UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549


FORM
      10-Q


(Mark
      One)





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


EXCHANGE
      ACT OF 1934





For
      the
      quarterly period ended June
      30, 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
            
            (I.R.S.
                Employer Identification No.)of
                incorporation or organization)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
o.




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 o
            Accelerated
                filer xNon-accelerated
                filer o
            Smaller
                reporting company o(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 o NO
x .





As
      of the
      close of business on August 6, 2008 there were 41,420,985 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 June 30, 2008 and
                December 31, 2007
            
            3Consolidated
                Statements of Operations for the three
                and six month periods ended June 30, 2008 and
                2007
            
            4Consolidated
                Statements of Cash Flows for the six month
                periods ended June 30, 2008 and 2007
            
            5Notes
                to Consolidated Financial Statements
            
            6-14Item
                2
            Management's
                Discussion and Analysis of Financial
                Condition and Results of Operations
            
            15-22Item
                3
            Quantitative
                and Qualitative Disclosures about Market Risk
            
            23Item
                4
            Controls
                and Procedures
            
            23PART
                II
            OTHER
                INFORMATIONItem
                2
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            23Item
                4
            Submission
                of Matters to a Vote of Security Holder
            
            24Item
                6
            Exhibits
            
            24Signatures
            
            26


2


**iCAD,
        INC. AND SUBSIDIARY**
 **Consolidated
        Balance Sheets**
 (unaudited)
 
 **June 30,**
              
              **December 31,****2008**
              
              **2007**Assets
                  (Note 2)Current
                  assets:Cash
                  and cash equivalents
              
              $
              7,120,057
              
              $
              4,348,729Trade
                  accounts receivable, net of allowance for doubtful accounts of
                  $50,000 in
                  2008 and 2007
              
              
              6,162,126
              
              
              6,483,618Inventory,
                  net
              
              
              2,122,156
              
              
              1,798,243Prepaid
                  and other current assets
              
              
              645,977
              
              
              320,169Total
                  current assets
              
              
              16,050,316
              
              
              12,950,759Property
                  and equipment:Equipment
              
              
              3,565,479
              
              
              3,512,557Leasehold
                  improvements
              
              
              71,611
              
              
              71,611Furniture
                  and fixtures
              
              
              341,280
              
              
              330,077Marketing
                  assets
              
              
              323,873
              
              
              323,8734,302,243
              
              
              4,238,118Less
                  accumulated depreciation and amortization
              
              
              2,726,453
              
              
              2,369,590Net
                  property and equipment
              
              
              1,575,790
              
              
              1,868,528Other
                  assets:Deposits
              
              
              63,194
              
              
              63,194Patents,
                  net of accumulated amortization
              
              
              29,207
              
              
              68,269Technology
                  intangibles, net of accumulated amortization
              
              
              2,807,802
              
              
              3,115,843Tradename,
                  net of accumulated amortization
              
              
              136,400
              
              
              148,800Goodwill
              
              
              43,515,285
              
              
              43,515,285Total
                  other assets
              
              
              46,551,888
              
              
              46,911,391Total
                  assets
              
              $
              64,177,994
              
              $
              61,730,678Liabilities
                  and Stockholders' EquityCurrent
                  liabilities:Accounts
                  payable
              
              $
              1,784,070
              
              $
              2,010,717Accrued
                  salaries and other expenses
              
              
              2,547,928
              
              
              3,461,422Deferred
                  revenue
              
              
              2,074,885
              
              
              1,674,005Convertible
                  loans payable to related parties
              
              
              2,297,794
              
              
              2,793,382Convertible
                  loans payable to non-related parties
              
              
              694,853
              
              
              684,559Total
                  current liabilities
              
              
              9,399,530
              
              
              10,624,085Convertible
                  revolving loans payable to related party
              
              
              -
              
              
              2,258,906Total
                  liabilities
              
              
              9,399,530
              
              
              12,882,991Commitments
                  and contingenciesStockholders'
                  equity:Common
                  stock, $ .01 par value: authorized 85,000,000 shares; issued 41,378,854
                  in
                  2008 and 39,239,208 in 2007; outstanding 41,310,978 in 2008 and
                  39,171,332
                  in 2007
              
              
              413,788
              
              
              392,392Additional
                  paid-in capital
              
              
              139,024,054
              
              
              135,055,418Accumulated
                  deficit
              
              
              (83,709,114
              )
              
