue No. 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities” (“EITF
03-6-1”).  EITF 03-6-1 addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting
and, therefore, need to be included in the earnings allocation in computing
earnings per share (EPS) under the two-class method described in paragraphs 60
and 61 of FASB No. 128, “Earnings per Share”.  EITF 03-6-1 is
effective for fiscal years beginning after December 15, 2008 and is to be
applied retrospectively.  The adoption of EITF 03-6-1 is not expected
to have a material impact on the Company’s consolidated financial position and
results of operations.
 
 NOTE
4 – Property and Equipment
 
 Property
and equipment consists of the following as of December 31, 2008 and
2007:
 
 2008
                          
                          
                          2007Machinery
      and equipment
                          
                          $
                          156,021
                          
                          
                          $
                          130,078Furniture
      and fixtures
                          
                          
                          16,599
                          
                          
                          
                          6,619Leasehold
      improvements
                          
                          
                          15,840
                          
                          
                          
                          15,840188,460
                          
                          
                          
                          152,537Less
      accumulated depreciation and amortization
                          
                          
                          (86,952
                          )
                          
                          
                          (35,252
                          )$
                          101,508
                          
                          
                          $
                          117,285
 
 Depreciation
and amortization expense relating to property and equipment was $51,700 and
$25,223 for the years ended December 31, 2008 and 2007, respectively, and is
included in selling, general and administrative expense in the accompanying
consolidated statements of operations.
 
 NOTE
5 – Related Party Transaction
 
 As of
March 16, 2007, one former member of the Board of Directors had a total of
$510,000 notes payable outstanding, of which he exchanged $496,500 of the notes
and accrued interest of $11,289 as part of the Series B Preferred Stock private
placement. See Note 7. The remaining balance of $13,500 and accrued interest
totaling $786 was paid in full at June 29, 2007. See Note 7.
 
 On
January 23, 2008, one member of the Board of Directors purchased a $22,500
convertible note in the Company’s private placement (see Note 6).  On
June 30, 2008, this convertible note, along with $750 of accrued interest, was
exchanged into the Company’s Series C Convertible Preferred stock
offering.  The board member received 31 shares of Series C Convertible
Preferred stock and a warrant to purchase 62,000 shares of the Company’s common
stock at that time, in accordance with the terms of the Company’s private
placement.  The Company also paid $426 of accrued interest not
exchanged into the private placement. See Note 6.
 
 Note
6 – Convertible Notes Payable
 
 On
January 23, 2008, the Company completed the sale of $1,500,000 of convertible
notes payable (“Convertible Notes”) in a private placement.
 
 Important
terms of the Convertible Notes included:
  ·
                The
      Convertible Notes were unsecured, bore interest at the rate of 12% per
      annum, were payable nine months from the issue date (“Maturity Date”) and
      could be pre-paid at any time without
penalty.
  32
  SIMTROL,
INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007
 
 Note
6 – Convertible Notes Payable, continued
  ·
                If
      the Company closed a “Qualifying Next Equity Financing” before the
      Maturity Date, the then-outstanding balance of principal and accrued
      interest on the Convertible Notes would automatically convert into shares
      of the “Next Equity Financing Securities” the Company
      issues.  If the Company closed a “Non-Qualifying Next Equity
      Financing” before the Maturity Date, the then-outstanding balance of
      principal and accrued interest on the Convertible Notes could be
      converted, at the option and election of the investor, into shares of the
      “Next Equity Financing Securities” the Company
  issues.
  ·
                A
      “Qualifying Next Equity Financing” means the first bona fide equity
      financing (or series of related equity financing transactions) occurring
      subsequent to the date of issue of a Convertible Note in which the Company
      sells and issues any of the Company’s securities for total consideration
      totaling not less than $2.0 million in the aggregate (including the
      principal balance and accrued but unpaid interest to be converted on all
      the outstanding Convertible Notes) at a price per share for equivalent
      shares of common stock that is not greater than $0.75 per
      share.  A “Non-Qualifying Next Equity Financing” means that the
      Company completes a bona fide equity financing but fails to raise total
      consideration of at least $2.0 million, or the price per share for
      equivalent shares of common stock is greater than $0.75 per
      share.  “Next Equity Financing Securities” means the type and
      class of equity securities that the Company sells in a Qualifying Next
      Equity Financing or a Non-Qualifying Next Equity Financing.  If
      the Company sells a unit comprising a combination of equity securities,
      then the Next Equity Financing Securities shall be deemed to constitute
      that unit.
  ·
                Upon
      conversion of a Convertible Note, the Company will issue that number of
      shares of Next Equity Financing Securities equal the quotient obtained by
      dividing the then-outstanding balance of principal and accrued interest on
      the Convertible Notes by the price per share of the Next Equity Financing
      Securities.
  ·
                Upon
      any default, the Company would be required to pay a 1% default fee on the
      outstanding balance.  The default fee will be added to the
      outstanding balance and become due under the terms of the Convertible
      Note.
  The
Company also issued investors warrants to acquire 500,000 shares of common stock
at an exercise price of $0.75 per Share.  The Warrants have a term
ending on the earlier to occur of (i) the fifth anniversary of the Warrant
issue date or (ii) the closing of a change of control event.
  The
Company raised a net total of $1,479,000 from the sale (offering costs of
approximately $16,000 incurred in 2007 and $5,000 during 2008 were capitalized
as financing costs).  In conjunction with the issuance of the
Convertible Notes, the Company recorded debt discounts of $532,076 for the
estimated value of the warrants and a beneficial conversion
feature.  Amortization of the debt discounts included in finance
expense during 2008 totaled $532,076.  All debt discounts have been
fully amortized as of December 31, 2008, due to the exchange of all the
Convertible Notes into Series C Convertible Preferred Stock as a result of a
“Qualifying Next Equity Financing” on June 30, 2008 per the above terms (see
Note 7).  Accrued interest of $72,750 on the notes converted on that
date and $6,144 of accrued interest that remained outstanding on that date was
repaid to noteholders in July 2008.
  33
  SIMTROL,
INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007
 
