---

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|                                   
|-----------------------------------
|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 September 30, 2009.                                      
|  |                                                                                          
|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 CToms 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 x  No o

Indicate by
check mark whether the Registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See 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 November
23, 2009, there were 105,622,526 shares of the registrants common stock
outstanding.

1

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VISUAL MANAGEMENT SYSTEMS,INC. AND SUBSIDIARIES
INDEX

|                              |         |                                                                                                                              |  |         
|----------------------------- | ------- | ---------------------------------------------------------------------------------------------------------------------------- |  | --------
|                              |         |                                                                                                                              |  | Page No.
|                              |         |                                                                                                                              |  |         
|PART I. Financial Information |         | 3                                                                                                                           
|                              |         |                                                                                                                              |  |         
|                              | Item 1. | Financial Statements                                                                                                         |  | 3       
|                              |         |                                                                                                                              |  |         
|                              |         | Condensed Consolidated Balance Sheets as of September 30, 2009
 (Unaudited) and December 31, 2008 (Audited)                  |  | 4       
|                              |         |                                                                                                                              |  |         
|                              |         | Condensed Consolidated Statements of Operations (Unaudited) for the
 Nine and Three Months Ended September 30, 2009 and 2008 |  | 5       
|                              |         |                                                                                                                              |  |         
|                              |         | Condensed Consolidated Statements of Cash Flows (Unaudited) for the
 Nine Months Ended September 30, 2009 and 2008           |  | 6       
|                              |         |                                                                                                                              |  |         
|                              |         | Notes to Condensed Consolidated Financial Statements                                                                         |  | 8       
|                              |         |                                                                                                                              |  |         
|                              | Item 2. | Managements Discussion and Analysis of Financial Condition and
 Results of Operations                                       |  | 15      
|                              |         |                                                                                                                              |  |         
|                              | Item 3. | Quantitative and Qualitative Disclosures About Market Risk                                                                   |  | 17      
|                              |         |                                                                                                                              |  |         
|                              | Item 4. | Controls and Procedures                                                                                                      |  | 17      
|                              |         |                                                                                                                              |  |         
|PART II. Other Information    |         | 20                                                                                                                          
|                              |         |                                                                                                                              |  |         
|                              | Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds                                                                  |  | 20      
|                              |         |                                                                                                                              |  |         
|                              | Item 3. | Defaults upon Senior Securities                                                                                              |  | 20      
|                              |         |                                                                                                                              |  |         
|                              | Item 6. | Exhibits                                                                                                                     |  | 21      
|                              |         |                                                                                                                              |  |         
|SIGNATURES                    |         | 21                                                                                                                          

2

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PART I -
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS

3

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Visual Management Systems, Inc. and
Subsidiaries 
Condensed Consolidated Balance Sheets

|                                                                                                     |  |                    |             |                   |   |             |  
|---------------------------------------------------------------------------------------------------- |  | ------------------ | ----------- | ----------------- | - | ----------- | -
|                                                                                                     |  | September 30, 2009 |             | December 31, 2008 |  
|                                                                                                     |  | (unaudited)        |             | (audited)         |  
|Assets                                                                                               |  |                    |             |                   |   |             |  
|                                                                                                     |  |                    |             |                   |   |             |  
|Current assets                                                                                       |  |                    |             |                   |   |             |  
|Cash                                                                                                 |  | $                  | 11,222      |                   | $ | 16,186      |  
|Accounts receivable, net                                                                             |  |                    | 135,897     |                   |   | 230,339     |  
|Inventory                                                                                            |  |                    | 142,960     |                   |   | 340,650     |  
|Prepaid expenses                                                                                     |  |                    | 33,248      |                   |   | 177,450     |  
|                                                                                                     |  |                    |             |                   |   |             |  
|Total current assets                                                                                 |  |                    | 323,327     |                   |   | 764,625     |  
|                                                                                                     |  |                    |             |                   |   |             |  
|Property and equipment - net                                                                         |  |                    | 338,414     |                   |   | 533,912     |  
|Capitalized software-net                                                                             |  |                    | 153,098     |                   |   | 180,115     |  
|Deposits and other assets                                                                            |  |                    | 146,227     |                   |   | 146,227     |  
|Investment in joint venture                                                                          |  |                    | 5,000       |                   |   | 5,000       |  
|Software-net                                                                                         |  |                    | 775,346     |                   |   | 912,172     |  
|Deferred financing costs-net                                                                         |  |                    | 514,444     |                   |   | 1,089,322   |  
|                                                                                                     |  |                    |             |                   |   |             |  
|                                                                                                     |  |                    |             |                   |   |             |  
|Total Assets                                                                                         |  | $                  | 2,255,856   |                   | $ | 3,631,373   |  
|                                                                                                     |  |                    |             |                   |   |             |  
|                                                                                                     |  |                    |             |                   |   |             |  
|Liabilities and Stockholders Deficit                                                                |  |                    |             |                   |   |             |  
|                                                                                                     |  |                    |             |                   |   |             |  
|Current liabilities                                                                                  |  |                    |             |                   |   |             |  
|Accounts payable                                                                                     |  | $                  | 1,730,148   |                   | $ | 1,708,861   |  
|Accrued expenses and other current
 liabilities                                                      |  |                    | 2,332,600   |                   |   | 2,312,843   |  
|Customer deposits                                                                                    |  |                    | 75,865      |                   |   | 195,976     |  
|Sales tax payable                                                                                    |  |                    | 151,488     |                   |   | 136,745     |  
|Bank line of credit                                                                                  |  |                    | 46,649      |                   |   | 49,981      |  
|Short term notes payable                                                                             |  |                    | 726,557     |                   |   | 756,387     |  
|Current portion of long-term debt                                                                    |  |                    | 154,584     |                   |   | 100,738     |  
|Current portion of obligations under
 capital leases                                                 |  |                    | 105,889     |                   |   | 110,212     |  
|Current portion of convertible notes
 payable (net of unamortized discount of $198,333 and $423,333) |  |                    | 5,470,909   |                   |   | 4,870,667   |  
|                                                                                                     |  |                    |             |                   |   |             |  
|                                                                                                     |  |                    |             |                   |   |             |  
|Total current liabilities                                                                            |  |                    | 10,794,689  |                   |   | 10,242,410  |  
|                                                                                                     |  |                    |             |                   |   |             |  
|                                                                                                     |  |                    |             |                   |   |             |  
|Convertible notes payable                                                                            |  |                    |            |                   |   |            |  
|Long-term debt - net of current portion                                                              |  |                    | 120,433     |                   |   | 234,248     |  
|Obligations under capital leases - net of
 current portion                                           |  |                    |            |                   |   | 13,500      |  
|Other long term liabilities                                                                          |  |                    | 27,257      |                   |   | 54,523      |  
|Commitments and contingencies                                                                        |  |                    |             |                   |   |             |  
|                                                                                                     |  |                    |             |                   |   |             |  
|Stockholders deficit                                                                                |  |                    |             |                   |   |             |  
|Preferred stock                                                                                      |  |                    | 1           |                   |   |            |  
|Common stock                                                                                         |  |                    | 91,423      |                   |   | 10,808      |  
|Additional paid-in-capital                                                                           |  |                    | 19,959,030  |                   |   | 14,205,834  |  
|Accumulated deficit                                                                                  |  |                    | (28,586,977 | )                 |   | (20,979,950 | )
|Treasury stock, at cost                                                                              |  |                    | (150,000    | )                 |   | (150,000    | )
|                                                                                                     |  |                    |             |                   |   |             |  
|Total stockholders deficit                                                                          |  |                    | (8,686,523  | )                 |   | (6,913,308  | )
|                                                                                                     |  |                    |             |                   |   |             |  
|                                                                                                     |  |                    |             |                   |   |             |  
|Total Liabilities and Stockholders Deficit                                                          |  | $                  | 2,255,856   |                   | $ | 3,631,373   |  
|                                                                                                     |  |                    |             |                   |   |             |  

