UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549


FORM
      10-Q


(Mark
      One)





x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934





For
      the
      quarterly period ended September
      30, 2008





OR





o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934





For
      the
      transition period from  to
      ________________





Commission
      file number 1-9341





iCAD,
      Inc.


(Exact
      name of registrant as specified in its charter)





Delaware
            
            02-0377419(State
                or other jurisdiction
              of
                incorporation or organization)
            
            (I.R.S.
                Employer Identification No.)





98
                Spit Brook Road, Suite 100, Nashua, NH
            
            03062(Address
                of principal executive offices)
            
            (Zip
                Code)





(603)
      882-5200  (Registrant's
        telephone number, including area code)





Not
      Applicable  (Former
      name, former address and former fiscal year, if changed since last
      report)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirement
      for
      the past 90 days. YES x NO  ̈ .




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      the definitions of “large accelerated filer”, “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act.





Large
                Accelerated filer ̈
            Accelerated
                filerxNon-accelerated
                filer ̈
            Smaller
                reporting company ̈(do
                not check if a smaller reporting company)





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act) YES  ̈ NO x .





As
      of the
      close of business on October 30, 2008 there were 45,343,508 shares outstanding
      of the registrant 's Common Stock, $.01 par value.







iCAD,
      INC.





INDEX





PAGEPART
                I
            FINANCIAL
                INFORMATIONItem
                1
            Financial
                Statements (unaudited)Consolidated
                Balance Sheets as of September 30, 2008 and December 31,
                2007
            
            4Consolidated
                Statements of Operations for the three and nine month periods ended
                September 30, 2008 and 2007
            
            5Consolidated
                Statements of Cash Flows for the nine month periods ended September
                30,
                2008 and 2007
            
            6Notes
                to Consolidated Financial Statements
            
            7-15Item
                2
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            16-23Item
                3
            Quantitative
                and Qualitative Disclosures about Market Risk
            
            24Item
                4
            Controls
                and Procedures
            
            24PART
                II
            OTHER
                INFORMATIONItem
                2
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            25Item
                6
            Exhibits
            
            25Signatures
            
            26


3


**iCAD,
      INC. AND SUBSIDIARY**





**Consolidated
      Balance Sheets**


(unaudited)





**September 30,**
            
            **December 31,****2008**
            
            **2007**Assets(Note 2)Current
                assets:Cash
                and cash equivalents
            
            $
            11,049,682
            
            $
            4,348,729Trade
                accounts receivable, net of allowance for doubtfulaccounts
                of $50,000 in 2008 and 2007
            
            
            6,016,104
            
            
            6,483,618Inventory,
                net
            
            
            1,813,523
            
            
            1,798,243Prepaid
                and other current assets
            
            
            559,679
            
            
            320,169Total
                current assets
            
            
            19,438,988
            
            
            12,950,759Property
                and equipment:Equipment
            
            
            3,763,567
            
            
            3,512,557Leasehold
                improvements
            
            
            75,590
            
            
            71,611Furniture
                and fixtures
            
            
            356,497
            
            
            330,077Marketing
                assets
            
            
            234,140
            
            
            323,8734,429,794
            
            
            4,238,118Less
                accumulated depreciation and amortization
            
            
            2,761,510
            
            
            2,369,590Net
                property and equipment
            
            
            1,668,284
            
            
            1,868,528Other
                assets:Deposits
            
            
            63,194
            
            
            63,194Patents,
                net of accumulated amortization
            
            
            21,977
            
            
            68,269Customer
                relationships, net of accumuated amortization
            
            
            242,833
            
            
            -Technology
                intangibles, net of accumulated amortization
            
            
            7,401,480
            
            
            3,115,843Tradename,
                net of accumulated amortization
            
            
            130,200
            
            
            148,800Goodwill
            
            
            43,515,285
            
            
            43,515,285Total
                other assets
            
            
            51,374,969
            
            
            46,911,391Total
                assets
            
            $
            72,482,241
            
            $
            61,730,678Liabilities
                and Stockholders' EquityCurrent
                liabilities:Accounts
                payable
            
            $
            1,809,829
            
            $
            2,010,717Accrued
                salaries and other expenses
            
            
            3,079,179
            
            
            3,461,422Deferred
                revenue
            
            
            2,129,772
            
            
            1,674,005Convertible
                loans payable to related parties
            
            
            -
            
            
            2,793,382Convertible
                loans payable to non-related parties
            
            
            -
            
            
            684,559Total
                current liabilities
            
            
            7,018,780
            
            
            10,624,085Convertible
                revolving loans payable to related party
            
            
            -
            
            
            2,258,906Total
                liabilities
            
            
            7,018,780
            
            
            12,882,991Commitments
                and contingenciesStockholders'
                equity:Common
                stock, $ .01 par value: authorized 85,000,000 shares; issued 45,411,384
                in
                2008 and 39,239,208 in 2007; outstanding 45,343,508 in 2008 and 39,171,332
                in 2007
            
            
            454,113
            
            
            392,392Additional
                paid-in capital
            
            
            147,574,151
            
            
            135,055,418Accumulated
                deficit
            
            
            (81,614,539
            )
            
            (85,649,859
            )Treasury
                stock at cost (67,876 shares)
            
            
            (950,264
            )
            
            (950,264
            )Total
                Stockholders' equity
            
            
            65,463,461
            
            
            48,847,687Total
                liabilities and stockholders' equity
            
            $
            72,482,241
            
            $
            61,730,678




*See
      accompanying notes to consolidated financial statements.*


4




**iCAD,
      Inc.**





**Consolidated
      Statements of Operations**


(unaudited)





**Three Months**
            
            **Nine Months****September 30,**
            
            **September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**RevenueProducts
            
            $
            10,322,512
            
            $
            5,458,776
            
            $
            25,654,259
            
            $
            15,993,182Service
                and supplies
            
            
            871,119
            
            
            800,765
            
            
            2,520,877
            
            
            2,518,581Total
                revenue
            
            
            11,193,631
            
            
            6,259,541
            
            
            28,175,136
            
            
            18,511,763Cost
                of revenueProducts
            
            
            1,588,501
            
            
            1,010,884
            
            
            4,014,143
            
            
            2,962,174Service
                and supplies
            
            
            193,451
            
            
            237,121
            
            
            639,834
            
            
            712,652Total
                cost of revenue
            
            
            1,781,952
            
            
            1,248,005
            
            
            4,653,977
            
            
            3,674,826Gross
                margin
            
            
            9,411,679
            
            
            5,011,536
            
            
            23,521,159
            
            
            14,836,937Operating
                expenses:Engineering
                and product development
            
            
            1,905,841
            
            
            1,129,345
            
            
            4,818,645
            
            
            3,327,644Marketing
                and sales
            
            
            3,340,072
            
            
            2,620,827
            
            
            8,533,061
            
            
            7,923,032General
                and administrative
            
            
            1,942,582
            
            
            1,816,657
            
            
            5,726,819
            
            
            5,319,963Total
                operating expenses
            
            
            7,188,495
            
            
            5,566,829
            
            
            19,078,525
            
            
            16,570,639Income
                (loss) from operations
            
            
            2,223,184
            
            
            (555,293
            )
            
            4,442,634
            
            
            (1,733,702
            )Interest
                expense - net
            
            
            27,610
            
            
            114,752
            
            
            210,314
            
            
            329,891Net
                income (loss) before provision for income taxes
            
            $
            2,195,574
            
            $
            (670,045
            )
            $
            4,232,320
            
            $
            (2,063,593
            )Provision
                for income taxes
            
            
            101,000
            
            
            -
            
            
            197,000
            
            
            -Net
                income (loss)
            
            
            2,094,574
            
            
            (670,045
            )
            
            4,035,320
            
            
            (2,063,593
            )Preferred
                dividend
            
            
            -
            
            
            11,880
            
            
            -
            
            
            67,760Net
                income (loss) attributable to common stockholders
            
            $
            2,094,574
            
            $
            (681,925
            )
            $
            4,035,320
            
            $
            (2,131,353
            )Net
                income (loss) per shareBasic
            
