OMNICOMM SYSTEMS INC (Form: 10QSB, Received: 11/14/2006 15:13:18)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

[Mark One]

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

For the quarterly period ended September 30, 2006

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

For the transition period from to

Commission File Number: 0-25203

OmniComm Systems, Inc.

(Name of Small Business Issuer in its Charter)


Delaware		11-3349762
State of Incorporation		IRS Federal Employer Identification Number

2101 W. Commercial Blvd. Suite 4000, Ft. Lauderdale, FL		33309
Current Address of Principal Office		Zip Code

2555 Davie Road, Suite 110-B, Davie, FL		33317
Former Address of Principal Office		Zip Code

Registrant’s Telephone Number: 954.473.1254

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares outstanding of each of the issuer’s classes of common equity as of November 11, 2006: 37,398,804 common stock $.001 par value.

Transitional Small Business Disclosure Format (Check one): Yes ¨ No x

TABLE OF CONTENTS TO THE QUARTERLY REPORT ON FORM 10-QSB FOR THE

NINE MONTHS ENDED SEPTEMBER 30, 2006


PART I. FINANCIAL INFORMATION

Item 1. Unaudited Consolidated Financial Statements

Consolidated Balance Sheets – September 30, 2006 and December 31, 2005		3

Consolidated Statements of Operations – Nine and Three Months Ended September 30, 2006 and September 30, 2005		4

Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2006 and September 30, 2005		5

Notes to Consolidated Unaudited Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16

Item 3. Controls and Procedures		28

PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders		28

Item 6. Exhibits		29

SIGNATURES		30

Exhibit 10.1 Employment Agreement and Stock Option Agreement Between the Company and Stephen E. Johnson dated September 1, 2006

Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act OF 2002– CEO Cornelis F. Wit

Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act OF 2002– CFO Ronald T. Linares

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 – CEO - Cornelis F. Wit

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 – CFO - Ronald T. Linares

OMNICOMM SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS


	September 30, 2006			December 31, 2005
	(unaudited)
ASSETS
CURRENT ASSETS
Cash	$	110,543		$	9,931
Accounts receivable, net of allowance for doubtful accounts of $58,539 and $58,539 in 2006 and 2005, respectively		254,366			234,565
Prepaid expenses		25,313			2,394

Total current assets		390,222			246,890

PROPERTY AND EQUIPMENT, net		195,077			31,222

OTHER ASSETS
Intangible assets, net		2,736			-0-
Other assets		16,834			5,497

TOTAL ASSETS	$	604,869		$	283,609

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	1,090,928		$	779,456
Accrued payroll taxes		107,957			58,742
10% Convertible Notes		125,000			125,000
Notes payable – current portion		460,000			-0-
Notes payable, related party – current portion		167,000			-0-
Deferred revenue		1,604,832			1,048,707

Total current liabilities		3,555,717			2,011,905

NOTES PAYABLE, net of current portion		1,683,623			2,043,623
NOTES PAYABLE RELATED PARTY, net of current portion		963,637			1,150,937

TOTAL LIABILITIES		6,202,977			5,206,465

COMMITMENTS AND CONTINGENCIES (NOTE 6)

SHAREHOLDERS’ EQUITY (DEFICIT)
Undesignated preferred stock - $.001 par value. 4,022,500 shares authorized, no shares issued and outstanding		-0-			-0-

Series B convertible preferred stock, - $.001 par value. 230,000 shares authorized, 50,000 and 65,000 issued and outstanding, respectively; liquidation preference $500,000 and $650,000, respectively		50			65

Series C convertible preferred stock, -$.001 par value. 747,500 shares authorized, 337,150 and 337,150 issued and outstanding, respectively; liquidation preference $3,371,500 and $3,371,500, respectively		337			337

5% Series A convertible preferred stock - $0.001 par value, 5,000,000 shares authorized; 4,215,224 and 4,215,224 issued and outstanding, respectively; liquidation preference $4,215,224 and $4,215,224, respectively		4,215			4,215

Common stock – 150,000,000 shares authorized, 38,826,080 and 27,425,915 issued and outstanding, after deducting 673,878 and 673,878 shares of treasury stock, at $.001 par value, respectively		39,451			28,051
Additional paid in capital – preferred		7,703,502			7,853,488
Additional paid in capital – common		16,968,544			15,201,406
Accumulated other comprehensive income		3,338			-0-
Less: Treasury stock, cost method, 673,878 and 673,878 shares, respectively		(299,861	)		(299,861	)
Accumulated deficit		(30,017,684	)		(27,710,557	)

TOTAL SHAREHOLDERS’ EQUITY (DEFICIT)		(5,598,108	)		(4,922,856	)

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)	$	604,869		$	283,609

See accompanying summary of accounting policies and notes to financial statements.

OMNICOMM SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE NINE AND THREE MONTH PERIODS ENDED SEPTEMBER 30, 2006 AND SEPTEMBER 30, 2005

(unaudited)


	For the nine months ended September 30,						For the three months ended September 30,
	2006			2005			2006			2005
Revenues	$	2,011,210		$	1,261,216		$	788,947		$	498,615
Cost of sales		697,931			262,162			238,117			94,232

Gross margin		1,313,279			999,054			550,830			404,383

Operating expenses
Salaries, benefits and related taxes		2,307,116			1,376,384			836,383			445,736
Rent & occupancy expenses		132,723			114,990			52,674			39,376
Consulting – marketing, sales and product development		281,602			-0-			130,977			-0-
Legal and professional fees		172,940			129,632			66,508			42,461
Travel		149,270			82,899			52,154			23,205
Telephone and internet		63,745			53,930			23,125			19,030
Selling, general and administrative		245,039			177,927			105,295			85,226
Bad debt expense		-0-			9,201			-0-			9,201
Depreciation and amortization		38,675			23,282			16,470			4,885

Total operating expenses		3,391,110			1,968,245			1,283,586			669,120

Operating income (loss)		(2,077,831	)		(969,191	)		(732,756	)		(264,737	)

Other income (expense)
Interest expense		(229,296	)		(298,511	)		(77,132	)		(70,854	)
Interest income		-0-			381			-0-			300

(Loss) before taxes and preferred dividends		(2,307,127	)		(1,267,321	)		(809,888	)		(335,291	)

Income tax expense (benefit)		-0-			-0-			-0-			-0-

Net income (loss)		(2,307,127	)		(1,267,321	)		(809,888	)		(335,291	)

Preferred stock dividends in arrears Series A Preferred		(153,600	)		(153,600	)		(51,763	)		(51,763	)
Preferred stock dividends in arrears Series B Preferred		(32,581	)		(42,334	)		(10,082	)		(13,107	)
Preferred stock dividends in arrears Series C Preferred		(201,736	)		(201,735	)		(67,984	)		(67,984	)

Total preferred stock dividends		(387,917	)		(397,669	)		(129,829	)		(132,854	)

Net income (loss) attributable to common stockholders	$	(2,695,044	)	$	(1,664,990	)	$	(939,717	)	$	(468,145	)

Net (loss) per share	$	(0.08	)	$	(0.06	)	$	(0.02	)	$	(0.02	)

Weighted average number of shares outstanding		33,151,747			25,883,514			38,349,658			26,819,248

See accompanying summary of accounting policies and notes to financial statements

OMNICOMM SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

OMNICOMM SYSTEM, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2006 AND SEPTEMBER 30, 2005

(unaudited)


	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(2,307,127	)	$	(1,267,321	)
Adjustment to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		38,675			23,282
Interest expense from beneficial conversion feature on 10% convertible notes payable		-0-			104,000
Employee stock option wage expense		163,545			-0-
Change in assets and liabilities:
Accounts receivable		(18,284	)		(155,968	)
Prepaid expenses		(22,919	)		(18,750	)
Other assets		(11,292	)		-0-
Accounts payable and accrued expenses		337,336			317,040
Deferred revenue		556,125			523,781

Net cash provided by (used in) operating activities		(1,263,941	)		(473,936	)

CASH FLOWS FROM INVESTING ACTIVITIES
Investment in intangible assets		(3,065	)		-0-
Sale of property and equipment		2,500			-0-
Purchase of property and equipment		(206,265	)		(22,879	)

Net cash provided by (used in) investing activities		(206,830	)		(22,879	)

CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of note payable		(20,300	)		(72,000	)
Proceeds from employee stock option exercise		1,500			-0-
Proceeds from issuance of common stock, net of issuance costs		1,486,845			192,500
Proceeds from notes payable		100,000			343,300

Net cash provided by (used in) financing activities		1,568,045			463,800

Effect of exchange rate changes on cash and cash equivalents		3,338			-0-
Net increase (decrease) in cash and cash equivalents		100,612			(33,015	)
Cash and cash equivalents at beginning of period		9,931			65,695

Cash and cash equivalents at end of period	$	110,543		$	32,680


	For the nine months ended September 30,
	2006		2005
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:

Income tax	$	-0-	$	-0-

Interest	$	10,237	$	13,925

Non-cash Transactions
Conversion of Series B common stock warrants on a cashless basis	$	250,000	$	-0-
Exercise of Series B Placement Agent Unit Option on a cashless basis	$	557,013	$	-0-
Conversion of 10% Convertible Notes Payable in common stock	$	-0-	$	234,000
Accrued interest converted into common stock	$	-0-	$	21,985
Conversion of Series B Preferred Stock into common stock	$	150,000	$	325,000

See accompanying summary of accounting policies and notes to financial statements

OMNICOMM SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(continued)

NOTE 1: ORGANIZATION AND NATURE OF OPERATIONS

OmniComm Systems, Inc. is a healthcare technology company that provides Web-based electronic data capture (“EDC”) solutions and related value-added services to pharmaceutical and biotech companies, clinical research organizations, and other clinical trial sponsors. TrialMaster ^® allows clinical trial sponsors and investigative sites to securely collect, validate, transmit and analyze clinical trial data.