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

4

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|                                                                
|----------------------------------------------------------------
|Visual
 Management Systems, Inc. and Subsidiaries               
|Condensed Consolidated Statements of Operations                 
|For the
 Nine and Three Months Ended September 30, 2009 and 2008
|(Unaudited)                                                     
|                                                                

|                                                      |  |                                |            |                                 |   |            |   |      |            |   |   |            |  
|----------------------------------------------------- |  | ------------------------------ | ---------- | ------------------------------- | - | ---------- | - | ---- | ---------- | - | - | ---------- | -
|                                                      |  | Nine Months Ended September 30 |            | Three Months Ended September 30 |  
|                                                      |  | 2009                           |            | 2008                            |   | 2009       |   | 2008 |           
|                                                      |  |                                |            |                                 |   |            |   |      |           
|                                                      |  |                                |            |                                 |   |            |   |      |            |   |   |            |  
|Revenues - net                                        |  | $                              | 2,141,323  |                                 | $ | 4,992,691  |   | $    | 559,012    |   | $ | 1,779,866  |  
|                                                      |  |                                |            |                                 |   |            |   |      |            |   |   |            |  
|Cost of revenues                                      |  |                                | 1,124,257  |                                 |   | 2,785,996  |   |      | 313,137    |   |   | 1,132,500  |  
|                                                      |  |                                |            |                                 |   |            |   |      |            |   |   |            |  
|                                                      |  |                                |            |                                 |   |            |   |      |            |   |   |            |  
|Gross profit                                          |  |                                | 1,017,066  |                                 |   | 2,206,695  |   |      | 245,875    |   |   | 647,366    |  
|                                                      |  |                                |            |                                 |   |            |   |      |            |   |   |            |  
|Operating expenses                                    |  |                                | 2,667,362  |                                 |   | 6,594,611  |   |      | 746,226    |   |   | 1,669,678  |  
|                                                      |  |                                |            |                                 |   |            |   |      |            |   |   |            |  
|                                                      |  |                                |            |                                 |   |            |   |      |            |   |   |            |  
|Loss from operations                                  |  |                                | (1,650,296 | )                               |   | (4,387,916 | ) |      | (500,351   | ) |   | (1,022,312 | )
|                                                      |  |                                |            |                                 |   |            |   |      |            |   |   |            |  
|Other (income) expenses                               |  |                                |            |                                 |   |            |   |      |            |   |   |            |  
|Interest expense                                      |  |                                | 1,007,362  |                                 |   | 449,886    |   |      | 268,627    |   |   | 152,852    |  
|Miscellaneous loss (income)                           |  |                                | 5,361      |                                 |   | (52,749    | ) |      | 5,031      |   |   | (53,054    | )
|                                                      |  |                                |            |                                 |   |            |   |      |            |   |   |            |  
|                                                      |  |                                | 1,012,723  |                                 |   | 397,137    |   |      | 273,658    |   |   | 99,798     |  
|                                                      |  |                                |            |                                 |   |            |   |      |            |   |   |            |  
|                                                      |  |                                |            |                                 |   |            |   |      |            |   |   |            |  
|Net loss                                              |  | $                              | (2,663,019 | )                               | $ | (4,785,053 | ) | $    | (774,009   | ) | $ | (1,122,110 | )
|                                                      |  |                                |            |                                 |   |            |   |      |            |   |   |            |  
|                                                      |  |                                |            |                                 |   |            |   |      |            |   |   |            |  
|Deemed dividend on convertible preferred              |  |                                | 4,944,009  |                                 |   |           |   |      | 1,192,566  |   |   |           |  
|                                                      |  |                                |            |                                 |   |            |   |      |            |   |   |            |  
|Net Loss applicable to
 common stockholders           |  | $                              | (7,607,028 | )                               | $ | (4,785,053 | ) | $    | (1,966,575 | ) | $ | (1,122,110 | )
|                                                      |  |                                |            |                                 |   |            |   |      |            |   |   |            |  
|                                                      |  |                                |            |                                 |   |            |   |      |            |   |   |            |  
|Per share data - basic and
 fully diluted             |  | $                              | (0.18      | )                               | $ | (0.60      | ) | $    | (0.02      | ) | $ | (0.13      | )
|                                                      |  |                                |            |                                 |   |            |   |      |            |   |   |            |  
|                                                      |  |                                |            |                                 |   |            |   |      |            |   |   |            |  
|Weighted average number of
 common shares outstanding |  |                                | 42,982,182 |                                 |   | 7,984,506  |   |      | 80,812,881 |   |   | 8,482,107  |  
|                                                      |  |                                |            |                                 |   |            |   |      |            |   |   |            |  

