UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-Q





(Mark
one)




x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
quarterly period ended July 31, 2009




OR




 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
transition period from __________ to ________




Commission
File No. 000-24015









STEELCLOUD,
INC.


(Exact
name of registrant as specified in its charter)




VIRGINIA
              
              54-1890464(State
      or other jurisdiction of
                incorporation
      or organization)
              
              (I.R.S.
      Employer
                Identification
      No.)




13962
Park Center Road, Herndon, VA    20171


(Address
of principal executive offices)    (Zip code)




(703)
674-5500


(Registrant’s
telephone number, including area code)




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




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes þ No  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 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  ̈ No  ̈




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” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one)


Large
Accelerated filer  ̈Accelerated
filer  ̈Non-accelerated
filer  ̈Smaller
Reporting Company þ




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


Yes  ̈ No þ




As of
September 11, 2009 there were 15,411,876 shares of the registrant’s common stock
outstanding.





SteelCloud,
Inc.


Form
10-Q Index


for
the Quarterly period ended July 31, 2009




PART
      I. FINANCIAL INFORMATION
                                      1ITEM
      1.
                                      FINANCIAL
      STATEMENTS
                                      1ITEM
      2.
                                      MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                                      2ITEM
      3.
                                      QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                                      15ITEM
      4T.
                                      CONTROLS
      AND PROCEDURES
                                      15PART
      II. OTHER INFORMATION
                                      15ITEM
      1.
                                      LEGAL
      PROCEEDINGS
                                      15ITEM
      1A.
                                      RISK
      FACTORS
                                      16ITEM
      2.
                                      UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
                                      17ITEM
      3.
                                      DEFAULTS
      UPON SENIOR SECURITIES
                                      17ITEM
      4.
                                      SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                                      17ITEM
      5.
                                      OTHER
      INFORMATION
                                      19ITEM
      6.
                                      EXHIBITS
                                      19SIGNATURES
                                      20




i




PART
I. FINANCIAL INFORMATION




ITEM
1.     FINANCIAL STATEMENTS




Index
to Financial Statements




Condensed
      Consolidated Balance Sheets
              F–1Unaudited
      Condensed Consolidated Statements of Operations
              F–2Unaudited
      Condensed Consolidated Statements of Cash Flows
              F–3Notes
      to Unaudited Condensed Consolidated Financial Statements
              F–4




1


STEELCLOUD,
INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS




October
      31,
                      
                      
                      July
      31,2008
                      
                      
                      2009(unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
                      
                      $
                      752,351
                      
                      
                      $
                      366,210Accounts
      receivable, net
                      
                      
                      1,571,673
                      
                      
                      
                      202,201Inventory,
      net of
      inventory reserve of $0
                      
                      
                      521,920
                      
                      
                      
                      111,457Prepaid
      expenses and other current assets
                      
                      
                      130,446
                      
                      
                      
                      249,362Deferred
      contract costs
                      
                      
                      -
                      
                      
                      
                      38,140Total
      current assets
                      
                      
                      2,976,390
                      
                      
                      
                      967,370Property
      and equipment, net
                      
                      
                      626,440
                      
                      
                      
                      477,643Equipment
      on lease, net
                      
                      
                      442,099
                      
                      
                      
                      1,818Other
      assets
                      
                      
                      7,020
                      
                      
                      
                      11,102Total
      assets
                      
                      $
                      4,051,949
                      
                      
                      $
                      1,457,933LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable
                      
                      $
                      718,316
                      
                      
                      $
                      614,365Accrued
      expenses
                      
                      
                      561,009
                      
                      
                      
                      224,078Notes
      payable, current
                      
                      
                      7,538
                      
                      
                      
                      176,910Unearned
      revenue
                      
                      
                      8,882
                      
                      
                      
                      96Total
      current liabilities
                      
                      
                      1,295,745
                      
                      
                      
                      1,015,449Long-term
      liabilitiesNotes
      payable, long-term
                      
                      
                      7,903
                      
                      
                      
                      -Other
      long-term
                      
                      
                      132,055
                      
                      
                      
                      223,906Total
      long-term liabilities
                      
                      
                      139,958
                      
                      
                      
                      223,906Stockholders’
      equityPreferred
      stock, $.001 par value: 2,000,000 shares authorized, no shares issued and
      outstanding at October 31, 2008 and July 31, 2009
                      
                      
                      –
                      
                      
                      
                      -Common
      stock, $.001 par value: 50,000,000 shares authorized, 15,138,376 and
      15,733,376 shares issued at October 31, 2008 and July 31, 2009,
      respectively
                      
                      
                      15,138
                      
                      
                      
                      15,733Additional
      paid in capital
                      
                      
                      50,902,172
                      
                      
                      
                      51,256,046Treasury
      stock, 400,000 shares at October 31, 2008 and July 31,
2009
                      
                      
                      (3,432,500
                      )
                      
                      
                      (3,432,500
                      )Accumulated
      deficit
                      
                      
                      (44,868,564
                      )
                      
                      
                      (47,620,701
                      )Total
      stockholders’ equity
                      
                      
                      2,616,246
                      
                      
                      
                      218,578Total
      liabilities and stockholders’ equity
                      
                      $
                      4,051,949
                      
                      
                      $
                      1,457,933





The
Accompanying Notes Are an Integral Part of these Condensed Consolidated
Financial Statements


F-1


STEELCLOUD,
INC.


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS




Three
      Months Ended
                July
      31,
              
              
              Nine
      Months Ended
                July
      31,2008
              
              
              2009
              
              
              2008
              
              
              2009RevenuesProducts
              
              $
              57,228
              
              
              $
              88,518
              
              
              $
              1,863,083
              
              
              $
              188,319Services
              
              
              846,215
              
              
              
              193,187
              
              
              
              1,954,564
              
              
              
              971,945Total
      revenues
              
              
              903,443
              
              
              
              281,705
              
              
              
              3,817,647
              
              
              
              1,160,264Cost
      of revenuesProducts
              
              
              34,152
              
              
              
              35,502
              
              
              
              1,569,694
              
              
              
              87,226Services
              
              
              675,966
              
              
              
              126,997
              
              
              
              1,596,479
              
              
              
              740,555Total
      cost of revenues
              
              
              710,118
              
              
              
              162,499
              
              
              
              3,166,173
              
              
              
              827,781Gross
      profit
              
              
              193,325
              
              
              
              119,206
              
              
              
              651,474
              
              
              
              332,483Selling
      and marketing
              
              
              248,557
              
              
              
              153,412
              
              
              
              640,738
              
              
              
              369,276Research
      and product development
              
              
              58,066
              
              
              
              53,637
              
              
              
              179,523
              
              
              
              151,869General
      and administrative
              
              
              899,042
              
              
              
              591,397
              
              
              
              2,635,418
              
              
              
              1,886,485Severance
      and restructuring
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              73,205Operating
      loss from continuing operations
              
              
              (1,012,340
              )
              
              
              (679,240
              )
              
              
              (2,804,205
              )
              
              
              (2,148,352
              )Interest
      (expense) income, net
              
              
              (5,825
              )
              
              
              (20,761
              )
              
              
              5,417
              
              
              
              (20,351
              )Loss
      from continuing operations before income taxes
              
              
              (1,018,165
              )
              
              
              (700,001
              )
              
              
              (2,798,788
              )
              
              
              (2,168,703
              )(Provision)
      benefit for income taxes
              
              
              (312,096
              )
              
              
              -
              
              
              
              393,596
              
              
              
              -Loss
      from continuing operations
              
              
              (1,330,261
              )
              
              
              (700,001
              )
              
              
              (2,405,192
              )
              
              
              (2,168,703
              )Discontinued
      Operations:Loss
      from disposal of discontinued operations (net of applicable taxes of
      $0)
              
              
              -
              
              
              
              (19,565
              )
              
              
              -
              
              
              
              (19,565
              )Income
      (loss) from discontinued operations, net of tax
              
              
              388,575
              
              
              
              (178,868
              )
              
              
              797,350
              
              
              
              (563,869
              )Income
      (loss) from discontinued operations
              
              
              388,575
              
              
              
              (198,433
              )
              
              
              797,350
              
              
              
              (583,434
              )Net
      loss
              
              $
              (941,686
              )
              
              $
              (898,434
              )
              
              $
              (1,607,842
              )
              
              $
              (2,752,137
              )Basic
      and diluted (loss) income per share:Continuing
      Operations
              
              $
              (0.09
              )
              
              $
              (0.05
              )
              
              $
              (0.17
              )
              
              $
              (0.14
              )Discontinued
      Operations
              
              
              0.03
              
              
              
              (0.01
              )
              
              
              0.06
              
              
              
              (0.04
              )Net
      loss
              
              $
              (0.06
              )
              
              $
              (0.06
              )
              
              $
              (0.11
              )
              
              $
              (0.18
              )Weighted–average
      shares outstanding:Basic
              
              
              14,595,649
              
              
              
              15,140,024
              
              
              
              14,426,565
              
              
              
              14,903,494Diluted
              
              
              14,595,649
              
              
              
              15,140,024
              
              
              
              14,426,565
              
              
              
              14,903,494





The
Accompanying Notes Are an Integral Part of these Condensed Consolidated
Financial Statements


F-2


STEELCLOUD,
INC.


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS




Nine
      Months Ended
                  July
      31,2008
              
              
              2009Operating
      activitiesNet
      loss
              
              $
              (1,607,842
              )
              
              $
              (2,752,137
              )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Loss
      on disposal
              
              
              -
              
              
              
              19,565Depreciation
      and amortization
              
              
              370,931
              
              
              
              228,795Stock-based
      compensation
              
              
              273,771
              
              
              
              181,394Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              1,514,098
              
              
              
              1,362,354Inventory
              
              
              1,527
              
              
              
              174,533Deferred
      contract costs
              
              
              52,217
              
              
              
              (38,140
              )Prepaid
      expenses and other assets
              
              
              97,210
              
              
              
              (122,998
              )Accounts
      payable
              
              
              (801,318
              )
              
              
              (103,951
              )Unearned
      revenue
              
              
              (59,285
              )
              
              
              (8,786
              )Accrued
      expenses and other liabilities
              
              
              (494,954
              )
              
              
              (146,358
              )Net
      cash  used in operating activities
              
              
              (653,645
              )
              
              
              (1,205,729
              )Investing
      activitiesSale
      of hardware integration business
              
              
              -
              
              
              
              150,000(Purchase)
      sale of property and equipment
              
              
              (382,362
              )
              
              
              347,544Net
      cash (used in) provided by investing activities
              
              
              (382,362
              )
              
              
              497,544Financing
      activitiesProceeds
      from exercise of common stock options
              
              
              231,297
              
              
              
              -Proceeds
      from the sale of common stock
              
              
              -
              
              
              
              87,500Proceeds
      from issuance of notes payable
              
              
              -
              
              
              
              250,000Payments
      on notes payable
              
              
              (11,012
              )
              
              
              (15,456
              )Net
      cash provided by (used in) financing activities
              
              
              220,285
              
              
              
              322,044Net
      decrease in cash and cash equivalents
              
              
              (815,722
              )
              
              
              (386,141
              )Cash
      and cash equivalents at beginning of period
              
              
              2,622,654
              
              
              
              752,351Cash
      and cash equivalents at end of period
              
              $
              1,806,932
              
              
              $
              366,210Supplemental
      cash flow informationInterest
      paid
              
              $
              17,514
              
              
              $
              22,779Income
      taxes paid
              
              $
              -
              
              
              $
              -Non-cash
      investing and financing activities
              
              $
              -
              
              
              $
              85,575




The
Accompanying Notes Are an Integral Part of these Condensed Consolidated
Financial Statements


F-3


1.
            Nature
      of Business and Basis of
Presentation




Founded
in 1987, SteelCloud, Inc. (the “Company” or “SteelCloud”) is a developer of
mobility appliance software solutions primarily for the Research In Motion
(“RIM”) Blackberry market.  SteelCloud designs and integrates its
software into specialized server appliances targeted at Department of Defense
(“DoD”), public sector, commercial, and remote hosting customers.




