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

FORM 10-Q

|  |                                                                                                                                         
|- | ----------------------------------------------------------------------------------------------------------------------------------------
|x | Quarterly Report
 pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For
 the quarterly period ended March 31, 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 |  | (IRS Employer Identification
 Number)
|incorporation or organization)  |  |                                      

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

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

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

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

Indicate by check mark whether the registrant has submitted
electronically and posted on its website, if any, every Interactive Data File
required to be submitted and posted pursuant to rule 405 of Regulation S-T
(§232.405 of this chapter) during he preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files) Yes o No o

Indicate by
check mark whether the Registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definition
of accelerated filer, large accelerated filer, and smaller reporting
company in Rule 12b-2 of the Exchange Act. (Check one):

|                                                                      
|----------------------------------------------------------------------
|Large
 accelerated filer o                                            
|Accelerated
 filer o                                                  
|Non-accelerated
 filer o (Do not check if a smaller reporting company)
|Smaller
 reporting company x                                          

Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).


Yes o No x


As of May 14,
2009, there were 35,669,277 shares of the registrants common stock
outstanding.







VISUAL MANAGEMENT SYSTEMS,INC. AND SUBSIDIARIES INDEX

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

---



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

|                                                                                                                              |  |                             |             |                              |   |             |  
|----------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ----------- | ---------------------------- | - | ----------- | -
|                                                                                                                              |  | March 31, 2009
 (unaudited) |             | December 31, 2008
 (audited) |  
|                                                                                                                              |  |                             |             |                              |   |             |  
|Assets                                                                                                                        |  |                             |             |                              |   |             |  
|Current
 assets                                                                                                               |  |                             |             |                              |   |             |  
|Cash                                                                                                                          |  | $                           | 25,293      |                              | $ | 16,186      |  
|Accounts receivable, net                                                                                                      |  |                             | 182,159     |                              |   | 230,339     |  
|Inventory                                                                                                                     |  |                             | 288,430     |                              |   | 340,650     |  
|Prepaid expenses                                                                                                              |  |                             | 122,583     |                              |   | 177,450     |  
|                                                                                                                              |  |                             |             |                              |   |             |  
|Total current assets                                                                                                          |  |                             | 618,465     |                              |   | 764,625     |  
|                                                                                                                              |  |                             |             |                              |   |             |  
|Property and
 equipment - net                                                                                                 |  |                             | 437,021     |                              |   | 533,912     |  
|Capitalized
 software-net                                                                                                     |  |                             | 171,110     |                              |   | 180,115     |  
|Deposits and
 other assets                                                                                                    |  |                             | 146,227     |                              |   | 146,227     |  
|Investment
 in joint venture                                                                                                  |  |                             | 5,000       |                              |   | 5,000       |  
|Software-net                                                                                                                  |  |                             | 866,563     |                              |   | 912,172     |  
|Deferred
 financing costs-net                                                                                                 |  |                             | 895,536     |                              |   | 1,089,322   |  
|                                                                                                                              |  |                             |             |                              |   |             |  
|                                                                                                                              |  |                             |             |                              |   |             |  
|Total Assets                                                                                                                  |  | $                           | 3,139,922   |                              | $ | 3,631,373   |  
|                                                                                                                              |  |                             |             |                              |   |             |  
|                                                                                                                              |  |                             |             |                              |   |             |  
