UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549







A mendment No.
1




to




FORM
10-K




FOR
ANNUAL AND TRANSITION REPORTS


PURSUANT
TO SECTIONS 13 OR 15(D) OF THE


SECURITIES
EXCHANGE ACT OF 1934




(Mark
One)




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




For the
fiscal year ended December 31,
2008




OR




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




For the
transition period from   
to




Commission
file number 000-53205




Diligent
Board Member Services, Inc.


(Exact
Name of Registrant as Specified in Its Charter)




Delaware
              
              26-1189601(State
      or Other Jurisdiction
              
              (I.R.S.
      Employerof
      Incorporation or Organization)
              
              Identification
      No.)





39
West 37 St. 8th Floor, New York, NY, 10018


(Address
of Principal Executive Offices)(Zip Code)




(212)
741-8181


(Registrant’s
telephone number, including area code)





Securities
registered pursuant to Section 12(b) of the Act: None




Securities
registered pursuant to Section 12(g) of the Act:




Title of Each Class
                      
                      Name of Each Exchange on Which RegisteredCommon
      Stock, par value $0.001 per share
                      
                      The
      New Zealand Stock
Exchange




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes  ̈ No x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes  ̈ No
x




Indicate
by check mark whether the registrant:  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  ̈  No  x




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
their Form 10-K.   ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definition of “accelerated filer, “large accelerated
filer” and smaller company: in Rule 12b-2 of the Exchange Act. (Check
One):




Large
accelerated filer  ̈     Accelerated
filer   ̈   Non-accelerated
filer  ̈    Smaller
reporting company x




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




The aggregate market value of common
equity held by non-affiliates, computed by reference to the last sales price as
reported by NZX on March 13, 2009 was $2,036,260.




The number of shares of the
registrant’s common stock outstanding as of March 17, 2009 was
90,440,000.




DOCUMENTS
INCORPORATED BY REFERENCE




The following documents are
incorporated herein by reference:




(1)
            Proxy
      Statement for the Annual Meeting to be held May 29, 2009, New Zealand
      Time.









EXPLANATORY
NOTE
 
 This
Annual Report on Form 10-K/A ("Form 10-K/A") is being filed as Amendment No. 1
to our Annual Report on Form 10-K for the fiscal year ended December 31, 2008,
which was filed with the Securities and Exchange Commission on March 30, 2009
(the "Original Filing"). This Form 10-K/A is being filed to:
 
 (1) Revise Item 5 to include the
exemption from registration under the Securities Act of 1933 used in connection
with our sale of securities in October 2008 and March 2009;
 
 (2) Revise Item 7 regarding the
discussion of Results of Operations to delineate our 2007 results between the
first nine months when our business was conducted by our predecessor and the
last three months when our business was conducted by us, rather than discussing
2007 on a combined basis, and to provide additional detail in the Liquidity and
Capital Resources section regarding our cash flow forecast, and related information
in footnotes of the financial statements;
 
 (3) Revise the signature page to
include additional information regarding capacity in which our officers are
signing the document; and
 
 (4) Revise Exhibits 31.1 and 31.2 to
conform the certifications to the exact form prescribed by Item 601(b)(31) of
Regulation S-K by deleting the certifying person's title at the beginning of the
certification.
 
 The
following sections in this report have been amended as a result of the
restatement:
 
 Part I-Item 5: Business
 
 Part II-Item 7: Results of Operations;
and
 
 Part IV-Item 15. Exhibits and Financial
Statement Schedules.
 
 For the
convenience of the reader, this Form 10-K/A sets forth the Original Filing, as
amended, in its entirety. However, this Form 10-K/A only amends and restates the
Items described above, and we have not modified or updated other disclosures
presented in our Original Filing.
 
 Accordingly,
this Amendment No. 1 does not reflect events occurring after the filing of our
Original Filing, and does not modify or update those disclosures affected by
subsequent events, except as specifically referenced herein. Information not
affected by this restatement is unchanged and reflects the disclosures made at
the time of the Original Filing on March 30, 2009.









CONTENTS





PAGEForward
      Looking Statements
                                                                                          
                                                                                          iiAvailable
      Information
                                                                                          
                                                                                          iiPART
      IItem
      1.
                                                                                          Business
                                                                                          
                                                                                          1Item
      1A.
                                                                                          Risk
      Factors
                                                                                          
                                                                                          8Item
      1B.
                                                                                          Unresolved
      Staff Comments
                                                                                          
                                                                                          8Item
      2.
                                                                                          Properties
                                                                                          
                                                                                          8Item
      3.
                                                                                          Legal
      Proceedings
                                                                                          
                                                                                          8Item
      4.
                                                                                          Submission
      of Matters to a Vote of Security Holders
                                                                                          
                                                                                          8PART
      IIItem
      5.
                                                                                          Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                                                                                          
                                                                                          9Item
      6.
                                                                                          Selected
      Financial Data
                                                                                          
                                                                                          10Item
      7.
                                                                                          Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                                                          
                                                                                          11Item
      7A.
                                                                                          Quantitative
      and Qualitative Disclosure About Market Risk
                                                                                          
                                                                                          21Item
      8.
                                                                                          Financial
      Statements and Supplementary Data
                                                                                          
                                                                                          22Item
      9.
                                                                                          Changes in and
      Disagreements with Accountants on Accounting and Financial
      Disclosure
                                                                                          
                                                                                          47Item
      9A.
                                                                                          Controls
      and Procedures
                                                                                          
                                                                                          47Item
      9B.
                                                                                          Other
      Information
                                                                                          
                                                                                          47PART
      IIIItem
      10.
                                                                                          Directors
      and Corporate Governance
                                                                                          
                                                                                          48Item
      11.
                                                                                          Executive
      Compensation
                                                                                          
                                                                                          48Item
      12.
                                                                                          Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                                                                          
                                                                                          48Item
      13.
                                                                                          Certain
      Relationships and Related Transactions, and Director
      Independence
                                                                                          
                                                                                          48Item
      14.
                                                                                          Principal
      Accountant Fees and Services
                                                                                          
                                                                                          48PART
      IVItem
      15.
                                                                                          Exhibits,
      Financial Statement Schedules
                                                                                          
                                                                                          49SIGNATURES
                                                                                          
                                                                                          50INDEX
      TO EXHIBITS
                                                                                          
                                                                                          52




i




FORWARD
LOOKING STATEMENTS





Except for statements of historical
fact, certain information described in this document contains "forward-looking
statements" that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "anticipate," "believe,"
"could," "estimate," "expect," "intend," "may," "should," "will," "would" or
similar words. The statements that contain these or similar words should be read
carefully because these statements discuss our future expectations, contain
projections of our future results of operations or of our financial position, or
state other "forward-looking" information. Diligent Board Member Services, Inc.
believes that it is important to communicate our future expectations to our
investors. However, there may be events in the future that we are not able
accurately to predict or control. Further, we urge you to be cautious of the
forward-looking statements which are contained in this Form 10-K because they
involve risks, uncertainties and other factors affecting our operations, market
growth, service, products and licenses. Events in the future may cause our
actual results and achievements, whether expressed or implied, to differ
materially from the expectations we describe in our forward-looking statements.
The occurrence of future events could have a material adverse effect on our
business, results of operations and financial position.