              (85,649,859
              )Treasury
                  stock at cost (67,876 shares)
              
              
              (950,264
              )
              
              (950,264
              )Total
                  Stockholders' equity
              
              
              54,778,464
              
              
              48,847,687Total
                  liabilities and stockholders' equity
              
              $
              64,177,994
              
              $
              61,730,678
 
 *See
        accompanying notes to consolidated financial statements.*


3


**iCAD,
        INC.**
 
 **Consolidated
        Statements of Operations**
 **(unaudited)**
 
 **Three Months Ended**
              
              **Six Months Ended****June 30,**
              
              **June 30,****2008**
              
              **2007**
              
              **2008**
              
              **2007**RevenueProducts
              
              $
              9,677,125
              
              $
              5,263,732
              
              $
              15,331,748
              
              $
              10,534,406Service
                  and supplies
              
              
              872,364
              
              
              841,004
              
              
              1,649,757
              
              
              1,717,816Total
                  revenue
              
              
              10,549,489
              
              
              6,104,736
              
              
              16,981,505
              
              $
              12,252,222Cost
                  of revenueProducts
              
              
              1,470,227
              
              
              947,172
              
              
              2,425,642
              
              
              1,951,290Service
                  and supplies
              
              
              263,614
              
              
              271,021
              
              
              446,383
              
              
              475,531Total
                  cost of revenue
              
              
              1,733,841
              
              
              1,218,193
              
              
              2,872,025
              
              
              2,426,821Gross
                  margin
              
              
              8,815,648
              
              
              4,886,543
              
              
              14,109,480
              
              
              9,825,401Operating
                  expenses:Engineering
                  and product development
              
              
              1,503,595
              
              
              1,133,424
              
              
              2,912,804
              
              
              2,198,299Marketing
                  and sales
              
              
              2,809,466
              
              
              2,793,446
              
              
              5,192,989
              
              
              5,302,205General
                  and administrative
              
              
              1,935,891
              
              
              1,689,951
              
              
              3,784,237
              
              
              3,503,306Total
                  operating expenses
              
              
              6,248,952
              
              
              5,616,821
              
              
              11,890,030
              
              
              11,003,810Income
                  (loss) from operations
              
              
              2,566,696
              
              
              (730,278
              )
              
              2,219,450
              
              
              (1,178,409
              )Interest
                  expense - net
              
              
              84,098
              
              
              109,333
              
              
              182,705
              
              
              215,139Net
                  income (loss) before provision for income taxes
              
              $
              2,482,598
              
              $
              (839,611
              )
              $
              2,036,745
              
              $
              (1,393,548
              )Provision
                  for income taxes
              
              
              96,000
              
              
              -
              
              
              96,000
              
              
              -Net
                  income (loss)
              
              
              2,386,598
              
              
              (839,611
              )
              
              1,940,745
              
              
              (1,393,548
              )Preferred
                  dividend
              
              
              -
              
              
              26,830
              
              
              -
              
              
              55,880Net
                  income (loss) attributable to common stockholders
              
              $
              2,386,598
              
              $
              (866,441
              )
              $
              1,940,745
              
              $
              (1,449,428
              )Net
                  income (loss) per shareBasic
              
              $
              0.06
              
              $
              (0.02
              )
              $
              0.05
              
              $
              (0.04
              )Diluted
              
              $
              0.06
              
              $
              (0.02
              )
              $
              0.05
              
              $
              (0.04
              )Weighted
                  average number of shares used in computing income (loss) per
                  shareBasic
              
              
              39,308,978
              
              
              38,035,094
              
              
              39,240,427
              
              
              37,755,330Diluted
              
              
              44,635,496
              
              
              38,035,094
              
              
              44,179,709
              
              
              37,755,330
 
 *See
        accompanying notes to consolidated financial
        statements.*


4


**iCAD,
        INC.**
 **Consolidated
        Statements of Cash Flows**
 (unaudited)
 
 **Six Months Ended**
              
              **Six Months Ended****June 30, 2008**
              
              **June 30, 2007**Cash
                  flows from operating activities:Net
                  income (loss)
              
              $
              1,940,745
              
              $
              (1,393,548
              )Adjustments
                  to reconcile net income (loss) to net cash provided by (used for)
                  operating activities:Depreciation
              