Our ability to compete within the EDC industry is predicated on our ability to continue enhancing and broadening the scope of solutions offered through TrialMaster. Our research and development ( R & D) efforts are focused on developing new, complementary software solutions, as well as enhancing our existing software solutions through the addition of increased functionality. During fiscal 2005, we spent approximately $478,000 on R & D activities, the majority of which represented salaries to our developers. In fiscal 2004 we spent approximately $537,000 on R & D activities, which include costs associated with customization of the TrialMaster software for our client’s projects.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

The Company’s accounts include those of its wholly owned subsidiary, OmniComm Europe BV and have been prepared in conformity with (i) accounting principles generally accepted in the United States of America; and (ii) the rules and regulations of the United States Securities and Exchange Commission. All significant intercompany accounts and transactions between the Company and its subsidiaries have been eliminated in consolidation.

UNAUDITED FINANCIAL STATEMENTS

The accompanying unaudited consolidated financial statements of OmniComm Systems, Inc. and its Subsidiary (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission. Pursuant to such rules and regulations, certain financial information and footnote disclosures normally included in the consolidated financial statements have been condensed or omitted. The results for the periods indicated are unaudited, but reflect all adjustments (consisting only of normally recurring adjustments) which management considers necessary for a fair presentation of operating results.

Operating results for the nine and three months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2005.

ESTIMATES IN FINANCIAL STATEMENTS

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes thereto. Actual results may differ from those estimates.

RECLASSIFICATIONS

Certain reclassifications have been made in the 2005 financial statements to conform to the 2006 presentation. These reclassifications did not have any effect on net income (loss) or shareholders’ equity.

OMNICOMM SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(continued)

SEGMENT INFORMATION

The Company operates in one reportable segment.

CASH AND CASH EQUIVALENTS

Cash equivalents consist of highly liquid, short-term investments with maturities of 90 days or less. The carrying amount reported in the accompanying consolidated balance sheets approximates fair value.

ACCOUNTS RECEIVABLE

Accounts receivable are judged as to collectibility by management and an allowance for bad debts is established as necessary. The Company had recorded an allowance for uncollectible accounts receivable of $58,539 and $58,539 as of September 30, 2006 and December 31, 2005.

CONCENTRATION OF CREDIT RISK

Accounts receivable subject the Company to its highest potential concentration of credit risk. The Company reserves for credit losses. The Company does not require collateral on trade accounts receivables. Our top five customers accounted for approximately 50% of our revenues during the first nine months of 2006 and approximately 60% of our revenues during the same period in fiscal 2005. One customer accounted individually for 10% or more of our revenues during fiscal 2006.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Additions and betterments are capitalized; maintenance and repairs are expensed as incurred. Depreciation is calculated using the straight-line method over the asset’s estimated useful life, which is 5 years for leasehold improvements, equipment and furniture and 3 years for software. Gains or losses on disposal are charged to operations.

DEFERRED REVENUE

Deferred revenue represents cash advances received in excess of revenue earned on on-going contracts. Payment terms vary with each contract but may include an initial payment at the time the contract is executed, with future payments dependent upon the completion of certain contract phases or targeted milestones. In the event of contract cancellation, the Company is entitled to payment for all work performed through the point of cancellation. As of September 30, 2006 the Company had $1,604,832 in deferred revenues relating to contracts for services to be performed over periods ranging from 1 month to 5 years.

REVENUE RECOGNITION POLICY

OmniComm’s revenue model is transaction-based and can be implemented either as an ASP (Application Service Provider) or licensed for implementation by a customer such as a pharmaceutical company. Revenues are derived from the set-up of clinical trial engagements; on-going maintenance fees incurred throughout the duration of an engagement; fees for report writing and project change orders. The clinical trials that are conducted using TrialMaster can last from a few months to several years. Most of the fees associated with our product including post-setup customer support in the form of maintenance charges are recognized ratably over the term of the clinical trial. Cost of sales is primarily comprised of programmer salaries and taxes and is expensed as incurred.

OMNICOMM SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(continued)

The Company recognizes sales, for both financial statement and tax purposes in accordance with SEC Staff Accounting Bulletin No. 101 “Revenue Recognition in Financial Statements” (SAB 101). SAB 101 requires that revenues be recognized ratably over the life of a contract. The Company will periodically record deferred revenues relating to advance payments in contracts.

ADVERTISING

Advertising costs are expensed as incurred. Advertising costs were $125,185 and $81,876 for the nine months ended September 30, 2006 and September 30, 2005, respectively.

RESEARCH AND DEVELOPMENT EXPENSES

Software development costs are included in research and development and are expensed as incurred. Statement of Financial Accounting Standards No. 86 “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”, (“SFAS 86”), requires the capitalization of certain development costs of software to be sold once technological feasibility is established, which the Company defines as completion to the point of marketability. The capitalized cost is then amortized on a straight-line basis over the estimated product life. To date, the period between achieving technological feasibility and the general availability of such software has been short and software development costs qualifying for capitalization have been immaterial. Accordingly, the Company has not capitalized any software development costs under SFAS 86. Research and development expense was approximately $554,647 and $353,419 for the nine months ended September 30, 2006 and September 30, 2005 respectively.

EMPLOYEE EQUITY INCENTIVE PLANS

The company has an employee equity incentive plan, which is more fully described below. Until December 31, 2005, the company accounted for its equity incentive plan under the intrinsic value recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Effective with the first quarter of fiscal 2006 which ended March 31, 2006, the Company began accounting for employee stock options using the fair-value method. The exercise price of options granted is equal to the market price of OmniComm Systems common stock (defined as the closing bid price reported on the NASDAQ OTC Bulletin-Board) on the date of grant. The following table illustrates the effect on net income and earnings per share as if the company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”, as amended, (“SFAS 123”), to options granted under the stock options plan for options granted through the nine months ended September 30, 2005. The net loss available to common stockholders for the nine months ended September 30, 2006 reflects the expense attributable to employee stock option grants under the fair-value method. For purpose of this pro-forma disclosure, the value of the options is estimated using a Binomial option pricing model. Because the estimated value is determined as of the date of grant, the actual value ultimately realized by the employee may be significantly different.

OMNICOMM SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(continued)


	Nine Months Ended September 30,
*(in thousands, except for per share data)*	2006			2005
Net loss available to common stockholders
As reported	$	(2,695	)	$	(1,665	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		-0-			(201	)

Pro forma net loss available to common stockholders	$	(2,695	)	$	(1,866	)

Weighted average number of common shares outstanding used to compute net income (loss) per common share – basic and diluted		33,152			25,884

Reported basic and diluted net loss per common share	$	(0.08	)	$	(0.06	)

Pro forma basic and diluted net loss per common share	$	(0.08	)	$	(0.07	)

SFAS No. 123 requires the use of option pricing models that were not developed for use in valuing employee stock options. Binomial option pricing models were developed for use in estimating the fair value of short-lived exchange-traded options that have no vesting restrictions and are fully transferable. The company’s employee stock options have characteristics significantly different from those of traded options. In addition, option pricing models require the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock, and changes in the subjective input assumptions can materially affect the fair value estimate of employee stock options.

The estimated value of employee stock options granted during the nine months ended September 30, 2006 was $9,870 ($120,985 for the nine months ended September 30, 2005). The value of options granted in 2006 and 2005 was estimated at the date of grant using the following assumptions:


	2006		2005
Risk-free interest rate	4.67	%	2.07	%
Expected years until exercise	6 Years		6 Years
Expected stock volatility	99.3	%	107.3	%
Dividend yield	0	%	0	%

An analysis of historical information is used to determine the company’s assumptions, to the extent historical information is relevant based on the terms of the grants being issued in any given period.

Description of Stock Option Plan

In 1998, the Company’s Board of Directors approved the 1998 Stock Incentive Plan of OmniComm Systems, (the “1998 Plan”). The 1998 Plan provides for granting Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Phantom Stock Unit Awards and Performance Share Units. Pursuant to the 1998 Plan the Company may grant options to purchase up to 12,500,000 shares of the Company’s common stock. The term of each option may not exceed ten years from the date of grant, and options vest in accordance with a vesting schedule established by the Plan administrator. As of September 30, 2006 substantially all of the company’s employees were participating in the 1998 Plan. Options granted under the 1998 Plan will generally expire ten years from the date of grant for most employees and seven years from the date of grant for officers and directors of the company.

OMNICOMM SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(continued)

EARNINGS PER SHARE

The Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 128, “Earnings per Share”, (“SFAS 128”). SFAS 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. The diluted earnings per share calculation is very similar to the previously utilized fully diluted earnings per share calculation method.

Basic earnings per share were calculated using the weighted average number of shares outstanding of 33,151,747 and 25,883,514 for the nine months ended September 30, 2006 and 2005, respectively. Basic earnings per share were calculated using the weighted average number of shares outstanding of 38,349,658 and 26,819,248 for the three months ended September 30, 2006 and 2005, respectively. There were no differences between basic and diluted earnings per share. Options were granted under the 1998 Stock Incentive Plan to purchase 6,974,770 shares of common stock at prices ranging from $.15 to $2.75 per share were outstanding at September 30, 2006. Stock warrants to purchase 4,631,350 shares of common stock at prices ranging from $0.25 to $0.50 per share were outstanding at September 30, 2006.

The Company granted a Unit Purchase Option (“Agent Option”) to the Placement Agent of its Series C Convertible Preferred Stock that provides the Placement Agent the ability to purchase 24,848 Series C Preferred Shares with 496,950 detachable common stock warrants. The exercise of the Agent Option would result in the issuance of an aggregate of 1,490,850 shares of common stock at an exercise price of $0.25 per share. The warrants and Agent Options were not included in the computation of diluted earnings per share because they have an anti-dilutive effect on net loss per share.

The Company’s convertible debt and convertible preferred stock have an anti-dilutive effect on net loss per share and were not included in the computation of diluted earnings per share.

INCOME TAXES

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.”, (“SFAS 109”). SFAS 109 has as its basic objective the recognition of current and deferred income tax assets and liabilities based upon all events that have been recognized in the financial statements as measured by the provisions of the enacted tax laws.

Valuation allowances are established when necessary to reduce deferred tax assets to the estimated amount to be realized. Income tax expense represents the tax payable for the current period and the change during the period in the deferred tax assets and liabilities.

