|                                  
|----------------------------------
|UNITED STATES                     
|SECURITIES AND EXCHANGE COMMISSION
|WASHINGTON, D.C. 20549            
|                                  
|FORM 10-Q                         

|  |                                                                                          
|- | -----------------------------------------------------------------------------------------
|o | Quarterly Report pursuant to Section 13 or 15(d) of
 the Securities Exchange Act of 1934 
|  |                                                                                          
|  | For the
 quarterly period ended March 31, 2010.                                          
|  |                                                                                          
|o | Transition Report pursuant to Section 13 or 15(d) of
 the Securities Exchange Act of 1934
|  |                                                                                          
|  | For the
 transition period _____________ to ______________.                              

|                                                      
|------------------------------------------------------
|Commission File Number 333-133936                     
|                                                      
|VISUAL MANAGEMENT SYSTEMS, INC.                       
|(Exact name of registrant as specified in its charter)

|                                                                |                                     
|--------------------------------------------------------------- | ------------------------------------
|Nevada                                                          | 68-0634458                          
|(State or other jurisdiction of
 incorporation or organization) | (IRS Employer Identification Number)

1000 Industrial Way North, Suite C
Toms River, New Jersey 08755(Address of principal executive offices)

(732) 281-1355(Registrants telephone number, including area code)

(Former name, former address and former
fiscal year, if changed since last report)

Check whether
the registrant (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90
days.                                                                                Yes
x   No o

Indicate by
check mark whether the registrant has submitted electronically and posted on
its website, if any, every Interactive Data File required to be submitted and
posted pursuant to rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files)   Yes o   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 definition
of accelerated filer, large accelerated filer, and smaller reporting
company in Rule 12b-2 of the Exchange Act. (Check one):

|                                                                                                                  
|------------------------------------------------------------------------------------------------------------------
|Large
 accelerated filer o                                                                                        
|Accelerated
 filer o                                                                                              
|Non-accelerated
 filer o (Do not check if a smaller reporting company)                                            
|Smaller
 reporting company x                                                                                      
|                                                                                                                  
|Indicate by
 check mark whether the registrant is a shell company (as defined in Rule
 12b-2 of the Exchange Act).
|Yes o   No x                                                                                                      

As of May 17,
2010, there were 147,612,526 shares of the registrants common stock
outstanding.

1







VISUAL MANAGEMENT SYSTEMS,INC. AND SUBSIDIARIES
INDEX

|                              |         |                                                                                                                  |  |         
|----------------------------- | ------- | ---------------------------------------------------------------------------------------------------------------- |  | --------
|                              |         |                                                                                                                  |  | Page No.
|                              |         |                                                                                                                  |  |         
|PART I. Financial Information |         |                                                                                                                 
|                              |         |                                                                                                                 
|                              | Item 1. | Financial Statements                                                                                             |  | 3       
|                              |         |                                                                                                                  |  |         
|                              |         | Condensed
 Consolidated Balance Sheets (Unaudited) as of March 31, 2010 and 2009                                 |  | 3       
|                              |         |                                                                                                                  |  |         
|                              |         | Condensed
 Consolidated Statements of Operations (Unaudited) for the Three Months Ended
 March 31, 2010 and 2009 |  | 4       
|                              |         |                                                                                                                  |  |         
|                              |         | Condensed
 Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended
 March 31, 2010 and 2009 |  | 5       
|                              |         |                                                                                                                  |  |         
|                              |         | Notes to Condensed Consolidated Financial Statements                                                             |  | 6       
|                              |         |                                                                                                                  |  |         
|                              | Item 2. | Managements
 Discussion and Analysis of Financial Condition and Results of Operations                           |  | 12      
|                              |         |                                                                                                                  |  |         
|                              | Item 3. | Quantitative
 and Qualitative Disclosures About Market Risk                                                      |  | 14      
|                              |         |                                                                                                                  |  |         
|                              | Item 4. | Controls and Procedures                                                                                          |  | 14      
|                              |         |                                                                                                                  |  |         
|PART II. Other Information    |         |                                                                                                                 
|                              |         |                                                                                                                 
|                              | Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds                                                      |  | 16      
|                              |         |                                                                                                                  |  |         
|                              | Item 3. | Defaults upon Senior Securities                                                                                  |  | 16      
|                              |         |                                                                                                                  |  |         
|                              | Item 6. | Exhibits                                                                                                         |  | 17      
|                              |         |                                                                                                                  |  |         
|SIGNATURES                    |         | 18                                                                                                              

2

---



|                                                                                        
|----------------------------------------------------------------------------------------
|PART I - FINANCIAL INFORMATION                                                          
|Item 1. FINANCIAL STATEMENTS                                                            
|Visual Management Systems, Inc. and Subsidiaries 
 Condensed Consolidated Balance Sheets

|                                                                                                      |  |                |             |                   |   |             |  
|----------------------------------------------------------------------------------------------------- |  | -------------- | ----------- | ----------------- | - | ----------- | -
|                                                                                                      |  | March 31, 2010 |             | December 31, 2009 |  
|                                                                                                      |  | (unaudited)    |             |                   |  
|Assets                                                                                                |  |                |             |                   |   |             |  
|                                                                                                      |  |                |             |                   |   |             |  
|Current
 assets                                                                                       |  |                |             |                   |   |             |  
|Cash                                                                                                  |  | $              | 59,985      |                   | $ | 24,884      |  
|Accounts receivable, net                                                                              |  |                | 121,233     |                   |   | 90,286      |  
|Inventory                                                                                             |  |                | 97,635      |                   |   | 46,462      |  
|Prepaid expenses                                                                                      |  |                | 37,152      |                   |   | 27,584      |  
|                                                                                                      |  |                |             |                   |   |             |  
|Total current assets                                                                                  |  |                | 316,005     |                   |   | 189,216     |  
|                                                                                                      |  |                |             |                   |   |             |  
|Property
 and equipment - net                                                                         |  |                | 164,619     |                   |   | 192,958     |  
|Capitalized
 software-net                                                                             |  |                | 135,086     |                   |   | 144,092     |  
|Deposits
 and other assets                                                                            |  |                | 176,807     |                   |   | 148,431     |  
|Software-net                                                                                          |  |                | 684,129     |                   |   | 729,738     |  
|Deferred
 financing costs-net                                                                         |  |                | 133,215     |                   |   | 322,853     |  
|                                                                                                      |  |                |             |                   |   |             |  
|                                                                                                      |  |                |             |                   |   |             |  
|Total Assets                                                                                          |  | $              | 1,609,861   |                   | $ | 1,727,288   |  
|                                                                                                      |  |                |             |                   |   |             |  
|                                                                                                      |  |                |             |                   |   |             |  
|Liabilities and Stockholders Deficit                                                                 |  |                |             |                   |   |             |  
|                                                                                                      |  |                |             |                   |   |             |  
|Current
 liabilities                                                                                  |  |                |             |                   |   |             |  
|Accounts payable                                                                                      |  | $              | 1,624,178   |                   | $ | 1,664,913   |  
|Accrued expenses and other current
 liabilities                                                       |  |                | 3,259,677   |                   |   | 2,885,414   |  
|Customer deposits                                                                                     |  |                | 164,525     |                   |   | 68,394      |  
|Sales tax payable                                                                                     |  |                | 168,648     |                   |   | 145,159     |  
|Bank line of credit                                                                                   |  |                | 41,951      |                   |   | 45,283      |  
|Short term notes payable                                                                              |  |                | 499,814     |                   |   | 504,303     |  
|Convertible notes payable                                                                             |  |                | 319,546     |                   |   | 289,046     |  
|Current portion of long-term debt                                                                     |  |                | 109,740     |                   |   | 115,321     |  
|Current portion of obligations under
 capital leases                                                  |  |                | 105,889     |                   |   | 105,889     |  
|Current portion of convertible notes
 payable
 (net of unamortized discount of $123,333 and $198,333) |  |                | 5,579,409   |                   |   | 5,504,409   |  
|                                                                                                      |  |                |             |                   |   |             |  
|                                                                                                      |  |                |             |                   |   |             |  
|Total current liabilities                                                                             |  |                | 11,873,377  |                   |   | 11,328,131  |  
|                                                                                                      |  |                |             |                   |   |             |  
|Long-term
 debt - net of current portion                                                              |  |                | 93,913      |                   |   | 101,745     |  
|Commitments
 and contingencies                                                                        |  |                |             |                   |   |             |  
|                                                                                                      |  |                |             |                   |   |             |  
|Stockholders
 deficit                                                                                |  |                |             |                   |   |             |  
|Preferred stock                                                                                       |  |                | 1           |                   |   | 1           |  
|Common stock                                                                                          |  |                | 143,563     |                   |   | 129,264     |  
|Additional paid-in-capital                                                                            |  |                | 20,998,018  |                   |   | 20,822,226  |  
|Accumulated deficit                                                                                   |  |                | (31,349,011 | )                 |   | (30,504,079 | )
|Treasury stock, at cost                                                                               |  |                | (150,000    | )                 |   | (150,000    | )
|                                                                                                      |  |                |             |                   |   |             |  
|Total stockholders deficit                                                                           |  |                | (10,357,429 | )                 |   | (9,702,588  | )
|                                                                                                      |  |                |             |                   |   |             |  
|                                                                                                      |  |                |             |                   |   |             |  
|Total Liabilities and Stockholders Deficit                                                           |  | $              | 1,609,861   |                   | $ | 1,727,288   |  
|                                                                                                      |  |                |             |                   |   |             |  