 Note
7 - Stockholders’ Equity
 
 During
2008 and 2007, the Company issued 17,376 and 18,431 shares of common stock
valued at $5,850 and $21,450, respectively, to members of the Board of Directors
for attendance at meetings.  These amounts were included in selling,
general, and administrative expenses in the accompanying consolidated statement
of operations.
 
 During
2008 and 2007, respectively, the Company issued 320,400 and 784,900 restricted
common shares to Triton Value Partners (“Triton”) valued at $139,107 and
$490,381 as part of its 24-month engagement with the Company that commenced on
January 31, 2007.  Triton received 480,000 shares in January 2007 at
the conclusion of its initial engagement and received 640,000 shares of stock
ratably over the term of its 24-month engagement commenced in January
2007.  The expense was recorded at the fair value of the stock on the
days of issuances of the stock.
 
 During
2008, two Series A Convertible Preferred Stock holders converted 40,000 shares
of their Preferred Stock and were issued 160,000 shares of common
stock.
 
 During
2008, thirteen Series B Convertible Preferred Stock holders converted 415 shares
of Preferred Stock and were issued 830,000 shares of common stock.
 
 On
January 3, 2008 the Company issued 10,000 shares of common stock valued at
$9,500 in exchange for investor relations services performed for the Company by
an investor relations consulting company.  On February 5, 2008 the
Company issued 105,000 shares of common stock valued at $78,750 in exchange for
investor relations and consulting services performed for the Company by an
investor relations consultant.
 
 On June
26, 2008, the Certificate of Designation establishing the terms of a Series C
Convertible Preferred Stock was filed. Certain terms of the Series C Preferred
Stock are as follows:
 
 ·
                The
      Series C Convertible Preferred Stock stated value is $750 and each share
      converts into common stock at the conversion price of $0.375 at any time
      and without limitation.
 
 ·
                Without
      approval of a majority of the Series C Convertible Preferred Stock
      Holders, the Company shall not incur debt (other than debt collateralized
      by accounts receivable of the Company) in excess of an aggregate of $1.5
      million outside of trade debt in the normal course of business. The terms
      of such debt shall not encumber any copyrights, marketing materials,
      software code or any other proprietary technology, software or product
      processes, patents or patent
licenses.
 
 ·
                The
      Series C Convertible Preferred Stock will pay a 12% (based on stated
      value) noncumulative coupon beginning December 31, 2008, payable
      semi-annually (June 30, December 31) in cash or common stock (common stock
      value deemed $0.375 for purpose of dividend payment if closing price of
      common stock on payment date is less than
  $0.375).
 
 ·
                If
      the Company’s common stock bid price closes at or above $1.00 for 20
      consecutive trading days and the average daily trading volume, in dollars,
      of the common stock is equal to or greater than $150,000, then Series C
      Convertible Preferred Stock will automatically convert to common at $0.375
      per common share.
 
 ·
                Series
      C Convertible Preferred Stock Holders receive pre-emptive rights to
      participate in subsequent equity rounds at the same pro rata percentage of
      ownership they currently own in Company on an as-converted basis
      today.
 
 ·
                Series
      C Convertible Preferred Stock is callable at $1,875 per share at option of
      Company.
 
