"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 VeralookÔ, 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 September 30, 2009 compared to Quarter Ended September 30, 2008 and Nine Months Ended September 30, 2009 compared to Nine Months Ended September 30, 2008
Revenue. Total revenue for the three and nine month periods ended September 30, 2009 was $7,106,270 and $20,001,155, respectively, compared with revenue of $11,193,631 and $28,175,136 for the three and nine month periods ended September 30, 2008, for a decrease of $4,087,361 and $8,173,981 or 36.5% and 29.0%, respectively. The decrease in revenue for the three and nine month periods ended September 30, 2009 was due primarily to the decrease in digital and MRI CAD and film-based revenue partially offset by a slight increase in service and supply revenue.
The Company's digital and MRI CAD revenue for the three and nine month periods ended September 30, 2009 decreased $3,346,990 and $7,718,055, or 41.0% and 37.8%, respectively, to $4,808,683 and $12,685,228, compared to sales of $8,155,673 and $20,403,283, respectively, in the same periods in 2008. This decrease is due primarily to the softening demand for Full Field Digital Mammography ("FFDM") systems and digital CAD technology for the detection of breast cancer. The Company believes that the softening of the digital mammography market is temporary due to current economic conditions as 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 nine month periods ended September 30, 2009 decreased 41.1% and 13.1%, respectively, to $1,275,884 and $4,561,053, compared to $2,166,839 and $5,250,976 in the three and nine month periods ended September 30, 2008. This decrease is largely due to the softening demand for FFDM systems primarily due to current economic conditions. 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 grow as the economy improves and the ongoing transition to digital mammography continues.

Service and supply revenue for the three and nine month periods ended September 30, 2009 increased 17.3% and 9.3%, respectively, to $1,021,703 and $2,754,874, compared to $871,119 and $2,520,877 in the same periods in 2008. The increase in the Company's service and supply 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 91% and 85% of the Company's total service and supply revenue for the third quarter of 2009 and 2008, respectively.

                                             Three months ended September 30,
                                  2009             2008            Change         % Change
   Digital & MRI CAD revenue   $ 4,808,683     $  8,155,673     $ (3,346,990 )        -41.0 %
   Film based revenue            1,275,884        2,166,839         (890,955 )        -41.1 %
   Service & supply revenue      1,021,703          871,119          150,584           17.3 %

   Total revenue               $ 7,106,270     $ 11,193,631     $ (4,087,361 )        -36.5 %




                                             Nine months ended September 30,
                                  2009             2008            Change         % Change
  Digital & MRI CAD revenue   $ 12,685,228     $ 20,403,283     $ (7,718,055 )        -37.8 %
  Film based revenue             4,561,053        5,250,976         (689,923 )        -13.1 %
  Service & supply revenue       2,754,874        2,520,877          233,997            9.3 %

  Total revenue               $ 20,001,155     $ 28,175,136     $ (8,173,981 )        -29.0 %

Gross Margin. The Company achieved gross margin of 84.8% in the three month period ended September 30, 2009 compared with 84.1% in the same period in 2008. This increase in the third quarter of 2009 is primarily due to cost reduction efforts and some average selling price increases. Gross margin decreased slightly to 83.0% for the nine month period ended September 30, 2009 compared to 83.5% in the same nine month period in 2008. The decrease in gross margin for the nine month period of 2009 is primarily attributable to lower sales volume of the Company's products.
Engineering and Product Development. Engineering and product development costs for the three month period ended September 30, 2009 decreased by $203,578 or 10.7%, from $1,905,841 in 2008 to $1,702,263 in 2009. The decrease in engineering and product development costs during this three month period was primarily due to a decrease in subcontracting costs of $112,000 primarily associated with the completion of the clinical trial for the Company's CT colon product, a decrease in the bonus accrual of $106,000, and decreases in travel, legal, depreciation and stock- based compensation expense totaling $54,000. These decreases were partially offset by increases in consulting expense of $30,000, amortization expense of $26,000, relating to the acquisition of the assets of CAD Sciences in the third quarter of 2008, and various other expenses totaling $12,000.
Engineering and product development costs for the nine month period ended September 30, 2009 increased by $783,111 or 16.3%, from $4,818,645 in 2008 to $5,601,756 in 2009. The increase in engineering and product development costs during this nine month period was primarily due to an increase in personnel and related costs of $277,000 resulting from staff increases from the acquisition of the assets of CAD Sciences and staff increases in the quality and regulatory function, $290,000 in amortization expense relating to the acquisition of assets of CAD Sciences in the third quarter of 2008, $233,000 in subcontracting costs primarily related to the clinical trial for the Company's CT colon product, $249,000 in consulting and license fees and $72,000 from a combination of stock-based compensation expense, depreciation expense and various other expenses. These expenses were partially offset by a decrease of $212,000 in bonus accrual and $126,000 in legal, travel and rent expenses.