IMPACT OF NEW ACCOUNTING STANDARDS

In February 2006, the FASB issued FASB Staff Position (“FSP”) FAS 123R-4 “Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event.” FSP FAS 123(R)-4 addresses the classification of options and similar instruments issued as employee compensation that allow for cash settlement upon the occurrence of a contingent event and amends paragraphs 32 and A229 of SFAS 123(R). The Company is required to apply the guidance in FSP FAS123(R)-4 in the quarterly period ending April 30, 2006. The adoption of FSP FAS123(R)-4 has not had a significant impact on the Company’s consolidated financial position or results of operations.

OMNICOMM SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(continued)

In February 2006, the FASB issued SFAS 155 “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140.” This Statement amends FASB 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 resolves issues addressed in Statement 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. SFAS 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and amends SFAS 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of the Company’s first fiscal year that begins after September 15, 2006, with earlier adoption permitted. The Company does not expect SFAS 155 will have a material effect on its consolidated financial position, results of operations and cash flows.

In March 2006, the FASB issued SFAS No. 156 (“FAS 156”), “Accounting for Servicing of Financial Assets—An Amendment of FASB Statement No. 140.” Among other requirements, FAS 156 requires a company to recognize a servicing asset or servicing liability when it undertakes an obligation to service a financial asset by entering into a servicing contract under certain situations. Under FAS 156 an election can also be made for subsequent fair value measurement of servicing assets and servicing liabilities by class, thus simplifying the accounting and provide for income statement recognition of potential offsetting changes in the fair value of servicing assets, servicing liabilities and related derivative instruments. FAS 156 is effective for fiscal years beginning after September 15, 2006. The Company does not expect the adoption of FAS 156 will have a material impact on its financial position or results of operations.

In July 2006, the FASB issued Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”), which is a change in accounting for income taxes. FIN 48 specifies how tax benefits for uncertain tax positions are to be recognized, measured, and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the balance sheet; and provides transition and interim period guidance, among other provisions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company does not expect the adoption of FIN 48 will have a material impact on its financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157 (“FAS 157”), “Fair Value Measurements.” Among other requirements, FAS 157 defines fair value and establishes a framework for measuring fair value and also expands disclosure about the use of fair value to measure assets and liabilities. FAS 157 is effective beginning the first fiscal year that begins after November 15, 2007. The Company is currently evaluating the impact of FAS 157 on its financial position and results of operations.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The guidance is applicable for fiscal years ending after November 15, 2006. The Company does not believe SAB 108 will have a material impact on its consolidated financial statements.

OMNICOMM SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(continued)

NOTE 3: OPERATIONS AND LIQUIDITY

We have experienced negative cash flow from operations and have funded our activities to date primarily from debt and equity financings. We will continue to require substantial funds to continue our R & D activities and to market, sell and commercialize our technology. We may need to raise substantial additional capital to fund our future operations. Our capital requirements will depend on many factors, including the problems, delays, expenses and complications frequently encountered by companies developing and commercializing new technologies; the progress of our R & D activities; the rate of technological advances; determinations as to the commercial potential of our technology under development; the status of competitive technology; the establishment of collaborative relationships; the success of our sales and marketing programs; and other changes in economic, regulatory or competitive conditions in our planned business.

Estimates about the adequacy of funding for our activities are based upon certain assumptions, including assumptions that the R & D programs relating to our technology can be conducted at projected costs and that progress towards the commercialization of our technology will be timely and successful. There can be no assurance that changes in our R & D plans, acquisitions or other events will not result in accelerated or unexpected expenditures.

To satisfy our capital requirements, we may seek additional financing through debt and equity financings. There can be no assurance that any such funding will be available to us on favorable terms or at all. If adequate funds are not available when needed, we may be required to delay, scale back or eliminate some or all of our research and product development and marketing programs. If we are successful in obtaining additional financings, the terms of such financings may have the effect of diluting or adversely affecting the holdings or the rights of the holders of our common and preferred stock.

The ability of the Company to continue in existence is dependent on its having sufficient financial resources to bring products and services to market for marketplace acceptance. As a result of its significant losses, negative cash flows from operations, and accumulated deficits for the nine months ending September 30, 2006 there is doubt about the Company’s ability to continue as a going concern.

NOTE 4: EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed by dividing income available to common shareholders (which for the Company equals its net loss) by the weighted average number of common shares outstanding, and dilutive EPS adds the dilutive effect of stock options and other common stock equivalents. Antidilutive shares aggregating 30,996,170 and 44,496,065 have been omitted from the calculation of dilutive EPS for the nine months September 30, 2006 and September 30, 2005, respectively. Provided below is reconciliation between numerators and denominators of the basic and diluted earnings per shares:

Nine Months Ended



	September 30, 2006							September 30, 2005
	Income Numerator			Shares Denominator	Per-Share Amount			Income Numerator			Shares Denominator	Per-Share Amount
Basic EPS	$	(2,695,044	)	33,151,247	$	(0.08	)	$	(1,664,990	)	25,883,514	$	(0.06	)
Effect of Dilutive Securities
None.		-0-		-0-		-0-			-0-		-0-		-0-

Diluted EPS	$	(2,695,044	)	33,151,247	$	(0.08	)	$	(1,664,990	)	25,883,514	$	(0.06	)

OMNICOMM SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(continued)

Three Months Ended



	September 30, 2006							September 30, 2005
	Income Numerator			Shares Denominator	Per-Share Amount			Income Numerator			Shares Denominator	Per-Share Amount
Basic EPS	$	(939,717	)	38,349,658	$	(0.02	)	$	(468,145	)	26,819,248	$	(0.02	)
Effect of Dilutive Securities
None.		-0-		-0-		-0-			-0-		-0-		-0-

Diluted EPS	$	(939,717	)	38,349,658	$	(0.02	)	$	(468,145	)	26,819,248	$	(0.02	)

NOTE 5: NOTES PAYABLE

At September 30, 2006, the Company owed $3,274,260 in notes payable. The table below provides details as to the terms and conditions of the notes payable.


Origination Date	Due Date	Interest Rate		Amount		Short Term		Long Term
12/31/2003	1/31/2007	9.00	%	$	20,000	$	20,000		-0-
8/15/2003	1/31/2007	9.00	%		100,000		100,000		-0-
12/31/2005	4/1/2008	9.00	%		117,550		—		117,550
12/31/2005	4/1/2008	9.00	%		259,758		—		259,758
12/31/2005	4/1/2008	9.00	%		117,665		—		117,665
12/31/2005	4/1/2008	9.00	%		549,501		—		549,501
12/31/2005	4/1/2008	9.00	%		414,136		—		414,136
12/31/2005	4/1/2008	9.00	%		676,740		—		676,740
12/31/2005	4/1/2008	9.00	%		511,910		—		511,910
3/31/2005	1/31/2007	9.00	%		22,000		22,000		-0-
4/7/2005	1/31/2007	9.00	%		25,000		25,000		-0-
4/7/2005	1/31/2007	9.00	%		50,000		50,000		-0-
5/12/2005	1/31/2007	9.00	%		40,000		40,000		-0-
6/30/2005	1/31/2007	9.00	%		120,000		120,000		-0-
11/8/2005	5/31/2007	9.00	%		50,000		50,000		-0-
11/30/2005	5/31/2007	9.00	%		50,000		50,000		-0-
12/5/2005	5/31/2007	9.00	%		50,000		50,000		-0-
1/10/2006	5/31/2007	9.00	%		100,000		100,000		-0-

				$	3,274,260	$	627,000	$	2,647,260

OMNICOMM SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(continued)

NOTE 6: COMMITMENTS AND CONTINGENCIES

The Company currently leases office space under an operating lease. The minimum future lease payments required under the Company’s operating leases at September 30, 2006 are as follows:


2006	$	40,723
2007		160,781
2008		113,116
2009		117,499
2010		122,032
2011		41,187

Total	$	595,338

In addition to annual base rental payments the Company pays for the operating expenses associated with its leased office space and is responsible for any escalation in operating expenses as determined in the lease. Rent expense was $132,723 and $114,990 for the nine months ended September 30, 2006 and 2005, respectively.

LEGAL PROCEEDINGS

On November 16, 2005, Lawton Jackson, (“Jackson”) filed suit (Civil Action No. 05-14582 CA 01) in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida against OmniComm Systems, Inc. In his suit Jackson alleges that we breached two employment agreements by not paying him the salary set forth in the agreements. Jackson is seeking $128,098 as damages. We filed a Motion to Dismiss, on December 5, 2005, to Jackson’s claim of breach of contract. The Court denied our Motion to Dismiss but responded that it found issues with Jackson’s claims based on the statute of limitations regarding the employment contracts. Jackson filed a First Amended Complaint in January, 2006, alleging certain oral agreements amended the original employment agreements. We filed an Answer and Affirmative Defenses in January, 2006. This matter is ongoing and we are prepared to vigorously defend against the claim.

NOTE 7: INCOME TAXES

The tax expense (benefit) for income taxes differs from the amount computed by applying the statutory federal income tax rate of 34% to income (loss) before provision (benefit) for income taxes as follows:


	9/30/06			9/30/05
Current tax expense (benefit):
Income tax at statutory rates	$	-0-		$	-0-

Deferred tax expense (benefit):
Amortization of goodwill and covenant		-0-			-0-
Operating loss carryforward		(868,172	)		(476,892	)

		(868,172	)		(476,892	)

Valuation allowance		868,172			476,892

Total tax expense (benefit)	$	-0-		$	-0-

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows:

OMNICOMM SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(continued)


	9/30/06			12/31/05
Deferred tax assets:
Amortization of intangibles	$	283,698		$	283,698
Operating loss carryforwards		8,473,258			7,318,203

Gross deferred tax assets		8,756,956			7,601,901

Valuation allowance		(8,756,956	)		(7,601,901	)

Net deferred tax asset	$	-0-		$	-0-

The Company has net operating loss carryforwards (NOL) for income tax purposes of approximately $22,505,203. This loss is allowed to be offset against future income until the year 2023 when the NOL’s will expire. Other timing differences relate to depreciation and amortization for the stock acquisition of Education Navigator in 1998. The tax benefits relating to all timing differences have been fully reserved for in the valuation allowance account due to the lack of operating history and the substantial losses incurred through September 30, 2006.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

General

The following information should be read in conjunction with the Consolidated Unaudited Financial Statements and Notes thereto and other information set forth in this report.