              
              458,829
              
              
              505,284Amortization
              
              
              359,503
              
              
              359,504Loss
                  on disposal of assets
              
              
              -
              
              
              11,145Stock
                  based compensation
              
              
              816,643
              
              
              492,608Non-cash
                  interest expense associated with discount on convertible loans
                  payable
              
              
              14,706
              
              
              14,706Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              321,492
              
              
              (337,524
              )Inventory
              
              
              (323,913
              )
              
              732,418Other
                  current assets
              
              
              (325,808
              )
              
              (101,832
              )Accounts
                  payable
              
              
              (226,647
              )
              
              (805,127
              )Accrued
                  interest
              
              
              142,214
              
              
              223,263Accrued
                  salaries and other expenses
              
              
              (601,534
              )
              
              (549,285
              )Deferred
                  revenue
              
              
              400,880
              
              
              238,559Total
                  adjustments
              
              
              1,036,365
              
              
              783,719Net
                  cash provided by (used for) operating activities
              
              
              2,977,110
              
              
              (609,829
              )Cash
                flows from investing activities:Additions
                  to property and equipment
              
              
              (198,348
              )
              
              (368,250
              )Net
                  cash used for investing activities
              
              
              (198,348
              )
              
              (368,250
              )Cash
                  flows from financing activities:Issuance
                  of common stock for cash
              
              
              251,472
              
              
              1,146,445Payment
                  of convertible notes payable
              
              
              (258,906
              )
              
              -Payment
                  of note payable
              
              
              -
              
              
              (375,000
              )Net
                  cash (used for) provided by financing activities
              
              
              (7,434
              )
              
              771,445Increase
                  (decrease) in cash and equivalents
              
              
              2,771,328
              
              
              (206,634
              )Cash
                  and equivalents, beginning of period
              
              
              4,348,729
              
              
              3,623,404Cash
                  and equivalents, end of period
              
              $
              7,120,057
              
              $
              3,416,770Supplemental
                  disclosure of cash flow information:Interest
                  paid
              
              $
              55,598
              
              $
              8,743Non-cash
                  items from investing and financing activities:Conversion
                  of convertible notes payable into Common Stock
              
              $
              2,500,000
              
              $
              -Accrued
                  dividends on convertible preferred stock
              
              $
              -
              
              $
              55,880
 
 *See
        accompanying notes to consolidated financial statements.*




5


**iCAD,
      INC.**


**Notes
      to Consolidated Financial Statements**


**(Unaudited)**


**June
      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
      June
      30, 2008, the results of operations for the three and six month periods ended
      June 30, 2008 and 2007, and cash flows for the six month periods ended June
      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 six month periods ended June 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 (the "Prior Loan 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. As of June 30, 2008, the Company
      had approximately $4,700,000 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.





6




**iCAD,
      INC.**


**Notes
      to Consolidated Financial Statements**


**(Unaudited)**


**June
      30, 2008**





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





**Loan
      and Security Agreement** (continued)





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 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.


7


**iCAD,
      INC.**


**Notes
      to Consolidated Financial Statements**


**(Unaudited)**


**June
      30, 2008**





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





**Convertible
      Loans Payable to Related Parties**





On
      June
      19, 2006, the Company and Dr. Lawrence Howard, who subsequently became Director
      and is currently the Chairman of the Board of Director 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. 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. The
      Ferry
      Note has, therefore, been fully repaid and satisfied and was terminated as
      of
      June 20, 2008.




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,
      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), 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 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 are due two years from the date of issue subject to the right of the
      Company to prepay the Notes and the right of the holders of the Notes to
      accelerate payment of their respective Notes upon the Company filing for or
      being adjudicated bankrupt or insolvent. The holders


8


**iCAD,
      INC.**


**Notes
      to Consolidated Financial Statements**


**(Unaudited)**


**June
      30, 2008**





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





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





of
      the
      Notes may convert the principal and accrued and unpaid interest under the Notes
      into shares of the Company’s common stock at a price of $1.70 per share, which
      conversion price is subject to adjustment under certain circumstances such
      as
      common stock splits, or combinations or common stock dividends. The Note issued
      to Mr. Steven Rappaport on September 19, 2006 in the principal amount of
      $300,000 was issued with a conversion price below the market price of $1.80
      per
      share on the date of the Note and the Company recorded a discount to Note
      Payables of $17,647 to reflect the beneficial conversion feature. This loan
      is
      recorded on the balance sheet at its face value net of the discount at June
      30,
      2008 of $2,206 at $297,794.