The
accompanying notes to the Condensed Consolidated Financial Statements are an
integral part of these statements.

3

---



|                                                  
|--------------------------------------------------
|Visual Management Systems, Inc. and Subsidiaries  
|Condensed Consolidated
 Statements of Operations  
|For the Three Months Ended March 31, 2010 and 2009
|(Unaudited)                                       
|                                                  

|                                                      |  |                             |             |      |   |            |  
|----------------------------------------------------- |  | --------------------------- | ----------- | ---- | - | ---------- | -
|                                                      |  | Three Months Ended March 31 |            
|                                                      |  | 2010                        |             | 2009 |  
|                                                      |  |                             |             |      |  
|                                                      |  |                             |             |      |   |            |  
|Revenues
 - net                                       |  | $                           | 440,867     |      | $ | 851,360    |  
|                                                      |  |                             |             |      |   |            |  
|Cost
 of revenues                                     |  |                             | 215,910     |      |   | 405,878    |  
|                                                      |  |                             |             |      |   |            |  
|                                                      |  |                             |             |      |   |            |  
|Gross
 profit                                         |  |                             | 224,957     |      |   | 445,482    |  
|                                                      |  |                             |             |      |   |            |  
|Operating
 expenses                                   |  |                             | 616,270     |      |   | 919,589    |  
|                                                      |  |                             |             |      |   |            |  
|                                                      |  |                             |             |      |   |            |  
|Loss
 from operations                                 |  |                             | (391,313    | )    |   | (474,107   | )
|                                                      |  |                             |             |      |   |            |  
|Other
 (income) expenses                              |  |                             |             |      |   |            |  
|Interest expense                                      |  |                             | 453,618     |      |   | 206,789    |  
|                                                      |  |                             |             |      |   |            |  
|                                                      |  |                             |             |      |   |            |  
|Net
 loss                                             |  | $                           | (844,931    | )    | $ | (680,896   | )
|                                                      |  |                             |             |      |   |            |  
|                                                      |  |                             |             |      |   |            |  
|Net
 Loss applicable to common stockholders           |  | $                           | (844,931    | )    | $ | (680,896   | )
|                                                      |  |                             |             |      |   |            |  
|                                                      |  |                             |             |      |   |            |  
|Per
 share data - basic and fully diluted             |  | $                           | (0.01       | )    | $ | (0.06      | )
|                                                      |  |                             |             |      |   |            |  
|                                                      |  |                             |             |      |   |            |  
|Weighted
 average number of common shares outstanding |  |                             | 135,043,637 |      |   | 11,007,833 |  
|                                                      |  |                             |             |      |   |            |  

The
accompanying notes to the Condensed Consolidated Financial Statements are an
integral part of these statements.

4

---



|                                                   |  |  |  |  |  |  | 
|-------------------------------------------------- |  |  |  |  |  |  | 
|Visual Management Systems, Inc. and Subsidiaries   |  |  |  |  |  |  | 
|Condensed Consolidated Statements of Cash Flows   
|For the Three Months Ended March 31, 2010 and 2009
|(Unaudited)                                       
|                                                  

|                                                                            |  |      |          |      |   |          |  
|--------------------------------------------------------------------------- |  | ---- | -------- | ---- | - | -------- | -
|                                                                            |  | 2010 |          | 2009 |  
|                                                                            |  |      |          |      |  
|                                                                            |  |      |          |      |   |          |  
|Cash flows from operating activities                                        |  |      |          |      |   |          |  
|Net loss                                                                    |  | $    | (844,931 | )    | $ | (680,896 | )
|Adjustments to reconcile net loss to net
 cash used by operating activities |  |      |          |      |   |          |  
|Depreciation and amortization                                               |  |      | 287,250  |      |   | 345,291  |  
|Non-cash interest expense                                                   |  |      | 149,635  |      |   | 190,702  |  
|Restricted registration penalty                                             |  |      | (2,891   | )    |   | (114,135 | )
|Bad debt expense                                                            |  |      |         |      |   | 32,472   |  
|Payment of stock for services                                               |  |      |         |      |   | 34,100   |  
|Stock-based compensation                                                    |  |      | 11,772   |      |   | 40,350   |  
|(Increase) decrease in operating assets                                     |  |      |          |      |   |          |  
|Accounts receivable                                                         |  |      | (30,947  | )    |   | 15,707   |  
|Inventory                                                                   |  |      | (51,173  | )    |   | 52,221   |  
|Prepaid expenses and other assets                                           |  |      | (9,568   | )    |   | 54,867   |  
|Deposits and other assets                                                   |  |      | (28,376  | )    |   |         |  
|Increase (decrease) in operating
 liabilities                               |  |      |          |      |   |          |  
|Accounts payable                                                            |  |      | (40,735  | )    |   | 31,520   |  
|Accrued expenses and other current
 liabilities                             |  |      | 377,154  |      |   | 25,296   |  
|Sales tax payable                                                           |  |      | 23,489   |      |   | (1,294   | )
|Customer deposits                                                           |  |      | 96,131   |      |   | 12,179   |  
|                                                                            |  |      |          |      |   |          |  
|Net cash used from operating activities                                     |  |      | (63,190  | )    |   | 38,380   |  
|                                                                            |  |      |          |      |   |          |  
|                                                                            |  |      |          |      |   |          |  
|Cash flows from investing activities                                        |  |      |          |      |   |          |  
|Purchases of property and equipment                                         |  |      |         |      |   |         |  
|                                                                            |  |      |          |      |   |          |  
|                                                                            |  |      |          |      |   |          |  
|Net cash used by investing activities                                       |  |      |         |      |   |         |  
|                                                                            |  |      |          |      |   |          |  
|                                                                            |  |      |          |      |   |          |  
|                                                                            |  |      |          |      |   |          |  
|Cash flows from financing activities                                        |  |      |          |      |   |          |  
|Repayment of capital leases                                                 |  |      |         |      |   | (7,330   | )
|Repayment of short term notes                                               |  |      |         |      |   | (19,075  | )
|Proceeds from convertible notes (net of
 $11,340 of issuance costs)         |  |      | 124,160  |      |   |         |  
|Repayment on bank line of credit                                            |  |      | (3,332   | )    |   |         |  
|Principal repayments of long-term debt                                      |  |      | (13,413  | )    |   |         |  
|Repayment of loans payable - stockholders                                   |  |      | (9,123   | )    |   | (2,868   | )
|                                                                            |  |      |          |      |   |          |  
|Net cash provided by financing activities                                   |  |      | 98,292   |      |   | (29,273  | )
|                                                                            |  |      |          |      |   |          |  
|                                                                            |  |      |          |      |   |          |  
|Change in cash                                                              |  |      | 35,102   |      |   | 9,107    |  
|                                                                            |  |      |          |      |   |          |  
|Cash                                                                        |  |      |          |      |   |          |  
|Beginning of period                                                         |  |      | 24,884   |      |   | 16,186   |  
|                                                                            |  |      |          |      |   |          |  
|End of period                                                               |  | $    | 59,986   |      | $ | 25,293   |  
|                                                                            |  |      |          |      |   |          |  
|                                                                            |  |      |          |      |   |          |  
|Supplemental Disclosure of Cash Flow Information                            |  |      |          |      |   |          |  
|                                                                            |  |      |          |      |   |          |  
|                                                                            |  | 2010 |          | 2009 |  
|                                                                            |  |      |          |      |  
|                                                                            |  |      |          |      |   |          |  
|Cash paid for taxes                                                         |  |      |         |      |   | 313      |  
|                                                                            |  |      |          |      |   |          |  
|Cash paid for interest                                                      |  |      | 9,661    |      |   | 3,362    |  

