---

---

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 June 30, 2009.                                           
|                                                       |                                                                                          
|o                                                      | Transition
 Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|                                                       |                                                                                          
|                                                       | For the
 transition period _____________ to ______________.                              
|                                                       |                                                                                          
|Commission File Number 333-133936                     
|                                                      
|VISUAL
 MANAGEMENT SYSTEMS, INC.                      
|(Exact name of registrant as specified in its charter)

|                                                                                    |  |                                     
|----------------------------------------------------------------------------------- |  | ------------------------------------
|Nevada                                                                              |  | 68-0634458                          
|(State or other jurisdiction of
 incorporation or organization)                     |  | (IRS Employer Identification Number)
|                                                                                    |  |                                     
|1000 Industrial Way North, Suite C                                                 
|Toms River, New Jersey 08755                                                       
|(Address of principal executive offices)                                           
|                                                                                   
|(732) 281-1355                                                                     
|(Registrants telephone number, including area code)                               
|                                                                                   
|(Former name, former address and former fiscal year, if changed since
 last report)

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

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

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

|                                                                                                                  
|------------------------------------------------------------------------------------------------------------------
|Large
 accelerated filer o                                                                                        
|Accelerated
 filer o                                                                                              
|Non-accelerated
 filer o (Do not check if a smaller reporting company)                                            
|Smaller
 reporting company x                                                                                      
|                                                                                                                  
|Indicate by
 check mark whether the registrant is a shell company (as defined in Rule
 12b-2 of the Exchange Act).
|Yes o No x                                                                                                        
|                                                                                                                  
|As of August
 18, 2009, there were 76,156,777 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 as of June 30, 2009 (Unaudited)
 and December 31, 2008 (Audited)                 | 1        | 
|                              |    |                                                                                                                        |          | 
|                              |    | Condensed Consolidated Statements of Operations (Unaudited) for the
 Six and Three Months Ended June 30, 2009 and 2008 | 2        | 
|                              |    |                                                                                                                        |          | 
|                              |    | Condensed Consolidated Statements of Cash Flows (Unaudited) for the
 Six Months Ended June 30, 2009 and 2008           | 3        | 
|                              |    |                                                                                                                        |          | 
|                              |    | Notes to Condensed Consolidated Financial Statements                                                                   | 5        | 
|                              |    |                                                                                                                        |          | 
|Item 2.                       |    | Managements Discussion and Analysis of Financial Condition and
 Results of Operations                                 | 11       | 
|                              |    |                                                                                                                        |          | 
|Item 3.                       |    | Quantitative and Qualitative Disclosures About Market Risk                                                             | 14       | 
|                              |    |                                                                                                                        |          | 
|Item 4.                       |    | Controls and Procedures                                                                                                | 14       | 
|                              |    |                                                                                                                        |          | 
|PART II. Other Information    |    |                                                                                                                       
|                              |    |                                                                                                                        |          | 
|Item 2.                       |    | Unregistered Sales of Equity Securities and Use of Proceeds                                                            | 16       | 
|                              |    |                                                                                                                        |          | 
|Item 3.                       |    | Defaults upon Senior Securities                                                                                        | 16       | 
|                              |    |                                                                                                                        |          | 
|Item 5.                       |    | Other Information                                                                                                      | 16       | 
|                              |    |                                                                                                                        |          | 
|Item 6.                       |    | Exhibits                                                                                                               | 16       | 
|                              |    |                                                                                                                        |          | 
|SIGNATURES                    | 17 |                                                                                                                       