Forward-Looking Statements

Statements contained in this Form 10-QSB that are not historical fact are “forward looking statements”. These statements can often be identified by the use of forward-looking terminology such as “estimate”, “project”, “believe”, “expect”, “may”, “will”, “should”, “intends”, or “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. We wish to caution the reader that these forward-looking statements, such as statements relating to timing, costs and of the acquisition of, or investments in, existing business, the revenue or profitability levels of such businesses, and other matters contained in this Form 10-QSB regarding matters that are not historical facts, are only predictions. No assurance can be given that plans for the future will be consummated or that the future results indicated, whether expressed or implied, will be achieved. While sometimes presented with numerical specificity, these plans and projections and other forward-looking statements are based upon a variety of assumptions, which we consider reasonable, but which nevertheless may not be realized. Because of the number and range of the assumptions underlying our projections and forward-looking statements, many of which are subject to significant uncertainties and contingencies that are beyond our reasonable control, some of the assumptions inevitably will not materialize, and unanticipated events and circumstances may occur subsequent to the date of this Form 10-QSB. Therefore, our actual experience and results achieved during the period covered by any particular projections or forward-looking statements may differ substantially from those projected. Consequently, the inclusion of projections and other forward-looking statements should not be regarded as a representation by us or any other person that these plans will be consummated or that estimates and projections will be realized, and actual results may vary materially. There can be no assurance that any of these expectations will be realized or that any of the forward-looking statements contained herein will prove to be accurate. The Company does not undertake any obligation to update or revise any forward-looking statement made by it or on its behalf, whether as a result of new information, future events or otherwise.

MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

Overview

We are a healthcare technology company that provides Electronic Data Capture (“EDC”) solutions and related value-added services to pharmaceutical and biotechnology companies, clinical research organizations (“CRO”), and other clinical trial sponsors via our Web-based software, TrialMaster. TrialMaster allows clinical trial sponsors and investigative sites to securely collect, validate, transmit, and analyze clinical study data including patient histories, patient dosing, adverse events, and other clinical trial information. All of our personnel are involved in the development and marketing of TrialMaster and its related products.

During 2006 the Company has continued its efforts in executing its strategy. The primary focus of our strategy includes:

•

Stimulating demand by providing clinical trial Sponsors with high value EDC;

•

Emphasizing low operating costs;

•

Expanding our business model by offering our software solution, TrialMaster, on a licensed basis in addition to our existing hosted-services solutions;

•

Providing EDC services to small and midsize Pharma, Bio-Tech, Medical Device Companies and CROs (Clinical Research Organizations); and

•

Differentiation through service.

A crucial success factor in the EDC industry is the overall penetration of our industry into the domestic and international clinical trial market. CenterWatch, an industry publication, estimates that as of 2004 approximately 20 to 25% of clinical trials are conducted with the use of EDC. Global R & D was estimated at $66 billion in 2004. Based on a 2002 CenterWatch report approximately 8.5% of total R & D costs are spent on data management. Our operating focus is first to increase our sales and marketing capabilities and penetration rate and secondly, to continue developing and improving

TrialMaster to ensure our services and products remain an attractive, high-value EDC choice. During 2005 and the first half of 2006 we expanded our sales and marketing team and we anticipate continuing to increasing our marketing and sales personnel during the remainder of fiscal 2006.

The Nine Months Ended September 30, 2006 Compared With the Nine Months Ended September 30, 2005

Results of Operations

A summarized version of our results of operations for the nine months ended September 30, 2006 and September 30, 2005 is included in the table below.

Summarized Statement of Operations


	For the nine months ended September 30,
	2006			% of Revenues		2005			% of Revenues		$ Change			% Change
Total revenues	$	2,011,210				$	1,261,216				$	749,994		59.5	%
Cost of sales		697,931		34.7	%		262,162		20.8	%		435,769		166.2	%

Gross margin		1,313,279		65.3	%		999,054		79.2	%		314,225		31.5	%

Salaries, benefits and related taxes		2,307,116		114.7	%		1,376,384		109.1	%		930,732		67.6	%
Travel		149,270		7.4	%		82,899		6.6	%		66,371		80.1	%
Selling, general and administrative		245,039		12.2	%		177,927		14.1	%		67,112		37.7	%
Bad debt expense		—		0.0	%		—		0.0	%		—		N/M
Depreciation and amortization		38,675		1.9	%		23,282		1.8	%		15,393		66.1	%

Total Operating Expenses		3,391,110		168.6	%		1,968,245		156.1	%		1,422,865		72.3	%

Operating income (loss)		(2,077,831	)	-103.3	%		(969,191	)	-76.8	%		(1,108,640	)	114.4	%

Interest Expense		229,296		11.4	%		298,511		23.7	%		(69,215	)	-23.2	%
Interest income		—		0.0	%		381		0.0	%		(381	)	-100.0	%

(Loss) before income taxes and dividends		(2,307,127	)	-114.7	%		(1,267,321	)	-100.5	%		(1,039,806	)	82.0	%
Income tax expense (benefit)		-0-		0.0	%		-0-		0.0	%		-0-		N/M

Net (loss)		(2,307,127	)	-114.7	%		(1,267,321	)	-100.5	%		(1,039,806	)	82.0	%
Total preferred stock dividends		(387,917	)	-19.3	%		(397,669	)	-31.5	%		9,752		-2.5	%

Net (loss) attributable to common stockholders	$	(2,695,044	)	-134.0	%	$	(1,664,990	)	-132.0	%	$	(1,030,054	)	61.9	%

Revenues for the nine months ended September 30, 2006 were $2,011,120 compared to $1,261,216 for the nine-months ended September 30, 2005, an increase of 59.5%. The revenue increase can be attributed to a 13% increase in projects under management. In addition the average trial currently being managed is approximately 38% larger than the trials being managed in fiscal 2005. Industry acceptance of EDC continues to increase and we believe that currently approximately 20% - 25% of clinical trials use Web-based EDC services. TrialMaster is currently sold primarily as an Application Service Provider (“ASP”) that provides EDC and other services such as an enterprise management suite which assists its clients in the pharmaceutical, biotechnology and medical device industries in accelerating the completion of clinical trials. As we continue developing TrialMaster and our client relationships mature, we expect some of our clients to deploy TrialMaster on a licensed, rather than ASP hosted basis. TrialMaster contracts provide for pricing that is based on both the size and duration of the clinical trial. Size parameters include the number of case report forms used to collect data and the number of sites utilizing TrialMaster. The client will pay a trial setup fee based on the previously mentioned factors, and then pay an on-going maintenance fee for the duration of the clinical trial that provides software, network and site support during the trial. During the nine months ended September 30, 2006 approximately 71.3% of revenues were generated by trial setup activities, 18.8% were generated from on-going maintenance fees and approximately 10.0% was generated from fees charged for changes to on-going clinical trial engagements. During the nine months ended September 30, 2005 we generated 69.7% of revenues from setup fees, 20.6% from on-going maintenance fees and 9.7% from project change orders. Generally, these contracts will range in duration from one month to several years. Setup fees are generally earned prior to the inception of a trial, however, the revenues will be recognized in accordance with SEC Staff Accounting Bulletin No. 104 “Revenue Recognition” which requires that the revenues be recognized ratably over the life of the contract. The maintenance fee revenues are earned and recognized monthly. Costs associated with contract revenues are recognized as incurred.

Our top five customers accounted for approximately 50% of our revenues during the nine months ended September 30, 2006 and approximately 60% of our revenues during the nine months ended September 30, 2005. One customer accounted individually for 10% or more of our revenues during the first half of fiscal 2006. The loss of any of our contracts or these customers in the future could adversely affect our results of operations.

Cost of goods sold increased to $697,931 for the nine months ended September 30, 2006 compared to $262,162 for the nine months ended September 30, 2005, an increase of $435,769, or 166.2%. Cost of goods sold were approximately 34.7% of sales for the nine months ended September 30, 2006 compared to 20.8% for the nine months ended September 30, 2005. Cost of goods sold relates primarily to salaries and related benefits associated with the programmers, developers and systems analysts producing clinical trials on behalf of our clients. Salaries increased during the nine months ended September 30, 2006 due to the addition of five additional programmers and four quality assurance analysts as part of our trial operations. We believe that the staffing of our quality assurance department is crucial to our long-term success. We expect our current staffing levels to provide the appropriate level of quality assurance resources needed to manage our business when evaluated in concert with our expected release of TrialMaster V4.0.

We expect to increase development programming labor costs on an absolute basis as our trial revenues increase. We expect our cost of goods sold to return to approximately 20-25% of sales during the next twelve months. We expect to continue to increase follow-on engagements from existing clients and expect to increase the phase I and CRO portions of our client base. TrialMaster V3.0, the current release of our trial-building software has improved our ability to reduce trial production related costs since it automates many of the trial building functions that were manually performed in prior releases of our software. We expect the next version of TrialMaster, (V4.0), which we anticipate releasing for commercialization during the fourth quarter of 2006, to increase the efficiency of trial building operations by 20 to 25%. V4.0 is being designed using Microsoft’s .Net framework. Microsoft ^® .NET is described by Microsoft as a set of software technologies for connecting information, people, systems and devices. This new generation of technology is based on Web services—small building-block applications that can connect to each other as well as to other, larger applications over the Internet.

Salaries and related expenses are our largest expense at 68.0% of total operating expenses for the nine months ended September 30, 2006. Salaries and related expenses totaled $2,307,116 for the nine months ended September 30, 2006 compared to $1,376,384, or 69.9% of total operating expenses, for the nine months ended September 30, 2005, an increase of 67.6%. We currently employ approximately 32 employees out of our Ft. Lauderdale, Florida corporate office and have five out-of-state employees, including one employee in The Netherlands. During the first half of 2006 we increased our corporate level staff by twelve employees. Our objective during this period was to strengthen our Business Development, R & D and Clinical Support functions in anticipation of growth expected to occur during the balance of 2006. We believe that our ability to compete and to continue growing our business within the EDC industry is predicated, in part, on the

success of our efforts at developing new and more sophisticated products. These efforts allow us to service our clients more efficiently; our ability to provide service and support that is more effective than that of our competitors and through increasing our level of market penetration. We believe that the personnel added during 2006 provide us with the human resources necessary to achieve these operating objectives. We will look to selectively add experienced sales and marketing personnel during the remainder of fiscal 2006 in an effort to increase our market penetration and to continue broadening our client base, but do not believe that any other corporate level department will increase significantly during the remainder of fiscal 2006.