AVAILABLE
INFORMATION




We file
reports, proxy statements, information statements and other information with the
Securities and Exchange Commission. You may read and copy this information, for
a copying fee, at the SEC’s public reference room at 100 F Street, N.E.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more
information on its public reference rooms. Our Securities and Exchange
Commission filings are also available to the public from commercial document
retrieval services, and at the web site maintained by the Securities and
Exchange Commission at http://www.sec.gov. Our internet address is
http://www.boardbooks.com.  We will make available through a link to
the SEC’s web site, electronic copies of the materials we file with the SEC
(including our annual reports on Form 10-K, our quarterly reports on Form 10-Q,
our current reports on Form 8-K, the Section 16 reports filed by our executive
officers, directors and 10% stockholders and amendments to those
reports).  To receive paper copies of our SEC materials, please
contact us by mail addressed to Robert E. Norton, Corporate Secretary, Diligent
Board Member Services, Inc., 39 West 37 St. 8th Floor, New York, NY 10018, (212)
741-8181.




ii




PART
I




ITEM
1.  BUSINESS




As
used herein, unless the context otherwise requires, the terms “Company”, “we”,
“us”, “our” and words of similar import refer to the combined business of
Diligent Board Member Services, Inc. and its consolidated
subsidiaries.




GENERAL
INFORMATION




History





We are a Delaware corporation that was
incorporated on September 27, 2007.  On October 1, 2007, our
accounting predecessor entity and sole stockholder at that time, Diligent Board
Member Services, LLC (now known as Services Share Holding, LLC, and referred to
in this document as “DBMS LLC”, “LLC” or “Predecessor”), contributed
substantially all of its tangible assets and its “Diligent Boardbooks” business
to Diligent Board Member Services, Inc.  DBMS LLC (previously known as
Manhattan Creative Partners, LLC) was founded in 1994 and developed complex
database-driven software for large and small companies until 2003, when it
shifted its focus to corporate governance service delivery
software.





Company
Overview





We develop and sell an online software
application called Diligent Boardbooks, which is a web-based portal that
directors and administrative staff use to compile, update and examine board
materials prior to and during board meetings.  Each of our clients
enters into a service agreement whereby we agree to provide and support the
Diligent Boardbooks service.





The Boardbooks product features an
on-screen interface that resembles a book and displays documents in single
web-viewable pages, from a secure central database.  The software is
accessed via the internet and is a “point and click” system that gives directors
the ability to navigate throughout the entire virtual book.





The first phase of our business focus
was developing and testing the Boardbooks system, building a loyal core of blue
chip customers to become champions of the product, and promoting product
awareness through exposure in print media.  During this phase we did
not focus on revenue growth or profitability, and sales and marketing had been
conducted by two to three staff members, who fit this role alongside their other
responsibilities.  By 2007 we had a commercially viable product and
shifted our focus to commit substantial resources to the sales and marketing of
our Boardbooks product.  We are now in the customer acquisition phase
of our business and currently provide the Boardbooks service to over 170
companies and 4,500 users.





Development
Timeline





The
paragraphs below provide a general timeline of the development of the Diligent
Boardbooks system:





·
            The Diligent Boardbooks
      Concept (1998-2001) . We began developing components of the
      Diligent Boardbooks system starting in 1998.  In 2001,SunAmerica
      Funds requested a solution to automate the management of its board meeting
      papers.  With this request, the founders of DBMS LLC launched
      the Diligent Boardbooks concept and produced and tested a working concept
      that was licensed to AIG.





·
            Diligent Boardbooks Delivery
      and Development (2000-2002) .  The development process
      took more than three years to create the first commercially viable version
      of Diligent Boardbooks. The founders of DBMS LLC made this investment
      foreseeing the end product could become an extremely valuable licensing
      opportunity for DBMS LLC.




1




·
            Diligent Boardbooks Testing
      (2002-2004) .  With SunAmerica Funds as an anchor client,
      DBMS LLC spent a year getting other major accounts to buy licenses in a
      market that had yet to deal with the implications of the Sarbanes-Oxley
      Act.  These clients had to be “seasoned” (a term we use to
      describe the time an account takes to become a “paying, satisfied
      Boardbooks client”) for years in many cases prior to them having the
      comfort to move their board materials on to our
  servers.





·
            Building Credentials
      (2004-2006) .  After “seasoning” the anchor accounts we
      began establishing our own credentials. Our marketing group produced
      credential style marketing materials featuring the initial test license
      accounts.





·
            Scaling (2006-2007)
      .  Before undertaking an international rollout of a large
      licensing sales force, we tested several key growth assumptions relating
      to scaling the Diligent Boardbooks
service.





·
            Roll-out (2007-2008)
      .  The roll-out of a sales force commenced in 2007 and by the
      end of the 3rd
      quarter our sales force had increased from 3 to 23 full time salespeople,
      which was subsequently reduced to 18 following performance evaluations. As
      of the date of this filing, a 4th
      quarter general workforce reduction, due to a difficult worldwide economic
      climate, further reduced the sales force to
10.





New
Zealand Offering





Acquisition of the Diligent
Boardbooks Business.





On October 1, 2007, we entered into a
Contribution Agreement with DBMS LLC, under which DBMS LLC contributed assets
and certain liabilities relating to the Diligent Boardbooks business, including
accounts receivables, prepaid expense, property and equipment, security
deposits, capital lease obligations and deferred revenue, as a contribution to
our capital.  In order to effectuate this as a tax-free transaction,
DBMS LLC retained certain Diligent Boardbooks liabilities, which DBMS LLC
discharged using proceeds of a loan by us to DBMS LLC of approximately
$6,800,000.  The monies for this loan were part of the proceeds of the
share offering described below under “New Zealand Offering.”  (See
Item 13 “Certain Relationships and Related Transactions” for more information on
our capitalization and this loan.)  To our knowledge, DBMS LLC has no
continuing operations other than acting as a holding company for its Diligent
shares.





New Zealand
Offering.





On December 12, 2007, we completed an
offshore offering of 24,000,000 common shares to members of the public in
conjunction with a listing of our stock on the New Zealand Stock
Exchange.  The net proceeds of the offering were approximately $16.4
million, which we used to:





·
            Recruit
      additional staff to grow our business, including more licensing sales
      people in North America, Europe and the Pacific
  Rim.





·
            Invest
      in the operational infrastructure required to scale the
      business.





·
            Provide
      working capital to sustain the operations of the business while we further
      build our revenue streams.




2




·
            Advance
      approximately $6.8 million to or on behalf of DBMS LLC to retire certain
      debt obligations incurred by DBMS LLC in connection with the development
      of the Diligent Boardbooks business.  Of the $6.8 million,
      approximately $3.1 million was reinvested by the holders of the
      obligations in our common stock in a private placement (See “Recent Sales
      of Unregistered Securities” within Item 5) such that our net cash outflow
      as a result of the loan was only $3.7
million.





Although it was intended that the
proceeds from the offering be used for the purposes specified above, we are
aware that we need to be flexible with our strategies, plans, targeted
milestones, operations and affairs so that we can quickly respond to change,
such as changes in the software industry, our competitive environment and
insights we gain regarding operations, costs and investment requirements as the
business grows.