SteelCloud
has developed SteelWorks® (“SteelWorks”), an appliance solution specifically for
the BlackBerry Enterprise Server (“BES”).  SteelWorks was developed in
conjunction with RIM.  SteelWorks is an integrated server appliance
that enables virtually any size organization to implement the BES at a fraction
of the cost, time, and resource commitment.  SteelCloud has filed for
patent protection for the SteelWorks technology it created for the installation
wizard, backup and restore features.  These patents are currently
pending approval from the U.S. Patent and Trademark
Office.  Additionally, SteelCloud developed SteelWorks FedMobile, a
BlackBerry Enterprise Server appliance solution specifically for the DoD and
other related agencies.  The SteelWorks FedMobile appliance builds
upon SteelWorks by automating the application of the Defense Information Systems
Agency’s and DoD’s Security Technical Implementation Guide (“STIG”) to the BES
installation process.  The STIG mandates the policies in accordance
with which the DoD and related agencies must operate their wireless
communications.  As a result, SteelCloud’s FedMobile appliance allows
DoD organizations to implement a STIG compliant BES infrastructure in a fraction
of the time, cost, or resources necessary to what is otherwise a time intensive
and manual STIG process.




In
addition, the Company serves information technology end users directly, in both
the public and private sectors, with services focused on IT-centric
solutions.  SteelCloud’s IT centric solutions consist primarily of
consulting and staff augmentation services.




As
further discussed in Note 2, SteelCloud sold its Federal and ISV integration
business on July 10, 2009.




The
following unaudited condensed financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission (the
“SEC”). Certain information and note disclosures, normally included in annual
financial statements prepared in accordance with U.S. Generally Accepted
Accounting Principles (“GAAP”), have been condensed or omitted pursuant to those
rules and regulations, although the Company believes that the disclosures made
are adequate to make the information not misleading.  It is suggested
that these condensed financial statements be read in conjunction with the
financial statements and the Footnotes thereto included in the Company’s Annual
Report on Form 10-K for the fiscal year ended October 31, 2008, filed with the
SEC on February 12, 2009 and subsequently amended on March 4, 2009.




All
adjustments that are of a normal recurring nature, in the opinion of management,
which are necessary for a fair presentation for the periods presented have been
reflected as required by Regulation S-X, Rule 10-01.




The
Company’s consolidated financial statements for the three and nine months ended
July 31, 2009 do not give effect to any adjustments to recorded amounts and
their classifications, which would be necessary should the Company be unable to
continue as a going concern and therefore, be required to realize its assets and
discharge its liabilities in other than the normal course of business and at
amounts different from those reflected in the consolidated financial
statements.




Going
Concern




SteelCloud
has had recurring annual operating losses since its fiscal year ended October
31, 2004.  SteelCloud expects that such losses will continue at least
through its fiscal year ending October 31, 2009.  The report of
SteelCloud’s independent registered public accounting firm on SteelCloud’s
consolidated financial statements for the fiscal year ended October 31, 2008
contains an explanatory paragraph regarding SteelCloud’s ability to continue as
a going concern based upon its history of net losses.


F-4




SteelCloud
is dependent upon available cash and operating cash flow to meet its capital
needs.  SteelCloud is considering all strategic options to improve its
liquidity and provide it with working capital to fund its continuing business
operations, including equity offerings, asset sales or debt; however, there can
be no assurance that SteelCloud will be successful in negotiating financing on
terms agreeable to it or at all.  If adequate funds are not available
or are not available on acceptable terms, SteelCloud will likely not be able to
take advantage of unanticipated opportunities, develop or enhance services or
products, respond to competitive pressures, or continue as a going
concern.  There is no assurance that SteelCloud will be successful in
raising working capital as needed.  Further, there are no assurances
that SteelCloud will have sufficient funds to execute its business plan, pay its
operating expenses and obligations as they become due or generate positive
operating results or continue as a going concern.




SteelCloud
is in the process of executing on several restructuring initiatives which
include the following:




•
                A
      reorganization that included personnel terminations from all parts of the
      organization;•
                Elimination
      of all non-essential costs;•
                Reduction
      of occupancy costs; and•
                Obtaining
      capital or bridge
financing.





While
SteelCloud believes that these initiatives will better align its costs with its
anticipated revenues going forward, it will take time for these initiatives to
have an impact on SteelCloud’s net revenue and operating
income.  Furthermore, in reviewing its business strategies,
SteelCloud’s management has determined that it is in the Company’s best interest
to focus its resources and investments on its BlackBerry-related technologies
and products.  The Company sold its hardware integration business on
July 10, 2009 and is evaluating other strategic alternatives with regards to
obtaining capital.




2.
            Sale of Integration
      Business




On July
10, 2009, SteelCloud entered into an Asset Purchase Agreement (the “Agreement”)
with NCS Technologies, Inc., a Virginia corporation (“NCS”), pursuant to which
SteelCloud agreed to sell to NCS, and NCS agreed to purchase from SteelCloud,
all of SteelCloud’s right, title and interest in and to the assets relating to
SteelCloud’s computer integration business.   The purchase price
was $475,000 of which $150,000 was paid as a deposit and the remaining $325,000
is an earn-out amount, which is payable from and to the extent of revenue NCS
receives during the three-year period after the closing date from certain
existing and prospective clients, at a rate equal to 15% of the net sales price
received by NCS from such clients.  Any payments by NCS to SteelCloud
are due on or before the tenth business day following the month in which NCS
receives the payments from the client(s).




The
Company has classified the hardware integration business as discontinued
operations in the statements of operations for the three and nine month periods
ending July 31, 2009 as well as all comparative periods
presented.  Certain amounts have been reclassified in order to conform
with the current period presentation.  Revenues from discontinued
operations for the three and nine months ended July 31, 2009 were $374,621 and
$1,581,036, respectively. Revenues from discontinued operations for the three
and nine months ended July 31, 2008 were $1,661,029 and $12,937,931,
respectively.    Current assets and current liabilities of
discontinued operations at October, 31, 2008 were approximately $1.7 million and
$575,000, respectively.  Total assets and total liabilities of
discontinued operations on October 31, 2008 were approximately $2.1 million and
$707,000, respectively.  No assets or liabilities remain as of July
31, 2009.




F-5





3.
            Recently
      Issued Accounting Pronouncements




Effective
November 1, 2008, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”) and
Statement of Financial Accounting Standards No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS No. 159”).  SFAS
157, which defines fair value, establishes a framework for measuring fair value
in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), and
expands disclosures about fair value measurements.  SFAS 157 clarifies
that fair value is an exit price, representing the amount that would be received
to sell asset or paid to transfer a liability in an orderly transaction between
market participants.  SFAS 159 permits an entity to measure certain
financial assets and financial liabilities at fair value with changes in fair
value recognized in earnings each period. For the three and nine month periods
ended July 31, 2009, the Company has elected not to use the fair value option
permitted under SFAS 159 for any of its financial assets and financial
liabilities that are not already recorded at fair value.




In
February 2008, the FASB issued Staff Position No. 157-2, “Effective Date of FASB
Statement No. 157” (“FSP 157-2”).  FSP 157-2 deferred the effective
date of FAS 157 for all nonfinancial assets and nonfinancial liabilities to
fiscal years beginning after November 15, 2008.  The Company is in the
process of evaluating the effect, if any, the adoption of FSP 157-2 will have on
its financial statements.




In
October 2008, the FASB issued Staff Position No. 157-3, “Determining the Fair
Value of a Financial Asset When the Market for that Asset is not Active” (“FSP
157-3”).  FSP 157-3 provides guidance for determining the fair value
of a financial asset in an inactive market.  The Company adopted FSP
157-3 for the quarter ended July 31, 2009.  The adoption did not have
a material impact on the financial statements.




In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141 (Revised 2007) “Business Combinations” (“SFAS No. 141R”).  SFAS
No. 141R, which replaces SFAS No. 141, requires that the acquisition method of
accounting (which SFAS No. 141 called the “purchase method”) be used for all
business combinations and for an acquirer to be identified for each business
combination.  SFAS No. 141R also establishes principles and
requirements for how the acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree; recognizes and measures the goodwill
acquired in the business combination or a gain from a bargain purchase; and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination.  SFAS No. 141R also requires that acquisition-related
costs be recognized separately from the business combination.  SFAS
No. 141R will apply prospectively to business combinations for which the
acquisition date is after fiscal years beginning on or after December 15,
2008.  The Company is in the process of evaluating the effect, if any,
the adoption of SFAS No. 141(R) will have on its financial statements, if the
Company undertakes an acquisition.




In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, “Noncontrolling Interests in Consolidated Financial Statements — an
amendment of ARB No. 51” (“SFAS No. 160”).  SFAS No. 160 requires all
entities to report noncontrolling (minority) interests in subsidiaries as equity
in the consolidated financial statements.  Its intention is to
eliminate the diversity in practice regarding the accounting for transactions
between an entity and noncontrolling interests.  This statement is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008.  Earlier adoption is
prohibited.  The Company is in the process of evaluating the effect,
if any, the adoption of SFAS No. 160 will have on its financial
statements.




In May
2008, The FASB issued Statement of Financial Accounting Standards No.162 “The
Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”), which
reorganizes the GAAP hierarchy.  SFAS 162 is intended to improve
financial reporting by providing a consistent framework for determining what
accounting principles should be used in preparing GAAP financial
statements.  With the issuance of SFAS 162, the FASB concluded that
the GAAP hierarchy should be directed toward the entity and not its auditor, and
reside in the accounting literature established by the FASB as opposed to the
American Institute of Certified Accountants Statement on Auditing Standards No.
69, “The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles”.  SFAS 162 will become effective 60 days
following the SEC approval of the Public Accounting Oversight Board amendments
to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles” and is not expected to have any impact on the
Company’s financial statements.


F-6




In May
2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165
is intended to establish general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for
selecting that date, that is, whether that date represents the date the
financial statements were issued or were available to be issued. SFAS 165
is effective for interim or annual financial periods ending after June 15,
2009.  The Company adopted SFAS 165 for the quarter ended July 31,
2009.  Except for the required disclosures, there was no material
impact to the financial statements.




In April
2009, the FASB issued FSP FAS 107-1 and APB-28-1, “Interim Disclosure about Fair
Value of Financial Instruments” (FSP 107-1/APB 28-1). FSP 107-1/APB 28-1
requires interim disclosures regarding the fair values of financial instruments
that are within the scope of FAS 107, “Disclosures about the Fair Value of
Financial Instruments”. Additionally, FSP107-1/APB28-1 requires disclosure of
the methods and significant assumptions used to estimate the fair value of
financial instruments on an interim basis as well as changes of the methods and
significant assumptions from prior periods. FSP 107-1/APB 28-1 does not change
the accounting treatment for these financial instruments and is effective for
interim reporting periods ending after June 15, 2009. The Company has adopted
FSP 107-1/APB 28-1 during the quarter ended July 31, 2009
and  disclosed the fair value of its financial instruments in the
financial statements.





In April
2009, the FASB issued FSP 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairment” (FSP 115-2/124-2). FSP 115-2/124-2 amends the
requirements for the recognition and measurement of other-than-temporary
impairments for debt securities by modifying the pre-existing “intent and
ability” indicator. Under FSP 115-2/124-2, an other-than-temporary impairment is
triggered when there is an intent to sell the security, it is more likely than
not the security will be required to be sold before recovery, or the security is
not expected to recover the entire amortized cost basis of the
security.  Additionally, FSP 115-2/124-2 changes the presentation of
another-than-temporary impairment in the income statement for those impairments
involving credit losses. The credit loss component will be recognized in
earnings and the remainder of the impairment will be recorded in other
comprehensive income. FSP 115-5 2/124-2 is effective for interim and annual
reporting periods ending after June 15, 2009. The Company has adopted FSP
107-1/APB 28-1 during the quarter ended July 31, 2009.  The adoption
did not have a material impact on the financial statements.