**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 are evidenced by the September
      Notes issued by the Company in favor of the non-related parties. The September
      Notes mature two years from the date of issue subject to the right of the
      Company to prepay the September Notes and the right of the holders of the
      September Notes to accelerate payment of their respective September Notes upon
      the Company filing for or being adjudicated bankrupt or insolvent. The holders
      of the September Notes may convert the principal and accrued and unpaid interest
      under the September Notes into shares of the Company’s common stock at a price
      of $1.70 per share, which conversion price is subject to adjustment under
      certain circumstances such as common stock splits, or combinations or common
      stock dividends. The September Notes issued on September 19, 2006 in the
      aggregate principal amount of $700,000 were issued with a conversion price
      below
      the market price of $1.80 per share on the date of the September Notes and
      the
      Company recorded a discount to Note Payables of $41,177 to reflect the
      beneficial conversion feature. These loans are recorded on the balance sheet
      at
      June 30, 2008 at $694,853, which represents their face value net of the discount
      of $5,147.


9





**iCAD,
      INC.**


**Notes
      to Consolidated Financial Statements**


**(Unaudited)**


**June
      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**
                **June 30,**
              
              **Six Months Ended**
                **June 30,****2008**
              
              **2007**
              
              **2008**
              
              **2007**Net
                  income (loss)
              
              $
              2,386,598
              
              $
              (839,611
              )
              $
              1,940,745
              
              $
              (1,393,548
              )Less
                  preferred dividends
              
              
              -
              
              
              (26,830
              )
              
              
              
              
              (55,880
              )Net
                  income (loss) available to common shareholders - basic
              
              $
              2,386,598
              
              $
              (866,441
              )
              $
              1,940,745
              
              $
              (1,449,428
              )Add
                  interest relating to convertible loans payable
              
              
              79,893
              
              
              -
              
              
              173,570
              
              
              -Net
                  income (loss) available to common shareholders - diluted
              
              $
              2,470,696
              
              $
              (866,441
              )
              $
              2,123,450
              
              $
              (1,449,428
              )Basic
                  shares used in the calculation of earnings per share
              
              
              39,308,978
              
              
              38,035,094
              
              
              39,240,427
              
              
              37,755,330Effect
                  of dilutive securities:Stock
                  options
              
              
              1,545,516
              
              
              -
              
              
              1,180,134
              
              
              -Restricted
                  stock
              
              
              58,834
              
              
              -
              
              
              14,705
              
              
              -Convertible
                  loans payable
              
              
              3,722,168
              
              
              -
              
              
              3,744,443
              
              
              -Stock
                  warrants
              
              
              -
              
              
              -
              
              
              -
              
              
              -Diluted
                  shares used in the calculation of earnings per share
              
              
              44,635,496
              
              
              38,035,094
              
              
              44,179,709
              
              
              37,755,330Net
                  income (loss) per share :Basic
              
              $
              0.06
                  $
              
              
              (0.02
              )
              $
              0.05
                  $
              
              
              (0.04
              )Diluted
              
              $
              0.06
                  $
              
              
              (0.02
              )
              $
              0.05
                  $
              
              
              (0.04
              )