DBMS LLC “Warranty” of Annualized
License Fees.





In
connection with the New Zealand offering, DBMS LLC agreed to warrant that should
the Company’s Annualized License Fees (defined below) as of December 31, 2008
not reach $10,800,000, DBMS LLC agreed that it would forfeit certain of its
shares according to a graduated share cancellation formula.  The net
result of any share cancellations would be that DBMS LLC would forfeit the
cancelled shares and that the remaining shares still outstanding would represent
an increased percentage ownership of our total equity.





“Annualized License Fees” (ALFs) is a
forward-looking measure, defined as the total fees required to be paid to us for
the next twelve months under all of our service contracts in effect at a
particular point in time assuming that the contracts will remain in full force
and effect and are fully paid without setoff or discount throughout the
twelve-month period.





DBMS LLC delivered 14,000,000 of our
shares to an escrow agent, pending determination of Annualized License Fees as
of December 31, 2008.  Based on the ALFs at December 31, 2008, the
warranty was not met and the entire 14,000,000 shares were delivered to us for
cancellation on January 26, 2009, and the shares have been
canceled.





Acquisition of Diligent Board Member
Services NZ Limited; Activities of UK Subsidiary





Effective January 1, 2008, we acquired
the stock of Diligent Board Member Services NZ Limited, for consideration of
NZ$5,000 (approximately US$3,800), which provides software development services
and support.  Effective April 2008, our United Kingdom subsidiary,
Diligent Boardbooks Limited, became active and is engaged in European
sales.





Market
Opportunity





The online board portal industry
remains in its infancy with market penetration still relatively low. We believe
that less than 20 percent of companies use a board portal to communicate with
directors. Of these 20 percent, less than five percent use an externally
provided board portal product.





Our client base was previously
comprised of blue chip companies predominantly in the financial service
sector.  These entities had previously been prime targets because their
board materials are crucial to effectively managing the corporate governance
process. Public recognition by prominent publications has helped us become a
leader in the provision of online board portal software in this sector.  A
vast opportunity for us remains in the global financial service sector as there
are more than 61,000 mutual funds (of all sizes, although many of this number
will be managed by the same manager) and more than 11,000 banks.





Although
2008 was an extremely challenging time for the Company, Diligent managed to
expand the industry sectors that it has clients in to include energy, oil and
gas, health care, and universities. In spite of the financial stress in the key
US market, an impressive list of new clients was added, including several
international brand names. Further inroads were also made into Canada with four
major energy companies and one of Canada’s largest pension funds selecting the
Boardbooks board portal to provide them with real time access to vital board
materials.





3




Encouragingly,
Diligent’s sales pipeline (all prospects who have expressed interest in Diligent
Boardbooks) remains strong and continues to grow.  Additionally, a selling
agreement with a leading Houston-based software solutions provider, Bridgeway
Software, Inc, was also added later in the year, which is expected to further
drive sales.





It
appears that despite the dire world economic conditions, companies continue to
implement and upgrade Diligent Boardbooks as a way to save costs, improve
efficiencies and broaden their corporate governance and compliance
standards.





Our
Product Strengths





Established Brand
..  We compete against several competitors within the board portal
industry.  Notably however, we began development in early 2001 while
many of our competitors remain at a much earlier stage of
development.





Ease of Use .  In
an article published in The Wall Street Journal on October 23, 2006, the author
commented that “The portal from Diligent Board Member Services may be the
easiest to use.  The Diligent layout looks like a paper
book.  A binding coil and divider tabs are drawn onto the screen and
directors “flip” pages with the click of a mouse.” This “ease of use” has been
one of the many key elements to Diligent Boardbooks' popularity among executives
with little time to learn a new system.





Flexible Online and Offline
Viewing .  Diligent Boardbooks may be viewed online via the
Internet or offline on the user’s computer.  The offline version of
Diligent Boardbooks allows a user to download a secure encrypted database of
their own corporation’s entire Diligent Boardbooks database.  This
allows meetings to be run off-site without an Internet
connection.  The same book-like interface is used to view offline as
well as online.  This system is secured through high-level security
and encryption technology.





Additionally, when paper copies are
requested, Diligent Boardbooks has a “Print Book” feature that allows directors
to print the entire collated Boardbook complete with page numbers,
agenda-related footers and more.  This feature is controlled by the
user, allowing a page, a tab or a whole book to be printed.  This is a
password-specific functionality controlled by the users.





Offline Synchronization
..  The main distinction between Diligent Boardbooks and other systems
is that Diligent Boardbooks maintains a single copy and does not download
information that has already been downloaded, making synchronization an
efficient and rapid process.  Accordingly, there is no risk of having
multiple copies or outdated documents floating on the computer
desktop.





Regular Upgrades
..  The Diligent Boardbooks software is regularly updated by our
software development team.  Updates are applied automatically and
users receive the benefit of enhanced functionality without the inconvenience of
software reinstallation.





Application Security
..  We designed a powerful and secure triple redundant network to
promote absolute protection and availability of client
data.  Primaries, secondaries and fail-over servers and systems are
located in geographically diverse locations for application and data delivery
security.  An automated intrusion detection system blocks malicious
activity and reverse proxy authentication provides another barrier of protection
for sensitive data. For complete security, each individual Diligent Boardbooks
user has a distinct user name and password that is required to access the
Diligent Boardbooks site.  All data is encrypted.





We are SAS 70 – Series II Audited
(Statement on Auditing Standards – Service Organizations).  This means
our licensed client base can be assured that their most intimate corporate
information is secure.





4


Global Support
..  We serve the highest level officers of some of the largest
companies in the world.  To assist with completely meeting the
expectations of these directors and their key employees, we have staff and
contractors in four countries.  Our support team is trained to work
with its high-level clients to solve any problem a user might
encounter.  This high level of support is a core competency that has
helped to ensure successful implementation and retention for over 170 companies
and approximately 4,500 users to date, while keeping client attrition rates to
less than five percent per year.





Full Management and Implementation
Team .  We provide personalized and high quality account
management and implementation to our clients.  Each client has a
dedicated team that includes an assigned day-to-day account manager, an assigned
security engineer and an assigned executive.





Rapid, Cost Effective
Deployment .  Diligent Boardbooks can be rapidly deployed for
use within an organization.  Once a company chooses to use Diligent
Boardbooks, it can begin to realize the benefits almost
immediately.  Director training typically takes less than 45 minutes
and full product administration training less than 10 hours.  We
consider this a very important distinguishing factor relative to key competitors
whose systems can take considerably longer to implement.





Business
Model





We use the Software-as-a-Service
(“SaaS”) model to distribute our Diligent Boardbooks software to the market and
maintain the security and integrity of our clients’ data.  Under this
model, we license customer access to our Boardbook product, which is hosted on
our secure servers, and offer a complete suite of related services including
training, support, data migration and data security/backup.