 ·
                A
      total of 7,900 shares of Series C Convertible Preferred Stock were
      designated.
  34
 SIMTROL,
INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007
 
 Note
7 – Stockholders’ Equity, Continued
 
 On June
30, 2008, the Company completed the sale of a total of $2,716,750 of securities
in a private placement of 3,622 units (at $750 per unit) consisting of one share
of Series C Convertible Preferred Stock and one warrant to purchase 2,000 shares
of the Company’s common stock at an exercise price of $0.375 per share. The sale
was comprised of $1,144,250 gross cash proceeds and the exchange of the
Convertible Notes (see note 6) from 21 note holders, including one member of the
board of directors, totaling $1,500,000 principal and $72,750 of accrued
interest.  The net proceeds were $1,053,153.  Each share of
Series C Convertible Preferred Stock has a conversion price of $0.375 per share
(one Series C Convertible Preferred share equals 2,000 shares of common stock).
In accordance with Emerging Issues Task Force 00-27, "Application of Issue No.
98-5 to Certain Convertible Instruments" and Emerging Issues Task Force 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjusted Conversion Ratios", the Company determined the relative
fair value of the warrants and the Series C convertible preferred stock and
allocated the proceeds received on a relative fair value basis. The fair value
of the warrants was calculated using the Black-Scholes option pricing model with
the following assumptions: dividend yield of 0%, expected volatility of 114.6%,
risk-free interest rate of 3.34% and a term of five years. In connection with
the issuance of the securities above, a deemed dividend of $1,299,838 was
recorded to reflect the beneficial conversion feature on the common shares
that would result from the conversion of the Series C Preferred Stock, due to
the $0.19 per share effective conversion price of the Series C Convertible
Preferred Stock issued on June 30, 2008.
 
 On
September 26, 2008, the Company completed the sale of a total of $1,433,750 of
securities in a private placement of 1,912 units (at $750 per unit) consisting
of one share of Series C Convertible Preferred Stock and one warrant to purchase
2,000 shares of the Company’s common stock at an exercise price of $0.375 per
share. Each share of Series C Convertible Preferred Stock has a conversion price
of $0.375 per share (one Series C Convertible Preferred share equals 2,000
shares of common stock).   The fair value of the warrants was
calculated using the Black-Scholes option pricing model with the following
assumptions: dividend yield of 0%, expected volatility of 110.5%, risk-free
interest rate of 3.05% and a term of five years. In connection with the issuance
of the securities above, a deemed dividend of $675,760 was recorded to reflect
the beneficial conversion feature on the common shares that would result
from the conversion of the Series C Preferred Stock, due to the $0.18 per share
effective conversion price of the Series C Convertible Preferred Stock issued on
September 26, 2008.
 
 On June
30, 2008, in accordance with the terms of the Series B Convertible Preferred
stock, the Company elected to pay the dividend due to the Series B stockholders
on that date with 521,160 shares of its common stock.  A share value of
$0.375 was used per the terms of the Series B Convertible Preferred stock to
determine the number of shares required to pay the dividend on that
date.
 
 On June
30, 2008, the Company elected to pay the dividend due to the Series A
stockholders on that date with 220,375 shares of its common stock.  A share
value of $0.375 was used to determine the number of shares required to pay the
dividend on that date. The Company erroneously issued holders of Series A
Preferred Stock common stock dividends on June 30, 2008 with a value of $0.375
per share, rather than the $0.75 per share rate per the terms of the Series A
Convertible Preferred stock.  As a result, the holders were issued
twice the number of common shares to which they were entitled in payment of the
June 30, 2008 dividend and no additional shares were issued on December 31,
2008.
 
 On
December 31, 2008, in accordance with the terms of the Series A Convertible
Preferred stock, the Company elected to pay the dividend due to the Series A
stockholders on that date with 110,188 shares of its common
stock.  The Company erroneously issued holders of Series A Preferred
Stock common stock dividends on June 30, 2008 with a value of $0.375 per share,
rather than the $0.75 per share rate per the terms of the Series A Convertible
Preferred stock.  As a result, the holders were issued twice the
number of common shares to which they were entitled in payment of the June 30,
2008 dividend and no additional shares were issued on December 31,
2008.
 
 On
December 31, 2008, in accordance with the terms of the Series B Convertible
Preferred stock, the Company elected to pay the dividend due to the Series B
stockholders on that date with 521,160 shares of its common stock.  A share
value of $0.375 was used per the terms of the Series B Convertible Preferred
stock to determine the number of shares required to pay the dividend on that
date.
  35
  SIMTROL,
INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007
 
 Note
7 – Stockholders’ Equity, Continued
 
 On
December 31, 2008, in accordance with the terms of the Series C Convertible
Preferred stock, the Company elected to pay the dividend due to the Series C
stockholders on that date with 664,040 shares of its common stock.  A share
value of $0.375 was used per the terms of the Series C Convertible Preferred
stock to determine the number of shares required to pay the dividend on that
date.
 
 On
November 22, 2008 and 2007, respectively, the Company issued 100,000 shares of
restricted common stock to Integrated Digital Systems (“IDS”) as partial
consideration for purchasing their membership interest Justice Digital Solutions
(“JDS”).  See Note 11.
 