            $
            0.05
            
            $
            (0.02
            )
            $
            0.10
            
            $
            (0.06
            )Diluted
            
            $
            0.04
            
            $
            (0.02
            )
            $
            0.09
            
            $
            (0.06
            )Weighted
                average number of shares usedin
                computing income (loss) per shareBasic
            
            
            42,953,932
            
            
            38,707,772
            
            
            40,487,297
            
            
            38,076,299Diluted
            
            
            46,578,716
            
            
            38,707,772
            
            
            45,241,275
            
            
            38,076,299





*See
      accompanying notes to consolidated financial statements.*


5


**iCAD,
      Inc.**





**Consolidated
      Statements of Cash Flows**


(unaudited)




**Nine Months**
            
            **Nine Months****September 30, 2008**
            
            **September 30, 2007**Cash
                flows from operating activities:Net
                Income (loss)
            
            $
            4,035,320
            
            $
            (2,063,593
            )Adjustments
                to reconcile net income (loss)to
                net cash provided by (used for) operating activities:Depreciation
            
            
            677,170
            
            
            740,871Amortization
            
            
            640,689
            
            
            539,255Loss
                on disposal of assets
            
            
            20,982
            
            
            17,680Stock
                based compensation
            
            
            1,354,635
            
            
            855,533Non-cash
                interest expense associated with discounton
                convertible loans payable
            
            
            22,059
            
            
            22,059Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            584,514
            
            
            (436,804
            )Inventory
            
            
            (15,280
            )
            
            1,199,446Prepaid
                and other current assets
            
            
            (239,510
            )
            
            (145,978
            )Accounts
                payable
            
            
            (368,336
            )
            
            (1,215,468
            )Accrued
                interest
            
            
            181,082
            
            
            341,189Accrued
                salaries and other expenses
            
            
            276,079
            
            
            (198,016
            )Deferred
                revenue
            
            
            455,767
            
            
            171,650Total
                adjustments
            
            
            3,589,851
            
            
            1,891,417Net
                cash provided by (used for) operating activities
            
            
            7,625,171
            
            
            (172,176
            )Cash
                flows from investing activities:Additions
                to property and equipment
            
            
            (534,214
            )
            
            (449,682
            )Acquisition
                of CAD Sciences
            
            
            (2,000,000
            )
            
            -Net
                cash used for investing activities
            
            
            (2,534,214
            )
            
            (449,682
            )Cash
                flows from financing activities:Issuance
                of common stock for cash
            
            
            1,868,902
            
            
            1,231,327Payment
                of convertible notes payable
            
            
            (258,906
            )
            
            -Payment
                of note payable
            
            
            -
            
            
            (375,000
            )Net
                cash provided by financing activities
            
            
            1,609,996
            
            
            856,327Increase
                in cash and equivalents
            
            
            6,700,953
            
            
            234,469Cash
                and equivalents, beginning of period
            
            
            4,348,729
            
            
            3,623,404Cash
                and equivalents, end of period
            
            $
            11,049,682
            
            $
            3,857,873Supplemental
                disclosure of cash flow information:Interest
                paid
            
            $
            55,598
            
            $
            8,743Non-cash
                items from investing and financing activities:Fair
                market value of iCAD common stock issued to acquireassets
                of CAD Sciences
            
            $
            3,000,000
            
            $
            -Conversion
                of convertible notes payable and related accruedinterest
                into Common Stock
            
            $
            6,356,917
            
            $
            -Accrued
                dividends on convertible preferred stock
            
            $
            -
            
            $
            67,760





*See
      accompanying notes to consolidated financial statements.*




6




**iCAD,
      INC.**


**Notes
      to Consolidated Financial Statements**


**(Unaudited)**


**September
      30, 2008**





**(1)**
            **Basis
                of Presentation and Significant Accounting
                Policies**





Reference
      should be made to iCAD, Inc.'s (“iCAD”, “Company”, “we”, “our” or “us”) Annual
      Report on Form 10-K for the year ended December 31, 2007 for a comprehensive
      summary of significant accounting policies.





The
      accompanying consolidated financial statements of the Company have been prepared
      in accordance with accounting principles generally accepted in the United States
      of America. In the opinion of management, these unaudited interim consolidated
      financial statements reflect all adjustments, consisting of normal recurring
      adjustments, necessary for a fair presentation of the financial position at
      September 30, 2008, the results of operations for the three and nine month
      periods ended September 30, 2008 and 2007, and cash flows for the nine month
      periods ended September 30, 2008 and 2007. Although the Company believes that
      the disclosures in these financial statements are adequate to make the
      information presented not misleading, certain information normally included
      in
      the footnotes prepared in accordance with generally accepted accounting
      principles in the United States of America has been omitted as permitted by
      the
      rules and regulations of the Securities and Exchange Commission. The
      accompanying financial statements should be read in conjunction with the audited
      financial statements and notes thereto included in the Company’s Annual Report
      on Form 10−K for the fiscal year ended December 31, 2007 filed with the
      Securities and Exchange Commission on March 17, 2008. The results for the three
      and nine month periods ended September 30, 2008 are not necessarily indicative
      of the results that may be expected for the fiscal year ending December 31,
      2008, or any future period. Interim period amounts are not necessarily
      indicative of the results of operations for the full fiscal year.





**(2)**
            **Financing
                Arrangements**





**Loan
      and Security Agreement**





On
      June
      30, 2008, the Company entered into a Loan and Security Agreement (the “RBS Loan
      Agreement”) with RBS Citizens, N.A. (“RBS”). The Loan Agreement replaces the
      prior Revolving Loan and Security Agreement with Mr. Robert Howard, the
      Company’s former Chairman of the Board of Directors. The RBS Loan Agreement
      established a secured revolving credit facility with a line of credit of up
      to
      $5,000,000. The borrowing base under the RBS Loan Agreement is limited to 80%
      of
      eligible accounts receivable or, if adjusted EBITDA (EBITDA is defined in the
      agreement as earnings before interest expense, income tax expense, depreciation,
      amortization and SFAS 123R stock option expense) for the quarter is greater
      than
      or equal to $1,250,000, then the Company shall not be subject to a restriction
      as to availability of credit upon the borrowing base.




7




**iCAD,
      INC.**


**Notes
      to Consolidated Financial Statements**


**(Unaudited)**


**September
      30, 2008**





**(2)**
            **Financing
                Arrangements**(continued)





**Loan
      and Security Agreement** (continued)





In
      this
      event, the Company shall be subject to compliance with a Total Funded Debt
      to
      Adjusted EBITDA covenant. As of September 30, 2008, the Company had
      approximately $5,000,000 of available borrowing capacity. Unless earlier repaid,
      all amounts due and owing under the RBS Loan Agreement are required to be repaid
      on June 30, 2009, the stated termination date of the RBS Loan Agreement.





The
      RBS
      Loan Agreement contains certain financial and non-financial covenants relating
      to the Company. The RBS Loan Agreement also contains certain events of default.
      Amounts due under the RBS Loan Agreement and the related Revolving Note (the
      “Revolving Note”) dated June 30, 2008, may be prepaid at any time, in whole or
      in part, at the option of the Company, provided, however, that for any portion
      of the loan accruing interest as a “LIBOR Rate Loan” (as defined in the RBS Loan
      Agreement), the Company is responsible to pay any LIBOR Breakage Fee as defined
      and further described in the Revolving Note. All amounts outstanding under
      the
      RBS Loan Agreement and the associated Revolving Note will bear interest, at
      the
      Company’s option, at a fluctuating per annum rate of interest equal to (i) Prime
      Rate (as defined in the Revolving Note) plus one-half of one percent or (ii)
      the
      Adjusted LIBOR Rate (as defined in the Revolving Note) plus the LIBOR Rate
      Margin (as defined in the Revolving Note).




In
      connection with the RBS Loan Agreement and the Revolving Note, the Company
      has
      entered into a Negative Pledge Agreement dated June 30, 2008. Pursuant to the
      Negative Pledge Agreement, the Company agreed, among other things, (i) not
      to
      incur any liens, other than as permitted under the RBS Loan Agreement, with
      respect to the Company’s intellectual property and (ii) not to sell or assign,
      other than for fair consideration in the ordinary course of business, the
      Company’s intellectual property. In addition, the Company assigned all its
      assets to RBS wherever located and whether now owned or hereafter acquired,
      including, without limitation, all inventory, machinery, equipment, fixtures
      and
      other goods.