The SaaS model is characterized by a
company providing on-demand access to its complex software through a web-based
interface in return for subscription-based revenue.  The SaaS industry
has undergone significant growth over the past five years, spurred on by several
factors:





·
            SaaS
      providers can cost-effectively share one application across hundreds or
      thousands of companies;





·
            Clients
      can accelerate the deployment process and eliminate additional
      infrastructure costs;





·
            A
      continuing decline in the cost of bandwidth has meant web-based solutions
      have become more viable;





·
            Lower
      cost of implementation. Clients do not pay large sums for a product with a
      long development and implementation timeframe with no guarantee of
      success. Instead, clients that pay a nominal set-up and/or training fee
      (installation fee), and a recurring subscription fee, can begin to use the
      fully developed service immediately and retain the ability to cancel the
      service, if unsatisfied;





·
            The
      success of on-demand services in the consumer market (e.g., Google, iTunes
      and YouTube) have made accessing content and services commonplace in
      professionals’ personal lives. Professionals are now demanding similar
      features in business software; and





·
            The
      success of early leaders such as WebEx and salesforce.com has demonstrated
      the viability and value proposition of the SaaS
  model.





Central characteristics of implementing
the SaaS model include the:





·
            Ability
      to obtain rapid growth in market share and revenue over a sustained period
      of time;





·
            Highly
      scalable operations that can support sales growth with much lower
      increases in operating costs;




5




·
            Significant
      up-front investment in sales and marketing in order to maximize the market
      penetration;





·
            Negative
      earnings over the expansion period offset by equity capital;
      and





·
            After
      a period of intense competition, typically one or two companies emerge as
      the market leaders.





Generally, following an initial capital
raise that finances accelerated investment in marketing, there is rapid growth
in sales that continues for a number of years (“Stage One”).  Three to
five years following the initial capital injection, the accelerated expansion in
sales may steady somewhat (“Stage Two”).  Growth may continue to be
very strong for many years however, being limited primarily by competition and
by market size (which is often, as is the case for us, of a global
scale).  Throughout Stage Two profitability continues to be
subordinate to both revenue growth and market penetration.





Stage One revenue multiples are
generally much higher than their Stage Two counterparts, reflecting the
anticipated accelerated growth in revenues associated with the significant
increased investment in marketing.





We are at the beginning of Stage One in
our growth cycle and can be expected to remain so for a number of
years.  Because of the strengths of the Diligent Boardbooks product
and the high quality of the existing client base, we believe our business risk
is lower than is typical for a Stage One company.  Our position is
further strengthened by the fact that, as the vast majority of companies
worldwide are not currently using an electronic board materials management
system at all, there is no existing software system to
displace.  While in some cases there are competing electronic board
materials management systems, in most cases our main competition is a paper
based system, which we believe is a far inferior and more costly
approach.





Marketing;
Growth Strategy





We believe that building a successful
sales and marketing team to present to and serve the boards of the world’s major
corporations is a significant undertaking.  Staff must have a deep
understanding of corporate governance issues while also being able to interact
credibly with the board members and senior executives of major US and
international corporations.





The roll-out of a sales force commenced
in 2007. By the beginning of the 4th quarter
2008, our sales force had increased to 23 full time salespeople and then was
subsequently reduced to 18 after performance evaluations.  We continue
on an ongoing basis to evaluate the performance of our sales team and make
adjustments as prudent and/or necessary.





On
November 21, 2008, after consideration of the current market environment and
economic conditions, and the concern about the Company’s ability to raise
additional growth financing on historically favorable terms, management decided
to implement a cost reduction program that reduced staff by 13 people, including
8 in sales and 1 in marketing, leaving a total of 10 active in
sales.  Although this is a dramatic cut in sales force, the Company
believes it has retained its most effective salespeople and can continue the
pattern of growth necessary to maintain its market position.





Intellectual
Property





We acquired all Diligent
Boardbooks-related intellectual property from DBMS LLC, as of October 1,
2007.  We have protected our unique graphical user interface by
copyright and have in process multiple patent applications to protect key or
unique aspects of the new software.  We will continue to take steps to
protect our intellectual property, although there can be no assurance that we
will be able to secure such patents or that, if successful, such patents will
offer any protection.





6


All software developed by us is
protected by copyright and has been developed entirely by our
employees.  Employees and contractors have no rights to the
application source code, design, user interface or any other aspect of the
application, which is protected by copyright and provisions in our employment
contracts.





Clients have no rights, other than
licensed use, to the application source code, and generally have no visibility
of the source code.  We make occasional exceptions to allow clients to
perform due diligence security audits, which are protected by
non-disclosure/non-use agreements.  Client rights to the application
are defined and protected by the client license agreement.





Customers
and Certain Contracts





Our client base is currently comprised
of large companies predominantly in the financial service sector.  Our
customers currently include SunAmerica Funds, Allianz Global Investors, New York
Life Investment Management and Motorola.  We have implemented the
Diligent Boardbooks system for over 170 companies and approximately 4,500
users.





Research
and Development





Our research and development efforts
are focused on improving and enhancing our Diligent Boardbooks system. We spent approximately
$1.3 million in 2007 and $.955 million in 2008 on research and
development.  None of these costs were borne directly by our
customers.





Competition





We are subject to significant
competition that could impact our ability to gain market share, win business and
increase the price pressure on our products.  We face strong
competition from a wide variety of firms, both large and small.  Some
of our primary direct competitors are the following:





·
            Thomson
      Reuters, headquartered in New York, which provides a board portal service
      through a product called Thomson
BoardLink;


·
            BoardVantage,
      Inc., located in California, which provides a product called BoardVantage
      Board Portal;


·
            Directors
      Desk, located in New York and Washington, which provides a product called
      Directors Desk; and


·
            SAI
      Global Limited, which acquired 80-20 Software Inc., a Melbourne-based
      service provider with a product called
Leaders4.





We believe the principal factors that
generally determine a company’s competitive advantage in the market in which
Diligent Boardbooks competes are:





·
            software
      development capabilities;


·
            functionality
      and reliability of products and
services;


·
            competitive
      sales and marketing capabilities;


·
            proven
      testing record of software products and services;
  and


·
            market
      share.





We
believe that we compete favorably regarding each of these factors.





Regulation





Our business is not subject to any
industry-specific regulation that affects our business as currently conducted,
although we are subject to general tax, corporate, securities, employment,
privacy and other laws and regulations that affect businesses
generally.  We are a beneficiary of the push to improve corporate
governance and oversight stimulated by the Sarbanes-Oxley Act of 2002, which we
believe has increased demand for our Diligent Boardbooks product.





7




Environmental
Matters





We do not believe that the costs and
effects of compliance with environmental laws will be material to our
business.





Employees





As of
January 30, 2009, we had approximately 45 full-time employees.  Of
these, the majority are located in our New York, New York
offices.  The remaining employees are located predominantly in our
Christchurch, New Zealand office, which provides software and help desk support
for several large corporations, as well as providing the software development of
the Diligent Boardbooks product.




ITEM
1A.  RISK FACTORS





Because the Company qualifies as a
smaller reporting company, as defined by §229.10(f)(1) it is not required to
provide the information required by this Item.





ITEM
1B.  UNRESOLVED STAFF COMMENTS





Because the Company qualifies as a
smaller reporting company, as defined by §229.10(f)(1) it is not required to
provide the information required by this Item.