---



PART I - FINANCIAL INFORMATION


Item 1.  FINANCIAL STATEMENTS


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

|                                                                                               |  |                            |             |                              |   |             |  
|---------------------------------------------------------------------------------------------- |  | -------------------------- | ----------- | ---------------------------- | - | ----------- | -
|                                                                                               |  | June 30, 2009
 (unaudited) |             | December 31, 2008
 (audited) |  
|                                                                                               |  |                            |             |                              |  
|Assets                                                                                         |  |                            |             |                              |   |             |  
|Current
 assets                                                                                |  |                            |             |                              |   |             |  
|Cash                                                                                           |  | $                          | 14,205      |                              | $ | 16,186      |  
|Accounts receivable net                                                                        |  |                            | 141,396     |                              |   | 230,339     |  
|Inventory                                                                                      |  |                            | 196,403     |                              |   | 340,650     |  
|Prepaid expenses                                                                               |  |                            | 62,433      |                              |   | 177,450     |  
|                                                                                               |  |                            |             |                              |   |             |  
|Total current assets                                                                           |  |                            | 414,437     |                              |   | 764,625     |  
|                                                                                               |  |                            |             |                              |   |             |  
|Property
 and equipment - net                                                                  |  |                            | 383,220     |                              |   | 533,912     |  
|Capitalized
 software-net                                                                      |  |                            | 162,104     |                              |   | 180,115     |  
|Deposits
 and other assets                                                                     |  |                            | 146,227     |                              |   | 146,227     |  
|Investment
 in joint venture                                                                   |  |                            | 5,000       |                              |   | 5,000       |  
|Software-net                                                                                   |  |                            | 820,955     |                              |   | 912,172     |  
|Deferred
 financing costs-net                                                                  |  |                            | 699,726     |                              |   | 1,089,322   |  
|                                                                                               |  |                            |             |                              |   |             |  
|                                                                                               |  |                            |             |                              |   |             |  
|Total Assets                                                                                   |  | $                          | 2,631,669   |                              | $ | 3,631,373   |  
|                                                                                               |  |                            |             |                              |   |             |  
|                                                                                               |  |                            |             |                              |   |             |  
|Liabilities and Stockholders Deficit                                                          |  |                            |             |                              |   |             |  
|                                                                                               |  |                            |             |                              |   |             |  
|Current
 liabilities                                                                           |  |                            |             |                              |   |             |  
|Accounts payable                                                                               |  | $                          | 1,690,110   |                              | $ | 1,708,861   |  
|Accrued expenses and other current
 liabilities                                                |  |                            | 2,429,701   |                              |   | 2,312,843   |  
|Customer deposits                                                                              |  |                            | 79,067      |                              |   | 195,976     |  
|Sales tax payable                                                                              |  |                            | 144,875     |                              |   | 136,745     |  
|Bank line of credit                                                                            |  |                            | 49,148      |                              |   | 49,981      |  
|Short term notes payable                                                                       |  |                            | 726,139     |                              |   | 756,387     |  
|Current portion of long-term debt                                                              |  |                            | 161,431     |                              |   | 100,738     |  
|Current portion of obligations under
 capital leases                                           |  |                            | 105,889     |                              |   | 110,212     |  
|Convertible notes
 payable (net of unamortized discount of $273,333 and 423,333, respectively) |  |                            | 5,020,667   |                              |   | 4,870,667   |  
|                                                                                               |  |                            |             |                              |   |             |  
|                                                                                               |  |                            |             |                              |   |             |  
|Total current liabilities                                                                      |  |                            | 10,407,027  |                              |   | 10,242,410  |  
|                                                                                               |  |                            |             |                              |   |             |  
|Long-term
 debt - net of current portion                                                       |  |                            | 133,398     |                              |   | 234,248     |  
|Obligations
 under capital leases - net of current portion                                     |  |                            |            |                              |   | 13,500      |  
|Other
 long term liabilities                                                                   |  |                            | 27,257      |                              |   | 54,523      |  
|Commitments
 and contingencies                                                                 |  |                            |             |                              |   |             |  
|                                                                                               |  |                            |             |                              |   |             |  
|Stockholders
 deficit                                                                         |  |                            |             |                              |   |             |  
|Preferred stock                                                                                |  |                            | 1           |                              |   |            |  
|Common stock                                                                                   |  |                            | 68,757      |                              |   | 10,808      |  
|Additional paid-in-capital                                                                     |  |                            | 18,765,632  |                              |   | 14,205,834  |  
|Accumulated deficit                                                                            |  |                            | (26,620,403 | )                            |   | (20,979,950 | )
|Treasury stock, at cost                                                                        |  |                            | (150,000    | )                            |   | (150,000    | )
|                                                                                               |  |                            |             |                              |   |             |  
|Total stockholders deficit                                                                    |  |                            | (7,936,013  | )                            |   | (6,913,308  | )
|                                                                                               |  |                            |             |                              |   |             |  
|                                                                                               |  |                            |             |                              |   |             |  
|Total Liabilities and Stockholders Deficit                                                    |  | $                          | 2,631,669   |                              | $ | 3,631,373   |  
|                                                                                               |  |                            |             |                              |   |             |  

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

1

---



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

|                                                      |  |                          |            |                            |   |            |   |      |            |   |   |            |  
|----------------------------------------------------- |  | ------------------------ | ---------- | -------------------------- | - | ---------- | - | ---- | ---------- | - | - | ---------- | -
|                                                      |  | Six Months Ended June 30 |            | Three Months Ended June 30 |  
|                                                      |  | 2009                     |            | 2008                       |   | 2009       |   | 2008 |           
|                                                      |  |                          |            |                            |   |            |   |      |           
|                                                     
|Revenues
 - net                                       |  | $                        | 1,582,312  |                            | $ | 3,212,825  |   | $    | 730,952    |   | $ | 1,635,516  |  
|                                                      |  |                          |            |                            |   |            |   |      |            |   |   |            |  
|Cost
 of revenues                                     |  |                          | 811,120    |                            |   | 1,653,496  |   |      | 405,242    |   |   | 810,383    |  
|                                                      |  |                          |            |                            |   |            |   |      |            |   |   |            |  
|                                                      |  |                          |            |                            |   |            |   |      |            |   |   |            |  
|Gross
 profit                                         |  |                          | 771,192    |                            |   | 1,559,329  |   |      | 325,710    |   |   | 825,133    |  
|                                                      |  |                          |            |                            |   |            |   |      |            |   |   |            |  
|Operating
 expenses                                   |  |                          | 1,921,136  |                            |   | 4,924,933  |   |      | 1,001,547  |   |   | 2,195,571  |  
|                                                      |  |                          |            |                            |   |            |   |      |            |   |   |            |  
|                                                      |  |                          |            |                            |   |            |   |      |            |   |   |            |  
|Loss
 from operations                                 |  |                          | (1,149,944 | )                          |   | (3,365,604 | ) |      | (675,837   | ) |   | (1,370,438 | )
|                                                      |  |                          |            |                            |   |            |   |      |            |   |   |            |  
|Other
 (income) expenses                              |  |                          |            |                            |   |            |   |      |            |   |   |            |  
|Interest expense                                      |  |                          | 738,736    |                            |   | 297,034    |   |      | 531,947    |   |   | 157,031    |  
|Miscellaneous loss (income)                           |  |                          | 330        |                            |   | 305        |   |      | 330        |   |   |           |  
|                                                      |  |                          |            |                            |   |            |   |      |            |   |   |            |  
|                                                      |  |                          | 739,066    |                            |   | 297,339    |   |      | 532,277    |   |   | 157,031    |  
|                                                      |  |                          |            |                            |   |            |   |      |            |   |   |            |  
|                                                      |  |                          |            |                            |   |            |   |      |            |   |   |            |  
|Net
 loss                                             |  | $                        | (1,889,010 | )                          | $ | (3,662,943 | ) |      | (1,208,114 | ) | $ | (1,527,469 | )
|                                                      |  |                          |            |                            |   |            |   |      |            |   |   |            |  
|                                                      |  |                          |            |                            |   |            |   |      |            |   |   |            |  
|Deemed dividend on convertible preferred              |  |                          | 3,751,443  |                            |   |           |   |      | 3,751,443  |   |   |           |  
|                                                      |  |                          |            |                            |   |            |   |      |            |   |   |            |  
|Net Loss applicable to common stockholders            |  | $                        | (5,640,453 | )                          | $ | (3,662,943 | ) |      | (4,959,557 | ) | $ | (1,527,469 | )
|                                                      |  |                          |            |                            |   |            |   |      |            |   |   |            |  
|                                                      |  |                          |            |                            |   |            |   |      |            |   |   |            |  
|Per share data - basic and fully diluted              |  | $                        | (0.24      | )                          | $ | (0.47      | ) | $    | (0.14      | ) | $ | (0.19      | )
|                                                      |  |                          |            |                            |   |            |   |      |            |   |   |            |  
|                                                      |  |                          |            |                            |   |            |   |      |            |   |   |            |  
|Weighted average number of common shares
 outstanding |  |                          | 23,753,318 |                            |   | 7,732,971  |   |      | 36,358,744 |   |   | 8,023,575  |  
|                                                      |  |                          |            |                            |   |            |   |      |            |   |   |            |  