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**
                
                **Six
                    Months Ended****June
                    30,**
                
                **June
                    30,****2008**
                
                **2007**
                
                **2008**
                
                **2007**Stock
                    options
                
                
                1,813,655
                
                
                5,057,362
                
                
                1,988,844
                
                
                5,057,362Restricted
                    stock
                
                
                -
                
                
                -
                
                
                855,000
                
                
                -Stock
                    warrants
                
                
                1,003,311
                
                
                1,003,311
                
                
                1,003,311
                
                
                1,003,311Convertible
                    Revolving Promissory Note
                
                
                -
                
                
                1,441,848
                
                
                -
                
                
                1,441,848Convertible
                    loans payable
                
                
                -
                
                
                2,098,039
                
                
                -
                
                
                2,098,039Convertible
                    Series A Preferred Stock
                
                
                -
                
                
                460,000
                
                
                -
                
                
                460,000Convertible
                    Series B Preferred Stock
                
                
                -
                
                
                527,500
                
                
                -
                
                
                527,500**2,816,966**
                
                
                **10,588,060**
                
                
                **3,847,155**
                
                
                **10,588,060**


10





**iCAD,
      INC.**


**Notes
      to Consolidated Financial Statements**


**(Unaudited)**


**June
      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 No. 123R
      using a modified prospective application, as permitted under SFAS No. 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 351,123 stock options and 533,250 shares of restricted stock
      in
      the six months ended June 30, 2008. The options granted during the six months
      of
      2008 had a weighted average exercise price of $2.17. The weighted average fair
      value of options granted during the six month period ended June 30, 2008 was
      $0.95 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 2.98%, 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 recorde d
      $816,643 for share-based compensation in accordance with SFAS 123R.





For
      the
      same period in 2007, t he
      Company issued 363,056 stock options. The options granted during the first
      six
      months of 2007 had a weighted average exercise price of $3.88. The weighted
      average fair value of options granted during the six month period ended June
      30,
      2007 was $1.85 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
      4.70%, 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 recorde d
      $492,608 for share-based compensation in accordance with SFAS 123R.





As
      of
      June 30, 2008 there was approximately
      $4,059,958 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.


11


**iCAD,
      INC.**


**Notes
      to Consolidated Financial Statements**


**(Unaudited)**


**June
      30, 2008**





**(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.


12


**iCAD,
      INC.**


**Notes
      to Consolidated Financial Statements**


**(Unaudited)**


**June
      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 June 30, 2008 are cash equivalents. The
      cash equivalents are measured using level one 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 June 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 June 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
      June 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 six months


13


**iCAD,
      INC.**


**Notes
      to Consolidated Financial Statements**


**(Unaudited)**


**June
      30, 2008**





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





ended
      June 30, 2008 and no income tax expense was provided for the six month period
      ended June 30, 2007. The effective income tax rate is based upon the estimated
      income for the year. For the six month period ended June 30, 2008, the effective
      tax rate varied from the statutory tax rate principally due to federal and
      state
      net operating loss carryforwards available.




**(8)**
            **Subsequent
                Events**





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 (the “Seller”) 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 the Seller 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, the Seller
      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 the Seller’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.




14




**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 computer aided detection solutions (“CAD”) that
      enable radiologists and other healthcare professionals to better serve patients
      by identifying pathologies and pinpointing cancer earlier. 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. 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.





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. The Company
      believes that the shift to digital CAD technology will continue and as such
      it
      will continue to have a positive impact on the Company’s overall financial
      performance, primarily because as the number of facilities converting to full
      field digital mammography systems continues to grow, the recent release of
      the
      Company’s CAD product for use with Computed Radiography (CR), and the Company
      expects to realize higher revenue of its digital products due to the higher
      adoption rate of digital CAD technology as compared to analog CAD technology
      and
      from higher gross margins realized on the Company’s digital
      products.




15




iCAD’s
      CAD 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 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 is developing 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 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. 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 with the acquisition of CAD
      Sciences also in New York.





**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.




16


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 June 30, 2008 compared to Quarter Ended June 30, 2007 and Six Months
      Ended
      June 30, 2008 compared to Six Months Ended June 30, 2007**





*Revenue.* Revenue
      for the three and six month periods ended June 30, 2008 was $10,549,489 and
      $16,981,505, respectively, compared with revenue of $6,104,736 and $12,252,222
      for the three and six month periods ended June 30, 2007. In the six month period
      ended June 30, 2008, sales of iCAD’s digital solutions increased $4,832,361 or
      65.2% to $12,247,611, compared to sales of $7,415,250 in the six month period
      in
      2007.





The
      increase in revenue for the six month period ended June 30, 2008, was due
      primarily to the substantial increase in digital CAD revenue during the second
      quarter 2008. The Company’s digital revenue for the second quarter of 2008
      increased $4,000,065 or 101.0%, to $7,961,945, compared to sales of $3,961,880
      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.





Sales
      of
      iCAD’s film based product revenue increased 31.7% or $413,328 in the second
      quarter of 2008, to $1,715,180 in 2008 compared to $1,301,852 in the second
      quarter of 2007, and a decrease of 1.1% or $35,019 for the six month period
      ended June 30, 2008, to $3,084,137 in 2008, compared to $3,119,156 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 in the second quarter
      of
      2008.