|Liabilities and Stockholders Deficit                                                                                         |  |                             |             |                              |   |             |  
|                                                                                                                              |  |                             |             |                              |   |             |  
|Current
 liabilities                                                                                                          |  |                             |             |                              |   |             |  
|Accounts payable                                                                                                              |  | $                           | 1,740,381   |                              | $ | 1,708,861   |  
|Accrued expenses and other current
 liabilities                                                                               |  |                             | 2,338,139   |                              |   | 2,312,843   |  
|Customer deposits                                                                                                             |  |                             | 194,682     |                              |   | 195,976     |  
|Sales tax payable                                                                                                             |  |                             | 148,923     |                              |   | 136,745     |  
|Bank line of credit                                                                                                           |  |                             | 49,981      |                              |   | 49,981      |  
|Short term notes payable                                                                                                      |  |                             | 765,580     |                              |   | 756,387     |  
|Current portion of long-term debt                                                                                             |  |                             | 165,335     |                              |   | 100,738     |  
|Current portion of obligations under
 capital leases                                                                          |  |                             | 101,773     |                              |   | 110,212     |  
|Current portion of convertible notes
 payable                                                                                 |  |                             | 4,945,667   |                              |   | 4,870,667   |  
|                                                                                                                              |  |                             |             |                              |   |             |  
|(net of unamortized discount of $348,333
 and $498,333 for periods)ending March 31, 2009 and December 31, 2008, respectively) |  |                             |             |                              |   |             |  
|                                                                                                                              |  |                             |             |                              |   |             |  
|Total current liabilities                                                                                                     |  |                             | 10,450,461  |                              |   | 10,242,410  |  
|                                                                                                                              |  |                             |             |                              |   |             |  
|Long-term
 debt - net of current portion                                                                                      |  |                             | 150,576     |                              |   | 234,248     |  
|Obligations
 under capital leases - net of current portion                                                                    |  |                             | 4,116       |                              |   | 13,500      |  
|Other long
 term liabilities                                                                                                  |  |                             | 54,523      |                              |   | 54,523      |  
|Commitments
 and contingencies                                                                                                |  |                             |             |                              |   |             |  
|                                                                                                                              |  |                             |             |                              |   |             |  
|Stockholders
 deficit                                                                                                        |  |                             |             |                              |   |             |  
|Preferred stock                                                                                                               |  |                             |            |                              |   |            |  
|Common stock                                                                                                                  |  |                             | 11,098      |                              |   | 10,808      |  
|Additional paid-in-capital                                                                                                    |  |                             | 14,279,994  |                              |   | 14,205,834  |  
|Accumulated deficit                                                                                                           |  |                             | (21,660,846 | )                            |   | (20,979,950 | )
|Treasury stock, at cost                                                                                                       |  |                             | (150,000    | )                            |   | (150,000    | )
|                                                                                                                              |  |                             |             |                              |   |             |  
|Total stockholders deficit                                                                                                   |  |                             | (7,519,754  | )                            |   | (6,913,308  | )
|                                                                                                                              |  |                             |             |                              |   |             |  
|                                                                                                                              |  |                             |             |                              |   |             |  
|Total Liabilities and Stockholders Deficit                                                                                   |  | $                           | 3,139,922   |                              | $ | 3,631,373   |  
|                                                                                                                              |  |                             |             |                              |   |             |  