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

2

---



|                                                
|------------------------------------------------
|Visual Management Systems, Inc. and Subsidiaries
|Condensed Consolidated Statements of Cash Flows 
|For the Six Months Ended June 30, 2009 and 2008 
|(Unaudited)                                     
|                                                

|                                                                                 |  |      |            |      |   |            |  
|-------------------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|                                                                                 |  | 2009 |            | 2008 |  
|                                                                                 |  |      |            |      |  
|                                                                                 |  |      |            |      |   |            |  
|Cash flows from operating activities                                             |  |      |            |      |   |            |  
|Net loss                                                                         |  | $    | (1,889,010 | )    | $ | (3,662,943 | )
|Adjustments to reconcile net loss to net
 cash used by operating activities      |  |      |            |      |   |            |  
|Depreciation and amortization                                                    |  |      | 641,309    |      |   | 484,597    |  
|Non-cash interest expense                                                        |  |      | 483,430    |      |   | 173,451    |  
|Bad debt expense                                                                 |  |      | 32,472     |      |   |           |  
|Payment of stock for services                                                    |  |      | 34,100     |      |   | 721,425    |  
|Stock-based compensation                                                         |  |      | 64,182     |      |   | 207,331    |  
|Loss on disposition of assets (net)                                              |  |      | 4,522      |      |   | 305        |  
|(Increase) decrease in operating assets                                          |  |      |            |      |   |            |  
|Accounts receivable                                                              |  |      | 56,471     |      |   | 91,582     |  
|Inventory                                                                        |  |      | 144,247    |      |   | 69,538     |  
|Prepaid expenses and other assets                                                |  |      | 115,017    |      |   | 8,046      |  
|Deposits and other assets                                                        |  |      |           |      |   | 13,883     |  
|Increase (decrease) in operating
 liabilities                                    |  |      |            |      |   |            |  
|Accounts payable                                                                 |  |      | (14,071    | )    |   | 332,181    |  
|Accrued expenses and other current
 liabilities                                  |  |      | 103,000    |      |   | 713,003    |  
|Sales tax payable                                                                |  |      | 8,130      |      |   | 48,434     |  
|Customer deposits                                                                |  |      | (116,910   | )    |   | 96,970     |  
|                                                                                 |  |      |            |      |   |            |  
|Net cash used by operating activities                                            |  |      | (333,111   | )    |   | (702,197   | )
|                                                                                 |  |      |            |      |   |            |  
|                                                                                 |  |      |            |      |   |            |  
|Cash flows from investing activities                                             |  |      |            |      |   |            |  
|Purchases of property and equipment                                              |  |      |           |      |   | (54,043    | )
|Capitalized software                                                             |  |      |           |      |   | (64,000    | )
|Proceeds from disposition of assets                                              |  |      | 3,715      |      |   | 11,143     |  
|Investment in joint venture                                                      |  |      |           |      |   | (5,000     | )
|                                                                                 |  |      |            |      |   |            |  
|Net cash provided from investing activities                                      |  |      | 3,715      |      |   | (111,900   | )
|                                                                                 |  |      |            |      |   |            |  
|                                                                                 |  |      |            |      |   |            |  
|                                                                                 |  |      |            |      |   |            |  
|Cash flows from financing activities                                             |  |      |            |      |   |            |  
|Repayment of capital leases                                                      |  |      | (7,330     | )    |   | (24,885    | )
|Repayment of short term notes                                                    |  |      | (29,500    | )    |   | (68,000    | )
|Proceeds from short term notes payable (net
 of $15,200 of issuance costs)       |  |      |           |      |   | 288,800    |  
|Proceeds from the issuance of preferred
 stock, net of issuance costs of $33,300 |  |      | 429,188    |      |   |           |  
|Repayment on bank line of credit                                                 |  |      | (833       | )    |   |            |  
|Principal repayments of long-term debt                                           |  |      | (40,158    | )    |   | (61,973    | )
|Repayment of loans payable - stockholders                                        |  |      | (23,952    | )    |   |           |  
|                                                                                 |  |      |            |      |   |            |  
|Net cash provided from financing activities                                      |  |      | 327,415    |      |   | 133,942    |  
|                                                                                 |  |      |            |      |   |            |  
|                                                                                 |  |      |            |      |   |            |  
|Change in
 cash                                                                  |  |      | (1,981     | )    |   | (680,155   | )
|                                                                                 |  |      |            |      |   |            |  
|Cash                                                                             |  |      |            |      |   |            |  
|Beginning of period                                                              |  |      | 16,186     |      |   | 707,025    |  
|                                                                                 |  |      |            |      |   |            |  
|End of period                                                                    |  | $    | 14,205     |      | $ | 26,870     |  
|                                                                                 |  |      |            |      |   |            |  