The accompanying notes to the
Condensed Consolidated Financial Statements are an integral part of these
statements.

5

---



|                                                                                                                      
|----------------------------------------------------------------------------------------------------------------------
|Visual
 Management Systems, Inc. and SubsidiariesNotes to Condensed Consolidated Financial
 Statements
 March 31, 2010
|                                                                                                                      

1. Basis of Presentation and Nature of Business Operations

The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the requirements of Form 10-Q and Article 8 of
Regulation S-X of the Securities and Exchange Commission (the Commission) and
include the results of Visual Management Systems, Inc., Visual Management
Systems LLC and Intelligent Product Development Group, LLC, its wholly-owned
subsidiaries (the Subsidiaries), which are collectively referred to as the
Company. Accordingly, certain information and footnote disclosures required
in the unaudited consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
been condensed or omitted. In the opinion of the Companys management, the
accompanying unaudited condensed consolidated financial statements contain all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for the fair presentation of the Companys consolidated
financial position as of March 31, 2010, and the results of its operations for
the three month periods ended March 31, 2010, and are not necessarily
indicative of results that may be expected for the entire year. These unaudited
condensed financial statements should be read in conjunction with the audited
financial statements and related notes included in the Companys Annual Report
for the year ended December 31, 2009 on Form 10-K.

The
Company designs and sells computer-based video protective technology solutions,
including digital video recorders and other surveillance products. The Company
is New Jersey-based and began operations in June 2003.

Summary of Significant Accounting Policies

Debt instruments and the features/instruments contained
therein

Deferred
financing costs are amortized over the term of the associated debt instrument.
The Company evaluates the terms of the debt instruments to determine if any
embedded derivatives or beneficial conversion features exist. The Company
allocates the aggregate proceeds of the notes payable between the warrants and
the notes based on their relative fair values. The fair value of the warrants
issued to note holders or placement agents are calculated utilizing the
Black-Scholes option-pricing model.

Intangible assets

Intangible
assets acquired by the Company from Intelligent Digital System LLC (IDS) as
described in Note 4 have been valued using the income method, based on future
economic benefits expected on a net present value basis. Values assigned to
intangible assets are being amortized over the estimated useful lives of the
respective intangible assets. Values assigned to intangible assets acquired and
their useful lives will be reviewed no less frequently then on an annual basis
to determine if there has been any impairment to the then carrying value of the
assets or if a change in amortization period is required, as prescribed by FASB
ASC 350-20-35.

Capitalized Software Development Costs

Capitalization
of computer software development costs begins upon the establishment of
technological feasibility, as defined in FASB ASC 985-20-25. The establishment
of technological feasibility and the ongoing assessment of recoverability of
capitalized computer software development costs require considerable judgment
by management with respect to certain external factors, including, but not
limited to, technological feasibility, anticipated future gross revenue,
estimated economic life and changes in software and hardware technology. As of
March 31, 2010 and December 31, 2009, the Company has capitalized approximately
$180,000 of software development costs relating to new products.

Amortization
is provided on a product-by-product basis. The annual amortization is the
greater of the amount computed using (a) the ratio that current gross revenue
for a product bears to the total of current and anticipated future gross
revenue for that product, or (b) the straight-line method over the remaining
estimated economic life of the product. Amortization will start when (a) the
product is available for general release to customers and (b) all research and
development activities relating to the other components of the product are
completed. At March 31, 2010, the Hybrid DVR software and DVR software products
under development were generally available to customers and as a result, there
was approximately $9,006 of amortization charges for the three months ended
March 31, 2010 for those products. There was $9,006 of amortization charges for
the same period in 2009.

The
Company performs reviews of the recoverability of such capitalized software
development costs at each balance sheet date. At the time a determination is
made that capitalized amounts are not recoverable based on the estimated cash
flows to be generated from the applicable software, the capitalized cost of
each software product is then valued at the lower of its remaining unamortized
costs or net realizable value.

6

---



Inventory

Inventory,
which consists of digital video recorders and related components, security
cameras and related installation materials, is stated at the lower of cost or
market value. Cost is computed on the first-in, first-out method. The Company
reviews inventory for slow moving and obsolete inventory during each reporting
period to determine if a reserve is required. Based on the review conducted as
of March 31, 2010, management does not believe any reserve is required.

The
Companys inventory consisted of a total of $97,635 (approximately $10,190 of
raw materials and $87,445 of finished goods) at March 31, 2010 as compared to
inventory of $46,460 (approximately $20,000 of raw materials and $26,460 of
finished goods) at December 31, 2009.

New Accounting Pronouncements

In
January 2010, the FASB issued amended standards that require additional fair
value disclosures. These disclosure requirements are effective in two phases.
Effective in our fiscal year beginning January 1, 2010, the amended standards
will require enhanced disclosures about inputs and valuation techniques used to
measure fair value as well as disclosures about significant transfers between
categories of the fair value measurement hierarchy. Effective in our fiscal
year beginning January 1, 2011, the amended standards will require presentation
of disaggregated activity within the reconciliation for fair value measurements
using significant unobservable inputs (Level 3). These amended standards do not
significantly impact our consolidated financial statements.

Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not or are not believed by
management to have a material impact on the Companys present or future
consolidated financial statements

2. Going Concern

The
accompanying financial statements have been prepared assuming the Company is a
going concern, which assumption contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Company has
suffered recurring losses from operations, including a loss from operations of
approximately $850,000 for the three months ended March 31, 2010 as compared to
approximately $680,000 for the same period in the prior year. The Companys
cash used for operations was approximately $63,000 for the three months ended
March 31, 2010 as compared to cash generated from operations of approximately $
$38,000 for the same period in the prior year.