4.
            Loan
      and Note Payable




On July
1, 2009, the Company entered into a Business Loan and Security Agreement with
Caledonia Capital Corporation, a Delaware corporation (the “Lender”) pursuant to
which the Lender agreed to lend to SteelCloud $250,000 in the form of a Secured
Promissory Note (the “Note”) which was issued on July 1, 2009 (the “Issuance
Date”).  The Note bears interest at a rate of 15% per annum, and is
payable in quarterly installments commencing three months after the Issuance
Date, or October 1, 2009.  The principal amount of the Note is due and
payable in full on December 29, 2009 (The “Maturity Date”.  There are
no penalties for early prepayment of the Note.




Additionally,
in the event that the Company receives investments from one or more investors in
one or more transactions in an aggregate amount in excess of $750,000, whether
in the form of cash, negotiable or non-negotiable instruments or any form of
payment in exchange for the issuance of any certificated or non-certificated
security of the Company, whether in the form of debt or equity (an “Equity
Raise”), at any time between the Issuance Date and the Maturity Date, then, the
Company shall be required, within five (5) business days after the Equity Raise
first exceeds $750,000, to curtail the accrued interest and outstanding
principal balance of the Note by an amount equal to the amount by which the
Equity Raise then exceeds $750,000 (but in no event by more than the then
outstanding principal balance and interest accrued on the Note). Until delivery
of such funds to the Lender, all such funds shall be deemed held in trust by the
Company for and on behalf of the Lender.  All funds that the Company
delivers to the Lender from the Equity Raise shall be deemed prepayments of the
Note.





Pursuant
to the Agreement and the Note, the Company’s obligations thereunder are secured
by a first priority lien in and to all of SteelCloud’s intellectual property
rights, title and interest in and to the SteelWorks® Mobile integrated server
appliance software.


F-7


As an
inducement to the Lender to make the loan to the Company, the Company issued to
the Lender a warrant to purchase up to 625,000 shares of SteelCloud’s common
stock, par value $0.001 per share.  The Warrant is exercisable for
four years at an exercise price of $0.15 per share.  The Company
determined the fair value of these warrants utilizing the Black-Sholes
method.  The fair value of these warrants at issuance date was
approximately $130,000.





The loan
amount of $250,000 was allocated between the note payable and warrants based
upon their relative fair market values. The difference between the face amount
of the note of $250,000 and the note payable amount of $164,425 recorded at date
of execution represents the debt discount of $85,575 which will be amortized
over the life of the note.  To determine the fair value of the
warrants, management used the Black-Scholes Model which includes assumptions on
the period end stock price, historical stock volatility, risk free interest rate
and term of warrants.


The fair
value of the loan at July 31, 2009 was approximately $180,035.





5.
              Equity




Investment




On June
15, 2009, the Company sold an aggregate of 350,000 shares of its common stock,
$.001 par value, to its seven directors, for aggregate cash proceeds of
$87,500.  The shares of common stock were sold at $0.25 per share, or $.01
higher than the closing price of the common stock on the date of
sale.  Each share of common stock was accompanied by one warrant to
purchase one additional share of common stock (the “Warrant”).  The
Warrants are exercisable for five years from the date of issuance at an exercise
price of $0.25 per share.  The seven directors have entered into a
lock-up agreement with the Company, restricting their ability to exercise the
warrants until the Company receives shareholder approval for the issuance of the
Warrants.




Stock-based
Compensation




The
Company recognized approximately $53,000 and $110,000 of stock-based
compensation expense during the three month periods ended July 31, 2009 and
2008, respectively.  Stock-based compensation expense for the
three-month period ended July 31, 2009 and 2008 increased the Company’s basic
and diluted loss per share by $0.01.  The Company recognized
approximately $181,000 and $274,000 of stock-based compensation expense during
the nine month periods ended July 31, 2009 and 2008,
respectively.  Stock-based compensation expense for the nine month
periods ended July 31, 2009 and 2008 decreased the Company’s basic and diluted
loss per share by $0.01.  The estimated fair value of the Company’s
stock-based awards is amortized on a straight-line basis over the awards’
original service period.


F-8


On
February 28, 2009, the Company entered into an Employment Agreement Amendment
with Kevin Murphy, the Company’s current Chief Financial Officer in which Mr.
Murphy agreed to forfeit options to purchase an aggregate of 225,000 shares of
the Company’s common stock, $0.001 par value per share and instead entered into
separate Incentive Stock Option and Restricted Stock agreements with the
Company.  Pursuant to the Incentive Stock Option agreement Mr. Murphy
was granted an option to purchase 150,000 shares of common stock, which shall
vest quarterly in arrears over a one year period.  Pursuant to the
Restricted Stock Agreement with the Company, Mr. Murphy shall receive 90,000
shares of restricted stock which shall vest ratably over 12 months, or 7,500
shares per month, so long as Mr. Murphy is employed by the Company on the last
day of each month.  The cancellation and reissuance of equity awards
to Mr. Murphy was treated as a modification of Mr. Murphy’s forfeited awards in
accordance with SFAS No. 123R.




Restricted
Stock




During
the nine month period ended July 31, 2009, the Company granted 546,000 shares of
restricted common stock pursuant to its Amended 2007 Stock Option and Restricted
Stock Plan.  The Company did not grant any restricted stock for the
three month periods ended July 31, 2009 and July 31, 2008 or the nine month
period ended July 31, 2008.  The fair value of the restricted stock
was determined based upon the closing stock price on the date of
grant.  The restricted stock grants vest quarterly over a one year
period.  As of July 31, 2009, 150,000 of the restricted stock grants
vested.  The Company’s restricted stock grants are accounted for as
equity awards and are recognized on a straight-line basis over the requisite
service period.  The Company’s restricted stock agreements do not
contain any post-vesting restrictions.  For the three and nine month
periods ended July 31, 2009, the Company recognized $32,000 and $109,000,
respectively, of stock-based compensation expense associated with these
restricted stock awards.




Additional
Paid-in Capital




Additional
paid in capital has increased approximately $354,000 during the nine month
period ended July 31, 2009  due to $181,000 of stock based
compensation expense, $86,000 due to the issuance of warrants and $87,500 due to
sales of common stock.




6.
            Inventories




Inventories
consisted of the following:




October 31,
                  
                  
                  July 31,2008
                  
                  
                  2009Raw
      materials
                  
                  $
                  344,898
                  
                  
                  $
                  80,451Work
      in
      process
                  
                  
                  -
                  
                  
                  
                  -Finished
      goods
                  
                  
                  177,022
                  
                  
                  
                  31,006$
                  521,920
                  
                  
                  $
                  111,457




F-9


7.
              Earnings
      per Share
  Basic
earnings per share is based on the weighted average number of common shares
outstanding during the period and is calculated by dividing the net earnings
(loss) by the weighted average number of common shares outstanding. Diluted
earnings per share is based on the weighted average number of common shares
outstanding plus common stock equivalents associated with stock options and
warrants and is calculated by dividing net earnings by the weighted average
number of common shares outstanding used in the basic earnings per share
calculation plus the common stock equivalent of stock options and warrants. The
dilutive weighted average number of common stock outstanding excluded potential
common stock from stock options and warrants of approximately 128,000 and
340,000 for the three month periods ended July 31, 2009 and 2008, respectively,
and 128,000 and 404,000 for the nine month periods ended July 31, 2009 and 2008,
respectively.  These shares were excluded from the earnings per share
calculation due to their antidilutive effect resulting from the loss from
operations.
  8.
              Income
      Tax
  In the
three and nine month periods ended July 31, 2008, the Company recorded an income
tax benefit attributable to discontinued operations of $(312,096) and income tax
expense from discontinued operations of $393,596.  In accordance with
intra-period tax allocation rules the Company recorded a corresponding income
tax expense on continuing operations $312,396 and income tax benefit on
continuing operations of $(393,596) for the three and nine month periods ended
July 31, 2008.  The income tax benefit from discontinued operations in
the three month period ended July 31, 2008 was due to a significant decrease in
the Company’s estimated taxable income for discontinued operations for the
fiscal year ended October 31, 2008.
 
 On
November 1, 2007, the Company adopted FASB Interpretation No. 48 “Accounting for
Uncertainty in Income Taxes” (“FIN 48”). FIN 48 prescribes a recognition
threshold that a tax position is required to meet before being recognized in the
financial statements and provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition issues.  The Company has an unrecognized tax
benefit of approximately $61,000 and does not expect any of this amount to
reverse in the next twelve months.  The amount of unrecognized tax
benefits that, if recognized, would impact the effective tax rate is
$0.
  The
Company conducts business in the U.S. and is subject to tax in that
jurisdiction. As a result of its business activities, the Company files tax
returns that are subject to examination by the respective federal and state tax
authorities. For income tax returns filed by the Company, the Company is no
longer subject to U.S. federal, or state tax examination by tax authorities for
years before October 31, 2006, although carryforward tax attributes that were
generated prior to October 31, 2006 may still be adjusted upon examination by
tax authorities if they either have been or will be utilized.  The
Company’s accounting policy is to recognize interest and penalties related to
income tax matters in general and administrative expense. The Company had $0
accrued forinterest
and penalties as of July 31, 2009.
  9.
              Commitments
      and Contingencies
  The
Company has accrued approximately $51,000 pertaining to payroll taxes and
related interest resulting from the failure to report certain employee
reimbursements as compensation.  The Company has filed the necessary
returns.  The Company has retained the contingency to account for
additional taxes, interest and penalties that may be assessed.
  10.
              Subsequent
      Events
  The
Company has evaluated subsequent events through September 14, 2009.
 NASDAQ
Listing
 On March
23, 2009, the Company received notice, under NASDAQ Marketplace Rule 4310(c)(3),
that its common stock was subject to potential delisting from the NASDAQ Capital
Market because the Company did not meet the criteria of NASDAQ Listing Rule
5550(b) (the “Rule”) and did not have a minimum of $2,500,000 in stockholders’
equity, $35,000,000 market value of listed securities, or $500,000 of net income
from continuing operations for the most recently completed fiscal year or two of
the three most recently completed fiscal years.  The Company provided
NASDAQ with a specific plan of how it intended to achieve and sustain compliance
with all the NASDAQ Capital Market listing requirements, including a time frame
for completion of such plan.  The plan included the following two
strategies: (i) increasing our stockholders equity in excess of the minimum
$2,500,000 requirement by raising between $3,000,000 to $4,000,000 through an
equity transaction; and (ii) identifying a strategic partner interested in
either merging with or acquiring the Company.  On April 28, 2009 the
Company received notice from NASDAQ indicating that NASDAQ had granted the
Company’s request for an extension of time to regain compliance with the
Rule.  Pursuant to the terms of the extension, the Company was
required to: (a) on or before July 6, 2009, complete an equity transaction or a
merger and/or acquisition, and (b) make appropriate disclosures to the SEC and
NASDAQ on a Form 8-K.  The Company was not able to complete an equity
transaction or a merger and/or acquisition by July 6, 2009, and on July 8, 2009,
the Company received written notification from NASDAQ stating that it did not
meet the terms of the extension, and that, as a result, the Company’s common
stock would be subject to suspension from trading at the opening of business on
July 17, 2009, and delisted from NASDAQ.  The notification stated that
a hearing request made to the NASDAQ Hearing Panel (the “Panel”) to appeal the
determination would stay the delisting of the Company’s common stock pending the
Panel’s decision.  On July 15, 2009, the Company requested a hearing
to appeal the determination before the Panel and to present its plan for
regaining compliance with the Rule (the “Appeal”).  On August 4, 2009,
the Company received notice that NASDAQ received its Appeal, and that the
delisting action has been stayed, pending a final written decision by the Panel
after an oral/written hearing (the “Hearing”), where the Company was required to
demonstrate its ability to regain and sustain compliance with the
Rule.  The Hearing was held at 11:00 A.M. EST, on September 3, 2009.
The Company presented its updated plan of compliance to the Panel on that
date.  The Company is awaiting response from the Panel regarding the
determination of its appeal.  There can be no assurance that the Panel
will grant the Company’s request for continued listing.
  F-10
  ITEM
      2.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
  References
herein to “we”, “our”, “ours” and “us” are to SteelCloud, Inc.
  Certain
statements contained herein may constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. The words or
phrases “would be,” “will allow,” “intends to,” “will likely result,” “are
expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or
similar expressions are intended to identify “forward-looking statements.”
Because such statements include risks and uncertainties, actual results may
differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to, our ability to obtain financing in the short
term, risks associated with the integration of businesses following an
acquisition, concentration of revenue from one source, competitors with broader
product lines and greater resources, emergence into new markets, the termination
of any of our significant contracts or partnerships, our inability to maintain
working capital requirements to fund future operations or our inability to
attract and retain highly qualified management, technical and sales personnel.
Statements made herein are as of the date of the filing of this Quarterly Report
on Form 10-Q with the Securities and Exchange Commission (the “SEC”) and should
not be relied upon as of any subsequent date. Unless otherwise required by
applicable law, we do not undertake, and we specifically disclaim, any
obligation to update any forward-looking statements to reflect occurrences,
developments, unanticipated events or circumstances after the date of such
statement.
  The
following discussion should be read in conjunction with the consolidated
financial statements and Footnotes thereto included in Item 1 in this Quarterly
Report on Form 10-Q,and with our Annual Report on Form 10-K for the fiscal year
ended October 31, 2008 as amended, filed by us with the SEC.
  OVERVIEW
  Founded
in 1987, we are a developer of mobility appliance software solutions primarily
for the Research In Motion® (RIM) BlackBerry market.  We design and
integrate our software into specialized server appliances targeted at Department
of Defense (“DoD”), public sector, commercial, and remote hosting
customers.
  Recent
Developments
 