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

5

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|                                                                                                                                                                    
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Visual Management Systems, Inc. and SubsidiariesCondensed Consolidated Statements of Cash Flows
 For the Nine Months Ended September 30, 2009 and 2008 
 (Unaudited)
|                                                                                                                                                                    

|                                                                                 |  |      |            |      |   |            |  
|-------------------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|                                                                                 |  | 2009 |            | 2008 |  
|                                                                                 |  |      |            |      |  
|Cash flows from operating activities                                             |  |      |            |      |   |            |  
|Net loss                                                                         |  | $    | (2,663,019 | )    | $ | (4,785,053 | )
|Adjustments to reconcile net loss to net
 cash used by operating activities      |  |      |            |      |   |            |  
|Depreciation and amortization                                                    |  |      | 925,131    |      |   | 752,384    |  
|Non-cash interest expense                                                        |  |      | 566,689    |      |   | 323,217    |  
|Bad debt expense                                                                 |  |      | 56,136     |      |   |           |  
|Payment of stock for services                                                    |  |      | 34,100     |      |   | 766,034    |  
|Stock-based compensation                                                         |  |      | 71,543     |      |   | 311,059    |  
|Loss on disposition of assets (net)                                              |  |      | 9,553      |      |   | 249        |  
|(Increase) decrease in operating assets                                          |  |      |            |      |   |            |  
|Accounts receivable                                                              |  |      | 38,306     |      |   | 12,409     |  
|Inventory                                                                        |  |      | 197,690    |      |   | 87,150     |  
|Prepaid expenses and other assets                                                |  |      | 144,201    |      |   | (33,974    | )
|Deposits and other assets                                                        |  |      |           |      |   | (45,637    | )
|Increase (decrease) in operating
 liabilities                                    |  |      |            |      |   |            |  
|Accounts payable                                                                 |  |      | 26,952     |      |   | 749,166    |  
|Accrued expenses and other current
 liabilities                                  |  |      | 342,903    |      |   | 918,630    |  
|Sales tax payable                                                                |  |      | 14,744     |      |   | 76,317     |  
|Customer deposits                                                                |  |      | (120,112   | )    |   | 135,508    |  
|                                                                                 |  |      |            |      |   |            |  
|Net cash used from operating activities                                          |  |      | (355,183   | )    |   | (732,541   | )
|                                                                                 |  |      |            |      |   |            |  
|                                                                                 |  |      |            |      |   |            |  
|Cash flows from investing activities                                             |  |      |            |      |   |            |  
|Purchases of property and equipment                                              |  |      |           |      |   | (59,394    | )
|Capitalized software                                                             |  |      |           |      |   | (132,923   | )
|Proceeds from disposition of assets                                              |  |      | 3,715      |      |   | 12,145     |  
|Investment in joint venture                                                      |  |      |           |      |   | (5,000     | )
|                                                                                 |  |      |            |      |   |            |  
|                                                                                 |  |      |            |      |   |            |  
|                                                                                 |  |      |            |      |   |            |  
|Net cash used by investing activities                                            |  |      | 3,715      |      |   | (185,172   | )
|                                                                                 |  |      |            |      |   |            |  
|                                                                                 |  |      |            |      |   |            |  
|                                                                                 |  |      |            |      |   |            |  
|Cash flows from financing activities                                             |  |      |            |      |   |            |  
|Repayment of capital leases                                                      |  |      | (7,330     | )    |   | (42,060    | )
|Repayment of short term notes                                                    |  |      | (29,500    | )    |   | (68,000    | )
|Proceeds from convertible notes (net of
 $4,150 of issuance costs)               |  |      | 37,350     |      |   |           |  
|Proceeds from the exercise of warrants                                           |  |      |           |      |   | 124,922    |  
|Proceeds from short term notes payable (net
 of $15,200 of issuance costs)       |  |      |           |      |   | 480,261    |  
|Proceeds from the issuance of preferred
 stock, net of issuance costs of $33,300 |  |      | 429,188    |      |   |           |  
|Repayment on bank line of credit                                                 |  |      | (3,332     | )    |   |           |  
|Principal repayments of long-term debt                                           |  |      | (59,968    | )    |   | (85,437    | )
|Repayment of loans payable - stockholders                                        |  |      | (19,904    | )    |   |           |  
|                                                                                 |  |      |            |      |   |            |  
|Net cash provided by financing activities                                        |  |      | 346,504    |      |   | 409,686    |  
|                                                                                 |  |      |            |      |   |            |  
|                                                                                 |  |      |            |      |   |            |  
|Change in cash                                                                   |  |      | (4,964     | )    |   | (508,027   | )
|                                                                                 |  |      |            |      |   |            |  
|Cash                                                                             |  |      |            |      |   |            |  
|Beginning of period                                                              |  |      | 16,186     |      |   | 707,025    |  
|                                                                                 |  |      |            |      |   |            |  
|End of period                                                                    |  | $    | 11,222     |      | $ | 198,998    |  
|                                                                                 |  |      |            |      |   |            |  