These
factors raise substantial doubt about the Companys ability to continue as a
going concern. The financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or the
amount of liabilities that might be necessary should the Company be unable to
continue in existence. The Companys ability to continue in business depends upon
the continued cooperation of its creditors, its ability to generate cash flow
to meet its continuing obligations on a timely basis, its ability to further
reduce costs and its ability to obtain additional financing. Current
liabilities at March 31, 2010 were approximately $11.9 million and current
assets were approximately $0.3 million. The difference of approximately $11.6
million is a working capital deficit, which is primarily the result of current
debt obligations and amounts due vendors. The Company can give no assurance
that it will raise sufficient capital to eliminate its working capital deficit
or that its creditors will not seek to enforce their remedies against it, which
include the imposition of insolvency proceedings. See Note 6. Legal Proceedings.

The
Companys future operations pursuant it to its ongoing business plan are
dependent upon managements ability to either generate sufficient cash flow in
excess of the items necessary to maintain operations as detailed above or find sources
of additional capital. The Company needs to raise additional financing to
continue to develop its proprietary technology, and re-establish and grow its
sales and marketing efforts. Without the money to fund these components of the
business the Companys competitive position may never mature to a point where
the business plan will be attainable, and further retrenchment of managements
plans may be necessary. If the Company is unsuccessful in obtaining such
profitability, raising funds or additionally curtailing expenses, the Company
may be required to cease operations or file for bankruptcy.

3. Commitments and Contingencies

Chase Loan

We
are a party to a $50,000 term loan agreement with JPMorgan Chase Bank, N.A.
which provides for interest at a rate of 8.5% per annum and which is payable in
equal monthly installments through October 2013. As of March 31, 2010, $29,341
was outstanding under the loan agreement compared to $31,651 at December 31,
2009.

7

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Chase Line of Credit

We
are a party to a $50,000 line of credit with JPMorgan Chase Bank, N.A. which as
of March 31, 2010 provided for interest at a rate of 4.75% per annum and which
is payable in variable monthly installments. As of March 31, 2010, the
outstanding balance on the line of credit was $41,951, which automatically
renews every year until paid in full. At December 31, 2009, the outstanding
balance was $45,283.

Auto Loans

We
had $174,312 in principal balance on auto loans outstanding as of March 31,
2010, as compared to $185,415 at December 31, 2009. These loans, which bear
interest at rates ranging from 3.9% to 8.69%, mature at various dates through
November 2012.

Capital Leases

We
entered into capital leases in the ordinary course of business for office
equipment and computer software, and other equipment. The outstanding amount
due for leased equipment as of March 31, 2010 and December 31, 2009 was
$105,889.

Loan from Former Chief Operating Officer

In
2008 Caroline Gonzalez our former Chief Operating Officer, and the wife of our
Chief Executive Officer loaned us $97,420 via extension of lines of credit on
personal credit cards issued to her by traditional unsecured consumer credit
providers. Since the date of the loan we have been making monthly payments
pursuant to the relevant card terms, which include interest rates ranging from
9.49% to 27.99%. As of March 31, 2010 the outstanding balance on these accounts
was $58,622 as compared to $63,111 at December 31, 2009.

Original Issue Discount Notes

Between April and September 2008, we issued a series of original issue discount
notes to individual investors. These notes totaled $499,450 in face value, and
yielded net proceeds to us of $414,950 after fees paid to consultants and placement
agents. $99,450 in total face value of the OID Notes was retired via payments
to the holders made in June 2008 and October 2008. $250,000 in total face value
of the OID notes was retired via conversion into $229,046 of 12% one-year
convertible notes (which included accrued and unpaid interest) and cash
payments of $29,500. The remaining $150,000 in total face value of OID notes
remain unpaid, and are past due. At March 31, 2010 and December 31, 2009, the
face value of these notes was $150,000.

November 2007 Debentures

On November 30, 2007, we entered into a securities purchase agreement with
three affiliated institutional investors for the sale of original issue
discount 5% senior secured convertible debentures and common stock purchase warrants.
We refer to this transaction as our November 2007 Private Placement. In this
transaction, we issued an aggregate of $3.75 million principal amount of
debentures at an original issue discount of 20% and warrants to purchase an
aggregate of 11,250,000 shares of our common stock. The warrants expire in
November 2014 and initially had an exercise price of $1.15 per share, subject
to adjustment, including full ratchet anti-dilution protection.

Since
January 1, 2008, we have been required to make quarterly payments of interest
under the convertible debentures issued in our November 2007 Private Placement.
None of such payments have been made since August 2008. We have also been
required to make monthly principal payments in the aggregate of $208,333 since
November 2008. None of such payments have been made. On August 28, 2008, we
entered into an Amendment and Waiver Agreement with each of the holders of
these debentures pursuant to which the debenture holders have:

-
waived our compliance with the provisions of the debentures which require us to
have a registration statement covering the shares issuable upon the conversion
of the debentures declared effective under the
Securities Act of 1933 and maintain the effectiveness of such registration
statement;

-
waived the anti-dilution provisions of the debentures which, as a result of
prior transactions, would have otherwise resulted in an adjustment to the
conversion price of the debentures to $.40 per share;

-
waived certain provisions of the agreement pursuant to which the debentures
were issued which restrict our ability to issue common stock and securities
convertible into or exercisable for common stock;

-
waived all registration rights previously granted to the debenture holders with
respect to the shares issuable upon the conversion of the debentures and
exercise of the warrants issued to the debenture holders in connection with the
transaction, provided that we do not fail to satisfy the current public
information requirements under Rule 144(c) of the Securities Act of 1933 for a
period of three (3) consecutive trading days or more. In the event of such a
public information failure we will be required to file a registration statement
covering the shares issuable upon the debentures and warrants and will be
subject to monetary penalties if it fails to obtain and maintain the
effectiveness of the registration statement.

8

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In
consideration of the waivers and in lieu of (i) $250,000 of liquidated damages
that the debenture holders alleged were owed as a result of the our failure to
register the shares underlying the debentures and warrants for public resale
and (ii) $46,875 of accrued and unpaid interest owed to the debenture holders,
we agreed to issue shares of our common stock valued at $296,875 (based upon a
per share price equal to 80% of the average of the value weighted average price
of the common stock for the 20 trading days prior to the date of the amendment
and waiver) to the debenture holders pro-rata according to their percentage
ownership of the debentures. We agreed to register the new shares for resale
under the Securities Act of 1933, as amended.

The
exercise price of the warrants was also adjusted to $.40 per share.

In
August 2009, we entered into an additional Amendment and Waiver Agreement with
each of the holders of the debentures pursuant to which:

-
Our default for past incidents of non-payment of interest and principal on the
debentures was waived.

-
The total outstanding principal balance of the debentures was increased from
$3,750,000 to $4,083,742, representing the inclusion of accrued interest.

-
The conversion price of the debentures was adjusted to $0.10 per share of the
Companys common stock. As of January 1, 2010 the conversion price became the
lesser of $0.10 or 80% of the lowest daily volume weighted average price during
the 20 Trading Days immediately prior to the applicable Conversion Date, but in
no case less than $0.00625.

-
The conversion price of warrants issued to the holders of the debentures at the
time of their original investment was adjusted to $0.12 per share.

Since
entering into this agreement monthly redemptions of principal for the
debentures have became due. Each of these monthly redemption amounts totals
$208,333 and has not been paid by us. Additional redemption payments will also
come due on the first day of each calendar month through May 2010.