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

3

---



|                                                                                                             |  |      |           |      |  |           | 
|------------------------------------------------------------------------------------------------------------ |  | ---- | --------- | ---- |  | --------- | 
|                                                                                                             |  | 2009 |           | 2008 | 
|                                                                                                             |  |      |           |      | 
|Supplemental Disclosure of Cash Flow Information                                                             |  |      |           |      |  |           | 
|                                                                                                             |  |      |           |      |  |           | 
|Issuance of a short term note to refinance
 existing long term note                                          |  |      |          |      |  | 267,192   | 
|                                                                                                             |  |      |           |      |  |           | 
|Issuance of convertible note for IDS
 Acquisition for acquisition of software assets and net working capital |  |      |          |      |  | 1,544,000 | 
|                                                                                                             |  |      |           |      |  |           | 
|Issuance of note payable for IDS
Acquisition                                                                 |  |      |          |      |  | 42,000    | 
|                                                                                                             |  |      |           |      |  |           | 
|Increase in inventory due to IDS asset
 acquisition                                                          |  |      |          |      |  | 20,123    | 
|                                                                                                             |  |      |           |      |  |           | 
|Increase in assets under capitalized
leases                                                                  |  |      |          |      |  | 95,391    | 
|                                                                                                             |  |      |           |      |  |           | 
|Increase in accrued interest due to reclass
 from capitalized leases                                         |  |      | 10,493    |      |  |          | 
|                                                                                                             |  |      |           |      |  |           | 
|Cash paid for interest                                                                                       |  |      | 30,269    |      |  | 89,921    | 
|                                                                                                             |  |      |           |      |  |           | 
|Increase in inventory for reclassification
 from fixed assets                                                |  |      |           |      |  | 38,990    | 
|                                                                                                             |  |      |           |      |  |           | 
|Change in accrued expenses due to reclass
 from long term liabilities                                        |  |      | (27,266   | )    |  |          | 
|                                                                                                             |  |      |           |      |  |           | 
|Issuance of shares for liquidated damages
 penalty                                                           |  |      | 1,900     |      |  |          | 
|                                                                                                             |  |      |           |      |  |           | 
|Issuance of Preferred B shares for vendor
 payments                                                          |  |      | 4,680     |      |  |          | 
|                                                                                                             |  |      |           |      |  |           | 
|Issuance of Preferred B shares to reduce
 accrued wages                                                      |  |      | 22,000    |      |  |          | 
|                                                                                                             |  |      |           |      |  |           | 
|Issuance of Preferred B shares as a finders
 fee                                                             |  |      | 4,000     |      |  |          | 
|                                                                                                             |  |      |           |      |  |           | 
|Issuance of Preferred B shares to reduce
 shareholder loan                                                   |  |      | 2,093     |      |  |          | 
|                                                                                                             |  |      |           |      |  |           | 
|Issuance of Preferred B shares as
 compensation                                                              |  |      | 5,000     |      |  |          | 
|                                                                                                             |  |      |           |      |  |           | 
|Deemed dividend on convertible preferred                                                                     |  |      | 3,751,443 |      |  |          | 

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

4

---



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

|   |                                                         
|-- | --------------------------------------------------------
|1. | Basis of
 Presentation and Nature of Business Operations

The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the requirements of Form 10-Q and Item 310 of
Regulation S-B of the Securities and Exchange Commission (the Commission) and
include the results of Visual Management Systems, Inc., formerly known as
Wildon Productions, Inc., 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 June 30, 2009 and the results of its operations for
the six and three month periods ended June 30, 2009 and 2008, and are not
necessarily indicative of results that may be expected for the entire year.
These unaudited condensed financial statements should be read in conjunction
with the audited financial statements and related notes included in the
Companys Annual Report for the year ended December 31, 2008 on Form 10-K.

The
Company 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 from Intelligent Digital System LLC as described
in Note 4 have been valued using the income method, based on future economic
benefits expected on a net present value basis. Values assigned to intangible
assets are being amortized over the estimated useful lives of the respective
intangible assets. Values assigned to intangible assets acquired and their
useful lives will be reviewed no less frequently then on an annual basis to
determine if there has been any impairment to the then carrying value of the
assets or if a change in amortization period is required, as prescribed by 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
June 30, 2009, the Company has capitalized approximately $180,000 of software
development costs relating to new products. There was approximately $180,000 of
software development cost capitalized as of December 31, 2008.