**Convertible
      Revolving Loan Payable to Related Party**





The
      Company had a Revolving Loan and Security Agreement (the "Prior Loan Agreement")
      with Mr. Robert Howard, the former Chairman of the Board of Directors of the
      Company, under which Mr. Howard had agreed to advance funds, or to provide
      guarantees of advances made by third parties in an amount up to $5,000,000.
      As a
      condition to, and simultaneously with, the execution of the RBS Loan Agreement,
      on June





8





**iCAD,
      INC.**


**Notes
      to Consolidated Financial Statements**


**(Unaudited)**


**September
      30, 2008**





**(2)**
            **Financing
                Arrangements**(continued)





**Convertible
      Revolving Loan Payable to Related Party** (continued)





30,
      2008,
      the unpaid principal amount and accrued interest of the Prior Loan Agreement,
      was extinguished as follows: (1) a total of $2,000,000 principal amount under
      the Prior Loan Agreement, together with $351,917 of accrued and unpaid interest
      on such principal amount, was converted by Mr. Howard into 1,622,012 shares
      of
      the Company’s common stock at $1.45 per share and (2) the remaining principal
      balance under the Prior Loan Agreement of $258,906, together with accrued and
      unpaid interest of $55,598 on such principal amount, was paid in cash to Mr.
      Howard. The outstanding indebtedness under the Prior Loan Agreement has
      therefore, been fully repaid and satisfied and the Prior Loan Agreement was
      terminated as of June 30, 2008.





**Convertible
      Loans Payable to Related Parties**





On
      June
      19, 2006, the Company and Dr. Lawrence Howard, who subsequently became a
      director and is currently the Chairman of the Board of Directors of the Company,
      entered into a Note Purchase Agreement with respect to the purchase by Dr.
      Howard from the Company of an aggregate of $200,000 principal amount of a 7%
      Convertible Note of the Company due June 19, 2008 (the “Howard Note”) at a
      purchase price of $200,000. Interest on the Howard Note was payable on the
      due
      date. On June 19, 2008, the $200,000 principal amount under the Howard Note,
      together with $28,000 of accrued and unpaid interest on such principal amount,
      was converted by Dr. Howard into 152,000 shares of the Company’s common stock at
      $1.50 per share conversion price as set forth in the Howard Note. The Howard
      Note has, therefore, been fully repaid and satisfied and was terminated as
      of
      June 19, 2008.





On
      June
      20, 2006, the Company and Mr. Kenneth Ferry, the Company’s Chief Executive
      Officer, entered into a Note Purchase Agreement with respect to the purchase
      by
      Mr. Ferry from the Company of an aggregate of $300,000 principal amount of
      a 7%
      Convertible Note of the Company due June 20, 2008 (the “Ferry Note”) at a
      purchase price of $300,000. Interest on the Ferry Note was payable on the due
      date. On June 20, 2008, the $300,000 principal amount under the Ferry Note,
      together with $42,000 of accrued and unpaid interest on such principal amount,
      was converted by Mr. Ferry into 228,000 shares of the Company’s common stock at
      $1.50 per share conversion price as set forth in the Ferry Note. The Ferry
      Note
      has, therefore, been fully repaid and satisfied and was terminated as of June
      20, 2008.




9




**iCAD,
      INC.**


**Notes
      to Consolidated Financial Statements**


**(Unaudited)**


**September
      30, 2008**





**(2)**
            **Financing
                Arrangements**(continued)





**Convertible
      Loans Payable to Related Parties** (continued)





On
      September 12, 14 and 19, 2006 the Company entered into Note Purchase Agreements
      with respect to the purchase from the Company of a total of $2,300,000 principal
      amount of its 7.25% Convertible Promissory Notes (the “Notes”) by directors,
      former directors, officers and employees of the Company, including the
      following: Mr. Robert Howard (as to $1,350,000), former Chairman of the Board
      and director of the Company, Mr. James Harlan (as to $300,000), former director
      of the Company and Dr. Elliott Sussman (as to $100,000), a director of the
      Company, Mr. Steven Rappaport (as to $300,000) who subsequently became and
      is
      currently a director of the Company and Dr. Lawrence Howard (as to $100,000)
      who
      subsequently became a director and is currently Chairman of the Board and a
      director of the Company, and $50,000 by each of the following executive officers
      and/or employees of the Company: Mr. Jeffrey Barnes, Ms. Stacey Stevens and
      Ms.
      Annette Heroux. The Notes were due two years from the date of issue. On
      September 12, 14 and 19, 2008, the total principal amount of $2,300,000 under
      the Notes, together with $333,500 of accrued and unpaid interest on such
      principal amount, were converted into 1,549,117 shares of the Company’s common
      stock at $1.70 per share conversion price as set forth in the Notes. The Notes
      have, therefore, been fully repaid and satisfied and were terminated as of
      September 12, 14 and 19, 2008, respectively.





**Convertible
      Loans Payable to Non-Related Parties**





On
      September 19, 2006 the Company entered into Note Purchase Agreements with
      respect to the purchase from the Company of an aggregate of $700,000 principal
      amount of its 7.25% Convertible Promissory Note (the “September Notes”) by two
      accredited outside investors, pursuant to Note Purchase Agreements between
      the
      Company and each of the investors. The loans were evidenced by the September
      Notes issued by the Company in favor of the non-related parties. The September
      Notes were due two years from the date of issue. On September 19, 2008, the
      total principal amount of $700,000 under the September Notes, together with
      $101,500 of accrued and unpaid interest on such principal amount, were converted
      into 471,471 shares of the Company’s common stock at $1.70 per share. The
      September Notes have, therefore, been fully repaid and satisfied and were
      terminated as of September 19, 2008.


10


**iCAD,
      INC** .


**Notes
      to Consolidated Financial Statements**


**(Unaudited)**


**September
      30, 2008**





**(3)**
            **Earning
                per Share**





The
      Company’s basic earnings per share is computed by dividing net profit or loss
      available to common stockholders by the weighted average number of shares of
      common stock outstanding for the period and, if there are dilutive securities,
      diluted earnings per share is computed by including common stock equivalents
      outstanding for the period in the denominator. Common stock equivalents include
      shares issuable upon the exercise of stock options, convertible notes and
      warrants, net of shares assumed to have been purchased with the proceeds, using
      the treasury stock method.  A summary of the Company’s calculation of
      earnings per share is as follows:





**Three Months Ended**
            
            **Nine Months Ended****September 30,**
            
            **September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Net
                income (loss)
            
            $
            2,094,574
            
            $
            (670,045
            )
            $
            4,035,320
            
            $
            (2,063,593
            )Less
                preferred dividends
            
            
            -
            
            
            (11,880
            )
            
            -
            
            
            (67,760
            )Net
                income (loss) available to common shareholders – basic
            
            $
            2,094,574
            
            $
            (681,925
            )
            $
            4,035,320
            
            $
            (2,131,353
            )Add
                interest relating to convertible loans payable
            
            
            38,868
            
            
            -
            
            
            238,488
            
            
            -Net
                income (loss) available to common shareholders – diluted
            
            $
            2,133,442
            
            $
            (681,925
            )
            $
            4,273,808
            
            $
            (2,131,353
            )Basic
                shares used in the calculation of earnings per share
            
            
            42,953,932
            
            
            38,707,772
            
            
            40,487,297
            
            
            38,076,299Effect
                of dilutive securities:Stock
                options
            
            
            1,917,916
            
            
            -
            
            
            1,720,431
            
            
            -Restricted
                stock
            
            
            244,592
            
            
            -
            
            
            68,233
            
            
            -Convertible
                loans payable
            
            
            1,462,276
            
            
            -
            
            
            2,965,314
            
            
            -Stock
                warrants
            
            
            -
            
            
            -
            
            
            -
            
            
            -Diluted
                shares used in the calculation of earnings per share
            
            
            46,578,716
            
            
            38,707,772
            
            
            45,241,275
            
            
            38,076,299Net
                income (loss) per share :Basic
            
            $
            0.05
            
            $
            (0.02
            )
            $
            0.10
            
            $
            (0.06
            )Diluted
            
            $
            0.04
            
            $
            (0.02
            )
            $
            0.09
            
            $
            (0.06
            )