 Board
of Directors Investment
 
 On June
15, 2009, we sold an aggregate of 350,000 shares of our common stock, $.001 par
value, to our seven directors, for aggregate cash proceeds of $87,500.
 The shares of common stock were sold at $0.25 per share, or $.01 higher
than the closing price of the common stock on the date of sale.  Each
share of common stock is accompanied by one warrant to purchase one additional
share of common stock (the “Warrant”).  The Warrants are exercisable
for five years from the date of issuance at an exercise price of $0.25 per
share. The seven directors have entered into a lock-up agreement with us,
restricting their ability to exercise the Warrants until we receive shareholder
approval for the issuance of the Warrants.
 
 Loan
and Note Payable
 
 On July
1, 2009, we entered into a Business Loan and Security Agreement with Caledonia
Capital Corporation, a Delaware Corporation (the Lender”) pursuant to which the
Lender agreed to lend us $250,000 in the form of a Secured Promissory Note (the
Note”) which was issued on July 1, 2009.  The Note bears interest at a
rate of 15% per annum, and is payable in quarterly installments commencing three
months after the Issuance Date, or October 1, 2009.  The principal
amount of the Note is due and payable in full on December 29, 2009 (the
“Maturity Date”).  There are no penalties for early prepayment of the
Note.
  2
 
 In the
event that any installment of principal and/or interest due under the Note is
not received by the Lender within ten (10) days after the date when the same is
due, then we shall be required to pay a late charge of 5.0% of such
installment.
 
 Additionally,
in the event that we receive investments from one or more investors in one or
more transactions in an aggregate amount in excess of $750,000, whether in the
form of cash, negotiable or non-negotiable instruments or any form of payment in
exchange for the issuance of any certificated or non-certificated security,
whether in the form of debt or equity (an “Equity Raise”), at any time between
the Issuance Date and the Maturity Date, shall be required, within five (5)
business days after the Equity Raise first exceeds $750,000, to curtail the
accrued interest and outstanding principal balance of the Note by an amount
equal to the amount by which the Equity Raise then exceeds $750,000 (but in no
event by more than the then outstanding principal balance and interest accrued
on the Note). Until delivery of such funds to the Lender, all such funds shall
be deemed held in trust by us for and on behalf of the Lender.  All
funds that we deliver to the Lender from the Equity Raise shall be deemed
prepayments of the Note.
 
 Pursuant
to the Agreement and the Note, our obligations thereunder are secured by a first
priority lien in and to all of our intellectual property rights, title and
interest in and to the SteelWorks® Mobile integrated server appliance
software.
  As an
inducement to the Lender to make the loan, we  issued to the Lender a
warrant to purchase up to 625,000 shares of our common stock, par value $0.001
per share.  The Warrant is exercisable for four years at an exercise
price of $0.15 per share.  We determined fair value of these warrants
utilizing the Black-Sholes method.  The fair value of these warrants
at issuance date was approximately $130,000.
  Sale
of Integration Business
 
 On July
10, 2009, we entered into an Asset Purchase Agreement (the “Agreement”) with NCS
Technologies, Inc., a Virginia corporation (“NCS”), pursuant to which we agreed
to sell to NCS, and NCS agreed to purchase from us, all of our right, title and
interest in and to the assets relating to our computer integration
business.  The purchase price was $475,000 of which $150,000 was paid
as a deposit and the remaining $325,000 is an earn-out amount, which is payable
from and to the extent of revenue NCS receives during the three-year period
after the closing date from certain existing and prospective clients, at a rate
equal to 15% of the net sales price received by NCS from such
clients.  Any payments by NCS to us are due on or before the 10th
business day following the month in which NCS receives the payments from the
client(s).
 
 We have
classified the integration business as discontinued operations for the three and
nine month periods ending July 31, 2009 as well as all comparative periods
presented.  Certain amounts have been reclassified in order to conform
to current period presentation.
 
 NASDAQ
Listing
  On March
23, 2009, we received notice, under NASDAQ Marketplace Rule 4310(c)(3), that our
common stock was subject to potential delisting from the NASDAQ Capital Market
because we did not meet the criteria of NASDAQ Listing Rule 5550(b) (the “Rule”)
and did not have a minimum of $2,500,000 in stockholders’ equity, $35,000,000
market value of listed securities, or $500,000 of net income from continuing
operations for the most recently completed fiscal year or two of the three most
recently completed fiscal years.  We provided NASDAQ with a specific
plan of how we intended to achieve and sustain compliance with all the NASDAQ
Capital Market listing requirements, including a time frame for completion of
such plan.  Our plan included the following two strategies: (i)
increasing our stockholders equity in excess of the minimum $2,500,000
requirement by raising between $3,000,000 to $4,000,000 through an equity
transaction; and (ii) identifying a strategic partner interested in either
merging with or acquiring us.  On April 28, 2009 we received notice
from NASDAQ indicating that NASDAQ had granted our request for an extension of
time to regain compliance with the Rule.  Pursuant to the terms of the
extension, we were required to: (a) on or before July 6, 2009, complete an
equity transaction or a merger and/or acquisition, and (b) make appropriate
disclosures to the SEC and NASDAQ on a Form 8-K.    We were
not able to complete an equity transaction or a merger and/or acquisition by
July 6, 2009, and on July 8, 2009, we received written notification from NASDAQ
stating that we did not meet the terms of the extension, and that, as a result,
our common stock would be subject to suspension from trading at the opening of
business on July 17, 2009, and delisted from NASDAQ.  The notification
stated that a hearing request made to the NASDAQ Hearing Panel (the “Panel”) to
appeal the determination would stay the delisting of our common stock pending
the Panel’s decision.  On July 15, 2009, we requested a hearing to
appeal the determination before the Panel and to present our plan for regaining
compliance with the Rule (the “Appeal”).  On August 4, 2009, we
received notice that NASDAQ received our Appeal, and that the delisting action
has been stayed, pending a final written decision by the Panel after an
oral/written hearing (the “Hearing”), where we were required to demonstrate our
ability to regain and sustain compliance with the Rule.  The Hearing
was held at 11:00 A.M. EST, on September 3, 2009. We presented our updated plan
of compliance to the Panel on that date.  We are awaiting response
from the Panel regarding the determination of its appeal.  There can
be no assurance that the Panel will grant our request for continued
listing.
  3
 
 Business
Overview
  BlackBerry®
Enterprise Server Solution (SteelWorks®)
  As an
extension of our ISV business, we developed SteelWorks® Mobile (“SteelWorks
Mobile”), an appliance solution specifically for the BlackBerry Enterprise
Server (“BES”).  SteelWorks Mobile was developed in conjunction with
Research in Motion (“RIM”).   SteelWorks Mobile is an integrated
server appliance that enables virtually any size organization to implement the
BES at a fraction of the cost, time, and resource commitment.  We have
filed for patent protection for the SteelWorks Mobile technology we created for
the installation wizard, backup and restore features.  These patents
are currently pending approval from the U.S. Patent and Trademark
Office.
  In
addition, we developed SteelWorks FedMobile, our BlackBerry Enterprise Server
appliance solution specifically for the Department of Defense (“DoD”) and other
related agencies.  The SteelWorks FedMobile appliance builds upon
SteelWorks Mobile by automating the application of the Defense Information
Systems Agency’s Security Technical Implementation Guides (“STIGs”) to the BES
installation process.  The STIG mandates the policies for which the
DoD and related agencies must operate their wireless
communications.  As a result, our FedMobile appliance allows DoD
organizations to implement a STIG compliant BES infrastructure in a fraction of
the time, cost, or resources necessary to what is otherwise a time intensive and
manual STIG process.
  Professional
Services
  We
provide information technology (“IT”) consulting and contract staffing solutions
for our commercial and government clients.  Our consultants are
subject matter experts in network infrastructure complexities and security
technologies including firewalls, content inspection, intrusion detection, spam
and vulnerability scanning.  For our contract staffing solutions, our
personnel function as “virtual” employees, performing work directly under the
auspices of client management and serve as an extension of the client’s in-house
staff resources.
  Research
and Product Development
  By
investing in product development, we believe we will have more control over the
functionality and marketing of our products.  We also believe that the
resulting intellectual property will increase the competitiveness of our
offerings and improve product margins.  For the three and nine months
ended July 31, 2009, we incurred research and development costs of approximately
$54,000 and $152,000, respectively.  We will continue to incur costs
for product development in the future.
  4
  GSA
Contract
  We have a
multiple award schedule contract with the U.S. General Services Administration
(the “GSA Contract”).  The GSA Contract was originally awarded in
April 1996.  It was renewed in fiscal years 2002 and 2007, and is
valid through March 31, 2012.  In August 2006, GSA Contract auditors
awarded us an “Outstanding” rating for our management and execution of the GSA
Contract.  The GSA Contract enables government IT purchasers to
acquire all of their needed goods and services from a particular vendor and
largely limits the competition to selected vendors holding GSA
Contracts.  For the three and nine months ended July 31, 2009, our GSA
Contract had sales of approximately $150,000 and $976,000 ,
respectively.
  CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
certain judgments, estimates and assumptions that could affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. We
based our estimates and assumptions on historical experience and on various
other assumptions believed to be applicable, and evaluated them on an on-going
basis to ensure they remained reasonable under current conditions. Actual
results could differ significantly from those estimates.  No changes
to our critical accounting policies have taken place since October 31,
2008.
 