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

---



|                                                                                                                                                                 |  |      |            |      |   |            |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|Visual Management Systems, Inc. and SubsidiariesCondensed Consolidated Statements of Operations
 For the Three Months Ended March 31, 2009 and 2008
 (Unaudited)
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                 |  | 2009 |            | 2008 |  
|                                                                                                                                                                 |  |      |            |      |  
|                                                                                                                                                                 |  |      |            |      |  
|Revenues - net                                                                                                                                                   |  | $    | 851,360    |      | $ | 1,577,309  |  
|                                                                                                                                                                 |  |      |            |      |   |            |  
|Cost of revenues                                                                                                                                                 |  |      | 405,878    |      |   | 843,113    |  
|                                                                                                                                                                 |  |      |            |      |   |            |  
|                                                                                                                                                                 |  |      |            |      |   |            |  
|Gross profit                                                                                                                                                     |  |      | 445,482    |      |   | 734,196    |  
|                                                                                                                                                                 |  |      |            |      |   |            |  
|Operating expenses                                                                                                                                               |  |      | 919,589    |      |   | 2,729,362  |  
|                                                                                                                                                                 |  |      |            |      |   |            |  
|                                                                                                                                                                 |  |      |            |      |   |            |  
|Loss from operations                                                                                                                                             |  |      | (474,107   | )    |   | (1,995,166 | )
|                                                                                                                                                                 |  |      |            |      |   |            |  
|Other (income) expenses                                                                                                                                          |  |      |            |      |   |            |  
|Interest expense                                                                                                                                                 |  |      | 206,789    |      |   | 140,003    |  
|Miscellaneous loss (income)                                                                                                                                      |  |      |           |      |   | 305        |  
|                                                                                                                                                                 |  |      |            |      |   |            |  
|                                                                                                                                                                 |  |      | 206,789    |      |   | 140,308    |  
|                                                                                                                                                                 |  |      |            |      |   |            |  
|                                                                                                                                                                 |  |      |            |      |   |            |  
|Net loss                                                                                                                                                         |  | $    | (680,896   | )    | $ | (2,135,474 | )
|                                                                                                                                                                 |  |      |            |      |   |            |  
|                                                                                                                                                                 |  |      |            |      |   |            |  
|Per share data - basic and fully diluted                                                                                                                         |  | $    | (0.06      | )    | $ | (0.29      | )
|                                                                                                                                                                 |  |      |            |      |   |            |  
|                                                                                                                                                                 |  |      |            |      |   |            |  
|Weighted average number of common shares
 outstanding                                                                                                            |  |      | 11,007,833 |      |   | 7,442,367  |  
|                                                                                                                                                                 |  |      |            |      |   |            |  