The
      following table summarizes the number of shares of common stock for securities
      that were not included in the calculation of diluted net income (loss) per
      share
      because such shares are antidilutive:





**Three Months Ended**
            
            **Nine Months Ended****September 30,**
            
            **September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Stock
                options
            
            
            965,266
            
            
            5,585,535
            
            
            1,931,322
            
            
            5,585,535Restricted
                stock
            
            
            5,000
            
            
            375,000
            
            
            5,000
            
            
            375,000Stock
                warrants
            
            
            1,003,311
            
            
            1,003,311
            
            
            1,003,311
            
            
            1,003,311Convertible
                Revolving Promissory Note
            
            
            -
            
            
            1,465,041
            
            
            -
            
            
            1,465,041Convertible
                loans payable
            
            
            -
            
            
            2,098,039
            
            
            -
            
            
            2,098,039**1,973,577**
            
            
            **10,526,926**
            
            
            **2,939,633**
            
            
            **10,526,926**





11




**iCAD,
      INC.**


**Notes
      to Consolidated Financial Statements**


**(Unaudited)**


**September
      30, 2008**





**(4)**
            **Stock-Based
                Compensation**





The
      Company follows the provisions of Statement No. 123R, *Share-Based
      Payment* (“SFAS
      123R”) and Staff Accounting Bulletin 107 ("SAB 107") for all share-based
      compensation that was not vested as of January 1, 2006. The Company adopted
      SFAS 123R using a modified prospective application, as permitted under SFAS
      123R. Accordingly, prior period amounts have not been restated. Under this
      application, the Company is required to record compensation expense for all
      awards granted after the date of adoption and for the unvested portion of
      previously granted awards that remain outstanding at the date of adoption.





The
      Company issued 504,736 stock options and 564,750 shares of restricted stock
      in
      the nine months ended September 30, 2008. The options granted during the nine
      months of 2008 had a weighted average exercise price of $2.46. The weighted
      average fair value of options granted during the nine month period ended
      September 30, 2008 was $1.08 and was estimated on the grant date using the
      Black-Scholes option-pricing model with the following weighted average
      assumptions: expected volatility of 62.8%, expected term of 3.5 years, risk-free
      interest rate of 3.02%, and expected dividend yield of 0%. Expected volatility
      is based on peer group volatility, also using the Company’s historical
      volatility within the peer group. The average expected life was calculated
      using
      the simplified method under SAB 107. The risk-free rate is based on the rate
      of
      U.S. Treasury zero-coupon issues with a remaining term equal to the expected
      life of option grants. The Company recorded $1,354,635 for share-based
      compensation in accordance with SFAS 123R for the nine months ended September
      30, 2008.




For
      the
      same period in 2007, the Company issued 1,045,840 stock options and 375,000
      shares of restricted stock. The options granted during the first nine months
      of
      2007 had a weighted average exercise price of $2.84. The weighted average fair
      value of options granted during the nine month period ended September 30, 2007
      was $1.86 and was estimated on the grant date using the Black-Scholes
      option-pricing model with the following weighted average assumptions: expected
      volatility of 62.8%, expected term of 3.5 years, risk-free interest rate of
      4.72%, and expected dividend yield of 0%. Expected volatility was based on
      peer
      group volatility, also using the Company’s historical volatility within the peer
      group. The average expected life was calculated using the simplified method
      under SAB 107. The risk-free rate is based on the rate of U.S. Treasury
      zero-coupon issues with a remaining term equal to the expected life of option
      grants. The Company recorded $855,533 for share-based compensation in accordance
      with SFAS 123R for the nine months ended September 30, 2007.


12


**iCAD,
      INC.**


**Notes
      to Consolidated Financial Statements**


**(Unaudited)**


**September
      30, 2008**





**(4)**
            **Stock-Based
                Compensation**(continued)





As
      of
      September 30, 2008 there was approximately $3,828,546 of total unrecognized
      compensation cost related to unvested options and restricted stock. That cost
      is
      expected to be recognized over a weighted average period of three years.





The
      Company’s aggregate intrinsic value of options outstanding at September 30, 2008
      was $4,303,860.





**(5)**
            **Fair
                Value Measurements**





Effective
      January 1, 2008, the Company adopted Statement of Financial Accounting
      Standards (“SFAS”) No. 157, “ *Fair
      Value Measurements* ”
(“SFAS
      157”). In February 2008, the Financial Accounting Standards Board (“FASB”)
      issued FASB Staff Position, FAS 157-2, “Effective Date of FASB Statement
      No. 157”, which provides a one year deferral of the effective date of SFAS
      157 for non-financial assets and non-financial liabilities, except those that
      are recognized or disclosed in the financial statements at fair value at least
      annually. Therefore, the Company has adopted the provisions of SFAS 157 with
      respect to its financial assets and liabilities only. SFAS 157, establishes
      a
      framework for measuring fair value under generally accepted accounting
      principles and enhances disclosures about fair value measurements. Fair value
      is
      defined under SFAS 157 as the exchange price that would be received for an
      asset
      or paid to transfer a liability (an exit price) in the principal or most
      advantageous market for the asset or liability in an orderly transaction between
      market participants on the measurement date. Valuation techniques used to
      measure fair value under SFAS 157 must maximize the use of observable inputs
      and
      minimize the use of unobservable inputs. The standard describes a fair value
      hierarchy based on three levels of inputs, of which the first two are considered
      observable and the last unobservable, that may be used to measure fair value
      which are the following:




§
            Level
                1 - Quoted prices in active markets for identical assets or
                liabilities.





§
            Level
                2 - Inputs other than Level 1 that are observable, either directly
                or
                indirectly, such as quoted prices for similar assets or liabilities;
                quoted prices in markets that are not active; or other inputs that
                are
                observable or can be corroborated by observable market data for
                substantially the full term of the assets or
                liabilities.





§
            Level
                3 - Unobservable inputs that are supported by little or no market
                activity
                and that are significant to the fair
                value.





A
      financial instrument’s level within the fair value hierarchy is based on the
      lowest level of any input that is significant to the fair value measurement.


13


**iCAD,
      INC.**


**Notes
      to Consolidated Financial Statements**


**(Unaudited)**


**September
      30, 2008**





**(5)**
            **Fair
                Value Measurements**(continued)





The
      adoption of this statement did not have a material impact on the Company’s
      consolidated results of operations and financial condition.





In
      accordance with SFAS 157, the Company’s financial assets that are measured at
      fair value on a recurring basis as of September 30, 2008 are cash equivalents.
      The cash equivalents are measured using Level 1 inputs.





**(6)**
            **Commitments
                and Contingencies**





In
      July
      2007, a dissolved former Canadian subsidiary of the Company, CADx Medical
      Systems Inc. (“CADx Medical”), received a tax re-assessment of approximately
      $6,800,000 from the Canada Revenue Agency (“CRA”) resulting from CRA’s audit of
      CADx Medical’s Canadian federal tax return for the year ended December 31, 2002.
      The Company believes that it will not be liable for the re-assessment against
      CADx Medical and no accrual was recorded as of September 30, 2008. The Company
      responded to the notice outlining its grounds of objection with respect to
      the
      re-assessment. The CRA responded acknowledging receipt of the correspondence
      and
      advised that they intend to schedule a review on the matter.





**(7)**
            **Income
                Taxes**





Effective
      January 1, 2007, the Company adopted the provisions of FASB Interpretation
      No.
      48, "Accounting for Uncertainty in Income Taxes—an interpretation of FASB
      Statement No. 109" ("FIN 48"). At September 30, 2008, the Company had no
      material unrecognized tax benefits and no adjustments to liabilities or
      operations were required under FIN 48. The Company does not expect that the
      unrecognized tax benefits will materially increase within the next twelve
      months. The Company did not recognize any interest or penalties related to
      uncertain tax positions at September 30, 2008. The Company files United States
      federal income tax returns and income tax returns in various state and local
      jurisdictions. The Company currently is not under examination by the Internal
      Revenue Service or other jurisdictions for any tax years. The Company’s
      effective income tax rate was 6% for the nine months ended September 30, 2008
      and no income tax expense was provided for the nine month period ended September
      30, 2007. The effective income tax rate is based upon the estimated income
      for
      the year. For the nine month period ended September 30, 2008, the effective
      tax
      rate varied from the statutory tax rate principally due to federal and state
      net
      operating loss carryforwards available.