 On
January 30, 2007, the Company received a notice of effectiveness from the State
of Delaware regarding the Certificate of Amendment of Certificate of
Incorporation of the Company (the "Amendment"), which modified the rights of the
holders of the Company's Series A Convertible Preferred Stock. The Amendment
provides for, among other things: (i) each holder of the Company's Series A
Convertible Preferred Stock to receive one additional share of Series A
Convertible Preferred Stock for each share owned; (ii) the addition of an 8%
(based on stated value) noncumulative coupon, payable semi-annually in cash or
common stock of the Company; (iii) pre-emptive rights for holders of the
Company's Series A Convertible Preferred Stock; (iv) the addition of a
redemption feature whereby the Series A Convertible Preferred Stock is callable
at $3.75 per share at the option of the Company; (v) the addition of a mandatory
conversion feature whereby the Series A Convertible Preferred Stock is
automatically converted to common stock of the Company in the event that
the bid price of the Company's common stock closes at or above $1.00 for 20
consecutive trading days and the average daily trading volume of the Company's
common stock is equal to or greater than $150,000; and (vi) the amendment of the
provision requiring unanimous approval for an increase in the
number of shares designated as Series A Convertible Preferred Stock to require a
majority approval for an increase in the number of shares designated as Series A
Convertible Preferred Stock. The Amendment also eliminated the working capital
test that previously occurred at quarter end per the previous Series A
Convertible Preferred Stock terms and increased the authorized number of Series
A Convertible Preferred shares from the previous 450,000 to
770,000.  On June 30, 2007, in accordance with the terms of the
Certificate, the Company paid a dividend to the Series A shareholders of 58,035
shares of its common stock.  The price of the stock on that date was
$1.54.  On December 31, 2007, in accordance with the terms of the
Certificate, the Company paid a dividend to the Series A shareholders of 119,797
shares of its common stock.  The price of the stock on that date was
$0.73.
 
 In
accordance with the receipt of a notice of effectiveness from the State of
Delaware regarding the Amendment, which modified the rights of the holders of
the Company's Series A Convertible Preferred Stock, the Company issued 384,666
shares of Series A Convertible Preferred stock on January 31, 2007 to the
existing Series A Convertible Preferred stockholders. Each stockholder also
received warrants to purchase two shares of common stock for each share of
Series A Convertible Preferred Stock issued on January 31, 2007 at an exercise
price of $0.375 per share. This issue of Series A Preferred stock and warrants
to purchase common stock settled the liability for dividend payable on
default of convertible preferred stock of $1,171,863. On January 31, 2007, in
accordance with the anti-dilution provisions
of certain warrants to purchase 388,000 shares of common stock that were issued
during 2004, thirteen warrant holders had the exercise prices of the warrants
adjusted from $2.00 per share to $0.375 per share and warrants to
purchase an additional 1,681,333 shares of common stock were issued.
On January 31, 2007, in accordance with the anti-dilution provisions of certain
warrants to purchase 2,145,444 shares of common stock that were issued during
2005, warrant holders having the right to purchase 345,444 shares of stock had
their exercise prices of the warrants adjusted from $0.75 per share to $0.375
per share, warrant holders having the right to purchase 900,000 shares of stock
had their exercise prices of the warrants adjusted from $1.25 per share to
$0.375 per share, and warrant holders having the right to purchase 900,000
shares of stock had their exercise prices of the warrants adjusted from $1.00
per share to $0.375 per share. The expiration dates of the 2004 and 2005
warrants were not changed.
 
 On
February 20, 2007, the Certificate of Designation establishing the terms of a
Series B Preferred Stock was filed. Certain terms of the Series B Preferred
Stock are as follows:
 
 ·
                The
      Series B Preferred Stock stated value is $750.00 and each share converts
      into common stock at the conversion
      price of $0.375 at any time and without
  limitation.
  36
  SIMTROL,
INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007
 
 Note
7 – Stockholders’ Equity, Continued
 
 ·
                Without
      approval of a majority of the Series B Preferred Stock Holders, the
      Company shall not incur debt (other than debt collateralized by accounts
      receivable of the Company) in excess of an aggregate of $1.5 million
      outside of trade debt in the normal course of business. The terms of such
      debt shall not encumber any copyrights,
      marketing materials, software code or any other proprietary technology,
      software or product processes, patents or patent
      licenses.
 
 ·
                The
      Series B Preferred Stock will pay a 12% (based on stated value)
      noncumulative coupon, payable semi-annually (June 30, December 31) in cash
      or common stock (common stock value deemed $0.375 for purpose of dividend
      payment if closing price of common stock on payment date is less than
      $0.375).
 
 ·
                If
      the Company has a current registration statement on file covering those
      common shares represented by Series B Preferred Stock and the Company’s
      common stock bid price closes at or above $1.00 for 20 consecutive trading
      days and the average daily trading volume of the common stock is equal to
      or greater than $150,000, then Series B Preferred Stock will automatically
      convert to common at $0.375 per common
share.
 
 ·
                Series
      B Preferred Stock Holders receive pre-emptive right to participate in
      subsequent equity rounds at the same pro rata percentage of ownership they
      currently own in Company on an as-converted basis
  today.
 
 ·
                Series
      B Preferred Stock callable at $1,875 per share at option of
      Company.
 
 ·
                A
      total of 4,700 shares of Series B Preferred Stock were
      designated.
 