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

---



|                                                                                                                                                                 |  |      |          |      |   |            |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -------- | ---- | - | ---------- | -
|Visual Management Systems, Inc. and SubsidiariesCondensed Consolidated Statements of Cash Flows
 For the Three Months Ended March 31, 2009 and 2008
 (Unaudited) | 
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                 |  | 2009 |          | 2008 |  
|                                                                                                                                                                 |  |      |          |      |  
|Cash flows from operating activities                                                                                                                             |  |      |          |      |   |            |  
|Net loss                                                                                                                                                         |  | $    | (680,896 | )    | $ | (2,135,474 | )
|Adjustments to reconcile net loss to net
 cash used by operating activities                                                                                      |  |      |          |      |   |            |  
|Depreciation and amortization                                                                                                                                    |  |      | 345,291  |      |   | 242,797    |  
|Liquidated damages revaluation                                                                                                                                   |  |      | (114,135 | )    |   |           |  
|Non-cash interest expense                                                                                                                                        |  |      | 190,702  |      |   | 75,000     |  
|Bad debt expense                                                                                                                                                 |  |      | 32,472   |      |   |           |  
|Payment of stock for services                                                                                                                                    |  |      | 34,100   |      |   | 690,000    |  
|Stock-based compensation                                                                                                                                         |  |      | 40,350   |      |   | 25,253     |  
|Gain/Loss on disposition of assets (net)                                                                                                                         |  |      |         |      |   | 305        |  
|(Increase) decrease in operating assets                                                                                                                          |  |      |          |      |   |            |  
|Accounts receivable                                                                                                                                              |  |      | 15,707   |      |   | 100,535    |  
|Inventory                                                                                                                                                        |  |      | 52,221   |      |   | 18,118     |  
|Prepaid expenses and other assets                                                                                                                                |  |      | 54,867   |      |   | 18,741     |  
|Deposits and other assets                                                                                                                                        |  |      |         |      |   | 11,500     |  
|Increase (decrease) in operating
 liabilities                                                                                                                    |  |      |          |      |   |            |  
|Accounts payable                                                                                                                                                 |  |      | 31,520   |      |   | (75,447    | )
|Accrued expenses and other current
 liabilities                                                                                                                  |  |      | 25,296   |      |   | 345,651    |  
|Sales tax payable                                                                                                                                                |  |      | (1,294   | )    |   | 39,509     |  
|Customer deposits                                                                                                                                                |  |      | 12,179   |      |   | 98,881     |  
|                                                                                                                                                                 |  |      |          |      |   |            |  
|Net cash generated (used) by operating activities                                                                                                                |  |      | 38,380   |      |   | (544,631   | )
|                                                                                                                                                                 |  |      |          |      |   |            |  
|                                                                                                                                                                 |  |      |          |      |   |            |  
|Cash flows from investing activities                                                                                                                             |  |      |          |      |   |            |  
|Purchases of property and equipment                                                                                                                              |  |      |         |      |   | (11,991    | )
|Proceeds from disposition of assets                                                                                                                              |  |      |         |      |   | 11,143     |  
|                                                                                                                                                                 |  |      |          |      |   |            |  
|Net cash used by investing activities                                                                                                                            |  |      |         |      |   | (848       | )
|                                                                                                                                                                 |  |      |          |      |   |            |  
|                                                                                                                                                                 |  |      |          |      |   |            |  
|Cash flows from financing activities                                                                                                                             |  |      |          |      |   |            |  
|Repayment of capital leases                                                                                                                                      |  |      | (7,330   | )    |   | (8,905     | )
|Principal repayments of long-term debt                                                                                                                           |  |      | (19,075  | )    |   | (41,074    | )
|Repayment of loans payable - stockholders                                                                                                                        |  |      | (2,868   | )    |   |            |  
|                                                                                                                                                                 |  |      |          |      |   |            |  
|Net cash provided by financing activities                                                                                                                        |  |      | (29,273  | )    |   | (49,979    | )
|                                                                                                                                                                 |  |      |          |      |   |            |  
|                                                                                                                                                                 |  |      |          |      |   |            |  
|Change in cash                                                                                                                                                   |  |      | 9,107    |      |   | (595,458   | )
|                                                                                                                                                                 |  |      |          |      |   |            |  
|Cash                                                                                                                                                             |  |      |          |      |   |            |  
|Beginning of period                                                                                                                                              |  |      | 16,186   |      |   | 707,025    |  
|                                                                                                                                                                 |  |      |          |      |   |            |  
|End of period                                                                                                                                                    |  | $    | 25,293   |      | $ | 111,567    |  
|                                                                                                                                                                 |  |      |          |      |   |            |  
|                                                                                                                                                                 |  |      |          |      |   |            |  
|Supplemental Disclosure of Cash Flow
 Information                                                                                                                |  |      |          |      |   |            |  
|                                                                                                                                                                 |  |      |          |      |   |            |  
|Cash paid for interest                                                                                                                                           |  | $    | 16,393   |      | $ | 3,362      |  
|                                                                                                                                                                 |  |      |          |      |   |            |  
|Cash paid for taxes                                                                                                                                              |  | $    | 313      |      | $ | 78         |  
|                                                                                                                                                                 |  |      |          |      |   |            |  

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

---



|                                                                                                                    
|--------------------------------------------------------------------------------------------------------------------
|Visual Management Systems, Inc. and SubsidiariesNotes to Condensed Consolidated Financial Statements
 March 31, 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., formerly known as
Wildon Productions, and 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 March 31, 2009 and the results of its operations for
the three month period ended March 31, 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 delivers protective technology solutions and remote management loss
prevention surveillance systems and provides on-site consultations regarding
its products. The Company also sells, installs, upgrades and services Digital
Video Recording Systems. 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 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 then carrying value of the assets or if a
change in amortization period is required, as prescribed by SFAS 142.

Capitalized Software Development Costs

Capitalization
of computer software development costs begins upon the establishment of
technological feasibility, as defined in SFAS 86. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized computer software development costs require considerable judgment
by management with respect to certain external factors, including, but not
limited to, technological feasibility, anticipated future gross revenue,
estimated economic life and changes in software and hardware technology. As of
March 31, 2009, the Company has capitalized approximately $171,110 of software
development costs relating to new products. There was no additional software development
cost capitalized during the 3 months ended March 31, 2009.