14


**iCAD,
      INC.**


**Notes
      to Consolidated Financial Statements**


**(Unaudited)**


**September
      30, 2008**





**(8)**
            **Asset
                Acquisition**





On
      July
      18, 2008, the Company completed the acquisition of substantially all of the
      assets of 3TP LLC dba CAD Sciences, a New York limited liability company (”CAD
      Sciences”) pursuant to an Asset Purchase Agreement (the “Purchase Agreement”)
      dated June 20, 2008 between the Company and the Seller.





In
      accordance with the terms of the Purchase Agreement, the purchase price of
      $5,000,000 paid by the Company to CAD Sciences consisted of (i) $2,000,000
      in
      cash and (ii) $3,000,000 in stock comprised of 1,086,957 restricted shares
      of
      the Company’s common stock (“shares”).





Simultaneously
      with the closing of the transactions contemplated by the Purchase Agreement,
      the
      Company entered into an Escrow Agreement by and among the Company, CAD Sciences
      and U.S. Bank National Association (the “Escrow Agreement”) pursuant to which
      271,740 of the shares were deposited by the parties into an escrow account
      for a
      period of up to one year to secure CAD Sciences’s indemnity obligations to the
      Company under the Purchase Agreement. The Escrow Agreement provides that, of
      the
      escrowed shares, 181,160 shares will be held in escrow for 6 months and the
      remaining escrow shares will be held in escrow for one year, in each case
      subject to earlier disbursement (in accordance with the terms of the Escrow
      Agreement) to the Company in satisfaction of any indemnification obligations
      arising under the terms of the Purchase Agreement.





The
      purchase price of $5,000,000 plus $167,448 in acquisition costs incurred, has
      been allocated to net assets acquired based upon an appraisal of their fair
      values, but the allocation is subject to further adjustment.




The
      following is a summary of the preliminary allocation of the total purchase
      price
      based on the estimated fair values of the assets acquired and liabilities
      assumed as of the date of the asset acquisition and the amortizable lives of
      the
      intangible assets:





AmortizableAmount
            
            LifeAccounts
                Receivable
            
            $
            117,000Property
                and equipment
            
            
            25,009Technology
                asset
            
            
            4,853,881
            
            
            10
                YearsCustomer
                relationships
            
            
            242,833
            
            
            10
                YearsWarranty
                liabilities
            
            
            (71,275
            )Purchase
                price
            
            $
            5,167,448


15


**Item
      2. Management's Discussion and Analysis of Financial Condition and Results
      of
      Operations**





"Safe
      Harbor" Statement under the Private Securities Litigation Reform Act of
      1995: Certain
      information included in this Item 2 and elsewhere in this Form 10-Q that are
      not
      historical facts contain forward looking statements that involve a number of
      known and unknown risks, uncertainties and other factors that could cause the
      actual results, performance or achievements of the Company to be materially
      different from any future results, performance or achievement expressed or
      implied by such forward looking statements. These risks and uncertainties
      include, but are not limited to, uncertainty of future sales levels, protection
      of patents and other proprietary rights, the impact of supply and manufacturing
      constraints or difficulties, product market acceptance, possible technological
      obsolescence of products, increased competition, litigation and/or government
      regulation, changes in Medicare reimbursement policies, competitive factors,
      the
      effects of a decline in the economy in markets served by the Company and other
      risks detailed in the Company’s other filings with the Securities and Exchange
      Commission. The words “believe”, “demonstrate”, “intend”, “expect”, “estimate”,
“anticipate”, “likely”, “seek”, “should” and similar expressions identify
      forward-looking statements. Readers are cautioned not to place undue reliance
      on
      those forward-looking statements, which speak only as of the date the statement
      was made.





**Results
      of Operations**





**Overview**





iCAD
      is
      an industry-leading provider of advanced image analysis and workflow solutions
      that enable radiologists and other healthcare professionals to better serve
      patients by identifying pathologies and pinpointing cancer earlier. iCAD offers
      a comprehensive range of high-performance, expandable Computer-Aided Detection
      (CAD) systems and workflow solutions for mammography (film-based, digital
      radiography (DR) and computed radiography (CR), Magnetic Resonance Imaging
      (MRI), and Computed Tomography (CT)). Currently available in more than 2,200
      healthcare centers worldwide, iCAD’s solutions aid in the early detection of the
      most prevalent cancers including breast, prostate and colon cancer. Early
      detection of cancer is the key to better prognosis, less invasive and lower
      treatment costs, and higher survival rates. Performed as an adjunct to
      mammography screening, CAD has quickly become the standard of care in breast
      cancer detection, helping radiologists improve clinical outcomes while enhancing
      workflow. Computer-enhanced breast and prostate MRI analysis streamlines case
      interpretation workflow and generates more robust information for more effective
      patient treatment. CAD for mammography screening is also reimbursable in the
      United States under federal and most third-party insurance programs. Since
      receiving FDA approval for the Company’s first breast cancer detection product
      in January 2002, over twenty two hundred of our CAD systems have been placed
      in
      mammography practices worldwide. iCAD is the only stand alone company offering
      CAD solutions for the early detection of breast cancer.




16




In
      late
      2005, the Company began to see a shift in sales from its film based analog
      CAD
      technology to its digital CAD technology. This shift has been primarily fueled
      by the results reported in 2005 in the New England Journal of Medicine from
      the
      American College of Radiology Imaging Network’s (ACRIN) Digital Mammographic
      Imaging Screening Trial (DMIST). The trial showed that there was no difference
      in accuracy between the two modalities for screening asymptomatic women in
      general. But for three subgroups of women (which represent over 60% of the
      population), digital mammography performed better than film-based analog
      mammography. Additionally, digital mammography offers better clinical images
      combined with significant workflow improvements for the radiologist. CAD
      technology is more often purchased for use with digital mammography equipment
      than is purchased for use with analog mammography equipment.





iCAD’s
      CAD mammography products have been shown to detect up to 72 percent of the
      cancers that biopsy proved were missed on the previous mammogram, an average
      of
      15 months earlier. Our advanced pattern recognition technology analyzes images
      to identify patterns and then uses sophisticated mathematical analysis to mark
      suspicious areas.





The
      Company intends to apply its core competencies in pattern recognition and
      algorithm development in disease detection. Our focus is on the development
      and
      marketing of cancer detection products for disease states where there are
      established or emerging protocols for screening as a standard of care. iCAD
      expects to pursue development or acquisition of products for select disease
      states where it is clinically proven that screening has a significant positive
      impact on patient outcomes, where there is an opportunity to lower health care
      costs, where screening is non-invasive or minimally invasive and where public
      awareness is high. Virtual colonoscopy (CTC) is a technology that has evolved
      rapidly in recent years. We expect that the market for virtual colonoscopy
      will
      grow. The anticipated growth is due to the increased demand for the procedures
      for early detection of colon cancer, combined with the recent results of the
      National CT Colonography Trial demonstrating that CTC is highly accurate for
      the
      detection of intermediate and large polyps and that the accuracy of CTC is
      similar to colonoscopy. CT Colonography or CTC is emerging as an alternative
      imaging procedure for evaluation of the colon. The Company has developed a
      product for computer aided detection of polyps in the colon using CTC and is
      currently in clinical trials.  Colorectal cancer has been shown to be
      highly preventable with early detection and removal of polyps.





The
      Company’s CAD systems include proprietary algorithm and other technology
      together with standard computer and display equipment. CAD systems for the
      film-based analog mammography market also include a radiographic film digitizer,
      manufactured by the Company and others for the digitization of film-based
      medical images. In July 2008, the Company acquired pharmaco-kinetic based CAD
      products that aid in the interpretation of contrast enhanced MRI images of
      the
      breast and prostate and expects to begin marketing these products in the fourth
      quarter of 2008.