 Recently
Issued Accounting Pronouncements
  Effective
November 1, 2008, we adopted the provisions of Statement of Financial Accounting
Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”) and Statement of
Financial Accounting Standards No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS No. 159”).  SFAS 157, which
defines fair value, establishes a framework for measuring fair value in
accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), and
expands disclosures about fair value measurements.  SFAS 157 clarifies
that fair value is an exit price, representing the amount that would be received
to sell asset or paid to transfer a liability in an orderly transaction between
market participants.  SFAS 159 permits an entity to measure certain
financial assets and financial liabilities at fair value with changes in fair
value recognized in earnings each period. For the three and six month periods
ended July 31, 2009, we have elected not to use the fair value option permitted
under SFAS 159 for any of our financial assets and financial liabilities that
are not already recorded at fair value.
  In
February 2008, the FASB issued Staff Position No. 157-2, “Effective Date of FASB
Statement No. 157” (“FSP 157-2”).  FSP 157-2 deferred the effective
date of FAS 157 for all nonfinancial assets and nonfinancial liabilities to
fiscal years beginning after November 15, 2008.  We are currently in
the process of evaluating the effect, if any, the adoption of FSP 157-2 will
have on our financial statements.
  In
October 2008, the FASB issued Staff Position No. 157-3, “Determining the Fair
Value of a Financial Asset When the Market for that Asset is not Active” (“FSP
157-3”).  FSP 157-3 provides guidance for determining the fair value
of a financial asset in an inactive market.  We adopted FAS 157-3 as
of the quarter ended July 31, 2009.  The adoption did not have a
material impact on the financial statements.
  In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141 (Revised 2007) “Business Combinations” (“SFAS No. 141R”).  SFAS
No. 141R, which replaces SFAS No. 141, requires that the acquisition method of
accounting (which SFAS No. 141 called the “purchase method”) be used for all
business combinations and for an acquirer to be identified for each business
combination.  SFAS No. 141R also establishes principles and
requirements for how the acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree; recognizes and measures the goodwill
acquired in the business combination or a gain from a bargain purchase; and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination.  SFAS No. 141R also requires that acquisition-related
costs be recognized separately from the business combination.  SFAS
No. 141R will apply prospectively to business combinations for which the
acquisition date is after fiscal years beginning on or after December 15,
2008.  We are in the process of evaluating the effect, if any, the
adoption of SFAS No. 141R will have on our financial statements.
 5
  In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, “Noncontrolling Interests in Consolidated Financial Statements — an
amendment of ARB No. 51” (“SFAS No. 160”).  SFAS No. 160 requires all
entities to report noncontrolling (minority) interests in subsidiaries as equity
in the consolidated financial statements.  Its intention is to
eliminate the diversity in practice regarding the accounting for transactions
between an entity and noncontrolling interests.  This statement is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008.  Earlier adoption is
prohibited.  We are in the process of evaluating the effect, if any,
the adoption of SFAS No. 160 will have on our financial statements.
  In May
2008, The FASB issued Statement of Financial Accounting Standards No.162 “The
Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”), which
reorganizes the GAAP hierarchy.  SFAS 162 is intended to improve
financial reporting by providing a consistent framework for determining what
accounting principles should be used in preparing GAAP financial
statements.  With the issuance of SFAS 162, the FASB concluded that
the GAAP hierarchy should be directed toward the entity and not its auditor, and
reside in the accounting literature established by the FASB as opposed to the
American Institute of Certified Accountants Statement on Auditing Standards No.
69, The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles”.  SFAS 162 will become effective 60 days
following the SEC’s approval of the Public Accounting Oversight Board amendments
to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles” and is not expected to have any impact on our
financial statements.
  In May
2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165
is intended to establish general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for
selecting that date, that is, whether that date represents the date the
financial statements were issued or were available to be issued. We adopted
SFAS 165 as of July 31, 2009.
  In April
2009, the FASB issued FSP FAS 107-1 and APB-28-1, “Interim Disclosure about Fair
Value of Financial Instruments” (FSP 107-1/APB 28-1). FSP 107-1/APB 28-1
requires interim disclosures regarding the fair values of financial instruments
that are within the scope of FAS 107, “Disclosures about the Fair Value of
Financial Instruments”. Additionally, FSP107-1/APB28-1 requires disclosure of
the methods and significant assumptions used to estimate the fair value of
financial instruments on an interim basis as well as changes of the methods and
significant assumptions from prior periods. FSP 107-1/APB 28-1 does not change
the accounting treatment for these financial instruments and is effective for
interim reporting periods ending after June 15, 2009. We adopted FSP 107-1/APB
28-1 during the quarter ended July 31, 2009 and  disclosed the fair
value of our financial instruments in the financial
statements.
  In April
2009, the FASB issued FSP 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairment” (FSP 115-2/124-2). FSP 115-2/124-2 amends the
requirements for the recognition and measurement of other-than-temporary
impairments for debt securities by modifying the pre-existing “intent and
ability” indicator. Under FSP 115-2/124-2, an other-than-temporary impairment is
triggered when there is an intent to sell the security, it is more likely than
not the security will be required to be sold before recovery, or the security is
not expected to recover the entire amortized cost basis of the
security.  Additionally, FSP 115-2/124-2 changes the presentation of
another-than-temporary impairment in the income statement for those impairments
involving credit losses. The credit loss component will be recognized in
earnings and the remainder of the impairment will be recorded in other
comprehensive income. FSP 115-5 2/124-2 is effective for interim and annual
reporting periods ending after June 15, 2009. We adopted FSP 115-5 2/124-2 as of
the quarter ended July 31, 2009.
  6
  RESULTS
OF OPERATIONS
  The
overall economic downturn has impacted virtually every area of our
business.  As a result, on July 10, 2009, we sold our hardware
integration business to NCS.  Accordingly, we have reclassified
amounts associated with this business as discontinued operations.  The
discussion below represents our analysis of the continuing
operations.  Discontinued operations are also discussed below,
separately.
  For
the three months ended July 31, 2009 compared to the three months ended July 31,
2008:
  Net
Revenue Discussion:
  The
following table summarizes our net revenue for the three months ended July 31,
2008 and 2009 in dollars and as a percentage of net revenues.
  Three Months Ended July 31,2008
                  
                  
                  2009
                  
                  
                  Increase (decrease)% of Net
                  
                  
                  
                  
                  
                  % of NetDollars
                  
                  
                  Revenues
                  
                  
                  Dollars
                  
                  
                  Revenues
                  
                  
                  Dollars
                  
                  
                  PercentageProducts
                  
                  $
                  57,228
                  
                  
                  
                  6.33
                  %
                  
                  $
                  88,518
                  
                  
                  
                  31.42
                  %
                  
                  $
                  31,290
                  
                  
                  
                  54.68
                  %Services
                  
                  
                  846,215
                  
                  
                  
                  93.67
                  %
                  
                  
                  193,187
                  
                  
                  
                  68.58
                  %
                  
                  
                  (653,028
                  )
                  
                  
                  (77.17
                  )%Total  net
      revenues
                  
                  $
                  903,443
                  
                  
                  
                  100.00
                  %
                  
                  $
                  281,705
                  
                  
                  
                  100.00
                  %
                  
                  $
                  (621,738
                  )
                  
                  
                  (68.82
                  )%
 
 The
increase in product revenue is primarily attributable to the introduction of our
new SteelWorks Mobile appliances.  Fiscal year 2008 product revenues
relate to other technology products that are not related to the SteelWorks
Mobile appliances.  Accordingly, we experienced 100% growth in this
appliance product in fiscal 2009.  The SteelWorks Mobile appliance was
launched in early fiscal 2009 and we anticipate sales will increase in future
periods as demand for the product increases.
  The
decrease in service revenue for the three-month period ended July 31, 2009 as
compared to the same period in fiscal 2008 is the result of our completing a
fiscal 2008 large services contract in December 2008.  We anticipate
service revenues will continue to fluctuate in future periods given the current
economic environment.
  Gross
Profit Discussion:
  The
following table summarizes our gross profit for the three months ended July 31,
2008 and 2009 in dollars, as a percentage of gross profit and as a percentage of
net revenues.
  Three Months Ended July 31,2008
                      
                      
                      2009
                      
                      
                      Increase (decrease)% of
                        Gross
                      
                      
                      
                      
                      
                      % of
                        GrossDollars
                      
                      
                      Profit
                      
                      
                      Dollars
                      
                      
                      Profit
                      
                      
                      Dollars
                      
                      
                      PercentageProducts
                      
                      $
                      23,076
                      
                      
                      
                      11.94
                      %
                      
                      $
                      53,016
                      
                      
                      
                      44.47
                      %
                      
                      $
                      29,940
                      
                      
                      
                      129.75
                      %Products
      - GM%
                      
                      
                      40.32
                      %
                      
                      
                      
                      
                      
                      
                      59.89
                      %Services
                      
                      
                      170,249
                      
                      
                      
                      88.06
                      %
                      
                      
                      66,190
                      
                      
                      
                      55.53
                      %
                      
                      
                      (104,059
                      )
                      
                      
                      (61.12
                      )%Services
      – GM%
                      
                      
                      20.12
                      %
                      
                      
                      
                      
                      
                      
                      34.26
                      %Total
      gross profit
                      
                      $
                      193,325
                      
                      
                      
                      100.00
                      %
                      
                      $
                      119,206
                      
                      
                      
                      100.00
                      %
                      
                      $
                      (74,119
                      )
                      
                      
                      (38.34
                      )%Total
      – GM%
                      
                      
                      21.40
                      %
                      
                      
                      
                      
                      
                      
                      42.32
                      %
  7
 
 The
increase in product gross profit percentage for the three months ended July 31,
2009 as compared to the same period in fiscal 2008 is primarily the result of
our new SteelWorks Mobile appliance.  Given the amount of intellectual
property and software created and developed for this product, we will achieve
significantly higher product gross margins as compared to the hardware
integration business.  We anticipate that the gross product margins
will fluctuate from quarter to quarter based on new functions and features
created for the product.  We believe that our gross margin percentage
for our SteelWorks Mobile family of products will be between 40% and
60%.
  The
increase in services gross profit for the three months ended July 31, 2009 as
compared to the same period in fiscal 2008 is primarily attributable to the
completion of a low margin services contract in December 2008.
  Operating
Expense Discussion:
  The
following table summarizes our operating expenses for the three months ended
July 31, 2008 and 2009 in dollars and as a percentage of net
revenues.
  Three Months Ended July 31,2008
                    
                    
                    2009
                    
                    
                    Increase (decrease)% of Net
                    
                    
                    
                    
                    
                    % of NetDollars
                    
                    
                    Revenues
                    
                    
                    Dollars
                    
                    
                    Revenues
                    
                    
                    Dollars
                    
                    
                    PercentageSelling
      and marketing
                    
                    $
                    248,557
                    
                    
                    
                    27.51
                    %
                    
                    $
                    153,412
                    
                    
                    
                    54.46
                    %
                    
                    $
                    (95,145
                    )
                    
                    
                    (38.28
                    )%Research
      and product development
                    
                    
                    58,066
                    
                    
                    
                    6.43
                    %
                    
                    
                    53,637
                    
                    
                    
                    19.04
                    %
                    
                    
                    (4,429
                    )
                    
                    
                    (7.63
                    )%General
      and administrative
                    
                    
                    899,042
                    
                    
                    
                    99.51
                    %
                    
                    
                    591,397
                    
                    
                    
                    209.93
                    %
                    
                    
                    (307,645
                    )
                    
                    
                    (34.22
                    )%Total
      operating expenses
                    
                    $
                    1,205,665
                    
                    
                    
                    133.45
                    %
                    
                    $
                    798,446
                    
                    
                    
                    283.43
                    %
                    
                    $
                    (407,219
                    )
                    