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

6

---



|                                                                                                             |  |      |           |      |  |           | 
|------------------------------------------------------------------------------------------------------------ |  | ---- | --------- | ---- |  | --------- | 
|Supplemental Disclosure of Cash Flow Information                                                             |  | 2009 |           | 2008 | 
|                                                                                                             |  |      |           |      | 
|                                                                                                             |  |      |           |      |  |           | 
|Issuance of a short term note to refinance
 existing long term note                                          |  |      |          |      |  | 267,192   | 
|                                                                                                             |  |      |           |      |  |           | 
|Issuance of convertible note for IDS
 Acquisition for acquisition of software assets and net working capital |  |      |          |      |  | 1,544,000 | 
|                                                                                                             |  |      |           |      |  |           | 
|Issuance of note payable for IDS
 Acquisition                                                                |  |      |          |      |  | 42,000    | 
|                                                                                                             |  |      |           |      |  |           | 
|Increase in inventory due to IDS asset
 acquisition                                                          |  |      |          |      |  | 6,841     | 
|                                                                                                             |  |      |           |      |  |           | 
|Increase in assets under capitalized leases                                                                  |  |      |          |      |  | 95,391    | 
|                                                                                                             |  |      |           |      |  |           | 
|Increase in accrued interest due to reclass
 from capitalized leases                                         |  |      | 10,493    |      |  |          | 
|                                                                                                             |  |      |           |      |  |           | 
|Cash paid for interest                                                                                       |  |      | 30,269    |      |  | 89,921    | 
|                                                                                                             |  |      |           |      |  |           | 
|Increase in inventory for reclassification
 from fixed assets                                                |  |      |          |      |  | 38,990    | 
|                                                                                                             |  |      |           |      |  |           | 
|Change in accrued expenses due to reclass
 from long term liabilities                                        |  |      | (27,266   | )    |  |          | 
|                                                                                                             |  |      |           |      |  |           | 
|Increase in prepaid expenses assocaited
 with issuance of stock and debt for investor relations services     |  |      |          |      |  | 194,016   | 
|                                                                                                             |  |      |           |      |  |           | 
|Decrease in accrued expenses for issuance
 of stock to pay liquidated damages                                |  |      |          |      |  | 387,050   | 
|                                                                                                             |  |      |           |      |  |           | 
|Issuance of shares for liquidated damages
 penalty                                                           |  |      | 4,663     |      |  |          | 
|                                                                                                             |  |      |           |      |  |           | 
|Issuance of Preferred B shares for vendor
 payments                                                          |  |      | 4,680     |      |  |          | 
|                                                                                                             |  |      |           |      |  |           | 
|Issuance of Preferred B shares to reduce
 accrued wages                                                      |  |      | 22,000    |      |  |          | 
|                                                                                                             |  |      |           |      |  |           | 
|Issuance of Preferred B shares as a finders
 fee                                                             |  |      | 4,000     |      |  |          | 
|                                                                                                             |  |      |           |      |  |           | 
|Issuance of Preferred B shares to reduce
 shareholder loan                                                   |  |      | 2,093     |      |  |          | 
|                                                                                                             |  |      |           |      |  |           | 
|Issuance of Preferred B shares as
 compensation                                                              |  |      | 5,000     |      |  |          | 
|                                                                                                             |  |      |           |      |  |           | 
|Deemed dividend on convertible preferred                                                                     |  |      | 4,944,009 |      |  |          | 
|                                                                                                             |  |      |           |      |  |           | 
|Decrease in accrued expenses and accounts
 payable to adjust shareholder loan balance                        |  |      | (1,484    | )    |  |          | 
|Increase in Convertible Debt for interest
 and penalty                                                       |  |      | 333,742   |      |  |          | 

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

7

---



|                                                    
|----------------------------------------------------
|Visual Management Systems, Inc. and Subsidiaries    
|Notes to Condensed Consolidated Financial Statements
|September 30, 2009                                  
|                                                    
|                                                    

|   |                                                        
|-- | -------------------------------------------------------
|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 Item 310 of
Regulation S-B of the Securities and Exchange Commission (the Commission) and
include the results of Visual Management Systems, Inc., Visual Management
Systems Holding, Inc., Visual Management Systems LLC and Intelligent Product Development Group, LLC. formerly known as
Visual Management Systems PDG, 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 September 30, 2009 and the results of its operations
for the nine and three month periods ended September 30, 2009 and 2008, 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, 2008 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 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
September 30, 2009, the Company has capitalized approximately $180,000 of
software development costs relating to new products. There was approximately
$180,000 of software development cost capitalized as of December 31, 2008.

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 September 30, 2009, the Hybrid DVR software and DVR software
products under development were generally available to customers and as a
result, there were approximately $27,017 and $9,006 of amortization charges for
the nine and three months ended September 30, 2009 for those products. There
was no amortization for the same periods in 2008.

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.

8

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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 September 30, 2009, management does not believe any reserve is required.

The
Companys inventory consisted of a total of $142,960 (approximately $20,900 of
raw materials and $122,060 of finished goods) at September 30, 2009 as compared
to inventory of $340,650 (approximately $50,000 of raw materials and $290,650
of finished goods) at December 31, 2008.

New Accounting Pronouncements

In
June 2009, the FASB issued authoritative guidance on accounting standards
codification and the hierarchy of generally accepted accounting principles.
The FASB Accounting Standards Codification (Codification) has become the
source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements
in accordance with GAAP. All existing accounting standard documents are
superseded by the Codification and any accounting literature not included in
the Codification will not be authoritative. However, rules and interpretive
releases of the Securities Exchange Commission (SEC) issued under the
authority of federal securities laws will continue to be sources of
authoritative GAAP for SEC registrants. The FASB authoritative guidance is
effective for interim and annual reporting periods ending after September 15,
2009. Therefore, beginning with the Companys quarter ending September 30,
2009, all references made by it to GAAP in its consolidated financial
statements now use the new Codification numbering system. The Codification does
not change or alter existing GAAP and, therefore, it does not have an impact on
the Companys financial position, results of operations and cash flows.

In
May 2009, the FASB issued ASC 855 (formerly Statement No. 165), Subsequent
Events. ASC 855 establishes general standards of accounting for and disclosure
of events that occur after the balance sheet date but before financial
statements are issued or available to be issued. ASC 855 is effective for
interim or annual periods ending after June 15, 2009. We adopted the new
disclosure requirements in our June 30, 2009 condensed financial statements.
The adoption of this provision does not have a material effect on our financial
position, results of operations and cash flows.