The
      Company’s headquarters are located in southern New Hampshire, with manufacturing
      and contract manufacturing facilities in New Hampshire and Massachusetts and
      research and development facilities in Ohio and New York.


17


**Critical
      Accounting Policies**





The
      Company’s discussion and analysis of its financial condition, results of
      operations, and cash flows are based on our consolidated financial statements,
      which have been prepared in accordance with accounting principles generally
      accepted in the United States. The preparation of these financial statements
      requires us to make estimates and judgments that affect the reported amounts
      of
      assets, liabilities, revenues and expenses, and related disclosure of contingent
      assets and liabilities. On an on-going basis, we evaluate these estimates,
      including those related to accounts receivable allowance, inventory valuation
      and obsolescence, intangible assets, income taxes, warranty obligations,
      contingencies and litigation. Additionally, we use assumptions and estimates
      in
      calculations to determine stock-based compensation. We base our estimates on
      historical experience and on various other assumptions that we believe to be
      reasonable under the circumstances, the results of which form the basis for
      making judgments about the carrying values of assets and liabilities that are
      not readily apparent from other sources. Actual results may differ from these
      estimates under different assumptions or conditions.





The
      Company’s critical accounting policies are set forth in its Annual Report on
      Form 10-K for the fiscal year ended December 31, 2007. The Company believes
      that
      revenue recognition is a critical accounting policy because it is governed
      by
      multiple complex accounting rules, however there are no significant estimates
      or
      assumptions used in recording the Company’s revenue.





**Quarter
      Ended September 30, 2008 compared to Quarter Ended September 30, 2007 and Nine
      Months Ended September 30, 2008 compared to Nine Months Ended September 30,
      2007**





*Revenue.* Revenue
      for the three and nine month periods ended September 30, 2008 was $11,193,631
      and $28,175,136, respectively, compared with revenue of $6,259,541 and
      $18,511,763 for the three and nine month periods ended September 30, 2007.
      In
      the nine month period ended September 30, 2008, sales of iCAD’s digital
      solutions increased $8,998,207 or 78.9% to $20,403,283, compared to sales of
      $11,405,076 in the nine month period in 2007.





The
      increase in revenue for the nine month period ended September 30, 2008, was
      due
      primarily to the substantial increase in digital CAD revenue during the second
      and third quarters of 2008. The Company’s digital revenue for the third quarter
      of 2008 increased $4,165,847 or 104.4%, to $8,155,673, compared to sales of
      $3,989,826 in the same period in 2007. These increases are due primarily to
      the
      release, during the second quarter of 2008, of the Company’s SecondLook Digital
      CAD for sale with Fujifilm Computed Radiography for Mammography
      (“FCR *m* ”)
      systems, as well as an increase in business from the Company’s other OEM
      customers due to the continued increased global demand for Full Field Digital
      Mammography (FFDM) systems and digital CAD technology for the detection of
      breast cancer.





On
      April
      4, 2008 the Company announced that its SecondLook ® Digital
      CAD system for mammography received approval from the U.S. Food and Drug
      Administration (FDA) for sale with ** Fuji’s
      FCR *m* systems.
      SecondLook Digital ** for
      FCR *m* is the
      first CAD product approved and available in the U.S. for use with computer
      radiography.




18




Sales
      of
      iCAD’s film based product revenue increased 47.5% or $697,889 in the third
      quarter of 2008, to $2,166,839 in 2008 compared to $1,468,950 in the third
      quarter of 2007, and an increase of 14.4% or $662,870 for the nine month period
      ended September 30, 2008, to $5,250,976 in 2008, compared to $4,588,106 in
      the
      same period of 2007. While the transition to digital technology has a
      significant positive impact on overall performance, the film based products
      are
      a mature product line. However, film based product revenue has benefited from
      demand for the Company’s TotalLook product that is used for digitizing film
      based prior mammography exams for comparative reading with current mammography
      exams. In addition, a new version of the Company’s TotalLook product, the
      TotalLook Mammo Advantage, was introduced late in the first quarter of 2008
      and
      the Company has received favorable customer feedback to this
      product.





Service
      and supply revenue increased 8.8% in the third quarter of 2008, to $871,119
      compared to $800,765 in the third quarter in 2007 and an increase of 0.1% or
      $2,296, from $2,518,581 to $2,520,877 for the nine month period ended September
      30, 2008, compared to the same nine month period in 2007. The increase in the
      Company’s service revenue for the nine month period ended September 30, 2008 is
      due primarily to increased service contract revenue on the Company’s digital and
      TotalLook products.





**Three months ended September 30,****2008**
            
            **2007**
            
            **Change**
            
            **% Change**Digital revenue
            
            $
            8,155,673
            
            $
            3,989,826
            
            $
            4,165,847
            
            
            104.4
            %Analog
                revenue
            
            
            2,166,839
            
            
            1,468,950
            
            
            697,889
            
            
            47.5
            %Service
                & supply revenue
            
            
            871,119
            
            
            800,765
            
            
            70,354
            
            
            8.8
            %Total
                revenue
            
            $
            11,193,631
            
            $
            6,259,541
            
            $
            4,934,090
            
            
            78.8
            %





**Nine months ended September 30,****2008**
            
            **2007**
            
            **Change**
            
            **% Change**Digital revenue
            
            $
            20,403,283
            
            $
            11,405,076
            
            $
            8,998,207
            
            
            78.9
            %Analog
                revenue
            
            
            5,250,976
            
            
            4,588,106
            
            
            662,870
            
            
            14.4
            %Service
                & supply revenue
            
            
            2,520,877
            
            
            2,518,581
            
            
            2,296
            
            
            0.1
            %Total
                revenue
            
            $
            28,175,136
            
            $
            18,511,763
            
            $
            9,663,373
            
            
            52.2
            %





*Gross
      Margin.* Gross
      margin increased to 84.1% and 83.5% for the three and nine month periods ended
      September 30, 2008 compared to 80.1% in the same three and nine month periods
      in
      2007. This 4.0% and 3.4% increase in gross margin for the three and nine month
      periods of 2008 is primarily attributable to increased volume of the Company’s
      digital products which have a higher gross margin than its film based products
      which include more hardware components and the realization of some component
      cost reductions and some average selling price increases.





*Engineering
      and Product Development.* Engineering
      and product development costs for the three and nine month periods ended
      September 30, 2008 increased by $776,496 or 68.8% and $1,491,001 or 44.8%,
      respectively, from $1,129,345 and $3,327,644 in 2007 to $1,905,841 and
      $4,818,645, respectively, in 2008. The increase in engineering and product
      development costs during the three and nine month periods ended September 30,
      2008 was primarily due to an increase in personnel and related costs of $467,000
      and $1,009,000, respectively, resulting from staff increases to support the
      Company’s new product development efforts, $162,000 and $327,000, respectively,
      in subcontracting services relating primarily to the clinical trials for its
      CT
      Colon product, and approximately $106,000 in amortization expense relating
      to
      the asset acquisition of CAD Sciences in the third quarter of 2008.




19




*Marketing
      and Sales.* Marketing
      and sales expense for the three and nine month periods ended September 30,
      2008
      increased by $719,245 or 27.4% and $610,029 or 7.7%, respectively, from
      $2,620,827 and $7,923,032 in 2007 to $3,340,072 and $8,533,061 in 2008. The
      increase in marketing and sales expense for the three month period ending
      September 30, 2008 was primarily attributable to a $709,000 increase in
      personnel, sales commission and related expenses and
      rebranding cost associated with our new MRI CAD products of $100,000, offset
      by
      decreases in consulting and subcontracted services of $137,000.The
      increase in marketing and sales expense for the nine month period ended
      September 30, 2008, primarily resulted from an increase in personnel, sales
      commission and related expenses of $934,000,
      travel expenses of $139,000 and rebranding cost associated with our new MRI
      CAD
      products of $100,000, offset by decreases in consulting and subcontracted
      services of $336,000 and warranty costs of $247,000.