We incurred $281,602 in consulting fees during the nine months ended September 30, 2006. This represents fees paid to human resource consultants to assist in recruiting sales, marketing and clinical services professionals. We anticipate incurring more professional fees during the fourth quarter of fiscal 2006 for this type of consulting services.

Rent and related expenses increased by $17,733 during the nine months ended September 30, 2006 compared to the same period in 2005. We signed a new corporate office lease during March 2006. The company did not incur a financial obligation associated with this lease until May 2006. This lease, which is for a term of five years, is expected to fulfill our operating needs during the term of the lease. In December 2001, we established a disaster recovery site at an IBM owned Co-Location facility in Atlanta, Georgia and will continue utilizing this facility for the foreseeable future since it is designed to ensure 100% production system up-time and to provide system redundancy. During 2006, the Company continued to augment its Business Continuity plan by establishing a relationship with a Fort Lauderdale, Florida based co-location facility. The facility is a Category 5 hurricane rated equipped with redundant power supply in the form of UPS and generators. The datacenter provides secure facilities, on demand bandwidth, redundant standby power, secure Internet connectivity and network redundancy. The facility is equipped with fully armed security and office facilities and incorporates an 18” raised floor data center with full 9 foot ceiling height. In addition to the data center, we have contracted for disaster recovery suites and cubicles which will allow us to maintain our full operating capacity using company-owned workstations to minimize down-time.

Legal and professional fees totaled $172,940 for the nine months ended September 30, 2006 compared with $129,632 for the nine months ended September 30, 2005, an increase of approximately $43,308. Professional fees represent fees paid to our auditors for services rendered on a quarterly and annual basis in connection with out SEC filings and fees paid to our attorneys in connection with representation in matters involving litigation or for services rendered to us related to securities and SEC related matters. We expect legal and professional fees to increase during the second half of 2006 in connection with our project aimed at ensuring timely compliance with Section 404 of the Sarbanes-Oxley Act of 2002.

Selling, general and administrative expenses (“SGA”) were $245,039 during the nine months ended September 30, 2006 compared to $177,927 during the nine months ended September 30, 2005, an increase of 37.7%. These expenses relate primarily to costs incurred in running our office day-to-day and other costs not directly related to other captioned items in our income statement, and include the cost of office equipment and supplies, the costs of attending conferences and seminars and other expenses incurred in the normal course of business. The Company increased its marketing, sales and advertising expenditures by $43,309 for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005 from $81,876 to $125,185, an increase of approximately 52.9%. We expect SGA expenses to continue increasing as we intensify and extend our selling and marketing efforts.

Interest expense was $229,296 during the nine months ended September 30, 2006 versus $295,811 during the nine months ended September 30, 2005, a decrease of $69,215 or 23.2%. The decrease can be attributed to approximately $104,000 in interest expense associated with a beneficial conversion provided to certain holders of our 10% Convertible Notes during the nine months ended September 30, 2005 offset by the interest expense incurred on notes issued during the nine months ended September 30, 2006 and the increase in interest expense associated with notes issued throughout the nine months ended September 30, 2005. We evaluate the cost of capital available to us in combination with our overall capital structure in deciding what financing best fulfills our short and long-term capital needs. During the nine months ended September 30, 2006 we issued $100,000 in promissory notes. During the nine months ended September 30, 2005, we issued $343,300 in promissory notes.

There were arrearages of $153,600 in 5% Series A Preferred Stock dividends, $32,581 in Series B Preferred Stock dividends and $201,736 in Series C Preferred Stock dividends for the nine months ended September 30, 2006, compared with arrearages of $153,600 in 5% Series A Preferred Stock dividends, $42,334 in Series B Preferred Stock dividends and $201,735 in Series C Preferred Stock dividends for the nine months ended September 30, 2005. We deducted $387,917 and $397,669 from Net Income (Loss) Attributable to Common Stockholders for the nine months ended September 30, 2006 and September 30, 2005, respectively, relating to undeclared Series A, B and C Convertible Preferred Stock dividends.

Included in our results of operations for the first half of 2006 are the results of our European Sales and Marketing subsidiary, OmniComm Europe, BV which was formed during April 2006. This operation incurred approximately $113,695 in selling, general and administrative expenses and recorded $626 in depreciation expense. This operation is expected to provide sales, marketing and limited support services to the European clinical trial market.

The Three Months Ended September 30, 2006 Compared With the Three Months Ended September 30, 2005

Results of Operations

A summarized version of our results of operations for the three months ended September 30, 2006 and September 30, 2005 is included in the table below.

Summarized Statement of Operations


	For the 3 months ended September 30,
	2006			% of Revenues		2005			% of Revenues		$ Change			% Change
Total revenues	$	788,947				$	498,615				$	290,332		58.2	%
Cost of sales		238,117		30.2	%		94,232		18.9	%		143,885		152.7	%

Gross margin		550,830		69.8	%		404,383		81.1	%		146,447		36.2	%

Salaries, benefits and related taxes		836,383		106.0	%		445,736		89.4	%		390,647		87.6	%
Travel		52,154		6.6	%		23,205		4.7	%		28,949		124.8	%
Selling, general and administrative		105,295		13.3	%		85,226		17.1	%		20,069		23.5	%
Bad debt expense		—		0.0	%		—		0.0	%		—		N/M
Depreciation and amortization		16,470		2.1	%		4,885		1.0	%		11,585		237.2	%

Total Operating Expenses		1,283,586		162.7	%		669,120		134.2	%		614,466		91.8	%

Operating income (loss)		(732,756	)	-92.9	%		(264,737	)	-53.1	%		(468,019	)	176.8	%
Interest Expense		77,132		9.8	%		70,854		14.2	%		6,278		8.9	%
Interest income		—		0.0	%		300		0.1	%		(300	)	-100.0	%

(Loss) before income taxes and dividends		(809,888	)	-102.7	%		(335,291	)	-67.2	%		(474,597	)	141.5	%
Income tax expense (benefit)		-0-		0.0	%		-0-		0.0	%		-0-		N/M

Net (loss)		(809,888	)	-102.7	%		(335,291	)	-67.2	%		(474,597	)	141.5	%
Total preferred stock dividends		(129,829	)	-16.5	%		(132,854	)	-26.6	%		3,025		-2.3	%

Net (loss) attributable to common stockholders	$	(939,717	)	-119.1	%	$	(468,145	)	-93.9	%	$	(471,572	)	100.7	%

Revenues for the three months ended September 30, 2006 were $788,947 compared to $498,615 for the three months ended September 30, 2005, an increase of 58.2%. We recognized revenues from approximately 55 clinical trial projects during the second quarter of 2006 compared with 38 clinical trial projects during the same period in 2005, an increase of approximately 44.7%. Industry acceptance of EDC continues to increase and we believe that currently approximately 20% - 25% of clinical trials use Web-based EDC services. TrialMaster is currently sold primarily as an Application Service Provider (“ASP”) that provides EDC and other services such as an enterprise management suite which assists its clients in the pharmaceutical, biotechnology and medical device industries in accelerating the completion of clinical trials. As we continue developing TrialMaster and our client relationships mature we expect some of our clients to deploy TrialMaster on a licensed, rather than ASP hosted basis. TrialMaster contracts provide for pricing that is based on both the size and duration of the clinical trial. Size parameters include the number of case report forms used to collect data and the number of sites utilizing TrialMaster. The client will pay a trial setup fee based on the previously mentioned factors, and then pay an on-going maintenance fee for the duration of the clinical trial that provides software, network and site support during the trial. During the third quarter of 2006 approximately 69.5% of revenues were generated by trial setup activities, 20.3% were generated from on-going maintenance fees and approximately 10.2% was generated from fees charged for changes to on-going clinical trial engagements. During the second quarter of fiscal 2005 we generated 66.4% of revenues from setup fees, 21.3% from on-going maintenance fees and 12.3% from project change orders. Generally, these contracts will range in duration from one month to several years. Setup fees are generally earned prior to the inception of a trial, however, the revenues will be recognized in accordance with SEC Staff Accounting Bulletin No. 104 “Revenue Recognition” which requires that the revenues be recognized ratably over the life of the contract. The maintenance fee revenues are earned and recognized monthly. Costs associated with contract revenues are recognized as incurred.

Cost of goods sold increased to $238,117 for the three months ended September 30, 2006 compared to $94,232 for the three months ended September 30, 2005, an increase of $143,885. Cost of goods sold were approximately 30.2% of sales for the three months ended September 30, 2006 compared to 18.9% for the three months ended September 30, 2005. Cost of goods sold relates primarily to salaries and related benefits associated with the programmers, developers and systems analysts producing clinical trials on behalf of our clients. Salaries increased during the three months ended September 30, 2006 due to the addition of five additional programmers and four quality assurance analysts as part of our trial operations.

We expect to increase development programming labor costs on an absolute basis as our trial revenues increase. We expect our cost of goods sold to return to approximately 20-25% of sales during the second half of 2006. We expect to continue to increase follow-on engagements from existing clients and expect to increase the phase I and CRO portions of our client base. TrialMaster V3.0, the current release of our trial-building software has improved our ability to reduce trial production related costs since it automates many of the trial building functions that were manually performed in prior releases of our software. We expect the next version of TrialMaster, (V4.0), which we anticipate releasing during the fourth quarter of 2006, to increase the efficiency of trial building operations by 20 to 25%. V4.0 is being designed using Microsoft’s .Net framework. Microsoft ^® .NET is described by Microsoft as a set of software technologies for connecting information, people, systems and devices. This new generation of technology is based on Web services—small building-block applications that can connect to each other as well as to other, larger applications over the Internet.