Amortization
is provided on a product-by-product basis. The annual amortization is the
greater of the amount computed using (a) the ratio that current gross revenue
for a product bears to the total of current and anticipated future gross
revenue for that product, or (b) the straight-line method over the remaining
estimated economic life of the product. Amortization will start when (a) the
product is available for general release to customers and (b) all research and
development activities relating to the other components of the product are
completed. At June 30, 2009, the Hybrid DVR software and DVR software products
under development were generally available to customers and as a result, there
were approximately $109,228 and $54,614 of amortization charges for the six and
three months ended June 30, 2009 for those products. There was no amortization
for the same periods in 2008.

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

5

---



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

The
Companys inventory consisted of a total of approximately $196,400,
(approximately $24,840 of raw materials and $171,560 of finished goods) at June
30, 2009 as compared to inventory of $340,650 (approximately $50,000 of raw
materials and $290,650 of finished goods) at December 31, 2008.

New Accounting Pronouncements

In
June 2009, the FASB issued FAS 168, The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles-a replacement of
FASB Statement No. 162 (FAS 168). FAS 168 establishes the FASB Accounting
Standards Codification as the sole source of authoritative GAAP. Pursuant to
the provisions of FAS 168, we will update our references to GAAP in our consolidated
financial statements issued for the period ended September 30, 2009 and
thereafter. The adoption of FAS 168 will have no impact on our financial
position or results of operations.

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

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

|   |               
|-- | --------------
|2. | Going
 Concern

The
accompanying financial statements have been prepared assuming the Company is a
going concern, which assumption contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Company has
suffered recurring losses from operations, including a loss from operations of
approximately $1,149,940 and $675,840 for the six and three months ended June
30, 2009 as compared to $3,365,600 and $1,370,440 for the same periods in the
prior year. The Companys cash used for operations was approximately $333,110
for the six months ended June 30, 2009 as compared to cash used for operations
of approximately $702,200 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 June 30, 2009 were approximately $10,407,000 and current assets
were $414,400. The difference of $9,992,600 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.

6

---



|   |                               
|-- | ------------------------------
|3. | Commitments
 and Contingencies

November 2007 Debentures

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

Since
January 1, 2008, the Company has been required to make quarterly payments of
interest under the convertible debentures issued in the Companys November 2007
Private Placement. The Company has also been required to make monthly principal
payments in the aggregate of $208,333 since November 2008. 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 had:

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

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

-
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 $0.40 per share, pursuant
to the terms of the April 2008 Amendment and Waiver agreement.

In
March 2009, the Company and the holders executed an Amendment to the Securities
Purchase Agreement from the November 2007 transaction which prevented
anti-dilution provisions of the Debentures from taking effect in relation to
the April 2009 issuance of Series B Convertible Preferred Stock by the Company.

On
the first day of each month since December 1, 2008 the Companys monthly
redemptions of principal for the debentures have become due. Each of these
monthly redemption amounts totals $208,333 and each 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, April 1,
2009 and July 1, 2009, and will also come due every three calendar months until
May 2011, and were also not paid by the Company.

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

-
The Companys default for past incidents of non-payment of interest and
principal on the debentures was waived.

7

---



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

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

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

Financing of the IDS Asset Purchase

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

As
of June 30, 2009, $24,000 of payments were 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 June 30, 2009 and determined no
charge to amortization was required.

The fair value hierarchy
defines the three levels as follows:

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

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

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

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

8

---



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 OtherObservable 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 June 30, 2009    |           | As of December 31, 2008    |  
|Amortized
 Intangible
 Assets |  | Gross Carrying
 Amount |           | Accumulated
 Amortization* |   | Gross Carrying
 Amount |  | Accumulated
 Amortization |          
|                              |  |                        |           |                            |   |                        |  |                           |           |  |   |         | 
|DVR Software                  |  | $                      | 28,555    |                            | $ | 28,555                 |  | $                         | 28,555    |  | $ | 28,555  | 
|Hybrid DVR Software           |  |                        | 1,534,137 |                            |   | 713,182                |  |                           | 1,534,137 |  |   | 621,965 | 
|                              |  |                        |           |                            |   |                        |  |                           |           |  |   |         | 
|                              |  |                        |           |                            |   |                        |  |                           |           |  |   |         | 
|Total                         |  | $                      | 1,562,692 |                            | $ | 741,737                |  | $                         | 1,562,692 |  | $ | 650,520 | 
|                              |  |                        |           |                            |   |                        |  |                           |           |  |   |         | 

9

---



|  |                                                                                                                                                                                                                                                                       
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Includes
 impairment of $636,242 relating to fair value revaluation of intangible
 assets during 2008 and amortization of $91,217 and $45,609 associated with
 Hybrid DVR software charged to cost of goods sold during the six and three
 months ended June 30, 2009.

