"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Certain information included in this Item 2 and elsewhere in this Form 10-Q that are not historical facts contain forward looking statements that involve a number of known and unknown risks, uncertainties and other factors that could cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievement expressed or implied by such forward looking statements. These risks and uncertainties include, but are not limited to, uncertainty of future sales levels, protection of patents and other proprietary rights, the impact of supply and manufacturing constraints or difficulties, product market acceptance, possible technological obsolescence of products, increased competition, litigation and/or government regulation, changes in Medicare reimbursement policies, competitive factors, the effects of a decline in the economy in markets served by the Company and other risks detailed in the Company's other filings with the Securities and Exchange Commission. The words "believe", "demonstrate", "intend", "expect", "estimate", "anticipate", "likely", "seek", "should" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on those forward-looking statements, which speak only as of the date the statement was made.

Results of Operations

Overview

iCAD is an industry-leading provider of advanced image analysis and workflow solutions that enable radiologists and other healthcare professionals to better serve patients by identifying pathologies and pinpointing cancer earlier. iCAD offers a comprehensive range of high-performance, expandable Computer-Aided Detection (CAD) systems and workflow solutions for mammography (film-based, digital radiography (DR) and computed radiography (CR), Magnetic Resonance Imaging (MRI), and Computed Tomography (CT)). iCAD's solutions aid in the early detection of the most prevalent cancers including breast, prostate and colon cancer. Early detection of cancer is the key to better prognosis, less invasive and lower treatment costs, and higher survival rates. Performed as an adjunct to mammography screening, CAD has quickly become the standard of care in breast cancer detection, helping radiologists improve clinical outcomes while enhancing workflow. Computer-enhanced breast and prostate MRI analysis streamlines case interpretation workflow and generates more robust information for more effective patient treatment. CAD for mammography screening is also reimbursable in the United States under federal and most third-party insurance programs. Since receiving U.S. Food and Drug Administration ("FDA") approval for the Company's first breast cancer detection product in January 2002, more than three thousand of iCAD's CAD systems have been placed in mammography practices worldwide. iCAD is the only stand alone company offering CAD solutions for the early detection of breast cancer.

iCAD's CAD mammography products have been shown to detect up to 72 percent of the cancers that biopsy proved were missed on the previous mammogram, an average of 15 months earlier. Our advanced pattern recognition technology analyzes images to identify patterns and then uses sophisticated mathematical analysis to mark suspicious areas.

The Company intends to apply its core competencies in pattern recognition and algorithm development in disease detection to its product development efforts. Its focus is on the development and marketing of cancer detection products for disease states where there are established or emerging protocols for screening as a standard of care. iCAD expects to pursue development or acquisition of products for select disease states that demonstrate one or more of the following: it is clinically proven that screening has a significant positive impact on patient outcomes, where there is an opportunity to lower health care costs, where screening is non-invasive or minimally invasive and where public awareness is high. Virtual colonoscopy (CTC) is a technology that has evolved rapidly in recent years. Based on the results of the National CT Colonography trial, the Company expects that the market for virtual colonoscopy will grow along with the procedures for early detection of colon cancer. This trial demonstrated that CTC is highly accurate for the detection of intermediate and large polyps and that the accuracy of CTC is similar to a colonoscopy. CT Colonography or CTC is emerging as an alternative imaging procedure for evaluation of the colon. The Company has developed Veralook™, a product for computer aided detection of polyps in the colon using CTC and has completed the analysis of the clinical trial data. The Company filed a 510(k) application with the FDA in the second quarter of 2009 seeking FDA approval to market Veralook in the United States. Colorectal cancer has been shown to be highly preventable with early detection and removal of polyps.

The Company's CAD systems include proprietary algorithm and other technology together with standard computer and display equipment. CAD systems for the film-based analog mammography market also include a radiographic film digitizer, manufactured by the Company and others for the digitization of film-based medical images. In July 2008, the Company acquired pharmaco-kinetic based CAD products that aid in the interpretation of contrast enhanced MRI images of the breast and prostate and began marketing these products in the fourth quarter of 2008.