 ·
                The
      Company was required to file a registration statement within sixty (60)
      days of the closing of this Offering and use its best efforts for it to be
      effective within sixty (60) days from its filing.  In the event
      that these filing requirements were not met, the Company will pay the
      Investor (pro rated on a daily basis), as partial compensation for such
      failure, and not as a penalty, in the form of common stock, equal to one
      and one half percent (1.5%) of the purchase price of the registrable
      securities purchased from the Company and held by the Investor for each
      month (or portion thereof) until such Registration Statement has been
      filed.  The Company filed a resale registration statement on
      Form SB-2 on May 14, 2007 to register the common stock underlying the
      Series B Convertible Preferred Stock, the common stock underlying the
      warrants issued in conjunction with the exchange of the notes payable, and
      the common stock underlying the warrants in the private
      placement.  The registration statement was not declared
      effective by the SEC and was withdrawn in June
  2008.
 
 On March
16, 2007, three note holders, including one member of the Board of Directors,
exchanged $696,500 principal and $13,700 interest due from the Company (totaling
$710,200) under their notes payable for units in the private
placement.  In conjunction with the exchange, the Company issued the
holders additional warrants to purchase an aggregate of 710,200 shares of the
Company’s common stock at an exercise price of $0.375 per share.  The
warrants have five-year terms.  The Company recorded a finance expense
of $772,655 to recognize the fair value of the warrants granted to the
noteholders.
 
 Additionally,
on March 16, 2007, the Company completed the sale of $3,525,000 of securities in
a private placement of 4,700 units (at $750 per unit) consisting of one share of
Series B Convertible Preferred Stock and one warrant to purchase 2,000 shares of
our common stock at an exercise price of $0.375 per share. Each share of Series
B Convertible Preferred Stock has a conversion price of $0.375 per share (one
Series B Convertible Preferred share equals 2,000 shares of common stock). The
fair value of the warrants was calculated using the Black-Scholes option pricing
model with the following assumptions: dividend yield of 0%, expected volatility
of 42%, risk-free interest rate of 3.92% and a term of three years. In
connection with the issuance of the securities above, a deemed dividend of 
$939,118
was recorded to reflect the beneficial conversion feature on the common
shares that would result from the conversion of the Series B Preferred Stock,
due to the $0.10 per share effective conversion price of the Series B
Convertible Preferred Stock issued on March 16, 2007.  On September
12, 2007, the Company amended the terms of its stock purchase
warrants.  The Warrants were revised to include a cashless exercise
provision and to extend the term of the Warrants from three years to five
years.  In conjunction with the amendment, the Company recorded an
expense of $578,611 to record the increased fair value of the warrants due to
the modification.
  37
  SIMTROL,
INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007
 
 Note
7 – Stockholders’ Equity, Continued
 
 On June
30, 2007, in accordance with the terms of the terms of the Series B Preferred
stock, the Company paid a dividend to the Series B shareholders of 137,378
shares of its common stock.  The price of the stock on that date was
$1.54.
 
 On
December 31, 2007, in accordance with the terms of the terms of the Series B
Preferred stock, the Company paid a dividend to the Series B shareholders of
289,767 shares of its common stock.  The price of the stock on that
date was $0.73.
 
 During
2007, five stockholders converted 40,668 shares of the Company’s Series A
Convertible Preferred Stock to 162,672 shares of the Company’s common
stock.
 
 During
2007, 15 warrant holders exercised warrants allowing the purchase of 927,828
shares of common stock via cashless exercise provisions.  Per the
terms of the warrant agreements, the Company issued the holders 713,387 shares
of its common stock.
 
 NOTE
8 – Stock Warrants
 
 The
Company had stock purchase warrants for 28,002,774 and 16,434,774 shares of
common stock outstanding at December 31, 2008 and 2007,
respectively.  A roll forward of the warrant totals for 2008 and 2007
is as follows:
 
 December 31,2008
                                
                                
                                2007Warrants
      outstanding at beginning of year
                                
                                
                                16,434,774
                                
                                
                                
                                4,897,737Granted
                                
                                
                                11,568,000
                                
                                
                                
                                12,560,865Exercised
                                
                                
                                -
                                
                                
                                
                                (927,828
                                )Terminated
                                
                                
                                -
                                
                                
                                
                                (96,000
                                )Warrants
      outstanding at December 31
                                
                                
                                28,002,774
                                
                                
                                
                                16,434,774
 
 The
exercise prices of warrants granted in 2008 were $0.375 to $0.75 and all
warrants granted in 2007 had exercise prices of $0.375.  The weighted
average exercise prices were approximately $0.51 and $0.60 at December 31, 2008
and 2007, respectively.
 
 NOTE
9- Major Customers
 
 Revenue
from two customers comprised 71% and 16% of the Company’s consolidated revenues
for 2008.  Revenue from two customers comprised 42% and 30% of the
Company’s consolidated revenues for 2007.  At December 31, 2008,
accounts receivable from one customer comprised approximately 100% of accounts
receivable.  All of these amounts were collected subsequent to
December 31, 2008.
 