|                                                                  |  |   |         | 
|----------------------------------------------------------------- |  | - | ------- | 
|Aggregate amortization expense for six
 months ended 6/30/2009    |  | $ | 91,218  | 
|                                                                  |  |   |         | 
|Estimated amortization expense for the 12
 months ending June 30: |  |   |         | 
|2009                                                              |  | $ | 182,435 | 
|2010                                                              |  |   | 182,435 | 
|2011                                                              |  |   | 182,435 | 
|2012                                                              |  |   | 182,435 | 
|2013                                                              |  |   | 91,215  | 
|                                                                  |  |   |         | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------
|5.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Equity Based Compensation, Warrants to Purchase Common Stock                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Issuance of Equity Compensation to Finders for Issuance of Series B
 Convertible Preferred Stock                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                 
|The
 Company has issued four shares of Series B Convertible Preferred Stock
 (included in the 500 total), 1,870,000 shares of Common Stock and warrants to
 purchase 5,510,000 shares of Common Stock at a range of exercise prices from
 $.04 to $0.13 per share, to finders in connection with the Companys offering
 of Series B Convertible Preferred Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                 
|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 and leases which have gone beyond permitted amounts
 and terms. These suits seek judgment ranging in value from approximately
 $4,000 to approximately $120,000. No individual lawsuit represents a
 substantial risk to the Companys ongoing operations, but taken in whole they
 pose a potentially serious to the Companys ongoing operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|7.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Convertible Preferred Stock Transactions                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                 
|During
 April, May and June of 2009, the Company issued 500 shares of Series B
 Convertible Preferred Stock raising $462,488 less cash issuance costs of
 $33,300 for net proceeds of approximately $429,188. These shares are
 convertible into common shares at $0.005. As a result of this issuance, the
 Company recorded a deemed dividend of approximately $500,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                 
|As
 a result of the issuance of the Series B Convertible Preferred Stock by the
 Company, certain securities previously issued by the Company had their
 effective conversions or exercise prices adjusted pursuant to the terms of
 the security. These included:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Adjustment
 of the conversion price of the Companys Series A Convertible Preferred
 Stock, to $0.005 per share.

10

---





|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                         
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Adjustment
 of the exercise price of warrants to purchase common stock, issued to holders
 and former holders of Series A Convertible Preferred Stock, former holders of
 our March 2007 Convertible Notes and placement agent warrants issued to
 finders for the Series A Convertible Preferred Stock and the November 2007
 Debenture issuances, to $0.005 per share.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Adjustment
 of the conversion price of the Unsecured Convertible Note issued to
 Intelligent Digital Systems, LLC to $0.12 per share.                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|During
 May of 2009, 14 shares of Series A Convertible Preferred Stock were converted
 into common stock. These shares were converted at $0.005 and resulted in the
 issuance of 7,000,000 shares of the Companys common stock. In connection
 with the conversion, the Company recorded a deemed dividend of approximately
 $573,300 for the excess of the fair value of the converted shares as compared
 to the carrying value of the preferred, net of dividends booked in prior
 periods.    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|During
 April, May and June of 2009, 243 shares of Series B Convertible Preferred
 Stock were converted into common stock. The shares were converted at $0.005
 and resulted in the issuance of 48,600,000 shares of common stock. In connection
 with the conversion, the Company recorded a deemed dividend of approximately
 $2,677,870 for the excess of the fair value of the converted shares as
 compared to the carrying value of the preferred, net of dividends booked in
 prior periods.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                         
|8.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Subsequent Events                                                                                                                                                                                                                                                                                                                                                       

Issuance of Convertible Notes

In
July 2009, the Company issued to unaffiliated individual investors, convertible
notes with an aggregate principal value of $23,500, an interest rate of 12% per
annum, and a conversion price of $.01 per share of Visual Management Systems,
Inc. common stock. The convertible notes mature on various dates throughout
January 2010.

The Companys
financial statements for the quarter ended June 30, 2009 were issued on August
19, 2009. Management has determined that no other events or transactions have occurred
through the date of issuance that would require recognition or disclosure
within the financial statements.

Conversions of Convertible Preferred Stock

During
July 2009, holders of 37 shares of Convertible Preferred B shares exercised
their right to convert, resulting in the issuance of 7,400,000 shares of the
Companys common stock.

Amendment and Waiver Agreement

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

- The
Companys default for past incidents of non-payment of interest and principal
on the debentures was waived.

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

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

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

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

Results of Operations for the Six Months
Ended June 30, 2009 and 2008

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

11

---



Net Revenues

Net
revenues decreased approximately $1,630,500, or 51% to about $1,582,300 during
the six months ended June 30, 2009, from approximately $3,212,800 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 $842,400, or 51% to approximately
$811,100 for the six months ended June 30, 2009, from approximately $1,653,500
during the same period in the prior year. This decrease was primarily due to
decreased material and labor costs and lower revenues as compared to the same
period in 2008 offset by increased amortization of intangibles to cost of goods
sold during 2009.

As
a result of the changes described above in revenues and cost of goods sold,
gross profit for the six months ended June 30, 2009 decreased to approximately
$771,190 from approximately $1,559,330 for the six months ended June 30, 2008,
and gross profit as a percentage increased to 48.7% for the six months ended
June 30, 2009 compared with 48.5% for the six months ended June 30, 2008.

Operating Expenses

Operating
expenses decreased approximately $3,003,800 to approximately $1,921,140 for the
six months ended June 30, 2009, from approximately $4,924,930 for the six
months ended June 30, 2008.

This
decrease was primarily attributable to a decrease in finance and investor
relations costs (approximately $800,000), charges for penalties relating to the
lack of filing required registration statements, as required by certain
agreements, and other general and administrative expenses (approximately
$1,000,000), and a decrease in wages due to reduced headcount (approximately
$1,100,000).