Amortization
is provided on a product-by-product basis. The annual amortization is the
greater of the amount computed using (a) the ratio that current gross revenue
for a product bears to the total of current and anticipated future gross revenue
for that product, or (b) the straight-line method over the remaining estimated
economic life of the product. Amortization will start when (a) the product is
available for general release to customers and (b) all research and development
activities relating to the other components of the product are completed. At
March 31, 2009, the Hybrid DVR software products under development were
generally available to customers and as a result, there were approximately
$9,100 of amortization charges for the three months ended March 31, 2009 for
those products.

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.

---



Inventory

Inventory,
which consists of digital video recorders and related components, security
cameras and related installation materials, is stated at the lower of cost or
market value. Cost is computed on the first-in, first-out method. The Company
reviews inventory for slow moving and obsolete inventory during each reporting
period to determine if a reserve is required. Based on the review conducted as
of March 31, 2009, management does not believe any reserve is required.

The
Companys inventory consisted of a total of approximately $288,430,
(approximately $36,730 of raw materials and $251,700 of finished goods) at
March 31, 2009 as compared to inventory of $340,650 (approximately $50,000 of
raw materials and $290,650 of finished goods) at December 31, 2008.

|   |              
|-- | -------------
|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 $474,000 for the three months ended March 31, 2009 as compared to
$1,995,000 for the same period in the prior year. The Companys cash generated
from operations was approximately $38,000 for the three months ended March 31,
2009 as compared to cash used for operations of approximately $545,000 for the
same period in the prior year.

These
factors raise substantial doubt about the Companys ability to continue as a
going concern. The financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or the
amount of liabilities that might be necessary should the Company be unable to
continue in existence. The Companys ability to continue in business depends
upon the continued cooperation of its creditors, its ability to generate cash
flow to meet its continuing obligations on a timely basis, its ability to
further reduce costs and its ability to obtain additional financing. Current
liabilities at March 31, 2009 were $10,450,461 and current assets were
$618,465. The difference of $9,831,996 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 force. 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 and were issued wth 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. On August 28, 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 result in an adjustment to the conversion
price of the debentures to $.40 per share;

-
waived certain provisions of the agreement pursuant to which the debentures
were issued which restrict 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 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 us 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 have 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 and April 1,
2009 and were also not paid by the Company.

Non-payment
of the amounts due under the debentures, and the failure to file an appropriate
registration may be considered default events under the relevant agreements
between the Company and the holders of the debentures, but no formal notice of
default or request for remedies in the case of default have been issued to the
Company by the holders. As a result of default, the holders have the right to
demand payment of $4,875,000 (representing 130% of the principal amount of the
debentures currently outstanding), as well as all accrued and unpaid interest.
At December 31, 2008, the Company has accrued $1,125,000 in connection with
this default. The Company continues to communicate with the holders and is
seeking a resolution to the potential default situation

Financing of the IDS Asset Purchase

In
connection with the April 3, 2008 purchase of substantially all of 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. If not converted, or
paid within 30 days of maturity, then from and after the maturity date, the
convertible note will bear annual interest at 12%. The convertible note is
convertible at the discretion of IDS into shares of 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, at a conversion price of $1.15 per
share. The Company has agreed to register the shares issuable upon the
conversion of the note for public resale.

As
of March 31, 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 under the note as well as $206,250 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 SFAS 142. The Company
performed a review of the fair value of the intangible assets at year end 2008
and identified an impairment of $636,242 was required to reflect fair value at
December 31, 2008.

