Revenues:

This decrease in revenue is mainly attributable to a decrease in sales in the elevator and escalator market in the first quarter of 2009. Specifically, escalator manufacturer and service provider sales fell to about $35,000 for the three months ended March 31, 2009, from $127,000 for the three months ended March 31, 2008. Sales of the analog product to one escalator manufacturer and service provider, which is one of the company’s customers, slowed during this period in anticipation of release of their private label version of the company’s digital product. The digital product is being tested and evaluated for use on a retrofit and OEM basis by this customer. The digital product offers greater features and functionality compared to the analog product, making it more attractive as an OEM product. For the three months ended March 31, 2009, industrial and other sales, of which all but one order consisted of digital units, was about 24% of total sales, and escalator and elevator sales, which consisted of a mix of digital units and analog units, were about 76% of total sales.

Cost of Revenues:

Total cost of revenues, which includes material and direct labor and overhead for the three months ended March 31, 2009 was about $29,000 compared to about $98,000 for the three months ended March 31, 2008, a decrease of $69,000 or 70%. This decrease is mainly attributable to a decrease in sales in the elevator and escalator market in the first quarter of 2009. As a percentage of revenue, total cost of sales decreased to about 61% for the three months ended March 31, 2009 compared to about 73% for the three months ended March 31, 2008. The decrease in the costs as a percentage of sales was primarily due to the company increasing its prices on certain units, which resulted in higher margins during the first quarter of 2009, and an increase in the sale of digital units, which have higher average margins than analog units.

Gross Profit:

Gross profit for the three months ended March 31, 2009 was about $18,000 compared to about $36,000 for the three months ended March 31, 2008, a decrease of $18,000 or 50%. This decrease is mainly attributable to a decrease in sales in the elevator and escalator market in the first quarter of 2009. As a percentage of revenue, gross profit increased to about 39% for the three months ended March 31, 2009 compared to about.

Operating Expenses:

Research and Development Expenses:

Research and development expenses were about $247,000 for the three months ended March 31, 2009, as compared to about $161,000 for the three months ended March 31, 2008, an increase of $86,000 or 53%. This increase is mainly attributable to the company’s continued research and development efforts on its digital controller for both its single-phase and three-phase products, including additional personnel in the company’s research and development department, which resulted in higher salaries and related payroll costs, as well as new product testing and certification expenses.

Selling, General and Administrative Expenses:

Selling, general and administrative expenses were about $1,057,000 for the three months ended March 31, 2009, as compared to $790,000 for the three months ended March 31, 2008, an increase of $267,000 or 34%. The increase in selling, general and administrative expenses compared to the prior year was primarily due to the company’s adoption of SFAS 133 and EITF 07-5, which resulted in the company recording an additional non cash loss of $485,919 during the three months ending March 31, 2009. No such expenses were recorded during the three months ending March 31, 2008. This increase was partially offset by a decrease in costs related to SFAS 123R.

Financial Condition, Liquidity, and Capital Resources:

The accompanying financial statements have been prepared assuming the company is a going concern, which assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The company suffered recurring losses from operations, and a recurring deficiency of cash from operations, including a cash deficiency of about $892,000 from operations, for the three months ended March 31, 2009. While the company appears to have adequate liquidity at March 31, 2009, there can be no assurances that such liquidity will remain sufficient.

These factors raise substantial doubt about the company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount of liabilities that might be necessary should the company be unable to continue in existence. Continuation of the company as a going concern is dependent upon achieving profitable operations in the long-term and raising additional capital to support existing operations for at least the next twelve months. Management’s plans to achieve profitability include developing new products, obtaining new customers and increasing sales to existing customers.

Since inception, the company has financed its operations primarily through the sale of its equity securities, debt securities and using available bank lines of credit. As of March 31, 2009, the company had cash of $1,201,903.

Cash used for operating activities for the three months ended March 31, 2009 was $891,634, which consisted of a net loss of $1,296,341; less depreciation and amortization of $19,315, warrants and options issued to employees and consultants of $83,399, warrants issued to investors of $485,919, and a decrease in accounts receivable of $18,017, offset by increases in inventory of $114,053, prepaid expenses and other current assets of $68,147, and decreases in provision for bad debt of $11,342, accounts payable of $7,459 and deferred rent of $942.

Cash used for operating activities for the three months ended March 31, 2008 was $807,405, which consisted of a net loss of $888,156; less depreciation and amortization of $14,847, warrants and options issued to employees and consultants of $207,000 and a decrease in deposits of $41,430, offset by increases in accounts receivable of $19,780, inventory of $1,679, prepaid expenses and other current assets of $72,481, and decreases in accounts payable and accrued expenses of $86,981 and customer deposits of $1,605.

Net cash used in investing activities for the three months ended March 31, 2009 was $6,476, compared to $48,425 for the three months ended March 31, 2008. The total amount for the first quarter of 2009 consisted of the purchase of property and equipment. The amount for the first quarter of 2008 consisted of the purchase of property and equipment of $35,764, and capitalized costs related to patent applications of $12,661.

There was no cash provided by or used for financing activities for the three months ended March 31, 2009. Net cash provided by financing activities for the three months ended March 31, 2008 was $280,000, which consisted solely of proceeds from the issuance of equity securities.

The company expects to experience growth in its operating expenses, particularly in research and development and selling, general and administrative expenses, for the foreseeable future in order to execute its business strategy. As a result, the company anticipates that operating expenses will constitute a material use of any cash resources.