Quarterly
interest payments owed by us subsequent to the waiver agreement to the holders
of the debentures in the amount of approximately $51,000 also have come due and
were also not paid by us except for those payments in stock pursuant to a
Waiver and Amendment, and a payment in May 2008 of $62,500.

Non-payment
of these amounts, and the failure to file an appropriate registration statement
may be considered default events under the relevant agreements between us and
the holders of the debentures, but no formal notice of default or request for
remedies in the case of default have been issued to the us by the holders. As a
result of default, the holders have the right to demand payment of
approximately $5,300,000 (representing 130% of the principal amount of the debentures
currently outstanding), as well as all accrued and unpaid interest. We continue
to communicate with the holders and are seeking a resolution to the non-payment
situation.

IDS Asset Purchase Convertible Note

In
connection with the April 3, 2008 purchase of substantially all the assets of
IDS, we issued to IDS an unsecured convertible note in the principal amount of
$1.54 million, bearing no interest until April 3, 2011. If not converted, or
paid within 30 days of maturity, then from and after the maturity date, the
convertible note will bear annual interest at 12%. The convertible note is
convertible at the discretion of IDS into shares of our common stock after May
31, 2010, or upon the approval of a majority in interest of the holders of our
then outstanding 5% secured convertible debentures, or any securities issued on
conversion thereof, at an initial conversion price of $1.15 per share. We have
agreed to register the shares issuable upon the conversion of the note for
public resale.

As
of March 31, 2010, $24,000 of payments were past due under the note issued to
IDS. In April 2009, IDS and its principal shareholder instituted an action
seeking to collect the entire $1,544,000 due under the note as well as $206,250
remaining due under the consulting agreement entered into in connection with
the Asset Purchase. See Note 6. Legal Proceedings.

Promissory Note

On
June 10, 2008, we issued a promissory note (the New Note) in the principal
amount of $267,192 to the Russ & Russ PC Defined Benefit Pension Plan - a
pension plan formed for the benefit of Mr. Russ - in exchange for the surrender
of a promissory note in the principal amount of $250,000 (the Old Note) which
was issued by us to an individual lender in October 2007 and assigned to the
pension plan before the exchange. At the time of the exchange, accrued and
unpaid interest under the Old Note, which was past due, was $17,192. The New
Note provided for interest at a rate of 10% per annum and became due on December
10, 2008.

As
further consideration for entering into the exchange transaction, we issued to
Mr. Russ options to acquire 20,000 shares of the our common stock under the
Companys Equity Incentive plan at an exercise price of $0.40 per share. We
have not paid the holder of the note.

9

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IDS, its
principal shareholder and the holder of the New Note have instituted an action
seeking to collect the past due amount. See Note 6. Legal Proceedings.

4. Acquisition
of IDS Assets

Intangible
assets acquired by the Company in connection with the IDS acquisition have been
valued using the income method, based on future economic benefits expected on a
net present value basis. Values assigned to intangible assets are being
amortized over the estimated useful lives of the respective intangible assets.
Values assigned to intangible assets acquired and their useful lives will be
reviewed no less frequently then on an annual basis to determine if there has
been any impairment to the carrying value of the assets or if a change in
amortization period is required, as prescribed by FASB ASC 350-35-28. The
Company performed a review of the fair value of the intangible assets at March
31, 2010, and determined no charge to amortization was required.

The fair value
hierarchy defines the three levels as follows:

Level 1:
Valuations based on quoted prices (unadjusted) in an active market that are
accessible at the measurement date for identical assets or liabilities. The
fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2:
Valuations based on observable inputs other than Level 1 prices such as quoted
prices for similar assets or liabilities; quoted prices in inactive markets; or
model-derived valuations in which all significant inputs are observable or can
be derived principally from or corroborated with observable market data.

Level 3:
Valuations based on unobservable inputs are used when little or no market data
is available. The fair value hierarchy gives lowest priority to Level 3 inputs.

In determining
fair value, the Company utilizes valuation techniques that maximize the use of
observable inputs and minimize the use of unobservable inputs to the extent
possible as well as considers counterparty credit risk (or other parties such
as counterparty in a swap) in its assessment of fair value

The amount of
$1,562,692 was assigned to intangible assets. The intangible assets consist of
the DVR Software and Hybrid DVR Software and are being amortized over their
estimated useful lives of 1 and 5 years respectively.

The following
table summarizes the estimated fair values of the assets acquired at the date
of acquisition:

|                     |  |                                                                          |   |                                                 |  |                                            |  |       |           |  |   |           | 
|-------------------- |  | ------------------------------------------------------------------------ | - | ----------------------------------------------- |  | ------------------------------------------ |  | ----- | --------- |  | - | --------- | 
|                     |  | Fair Value Measurement Using:                                            |  
|                     |  |                                                                          |   |                                                 |  |                                            |  |       |           |  |   |           | 
|                     |  | Quoted Market Prices in
 Active Markets for
 Identical Assets
 (Level 1) |   | Significant Other
 Observable Inputs
 (Level 2) |  | Significant
 Unobservable Input
 (Level 3) |  | Total |          
|                     |  |                                                                          |   |                                                 |  |                                            |  |       |           |  |   |           | 
|DVR Software         |  |                                                                          |  |                                                 |  |                                           |  | $     | 28,555    |  | $ | 28,555    | 
|Hybrid DVR
 Software |  |                                                                          |  |                                                 |  |                                           |  | $     | 1,534,137 |  |   | 1,534,137 | 
|                     |  |                                                                          |   |                                                 |  |                                            |  |       |           |  |   |           | 
|Total                |  |                                                                          |  |                                                 |  |                                           |  | $     | 1,562,692 |  | $ | 1,562,692 | 
|                     |  |                                                                          |   |                                                 |  |                                            |  |       |           |  |   |           | 

The intangible
software assets were valued using the income method, using the companys best
estimates of future cash flows from the sales of the products including the
software, a 40% tax rate and discount rates between 15 and 20%.

|                              |  |                        |           |                            |   |                        |  |                           |           |  |   |         | 
|----------------------------- |  | ---------------------- | --------- | -------------------------- | - | ---------------------- |  | ------------------------- | --------- |  | - | ------- | 
|Intangible
 Assets            |  | As of March 31, 2010   |           | As of December 31, 2009    |  
|                              |  |                        |           |                            |   |                        |  |                           |          
|Amortized
 Intangible
 Assets |  | Gross Carrying
 Amount |           | Accumulated
 Amortization* |   | Gross Carrying
 Amount |  | Accumulated
 Amortization |          
|                              |  |                        |           |                            |   |                        |  |                           |           |  |   |         | 
|DVR Software                  |  | $                      | 28,555    |                            | $ | 28,555                 |  | $                         | 28,555    |  | $ | 28,555  | 
|Hybrid DVR
 Software          |  |                        | 1,534,137 |                            |   | 850,008                |  |                           | 1,534,137 |  |   | 804.339 | 
|                              |  |                        |           |                            |   |                        |  |                           |           |  |   |         | 
|                              |  |                        |           |                            |   |                        |  |                           |           |  |   |         | 
|Total                         |  | $                      | 1,562,692 |                            | $ | 878,563                |  | $                         | 1,562,692 |  | $ | 832,954 | 
|                              |  |                        |           |                            |   |                        |  |                           |           |  |   |         | 

10

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|  |                                                                                                                                                                                                                                                    
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Includes
 impairment of $636,242 relating to fair value revaluation of intangible
 assets during 2008 and amortization of $45,609 associated with Hybrid DVR
 software charged to cost of goods sold during the three months ended March
 31, 2010.

|                                                                   |  |   |         | 
|------------------------------------------------------------------ |  | - | ------- | 
|Aggregate amortization expense for three
 months ended 3/31/2010   |  | $ | 45,609  | 
|                                                                   |  |   |         | 
|Estimated amortization expense for the 12
 months ending March 31: |  |   |         | 
|2011                                                               |  | $ | 182,435 | 
|2012                                                               |  |   | 182,435 | 
|2013                                                               |  |   | 182,435 | 
|2014                                                               |  |   | 136,824 | 

5. Equity Based Compensation, Warrants to Purchase Common
Stock

During
the three months ended March 31, 2010. warrants to purchase 342,000 shares of
the Companys common stock were issued to a placement agent in connection with
the issuance of convertible notes. These warrants were issued at exercise
prices ranging from $0.01 to $0.04 and have a five year life. In connection
with the issuance of these warrants, the Company recorded $3,318 to deferred
financing costs.