ITEM
2.  PROPERTIES




Our
headquarters are located at 39 West 37 St. 8th Floor, New York, NY 10018, where
our primary executive, sales and administrative offices are
located.  We also have an ancillary administrative office located at
115 Horseneck Rd, Suite 3, Montville, NJ 07045, which we plan on consolidating
with our New York headquarters in 2009.  We have sales offices in
Canada, England and New Zealand.  We also have an office at 69
Cambridge Terrace, 4th Floor, Christchurch, New Zealand, where our software
development takes place.  We lease all of these properties and do not
own any real property.





We believe that our current facilities
are suitable and adequate to meet our current needs, and that suitable
additional or substitute space will be available as needed to accommodate
expansion of our operations, although we intend to open additional sales offices
as our geographic sales footprint warrants.





We
believe that our facilities are adequately covered by insurance.




ITEM
3.  LEGAL PROCEEDINGS




The
Company is not a party to any material legal proceeding required to be disclosed
under Item 103 of Regulation S-K.




ITEM
4.  SUBMISSION OF MATTERS TO A VOT E OF
SECURITY HOLDERS




No
matters were submitted to a vote of stockholders during the fourth quarter of
the fiscal year covered by this report.




8




PART
II




ITEM
5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERS
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES




Market
Information





There is no United States established
public trading market for our common stock.  On December 12, 2007 we
completed a public share offering of 24,000,000 shares of our common stock in
conjunction with a listing of our stock on the New Zealand Stock Exchange under
the symbol “DIL.”





The following table shows the high and
low closing sales prices for our common stock in New Zealand dollars, which
began trading on December 12, 2007.





Closing Price of Common Stock (NZD)Period
                  
                  High
                  
                  
                  LowDecember
      12, 2007 – December 31, 2007
                  
                  
                  .90
                  
                  
                  
                  .682008
      – 1st
      Quarter
                  
                  
                  .76
                  
                  
                  
                  .632008
      – 2nd
      Quarter
                  
                  
                  .65
                  
                  
                  
                  .232008
      – 3rd
      Quarter
                  
                  
                  .40
                  
                  
                  
                  .182008
      – 4th
      Quarter
                  
                  
                  .25
                  
                  
                  
                  .15January
      1, 2009 – March 4, 2009
                  
                  
                  .15
                  
                  
                  
                  .15





There are no outstanding options or any
other securities convertible into our common stock.  Further, as of
December 31, 2008, there were no shares that could be sold under Securities and
Exchange Commission Rule 144 or that we have agreed to register under the
Securities Act for sale by our holders.  Since the completion of the
New Zealand offering, we are not offering, nor have we proposed to publicly
offer any of our shares, the offering of which could have a material effect on
the market price of our shares.





Holders





As of March 9, 2009, there are
approximately 700 holders of record of our common stock.





Dividends





We have not paid any dividends on our
common stock within the past two fiscal years or during the current fiscal year,
and have no plans to do so in the foreseeable future.





Equity
Compensation Plan Information





As of December 31, 2008, no shares of
common stock are issuable by us upon the exercise of options, warrants and
rights under any equity compensation plan, except as follows:





Plan category
              
              Number of securities to
                be issued
                upon exercise of
                outstanding options
              
              
              Weighted-average
                exercise price of
                outstanding options
              
              
              Number of securities
                remaining available for
                future issuance under
                equity
                compensation plansEquity
      compensationplans
      approved by
              
              
              -
              
              
              
              -
              
              
              
              5,560,000security
      holders




9




Recent
Sales of Unregistered Securities





The following is a summary of
transactions by our company within the past three years involving sales of its
securities that were not registered under the Securities Act of 1933 (or
“Securities Act”).





On October 1, 2007, we issued
68,484,611 shares of our common stock to DBMS LLC in exchange for a contribution
of certain of its assets related to our Diligent Boardbooks business, subject to
certain liabilities, as specified in a Contribution Agreement dated October 1,
2007, in a private offering under Section 4(2) of the Securities Act of
1933.





On December 12, 2007, we issued
24,000,000 shares of our common stock pursuant to our initial public floatation
on the New Zealand Stock Exchange for NZ$1.00 per share in an offshore
transaction that met the requirements of the safe harbor under Rule 903 of
Regulation S promulgated under the Securities Act of 1933.  The
offering was led by McDouall Stuart, a participant on the New Zealand Stock
Exchange, on a best efforts basis.  In connection with the offering,
McDouall Stuart received NZ$420,000 as a lead sponsor fee, NZ$720,000 in
brokerage fees and NZ$200,000 in incentive fees.





On
December 10, 2007, we issued 7,515,389 shares of our common stock to various
accredited investors for NZ$1.00 (US$0.75) per share in a private placement that
met the requirements of the safe harbor under Rule 903 of Regulation S
promulgated under the Securities Act of 1933 for non-US persons and for
accredited investors who were existing debt holders of DBMS LLC.





On
December 12, 2007, we issued 4,000,000 shares of our common stock in recognition
of services provided, or to be provided, to various employees, directors and
service providers pursuant to written agreements under our 2007 Stock Option and
Incentive Plan in accordance with Rule 701 promulgated under the Securities Act
of 1933.  Of the 4,000,000 shares, 1,929,000 shares were subject to a
substantial risk of forfeiture based on continued service requirements that
lapsed in January 2009.  During 2008, 160,000 of these shares were
forfeited.





On
October 23, 2008, we issued 600,000 shares of our common stock to our CFO and
General Counsel pursuant to written agreements under our 2007 Stock Option and
Incentive Plan pursuant to the exemption from registration provided by Rule 506
and/or Section 4(2) of the Securities Act of 1933.  As of the date of
this filing, 100,000 of these shares are subject to a substantial risk of
forfeiture based on continued service requirements, that lapses in May
2009.




On March
11, 2009, we issued 30,000,000 shares of newly created Series A Preferred Stock
to Spring Street Partners, L.P. and Carroll Capital Holdings, LLC for US$0.10
per share.  The Series A Preferred Stock was issued pursuant to the
exemption from registration provided by Rule 506 of Regulation D and/or Section
4(2) of the Securities Act of 1933 (based on the issuance not involving any
public offering and the shares being issued solely to accredited
investors).  The Preferred Shares carry a fixed, cumulative, dividend
of 11% per annum (adjusted for stock splits, consolidation, etc).  The
dividend may (at Diligent’s option) be paid on the first business day of each
calendar year for the prior year either in cash or in kind by the issue of
additional Preferred Shares (PIK Shares), to be issued at the same issue price
of US$0.10 per share.  The 11% annual dividend on the Preferred Shares
will rank ahead of the declaration or payment of any dividends on Diligent’s
common stock (ordinary shares).  In addition to the 11% preferred
dividend, the holders of the Preferred Shares will also be entitled to
participate pro rata in any dividend paid on Diligent’s common
stock.  The Preferred Shares will be convertible at any time at the
option of the holders into Diligent common stock on a one-for-one basis based on
a conversion price of US$0.10 per share.





ITEM
6.  SELECTED FINANCIAL DATA




Because
the Company qualifies as a smaller reporting company, as defined by
§229.10(f)(1) it is not required to provide the information required by this
Item.