17




Service
      and supply revenue increased 3.7% in the second quarter of 2008, to $872,364
      compared to $841,004 in the second quarter in 2007 and decreased 4.0% or
      $68,059, from $1,717,816 to $1,649,757 for the six month period ended June
      30,
      2008, compared to the same six month period in 2007. The decrease in the
      Company’s service revenue for the six month period ended June 30, 2008 is due
      primarily to a reduction in time and material billings for repair services
      and
      related parts sales due in part to certain of its older film based analog
      products no longer being supported, offset by increased service contract revenue
      on the Company’s digital and TotalLook products.





**Three
                months ended June 30,****2008**
            
            **2007**
            
            **Change**
            
            **% Change**Digital
                revenue
            
            $
            7,961,945
            
            $
            3,961,880
            
            $
            4,000,065
            
            
            101.0
            %Analog
                revenue
            
            
            1,715,180
            
            
            1,301,852
            
            
            413,328
            
            
            31.7
            %Service
                & supply revenue
            
            
            872,364
            
            
            841,004
            
            
            31,360
            
            
            3.7
            %Total
                revenue
            
            $
            10,549,489
            
            $
            6,104,736
            
            $
            4,444,753
            
            
            72.8
            %





**Six
                months ended June 30,****2008**
            
            **2007**
            
            **Change**
            
            **% Change**Digital
                revenue
            
            $
            12,247,611
            
            $
            7,415,250
            
            $
            4,832,361
            
            
            65.2
            %Analog
                revenue
            
            
            3,084,137
            
            
            3,119,156
            
            
            (35,019
            )
            
            -1.1
            %Service
                & supply revenue
            
            
            1,649,757
            
            
            1,717,816
            
            
            (68,059
            )
            
            -4.0
            %Total
                revenue
            
            $
            16,981,505
            
            $
            12,252,222
            
            $
            4,729,283
            
            
            38.6
            %





*Gross
      Margin.* Gross
      margin increased to 83.6% and 83.1% for the three and six month periods ended
      June 30, 2008 compared to 80.0% and 80.2%, respectively, in the same three
      and
      six month periods in 2007. This 3.6% and 2.9% increase in gross margin for
      the
      three and six 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.





*Engineering
      and Product Development.* Engineering
      and product development costs for the three and six month periods ended June
      30,
      2008 increased by $370,171 or 32.7% and $714,505 or 32.5%, respectively, from
      $1,133,424 and $2,198,299 in 2007 to $1,503,595 and $2,912,804, respectively,
      in
      2008. The increase in engineering and product development costs during the
      three
      and six month periods ended June 30, 2008 was primarily due to an increase
      in
      personnel and related costs of approximately $278,000 and $544,000,
      respectively, resulting from staff increases to support the Company’s new
      product development and approximately $106,000 and $131,000, respectively,
      in
      subcontracting services relating primarily to the clinical trials for its CT
      Colon product.




18


*Marketing
      and Sales.* Marketing
      and sales expense for the three month period ended June 30, 2008 increased
      slightly by $16,020 or 0.6%, from $2,793,446 in 2007 to $2,809,466 in 2008.
      Marketing and sales expense for the six month period ended June 30, 2008
      decreased $109,216 or 2.1%, from $5,302,205 in 2007 to $5,192,989 in 2008.
      The
      increase in marketing and sales expense for the three month period ending June
      30, 2008, is primarily attributable to a $184,000 increase in personnel and
      related costs offset by primarily by a decrease of $108,000 in consulting and
      subcontracted services and $51,000 in travel expenses. The decrease in marketing
      and sales expense for the six month period ended June 30, 2008, primarily
      resulted from an increase in personnel and related expenses of $238,000 offset
      by decreases in consulting and subcontracted services of $198,000, warranty
      costs of $74,000, travel expenses of $42,000 and recruiting expenses of $33,000.





*General
      and Administrative.* General
      and administrative expenses for the three and six month periods ended June
      30,
      2008 increased by $245,940 or 14.6% and $280,931 or 8.0%, respectively, from
      $1,689,951 and $3,503,306 in 2007 to $1,935,891 and $3,784,237 in 2008,
      respectively. The increase in general and administrative expense during the
      three month period ended June 30, 2008 was due primarily to an increase in
      stock
      based compensation expense of approximately $191,000 and increases in wage
      related and fringe benefit expenses of $66,000. For the six month period ended
      June 30, 2008 the increase was primarily due to an increase in stock based
      compensation expense of approximately $327,000 and consulting and investor
      relations expenses of $100,000, offset by a decrease in recruiting fees of
      $79,000 and legal expense of $73,000.