                    
                    (33.78
                    )%
 
 The
decrease in selling and marketing expense is the result of aligning expenses to
our current and future business models to focus on our SteelWorks Mobile
products. For the three months ended July 31, 2009 compared to the three months
ended July 31, 2008, marketing activities and expenses associated with selling
and marketing personnel decreased as a result of cost cutting
efforts.  We anticipate our sales and marketing costs will increase in
future periods in order to create demand for our new products.
  The
research and product development expense for the three months ended July 31,
2009 slightly decreased compared to the three months ended July 31,
2008.  We continue to make research and development investment into
our SteelWorks Mobile family of products.  We anticipate that these
research and development costs will continue in future periods.
  The
decrease in general and administrative expenses for the three months ended July
31, 2009 compared to the three months ended July 31, 2008 is primarily
attributable to a reduction in operating costs once the sale of our hardware
integration business was complete.  Furthermore, we have significantly
reduced our operating expenses from the prior year specifically relating to
rent, personnel, insurance and other corporate costs. We have  reduced
our overhead and personnel costs given the reduction of the business as certain
positions and resources are no longer needed to maintain
operations.
  8
  Other
Income (Expense) Discussion:
  The
following table summarizes our other income (expense) for the three months ended
July 31, 2008 and 2009 in dollars and as a percentage of net
revenues.
  Three Months Ended July 31,2008
                                
                                
                                2009
                                
                                
                                (Increase) decrease% of Net
                                
                                
                                
                                
                                
                                % of NetDollars
                                
                                
                                Revenues
                                
                                
                                Dollars
                                
                                
                                Revenues
                                
                                
                                Dollars
                                
                                
                                PercentageInterest
      expense
                                
                                $
                                (5,825
                                )
                                
                                
                                0.65
                                %
                                
                                $
                                (20,761
                                )
                                
                                
                                7.37
                                %
                                
                                $
                                (14,936
                                )
                                
                                
                                (256.4
                                )%
 
 The
increase in net interest expense for the three-month period ended July 31, 2009
is the result of us executing a loan from Caledonia Capital Corporation on July
1, 2009.  The note bears an annual interest rate of 15% payable on
October 1, 2009 and December 29, 2009.  In addition, we have accrued
interest associated with the settlement with our former landlord on May 22,
2009.   Interest on the settlement accrues at an annual rate of
18%.
  Income
Tax Expense:
 
 The
following table summarizes our income tax expense for the three months ended
July 31, 2008 and 2009 in dollars and as a percentage of net
revenues.
  Three
      Months Ended July 31,2008
                  
                  
                  2009
                  
                  
                  Increase
      (decrease)Dollars
                  
                  
                  %
      of NetRevenues
                  
                  
                  Dollars
                  
                  
                  %
      of NetRevenues
                  
                  
                  Dollars
                  
                  
                  PercentageIncome
      Tax Expense....
                  
                  $
                  312,096
                  
                  
                  
                  34.55
                  %
                  
                  $
                  -
                  
                  
                  
                  0.00
                  %
                  
                  $
                  (312,096
                  )
                  
                  
                  (100.00
                  )%
 
 In the
three month period ended July 31, 2008 we recorded an income tax benefit
attributable to discontinued operations and income tax expense on continuing
operations in accordance with intraperiod tax allocation rules. The income tax
benefit was due to a significant decrease in our estimated taxable income for
discontinued operations for the fiscal year ended October 31,
2008.  As such, we adjusted our income tax expense for the three month
period ended July 31, 2008 to reflect our change in estimates.
 Loss
from Continuing Operations Discussion:
  The
following table summarizes our loss from continuing operations for the three
months ended July 31, 2008 and 2009 in dollars and as a percentage of net
revenues.
  Three
      Months Ended July 31,2008
                
                
                2009
                
                
                (Increase)
      decreaseDollars
                
                
                %
      of Net
                  Revenues
                
                
                Dollars
                
                
                %
      of Net
                  Revenues
                
                
                Dollars
                
                
                PercentageLoss
      from continuing operations
                
                $
                (1,330,261
                )
                
                
                (147.24
                )%
                
                $
                (898,434
                )
                
                
                (318.93
                )%
                
                $
                431,827
                
                
                
                32.46
                %
 
 The
decrease in our loss from continuing operations for the three months ended July
31, 2009 as compared to the same period in fiscal 2008 is a result of increasing
our gross margins and reduction of operating costs.
  Income
(loss) from Discontinued Operations Discussion:
  The
following table summarizes our income (loss) from discontinued operations for
the three months ended July 31, 2008 and 2009 in dollars and as a percentage of
net revenues.
  Three
      Months Ended July 31,2008
                
                
                2009
                
                
                (Increase)
      decreaseDollars
                
                
                %
      of Net
                  Revenues
                
                
                Dollars
                
                
                %
      of Net
                  Revenues
                
                
                Dollars
                
                
                PercentageIncome
      (loss) from discontinued operations
                
                $
                388,575
                
                
                
                23.39
                %
                
                $
                (198,433
                )
                
                
                52.97
                %
                
                $
                (587,008
                )
                
                
                (48.93
                )%
 
 During
the 2008 fiscal year, we had several significant hardware integration contracts
which produced income.  Given the overall downward economic climate,
we experienced contract delays, non-renewals and order constriction in our
commercial business.  As a result of the continuing declines in
revenues as well as the cumulative losses, we determined to discontinue our
hardware integration business in the third quarter of the 2009 fiscal
year.
  9
  For
the nine months ended July 31, 2009 compared to the nine months ended July 31,
2008:
  Net
Revenue Discussion:
  The
following table summarizes our net revenue for the nine months ended July 31,
2008 and 2009 in dollars and as a percentage of net revenues.
  Nine Months Ended July 31,2008
                  
                  
                  2009
                  
                  
                  Increase (decrease)% of Net
                  
                  
                  
                  
                  
                  % of NetDollars
                  
                  
                  Revenues
                  
                  
                  Dollars
                  
                  
                  Revenues
                  
                  
                  Dollars
                  
                  
                  PercentageProducts
                  
                  $
                  1,863,083
                  
                  
                  
                  48.80
                  %
                  
                  $
                  188,319
                  
                  
                  
                  16.23
                  %
                  
                  $
                  (1,674,764
                  )
                  
                  
                  (89.89
                  )%Services
                  
                  
                  1,954,564
                  
                  
                  
                  51.20
                  %
                  
                  
                  971,945
                  
                  
                  
                  83.77
                  %
                  
                  
                  (982,618
                  
                  
                  
                  (50.27
                  )%Total  net
      revenues
                  
                  $
                  3,817,647
                  
                  
                  
                  100.00
                  %
                  
                  $
                  1,160,264
                  
                  
                  
                  100.00
                  %
                  
                  $
                  (2,657,383
                  )
                  
                  
                  (69.61
                  )%
 
 The
decrease in product revenue is primarily attributable to sales of ancillary
product revenues in fiscal 2008 to existing customers that were not included in
the sale of the hardware integration business.  Given the new focus of
our business in fiscal 2009, we do not anticipate a significant portion of our
revenues to be generated from ancillary technology products that are not focused
around the SteelWorks Mobile product line, however, we will continue to support
our existing customers and may sell products outside of our SteelWorks Mobile
product line from time to time.   Given the foregoing, SteelWorks
Mobile revenue increased 100% in fiscal 2009 compared to fiscal
2008.
  The
decrease in service revenue for the nine month period ended July 31, 2009 as
compared to the same period in fiscal 2008 is the result of us completing a
large services contract in December 2008.  We anticipate service
revenues to fluctuate in future periods as the current economic climate
improves.
  Gross
Profit Discussion:
  The
following table summarizes our gross profit for the nine months ended July 31,
2008 and 2009 in dollars, as a percentage of gross profit and as a percentage of
net revenues.
  Nine Months Ended July 31,2008
                      
                      
                      2009
                      
                      
                      Increase (decrease)% of
                        Gross
                      
                      
                      
                      
                      
                      % of
                        GrossDollars
                      
                      
                      Profit
                      
                      
                      Dollars
                      
                      
                      Profit
                      
                      
                      Dollars
                      
                      
                      PercentageProducts
                      
                      $
                      293,388
                      
                      
                      
                      91.45
                      %
                      
                      $
                      101,092
                      
                      
                      
                      30.04
                      %
                      
                      $
                      (192,296
                      )
                      
                      
                      (65.54
                      )%Products
      - GM%
                      
                      
                      15.75
                      %
                      
                      
                      
                      
                      
                      
                      53.68
                      %Services
                      
                      
                      358,084
                      
                      
                      
                      8.55
                      %
                      
                      
                      231,390
                      
                      
                      
                      69.59
                      %
                      
                      
                      (126,694
                      )
                      
                      
                      (35.38
                      )%Services
      – GM%
                      
                      
                      18.32
                      %
                      
                      
                      
                      
                      
                      
                      23.81
                      %Total
      gross profit
                      
                      $
                      651,472
                      
                      
                      
                      100.00
                      %
                      
                      $
                      332,482
                      
                      
                      
                      100.00
                      %
                      
                      $
                      (318,990
                      )
                      
                      
                      (48.96
                      )%Total
      – GM%
                      
                      
                      17.06
                      %
                      
                      
                      
                      
                      
                      
                      28.66
                      %
 
 The
significant increase in gross profit percentage for the nine months ended July
31, 2009 as compared to the same period in fiscal 2008 is the result of our
SteelWorks Mobile sales.  The product was launched in early fiscal
2009.  Given the significant intellectual property and software we
have created and developed for this product, we anticipate margins will continue
to improve in future periods.
  10
  The
increase in services gross profit for the nine months ended July 31, 2009 as
compared to the same period in fiscal 2008 is primarily attributable to the
completion of a low margin services contract in December 2008.
  Operating
Expense Discussion:
  The
following table summarizes our operating expenses for the nine months ended July
31, 2008 and 2009 in dollars and as a percentage of net revenues.
  Nine Months Ended July 31,2008
                    
                    
                    2009
                    
                    
                    Increase (decrease)% of Net
                    
                    
                    
                    
                    
                    % of NetDollars
                    
                    
                    Revenues
                    
                    
                    Dollars
                    
                    
                    Revenues
                    
                    
                    Dollars
                    
                    
                    PercentageSelling
      and marketing
                    
                    $
                    640,738
                    
                    
                    
                    16.78
                    %
                    
                    $
                    369,276
                    
                    
                    
                    31.83
                    %
                    
                    $
                    (271,462
                    )
                    
                    
                    (42.37
                    )%Research
      and product development
                    
                    
                    179,523
                    
                    
                    
                    4.70
                    %
                    
                    
                    151,869
                    
                    
                    
                    13.09
                    %
                    
                    $
                    (27,654
                    )
                    
                    
                    (15.40
                    )%General
      and administrative
                    
                    
                    2,635,418
                    
                    
                    
                    69.03
                    %
                    
                    
                    1,886,485
                    
                    
                    
                    162.59
                    %
                    
                    $
                    (748,933
                    )
                    
                    
                    (28.42
                    )%Severance
      and restructuring
                    
                    
                    -
                    
                    
                    
                    0.00
                    %
                    
                    
                    73,205
                    
                    
                    
                    6.31
                    %
                    
                    $
                    73,205
                    
                    
                    
                    100.00
                    %Total
      operating expenses
                    
                    $
                    3,455,679
                    
                    
                    
                    90.52
                    %
                    
                    $
                    2,480,835
                    
                    
                    
                    213.82
                    %
                    
                    $
                    (974,844
                    )
                    