In
June 2009, the FASB issued FAS 167, Amendments to FASB Interpretation No.
46(R) (FAS 167). FAS 167 is effective for interim and annual reporting
periods ending after November 15, 2009. FAS 167 amends certain guidance in FIN
46(R) to eliminate the exemption for special purpose entities, require a new
qualitative approach for determining who should consolidate a variable interest
entity and change the requirement for when to reassess who should consolidate a
variable interest entity. We plan to adopt FAS 167 effective January 1, 2010,
and we do not expect it to have any impact on our financial position or results
of operations. FAS 167 has not yet been codified.

In
June 2009, the FASB issued FAS 166 Accounting for Transfers of Financial
Assets - an amendment of FAS Statement No. 140 (FAS 166). FAS 166 is
effective for interim and annual reporting periods ending after November 15,
2009 and must be applied to transfers occurring on or after the effective date.
FAS 166 clarifies that the objective of paragraph 9 of Statement 140 is to
determine whether a transferor and all of the entities included in the
transferors financial statements being presented have surrendered control over
transferred financial assets. We plan to adopt FAS 166 effective January 1,
2010, and we do not expect it to have a material impact on our financial
position or results of operations. FAS 166 has not yet been codified.

In
October 2009, the FASB issued authoritative guidance in the form of Accounting
Standards Update 2009-14  Software (Topic 985) on revenue recognition that
will become effective for us beginning January 1, 2011, with earlier adoption
permitted. Under the new guidance on arrangements that include software
elements, tangible products that have software components that are essential to
the functionality of the tangible product will no longer be within the scope of
the software revenue recognition guidance, and software-enabled products will
now be subject to other relevant revenue recognition guidance. We believe
adoption of this new guidance will not have a material impact on our financial
statements.

In
August 2009, the FASB issued the FASB Accounting Standards Update No. 2009-04
Accounting for Redeemable Equity Instruments - Amendment to Section
480-10-S99 which represents an update to section 480-10-S99, distinguishing
liabilities from equity, per EITF Topic D-98, Classification and Measurement of
Redeemable Securities. The Company does not expect the adoption of this update
to have a material impact on its consolidated financial position, results of
operations or cash flows.

In
September 2009, the FASB issued the FASB Accounting Standards Update No.
2009-08 Earnings Per Share  Amendments to Section 260-10-S99,which
represents technical corrections to topic 260-10-S99, Earnings per share, based
on EITF Topic D-53, Computation of Earnings Per Share for a Period that
includes a Redemption or an Induced Conversion of a Portion of a Class of
Preferred Stock and EITF Topic D-42, The Effect of the Calculation of Earnings
per Share for the Redemption or Induced Conversion of Preferred Stock. The
Company does not expect the adoption of this update to have a material impact
on its consolidated financial position, results of operations or cash flows.

9

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The
FASB has issued Accounting Standards Update (ASU) 2009-13, Multiple
Deliverable Revenue Arrangements. ASU 2009-13 replaces EITF 00-21, and
clarifies the criteria for separating revenue between multiple deliverables.
This statement is effective for new revenue arrangements or materially modified
arrangements in periods subsequent to adoption. Adoption is required for fiscal
years beginning on or after June 15, 2010, but early adoption is allowed. We
anticipate adopting ASU 2009-13 as of January 1, 2011 for new commercial
revenue arrangements that fall within the scope of this Update. The adoption of
the standard is not expected to have a significant impact on the companys
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 $1,650,300 and $500,350 for the nine and three months ended
September 30, 2009 as compared to $4,387,920 and $1,022,310 for the same
periods in the prior year. The Companys cash used for operations was
approximately $355,180 for the nine months ended September 30, 2009 as compared
to cash used for operations of approximately $732,540 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 September 30, 2009 were approximately $10,794,690 and current
assets were approximately $323,330. The difference of approximately $10,471,360
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

November 2007 Debentures

On
November 30, 2007, the Company 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. This transaction is known as the Companys November 2007 Private
Placement. In this transaction, the Company 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 common stock. The
warrants expire in November 2014 were issued with an exercise price of $1.15
per share, subject to adjustment, including full ratchet anti-dilution
protection.

Since
January 1, 2008, the Company has been required to make quarterly payments of
interest under the convertible debentures issued in the Companys November 2007
Private Placement. The Company has also been required to make monthly principal
payments in the aggregate of $208,333 since November 2008. In August 2008, the
Company entered into an Amendment and Waiver Agreement with each of the holders
of these debentures pursuant to which the debenture holders have:

-
waived the Companys compliance with the provisions of the debentures which
require it 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 otherwise have resulted in an adjustment to the
conversion price of the debentures to $.40 per share;

10

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-
waived certain provisions of the agreement pursuant to which the debentures
were issued which restrict the Companys 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 the Company does 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 the Company 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 Companys
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, the Company agreed to issue shares of the Companys 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. The
Company agreed to register the new shares for resale under the Securities Act
of 1933, as amended. Failure to file and have the registration statement
declared effective within a specified time frame would subject the Company to
liquidated damages. The Company has not filed a registration statement in
compliance with its August 2008 Amendment and Waiver Agreement, and has
received no formal written waiver of such obligation; however the holders of
the debentures have advised the Company that that they will not require it to
file a registration statement.

The
exercise price of the warrants was also adjusted to $.40 per share, pursuant to
the terms of the amendment and waiver agreement.

On
the first day of each month since December 1, 2008 the Companys monthly
redemptions of principal for the debentures have become due. Each of these
monthly redemption amounts totals $208,333 and each has not been paid by the
Company. Additional redemption payments will also come due on the first day of
each calendar month until May 2011.

Quarterly
interest payments owed by the Company to the holders of the debentures in the
amount of $46,875 also came due on October 1, 2008 January 1, 2009, April 1,
2009 and July 1, 2009, October 1, 2009 and were also not paid by the Company.

In
August 2009, the Company entered into an Amendment and Waiver Agreement with
each of the holders of the November 2007 debentures pursuant to which:

-
The Companys 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. After January 1, 2010 the conversion price shall be 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.