The fair value
hierarchy defines the three levels as follows:

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

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

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

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

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

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

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

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

|                               |  |                        |           |                            |   |                        |  |                            |           |  |   |         | 
|------------------------------ |  | ---------------------- | --------- | -------------------------- | - | ---------------------- |  | -------------------------- | --------- |  | - | ------- | 
|Intangible
 Assets             |  | As of March 31, 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 |                            |   | 667,574                |  |                            | 1,534,137 |  |   | 621,965 | 
|                               |  |                        |           |                            |   |                        |  |                            |           |  |   |         | 
|                               |  |                        |           |                            |   |                        |  |                            |           |  |   |         | 
|Total                          |  | $                      | 1,562,692 |                            | $ | 696,129                |  | $                          | 1,562,692 |  | $ | 650,520 | 
|                               |  |                        |           |                            |   |                        |  |                            |           |  |   |         | 

---



|  |                                                                                                                                                                                                                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Includes
 impairment of $636,242 relating to fair value revaluation of intangible
 assets during 2008 and amortization of $45,609 associated with Hybrid DVR
 software charged to cost of goods sold during the three months ended March
 31, 2009, and zero amortization during the same period in 2008.

|                                                                 |  |   |         | 
|---------------------------------------------------------------- |  | - | ------- | 
|Aggregate amortization expense for three
 months ended 3/31/2009 |  | $ | 45,609  | 
|                                                                 |  |   |         | 
|Estimated amortization expense for years
 ending:                |  |   |         | 
|2009                                                             |  | $ | 182,435 | 
|2010                                                             |  |   | 182,435 | 
|2011                                                             |  |   | 182,435 | 
|2012                                                             |  |   | 182,435 | 
|2013                                                             |  |   | 182,432 | 

|   |                                        
|-- | ---------------------------------------
|5. | Equity Based Compensation, Common Stock

Issuance of Equity Compensation to J.H.
Darbie and Co., Inc.

In
January 2009, the Company issued 150,000 shares of its common stock to J.H.
Darbie and Co., Inc. with a fair market value of $28,500 based on the closing
price of the Companys stock on the date of share issuance, as compensation for
consulting services relating to an Investment Banking Agreement between the
Company and J.H. Darbie, Co. Inc. That agreement terminated on February 28,
2009.

Issuance of Equity Compensation to John
Whitman

In
February 2009, the Company issued 140,000 shares of the common stock to John
Whitman, pursuant to the Companys Equity Incentive Plan, with a fair market
value of $5,600 based on the closing price of the Companys stock on the date
of share issuance, as compensation for management consulting services rendered
to the Company pursuant to an Agreement between the Company and John Whitman.

|   |                  
|-- | -----------------
|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 which have gone beyond permitted amounts and terms. These
suits seek judgment ranging in value from $4,000 to $81,000. No individual
lawsuit represents a substantial risk to us, but taken in whole they could have
a material adverse effect on the Companys financial conditions and results of
operations.

|   |                  
|-- | -----------------
|7. | Subsequent Events

Issuance of Series B Convertible Preferred
Stock

In
April and May 2009, the Company issued a total of 354 shares of its Series B
Convertible Preferred Stock to 37 accredited investors for an aggregate
purchase price of $354,000. Each share has a face value of $1,000 a liquidation
preference of $1,000 per share and is convertible into shares of common stock
at a conversion price of $0.005 per share. Also
in April and May 2009, the holders of 102 shares of Series B Convertible
Preferred Stock, converted their shares into 20,400,000 shares of the Companys
common stock.

Conversion of Series A Convertible Preferred Stock into Common Stock

In
May 2009 holders of shares of the Companys Series A Convertible Preferred
Stock converted 8 shares of the Series A Preferred Stock into 4,000,000 shares of
the Companys common stock.

Exercise of Warrants

In May, 2009
the holder of a warrant to purchase 180,000 shares of the companys common
stock, received as part of the Companys March 2007 Convertible Note offering,
exercised that warrant on a cashless basis, and was issued 171,000 shares of
the Companys common stock.

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

Results of Operations for the Three Months
Ended March 31, 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 $727,000, or 54% to about $851,000 during the
three months ended March 31, 2009, from approximately $1,577,000 during the
same period in the prior year. The decrease in revenues reflects the impact of
the economy on the Companys sales efforts and a reduction in the Companys
sales force.