                    
                    (28.21
                    )%
 
 The
decrease in selling and marketing expense is the result of aligning expenses to
our current and future business models to focus on our SteelWorks Mobile
products. For the nine months ended July 31, 2009 compared to the nine months
ended July 31, 2008, marketing activities and expense associated with selling
and marketing personnel decreased as a result of cost cutting
efforts.  We anticipate our sales and marketing costs will increase in
future periods in order to create demand for our new products.
  The
research and product development expense for the nine months ended July 31, 2009
slightly decreased compared to the nine months ended July 31,
2008.  We continue to make research and development investment into
our SteelWorks Mobile family of products.  We anticipate that these
research and development costs will continue in future periods.
  The
decrease in general and administrative expenses for the nine months ended July
31, 2009 compared to the nine months ended July 31, 2008 is primarily
attributable to a reduction in operating costs once the sale of our hardware
integration business was complete.  Furthermore, we have significantly
reduced our operating expenses from the prior year specifically relating to
rent, personnel, insurance and other corporate costs. We have reduced our
overhead and personnel costs given the reduction of the business as certain
positions and resources are no longer needed to maintain
operations.
  We did
not incur any severance or restructuring costs in fiscal 2008.  As
such, these costs increased 100% in fiscal 2009 compared to fiscal
2008.
  11
  Other
Income (Expense) Discussion:
  The
following table summarizes our other income (expense) for the nine months ended
July 31, 2008 and 2009 in dollars and as a percentage of net
revenues.
  Nine Months Ended July 31,2008
                        
                        
                        2009
                        
                        
                        (Increase) decrease% of Net
                        
                        
                        
                        
                        
                        % of NetDollars
                        
                        
                        Revenues
                        
                        
                        Dollars
                        
                        
                        Revenues
                        
                        
                        Dollars
                        
                        
                        PercentageInterest
      income (expense)
                        
                        $
                        5,417
                        
                        
                        
                        0.14
                        %
                        
                        $
                        (20,351
                        )
                        
                        
                        1.75
                        %
                        
                        $
                        (25,768
                        )
                        
                        
                        (475.69
                        )%
 
 The
increase in net interest expense for the nine month period ended July 31, 2009
is the result of the execution of  a loan from Caledonia Capital
Corporation on July 1, 2009.  The note bears an annual interest rate
of 15% payable on October 1, 2009 and December 29, 2009.  In addition,
we have accrued interest associated with our settlement with our former landlord
on May 22, 2009.   Interest on the settlement accrues at an
annual rate of 18%.
  Income
Tax (Benefit):
  The
following table summarizes our income tax benefit for the nine months ended July
31, 2008 and 2009 in dollars and as a percentage of net revenues.
  Nine
      Months Ended July 31,2008
                
                
                2009
                
                
                Increase
      (decrease)Dollars
                
                
                %
      of Net
                  Revenues
                
                
                Dollars
                
                
                %
      of Net
                  Revenues
                
                
                Dollars
                
                
                PercentageIncome
      Tax Benefit
                
                $
                (393,596
                )
                
                
                10.31
                %
                
                $
                -
                
                
                
                0.00
                %
                
                $
                393,596
                
                
                
                100.00
                %
 
 In the
nine month period ended July 31, 2008 we recorded an income tax expense
attributable to discontinued operations and income tax benefit on continuing
operations in accordance with intraperiod tax allocation rules. We made a
significant decrease in our estimated taxable income for discontinued operations
for the fiscal year ended October 31, 2008.  As such, we adjusted our
income tax benefit for the three month period ended July 31, 2008 to reflect our
change in estimates.
  Loss
from Continuing Operations Discussion:
  The
following table summarizes our loss from continuing operations for the nine
months ended July 31, 2008 and 2009 in dollars and as a percentage of net
revenues.
  Nine
      Months Ended July 31,2008
                
                
                2009
                
                
                Increase
      (decrease)Dollars
                
                
                %
      of Net
                  Revenues
                
                
                Dollars
                
                
                %
      of Net
                  Revenues
                
                
                Dollars
                
                
                PercentageLoss
      from continuing operations
                
                $
                (2,405,192
                )
                
                
                63.00
                %
                
                $
                (2,168,703
                )
                
                
                186.91
                %
                
                $
                (236,489
                )
                
                
                9.83
                %
 
 The
increase in loss from continuing operations for the three months ended July 31,
2009 as compared to the same period in fiscal 2008 is a result of overall
economic environment, delay in contract awards, reduction in customer orders and
overall lower revenues.  As a result, we determined in the third
quarter of our 2009 fiscal year to discontinue the hardware integration business
and focus solely on our SteelWorks Mobile products based on the Blackberry
Enterprise Server.
  Income
(loss) from Discontinued Operations Discussion:
  The
following table summarizes our income (loss) from discontinued operations for
the three months ended July 31, 2008 and 2009 in dollars and as a percentage of
net revenues.
  Nine Months Ended July 31,2008
                        
                        
                        2009
                        
                        
                        Increase (decrease)% of Net
                        
                        
                        
                        
                        
                        % of NetDollars
                        
                        
                        Revenues
                        
                        
                        Dollars
                        
                        
                        Revenues
                        
                        
                        Dollars
                        
                        
                        PercentageIncome
      (loss) from discontinued operations
                        
                        $
                        797,350
                        
                        
                        
                        8.11
                        %
                        
                        $
                        (583,434
                        )
                        
                        
                        5.94
                        %
                        
                        $
                        (1,380,784
                        )
                        
                        
                        (173.17
                        )%
  12


In Fiscal
2008, we had several significant hardware integration contracts which produced
income.  Given the overall downward economic climate, we experienced
contract delays, non-renewals and order constriction in our commercial
business.  As a result of the continuing declines in revenues as well
as the cumulative losses, we determined to discontinue our hardware integration
business in the third quarter of our 2009 fiscal year.  The net loss
on disposal was approximately $20,000.




LIQUIDITY
AND CAPITAL RESOURCES




We have
experienced recurring losses from operations and negative cash
flows.  For the nine months ended July 31, 2009, we incurred a net
loss of $2,752,137 and an accumulated deficit of $47,620,701 as of that
date.  The report from our independent registered public accounting
firm on our audited financial statements at October 31, 2008 contains an
explanatory paragraph regarding doubt as to our ability to continue as a going
concern as a result of our net loss from operations.  Despite our
history of revenues, we can give no assurance that we will be able to maintain
or increase our revenues in fiscal 2009 or that we will be successful in
reaching profitability or generate positive cash flows from our
operations.  We are considering all strategic options to improve our
liquidity and provide us with working capital to fund our continuing business
operations including equity offerings, asset sales and debt financing as
alternatives to improve our cash needs; however; we can offer no assurance that
we will be successful in identifying, obtaining or negotiating financing
terms.  If adequate funds are not available or are not available on
terms acceptable to us, we will likely not be able to take advantage of
unanticipated opportunities, develop or enhance services or products, respond to
competitive pressures, or continue as a going concern.




As of
July 31, 2009, we had cash and cash equivalents of approximately $366,210 and a
working capital deficit.  As of September 11, 2009, we have
approximately $162,000 cash on hand, which is adequate for approximately 1
additional month of operations.  We do not have any working capital
commitments nor do we presently have any external sources of working
capital.  Historically, our revenues have not been sufficient to fund
our operations and we have relied on capital provided through the sale of equity
securities.  Our working capital needs in future periods will depend
primarily on the rate at which we can increase our revenues while controlling
our expenses and decreasing the use of cash from
operations.  Additional capital is needed to fund acquisitions of
additional companies or assets, although we are not a party to any pending
agreements at this time and, accordingly, cannot estimate the amount of capital
which may be necessary, if any, for acquisitions.  We believe cash on
hand together with cash generated from operations will not be adequate to
sustain our operations until our next fiscal quarter and that additional
financing is needed.  We are currently in the process of registering
shares of our common stock to sell directly to investors in order to raise
additional capital.  We can provide no assurances that any such
financings will be consummated.




For the
nine months ended July 31, 2009, we used $1.1 million in cash from operating
activities. Our primary use of cash was to finance our operating
loss.  The use and availability of our cash is affected by the timing,
pricing, and magnitude of orders for our products, and the timing of cash
outflows relating to these orders.




We
generated approximately $498,000 from our investing activities and $322,000 in
financing activities for the nine months ended July 31, 2009.




Our
consolidated financial statements for the three and nine months ended July 31,
2009 do not give effect to any adjustments to recorded amounts and their
classifications, which would be necessary should we be unable to continue as a
going concern and therefore, be required to realize our assets and discharge our
liabilities in other than the normal course of business and at amounts different
from those reflected in the consolidated financial statements.




Management
is exploring all options to improve our liquidity, including undertaking the
transactions described in the “Overview” section at page 10.




Off-Balance
Sheet Arrangements




Contractual
Obligations and Commercial Commitments




We have
significant contractual obligations for fiscal year 2009 and beyond for our
operating leases and employment agreements.


13


On
February 27, 2009, we entered into a lease amendment with the landlord of one of
our operation facilities whereby the current lease, which is presently scheduled
to expire on August 31, 2014, has been amended to provide for (i) the extension
of the lease term for a period of one (1) year and four (4) months ending on
December 31, 2015, and (ii) certain other modifications, including a reduction
in our rent cash payments by approximately $60,000 and $34,000 for the fiscal
years 2009 and 2010, respectively.  Our monthly straight-line rent
expense will be approximately $21,000 a month for the length of the
lease.




On May
22, 2009, we entered into a Stipulation/Consent Order with CRP (the
“Stipulation”), pursuant to an Affidavit and Statement of Account (the
“Affidavit”), stating, as declared by a general manager of Jones Lang LaSalle, a
property management company and agent for CRP Holdings A-1, LLC (“CRP”), the
landlord of 14040 Park Center Road, Suite 210, Herndon, Virginia 20171 (the
“Premises”), that CRP, as landlord, was seeking a judgment against us for: (i)
possession of the Premises, and (ii) monetary damages for nonpayment of rent due
under a sublease, dated September 28, 2004, by and between us and NEC America,
Inc. (“NEC”) (the “Sublease”), and a subsequent assignment of the Sublease to
CRP from NEC, dated December 15, 2008.  In the Stipulation we
acknowledged that the balance due for rent and additional rent for the Premises
was $168,637.96, together with attorney’s fees and court expenses of $7,041.00
through May 22, 2009 (the “Judgment Amount”).  Pursuant to the
Stipulation, we paid $30,000 (the “Forbearance Payment”) on May 22, 2009 toward
the Judgment Amount.  Further we agreed to, and have, vacated the
Premises.  CRP agreed to stay enforcement of the Judgment Amount until
the earlier of (a) our receipt of capital in the amount of at least $500,000, or
(b) May 31, 2010.  The matter was returned to the court’s files
pending our compliance with the terms of the Stipulation.




On
February 5, 2009, we entered into an Executive Retention Agreement (the “2009
Agreement”) with Brian Hajost, our current President and Chief Executive
Officer, effective as of January 16, 2009.  Pursuant to the terms of
the 2009 Agreement, as compensation for Mr. Hajost serving as our President and
Chief Executive Officer, Mr. Hajost receives (a) a semi-monthly salary of
$8,333.33 (or $200,000 annually); (b) a stock grant of 156,000 shares of our
common stock, which will vest ratably over 12 months; and (c) a stock option
grant of 300,000 shares of our common stock, which will vest ratably over a
three year term and have a five year exercise period.  The 2009
Agreement further provides that in the event we terminate Mr. Hajost’s
employment without cause (other than due to Mr. Hajost’s request), or if Mr.
Hajost terminates his employment for good reason, Mr. Hajost will be entitled to
(a) if the termination takes place within three months from the date of the 2009
Agreement, two months salary, (b) if the termination takes place between three
and six months from the date of the 2009 Agreement, three months salary, (c) if
the termination takes place between six months and one year from the date of the
2009 Agreement, six months salary, (d) if the termination takes place after the
first year anniversary of the 2009 Agreement, 12 months salary.  In
the event that a majority of our stock or a substantial portion of our assets
are acquired, the acquisition closes while Mr. Hajost is employed by us, and Mr.
Hajost’s employment with us is terminated without cause (other than due to Mr.
Hajost’s request) within 30 days of the acquisition, Mr. Hajost will be entitled
to severance pay equal to the lesser of (a) 24 months salary based on his annual
rate of pay for the calendar year before the calendar year of termination from
service, or (b) two times the IRS limit for qualified plans provided for in 26
U.S.C. § 401(a)(17) for the calendar year of termination of
service.