*General
      and Administrative.* General
      and administrative expenses for the three and nine month periods ended September
      30, 2008 increased by $125,925 or 6.9% and $406,856 or 7.6%, respectively,
      from
      $1,816,657 and $5,319,963 in 2007 to $1,942,582 and $5,726,819 in 2008,
      respectively. The increase in general and administrative expense during the
      three month period ended September 30, 2008 was due primarily to an increase
      in
      stock based compensation expense of approximately $91,000, increases in
      wage related and fringe benefit expenses of $92,000, offset by a decrease in
      legal expenses of $72,000. For the nine month period ended September 30, 2008
      the increase was primarily due to an increase in stock based compensation
      expense of approximately $418,000 and wage related and fringe benefit expense
      of
      $273,000, offset by a decrease in legal fees of $146,000, recruiting fees of
      $71,000 and travel expenses of $78,000.





*Interest
      Expense* .
      Net
      interest expense for the three and nine month periods ended September 30, 2008
      decreased from $114,752 and $329,891, respectively, in 2007 to $27,610 and
      $210,314 in 2008. This decrease is due primarily to the extinguishment of the
      Company’s outstanding convertible loans during the second and third quarters of
      2008 and the decrease in the interest rate on the Company’s Prior Loan Agreement
      with Mr. Robert Howard which bore interest at the prime rate plus 1%. The
      interest rate decreased from approximately 9.25% in the first six months of
      2007
      to approximately 6.25% in the comparable period of 2008.





*Provision
      for Income Taxes.* The
      provision for income taxes for the three and nine month periods ended September
      30, 2008 of $101,000 and $197,000, respectively, consists of an estimate for
      federal alternative minimum tax expense and various state income taxes based
      upon the estimated effective income tax rate for the full fiscal
      year.




*Net
      Income/(Loss)* *.*  As
      a
      result of the foregoing, the Company recorded net income of $2,094,574 or $0.05
      per basic share for the three month period ended September 30, 2008 on revenue
      of $11,193,631 compared to a net loss of ($670,045) or ($0.02) per basic share
      on revenue of $6,259,541 for the three months ended September 30, 2007. The
      net
      income for the nine months ended September 30, 2008 was $4,035,320 or $0.10
      per
      basic share on revenue of $28,175,136, compared to a net loss of ($2,063,593)
      or
      ($0.06) per basic share on revenue of $18,511,763 for the nine months ended
      September 30, 2007.




20




*Backlog.* The
      Company’s product backlog (excluding service and supplies) and deferred
      installation revenue as of September 30, 2008 totaled approximately $1,587,000
      as compared to product backlog of $1,716,000 as of September 30, 2007. It is
      expected that the majority of the product backlog at September 30, 2008 will
      be
      shipped within the current fiscal year. Backlog as of any particular period
      should not be relied upon as indicative of the Company’s net revenues for any
      future period as a large amount of the Company’s product is booked and shipped
      within the same quarter.





**Liquidity
      and Capital Resources**




The
      Company believes that its current liquidity and capital resources are sufficient
      to sustain operations through at least the next 12 months, primarily due to
      cash
      on hand, cash expected to be generated from continuing operations, as well
      as
      the availability of a credit line under the RBS Loan Agreement. At
      this
      point in time, our liquidity has not been materially impacted by the recent
      and
      unprecedented disruption in the current capital and credit markets and we do
      not
      expect that it will be materially impacted in the near future. We will continue
      to closely monitor our liquidity and the capital and credit
      markets.




The
      RBS
      Loan Agreement replaces the Prior Loan Agreement with Mr. Robert Howard,
      the Company’s former Chairman of the Board of Directors, which was fully repaid
      and terminated on June 30, 2008. The RBS Loan Agreement established a secured
      revolving credit facility with a line of credit of up to $5,000,000. The
      borrowing base under the RBS Loan Agreement is limited to 80% of eligible
      accounts receivable or,
      if
      adjusted EBITDA (EBITDA is defined in the agreement as earnings before interest
      expense, income tax expense, depreciation, amortization and SFAS 123R stock
      option expense) for the quarter is greater than or equal to $1,250,000, then
      the
      Company will not be subject to a restriction as to availability of credit upon
      the borrowing base. In this event, the Company will be subject to compliance
      with a Total Funded Debt to Adjusted EBITDA covenant.  As
      of
      September 30, 2008, the Company had $5,000,000 of available borrowing capacity.
      Unless earlier repaid, all amounts due and owing under the RBS Loan Agreement
      are required to be repaid on June 30, 2009, the stated termination date of
      the
      RBS Loan Agreement.





The
      RBS
      Loan Agreement contains certain financial and non-financial covenants relating
      to the Company. The RBS Loan Agreement also contains certain events of default.
      Amounts due under the RBS Loan Agreement and the related Revolving Note made
      by
      the Company in favor of RBS, may be prepaid at any time, in whole or in part,
      at
      the option of the Company, provided, however, that for any portion of the loan
      accruing interest as a “LIBOR Rate Loan” (as defined the in the RBS Loan
      Agreement), the Company is responsible to pay any LIBOR Breakage Fee as defined
      and further described in the Revolving Note. All amounts outstanding under
      the
      RBS Loan Agreement and the associated Revolving Note will bear interest, at
      the
      Company’s option, at a fluctuating per annum rate of interest equal to (i) Prime
      Rate (as defined in the Revolving Note) plus one-half of one percent or (ii)
      the
      Adjusted LIBOR Rate (as defined in the Revolving Note) plus the LIBOR Rate
      Margin (as defined in the Revolving Note).




In
      connection with the RBS Loan Agreement and the Revolving Note, the Company
      has
      entered into a Negative Pledge Agreement dated June 30, 2008 and made in favor
      of RBS. Pursuant to the Negative Pledge Agreement, the Company agreed, among
      other things, (i) not to incur any liens, other than as permitted under the
      RBS
      Loan Agreement, with respect to the Company’s intellectual property and (ii) not
      to sell or assign, other than for fair consideration in the ordinary course
      of
      business, the Company’s intellectual property. In addition, the Company assigned
      all its assets to RBS wherever located and whether now owned or hereafter
      acquired, including, without limitation, all inventory, machinery, equipment,
      fixtures and other goods.




21




The
      Company's ability to generate cash adequate to meet its future capital
      requirements will depend primarily on operating cash flow. If sales or cash
      collections are reduced from current expectations, or if expenses and cash
      requirements are increased, the Company may require additional financing.





At
      September 30, 2008 the Company had current assets of $19,438,988, current
      liabilities of $7,018,780 and working capital of $12,420,208. The ratio of
      current assets to current liabilities was 2.8:1





Net
      cash
      provided by operating activities for the nine months ended September 30, 2008
      was $7,625,171, compared to net cash used of $172,176 for the same period in
      2007. The cash provided by operating activities for the nine months ended
      September 30, 2008 resulted from the net income of $4,035,320, a decrease in
      accounts receivable of $584,514 and increases in accrued expenses and deferred
      revenue totaling $912,928, plus non-cash items including, depreciation,
      amortization, loss on disposal of assets and interest expense associated with
      discount on convertible loans payable all totaling $1,360,900 and stock based
      compensation of $1,354,635 offset by increases in inventory of $15,280 and
      other
      current assets of $239,510, and a decrease in accounts payable of
      $368,336.





The
      net
      cash used for investing activities for the nine months ended September 30,
      2008
      was $2,534,214 compared to net cash used for investing activities of $449,682
      for the same period in 2007. The net cash used for investing activities during
      2008 consisted of additions to property and equipment of $534,214 and $2,000,000
      for the acquisition of assets of CAD Sciences.





Net
      cash
      provided by financing activities for the nine months ended September 30, 2008
      was $1,609,996, compared to net cash provided by financing activities of
      $856,327 for the same period in 2007. The cash provided by financing activities
      during 2008 was due to cash received from the issuance of common stock relating
      to the exercise of stock options totaling $1,868,902, offset by the payment
      of
      convertible notes payable in the amount of $258,906.





**Contractual
      Obligations**





The
      following table summarizes, for the periods presented, the Company’s future
      estimated cash payments under existing contractual obligations at September
      30,
      2008.