Marketing and Sales. Marketing and sales expense for the three and nine month periods ended September 30, 2009 decreased by $762,753 or 22.8% and $358,309 or 4.2%, respectively, from $3,340,072 and $8,533,061, respectively, in 2008 to $2,577,319 and $8,174,752, respectively, in 2009. The decrease in marketing and sales expense during this three and nine month periods was primarily due to the decrease of $396,000 and $414,000, respectively, in sales commissions due to the decrease in revenue, $124,000 and $322,000 in bonus accrual and $144,000 and $127,000 in travel expenses. In addition, during this three and nine month periods the Company recorded decreases in consulting, subcontracted services, advertising, promotional, depreciation, and freight totaling $187,000 and $241,000, respectively. These decreases in the three and nine month periods were partially offset by an increase of $73,000 and $621,000, respectively, in personnel and related costs, and in various other expenses including stock-based compensation expense totaling $15,000 and $125,000, respectively. General and Administrative. General and administrative expenses for the three and nine month periods ended September 30, 2009 decreased by $224,103 or 11.5% and $482,945 or 8.4%, respectively, from $1,942,582 and $5,726,818 in 2008 to $1,718,479 and $5,243,873 in 2009. The decrease in general and administrative expense during the three and nine month periods ended September 30, 2009 was due primarily to the decreases in bonus accrual of $164,000 and $395,000, respectively, amortization expense of $15,000 and $54,000, due to fully amortized patents, and decreases in various administrative expenses totaling $32,000 and $90,000, respectively. In addition, the Company recorded a decrease of $34,000 in stock-based compensation expense in the three month period ended September 30, 2009. These decreases were partially offset by increases in personnel and related expenses of $21,000 and $23,000, respectively, and $33,000 in stock-based compensation expense for the nine month period ended September 30, 2009.
Interest Income/(Expense). Net interest income for the three and nine month periods ended September 30, 2009 was $22,965 and $88,641, respectively, compared to interest expense of $27,610 and $210,314, respectively, in 2008. The decrease in interest expense for the three and nine month periods of 2009, was 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 (benefit) for Income Taxes. The benefit from income taxes for the three and nine month periods ended September 30, 2009 amounted to $63,570 and $37,570, respectively, compared to an income tax provision of $101,000 and $197,000 for the three and nine month periods of 2008. The current year benefit was primarily due to the refundable R&D credit allowance.
Net Income/(Loss). As a result of the foregoing, the Company recorded net income of $112,758 or $0.00 per diluted share for the three month period ended September 30, 2009 on revenue of $7,106,270 compared to net income of $2,094,574 or $0.04 per diluted share on revenue of $11,193,631 for the three months ended September 30, 2008. The net loss for the nine months ended September 30, 2009 was ($2,285,022) or ($0.05) per diluted share on revenue of $20,001,155, compared to net income of $4,035,320 or $0.09 per diluted share on revenue of $28,175,136 for the nine months ended September 30, 2008.

Backlog. The Company's product backlog (excluding service and supplies) as of September 30, 2009 totaled approximately $663,000 as compared to $1,019,000 as of September 30, 2008 and $511,000 at June 30, 2009. It is expected that the majority of the backlog at September 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 a line of credit available. The Company did not borrow any amounts under the RBS Loan Agreement during the term and after evaluating its options elected not to renew the RBS Loan Agreement. 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 a Loan and Security Agreement (the "RBS Loan Agreement") with RBS Citizens, N.A. ("RBS"). The RBS Loan Agreement established a secured revolving credit facility with a line of credit of up to $5,000,000. 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 elected not to renew the RBS Loan Agreement.
At September 30, 2009 the Company had current assets of $19,683,381, current liabilities of $5,526,124 and working capital of $14,157,257. The ratio of current assets to current liabilities was 3.6:1 Net cash provided by operating activities for the nine months ended September 30, 2009 was $559,202, compared to net cash provided by operating activities of $7,625,171 for the same period in 2008. The cash provided by operating activities for the nine months ended September 30, 2009 resulted from the net loss of $2,285,022, decreases in accounts receivable and inventory totaling $1,342,883 and an increase in deferred revenue of $813,885, plus non-cash items including, depreciation and amortization of $1,481,315 and stock based compensation of $1,494,894, partially offset by an increase in other current assets of $70,098, and a decrease in accounts payable of $1,206,057 and accrued expenses of $1,012,598.
The net cash used for investing activities for the nine months ended September 30, 2009, consisted of additions to property and equipment of $126,544 and additions to patents and other assets of $88,549, compared to $2,534,214 for the comparable period in 2008 which consisted of additions to property and equipment of $534,214 and $2,000,000 for the acquisition of assets of CAD Sciences.