The Company's headquarters are located in southern New Hampshire, with manufacturing and contract manufacturing facilities in New Hampshire and Massachusetts and research and development facilities in Ohio and New York.

Critical Accounting Policies

The Company's discussion and analysis of its financial condition, results of operations, and cash flows are based on the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those related to accounts receivable allowance, inventory valuation and obsolescence, intangible assets, income taxes, warranty obligations, contingencies and litigation. Additionally, the Company uses assumptions and estimates in calculations to determine stock-based compensation. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company's critical accounting policies are set forth in its Annual Report on Form 10-K for the fiscal year ended December 31, 2008. The Company believes that revenue recognition is a critical accounting policy because it is governed by multiple complex accounting rules, however there are no significant estimates or assumptions used in recording the Company's revenue.

Quarter Ended June 30, 2009 compared to Quarter Ended June 30, 2008 and Six Months Ended June 30, 2009 compared to Six Months Ended June 30, 2008

Revenue. Total revenue for the three and six month periods ended June 30, 2009 was $5,729,887 and $12,894,885, respectively, compared with revenue of $10,549,489 and $16,981,505 for the three and six month periods ended June 30, 2008, for a decrease of $4,819,602 and $4,086,620 or 45.7% and 24.1%, respectively. The decrease in revenue for the three and six month periods ended June 30, 2009 was due primarily to the decrease in digital and MRI CAD revenue during the second quarter partially offset by increases in film-based revenue and service and supply revenue.

The Company's digital and MRI CAD revenue for the second quarter of 2009 decreased $4,862,520 or 61.1%, to $3,099,425, compared to sales of $7,961,945 in the same period in 2008. This decrease is due primarily to the softening U.S. demand for Full Field Digital Mammography ("FFDM") systems and digital CAD technology for the detection of breast cancer, partially offset by an increase in international revenue due to new global partnerships as well as from existing OEM partners. The Company's international revenue increased 72.9% to $1,198,787 in the second quarter of 2009 compared to $693,182 in the second quarter of 2008. The Company believes that the softening of the U.S. digital mammography market is temporary due to current economic conditions and that nearly half of the U.S. Market has yet to convert to digital technology.

Revenue from iCAD's film based products for the three and six month periods ended June 30, 2009 increased 0.4% and 6.5%, respectively, to $1,722,669 and $3,285,169, compared to $1,715,180 and $3,084,137 in the three and six month periods ended June 30, 2008. This increase is largely due to the continued positive market demand for the Company's TotalLook Mammo Advantage™ product introduced late in the first quarter of 2008. The TotalLook Mammo Advantage product is used for digitizing film based prior mammography exams for comparative reading with current mammography exams. The Company believes that the demand for the TotalLook Mammo Advantage will continue to grow as the ongoing transition to digital CAD technology creates a growing need for comparative reading software.

Service and supply revenue for the three and six month periods ended June 30, 2009 increased 4.1% and 5.1%, respectively, to $907,793 and $1,733,170, compared to $872,364 and $1,649,757 in the three and six month periods ended June 30, 2008. The increase in the Company's service revenue is due primarily to increased service contract revenue on the Company's digital and TotalLook products, which continue to grow as the Company's installed based of customer's migrate from warranty to service contracts. Service contract revenue represented 92% of the Company's total service and supply revenue for the second quarter of 2009.

                                               Three months ended June 30,
                                  2009             2008            Change         % Change
   Digital & MRI CAD revenue   $ 3,099,425     $  7,961,945     $ (4,862,520 )        -61.1 %
   Film based revenue            1,722,669        1,715,180            7,489            0.4 %
   Service & supply revenue        907,793          872,364           35,429            4.1 %
   Total revenue               $ 5,729,887     $ 10,549,489     $ (4,819,602 )        -45.7 %