Interest Expense

Interest
expense for the six months ended June 30, 2009 increased to approximately
$738,740, from about $297,000 in the six months ended June 30, 2008. The
increase of approximately $441,740 was primarily the result of (i) additional
interest due to repricing of warrants relating to debt of approximately
$310,000 and (i) interest on amounts relating to late payments of approximately
$100,000 and (ii) higher original issue discount amortization, totaling
approximately $30,000.

Net Loss

As
a result of the items discussed above there was a net loss of approximately
$1,889,010 for the six months ended June 30, 2009 compared with a net loss of
approximately $3,662,940 for the six months ended June 30, 2008. Net loss
applicable to common stockholders for the six months ended June 30, 2009 was
approximately $5,640,450 as a result of a deemed dividend relating to a
beneficial conversion feature on convertible debt issued during the period of
approximately $500,000 and $3,251,440 of a deemed dividend relating to
conversions of convertible preferred stock during the six months ended June 30,
2009. Net loss applicable to common stockholders during the six months ended June 30,
2008 was approximately $3,662,940 as there were no deemed dividends during that
period.

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

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

Net Revenues

Net
revenues decreased approximately $904,560, or 55% to about $730,950 during the
three months ended June 30, 2009, from approximately $1,635,520 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 $405,140, or 50% to approximately
$405,240 for the three months ended June 30, 2009, from approximately $810,380
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 June 30, 2009 decreased to
approximately $325,710 from approximately $825,130 for the three months ended
June 30, 2008, and gross profit as a percentage decreased to 44.6% for the
three months ended June 30, 2009 compared with 50.5% for the three months ended
June 30, 2008. The decrease in gross profit margin for the three months ended
June 30, 2009 is primarily the result of amortization of intangibles of
approximately $54,000 during 2009.

12

---



Operating Expenses

Operating
expenses decreased approximately $1,194,020 to approximately $1,001,550 for the
three months ended June 30, 2009, from approximately $2,195,570 for the three
months ended June 30, 2008.

This
decrease was primarily attributable to decreased wages (approximately
$640,000), charges for penalties relating to the lack of filing required
registration statements, as required by certain agreements, and other general
and administrative expenses (approximately $300,000), and a decrease in other
general and administrative costs (approximately $200,000).

Interest Expense

Interest
expense for the three months ended June 30, 2009 increased to approximately
$531,950, from about $157,000 in the three months ended June 30, 2008. The
increase of $374,950 was primarily the result of (i) additional interest due to
repricing of warrants relating to debt of approximately $310,000 and (i)
interest on amounts relating to late payments (approximately $63,000).

Net Loss

As
a result of the items discussed above there was a net loss of approximately
$1,208,110 for the three months ended June 30, 2009 compared with a net loss of
approximately $1,527,470 for the three months ended June 30, 2008. Net loss
applicable to common stockholders for the three months ended June 30, 2009 was
approximately $4,959,560 as a result of a deemed dividend relating to a
beneficial conversion feature on convertible debt issued during the period of
approximately $500,000 and $3,251,440 of a deemed dividend relating to
conversions of convertible preferred stock during the three months ended June
30, 2009. Net loss applicable to common stockholders during the three months ended June 30,
2008 was approximately $1,527,470 as there were no deemed dividends during that
period.

Liquidity and Capital Resources

The
Companys financial statements are prepared on a going concern basis, which
assumes that the Company will realize assets and discharge liabilities in the
normal course of business. At June 30, 2009, the Company had cash of
approximately $14,200, a working capital deficit of approximately $9,992,600,
stockholders deficit of approximately $7,936,010, and an outstanding balance
of long term debt of approximately $133,400 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 June 30, 2009
raises doubt as to the Companys ability to continue the Companys normal
business operations as a going concern. If the Company is unable to put into
effect certain plans, the Company may be required to restructure, file for
bankruptcy or cease operations.

In August 2009, the holders of the
Companys 5% Senior Secured Convertible Debentures waived existing payment defaults under the
Debentures in consideration of the Companys agreement to increase the principal amount of the Debentures from
$3,750,000 to $4,083,742, which represents the inclusion of accrued interest. See Item 5. Other Information.

Cash Flows from Operating Activities

Net
cash used by operating activities was approximately $333,110 for the six months
ended June 30, 2009 compared to cash used by operations of approximately
$702,200 for the six months ended June 30, 2008. Cash used during the six
months ended June 30, 2009 was primarily the result of the operating loss and a
reduction in customer deposits ($116,900) offset by decreases in receivables of
approximately $56,500, inventory of approximately $144,250 and prepaid expenses
of approximately $115,000 and increases in accrued expenses totaling
approximately $103,000. For the six months ended June 30, 2008, cash used in
operations of approximately $702,200 was primarily a result of the operating
loss incurred during the quarter offset by non cash operating expenses of
approximately $1,585,000, decreases in receivables of approximately $91,600,
inventory of approximately $69,540 and prepaid expenses and deposits of
approximately $22,000, increases in accounts payable and accrued expenses
totaling approximately $1,045,200 and increases in customer deposits and sales
tax payable of approximately $145,400.

Cash Flows from Investing Activities

Net
cash generated from investing activities was approximately $3,700 in the six
months ended June 30, 2009 as a result of proceeds from asset sales, as
compared to cash used by investing activities of $111,900 during the six months
ended June 30, 2008 which represented equipment purchases and capitalized
software costs net of proceeds from an asset disposition.