 Management
believes that concentration of credit risk with respect to trade receivables is
minimal due to the composition of the customer base. The end users for the
Company’s products are primarily large national and multinational
companies and agencies of the U.S. government. Allowances are maintained for
potential credit losses, and such losses have not been
material.
  38
  SIMTROL,
INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007
 
 NOTE
10 - Operating Leases
 
 The
Company leases office space and equipment under noncancellable operating leases
expiring at various dates through 2012.  On July 20, 2007, the Company
entered into a 60-month lease agreement with Narmada Partners, LLC to occupy new
office space consisting of approximately 10,000 square feet in an office
building in Norcross, Georgia. The
Company occupied the space on October 11, 2007.  The total amount of
rent payable under the lease will be recognized on a straight-line basis over
the term of the lease.  Due to scheduled annual rental increases of
approximately three percent during the term of the lease, the Company recognized
additional rent expense and deferred rent payable of $4,063 and $16,488 in 2008
and 2007, respectively.  The Company delivered to the landlord a
standby, irrevocable letter of credit for $100,000 as a security deposit with
the letter of credit amount reducing $20,000 for each year of the lease as long
as the lease is not in default.  The Company was required to
collateralize the letter of credit with a $100,000 one-year certificate of
deposit.  In 2008, the letter of credit amount was reduced to $80,000
per the terms of the lease and the Company collateralized the letter of credit
with an $80,000 certificate of deposit.  Accrued interest of $4,506
and principal of $20,000 from the initial $100,000 certificate of deposit were
returned to the Company at that time.   An event of default
occurs on the lease if the Company fails to pay any rental amounts within five
days when due and such failure to pay continues for seven additional days
following written notice from Narmada Partners, LLC of failure to
pay.  Upon an event of default, Narmada Partners, LLC may terminate
the lease and demand payment of all remaining rent due and coming due under the
remaining term of the lease.
 
 The
Company also maintains several operating leases related to copiers, telephone,
equipment, and office furniture under various non-cancellable agreements
expiring through November 2012.
 
 As of
December 31, 2008, the future minimum lease payments are as
follows:
 
 2009
                                
                                $
                                173,4852010
                                
                                
                                174,6522011
                                
                                
                                174,7412012
                                
                                
                                133,080Total
                                
                                $
                                655,958
 
 Rent
expense for all operating leases for the years ended December 31, 2008 and 2007
was $132,351 and $93,045, respectively.
 
 NOTE
11 – Intangibles
 
 In
conjunction with the purchase of the IDS interest in JDS in November 2006, the
Company recorded an intangible asset of $130,000 on November 28, 2006,
representing the fair value of 500,000 shares of common stock paid and payable
to IDS, to reflect the value of the license to use the OakVideo
Software.  In accordance with the purchase agreement, 100,000 shares
of the Company’s common stock were issued to IDS on November 22, 2008 and the
final issuance of 100,000 shares is due on November 22, 2009.  Prior
to December 31, 2008, the amount was being amortized over the estimated
remaining life of the license agreement for JDS’ use of the OakVideo software
through October 2015.  At December 31, 2008, the Company recorded an
impairment charge of $76,782 to reduce the value of the intangible to the amount
of gross profit anticipated in the year ending December 31, 2009 from purchase
orders previously received for the Company’s Curiax Arraigner
software.  Due to difficulties in gaining end user acceptance of the
product, the Company is unable to estimate whether any additional future sales
of the product will take place.  Amortization totaled $11,143 and
$14,857 during 2008 and 2007, respectively.
 
 39
 
 SIMTROL,
INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007
 
 Note
11 – Intangibles, Continued
 
 The
Company also recorded a customer list of $40,000 in conjunction with the
purchase of the IDS interest in JDS.  The $40,000 was fully amortized
during 2007.
 
 In
addition, JDS will pay IDS two and one-half percent (2.5%) of the gross revenues
of JDS during calendar year 2009.
 
 Note
12 – Stock-based Compensation
 
 On June
17, 2008, the independent directors of the Company approved an amendment to the
Company’s 2002 Equity Incentive Plan (the “Plan”) to increase the number of
shares of authorized common stock available for issuance under the Plan to
8,000,000 shares from the previously authorized number of 6,000,000
shares.  On August 31, 2007, the stockholders of the Company approved
an amendment to the Company's 2002 Equity Incentive Plan (the "Plan") to
increase the number of shares of common stock authorized for issuance under the
Plan to 6,000,000 shares from the previously authorized amount of 4,000,000
shares.  Option awards are granted with an exercise price equal to or
greater than the market price of the Company’s stock on the date of the grant in
accordance with the Plan.  The options have five-year contractual
terms for directors and ten years for employees, and generally vest immediately
for directors and over four years for employees.   Different
vesting periods may be used at the discretion of the Company’s Compensation
Committee, which administers the Plan.  Option grants to employees
with one year and three year vesting periods were made during 2007 and
2008.
 