                                                Six months ended June 30,
                                  2009             2008            Change         % Change
  Digital & MRI CAD revenue   $  7,876,546     $ 12,247,611     $ (4,371,065 )        -35.7 %
  Film based revenue             3,285,169        3,084,137          201,032            6.5 %
  Service & supply revenue       1,733,170        1,649,757           83,413            5.1 %
  Total revenue               $ 12,894,885     $ 16,981,505     $ (4,086,620 )        -24.1 %

Gross Margin. Gross margin decreased to 81.6% and 82.1% for the three and six month periods ended June 30, 2009 compared to 83.6% and 83.1%, respectively, in the same three and six month periods in 2008. The decrease in gross margin for the three and six month periods of 2009 is primarily attributable to lower sales volume of the Company's digital products which have a higher gross margin than its film based products.

Engineering and Product Development. Engineering and product development costs for the three and six month periods ended June 30, 2009 increased by $234,683 or 15.6% and $986,689 or 33.9%, respectively, from $1,503,595 and $2,912,804 in 2008 to $1,738,278 and $3,899,493, respectively, in 2009. The increase in engineering and product development costs during the three and six month periods ended June 30, 2009 was primarily due to an increase in personnel and related costs of $119,000 and $278,000, respectively, resulting from staff increases to support the Company's new MRI CAD products and quality and regulatory function, $133,000 and $264,000, respectively, in amortization expense relating to the acquisition of assets of CAD Sciences in the third quarter of 2008, and $54,000 and $454,000, respectively, in consulting, subcontracting and data collection services relating to the licensing and clinical trial costs for its CT Colon product. In addition, during the three and six month periods the Company experienced an increase in other consulting and licensing, rent, regulatory, and stock based compensation expenses totaling $122,000 and $115,000, respectively. These expenses were offset by a decrease of $128,000 and $107,000, respectively, in bonus accrual and $65,000 and $17,000, respectively, in legal and travel expenses. The Company reduced previously accrued bonus expense as it currently anticipates that it will not achieve the previously established performance based metrics that are required to be met for the bonuses to be paid.

Marketing and Sales. Marketing and sales expense for the three month period ended June 30, 2009 decreased by $157,154 or 5.6%, from $2,809,466 in 2008 to $2,652,312 in 2009. The decrease in marketing and sales expense during this three month period was primarily due to the decrease of $216,000 in bonus accrual and $155,000 in sales commissions due to the decrease in revenue. In addition, during this three month period the Company recorded decreases in consulting, subcontracted services, advertising, promotional, relocation, depreciation, and freight totaling $136,000. These decreases were offset by an increase of $260,000 in personnel and related costs, $40,000 in stock based compensation expense and approximately $50,000 in trade show and various office expenses.

Marketing and sales expense for the six month period ended June 30, 2009 increased $404,444 or 7.8%, from $5,192,989 in 2008 to $5,597,433 in 2009. The increase in marketing and sales expense for the six month period ended June 30, 2009 primarily resulted from an increase in personnel and related costs of $567,000 approximately half of which is in support of our new MRI CAD products, stock based compensation expense of $80,000, and increases in consulting, subcontracting, advertising, promotional and web design services totaling $58,000. These increases in marketing and sales expenses were offset by decreases of $198,000 in bonus accrual, $32,000 in travel and various office expenses, $31,000 in warranty related costs, $22,000 in relocation costs and $18,000 in commission due to the decrease in revenue. The Company reduced previously accrued bonus expense as it currently anticipates that it will not achieve the previously established performance based metrics that are required to be met for the bonuses to be paid.

General and Administrative. General and administrative expenses for the three and six month periods ended June 30, 2009 decreased by $245,808 or 12.7% and $258,843 or 6.8%, respectively, from $1,935,891 and $3,784,237 in 2008 to $1,690,083 and $3,525,394 in 2009. The decrease in general and administrative expense during the three and six month periods ended June 30, 2009 was due primarily to the decreases in bonus accrual of $235,000 and $231,000, respectively, amortization expense of $20,000 and $39,000, due to fully amortized patents, and decreases in various administrative expenses totaling $43,000 and $79,000, respectively. The Company reduced previously accrued bonus expense as it currently anticipates that it will not achieve the previously established performance based metrics that are required to be met for the bonuses to be paid. These decreases were partially offset by increases in personnel and related expenses and in stock based compensation expense totaling $52,000 and $90,000, respectively.