Salaries and related expenses are our largest expense at 65.2% of total operating expenses for the three months ended September 30, 2006. Salaries and related expenses totaled $836,283 for the three months ended September 30, 2006 compared to $445,736 for the three months ended September 30, 2005, an increase of 87.6%. We currently employ approximately 32 employees out of our Ft. Lauderdale, Florida corporate office and have five out-of-state employees, including one in The Netherlands. During the second quarter of 2006 we increased our corporate level staff by nine employees. Our objective during this period was to strengthen our Business Development, R & D and Clinical Support functions in anticipation of growth expected to occur during the balance of 2006. We believe that our ability to compete and to continue growing our business within the EDC industry is predicated, in part, on the success of our efforts at developing new and more sophisticated products. These efforts allow us to service our clients more efficiently; our ability to provide service and support that is more effective than that of our competitors and through increasing our level of market penetration. We believe that the personnel added during the course of the second quarter provide us with the human resources necessary to achieve these operating objectives. We will look to selectively add experienced sales and marketing personnel during the remainder of fiscal 2006 in an effort to increase our market penetration and to continue broadening our client base, but, do not believe that any other corporate level department will increase significantly during the second half of fiscal 2006.

We incurred $130,977 in consulting fees during the three months ended September 30, 2006. This represents fees paid to human resource consultants to assist in recruiting sales, marketing and clinical services professionals. We anticipate incurring more professional fees during the fourth quarter of fiscal 2006 for this type of consulting services.

Rent and related expenses increased by $13,298 during the three months ended September 30, 2006 compared to the three months ended September 30, 2005. We signed a new corporate office lease during March 2006. The company did not incur a financial obligation associated with this lease until May 2006. This lease, which is for a term of five years, is expected to fulfill our operating needs during the term of the lease. In December 2001, we established a disaster recovery site at an IBM owned Co-Location facility in Atlanta, Georgia and will continue utilizing this facility for the foreseeable future since it is designed to ensure 100% production system up-time and to provide system redundancy. During 2006, the Company continued to augment its Business Continuity plan by establishing a relationship with a Fort Lauderdale, Florida based co-location facility. The facility is a Category 5 hurricane rated equipped with redundant power supply in the form of UPS and generators. The datacenter provides secure facilities, on demand bandwidth, redundant standby power, secure Internet connectivity and network redundancy. The facility is equipped with fully armed security and office facilities and incorporates an 18” raised floor data center with full 9 foot ceiling height. In addition to the data center, we have contracted for disaster recovery suites and cubicles which will allow us to maintain our full operating capacity using company-owned workstations to minimize down-time.

Legal and professional fees totaled $66,508 for the three months ended September 30, 2006 compared with $42,461 for the three months ended September 30, 2005, an increase of approximately $24,047. The increase can be attributed to legal and accounting fees attributable to two registration statements filed with Securities and Exchange Commission during 2006 and legal fees incurred relating to litigation defense. Professional fees represent fees paid to our auditors for services rendered on a quarterly and annual basis in connection with out SEC filings and fees paid to our attorneys in connection with representation in matters involving litigation or for services rendered to us related to securities and SEC related matters. We expect legal and professional fees to increase during the second half of 2006 in connection with our project aimed at ensuring timely compliance with Section 404 of the Sarbanes-Oxley Act of 2002.

Selling, general and administrative expenses (“SGA”) were $105,295 during the three months ended September 30, 2006 compared to $85,226 during the three months ended September 30, 2005, an increase of 23.5%. These expenses relate primarily to costs incurred in running our office day-to-day and other costs not directly related to other captioned items in our income statement, and include the cost of office equipment and supplies, the costs of attending conferences and seminars and other expenses incurred in the normal course of business. The Company increased its marketing, sales and advertising expenditures by $18,432 in the three months ended September 30, 2006 compared to the three months ended September 30, 2005 from $61,036 to $79,468, an increase of approximately 30.2%. We expect SGA expenses to continue increasing as we intensify and extend our selling and marketing efforts.

Interest expense was $77,132 during the three months ended September 30, 2006 versus $70,854 during the three months ended September 30, 2005, an increase of $6,278 or 8.9%. The increase can be attributed the interest expense incurred on notes issued during the three months ended September 30, 2006 and the increase in interest expense associated with notes issued throughout the three months ended September 30, 2005. We evaluate the cost of capital available to us in combination with our overall capital structure in deciding what financing best fulfills our short and long-term capital needs. During the third quarter of 2006 we issued $-0- in promissory notes. During the third quarter of fiscal 2005, we issued $33,300 in promissory notes.

There were arrearages of $51,763 in 5% Series A Preferred Stock dividends, $10,082 in Series B Preferred Stock dividends and $67,984 in Series C Preferred Stock dividends for the three months ended September 30, 2006, compared with arrearages of $51,763 in 5% Series A Preferred Stock dividends, $13,107 in Series B Preferred Stock dividends and $67,984 in Series C Preferred Stock dividends for the three months ended September 30, 2005. We deducted $129,829 and $132,854 from Net Income (Loss) Attributable to Common Stockholders for the three months ended September 30, 2006 and September 30, 2005, respectively, relating to undeclared Series A, B and C Convertible Preferred Stock dividends.

Included in our results of operations for the second quarter of 2006 are the results of our European Sales and Marketing subsidiary, OmniComm Europe, BV which was formed during April 2006. This operation incurred approximately $59,261 in selling, general and administrative expenses and recorded $315 in depreciation expense. This operation is expected to provide sales, marketing and limited support services to the European clinical trial market.

Liquidity and Capital Resources

We have historically experienced negative cash flows and have relied on the proceeds from the sale of debt and equity securities to fund our operations. In addition, we have utilized stock-based compensation as a means of paying for consulting and salary related expenses.

The table provided below summarizes key measures of our liquidity and capital resources.

Liquidity and Capital Resources

Disclosure for the Period Ended

September 30,


	2006		2005		Change
Cash	110,543		9,931		100,612
Accounts Receivable, net of allowance for doubtful accounts	254,366		234,565		19,801
Current Assets	390,222		246,890		143,332

Accounts Payable and accrued expenses	1,090,928		779,456		311,472
Accrued payroll taxes	107,957		58,742		49,215
Deferred revenue	1,604,832		1,048,707		556,125
Convertible notes payable	125,000		125,000		—
Current Liabilities	3,555,717		2,011,905		1,543,812

Working Capital (Deficit)	(3,165,495	)	(1,765,015	)	(1,400,480	)

Net cash provided by (used in) operating activities	(1,263,941	)	(473,936	)
Net cash provided by (used in) investing activities	(206,830	)	(22,879	)
Net cash provided by financing activities	1,568,045		463,800

Net increase (decrease) in cash and cash equivalents	100,612		(33,015	)

Cash and cash equivalents increased by $100,612 from $9,931 to $110,543 at September 30, 2006. This was the result of cash provided by financing activities of $1,568,045 offset by cash used in operating activities of approximately $1,263,941 and $206,830 used in investing activities. The significant components of the activity include a loss from operations of approximately $2,307,127 offset by non-cash expenses of $202,220 and approximately $1,568,405 we raised through the issuance of debt and equity securities offset by $206,830 used in investing activities and increases in cash of $840,966 from changes in working capital accounts.

We are not currently bound by any long or short-term agreements for the purchase or lease of capital expenditures. Any amounts expended for capital expenditures would be the result of an increase in the capacity needed to adequately service any increase in our business. To date we have paid for any needed additions to our capital equipment infrastructure from working capital funds and anticipate this being the case in the future.

Contractual Obligations

The following table sets forth our contractual obligations as of September 30, 2006:


Contractual Obligations			Payments Due by Period
	Total		Less than 1 year			1-2 Years			2-3 Years		3- 5 Years
Long Term Debt (1)	$	3,399,260	$	752,000	(2)	$	2,647,260	(3)	$	-0-	$	-0-
Operating Lease Obligations		595,337		168,749			117,234			116,931		192,963
Financial Advisory Agreement		22,500		22,500			-0-			-0-		-0-

Total	$	4,017,097	$	943,249		$	117,234		$	116,931	$	192,963

1.	Amounts do not include interest to be paid.

Includes $125,000 of convertible notes currently in default and due that are convertible into shares of common stock at the option of the debenture holder at a conversion rate of $1.25 per share and $627,000 in promissory notes bearing interest at 9% annually that mature in January 31, 2007 and May 2007.

3.	Includes $2,647,260 in promissory notes bearing interest at 9% annually that mature on April 1, 2008.

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

We are currently in arrears on principal and interest payments owed totaling $192,738 on our 10% Convertible Notes. We were in default effective January 30, 2002.

We have been operating with a cash burn rate since beginning our EDC operations. In order to manage cash flows, we have issued preferred stock, common stock and debt to satisfy operating expenses and obligations. From April 2005 through July 2005, we sold an aggregate of 850,000 shares of our common stock resulting in gross proceeds of $212,500. We accrued $20,000 in transaction fees leaving net proceeds to us of $192,500. From January to September 2006 holders of common stock warrants exercised warrants to purchase 5,960,000 shares of common stock resulting in $1,487,319 in gross proceeds.

Our selling efforts include marketing our products to several Fortune 1000 pharmaceutical and medical device manufacturers and several of the largest CROs. We began providing services to some of these entities during 2003 and we have experienced success in broadening our client roster over the past two fiscal years. Continued success in broadening our existing client relationships and forging new relationships should provide us the opportunity to limit our need for funding our operations via debt and equity capital. Continuing to obtain contracts with clients of this size and reputation will also increase the credibility of the Company to the clinical trial market.

We experienced increased success in marketing TrialMaster during fiscal 2005. We entered into approximately $4.1 million in contracts for trials to be serviced over the next five years. These contracts included ten engagements with new clients. This success carried over into the nine months of fiscal 2006. During this period we entered into contracts totaling approximately $4.5 million in new engagements, including engagements with nine new clients. These contracts may however, be terminated by our clients at any time. Our focus continues to include increasing our penetration of all phases of the clinical trial market with a continued emphasis on becoming the market leader in Phase I EDC services. We believe this market is an operating and strategic strength of the Company due to the inherent flexibility that our TrialMaster Phase I product provides us. We believe we have the ability to produce trials more quickly and economically than our competitors for this specialized and large market. Additionally, we continue to focus on adding CROs as strategic and marketing partners. There is an industry-wide emphasis in establishing strategic relationships with CROs. These relationships provide marketing leverage in the form of joint marketing and sales efforts and also provide an installed base of trained TrialMaster users. This installed base of users increases our ability to provide rapidly developed, cost effective solutions for our clients.