6. Legal Proceedings.

On
March 27, 2009, we were served with a summons and a complaint in which we, our
CEO Jason Gonzalez, our current Board members Robert Moe, Martin McFeely,
Michael Ryan and Col. Jack Jacobs (ret.), and our former CFO Howard Herman were
named as defendants in a suit filed by Mr. Jay Russ, IDS and the Russ &
Russ PC Defined Benefit Pension Plan. In the complaint, which was filed in the
United States District Court for the Eastern District of New York, the
plaintiffs allege, among other things, misrepresentation, securities fraud and
breach of duty by the defendants, pertaining to, among other things, our
restatement of financial results for the periods ended August 31, 2007 and
September 30, 2007, and the Asset Purchase. The Complaint also asserts claims
regarding non-payment of amounts allegedly due to the plaintiffs pursuant to
agreements entered into in connection with the Asset Purchase and the issuance
of a note to Russ and Russ PC Defined Benefit Pension Plan. We believe that the
plaintiffs claims regarding misrepresentation, securities fraud and breach of
duty are entirely without merit and are vigorously defending against them. The
plaintiffs seek compensatory and punitive damages in a number of their claims.
If the plaintiffs succeed in any of their claims and obtain a judgment against
us, payment of that judgment would have a material adverse effect on our
financial condition and results of operations. The filing of this lawsuit,
substantial reduces the likelihood of us ever receiving any return on our
investment in our joint venture with IDS.

On
January 2, 2010, in response to our motion, the Court in this matter issued an
Order dismissing the securities claims in the Complaint on the grounds that the
note issued to IDS was not a security. This also invalidated the jurisdiction
of the Complaint as no federal subject matter remained, but Plaintiff was
granted leave to amend to plead diversity jurisdiction. At the same time the
Court ruled on Plaintiffs motion to attach our and the named individual defendants
New York assets. The Court denied the attachment of the individual defendants
assets on the grounds that plaintiffs had not established the required
probability of success, but granted the attachment against our assets on the
grounds that a judgment on the claims for non-payment was probable. On April 9,
2010, that attachment was issued against our New York assets. It is our
position that the attachment of our New York assets is not material to us,
because we have no New York assets.

We
have been named as the defendant in a number of lawsuits pertaining to vendor
lines of credit which have gone beyond permitted amounts and terms. These suits
seek judgment ranging in value from approximately $4,000 to $200,000. Only the
largest of these individual lawsuits represents a substantial risk to our
ongoing operations, but taken in whole they are likely to have a material
adverse effect on our financial conditions and results of operations.

We
are the Defendant in a lawsuit filed in New Hampshire by PC Connection, our
former vendor. The complaint seeks approximately $30,000. The case is pending.

We
are the Defendant in a lawsuit filed in California by Northern Video, our
former vendor. The complaint seeks approximately $67,000. The case is pending.

11

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We
are the Defendant in a lawsuit filed in New Jersey by American Express, our
former provider of charge card services. The complaint seeks approximately
$80,000. The case is pending.

We
are the Defendant in a lawsuit filed in New Jersey by Anixter, our former
vendor. The complaint seeks approximately $120,000. The case is pending.

We
are the Defendant in a lawsuit filed in New Jersey by CIT, our former provider
of credit for the purchase of business management software. The complaint seeks
approximately $120,000. The case is pending.

We
are the Defendant in a lawsuit filed in New Jersey by ACIC, our former bonding
company for government contract work for the East Brunswick, NJ Board of
Education, Pleasantville, NJ Public Schools, and Raritan Valley Community
College. The complaint seeks approximately $200,000. The case is pending.

7. Convertible Security Transactions

Convertible Preferred Stock Conversions

During
January and March of 2010, 19 shares of Series B Convertible Preferred Stock
were converted into common stock. These shares were converted at $0.005 and
resulted in the issuance of 3,800,000 shares of the Companys common stock

Issuance of Convertible Notes

In
January, February and March, 2010, the Company issued to unaffiliated
individual investors, convertible notes with an aggregate principal value of
$135,500, an interest rate of 12% per annum, and a conversion price of $.01 per
share of Visual Management Systems, Inc. common stock. The Company recorded
interest expense during the third quarter of $70,000 in connection with the
beneficial conversion feature of these notes. The convertible notes mature on
various dates through March 2011.

8. Subsequent Events

Issuance of Convertible Notes

In
April and May 2010, the Company issued to unaffiliated individual investors,
convertible notes with an aggregate principal value of $100,000, an interest
rate of 12% per annum, and a conversion price of $.01 per share of Visual
Management Systems, Inc. common stock. The convertible notes mature on various
dates through May 2011.

Convertible Note Conversions

During
April and May of 2010, an aggregate principal amount of $40,500 of convertible
notes were converted into common stock. These shares were converted at $0.01
and resulted in the issuance of 4,050,000 shares of the Companys common stock.

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

Results of Operations for the Three Months
Ended March 31, 2010 and 2009

The
following discussion and analysis should be read in conjunction with the
financial statements, including the notes thereto and other information
presented in this report.

Net Revenues

Net
revenues decreased approximately $410,000, or 48% to about $441,000 during the
three months ended March 31, 2010, from approximately $851,000 during the same
period in the prior year. The decrease in revenues reflects the impact of the economy
on the Companys sales efforts and a reduction in the Companys sales force.

12

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Cost of Goods Sold

Total
cost of goods sold decreased approximately $190,000, or 47% to approximately
$216,000 for the three months ended March 31, 2010, from approximately $406,000
during the same period in the prior year. This decrease was primarily due to
decreased material and labor costs and lower revenues as compared to the same
period in 2009.

As
a result of the changes described above in revenues and cost of goods sold,
gross profit for the three months ended March 31, 2010, decreased to
approximately $225,000 from approximately $445,000 for the three months ended
September 30, 2008, and gross profit as a percentage decreased to 51% for the three
months ended March 31, 2010 compared with 52% for the same period in the prior
year. The decrease in gross profit margin for the three months ended March 31,
2010 is primarily the result of slightly lower margin jobs completed in the
current period.

Operating Expenses

Operating
expenses decreased approximately $303,000 to approximately $616,000 for the
three months ended March 31, 2010, from approximately $919,000 for the three
months ended March 31, 2009.

This
decrease was primarily attributable to a decreased wage related items due to
lower headcount (approximately $200,000), decreased finance and investor
relations costs ($120,000), decreases in depreciation and other costs of
$90,000, offset by an increase in charges for late registration penalties of
about $110,000.