10





ITEM
7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS




Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes that appear elsewhere in this Form 10-K. In
addition to historical consolidated financial information, the following
discussion contains forward-looking statements that reflect our plans, estimates
and beliefs. Our actual results could differ materially from those discussed in
the forward-looking statements.





On October 1, 2007, the Diligent
Boardbooks business was transferred to Diligent Board Member Services, Inc. from
its accounting predecessor, DBMS LLC.  Both before and after the
transfer, the management of the business remained substantially the
same.  Accordingly, the terms “we,” “us,” “our,” and the “Company”,
when used in this Management’s Discussion and Analysis of Financial Condition
and Results of Operations (“MD&A”), refers to DBMS LLC for periods prior to
October 1, 2007 and to Diligent for periods on or after October 1, 2007,
unless otherwise indicated.





Overview





We develop and sell an online software
application called Diligent Boardbooks, which is a web-based portal that
directors and administrative staff use to compile, update and examine board
materials prior to and during board meetings.  Each of our clients
enters into a service agreement whereby we agree to provide and support the
Diligent Boardbooks service.





The Diligent Boardbooks product
features an on-screen interface that resembles a book and displays documents in
single web-viewable pages, from a secure central database.  The
software is accessed via the internet and is a “point and click” system that
gives directors the ability to navigate throughout the entire virtual
book.





The first phase of our business focus
was developing and testing the Diligent Boardbooks system, building a loyal core
of blue chip customers to become champions of the product, and promoting product
awareness through exposure in print media.  During this phase we did
not focus on revenue growth or profitability, and sales and marketing had been
conducted by two to three staff members, who fit this role alongside their other
responsibilities.  By 2007 we had a commercially viable product and
shifted our focus to commit substantial resources to the sales and marketing of
our Diligent Boardbooks product.  We are now in the customer
acquisition phase of our business and currently provide the Diligent Boardbooks
service to over 170 companies and approximately 4,500 users.





We believe that building a successful
sales and marketing team to present to and serve the boards of the world’s major
corporations is a significant undertaking.  Staff must have a deep
understanding of corporate governance issues while also being able to interact
credibly with the board members and senior executives of major U.S. and
international corporations.





The Company adopted a growth strategy
which required significant capital over and above what had been provided by
private sources.  In December 2007, the Company raised $16.4 million
dollars, net of expenses, in its initial public offering on the New Zealand
Stock Exchange.  Our plan was to use the proceeds of the IPO to
significantly expand our sales force and aggressively target
growth.  By the first quarter of 2008, much of the infrastructure for
this growth was set up.





Despite growth in net sales, our growth
rate lagged behind the projections we had set for the Company, which was
exacerbated by the global financial crisis.  By the third quarter of
2008, we initiated plans to scale back our growth plans in order to reduce our
operating expenses.  We significantly reduced our sales force, reduced
salaries for some of our more highly compensated employees and reduced the
number of members of the board of directors from nine to five.  The
cost cutting continues into 2009, as we consolidate our New York and New Jersey
offices and look for further opportunities to reduce overhead.





11


In March 2009, the Company secured $3
million of financing through the issuance of Series A Convertible Preferred
Stock.  At the current level of reduced expenses, coupled with
conservative sales growth forecasts, management believes this funding will be
sufficient to support sales growth and achieve cash flow breakeven by
approximately the third quarter of 2010.





In October 2010, a note receivable from
LLC matures.  Management has concluded that, in accordance with U.S.
generally accepted accounting principles (“GAAP”), an impairment loss and
valuation allowance is required, and accordingly the note is carried on our
books at its fair value at December 31, 2008.  The Note is not
currently in default and management believes it is possible that we will collect
a substantial portion, if not all, of the principal balance at maturity. We plan
to use the proceeds of this Note for an expansion of our marketing and sales
efforts as well as infrastructure increases to support significant sales
growth.





Our
overall performance depends in part on worldwide economic conditions. The United
States and other key international economies are currently undergoing a period
of severe recession, characterized by falling demand for a variety of goods and
services, restricted credit, going concern threats to financial institutions and
major multi-national companies, poor liquidity, declining asset
values, reduced corporate profitability, extreme volatility in credit, equity
and foreign exchange markets and increased bankruptcies. These conditions could
adversely affect our customers’ ability or willingness to purchase our service,
delay prospective customers’ purchasing decisions, reduce the value or duration
of their subscription contracts, or affect renewal rates, all of which could
adversely affect our operating results.





Critical
Accounting Policies and Estimates





Our consolidated financial statements
are prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period. On an
ongoing basis, management evaluates its estimates and judgments, including those
related to revenue recognition, deferral of costs, the allowance for accounts
receivable, software development costs, the impairment of long-lived assets and
note receivable, income taxes and assumptions for stock-based compensation.
Management bases its estimates and judgments on historical experience, known
trends or events and various other factors that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.




We define
our “critical accounting policies” as those that require us to make subjective
estimates about matters that are uncertain and are likely to have a material
impact on our financial condition and results of operations or that concern the
specific manner in which we apply GAAP. Our estimates are based upon assumptions
and judgments about matters that are highly uncertain at the time the accounting
estimate is made and applied and require us to assess a range of potential
outcomes.




We
believe the following critical accounting policies to be both those most
important to the portrayal of our financial condition and those that require the
most subjective judgment.




Revenues
and Accounts Receivable





We derive our revenues from set-up and
training fees (“installation fees”) of the Boardbooks system and license fees
for the ongoing use of our Diligent Boardbooks software.  We have no
other significant sources of revenues at this time.





12


Diligent recognizes revenue in
accordance with the provisions of the Securities and Exchange Commission (SEC)
Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition which
states that revenue is realized and earned when all of the following criteria
are met: (a) persuasive evidence of the arrangement exists, (b) delivery has
occurred or services have been rendered, (c) the seller’s price to the buyer is
fixed and determinable and (d) collectability is reasonably
assured.  Revenue from Diligent Boardbooks licenses is accrued ratably
over the contract period.  License fees paid in advance are recorded
as deferred revenue until recognized.  Through September 30, 2008,
revenue from installations was recognized upon completion of the
installation.  Effective October 1, 2008, revenue from installations
is accrued ratably over the contract period.  The effect of this
change is not material to the Company’s financial condition, operations or cash
flow.





Accounts receivable are recorded at
estimated net realizable value.  A provision for doubtful accounts is
based on management’s assessment of amounts considered uncollectable for
specific customers based on age of debt, history of payments and other relevant
information.  An allowance for doubtful accounts is provided for
accounts receivable which management determines will not be collectable in
full.





Cost
of Revenues and Operating Expenses





Cost of
Revenues.  Cost of revenues consists of direct expenses related
to account management, customer support and IT hosting.  We do not
allocate indirect overhead to cost of revenues.





Selling and Marketing Expenses.  Selling
and marketing expenses are comprised of sales commissions, salaries for sales
and marketing employees, and direct advertising expenses, including mailings and
travel.  We do not allocate indirect overhead to selling and
marketing.





General and Administrative
Expenses.  General
and administrative expenses consist of compensation and related expenses for
executive, finance, accounting, administrative, legal, professional fees, other
corporate expenses and overhead costs such as rents, utilities etc.