 Under
SFAS 123R, share-based payment awards result in a cost that will be measured at
fair value on the awards’ grant date based on the estimated number of awards
that are expected to vest. Compensation costs for awards that vest will not be
reversed if the awards expire without being exercised.  Stock
compensation expense under FAS 123R was $975,536 and $378,603 during 2008 and
2007, respectively.  Of these totals, $174,179 and $98,883 were
classified as research and development expense and $801,357 and $279,720 were
classified as selling, general, and administrative expense in 2008 and 2007,
respectively.
 
 The
Company uses historical data to estimate option exercise and employee
termination within the valuation model and historical stock prices to estimate
volatility.  The fair values for options issued during 2008 and 2007
were estimated at the dates of grant using a Black-Scholes option-pricing model
to be $1,215,302 and $1,648,047, respectively, with the following
assumptions:
 
 Assumptions
                                  
                                  2008
                                  
                                  2007Risk-free
      interest rate
                                  
                                  2.50%-3.67%
                                  
                                  3.32%-4.97%Annual
      rate of dividends
                                  
                                  0
                                  
                                  0Volatility
                                  
                                  108-131%
                                  
                                  89-133%Expected
      life
                                  
                                  5
      years
                                  
                                  5
      years
 
 The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. The
Company’s employee stock options have characteristics significantly different
from those of traded options, and changes in the subjective input assumptions
can materially affect the fair value estimate.
  40
  SIMTROL,
INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007
 
 Note
12 – Stock-based Compensation, Continued
 
 A summary
of option activity under the Company’s 1991 Stock Option Plan and the Company’s
2002 Equity Incentive Plan as of December 31, 2008 and changes during the year
then ended are presented below:
 
 Weighted-
                          Average
                        
                        
                        Weighted-Average
                          Remaining
                        
                        
                        AggregateOptions
                        
                        Shares
                        
                        
                        Exercise Price
                        
                        
                        Term
                        
                        
                        Intrinsic ValueOutstanding
      January 1, 2008
                        
                        
                        4,401,375
                        
                        
                        $
                        0.94Granted
                        
                        
                        3,984,000
                        
                        
                        $
                        0.57Exercised
                        
                        
                        -
                        
                        
                        $
                        -Forfeited
                        
                        
                        (964,425
                        )
                        
                        $
                        1.53Outstanding
      at December 31, 2008
                        
                        
                        7,420,950
                        
                        
                        $
                        0.66
                        
                        
                        
                        7.8
                        
                        
                        $
                        0Exercisable
      at December 31, 2008
                        
                        
                        2,927,734
                        
                        
                        $
                        0.74
                        
                        
                        
                        5.8
                        
                        
                        $
                        0
  The
weighted-average grant-date fair values of options granted during the years
ended December 31, 2008 and 2007 were $0.31 and $0.57, respectively. There were
no options exercised during 2008 or 2007. All grants of stock options during
2007 and 2008 were made from the Company’s 2002 Equity Incentive Plan as grants
can no longer be made from the Company’s 1991 Stock Option Plan.
 
 As of
December 31, 2008, there was $1,422,912 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
Plan.  That cost is expected to be recognized over a weighted average
period of 2.0 years.  The total fair values of shares vested during
the years ended December 31, 2008 and 2007 was $969,686 and $357,153,
respectively.
 
 At
December 31, 2008, 480,800 options remain available for grant under the
Company’s 2002 Stock Option Plan.
 
 The
following table summarizes information about stock options outstanding at
December 31, 2008:
 
 Options Outstanding
                              
                              
                              Options ExercisableWeightedAverage
                              
                              
                              Weighted
                              
                              
                              
                              
                              
                              WeightedRange of
                              
                              Number
                              
                              
                              Remaining
                              
                              
                              Average
                              
                              
                              Number
                              
                              
                              AverageExercise
                              
                              Outstanding at
                              
                              
                              Contractual
                              
                              
                              Exercise
                              
                              
                              Exercisable at
                              
                              
                              ExercisePrice
                              
                              December 31, 2008
                              
                              
                              Life (Years)
                              
                              
                              Price
                              
                              
                              December 31, 2008
                              
                              
                              Price$0.26-$0.38
                              
                              
                              2,939,500
                              
                              
                              
                              8.44
                              
                              
                              $
                              0.34
                              
                              
                              
                              912,150
                              
                              
                              $
                              0.36$0.40-$0.48
                              
                              
                              996,250
                              
                              
                              
                              4.57
                              
                              
                              $
                              0.41
                              
                              
                              
                              726,250
                              
                              
                              $
                              0.40$0.53-$0.90
                              
                              
                              2,288,750
                              
                              
                              
                              8.20
                              
                              
                              $
                              0.72
                              
                              
                              
                              877,801
                              
                              
                              $
                              0.74$1.04-$2.00
                              
                              
                              1,154,000
                              
                              
                              
                              8.53
                              
                              
                              $
                              1.37
                              
                              
                              
                              369,083
                              
                              
                              $
                              1.53$2.25-$4.80
                              
                              
                              35,950
                              
                              
                              
                              2.51
                              
                              
                              $
                              2.88
                              
                              
                              
                              35,950
                              
                              
                              $
                              2.88$19.50-$40.00
                              
                              
                              6,500
                              
                              
                              
                              2.10
                              
                              
                              $
                              33.77
                              
                              
                              
                              6,500
                              
                              
                              $
                              33.777,420,950
                              
                              
                              
                              7.83
                              
                              
                              $
                              0.67
                              
                              
                              
                              2,927,734
                              
                              
                              $
                              0.74
 
 During
2008, the Company granted options to purchase 3,077,500 shares of its common
stock employees with three-year vesting periods at exercise prices equal to or
greater than the fair value of the Company’s stock on their respective grant
dates.  The total fair value of these grants was $847,375 with a
weighted-average exercise price of $0.59.
 