Interest Expense

Interest
expense for the three months ended March 31, 2010 increased to approximately
$454,000, from about $207,000 in the three months ended March 31, 2009. The
increase of $247,000 was primarily the result of (i) additional interest due to
beneficial conversion of convertible debt of approximately $120,000 and (ii)
interest on amounts relating to late payments (approximately $120,000), and
increased interest due to late payment of payroll and other of about $7,000

Net Loss

As
a result of the items discussed above there was a net loss of approximately
$845,000 for the three months ended March 31, 2010 compared with a net loss of
approximately $681,000 for the three months ended March 31, 2009.

Liquidity and Capital Resources

The
Companys financial statements are prepared on a going concern basis, which
assumes that the Company will realize assets and discharge liabilities in the
normal course of business. At March 31, 2010, the Company had cash of
approximately $60,000, a working capital deficit of approximately $11.6
million, stockholders deficit of approximately $10.4 million, and an
outstanding balance of long term debt of approximately $94,000 net of current maturities.
In comparison, at December 31, 2009, the Company had cash and equivalents of
approximately $24,900, a working capital deficit of approximately $11.1
million, an outstanding balance of long term debt of approximately $102,000,
net of current maturities. The Companys financial condition as of March 31,
2010 raises doubt as to the Companys ability to continue the Companys normal
business operations as a going concern. If the Company is unable to put into
effect certain plans, the Company may be required to restructure, file for
bankruptcy or cease operations.

Cash Flows from Operating Activities

Net
cash used by operating activities was approximately $63,000 for the three
months ended March 31, 2010 compared to cash generated from operations of
approximately $38,400 for the three months ended March 31, 2009. Cash used
during the three months ended March 31, 2010 was primarily the result of the
operating loss (net of non-cash operating expenses of approximately $446,000)
and a reduction in accounts payable ($41,000) offset by decreases in
receivables of approximately $31,000, inventory of approximately $51,000 and
prepaid expenses and deposits of approximately $38,000 and increases in
customer deposits of approximately $96,130, accrued expenses totaling
approximately $377,000 and sales tax payable of approximately $23,490. For the
three months ended March 31, 2009, cash generated by operations of
approximately $38,400 was primarily a result of the operating loss incurred
during the quarter offset by non cash operating expenses of approximately
$528,780, increases in receivables of approximately $15,700, inventory of
approximately $52,200 and increases in prepaid expenses and deposits of
approximately $54,900, increases in accounts payable and accrued expenses
totaling approximately $57,000 and net increases in customer deposits and sales
tax payable of approximately $10,900.

Cash Flows from Investing Activities

There
was not any cash used for or generated from investing activities in the three
months ended March 31, 2010 or March 31, 2009.

Cash Flows from Financing Activities

Net
cash generated from financing activities was approximately $98,290 for the
three months ended March 31, 2010. The cash generated by financing activities
for the current period was a result of the issuance of convertible notes
netting aggregate proceeds of approximately $124,160 offset by payments of
approximately $25,870 on outstanding loans and capital leases. During the three
months

13

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ended March
31, 2009, cash used for financing activities of approximately $29,270 was
primarily the result of payments on outstanding loans and capital leases

Cash
increased from $24,884 at December 31, 2009 to $59,985 at March 31, 2010.

Item 3.
Quantitative and Qualitative Disclosure About
Market Risk

The
Company believes that the Companys business operations are not exposed to
market risk relating to interest rate, foreign currency exchange risk or
commodity price risk.

Item 4.
Controls and Procedures

Evaluation of disclosure controls and
procedures

As
required by Rule 13a-15 under the Exchange Act, as of the end of the period
covered by this Report on Form 10-Q, the Company carried out an evaluation of
the effectiveness of the design and operation of the Companys disclosure
controls and procedures. This evaluation was carried out under the supervision
of and with the participation of the Companys management, including the
Companys Chief Executive Officer and Chief Financial Officer. Disclosure
controls and procedures are controls and other procedures that are designed to
provide reasonable assurance that information required to be disclosed in the
Companys reports filed or submitted under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commissions rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to provide reasonable assurance that information required to be
disclosed in the Companys reports filed under the Exchange Act is accumulated and communicated to management,
including the Companys Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.

The
evaluation made by the Companys Chief Executive Officer and Chief Financial
Officer of the Companys disclosure controls and procedures included a review
of the controls objectives and design, the Companys implementation, and the
effect of the controls on the information generated for use in this quarterly
report and previous reports to the Commission. In the course of the evaluation,
the Company sought to identify data errors, control problems or acts of fraud
and to confirm that appropriate corrective action, including process
improvements, were being undertaken. The overall goals of these various
evaluation activities are to monitor the Companys disclosure controls and
procedures and to make modifications as necessary. The Companys intent in this
regard is that the disclosure controls and procedures will be maintained as
dynamic systems that change (including with improvements and corrections) as
conditions warrant. Based on their evaluation, the Companys Chief Executive
Officer and Chief Financial Officer concluded that the Companys disclosure
controls and procedures were effective as of March 31, 2010.

Managements Report on Internal Control over
Financial Reporting

Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934. Internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
(GAAP). Internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the Companys transactions and
dispositions of the Companys assets; (2) provide reasonable assurance that the
Companys transactions are recorded as necessary to permit preparation of the
Companys financial statements in accordance with GAAP, and that receipts and
expenditures are being made only in accordance with authorizations of the
Companys management and directors; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Companys assets that could have a material effect on the
financial statements.

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

Management
has evaluated the effectiveness of internal control over financial reporting as
of December 31, 2009 based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).

A
material weakness is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Companys annual or interim
financial statements will not be prevented or detected on a timely basis.

14

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Based on their
evaluation, the Companys Chief Executive Officer and Chief Financial Officer
identified a number of material weaknesses in the Companys internal control
over financial reporting. These material weaknesses included:

|  |                                                                                                                                                                                                                                                        
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|- | A lack of
 sufficient resources and an insufficient level of monitoring and oversight,
 which restricts the Companys ability to gather, analyze and report
 information relative to the financial statement assertions in a timely
 manner.           
|  |                                                                                                                                                                                                                                                        
|- | The limited
 size of the accounting department makes it impracticable to achieve an
 appropriate segregation of duties and to implement the formal documented
 closing and reporting calendar and checklists in a timely manner on a
 consistent basis.
|  |                                                                                                                                                                                                                                                        
|- | There are no
 formal cash flow forecasts, business plans, and organizational structure
 documents to guide the employees in critical decision-making processes.                                                                                        
|  |                                                                                                                                                                                                                                                        
|- | Material
 weaknesses identified in the past including deficiencies in information
 technology have not been fully remediated.                                                                                                                          

As
a result of the material weaknesses described above, the Company concluded
that, as of December 31, 2009, the Companys internal control over financial
reporting was not effective.

Remediation of Material Weaknesses

The
Company intends to take action to hire additional staff, implement stronger
financial reporting systems and software and develop the adequate policies and
procedures with said enhanced staff to ensure all noted material weaknesses are
addressed and resolved. However, due to cash flow constraints, the timing of
implementing the above has not yet been determined, and may not be possible.

The
Companys management does not expect that the Companys disclosure controls or
the Companys internal controls over financial reporting will prevent all error
and fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, but not absolute, assurance that the objectives of a
control system are met. Further, any control system reflects limitations on
resources, and the benefits of a control system must be considered relative to
its costs. These limitations also include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. In addition, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of a control. A design of a control system is also based upon certain
assumptions about potential future conditions. Over time, controls may become
inadequate because of changes in conditions, or the degree of compliance with
the policies or procedures may deteriorate. Because of the inherent limitations
in a cost-effective control system, misstatements due to error or fraud may
occur and may not be detected.

Changes in Internal Control over Financial
Reporting

During
the quarter ended March 31, 2010, no changes were made that impacted internal
control over financial reporting due to cash flow constraints.