We feel that the momentum established from new client acquisitions and our ability to retain clients for repeat engagements provide a good operating base from which to build during 2006. We expect to continue increasing the level of resources deployed in our sales and marketing efforts. We embarked on a cost cutting program during fiscal 2000. That program became part of our organization’s identity and remains ingrained in our culture today. We feel that a combination of our lean operating environment and increased success in new client acquisition, coupled with our ability to retain our existing clients will allow us to compete effectively within the EDC market.

Because of the losses experienced since 1999 we have needed to continue utilizing the proceeds from the sale of debt and equity securities to fund our working capital needs. When available, capital has been expensive relative to the valuations that were afforded during the expansion of the Internet sector in 1999 and 2000. The softness in the capital markets coupled with the losses experienced have caused working capital shortfalls. We have used a combination of equity financing and short-term bridge loans to fund our working capital needs. Other than our current capital and capital we may raise from future debt or equity offerings or short-term bridge loans, we do not have any additional sources of working capital.

We may continue to require substantial funds to continue our research and development activities and to market, sell and commercialize our technology. We may need to raise substantial additional capital to fund our future operations. Our capital requirements will depend on many factors, including the problems, delays, expenses and complications frequently encountered by companies developing and commercializing new technologies; the progress of our R & D activities; the rate of technological advances; determinations as to the commercial potential of our technology under development; the status of competitive technology; the establishment of collaborative relationships; the success of our sales and marketing programs; the cost of filing, prosecuting and defending and enforcing intellectual property rights; and other changes in economic, regulatory or competitive conditions in our planned business. Estimates about the adequacy of funding for our activities are based upon certain assumptions, including assumptions that the R & D programs relating to our technology can be conducted at projected costs and that progress towards broader commercialization of our technology will be timely and successful. There can be no assurance that changes in our R & D plans or other events will not result in accelerated or unexpected expenditures.

To satisfy our capital requirements, including ongoing future operations, we may seek to raise additional financing through debt and equity financings. There can be no assurance that any such funding will be available to us on favorable terms or at all. If adequate funds are not available when needed, we may be required to delay, scale back or eliminate some or all of our research and product development programs, and our business operations. If we are successful in obtaining additional financings, the terms of such financings may have the effect of diluting or adversely affecting the holdings or the rights of the holders of our common and preferred stock. Further, there can be no assurance that even if such additional capital is obtained or the planned cost reductions are implemented, that we will achieve positive cash flow or profitability or be able to continue as a business.

Our ability to continue in existence is dependent on our having sufficient financial resources to bring products and services to market. As a result of our significant losses, negative cash flows from operations, and accumulated deficits for the nine months ending September 30, 2006, there is doubt about our ability to continue as a going concern. In addition, our auditors Greenberg and Company, LLC, included language which qualified their opinion regarding our ability to continue as a going concern in their report dated February 10, 2006.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported. Note 2 of Notes to the Consolidated Financial Statements describes the significant accounting policies used in the preparation of the consolidated financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.

A critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates have the following attributes: 1) we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and 2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations.

Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the consolidated financial statements as soon as they became known. In addition, our Management is periodically faced with uncertainties, the outcomes of which are not within our control and will not be known for prolonged periods of time. Based on a critical assessment of its accounting policies and the underlying judgments and uncertainties affecting the application of those policies, our Management believes that our consolidated financial statements are fairly stated in accordance with accounting principles generally accepted in the United States (GAAP), and present a meaningful presentation of our financial condition and results of operations.

Our Management believes that the following are our critical accounting policies:

Deferred Revenue

Deferred revenue represents cash advances received in excess of revenue earned on on-going contracts. Payment terms vary with each contract but may include an initial payment at the time the contract is executed, with future payments dependent upon the completion of certain contract phases or targeted milestones. In the event of contract cancellation, we are entitled to payment for all work performed through the point of cancellation.

Revenue Recognition Policy

OmniComm’s revenue model is transaction-based and can be implemented either as an ASP or licensed for implementation by a customer such as a pharmaceutical company. Revenues are derived from the set-up of clinical trial engagements; on-going maintenance fees incurred throughout the duration of an engagement; fees for report writing and change orders. The clinical trials that are conducted using TrialMaster can last from a few months to several years. Most of the fees associated with our product including post-setup customer support in the form of maintenance charges are recognized ratably over the term of the clinical trial. Cost of sales is primarily comprised of programmer salaries and taxes and is expensed as incurred.

The Company recognizes sales, for both financial statement and tax purposes in accordance with SEC Staff Accounting Bulletin No. 101 “Revenue Recognition in Financial Statements” (“SAB 101”). SAB 101 requires that revenues be recognized ratably over the life of a contract. In accordance with SAB 101 the Company will record revenues over the estimated lives of the contracts.

Stock Based Compensation

Options granted to employees under our Stock Option Plan were accounted for by using the intrinsic value method under APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) until December 31, 2005. In October 1995, the Financial Accounting Standards Board (“FASB”) issued Statement No.123; Accounting for Stock-Based Compensation (“SFAS No. 123”), which defines a fair value based method of accounting for stock options. All stock based compensation issued to individuals, other than employees and directors such compensation which is accounted for in accordance with APB Opinion No. 25, are accounted for in accordance with SFAS No. 123, as amended by SFAS No.148. Effective with our first quarter, ended September 30, 2006, the Company was no longer using the intrinsic value method to value employee stock options. The Company began accounting for employee stock options using the fair value method effective January 1, 2006.

EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

ITEM 3. CONTROLS AND PROCEDURES

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-QSB, being September 30, 2006, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the Exchange Act) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation and up to the filing date of this Quarterly Report on Form 10-QSB. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

PART II. OTHER INFORMATION

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

We held our annual stockholders’ meeting in Fort Lauderdale, Florida on July 21, 2006. Stockholders voted:

To elect five directors to the board of directors to serve until the date of our next annual meeting until their successors have been elected and qualified;

To ratify the appointment of Greenberg & Co, as our independent auditors; and

To increase the number of shares authorized under the Company’s 1998 Stock Incentive Plan from 7,500,000 to 12,500,000.

With a majority (71%) of the outstanding shares voting either by proxy or in person, the stockholders approved the proposals, voting as follows:


Proposal 1.	For	Against	Abstain
Election of directors:
Randall G. Smith	35,970,630	143,680	-0-
Cornelis F. Wit	35,971,070	143,240	-0-
Guus van Kesteren	36,114,050	260	-0-
Matthew D. Veatch	36,114,050	260	-0-
Simon P. Kooyman	36,114,050	260	-0-

Proposal 2.	For	Against	Abstain
To ratify the appointment of Greenberg & Co., as our independent auditors	36,114,148	-0-	162

Proposal 3.	For	Against	Abstain
To increase the number of shares authorized under the 1998 Stock Incentive Plan	27,825,113	218,630	2

ITEM 6. EXHIBITS

The following documents are filed as a part of this report or are incorporated by reference to previous filings, if so indicated:


EXHIBIT NO.		DESCRIPTION
10.1		Employment Agreement and Stock Option Agreement between the Company and Stephen E. Johnson dated September 1, 2006

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, promulgated under the Securities and Exchange Act of 1934, as amended.

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, promulgated under the Securities and Exchange Act of 1934, as amended.

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

OmniComm Systems, Inc.

Registrant


By:		/s/ Cornelis F. Wit
		Cornelis F. Wit, Director, Chief Executive Officer and President

Date:		November 11, 2006

By:		/s/ Ronald T. Linares
		Ronald T. Linares, Vice President of Finance, Chief Financial and Accounting Officer

Date:		November 11, 2006

Exhibit Index


Exhibit Number		Description
10.1		Employment Agreement and Stock Option Agreement between the Company and Stephen E. Johnson dated September 1, 2006

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, promulgated under the Securities and Exchange Act of 1934, as amended.

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, promulgated under the Securities and Exchange Act of 1934, as amended.

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

Exhibit 10.1

EMPLOYMENT AGREEMENT

This Employment Agreement (the “Agreement”), dated as of September 1, 2006, between OmniComm Systems, Inc., a Delaware corporation, (the “Company”), and Stephen Johnson (the “Executive”).

WITNESSETH:

WHEREAS, the Executive has experience in managing at a senior level the business development activities of a firm engaged in marketing EDC products and services (or a division of such a company) to clinical trial sponsors;

WHEREAS, the parties acknowledge that the Executive’s abilities and services are unique and essential to the prospects of the Company; and,

WHEREAS, in light of the foregoing, the Company desires to employ the Executive as its Senior Vice President for Business Development and the Executive desires to accept such employment.

NOW, THEREFORE, the parties hereto agree as follows:

1. Employment . The Company hereby employs the Executive and the Executive hereby accepts employment upon the terms and conditions hereinafter set forth.

2. Term and Termination . This Agreement shall commence on September 1, 2006 and shall terminate as of the earlier of:

(a) 3 years from the date hereof;

(b) the death or disability of the Executive. Disability shall mean the Executive’s inability, due to sickness or injury, to perform effectively his duties hereunder for a period of at least 90 consecutive days;

(c) thirty (30) days after notice is given by the Company to the Executive after a material breach hereof by the Executive; or,

(d) thirty (30) days after notice is given by the Executive to the Company after a material breach hereof by the Company.

The exercise of the Company’s or the Executive’s right to terminate this Agreement pursuant to clause (c) or (d) hereof, as the case may be, shall not abrogate the rights and remedies of the terminating party in respect of the breach giving rise to such termination.

3. Salary . For all services rendered under this Agreement:

(a) During the term of his employment, the Company shall pay the Executive an annual salary of $175,000. The Executive’s salary may be paid in the form of cash and/or stock, as agreed upon by the parties. This amount may be increased at the discretion of the Board of Directors and shall be adjusted to compensate for annual cost of living increases.