Net cash provided by financing activities for the nine months ended September 30, 2009 was $23,494 due to cash received from the issuance of common stock relating to the exercise of stock options, compared to $1,609,996 for the same period in 2008, which consisted of $1,868,902 in cash received from the issuance of common stock relating to the exercise of stock options, partially offset by the payment of convertible notes payable in the amount of $258,906. Contractual Obligations
The following table summarizes, for the periods presented, the Company's future estimated cash payments under existing contractual obligations at September 30, 2009.

                                                              Payments due by period
                                                 Less than 1
Contractual Obligations            Total            year           1-3 years         3-5 years          5+ years

Lease Obligations*               $ 824,666      $     135,793      $  688,873      $           -      $          -

Total Contractual Obligations    $ 824,666      $     135,793      $  688,873      $           -      $          -

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

Recent Accounting Pronouncements
Effective July 1, 2009, the Company adopted The "FASB Accounting Standards Codification" and the Hierarchy of Generally Accepted Accounting Principles (ASC 105). This standard establishes only two levels of U.S. generally accepted accounting principles ("GAAP"), authoritative and nonauthoritative. The FASB Accounting Standards Codification (the "Codification") became the source of authoritative, nongovernmental 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 became nonauthoritative. The Company began using the new guidelines and numbering system prescribed by the Codification when referring to GAAP in the third quarter of fiscal 2009. As the Codification was not intended to change or alter existing GAAP, it did not have any impact on the Company's consolidated financial statements.
In September 2009, the FASB issued Update No. 2009-13, "Multiple-Deliverable Revenue Arrangements-a consensus of the FASB Emerging Issues Task Force" (ASU 2009-13). It updates the existing multiple-element revenue arrangements guidance currently included under ASC 605-25, which originated primarily from the guidance in EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables" (EITF 00-21). The revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. ASU 2009-13 will be effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. The Company is currently assessing the future impact of this new accounting update to its consolidated financial statements.

Effective July 1, 2009, the Company adopted FASB ASU No. 2009-05, "Fair Value Measurements and Disclosures (Topic 820)", ("ASU 2009-05"). ASU 2009-05 provided amendments to ASC 820-10, "Fair Value Measurements and Disclosures - Overall", for the fair value measurement of liabilities. ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using certain techniques. ASU 2009-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of a liability. ASU 2009-05 also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The adoption of ASU 2009-05 did not have any impact on the Company's financial position, results of operations or cash flows. Effective June 30, 2009, the Company adopted the FASB guidance now codified as FASB ASC Topic 855-10, "Subsequent Events" ('ASC 855-10"). This topic 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 topic 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 ASC 855-10 did not have any impact on the Company's financial position, results of operations or cash flows.
In April 2009, the Company adopted guidance now codified as FASB Topic 820-10-65, "Fair Value Measurements and Disclosures - Overall - Implementation and Guidance and Illustrations." ("ASC 820-10-65"). ASC 820-10-65 provides guidelines for making fair value measurements more consistent. ASC 820-10-65 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 requires enhanced disclosures. ASC 820-10-65 was effective for all periods ending after June 15, 2009. The adoption of ASC 820-10-65 did not have any impact on the Company's financial position, results of operations or cash flows. In April 2009, the FASB issued guidance now codified as FASB ASC Topic 825, "Financial Instruments," ("ASC 825"), which amends previous topic 825 guidance to require disclosures about fair value of financial instruments in interim as well as in annual financial statements. ASC 825 is effective for all reporting . . .