The
Company has made no payments to the holders of the Debentures since execution
of the August 2009 Amendment and Waiver Agreement, and remains in communication
with the holders towards the goal of obtaining a more long term solution to the
Companys non-payment.

Financing of the IDS Asset Purchase

In
connection with the April 3, 2008 purchase of substantially all the assets of
Intelligent Digital Systems, LLC (the Asset Purchase and IDS), the Company
issued to IDS an unsecured convertible note in the principal amount of $1.54
million, bearing no interest until April 3, 2011. According to its terms, if
not converted, or paid within 30 days of maturity, then from and after the
maturity date, the convertible note will bear annual interest of 12%. The
convertible note is convertible at the discretion of IDS into shares of the
Companys common stock after May 31, 2010, or upon the approval of a majority
in interest of the holders of the Companys then outstanding 5% secured
convertible debentures, or any securities issued on conversion thereof. The
initial conversion price was $1.15 per share, but according to its terms has
adjusted to $0.12 based on issuances of equity or equity equivalents subsequent
to the issuance of the convertible note. The Company has agreed to register the
shares issuable upon the conversion of the note for public resale.

As
of September 30, 2009, $24,000 of payments was past due under the note issued
to IDS. In April 2009 IDS, and its principal member and former member of the
Companys Board of Directors, Jay Russ, instituted an action seeking to collect
the entire $1,544,000 due

11

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under the note
as well as $287,500 remaining due under the consulting agreement with Jay Russ
entered into in connection with the Asset Purchase. See Note 6. Legal
Proceedings.

Promissory Note

On
June 10, 2008, the Company 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 Jay Russ - in exchange for the
surrender of a promissory note in the principal amount of $250,000 (the Old
Note) which was issued by the Company 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, the Company issued to Mr. Russ options to acquire 20,000
shares of the its common stock under the Companys Equity Incentive plan at an
exercise price of $0.40 per share. In April 2009, IDS and its principal
shareholder instituted an action seeking to collect the entire principal amount
of the New Note plus all accrued interest. 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
September 30, 2009 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 | 
|                     |  |                                                                          |   |                                                 |  |                                            |  |       |           |  |   |           | 
|                     |  |                                                                          |   |                                                 |  |                                            |  |       |           |  |   |           | 

12

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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 September 30, 2009 |           | As of December 31, 2008    |  
|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 |                            |   | 758,791                |  |                           | 1,534,137 |  |   | 621,965 | 
|                              |  |                          |           |                            |   |                        |  |                           |           |  |   |         | 
|                              |  |                          |           |                            |   |                        |  |                           |           |  |   |         | 
|Total                         |  | $                        | 1,562,692 |                            | $ | 787,346                |  | $                         | 1,562,692 |  | $ | 650,520 | 
|                              |  |                          |           |                            |   |                        |  |                           |           |  |   |         | 

|  |                                                                                                                                                                                                                                                                              
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Includes
 impairment of $636,242 relating to fair value revaluation of intangible
 assets during 2008 and amortization of $136,826 and $45,609 associated with
 Hybrid DVR software charged to cost of goods sold during the nine and three
 months ended September 30, 2009.

13

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|                                                                       |      |   |         |         | 
|---------------------------------------------------------------------- | ---- | - | ------- | ------- | 
|Aggregate amortization expense for nine
 months ended 9/30/2009        |      | $ | 136,825 |        
|                                                                       |      |   |         |         | 
|Estimated amortization expense for the 12
 months ending September 30: |      |   |         |        
|                                                                       | 2009 |   | $       | 182,435 | 
|                                                                       | 2010 |   |         | 182,435 | 
|                                                                       | 2011 |   |         | 182,435 | 
|                                                                       | 2012 |   |         | 182,435 | 
|                                                                       | 2013 |   |         | 45,606  | 

|   |                                                             
|-- | ------------------------------------------------------------
|5. | Equity Based Compensation, Warrants to Purchase Common Stock

No
equity based compensation was issued during the period covered by this report.

|   |                  
|-- | -----------------
|6. | Legal Proceedings

On
March 27, 2009, the Company was served with a summons and a complaint in which
the Company, its CEO Jason Gonzalez, the Companys current Board members Robert
Moe, Martin McFeely, Michael Ryan and Col. Jack Jacobs (ret.), and the
Companys former CFO Howard Herman were named as defendants in a suit filed by
Mr. 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, the Companys 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. The Company believes that the Plaintiffs
claims regarding misrepresentation, securities fraud and breach of duty are
entirely without merit and intend to vigorously defend 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
the Company, payment of that judgment would have a material adverse effect on
the Companys financial condition and results of operations. The filing of this
lawsuit substantially reduces the likelihood of the Company ever receiving any
return on the Companys investment in the Companys joint venture with IDS.

The
Company has been named as the defendant in a number of lawsuits pertaining to
vendor lines of credit, service contracts and leases which have gone beyond
permitted amounts and terms. These suits seek judgment ranging in value from
approximately $4,000 to approximately $120,000. No individual lawsuit
represents a substantial risk to the Companys ongoing operations, but taken in
whole they pose a potentially very serious risk to the Companys ongoing
operations.

|   |                                  
|-- | ---------------------------------
|7. | Convertible Security Transactions

Convertible Preferred Stock Conversions

During
July, August and September of 2009, 25.6 shares of Series A Convertible
Preferred Stock were converted into common stock. These shares were converted
at $0.005 and resulted in the issuance of 12,800,000 shares of the Companys
common stock. In connection with the conversion, the Company recorded a deemed
dividend of approximately $780,262 for the excess of the fair value of the
converted shares as compared to the carrying value of the preferred, net of
dividends booked in prior periods.

During
July, August and September of 2009, 49 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 9,800,000 shares of the Companys common stock.
In connection with the conversion, the Company recorded a deemed dividend of
approximately $412,304 for the excess of the fair value of the converted shares
as compared to the carrying value of the preferred, net of dividends booked in
prior periods.