*Interest
      Expense* .
      Net
      interest expense for the three and six month periods ended June 30, 2008
      decreased from $109,333 and $215,139, respectively, in 2007 to $84,098 and
      $182,705 in 2008. This decrease is due primarily to 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 of $96,000 for the 2008 periods, 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 $2,386,598 or $0.06
      per basic share for the three month period ended June 30, 2008 on revenue of
      $10,549,489 compared to a net loss of ($839,611) or ($0.02) per basic share
      on
      revenue of $6,104,736 for the three months ended June 30, 2007. The net income
      for the six months ended June 30, 2008 was $1,940,745 or $0.05 per basic share
      on revenue of $16,981,505, compared to a net loss of ($1,393,548) or ($0.04)
      per
      basic share on revenue of $12,252,222 for the six months ended June 30, 2007.





*Backlog.* The
      Company’s product backlog (excluding service and supplies) as of June 30, 2008
      totaled approximately $2,665,716 as compared to $1,568,541 as of June 30, 2007
      and $1,996,352 at March 31, 2008. It is expected that the majority of the
      backlog at June 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.




19


**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
      expected to be generated from continuing operations, as well as the availability
      of a credit line under the RBS Loan Agreement. The RBS Loan Agreement replaces
      the Prior Revolving Loan and Security 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. As of June 30, 2008, the Company had approximately
      $4,700,000 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.





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
      June
      30, 2008 the Company had current assets of $16,050,316, current liabilities
      of
      $9,399,530 and working capital of $6,650,786. The ratio of current assets to
      current liabilities was 1.7:1




20




Net
      cash
      provided by operating activities for the six months ended June 30, 2008 was
      $2,977,110, compared to net cash used of $609,829 for the same period in 2007.
      The cash provided by operating activities for the six months ended June 30,
      2008
      resulted from the net income of $1,940,745, a decrease in accounts receivable
      of
      $321,492 and increases in accrued interest and deferred revenue totaling
      $543,094, plus non-cash items including, depreciation, amortization, and
      interest expense associated with discount on convertible loans payable of
      $833,038 and stock based compensation of $816,643, offset by increases in
      inventory of $323,913 and other current assets of $325,808, and a decrease
      in
      accounts payable of $226,647 and accrued expenses of $601,534.





The
      net
      cash used for investing activities, consisted of additions to property and
      equipment for the six month period ended June 30, 2008, was $198,348 compared
      to
      $368,250 for the comparable period in 2007.





Net
      cash
      used for financing activities for the six months ended June 30, 2008 was $7,434,
      compared to net cash provided by financing activities of $771,445 for the same
      period in 2007. The cash used for financing activities during 2008 was due
      to
      cash received from the issuance of common stock relating to the exercise of
      stock options and conversion of loans payable offset by the payment of the
      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 June 30,
      2008.





**Contractual
                Obligations**
            
            **Payments
                due by period****Less
                than 1****Total**
            
            **year**
            
            **1-3
                years**
            
            **3-5
                years**
            
            **5+
                years**Convertible
                loans payable to related parties
            
            $
            2,297,794
            
            $
            2,297,794
            
            $
            -
            
            $
            -
            
            $
            -Convertible
                loans payable to investors
            
            $
            694,853
            
            $
            694,853
            
            $
            -
            
            $
            -
            
            $
            -Lease
                Obligations*
            
            $
            1,390,653
            
            $
            224,767
            
            $
            945,566
            
            $
            220,320
            
            $
            -Other
                Obligations
            
            $
            21,505
            
            $
            21,505
            
            $
            -
            
            $
            -
            
            $
            -Interest
                Obligation**
            
            $
            435,000
            
            $
            435,000
            
            $
            -
            
            $
            -
            
            $
            -**Total
                Contractual Obligations**
            
            **$**
            **4,839,805**
            
            **$**
            **3,673,919**
            
            **$**
            **945,566**
            
            **$**
            **220,320**
            
            **$**
            **-**





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


**Represents
      interest under the Convertible Promissory Note agreements at the rate of 7.25%.




21


**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.




22




**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
      June
      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.