Research and Development
Expenses.  Research
and development expenses are incurred as we upgrade and maintain our
software, and develop product enhancements.  Such expenses include
compensation and employee benefits of engineering and testing personnel,
materials, travel and all direct overhead associated with design and required
testing of our product line.   We do not allocate indirect
overhead to research and development.





Statement
of Financial Accounting Standards (SFAS) 86, “Accounting for Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed,” requires companies
to expense software development costs as they incur them until technological
feasibility has been established, at which time those costs are capitalized
until the product is available for general release to customers.  To
date, our software has been available for general release concurrent with the
establishment of technological feasibility and, accordingly, we have not
capitalized any development costs.  SFAS 2, “Accounting for Research and
Development Costs,”establishes accounting and reporting standards for
research and development.  In accordance with SFAS 2, costs we incur
to enhance products or after the general release of the service using the
product are expensed in the period they are incurred and included in research
and development costs in our consolidated statements of operations.





Prior to January 1, 2008, our research
and development was outsourced to Diligent Board Member Services, NZ Limited
(“DBMS NZ”), an affiliate through common ownership by a stockholder and former
director of the Company.  Effective January 1, 2008, the Company
acquired DBMS NZ and now the research and development activities are fully
integrated into the Company.





Share-Based
Compensation.  In November 2007, we adopted our 2007 Stock
Option and Incentive Plan pursuant to which we intend to issue share-based
compensation from time to time, in the form of stock, stock options and other
equity based awards.





13


Share-based
compensation incurred in 2007 and 2008 consists of stock issued to employees and
contractors for services rendered.  In accordance with SFAS 123(R),
Share-Based Payment ,
Diligent measures the cost of employee services received in exchange for an
award of equity-based securities using the fair value of the award on the date
of the grant, and recognizes the cost over the period that the award recipient
is required to provide services to Diligent in exchange for the
award.





Diligent
measures the cost of nonemployee services received in exchange for an award of
equity-based securities using the fair value method prescribed by Emerging
Issues Task Force (“EITF”) 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services. Compensation cost for awards
granted to non-employees is measured based on the fair value of the award at the
measurement date, which is the date performance is satisfied or services are
rendered by the non-employee.  Compensation costs are amortized over
the underlying awards’ vesting terms, and are recorded as share-based
compensation expense.  These costs are included in general and
administrative expense in our statement of operations.





Interest
Income (Expense), net





Interest
income is derived from interest bearing bank deposits held by US, UK and New
Zealand bank accounts, together with investment income from a loan receivable
due from a related party, DBMS LLC.





Foreign
Exchange Loss





As a
worldwide company, certain of Diligent’s revenues and expenses are denominated
in foreign currencies, which are recorded at the approximate rates of exchange
in effect at the transaction dates.  Assets and liabilities are
translated at the exchange rates in effect at the balance sheet dates, with
differences recorded as foreign exchange gains or losses in the statements of
operations.  Additionally, the Company has cash balances maintained in
New Zealand Dollars (NZD) and British Pounds Sterling (GBP).





The
Company’s wholly-owned subsidiaries, Diligent Boardbooks Limited (“DBL”) and
DBMS NZ, utilize the GBP and the NZD, respectively, as their functional
currencies.  Assets and liabilities of these subsidiaries are
translated to US dollars at exchange rates in effect at the balance sheet dates,
with the resulting translation adjustments directly recorded to a separate
component of accumulated other comprehensive income.





Income
taxes





The
parent Company files U.S. federal and state income tax
returns.  Foreign operations file income tax returns in their
respective foreign jurisdictions. The Company accounts for deferred income taxes
under the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carry-forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.





In June 2006, the Financial Accounting
Standards Board (“FASB”) issued Interpretation No. 48
(FIN 48) Accounting
for Uncertainty in Income Taxes — an interpretation of FASB Statement No.
109 . FIN 48 clarifies the criteria that must be met for financial
statement recognition and measurement of tax positions taken or expected to be
taken in a tax return. This Interpretation also addresses recognition and
derecognition of related penalties and interest, classification of liabilities
and disclosures of unrecognized tax benefits. FIN 48 is effective for
fiscal years beginning after December 15, 2006. The Company adopted
FIN 48 as of October 1, 2007.  The adoption of FIN 48 did not
have a material impact on the Company.





14


Note
receivable from affiliate





The note receivable from affiliate is
recorded at net realizable value, adjusted for any valuation allowance for
amounts considered uncollectable.  The valuation allowance is reviewed
for adjustment quarterly.





The Company recorded a $5.8 million
valuation allowance and a corresponding charge to impairment loss in order to
write down the Note to its estimated fair value of the underlying collateral at
December 31, 2008.  In the absence of an active market for the
Company’s stock, or other observable inputs for similar instruments, the Company
based its valuation principally on the value of the recent issue of preferred
stock, adjusted using an assumed discount rate of 20%, which is management’s
estimate based on the value of the preferred features of the Series A Preferred
Stock. In addition, management assumed that the LLC and/or its members would
sell a portion of the underlying collateral to meet their quarterly interest
payments, thereby reducing the amount of collateral expected to be available
when the Note matures in 2010.  These are considered unobservable
inputs falling within the definition of Level 3 inputs pursuant to SFAS 157,
Fair Value
Measurements.





Recent
Accounting Pronouncements





In
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No.
157, Fair Value
Measurements .  This standard defines fair value, establishes a
framework for measuring fair value and expands disclosure about fair value
measurements.  SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years.  The adoption of this statement did not have a
material impact on the Company’s consolidated financial statements.





In
February 2008, the FASB issued Staff
Position No. 157-2 (FSP 157-2), which delays the
effective date of SFAS 157 to fiscal years beginning after
November 15, 2008 for nonfinancial assets and nonfinancial liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). The delay is intended to
allow the FASB and constituents additional time to consider the effect of
various implementation issues that have arisen, or that may arise, from the
application of SFAS 157. The Company does not expect the adoption
of FSP 157-2 to have a material impact on its consolidated
financial statements.





In
October 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active . FSP
No. 157-3 clarifies the application of SFAS No. 157 in a market
that is not active and provides an example of key considerations
in determining the fair value of a financial asset when the market for that
asset is not active. FSP No. 157-3 was effective on October 10, 2008,
including prior periods for which financial statements have not been
issued. Revisions resulting from a change in the valuation technique or its
application should be accounted for as a change in accounting estimate following
the guidance in SFAS No. 154, Accounting Changes and Error
Corrections . The Company adopted FSP No. 157-3 on October
10, 2008 and it did not have a material effect on its consolidated financial
statements.





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities - including an amendment of FASB Statement No.
115 , which permits entities to choose to measure many financial
instruments and certain other items at fair value.  SFAS 159 is
effective for fiscal years beginning after November 15, 2007.  The
adoption of this statement did not have a material impact on the Company’s
consolidated financial statements.





In June
2007, the FASB ratified EITF Issue No. 07-3, Accounting for Nonrefundable Advance
Payments for Goods or Services Received for Use in Future Research and
Development Activities, which is effective for fiscal years beginning
after December 15, 2007, and interim periods within those fiscal years. The
EITF reached a conclusion that nonrefundable advance payments for goods or
services that will be used or rendered for future research and development
activities pursuant to an executory contractual arrangement should be deferred
and capitalized. Such amounts should be recognized as an expense as the goods
are delivered or the related services are performed. Entities should continue to
evaluate whether they expect the goods to be delivered or services to be
rendered. If an entity does not expect the goods to be delivered or services to
be rendered, the capitalized advance payment should be charged to expense. The
adoption of EITF 07-3 did not have a material impact on the Company’s
consolidated financial statements.