On
February 28, 2009, we entered into an Employment Agreement Amendment (the
“Amended Agreement”) with Kevin Murphy, our current Chief Financial Officer,
pursuant to which the terms of Mr. Murphy’s employment agreement, dated June 8,
2004, as amended on October 26, 2007 and December 31, 2008, were amended. Under
the terms of the Amended Agreement, Mr. Murphy’s annual base salary was reduced
to $193,500, from $215,000 and Mr. Murphy’s monthly general business allowance
was reduced to $500, from $1,000. The terms of the Amended Agreement further
provide that (a) Mr. Murphy agrees to forfeit options to purchase an aggregate
of 225,000 shares of our common stock, $0.001 par value per share (the “Common
Stock”), (b) Mr. Murphy shall enter into a separate Incentive Stock Option
agreement with us, pursuant to which Mr. Murphy shall be granted an option to
purchase 150,000 shares of our common stock, which shall vest quarterly in
arrears over a one year period, and (c) Mr. Murphy shall enter into a separate
Restricted Stock Agreement with us, pursuant to which Mr. Murphy shall receive
90,000 shares of restricted stock which shall vest ratably over 12 months, or
7,500 shares per month, so long as Mr. Murphy is employed by us on the last day
of each month.




As of
July 31, 2009 the total obligation of our employment agreements for fiscal year
2009 is approximately $197,000 and does not include applicable employment taxes
and potential bonuses.


14


We do not
have any purchase obligations, capital lease obligations or any material
commitments for capital expenditures.  We have not engaged in
off-balance sheet financing, commodity contract trading or significant related
party transactions.




ITEM
      3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




We are a
“smaller reporting company” as defined by Rule 12b-2 of the Securities Exchange
Act of 1934, as amended, and are not required to provide the information under
this item.




ITEM
      4T.
            CONTROLS
      AND PROCEDURES




Disclosure
Controls and Procedures




We have
established disclosure controls and procedures to ensure that material
information relating to our company is made known to the officers who certify
our financial reports and to other members of our senior management and our
Board of Directors.




A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within a company have been detected. Our disclosure controls and
procedures are designed to provide reasonable assurance of achieving our
objectives. Based upon their evaluation as of July 31, 2009, our Principal
Executive and Principal Financial and Accounting Officer have concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934) are effective at such
date.




Changes
in Internal Control Over Financial Reporting




There
were no changes in our internal control over financial reporting during our
fiscal quarter ended July 31, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.




PART
II. OTHER INFORMATION




ITEM
      1.
            LEGAL
      PROCEEDINGS




On May
22, 2009, we entered into a Stipulation, pursuant to an Affidavit, stating, as
declared by a general manager of Jones Lang LaSalle, a property management
company and agent for CRP, the landlord of the Premises, that CRP, as landlord,
was seeking a judgment against us for: (i) possession of the Premises, and (ii)
monetary damages for nonpayment of rent due under a sublease, dated September
28, 2004, by and between us and NEC (the “Sublease”), and a subsequent
assignment of the Sublease to CRP from NEC, dated December 15,
2008.  In the Stipulation we acknowledged Judgment
Amount.  Pursuant to the Stipulation, we made the Forbearance Payment
on May 22, 2009 toward the Judgment Amount.  Further we agreed to, and
have, vacated the Premises.  CRP agreed to stay enforcement of the
Judgment Amount until the earlier of (a) our receipt of capital in the amount of
at least $500,000, or (b) May 31, 2010.  The matter was returned to
the court’s files pending our compliance with the terms of the
Stipulation.





There are
routine legal claims pending against us that occur in the ordinary course of
business, but in the opinion of management, liabilities, if any, arising from
such claims will not have a material adverse effect on our financial condition
and results of operation.




Other
than the items previously disclosed we are not a party to any other material
legal proceedings.


15




ITEM
      1A.
            RISK
      FACTORS




RISKS RELATED TO OUR BUSINESS




Our auditors have expressed doubt
regarding our ability to continue as a going concern.





The report of our independent registered public
accounting firm on our consolidated financial statements for the fiscal year
ended October 31, 2008 contains an explanatory paragraph regarding our ability
to continue as a going concern based upon our history of net losses.  We
have had recurring annual operating losses since our fiscal year ended October
31, 2004.  We expect that such losses will continue at leastthroughour fiscal year ending October 31,
2009.





We cannot offer
assurances that any of the strategic options that we are considering to improve
our liquidity and provide us with working capital will occur or be
successful.





We are considering a variety of strategic options to
improve our liquidity and provide us with working capital to fund our continuing
business operations.  These options include equity offerings, asset
sales, debt financing and merger and acquisition transactions as alternatives to
improve our cash needs.  However, there can be no assurance that we will be
successful in negotiating or concluding any of these transactions.  If
we are unable to consummate one or more of these transactions, and adequate
funds are not available to us or are not available on acceptable terms, we will
likely not be able to continue as a going concern.





We may not be able to continue our operations without
additional funding.





As ofJuly
31, 2009, we had cash and cash equivalents
of approximately $336,00andnegativeworking capital.  We require
additional financing, which we may obtain through issuance of debt and/or
equity. Such financing, maynot be
forthcoming. As widely reported, the domestic financial markets have been
extremely volatile in recent months.  If such conditions and
constraints continue, we may not be able to acquire additional funds either
through credit markets or through equity markets. Even if additional financing
is available, it may not be available on terms we find favorable.Failure to
secure the needed additionalfinancing will
have an adverse effect on our ability to remain in business.





We may not be able to compete successfully against
current and future competitors.





The market for our products and services is highly
competitive. Many of our competitors offer broader product lines and have
substantially greater financial, technical, marketing and other resources than
we do, which could seriously harm our net sales and results of operation.
Additionally, our competitors may receive beneficial prices from purchasing
component parts in large quantities and may be party to product and process
technology license arrangement that are more favorable in terms of pricing and
availability than our arrangements. As a result, we may have difficulty
increasing our market share.




RISKS RELATED TO OUR COMMON STOCK




Our stock may be subject to substantial price and volume
fluctuations due to a number of factors, many of which are beyond our control
that may prevent our stockholders from reselling our common stock at a
profit.




The securities markets have experienced significant
price and volume fluctuations in recent months and the market price of our
common stock has been volatile. This market volatility, as well as general
economic, market or political conditions, has, and could continue to, reduce the
market price of our commonstock. In addition, our operating results
could be below the expectations of public market analysts and investors, and in
response the market price of our common stock could decrease significantly.
Investors may be unable to resell their shares of our common stock for a profit.
The decline in the market price of our common stock and market conditions
generally may adversely affect our ability to raise additional
capital.


16




If our common stock is delisted from theNASDAQCapital
Market, the market price of our common stock could decrease
significantly.




If we are unable to satisfy theNASDAQCapital
Market continued listing criteria in the future, our common stock may be
delisted from theNASDAQCapital Market. If this occurs, trading, if any, in our
common stock would thereafter be conducted in the over-the-counter market on the
“pink sheets” or the Over-the-Counter Bulletin Board. If our common stock is
delisted from theNASDAQCapital Market, a shareholder may find it more
difficult to dispose of, or to obtain quotations as to the price of our common
stock. Additionally, if our common stock is delisted from theNASDAQCapital
Market, the market price of our common stock could decrease
significantly.




Wemay issue more
shares in connection with a merger,acquisitionor a financing; this would result in substantial
dilution.




Any merger,acquisitionor financingeffected by us may result in the issuance of additional securities without
stockholder approval and may result in substantial dilution in the percentage of
our common stock held by our then existing stockholders. Moreover, the common
stock issued in any such merger or acquisition transaction may be valued on an
arbitrary or non-arm’s-length basis by our management, resulting in an
additional reduction in the percentage of common stock held by our then existing
stockholders. Our Board of Directors has the power to issue any or all of such
authorized but unissued shares without stockholder approval. To the extent that
additional shares ofcommonstock orpreferredstock
are issued in connection with a business transaction, combination or otherwise,
dilution to the interests of our stockholders will occur and the rights of the
holders of Common Stock might be materially adversely
affected.




ITEM
      2.
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS




Not
applicable.






ITEM
      3.
            DEFAULTS
      UPON SENIOR SECURITIES




Not
applicable.






ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS




On May
12, 2009 we held our 2008 Annual Meeting of Shareholders.  At the
Annual Meeting, our shareholders were asked to vote upon: (i) the election of
Directors; (ii) the approval of the amendment to the Corporation’s Certificate
of Incorporation to increase the number of authorized shares of common stock,
$0.001 par value, from 50,000,000 shares to 80,000,000 shares and; (iii) the
approval of Grant Thornton, as our independent certified public
accountants.





The
following persons were elected as Directors to serve on our Board of Directors
until the 2009 Annual Meeting of Shareholders by the votes noted next to such
persons name:





FOR
                  
                  
                  WITHHELDBrian
      H. Hajost
                  
                  
                  11,853,536
                  
                  
                  
                  1,461,122Kevin
      M. Murphy
                  
                  
                  10,925,186
                  
                  
                  
                  2,389,472James
      Bruno
                  
                  
                  11,895,601
                  
                  
                  
                  1,419,057VADM
      E.A. Burkhalter
                  
                  
                  11,798,012
                  
                  
                  
                  1,516,646Jay
      Kaplowitz
                  
                  
                  10,666,987
                  
                  
                  
                  2,647,671Benjamin
      Krieger
                  
                  
                  11,876,323
                  
                  
                  
                  1,438,335Ashok
      Kaveeshwar
                  
                  
                  11,824,711
                  
                  
                  
                  1,489,947


17


Brian H.
Hajost, Kevin M. Murphy, James Bruno, VADM E.A. Burkhalter, Jr., Jay Kaplowitz,
Benjamin Krieger, and Ashok Kaveeshwar were each elected as Directors and shall
serve until their respective successors have been duly elected and
qualified.





Our
Amended Certificate of Incorporation to increase the number of authorized shares
of common stock from 50,000,000 to 80,000,000 was approved by the following
vote:





FOR
                    
                    AGAINST
                    
                    
                    ABSTAIN12,019,052
                    
                    
                    1,289,376
                    
                    
                    
                    6,230


18


Grant
Thornton LLP was approved to act as our independent certified public accountants
for the ensuing year by the following vote:





FOR
                    
                    AGAINST
                    
                    
                    ABSTAIN12,899,279
                    
                    
                    224,037
                    
                    
                    
                    191,342




ITEM
      5.
            OTHER
      INFORMATION




Not
applicable.




ITEM
      6.
            EXHIBITS




Exhibit 11.1
                
                Statement
      of computation of earnings per share.Exhibit 31.1
                
                Certification
      of Chief Executive Officer and President Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.Exhibit 31.2
                
                Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.Exhibit 32.1
                
                Certification
      Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes – Oxley Act of 2002.Exhibit 32.2
                
                Certification
      Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes – Oxley Act of
2002.


19




SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.




September
      15, 2009
                        STEELCLOUD,
      INC.By:
                        /s/ Brian H. HajostName:
      Brian H. HajostTitle:
      Chief Executive Officer and PresidentBy:
                        /s/ Kevin MurphyName:
      Kevin MurphyTitle:
      Chief Financial
Officer


20