Cost of Goods Sold

Total
cost of goods sold decreased approximately $437,000, or 48% to approximately
$406,000 for the three months ended March 31, 2009, from approximately $843,000
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.

As
a result of the changes described above in revenues and cost of goods sold,
gross profit for the three months ended March 31, 2009 decreased to
approximately $445,000 from approximately $734,000 for the three months ended
March 31, 2008, and gross profit as a percentage increased to 52% for the three
months ended March 31, 2009 compared with 47% for the three months ended March
31, 2008. The increase in gross profit margin for the three months ended March
31, 2009 is a result of decreased material and labor costs as compared to the
same period in 2008.

Operating Expenses

Operating
expenses decreased approximately $1,810,000 to approximately $920,000 for the
three months ended March 31, 2009, from approximately $2,729,000 for the three
months ended March 31, 2008.

This
decrease was primarily attributable to a decrease in finance and investor
relations costs (approximately $860,000), charges for penalties relating to the
lack of filing required registration statements, as required by certain
agreements, and other general and administrative expenses (approximately
$490,000), and a decrease in wages due to reduced headcount (approximately
$460,000).

Interest Expense

Interest
expense for the three months ended March 31, 2009 increased to approximately
$207,000, from about $140,000 in the three months ended March 31, 2008. The
increase was primarily the result of (i) interest on amounts relating to late
payments (approximately $45,000) and (ii) higher original issue discount
amortization, totaling approximately $17,000.

Net Loss

---



As
a result of the items discussed above there was a net loss of approximately
$681,000 for the three months ended March 31, 2009 compared with a net loss of
approximately $2,135,000 for the three months ended March 31, 2008.

Liquidity and Capital Resources

The
Companys financial statements are prepared on a going concern basis, which
assumes that the Company will realize assets and discharge liabilities in the
normal course of business. At March 31, 2009, the Company had cash of approximately
$26,000, a working capital deficit of approximately $9,832,000, stockholders
deficit of approximately $7,520,000, and an outstanding balance of long term
debt of approximately $151,000 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 March 31, 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 generated by operating activities was approximately $38,000 for the three
months ended March 31, 2009 and cash used by operations was approximately
$545,000 for the three months ended March 31, 2008. Cash generated during the
three months ended March 31, 2009 was primarily the result of decreases in
receivables of approximately $15,000, inventory of approximately $52,000 and
prepaid expenses of approximately $55,000 and increases in accounts payable and
accrued expenses totaling approximately $57,000, which were offset by the
operating loss described above. For the three months ended March 31, 2008, cash
used in operations was primarily a result of the operating loss incurred during
the quarter offset by non cash operating expenses of approximately $1,033,000,
decreases in receivables of approximately $101,000, inventory of approximately
$18,000 and prepaid expenses of approximately $19,000 and increases in accounts
payable and accrued expenses totaling approximately $270,000 and increases in
customer deposits and sales tax payable of approximately $138,000.

Cash Flows from Investing Activities

Net
cash used in investing activities was zero in the three months ended March 31,
2009, as compared to approximately $850 during the three months ended March 31,
2009 which represented equipment purchases net of proceeds from an asset
disposition for the corresponding period in 2008.

Cash Flows from Financing Activities

Net
cash used by financing activities was approximately $29,000 for the three
months ended March 31, 2009 and approximately $50,000 for the three month
period ended March 31, 2008. The cash used by financing activities was a result
of payments on outstanding loans and capital leases during both periods.

Cash
increased from $16,186 at December 31, 2008 to $25,293 at March 31, 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 communicated to management, including the Companys Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.