**Contractual
                Obligations**
            
            **Payments due by period****Total**
            
            **Less than 1**
              **year**
            
            **1-3 years**
            
            **3-5 years**
            
            **5+ years**Lease
                Obligations*
            
            $
            1,378,958
            
            $
            213,072
            
            $
            945,566
            
            $
            220,320
            
            $
            -**Total
                   Contractual Obligations**
            
            **$**
            **1,378,958**
            
            **$**
            **213,072**
            
            **$**
            **945,566**
            
            **$**
            **220,320**
            
            **$**
            **-**





*
      The
      Company’s lease obligations is shown net of sublease amounts.




22




**Recent
      Accounting Pronouncements**





In
      May
      2008, the FASB issued SFAS No. 162, *The
      Hierarchy of Generally Accepted Accounting Principles* .
      This
      statement identifies the sources of accounting principles and the framework
      for
      selecting the principles to be used in the preparation of financial statements
      that are presented in conformity with generally accepted accounting
      principles in the United States. This statement is effective 60 days
      following the SEC’s approval of the Public Company Accounting Oversight Board
      amendments to AU Section 411, *The
      Meaning of Present Fairly in Conformity with Generally Accepted Accounting
      Principles.* We do
      not expect SFAS No. 162 to have a material impact on our consolidated financial
      statements.





On
      January 1, 2008, the Company adopted Statement of Financial Accounting
      Standards (“SFAS”) No. 157, Fair Value Measurements. This Statement defines
      fair value, establishes a framework for measuring fair value, and expands
      disclosures about fair value measurements. It clarifies that fair value is
      the
      price that would be received to sell an asset or paid to transfer a liability
      in
      an orderly transaction between market participants in the market in which the
      reporting entity transacts. This Statement does not require any new fair value
      measurements, but rather, it provides enhanced guidance to other pronouncements
      that require or permit assets or liabilities to be measured at fair value.
      The
      adoption of this standard only resulted in additional disclosure requirements
      and had no impact on the Company’s financial condition or results of operation.
      See Note 5 of the unaudited consolidated financial statements for further
      information regarding the fair value of the Company’s financial
      instruments.





In
      December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
      Combinations” (“SFAS 141R”). SFAS 141R retains the fundamental requirements in
      Statement 141 that the acquisition method of accounting (which Statement 141
      called the purchase method) be used for all business combinations and for an
      acquirer to be identified for each business combination. SFAS 141R requires
      an
      acquirer to recognize the assets acquired, the liabilities assumed, and any
      non-controlling interest in the acquiree at the acquisition date, to be measured
      at their fair values as of that date, with limited exceptions specified in
      the
      Statement. That replaces Statement 141’s cost-allocation process, which required
      the cost of an acquisition to be allocated to the individual assets acquired
      and
      liabilities assumed based on their estimated fair values. SFAS 141R retains
      the
      guidance in Statement 141 for identifying and recognizing intangible assets
      separately from goodwill. SFAS 141R will now require acquisition costs to be
      expensed as incurred, restructuring costs associated with a business combination
      must generally be expensed prior to the acquisition date and changes in deferred
      tax asset valuation allowances and income tax uncertainties after the
      acquisition date (including prior acquisitions) generally will affect income
      tax
      expense. SFAS 141R applies prospectively to business combinations for which
      the
      acquisition date is on or after the beginning of the first annual reporting
      period beginning on or after December 15, 2008 except for income taxes, as
      noted
      above. The Company is currently evaluating the impact of the adoption of SFAS
      141R on its consolidated financial statements.





In
      February 2007, the FASB issued Statement No. 159, “The Fair Value Option
      for Financial Assets and Financial Liabilities” (“SFAS 159”), including an
      amendment of FASB Statement No. 115, which allows an entity to elect to
      record financial assets and liabilities at fair value upon their initial
      recognition on a contract-by-contract basis. Subsequent changes in fair value
      would be recognized in earnings as the changes occur. SFAS 159 also
      establishes additional disclosure requirements for these items stated at fair
      value. SFAS 159 is effective as of the beginning of an entity’s first
      fiscal year that begins after November 15, 2007. The Company did not elect
      to adopt the fair value option under this statement.




23




**Item
      3.** ****  **Quantitative
      and Qualitative Disclosures about Market Risk**




Not
      applicable.





**Item 4.**  **Controls
      and Procedures**




The
      Company, under the supervision and with the participation of its management,
      including its principal executive officer and principal financial officer,
      evaluated the effectiveness of the design and operation of its disclosure
      controls and procedures as of the end of the period covered by this report.
      Based on this evaluation, the principal executive officer and principal
      financial officer concluded that the Company's disclosure controls and
      procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of
      1934
      (”Exchange Act”) were effective at the reasonable level of assurance.





A
      control
      system, no matter how well conceived and operated, can provide only reasonable,
      not absolute, assurance that the objectives of the control system are met.
      Further, the design of a control system must reflect the fact that there are
      resource constraints, and the benefits of controls must be considered relative
      to their costs. Because of the inherent limitations in all control systems,
      no
      evaluation of controls can provide absolute assurance that all control issues
      and instances of fraud, if any, within the Company have been detected. Because
      of the inherent limitations in a cost-effective control system, misstatements
      due to error or fraud may occur and not be detected. The Company conducts
      periodic evaluations to enhance, where necessary its procedures and
      controls.





The
      Company’s principal executive officer and principal financial officer conducted
      an evaluation of the Company's internal control over financial reporting (as
      defined in Exchange Act Rule 13a-15(f)) to determine whether any changes in
      internal control over financial reporting occurred during the quarter ended
      September 30, 2008, that have materially affected or which are reasonably likely
      to materially affect internal control over financial reporting. Based on that
      evaluation, there has been no such change during such period.


24


**PART
      II OTHER INFORMATION**





**Item
      2** **.**  **Unregistered
      Sales of Equity Securities and Use of Proceeds** **.**





During
      the quarter ended September 30, 2008 the Company issued an aggregate of
      2,020,588 shares of its unregistered common stock at a price of $1.70 per share
      upon conversion of an aggregate of $3,435,000 of principal and interest owed
      to
      a total of ten individuals consisting of three directors, two executive
      officers, an employee and two former directors, (one of whom is a principal
      stockholder of the Company) and two accredited outside investors. No
      remuneration was paid or given to any party for soliciting the conversion of
      the
      amounts due under the Company’s 7.25% Convertible Promissory Notes. All of the
      common stock issuances were made in private transactions and the certificates
      issued to related parties representing the shares, contained legends regarding
      restriction on transfer under the Securities Act of 1933 (“Act”). The shares of
      common stock were issued under exemptions from registration under Sections
      3(a)(9) and/or 4(2) of the Act.





The
      following table represents information with respect to purchases of common
      stock
      made by the Company during the three months ended September 30,
      2008:




Month of purchase
            
            Total number
              of shares
              purchased (1)
            
            Average
              price paid
              per share
            
            Total number of
              shares purchased
              as part of
              publicly
              announced plans
              or programs
            
            Maximum dollar
              value of shares
              that may yet be
              purchaed under
              the plans or
              programsJuly 1 – July 31,
                2008
            
            
            14,990
            
            $
            2.84
            
            $
            -
            
            $
            -August
                1 – August 31, 2008
            
            
            -
            
            $
            -
            
            $
            -
            
            $
            -September
                1 - September 30, 2008
            
            
            -
            
            $
            -
            
            $
            -
            
            $
            -Total
            
            
            14,990
            
            $
            2.84
            
            $
            -
            
            $
            -





(1)  Represents
      shares of common stock surrendered to the Company to pay employee withholding
      taxes due upon the vesting of restricted stock.





**Item
      6** **.**  **Exhibits** ****


Exhibit
                  No.
              
              Description31.1
              
              Certification
                  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002.31.2
              
              Certification
                  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002.32.1
              
              Certification
                  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                  Act of 2002.32.2
              
              Certification
                  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                  Act of 2002.


25




Signatures





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





iCAD,
                Inc.(Registrant)Date:
                November 7, 2008
            By:
            /s/
                Kenneth M. FerryKenneth
                M. FerryPresident,
                Chief Executive Officer,DirectorDate:
                November 7, 2008
            By:
            /s/
                Darlene M. Deptula-HicksDarlene
                M. Deptula-HicksExecutive
                Vice President of Financeand
                Chief Financial Officer, Treasurer





26