14

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Issuance of Convertible Notes

In
July and August 2009, the Company issued to unaffiliated individual investors,
convertible notes with an aggregate principal value of $41,500, 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 $41,500 in connection with the beneficial
conversion feature of these notes. The convertible notes mature on various
dates throughout January 2010.

|   |                  
|-- | -----------------
|8. | Subsequent Events

For
the purposes of these financial statements, the Company has evaluated
subsequent events occurring between the end of its fiscal quarter ended
September 30, 2009 and November 23, 2009, which is the date these financial
statements were issued.

Issuance of Convertible Notes

In
October and November 2009, the Company issued to unaffiliated individual
investors, convertible notes with an aggregate principal value of $60,000, 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 throughout October and November 2010.

Convertible Preferred Stock Conversions

During
July, October and November of 2009, 28 shares of Series A Convertible Preferred
Stock were converted into common stock. These shares were converted at $0.005
and resulted in the issuance of 14,000,000 shares of the Companys common
stock.

During
October of 2009, 1 share of Series B Convertible Preferred Stock was converted
into common stock. These shares were converted at $0.005 and resulted in the
issuance of 200,000 shares of the Companys common stock

Appointment of Chief Operating Officer

On
October 12, 2009, the Companys Board of Directors appointed W. Geoffrey Martin
its Chief Operating Officer. Mr. Martin previously served as the Companys
General Counsel, a role which he will continue to fill in addition to his new
capacity. The Companys former Chief Operating Officer was named Operations
Manager for its Visual Management Systems, LLC subsidiary.

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

Results of Operations for the Nine months
Ended September 30, 2009 and 2008

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 $2,851,370, or 57% to about $2,141,320
during the nine months ended September 30, 2009, from approximately $4,992,690
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.

Cost of Goods Sold

Total
cost of goods sold decreased approximately $1,661,740, or 60% to approximately
$1,124,260 for the nine months ended September 30, 2009, from approximately
$2,786,000 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 2008 offset by increased amortization of
intangibles to cost of goods sold during 2009.

As
a result of the changes described above in revenues and cost of goods sold,
gross profit for the nine months ended September 30, 2009 decreased to
approximately $1,017,070 from approximately $2,206,700 for the nine months
ended September 30, 2008, and gross profit as a percentage increased to 47.5%
for the nine months ended September 30, 2009 compared with 44.2% for the nine
months ended September 30, 2008.

Operating Expenses

Operating
expenses decreased approximately $3,927,250 to approximately $2,667,360 for the
nine months ended September 30, 2009, from approximately $6,594,610 for the
nine months ended September 30, 2008.

15

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This
decrease was primarily attributable to a decrease in finance and investor
relations costs (approximately $800,000), charges for penalties relating to the
lack of filing required registration statements, as required by certain
agreements, and other general and administrative expenses (approximately
$1,300,000), and a decrease in wage related costs due to reduced headcount
(approximately $1,800,000).

Interest
Expense

Interest
expense for the nine months ended September 30, 2009 increased to approximately
$1,007,360, from about $449,890 in the nine months ended September 30, 2008.
The increase of approximately $557,480 was primarily the result of (i)
additional interest due to repricing of warrants relating to debt of
approximately $290,000 and (ii) interest on amounts relating to late payments
of approximately $200,000, (iii) interest relating to the beneficial conversion
feature of convertible debt of $41,500 and (iv) higher original issue discount
amortization, totaling approximately $30,000.

Net Loss

As
a result of the items discussed above there was a net loss of approximately
$2,663,020 for the nine months ended September 30, 2009 compared with a net
loss of approximately $4,785,050 for the nine months ended September 30, 2008.
Net loss applicable to stockholders for the nine months ended September 30,
2009 was approximately $7,607,030 as a result of a deemed dividend relating to
a beneficial conversion feature on convertible preferred stock issued during
the period of approximately $4,944,010. Net loss applicable to stockholders
during the nine months ended September 30, 2008 was approximately $4,785,050 as
there were no deemed dividends during that period.

Results
of Operations for the Three Months Ended September 30, 2009 and 2008

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 $1,220,860, or 69% to about $559,010 during
the three months ended September 30, 2009, from approximately $1,779,870 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.

Cost of
Goods Sold

Total
cost of goods sold decreased approximately $819,360, or 72% to approximately
$313,140 for the three months ended September 30, 2009, from approximately
$1,132,500 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 2008.

As
a result of the changes described above in revenues and cost of goods sold,
gross profit for the three months ended September 30, 2009, decreased to
approximately $245,880 from approximately $647,370 for the three months ended
September 30, 2008, and gross profit as a percentage increased to 44.0% for the
three months ended September 30, 2009 compared with 36.4% for the three months
ended September 30, 2008. The increase in gross profit margin for the three
months ended September 30, 2009 is primarily the result of higher margin jobs
completed in the current period.

Operating
Expenses

Operating
expenses decreased approximately $923,450 to approximately $746,230 for the
three months ended September 30, 2009, from approximately $1,669,680 for the
three months ended September 30, 2008.

This
decrease was primarily attributable to a decreased wage related items due to
lower headcount (approximately $600,000), charges for penalties relating to the
lack of filing required registration statements, as required by certain
agreements (approximately $100,000), and a decrease in other general and
administrative costs (approximately $200,000).

Interest
Expense

Interest
expense for the three months ended September 30, 2009 increased to
approximately $268,630, from about $152,850 in the three months ended September
30, 2008. The increase of $115,780 was primarily the result of (i) additional
interest due to beneficial conversion of convertible debt of approximately
$41,500 and (ii) interest on amounts relating to late payments (approximately
$90,000).

Net Loss

As
a result of the items discussed above there was a net loss of approximately
$774,010 for the three months ended September 30, 2009 compared with a net loss
of approximately $1,122,110 for the three months ended September 30, 2008. Net
loss applicable to

16

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stockholders for the three months ended September 30,
2009 was approximately $1,966,580 as a result of a deemed dividend relating to
a beneficial conversion feature on convertible preferred stock issued during
the period of approximately $500,000 and $1,192,570 of a deemed dividend
relating to conversions of convertible preferred stock during the three months
ended September 30, 2009. Net loss applicable to common during the three months
ended September 30, 2008 was approximately $1,122,110 as there were no deemed
dividends during that period.