Sobel
& Co., LLC was not required to and did not perform a review of the
Companys internal controls over financial reporting.

15

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PART II 
OTHER INFORMATION

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

Between
January and May, 2010, the Company issued to unaffiliated individual investors,
convertible notes with an aggregate principal value of $235,500, an interest
rate of 12% per annum, and a conversion price of $.01 per share of Visual
Management Systems, Inc. common stock. The convertible notes mature on various
dates through May 2011. The Company relied upon the exemption provided by
Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 thereunder
in connection with the transaction detailed above.

Item 3. Defaults
Upon Senior Securities

Since
January 1, 2008, we have been required to make quarterly payments of interest
under the convertible debentures issued in our November 2007 Private Placement.
None of such payments have been made since August 2008. We have also been
required to make monthly principal payments in the aggregate of $208,333 since
November 2008. None of such payments have been made. On August 28, 2008, we
entered into an Amendment and Waiver Agreement with each of the holders of
these debentures pursuant to which the debenture holders have:

-
waived our compliance with the provisions of the debentures which require us to
have a registration statement covering the shares issuable upon the conversion
of the debentures declared effective under the Securities Act of 1933 and
maintain the effectiveness of such registration statement;

-
waived the anti-dilution provisions of the debentures which, as a result of
prior transactions, would have otherwise resulted in an adjustment to the
conversion price of the debentures to $.40 per share;

-
waived certain provisions of the agreement pursuant to which the debentures
were issued which restrict our ability to issue common stock and securities
convertible into or exercisable for common stock;

-
waived all registration rights previously granted to the debenture holders with
respect to the shares issuable upon the conversion of the debentures and
exercise of the warrants issued to the debenture holders in connection with the
transaction, provided that we do not fail to satisfy the current public
information requirements under Rule 144(c) of the Securities Act of 1933 for a
period of three (3) consecutive trading days or more. In the event of such a
public information failure we will be required to file a registration statement
covering the shares issuable upon the debentures and warrants and will be
subject to monetary penalties if it fails to obtain and maintain the
effectiveness of the registration statement.

In
consideration of the waivers and in lieu of (i) $250,000 of liquidated damages
that the debenture holders alleged were owed as a result of the our failure to
register the shares underlying the debentures and warrants for public resale
and (ii) $46,875 of accrued and unpaid interest owed to the debenture holders,
we agreed to issue shares of our common stock valued at $296,875 (based upon a
per share price equal to 80% of the average of the value weighted average price
of the common stock for the 20 trading days prior to the date of the amendment
and waiver) to the debenture holders pro-rata according to their percentage
ownership of the debentures. We agreed to register the new shares for resale
under the Securities Act of 1933, as amended.

The
exercise price of the warrants was also adjusted to $.40 per share.

In
August 2009, we entered into an additional Amendment and Waiver Agreement with
each of the holders of the debentures pursuant to which:

-
Our default for past incidents of non-payment of interest and principal on the
debentures was waived.

-
The total outstanding principal balance of the debentures was increased from
$3,750,000 to $4,083,742, representing the inclusion of accrued interest.

-
The conversion price of the debentures was adjusted to $0.10 per share of the
Companys common stock. As of January 1, 2010 the conversion price became the
lesser of $0.10 or 80% of the lowest daily volume weighted average price during
the 20 Trading Days immediately prior to the applicable Conversion Date, but in
no case less than $0.00625.

-
The conversion price of warrants issued to the holders of the debentures at the
time of their original investment was adjusted to $0.12 per share.

16

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Since
entering into this agreement monthly redemptions of principal for the
debentures have became due. Each of these monthly redemption amounts totals
$208,333 and has not been paid by us. Additional redemption payments will also
come due on the first day of each calendar month through May 2010, a date upon
which the entire principal balance of the debentures will have come due.

Quarterly
interest payments owed by us subsequent to the waiver agreement to the holders
of the debentures in the amount of approximately $51,000 also have come due and
were also not paid by us except for those payments in stock pursuant to a
Waiver and Amendment, and a payment in May 2008 of $62,500.

Non-payment
of these amounts, and the failure to file an appropriate registration statement
may be considered default events under the relevant agreements between us and
the holders of the debentures, but no formal notice of default or request for
remedies in the case of default have been issued to the us by the holders. As a
result of default, the holders have the right to demand payment of
approximately $5,300,000 (representing 130% of the principal amount of the
debentures currently outstanding), as well as all accrued and unpaid interest.
We continue to communicate with the holders and are seeking a resolution to the
non-payment situation.

In
connection with the April 3, 2008 purchase of substantially all the assets of
IDS, we issued to IDS an unsecured convertible note in the principal amount of
$1.54 million, bearing no interest until April 3, 2011. If not converted, or
paid within 30 days of maturity, then from and after the maturity date, the
convertible note will bear annual interest at 12%. The convertible note is
convertible at the discretion of IDS into shares of our common stock after May
31, 2010, or upon the approval of a majority in interest of the holders of our
then outstanding 5% secured convertible debentures, or any securities issued on
conversion thereof, at an initial conversion price of $1.15 per share. We have
agreed to register the shares issuable upon the conversion of the note for
public resale.

As
of March 31, 2010, $24,000 of payments were past due under the note issued to
IDS. In April 2009, IDS and its principal shareholder instituted an action
seeking to collect the entire $1,544,000 due under the note as well as $206,250
remaining due under the consulting agreement entered into in connection with
the asset purchase.

On
June 10, 2008, we issued a promissory note (the New Note) in the principal
amount of $267,192 to the Russ & Russ PC Defined Benefit Pension Plan - a
pension plan formed for the benefit of Mr. Russ - in exchange for the surrender
of a promissory note in the principal amount of $250,000 (the Old Note) which
was issued by us to an individual lender in October 2007 and assigned to the
pension plan before the exchange. At the time of the exchange, accrued and
unpaid interest under the Old Note, which was past due, was $17,192. The New
Note provided for interest at a rate of 10% per annum and became due on
December 10, 2008. As further consideration for entering into the exchange
transaction, we issued to Mr. Russ options to acquire 20,000 shares of the our
common stock under the Companys Equity Incentive plan at an exercise price of
$0.40 per share. We have not paid the holder of the note. IDS, its principal
shareholder and the holder of the New Note have instituted an action seeking to
collect the past due amount.

Item 6. Exhibits

|            |  |                                                                                                                         
|----------- |  | ------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibits                                                                                                                
|            |  |                                                                                                                         
|           
|31.1        |  | Certification
 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
 Sarbanes-Oxley Act of 2002
|           
|31.2        |  | Certification
 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
 Sarbanes-Oxley Act of 2002
|           
|32.1        |  | Certification
 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
 Sarbanes-Oxley Act of 2002
|           
|32.2        |  | Certification
 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
 Sarbanes-Oxley Act of 2002

17

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SIGNATURES

In
accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

|                     |     |                                 
|-------------------- | --- | --------------------------------
|                     |     | Visual
 Management Systems, Inc.
|                     |     |                                 
|                     |     | (Registrant)                    
|                     |     |                                 
|                     | By: | /s/
 Jason Gonzalez             
|                     |     |                                 
|                     |     | Jason
 Gonzalez                 
|                     |     | Chief
 Executive Officer        
|Dated: May
 20, 2010 |     |                                 
|                     |     |                                 
|                     | By: | /s/
 J.D. Gardner               
|                     |     |                                 
|                     |     | J.D. Gardner                    
|                     |     | Chief
 Financial Officer        
|Dated: May
 20, 2010 |     |                                 

18

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