The
evaluation made by the Companys Chief Executive Officer and Chief Financial
Officer of the Companys disclosure controls and procedures included a review
of the controls objectives and design, the Companys implementation, and the
effect of the controls on the information generated for use in this quarterly
report and previous reports to the Commission. In the course of the evaluation,
the Company

---



sought to
identify data errors, control problems or acts of fraud and to confirm that
appropriate corrective action, including process improvements, were being
undertaken. The overall goals of these various evaluation activities are to
monitor the Companys disclosure controls and procedures and to make
modifications as necessary. the Companys intent in this regard is that the
disclosure controls and procedures will be maintained as dynamic systems that
change (including with improvements and corrections) as conditions warrant.
Based on their evaluation, the Companys Chief Executive Officer and Chief
Financial Officer concluded that the Companys disclosure controls and
procedures were effective as of March 31, 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 has 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 absolute, assurance that the objectives of a
control system are met. Further, any control system reflects limitations on
resources, and the benefits of a control system must be considered relative to
its costs. These limitations also include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. In addition, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of a control. A design of a control system is also based upon certain
assumptions about potential future conditions. Over time, controls may become
inadequate because of changes in

---



conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and may not be detected.

Changes in Internal Control over Financial
Reporting

During
the quarter ended March 31, 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.

---



PART II 
OTHER INFORMATION

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

Issuance of Equity Compensation to John Whitman

In
February 2009, the Company issued 140,000 shares of the common stock to John
Whitman, pursuant to the Companys Equity Incentive Plan, with a fair market
value of $5,600 based on the closing price of the Companys stock on the date
of share issuance, as compensation for management consulting services rendered to
the Company pursuant to an Agreement between the Company and John Whitman.  The
Company relied upon the exemption provided by Section 4(2) of the Securities Act
of 1933 as amended, in connection with the issuance.

Conversion of Series A Convertible Preferred Stock into Common Stock

In May
2009 holders of shares of the Companys Series A Convertible Preferred Stock
converted 8 shares of the Series A Preferred Stock into 4,000,000 shares of the Companys common stock.

Issuance of Series B Convertible Preferred Stock

In April
and May 2009, the Company issued a total of 354 shares of its Series B Convertible
Preferred Stock to 37 accredited investors for an aggregate purchase price of $354,000.
Each share has a face value of $1,000 a liquidation preference of $1,000 per
share and is convertible into shares of common stock at a conversion price of $0.005
per share. Also in April and May 2009, the holders of 102 shares of Series B
Convertible Preferred Stock, converted their shares into 20,400,000 shares of the
Companys common stock.  The Company relied upon the exemption provided by
Section 3(a)(9) of the Securities Act of 1933 as amended, in connection with the 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 became due. Each of these
monthly redemption amounts totals $208,333 and 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 and April 1,
2009 and were also not paid by the Company.

The
Company has not filed a registration statement in compliance with its August
2008 Amendment and Waiver Agreement, and have 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.

Non-payment
of these amounts, and the failure to file an appropriate registration may be
considered default events under the relevant agreements between the Company and
the holders of the debentures, but no formal notice of default or request for
remedies in the case of default have been issued to the Company by the holders.
As a result of default, the holders have the right to demand payment of
$4,875,000 (representing 130% of the principal amount of the debentures
currently outstanding), as well as all accrued and unpaid interest. At March
31, 2009, the Company has accrued $1,125,000, in connection with this default.
The Company continues to communicate with the holders and is seeking a
resolution to the potential default situation

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 March 31, 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.

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 4. Submission of Matters to a Vote of Security Holders

On March 2009, the Board of the Directors of the
Company (the Board) and holders of 7,025,106 shares of the Companys
outstanding common stock approved a Certificate of Amendment to the Companys
Amended and Restated Certificate of Incorporation which increased the number of
authorized shares of the Companys common stock from fifty million (50,000,000)
to one billion (1,000,000,000).

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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: May
 15, 2009 |     |                                 
|                     |     |                                 
|                     | By: | /s/ J.D. Gardner                
|                     |     |                                 
|                     |     | J.D. Gardner                    
|                     |     | Chief Financial
 Officer        
|Dated: May
 15, 2009 |     |                                 

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