(b) During the term of his employment, the Executive shall be entitled to participate in employee benefit plans or programs of the Company, if any, to the extent the Executive is eligible to participate thereunder. Such plans and programs shall include, but not be limited to, the following:

(i)

major medical health insurance for the Executive, his spouse and children;

(ii)

dental insurance;

(iii)

long-term disability insurance;

(iv)

the Company sponsored 401(k) plan; and

(v)

three weeks paid vacation.

(c) The Executive shall be permitted to participate in the Company’s stock option plan. The number of shares subject to options, type of options, and vesting of the options are set forth on Exhibit “A,” attached hereto as if fully set forth herein.

(d) The Company will pay a 1% sales commission on any sales achieved by you or one of the members of your team. Commissions will become due upon receipt of funds from the client and will be paid monthly as part of the last payroll of each month.

(e) The Executive shall also be entitled to severance pay equal to three months (3) months salary and benefits for each year of service in the event of termination by the Company for any reason other than commission of a felony or a crime involving moral turpitude relating to services provided to the Company, or termination by the Company pursuant to Paragraph 2(c). Total severance pay will not exceed twelve (12) months salary and benefits. Options which have vested prior to the date of termination shall remain exercisable during the severance period. Unvested options shall terminate in accordance with the terms of the respective Stock Option Agreements.

4. Duties. The Executive shall be employed as Senior Vice President for Business Development for the Company and, subject to the direction of the Board of Directors and the Company’s officers designated by the Board of Directors, shall perform and discharge well and faithfully the duties which may be assigned to him from time to time by the Company in connection with the conduct of its business. If the Executive is elected or appointed a director of the Company or any subsidiary thereof during the term of this Agreement, the Executive will serve in such capacity without further compensation.

5. Extent of Services. Except as set forth below, the Executive shall devote his entire time, attention and energies to the business of the Company and shall not during the term of this Agreement be engaged, whether or not during normal business hours, in any other business or professional activity, whether or not such activity is pursued for gain, profit, or other pecuniary advantage. Notwithstanding the foregoing, the Executive shall be allowed to serve on the Board of Directors of other companies so long as such Board participation does not interfere with the Executive fulfilling his duties to the Company and the Executive obtains the prior written approval of the Company’s Board of Directors. In addition, the Executive shall be allowed to provide consulting services to other companies so long as he obtains the prior written approval of the Company’s Board of Directors, turns over to the Company the entire amount of the compensation he receives as a result of providing such services, and provides such services no more than three (3) days per month.

6. Disclosure of Information. The Executive recognizes and acknowledges that the Company’s trade secrets and proprietary information and processes, as they may exist from time to time, are valuable, special and unique assets of the Company’s business, access to and knowledge of which are essential to the performance of the Executive’s duties hereunder. The Executive will not, during or after the term of his employment by the Company, in whole or in part, disclose such secrets, information or processes to any person, firm, corporation, association or other entity for any reason or purpose whatsoever, nor shall the Executive make use of any such property for his own purposes or for the benefit of any person, firm, corporation or other entity except the Company under any circumstances during or after the term of his employment, provided that after the term of his employment these restrictions shall not apply to such secrets, information and processes which are then in the public domain provided that the Executive was not responsible, directly or indirectly, for such secrets, information or processes entering the public domain without the Company’s consent. The Executive agrees to hold as the Company’s property, all memoranda, books, papers, letters, formulas and other data, and all copies thereof and therefrom, in any way relating to the Company’s business and affairs, whether made by him or otherwise coming into his possession, and on termination of his employment, or on demand of the Company, at any time, to deliver the same to the Company. In the event an action is instituted and prior knowledge is an issue, it shall be the obligation of the Executive to prove by clear and convincing evidence that the confidential information disclosed was in the public domain, was already known by the Executive prior to his employment with the Company, or was developed independently by the Executive.

7. Inventions. The Executive hereby sells, transfers and assigns to the Company or to any person, or entity designated by the Company, all of the entire right, title and interest of the Executive in and to all inventions, ideas, disclosures and improvements, whether patented or unpatented, and copyrightable material, made or conceived by the Executive, solely or jointly, or in whole or in part, during the term hereof which (i) relate to methods, apparatus, designs, products, processes or devices sold, leased, used or under construction or development by the Company or any subsidiary, or (ii) otherwise relate to or pertain to the business, functions or operations of the Company or any subsidiary, or (iii) arise wholly or partly from the efforts of the Executive during the term hereof. The Executive shall communicate promptly and disclose to the Company, in such form as the Company requests, all information, details and data pertaining to the aforementioned inventions, ideas, disclosures and improvements; and, whether during the term hereof or thereafter, the Executive shall execute and deliver to the Company such formal transfers and assignments and such other papers and documents as maybe required of the Executive at the Company’s expense to permit the Company or any person or entity designated by the Company to file and prosecute the patent applications and, as to copyrightable material, to obtain copyright thereon. Any invention by the Executive within one (1) year following the termination of this Agreement shall be deemed to fall within the provisions of this paragraph unless proved by the Executive to have been first conceived and made following such termination.

8. Covenant Not to Compete.

(a) During the term hereof and for a period of one (1) year thereafter, the Executive shall not compete, directly or indirectly, with the Company, interfere with, disrupt or attempt to disrupt the relationship, contractual or otherwise, between the Company and any customer, client, supplier, consultant, or employee of the Company and any customer, client, supplier, consultant or employee of the Company, including, without limitation, employing or being an investor (representing more than 5% equity interest) in, or officer, director, or consultant to, any person or entity which employs any former key or technical employee whose employment with the Company was terminated after the date which is one year prior to the date of termination of the Executive’s employment therewith. An activity competitive with an activity engaged in by the Company shall mean performing services whether as an employee, officer, consultant, director, partner, or sole proprietor for any person or entity engaged in the business then engaged in by the Company, which services involve the development and marketing of a web-based system to collect, manage, and compile clinical trial and research data.

(b) It is the desire and intent of the parties that the provisions of this Section shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular portion of this Section shall be adjudicated to be invalid or unenforceable, this Section shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of this Section in the particular jurisdiction in which such adjudication is made.

(c) Nothing in this Section shall reduce or abrogate the Executive’s obligations during the term of this Agreement under Sections 4 and 5 hereof.

9. Remedies. If there is a breach or threatened breach of the provisions of Section 6, 7 or 8 of this Agreement, the Company shall be entitled to an injunction restraining the Executive from such breach. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies for such breach or threatened breach.

10. Assignment. This Agreement may not be assigned by any party hereto; provided that the Company may assign this Agreement: (a) to an affiliate so long as such affiliate assumes the Company’s obligations hereunder; provided that no such assignment shall discharge the Company of its obligations herein, or (b) in connection with a merger or consolidation involving the Company or a sale of more than 50% of the Company’s securities or assets, to the surviving corporation or purchaser as the case may be, so long as such assignee assumes the Company’s obligations thereunder.

11. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and sent by registered mail to the Executive at his residence at:

Stephen Johnson

[Insert Address]

and to the Company at:

OmniComm Systems, Inc.

2101 W. Commercial Blvd., Suite 4000

Ft. Lauderdale, Florida 33309

Attention: Chief Financial Officer

12. Waiver of Breach. A waiver by the Company or the Executive of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by the other party.

13. Entire Agreement. This instrument contains the entire agreement of the parties. It may be changed only by an agreement in writing signed by a party against whom enforcement of any waiver, change, modification, extension or discharge is sought.

14. Governing Law. This Agreement shall be construed in accordance with the laws of the State of Florida. All questions with respect to the construction hereof and the rights and liabilities of the parties hereto shall be governed by the laws of the State of Florida. Any action or proceeding arising out of or relating hereto shall be brought in Broward County, State of Florida.

IN WITNESS WHEREOF , the parties hereto have executed this Agreement as of the day and year first hereinabove written.


OmniComm Systems, Inc.

By:		/s/ Cornelis F. Wit
		Cornelis F. Wit
		Chief Executive Officer

Executive

By:		/s/ Stephen Johnson
		Stephen Johnson

Exhibit “A”

Incentive and Non-Qualified Stock Option

Total Number of Shares Subject to Options: 450,000

Vesting Schedule: 3 years


	Amount	Price	Vesting Date
Year 1 2006	150,000	Market Price	September 30, 2006
Year 2 2007	150,000	Market Price	September 30, 2007
Year 3 2008	150,000	Market Price	September 30, 2008

Other rights:

1. “Piggyback” rights in equal proportion to other employees.

2. Acceleration of all unvested options in the event of change in control, defined as a sale of more than 50% of the Company’s securities or assets to a third party.

3. Options will be granted as Incentive Stock Options (ISO’s) to the extent possible under Sec. 422 of the Internal Revenue Code of 1986.

4. Length of options: 7 years

Notes:

1. ISO : Incentive stock option pursuant to Sec. 422 of the Internal Revenue Code of 1986. ISO option price shall be the fair market value at the date of grant

2. NonQ : Non-qualified stock option.

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, CORNELIS WIT, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of OmniComm Systems, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designated under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

(c)

Disclosed in this quarterly report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of the internal controls over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.


By:		/s/ Cornelis Wit
		Cornelis Wit
		Chief Executive Officer

November 11, 2006

[A signed original of this written statement required by Section 906 has been provided to OmniComm Systems, Inc. and will be retained by OmniComm Systems, Inc. and furnished to the United States Securities and Exchange Commission or its staff upon request.]

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, RONALD T. LINARES, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of OmniComm Systems, Inc.;

(a)

(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

(c)

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.


By:		/s/ Ronald T. Linares
		Ronald T. Linares
		Chief Financial Officer

November 11, 2006

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

In connection with the Quarterly Report on Form 10-QSB of OmniComm Systems, Inc. (the “Company”) for the quarter ended September 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, being, Cornelis F. Wit, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Cornelis F. Wit

Cornelis F. Wit

President, Chief Executive Officer and Director

November 11, 2006

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

In connection with the Quarterly Report on Form 10-QSB of OmniComm Systems, Inc. (the “Company”) for the quarter ended September 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, being, Ronald T. Linares, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Ronald T. Linares

Ronald T. Linares

Vice President and Chief Financial Officer

November 11, 2006

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