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 September 30, 2009, the Company had cash of
approximately $11,220, a working capital deficit of approximately $10,471,360,
stockholders deficit of approximately $8,686,520, and an outstanding balance
of long term debt of approximately $120,430 net of current maturities. In
comparison, at December 31, 2008, the Company had cash and equivalents of
approximately $16,000, a working capital deficit of approximately $9,478,000,
an outstanding balance of long term debt of approximately $234,000, net of
current maturities. The Companys financial condition as of September 30, 2009
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 $355,180 for the nine
months ended September 30, 2009 compared to cash used by operations of
approximately $732,540 for the nine months ended September 30, 2008. Cash used
during the nine months ended September 30, 2009 was primarily the result of the
operating loss (net of non-cash operating expenses of approximately $1,653,600)
and a reduction in customer deposits ($122,110) offset by decreases in
receivables of approximately $38,310, inventory of approximately $197,690 and
prepaid expenses of approximately $144,200 and decreases in accrued expenses
totaling approximately $342,900. For the nine months ended September 30, 2008,
cash used in operations of approximately $732,540 was primarily a result of the
operating loss incurred during the quarter offset by non cash operating
expenses of approximately $2,152,690, decreases in receivables of approximately
$12,410, inventory of approximately $87,150 and increases in prepaid expenses
and deposits of approximately $79,610, increases in accounts payable and
accrued expenses totaling approximately $1,667,800 and increases in customer
deposits and sales tax payable of approximately $211,820.

Cash
Flows from Investing Activities

Net
cash generated from investing activities was approximately $3,700 in the nine
months ended September 30, 2009 as a result of proceeds from asset sales, as compared
to cash used by investing activities of $185,170 during the nine months ended
September 30, 2008 which represented equipment purchases and capitalized
software costs net of proceeds from an asset disposition.

Cash
Flows from Financing Activities

Net
cash generated from financing activities was approximately $346,500 for the
nine months ended September 30, 2009. The cash generated by financing
activities for the current period was a result of the issuance of convertible
preferred stock and convertible notes netting aggregate proceeds of
approximately $466,540 offset by payments of approximately $116,700 on
outstanding loans and capital leases. During the nine months ended September
30, 2008, cash generated from financing activities of approximately $409,690
was primarily the result of proceeds from short term notes of $480,260 offset
by payments of approximately $195,500 on outstanding loans and capital leases

Cash
decreased from $16,186 at December 31, 2008 to $11,222 at September 30, 2009.

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

17

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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 September 30, 2009.

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, 2008 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.

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, 2008, 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

18

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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 September 30, 2009, 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.

19

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PART II  OTHER INFORMATION

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

In
July and August 2009, the Company issued to unaffiliated individual investors,
convertible notes with an aggregate principal value of $41,500, 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 throughout January 2010. 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.

During
July, October and November of 2009, 28 shares of Series A Convertible Preferred
Stock were converted into common stock. These shares were converted at
$0.005 per share and resulted in the issuance of 14,000,000 shares of the
Companys common stock. During October of 2009, one share of Series B
Convertible Preferred Stock was converted into common stock. These shares were
converted at $0.005 per share and resulted in the issuance of 200,000
shares of the Companys common stock. The Company relied upon the exemptions
provided by Section 3(a)(9) of the Securities Act of 1933,as amended, in
connection with making such issuances.

Item 3. Defaults
Upon Senior Securities

On
the first day of each month since December 1, 2008 the Companys monthly
redemptions of principal for the debentures have become due. Each of these
monthly redemption amounts totals $208,333 and each has not been paid by the
Company. Additional redemption payments will also come due on the first day of
each calendar month until May 2011.

Quarterly
interest payments owed by the Company to the holders of the debentures in the
amount of $46,875 also came due on October 1, 2008 January 1, 2009, April 1,
2009 and July 1, 2009, October 1, 2009 and were also not paid by the Company.

In
August 2009, the Company entered into an Amendment and Waiver Agreement with
each of the holders of the November 2007 debentures pursuant to which:

-
The Companys 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. After January 1, 2010 the conversion price shall be 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.

The
Company has made no payments to the holders of the Debentures since execution
of the August 2009 Amendment and Waiver Agreement, and remains in communication
with the holders towards the goal of obtaining a more long term solution to the
Companys non-payment.

The
Company has not made a series of scheduled payments of amounts due to
Intelligent Digital Systems, LLC (IDS) as part of the Companys purchase of
substantially all of IDSs assets in April 2008, nor has the Company made a
series of payments due as part of a related consulting agreement between the Company
and IDSs sole member Jay Russ, a former member of the Companys board of
directors. The Company is currently past due on $24,000 in payments owed to
IDS, and past due to Jay Russ for consulting fees as of June 30, 2009 of
$62,500.

Non-payment
of these amounts may be considered default events under the relevant agreements
between the Company and IDS and the consulting agreement with Mr. Russ. As a
result of default, IDS and Mr. Russ have commenced litigation against the
Company seeking payment of the entire $1,544,000 principal amount of the note
issued to IDS as primary compensation for its assets and all accrued and unpaid
interest thereon, as well as payment of the aggregate $ 287,500 remaining due
under the consulting agreement.

20

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On
June 10, 2008, the Company issued a promissory note (the Note) in the
principal amount of $267,192, with an interest rate of 10% per annum, to a
pension plan formed for the benefit of Jay Russ. Pursuant to its terms, the
Note came became due on December 10, 2008, but was not paid by the Company. Mr.
Russ suit against the Company also includes claims demanding payment of this
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

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: November 23, 2009 |     |                                
|                         |     |                                
|                         | By: | /s/ J.D. Gardner               
|                         |     |                                
|                         |     | J.D. Gardner                   
|                         |     | Chief Financial Officer        
|Dated: November 23, 2009 |     |                                

21

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