Interest Income/(Expense). Net interest income/(expense) for the three and six month periods ended June 30, 2009 decreased $114,848 and $248,381, respectively, from interest expense of $84,098 and $182,705 in 2008, to interest income of $30,750 and $65,676 in 2009. This decrease in expense is due primarily to the extinguishment of the Company's outstanding convertible loans during the second and third quarters of 2008 and an increase in interest income generated from the Company's increased cash balance and associated interest earned from its money market accounts.

Provision for Income Taxes. The provision for income taxes for the three and six month periods ended June 30, 2009 decreased to $26,000 from $96,000 for the three and six month periods of 2008. The income tax provision consists of an estimate for federal alternative minimum tax expense and various state income taxes based upon the estimated effective income tax rate for the full fiscal year.

Net Income/(Loss). As a result of the foregoing, the Company recorded a net loss of ($1,399,253) or ($0.03) per basic share for the three month period ended June 30, 2009 on revenue of $5,729,887, compared to net income of $2,386,598 or $0.06 per basic and diluted share for the three month period ended June 30, 2008 on revenue of $10,549,489. The net loss for the six months ended June 30, 2009 was ($2,397,780) or ($0.05) per basic share on revenue of $12,894,885, compared to net income of $1,940,745 or $0.05 per basic and diluted share on revenue of $16,981,505 for the six months ended June 30, 2008.

Backlog. The Company's product backlog (excluding service and supplies) as of June 30, 2009 totaled approximately $511,418 as compared to $2,930,666 as of June 30, 2008 and $714,108 at March 31, 2009. It is expected that the majority of the backlog at June 30, 2009 will be shipped within the current fiscal year. Backlog as of any particular period should not be relied upon as indicative of the Company's net revenues for any future period as a large amount of the Company's product is booked and shipped within the same quarter.

Liquidity and Capital Resources

The Company believes that its current liquidity and capital resources are sufficient to sustain operations through at least the next 12 months, primarily due to cash on hand and projected cash balances from continuing operations. The Company's ability to generate cash adequate to meet its future capital requirements will depend primarily on operating cash flow. If sales or cash collections are reduced from current expectations, or if expenses and cash requirements are increased, the Company may require additional financing, although there are no guarantees that the Company will be able to obtain the financing if necessary. The Company does not currently have any alternate source of financing. The Company will continue to closely monitor its liquidity and capital resources and the capital and credit markets.

On June 30, 2008, the Company entered into the RBS Loan Agreement with RBS. The RBS Loan Agreement established a secured revolving credit facility with a line of credit of up to $5,000,000. The borrowing base under the RBS Loan Agreement was limited to 80% of eligible accounts receivable or, if adjusted EBITDA (EBITDA is defined in the RBS Loan Agreement as earnings before interest expense, income tax expense, depreciation, amortization and SFAS 123R stock option expense) for the quarter was greater than or equal to $1,250,000, then the Company was not subject to a restriction as to availability of credit upon the borrowing base. In the first quarter of 2009 the Company advised RBS that it failed to meet the Adjusted EBITDA covenant contained in the RBS Loan Agreement and requested that RBS agree to waive such non-compliance. On April 27, 2009 the Company executed an amendment, dated as of April 22, 2009, to the RBS Loan Agreement by which RBS waived the Company's non-compliance with the Adjusted EBITDA covenant for the quarter ended March 31, 2009 and removed the Adjusted EBITDA covenant from the RBS Loan Agreement on a going forward basis. The RBS Loan Agreement expired on June 30, 2009. The Company did not borrow any amounts under the RBS Loan Agreement during the term and is currently evaluating its options regarding a possible renewal of the RBS Loan Agreement.