Cash Flows from Financing Activities

Net
cash generated from financing activities was approximately $327,410 for the six
months ended June 30, 2009. The cash generated by financing activities for the
current period was a result of the issuance of convertible preferred stock
netting proceeds of approximately $429,190 offset by payments of approximately
$100,940 on outstanding loans and capital leases. During the six months ended
June 30, 2008, cash generated from financing activities of approximately
$133,940 was primarily the result of proceeds from short term notes of $288,800
offset by payments of approximately $154,860 on outstanding loans and capital
leases

Cash
decreased from $16,186 at December 31, 2008 to $14,205 at June 30, 2009.

13

---



|                                                                   | 
|------------------------------------------------------------------ | 
|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 June 30, 2009.

Managements Report on Internal Control over
Financial Reporting

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

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

Management
has evaluated the effectiveness of internal control over financial reporting as
of December 31 2008 based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).

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

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

|  |                                                                                                                                                                                                                                                        
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|- | A lack of
 sufficient resources and an insufficient level of monitoring and oversight,
 which restricts the Companys ability to gather, analyze and report
 information relative to the financial statement assertions in a timely
 manner.           
|  |                                                                                                                                                                                                                                                        
|- | The limited
 size of the accounting department makes it impracticable to achieve an
 appropriate segregation of duties and to implement the formal documented closing
 and reporting calendar and checklists in a timely manner on a consistent
 basis.

14

---



|  |                                                                                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|- | There are no
 formal cash flow forecasts, business plans, and organizational structure
 documents to guide the employees in critical decision-making processes.
|  |                                                                                                                                                                
|- | Material
 weaknesses identified in the past including deficiencies in information
 technology have not been fully remediated.                                  

As
a result of the material weaknesses described above, the Company concluded
that, as of December 31, 2008, the Companys internal control over financial
reporting was not effective.

Remediation of Material Weaknesses

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

The
Companys management does not expect that the Companys disclosure controls or
the Companys internal controls over financial reporting will prevent all error
and fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, but not 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 June 30, 2009, no changes were made that impacted internal
control over financial reporting due to cash flow constraints.

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

15

---



PART II  OTHER INFORMATION

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

On
June 26, 2009, the Company completed its private offering of Series B
Convertible Preferred Stock, the initial closing of which occurred on April 1,
2009. A total of 500 shares of Series B Convertible Preferred Stock were issued
in the offering, with total net proceeds to the Company of $429,188, after
finders fees. Of the 500 shares of Series B Preferred Stock sold, 185 were
purchased by members of the Companys board of directors, officers, employees
or other insiders of the Company. The shares of Series B Convertible Preferred
Stock have a liquidation preference of $1,000 per share and are convertible
into a number of shares of Common Stock determined by dividing the liquidation
preference by the conversion price of $0.005 per share, which is subject to
adjustment to protect against dilution under certain circumstances.

The
Company has issued four shares of Series B Convertible Preferred Stock
(included in the 500 total), 1,870,000 shares of Common Stock, warrants to
purchase 5,510,000 shares of Common Stock at a range of exercise prices from
$.04 to $0.13 per share and pay cash fees in the aggregate amount of $33,300 to
finders in connection with the offering. The Company relied upon the exemption
provided by Section 4(2) of the Securities Act of 1933, as amended, and rule
506 thereunder in connection with the transaction detailed above.

Proceeds from the offering were used to pay professional fees and working capital.

In
July 2009, the Company issued to unaffiliated investors convertible notes in
the aggregate principal amount of $23,500 which bear interest at a rate of 12%
per annum and are convertible into common stock at a price of $.01 per share. The
notes become due in January 2010. The Company relied upon the exemption
provided under Section 4(2) of the Securities Act of 1933, as amended, in
connection with the issuance of the notes.

|                                         | 
|---------------------------------------- | 
|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 its 5% Senior Secured Convertible 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, April 1,
2009 and July 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 with the holders of the debentures, 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.

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. In August 2009, the holders of the debentures waived the
existing payment defaults under the debentures. See Item 5. Other
Information below. In the absence of the waiver, 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 June 30,
2009 the Company has accrued $1,125,000, in connection with this default.

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

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

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 5. Other Information

In
August 2009, the Company entered into an Amendment and Waiver Agreement with
each of the holders of its 5% Senior Secured Convertible Debentures pursuant to
which:

-
The Companys default for past incidents of non-payment of interest and
principal on the Debentures was waived.

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

-
The conversion price of the Debentures was adjusted to $0.10 per share of the
Companys common stock. After January 1, 2010 the conversion price shall be the
lesser of $0.10 or 80% of the lowest daily volume weighted average price
during the 20 trading days immediately prior to the applicable conversion date,
but in no case less than $0.00625.

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

|                  | 
|----------------- | 
|Item 6.  Exhibits

|             |  |                                                                                                                              
|------------ |  | -----------------------------------------------------------------------------------------------------------------------------
|Exhibit
 No. |  | Exhibits                                                                                                                     
|             |  |                                                                                                                              
|4.12         |  | Form of 12% Convertible Note issued by Visual Management Systems, Inc.
in the aggregate principal amount of $23,000          
|             |  |                                                                                                                              
|10.22        |  | Amendment and Waiver
 Agreement between Visual Management Systems, Inc., and the holders of its 5%
 Senior Secured Debentures
|             |  |                                                                                                                              
|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     

16

---



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:
 August 19, 2009 |     |                                 
|                        |     |                                 
|                        | By: | /s/ J.D.
 Gardner               
|                        |     |                                 
|                        |     | J.D. Gardner                    
|                        |     | Chief
 Financial Officer        
|                        |     |                                 
|Dated:
 August 19, 2009 |     |                                 

17

---