 During
2008, the Company granted options to purchase 630,000 shares of its common stock
to directors and consultants with immediate vesting periods at exercise prices
equal to or greater than the fair value of the Company’s
  41
  SIMTROL,
INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007
 
 Note
12 – Stock-based Compensation, Continued
 
 stock on
their respective grant dates.  The total fair value of these grants
was $248,592 with a weighted-average exercise price of $0.48.
 
 On April
11, 2008, the Company granted options to purchase 276,500 shares of its common
stock to employees with one year vesting periods at exercise prices of $0.27,
equal to the fair value of the Company’s stock on the date of the
grant.  The total fair value of these grants was
$119,335.
 
 During
2007, the Company granted options to purchase 2,904,600 shares of its common
stock to employees with three-year vesting periods at exercise prices equal to
or greater than the fair value of the Company’s stock on their respective grant
dates.  The total fair value of these grants was $1,648,047 with a
weighted-average exercise price of $0.72.
 
 Note
13 – Income Taxes
 
 The
Company recognized deferred tax assets of approximately $19.1 million and $18.0
million, respectively as of December 31, 2008 and 2007, primarily relating to
net operating loss carry forwards of approximately $49.4 million and $46.9
million at those dates.  The losses at December 31, 2008 expire
through 2028.  The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. The Company considers
projected future taxable income and tax planning strategies in making this
assessment. At present, the Company does not have a history of income to
conclude that it is more likely than not that the Company will be able to
realize all of its tax benefits; therefore, valuation allowances of $19.1
million and $18.0 million, respectively, were established for the full value of
the deferred tax assets at December 31, 2008 and 2007. The valuation
allowance decreased by $285,000 during the year ended December 31,
2007.  A valuation allowance will be maintained until sufficient
positive evidence exists to support the reversal of any portion or all of the
valuation allowance net of appropriate reserves. Should the Company be
profitable in future periods with supportable trends, the valuation allowance
will be reversed accordingly.
 
 A
reconciliation of the expected federal statutory rate of 34% to the Company’s
actual rate as reported for each of the periods presented is as
follows:
 
 Year
      Ended
                        
                        
                        Year
      EndedDecember 31, 2008
                        
                        
                        December 31, 2007Expected
      Statutory Rate
                        
                        
                        (34.00
                        %)
                        
                        
                        (34.00
                        %)State
      income tax rate, net of federal benefit
                        
                        
                        (3.96
                        %)
                        
                        
                        (3.96
                        %)(37.96
                        %)
                        
                        
                        (37.96
                        %)Permanent
      Difference
                        
                        
                        7.35
                        %
                        
                        
                        10.50
                        %Expiring
      Net Operating Losses
                        
                        
                        5.96
                        %
                        
                        
                        1.98
                        %Increase
      in Valuation Allowance
                        
                        
                        24.65
                        %
                        
                        
                        25.48
                        %Net
      Effective Income Tax Rate
                        
                        
                        0.00
                        %
                        
                        
                        0.00
                        %
 NOTE
14 – Subsequent Events
 
 On
January 21, 2009 one shareholder converted 8,000 shares of the Company’s Series
A Convertible Preferred Stock to 32,000 shares of the Company’s common
stock.
 
 On March
4, 2009, one shareholder converted 11 shares of the Company’s Series B
Convertible Preferred Stock to 22,000 shares of the Company’s common
stock.
 
 On March
9, 2009, the Company executed a license agreement with ACIS, Inc. ("ACIS"), that
significantly expanded the scope of the Company's rights to certain ACIS
technology.  Pursuant to the agreement, ACIS granted to the Company the
right, in perpetuity, to use and modify the ACIS technology on a royalty-free
basis for all future Company products, without restrictions regarding the
underlying platform.  As consideration for the rights to the ACIS
technology, the Company granted to ACIS nonqualified options to purchase 150,000
shares of Company common stock at
an exercise price of $0.15 per share, with immediate vesting.  The license
agreement replaces and supersedes the license agreement dated September 27,
2001, under which the Company had been required to pay per-unit royalties for
use of the ACIS technology, which was restricted to a single specified
platform.
  42
  SIMTROL,
INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007
 
 Note
14 – Subsequent Events, Continued
 
 On March
26, 2009 one shareholder converted 10 shares of the Company’s Series B
Convertible Preferred Stock to 20,000 shares of the Company’s common
stock.
  43