At June 30, 2009 the Company had current assets of $18,469,921, current liabilities of $5,318,221 and working capital of $13,151,700. The ratio of current assets to current liabilities was 3.5:1

Net cash provided by operating activities for the six months ended June 30, 2009 was $217,967, compared to net cash provided by operating activities of $2,977,110 for the same period in 2008. The cash provided by operating activities for the six months ended June 30, 2009 resulted from the net loss of $2,397,780, decreases in accounts receivable and other current assets totaling $2,206,187 and an increase in deferred revenue of $293,785, plus non-cash items including, depreciation and amortization of $1,016,735 and stock based compensation of $1,002,722, offset by an increase in inventory of $30,712, and a decrease in accounts payable of $730,272 and accrued expenses of $1,142,698.

The net cash used for investing activities, consisted of additions to property and equipment for the six month period ended June 30, 2009, was $161,585 compared to $198,348 for the comparable period in 2008.

Net cash provided by financing activities for the six months ended June 30, 2009 was $3,201, compared to net cash used for financing activities of $7,434 for the same period in 2008. The cash provided by financing activities during 2009 was due to cash received from the issuance of common stock relating to the exercise of stock options.

Contractual Obligations

The following table summarizes, for the periods presented, the Company's future
estimated cash payments under existing contractual obligations at June 30, 2009.

Contractual Obligations                                      Payments due by period
                                                 Less than 1
                                    Total           year          1-3 years        3-5 years         5+ years
Lease Obligations*                $ 968,729     $     279,856     $  688,873     $           -     $          -
Total Contractual Obligations     $ 968,729     $     279,856     $  688,873     $           -     $          -

* The Company's lease obligations is shown net of sublease amounts.

Recent Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles". This standard replaces SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles", and establishes only two levels of U.S. GAAP, authoritative and non-authoritative. The FASB Accounting Standards Codification (the "Codification") will become the source of authoritative, non-governmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. This statement is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. We will use the new guidelines and numbering system prescribed by the Codification when referring to U.S. GAAP beginning in the third quarter of fiscal 2009. As the Codification was not intended to change or alter existing U.S. GAAP, it will not have any impact on our financial position, results of operations or cash flows.

Effective June 30, 2009, the Company adopted SFAS No. 165, "Subsequent Events". This statement 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. In particular, this statement sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of SFAS No. 165 did not have any impact on the Company's financial position, results of operations or cash flows.

In April 2009, the FASB issued FSP 157-4, "Determining Whether a Market Is Not Active and a Transaction Is Not Distressed". FSP 157-4 provides guidelines for making fair value measurements more consistent with the principles presented in SFAS No. 157. FSP 157-4 provides additional authoritative guidance in determining whether a market is active or inactive, and whether a transaction is distressed, is applicable to all assets and liabilities (i.e. financial and non-financial) and will require enhanced disclosures. FSP 157-4 is effective for all periods ending after June 15, 2009. The adoption of FSP 157-4 did not have any impact on the Company's financial position, results of operations or cash flows.

In April 2009, the FASB issued FSP 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments". FSP 107-1 and APB 28-1, amends SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", to require disclosures about fair value of financial instruments in interim as well as in annual financial statements. FSP 107-1 also amends APB Opinion No. 28, "Interim Financial Reporting", to require those disclosures in all interim financial statements. FSP 107-1 and APB 28-1 is effective for all reporting periods ending after June 15, 2009. The adoption of FSP 107-1 and APB 28-1 did not have any impact on the Company's financial position, results of operations or cash flows.

Effective January 1, 2009, the Company adopted EITF Issue No. 07-05, "Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock", which addresses the accounting for certain instruments as derivatives under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Under this new pronouncement, specific guidance is provided regarding requirements for an entity to consider embedded features as indexed to the entity's own stock. The adoption of EITF 07-05 did not have any impact on the Company's financial position, results of operations or cash flows.

Effective January 1, 2009, the Company adopted FASB Staff Position APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled In Cash upon Conversion (Including Partial Cash Settlement)". FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This FSP should be applied retrospectively for all periods presented. The adoption of FSP APB 14-1 did not have any impact on the Company's financial position, results of operations or cash flows.

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