**PART
      II OTHER INFORMATION**





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





During
      the quarter ended June 30, 2008 the Company issued the following shares of
      its
      unregistered common stock: (i) 1,622,012 shares to Mr. Robert Howard upon
      conversion of amounts owed to him by the Company under the Prior Loan Agreement;
      (ii) 152,000 shares to Dr. Lawrence Howard upon conversion of amounts owed
      to
      him by the Company under the Howard Note and (iii) 228,000 shares to Mr. Kenneth
      Ferry upon conversion of amounts owed to him by the Company under the Ferry
      Note. No commission or other remuneration was paid or given to any party for
      soliciting the conversion of the amounts due under the Prior Loan Agreement,
      the
      Howard Note or the Ferry Note, all of the common stock issuances were made
      in
      private transactions and the certificates 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.




23


**Item
      4** **.** **Submission
      of Matters to a Vote of Security Holders.**





At
      the
      Company’s Annual Meeting of Stockholders held on June 17, 2008 the stockholders
      of the Company entitled to vote at the meting voted to elect the seven
      individuals named below to serve as directors of the Company to hold office
      until the Annual Meeting of Stockholders to be held in 2009 and until their
      successors have been duly elected and qualified.





The
      votes
      cast by stockholders with respect to the election of directors were as
      follows:




Votes
                Cast
            
            VotesDirector
            
            "For"
            
            WithheldDr.
                Lawrence Howard
            
            36,795,018
            
            168,112Kenneth
                Ferry
            
            36,862,077
            
            101,053Rachel
                Brem, M.D.
            
            35,747,592
            
            1,215,538Steven
                Rappaport
            
            36,721,663
            
            241,467Maha
                Sallam
            
            36,862,332
            
            100,798Elliot
                Sussman, M.D.
            
            35,747,792
            
            1,215,338Anthony
                Ecock
            
            36,868,077
            
            95,053





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





Exhibit No.
            
            Description2.1*
            
            Asset
                Purchase Agreement dated as of June 20, 2008 between the Registrant
                and
                3TP LLC dba CAD Sciences(1)10.1
            
            Escrow
                Agreement dated as of July 18, 2008 by and among the Registrant,
                3TP LLC
                dba CAD Sciences and U.S. Bank National Association (1)10.2*
            
            Loan
                and Security Agreement dated as of June 30, 2008 by and between the
                Registrant and RBS Citizens, N.A. (2)10.3
            
            Revolving
                Note dated as of June 30, 2008 made by the Registrant in favor of
                RBS
                Citizens, N.A. (2)10.4
            
            Negative
                Pledge Agreement dated June 30, 2008 by the Registrant as accepted
                by RBS
                Citizens, N.A.(2)




24




10.5
            
            Employment
                Agreement entered into as of June 1, 2008 between the Registrant
                and Kenneth Ferry.10.6
            
            Employment
                Agreement entered into as of June 1, 2008 between the Registrant
                and
                Darlene Deptula-Hicks.10.7
            
            Employment
                Agreement entered into as of June 1, 2008 between the Registrant
                and
                Jeffrey Barnes.10.8
            
            Employment
                Agreement entered into as of June 1, 2008 between the Registrant
                and
                Stacey Stevens.10.9
            
            Employment
                Agreement entered into as of June 1, 2008 between the Registrant
                and
                Jonathan Go.31.1
            
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.31.2
            
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.32.1
            
            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.








(1)
      Incorporated by reference to the exhibit filed with the Registrant’s Current
      Report on Form 8-K for the event dated July 18, 2008.





(2)
      Incorporated by reference to the exhibit filed with the Registrant’s Current
      Report on Form 8-K for the event dated June 30, 2008.





*
      The Registrant has omitted certain schedules and exhibits pursuant to Item
      601(b)(2) of Regulation S-K and shall furnish supplementally to the SEC copies
      any of the omitted schedules and exhibits upon request by the SEC.




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: August
                8, 2008
            
            By:
            /s/
                Kenneth M. FerryKenneth
                M. FerryPresident,
                Chief Executive Officer,DirectorDate: August 8,
                2008
            
            By:
            /s/
                Darlene M. Deptula-HicksDarlene
                M. Deptula-HicksExecutive
                Vice President of Financeand
                Chief Financial Officer, Treasurer




26