15




In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51
..  This Statement changes the accounting for and reporting of
noncontrolling interests (formerly known as minority interests) in consolidated
financial statements. This statement is effective for financial statements
issued for fiscal years beginning on or after December 15, 2008.  The
Company does not believe the adoption of this statement will have a material
impact on its consolidated financial statements.





In
December 2007, the FASB ratified EITF Issue No. 07-1, Accounting for Collaborative
Arrangements , which is effective for fiscal years beginning after
December 15, 2008.  EITF 07-1 defines collaborative
arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement and between participants in the
arrangement and third parties.  EITF 07-1 also establishes the
appropriate income statement presentation and classification for joint operating
activities and payments between participants, as well as the sufficiency of the
disclosures related to these arrangements. The Company does not believe the
adoption of EITF 07-1 will have a material impact on its consolidated
financial statements.





In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations
..  SFAS No. 141(R) retains the underlying concepts of SFAS
No. 141 in that all business combinations are still required to be
accounted for at fair value under the acquisition method of accounting, but SFAS
No. 141(R) changed the method of applying the acquisition method in a
number of significant aspects. Acquisition costs will generally be expensed as
incurred; noncontrolling interests will be valued at fair value at the
acquisition date; in-process research and development will be recorded at fair
value as an indefinite-lived intangible asset at the acquisition date;
restructuring costs associated with a business combination will generally be
expensed subsequent to the acquisition date; and changes in deferred tax asset
valuation allowances and income tax uncertainties after the acquisition date
generally will affect income tax expense. This statement does not apply to a
combination between entities or businesses under common control.  SFAS
No. 141(R) is effective on a prospective basis for all business
combinations for which the acquisition date is on or after the beginning of the
first annual period subsequent to December 15, 2008.  Early
adoption is not permitted.





In April
2008, the FASB issued FASB Staff Position (FSP) No. 142-3, Determination of the Useful Life of
Intangible Assets . The final FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible
Assets . The FSP is intended to improve the consistency between the
useful life of an intangible asset determined under SFAS 142 and the period of
expected cash flows used to measure the fair value of the asset under SFAS
141(R) and other US generally accepted accounting principles. The FSP is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. The
Company does not believe the adoption of FSP 142-3 will have a material impact
on its consolidated financial statements.





In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles . SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. It is effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles . The Company
does not believe the adoption of SFAS 162 will have a material impact on
its consolidated financial statements.





16


In
June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating Securities
(“EITF 03-6-1”). EITF 03-6-1 defines participating securities as those that are
expected to vest and are entitled to receive nonforfeitable dividends or
dividend equivalents. Unvested share-based payment awards that have a right to
receive dividends on common stock (restricted stock) will be considered
participating securities and included in earnings per share using the two-class
method. The two-class method requires net income to be reduced for dividends
declared and paid in the period on such shares. Remaining net income is then
allocated to each class of stock (proportionately based on unrestricted and
restricted shares which pay dividends) for calculation of basic earnings per
share. Diluted earnings per share would then be calculated based on basic shares
outstanding plus any additional potentially dilutive shares, such as options and
restricted stock that do not pay dividends or are not expected to vest. This FSP
is effective in the first quarter 2009. The Company does not believe the
adoption of EITF 03-6-1 to have a material impact on its consolidated financial
statements.





In June
2008, the FASB issued EITF 07-5, Determining whether an Instrument
(or Embedded Feature) is indexed to an Entity's Own Stock (“EITF 07-5”).
EITF No. 07-5 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. Early application is not permitted. Paragraph 11(a) of SFAS No. 133 -
specifies that a contract that would otherwise meet the definition of a
derivative but is both (a) indexed to the Company's own stock and (b) classified
in stockholders' equity in the statement of financial position would not be
considered a derivative financial instrument. EITF 07-5 provides a new two-step
model to be applied in determining whether a financial instrument or an embedded
feature is indexed to an issuer's own stock and thus able to qualify for the
SFAS No. 133 paragraph 11(a) scope exception. The Company does not believe that
the adoption of EITF 07-5 will have a material impact on its consolidated
financial statements.





Results
of Operations





Comparisons
of the Years Ended December 31, 2008, the Three Months ended December 31, 2007
and the Nine Months Ended September 30, 2007





Revenues





The Company’s total revenues were $2.9
million for the year ended December 31, 2008 compared to $0.5 million for the
three months ended December 31, 2007 and $1.2 million for the nine months ended
September 30, 2007.  The sales for the three months ended December 31,
2007 show an increase over the average quarterly sales for the nine months ended
September 30, 2007.  Sales continued to grow in 2008, with the rate of
sales growth for year ended 2008 compared with the fourth quarter of 2007 on an
annualized basis increasing 42%.  The increase in revenues in 2008 is
due to the increase in our worldwide sales force.  After our initial
public offering in December 2007, we significantly expanded our sales
force.  While the total number of sales people was reduced in the last
quarter of 2008 (see Selling
and Marketing Expensesbelow), the fully trained sales force increased
from 5 to 10 at December 31, 2007 and 2008, respectively.





The cumulative number of licenses
increased to 174 at December 31, 2008 from 74 at December 31, 2007 and 57 at
September 30, 2007.





Cost
of Revenues and Operating Expenses





Cost
of Revenues





Cost of revenues were $1.9 million,
$0.3 million and $0.9 million for the year ended December 31, 2008, the three
months ended December 31, 2007 and the nine months ended September 30, 2007,
respectively.  Staffing costs for account management, customer support
and IT services increased significantly in 2008, to $1.3 million for the year
ended December 31, 2008 from $0.2 million for the three months ended December
31, 2007 and $0.6 million for the nine months ended September 30,
2007.  Non-employee IT-related costs for our hosting activities
increased to over $0.1 million for the year ended December 31, 2008 from only
$17 thousand for the three months ended December 31, 2007 and $38 thousand for
the nine months ended September 30, 2007.  Additionally, our IT
services costs in Canada and the UK increased to over $0.1 million for the year
ended December 31, 2008 from $16 thousand for the three months ended December
31, 2007 and $2 thousand for the nine months ended September 30,
2007.





17




Selling
and Marketing Expenses





Selling and marketing expenses were
$6.2 million, $0.9 million and $1.1 million for the year ended December 31,
2008, the three months ended December 31, 2007 and the nine months ended
September 30, 2007, respectively.  Subsequent to our initial public
offering at the end of 2007, we significantly increased our sales and marketing
efforts.  This resulted in an increase in our sales force, which
peaked to 23 at September 30, 2008, from 17 at December 31, 2007 and 4 at
September 30, 2007.  Our sales force was subsequently reduced to 10 at
December 31, 2008, all of whom are fully trained.  Salaries, benefits
and commissions for our sales force accounted for the most significant portion
of this increase, and were approximately $2.8 million, $0.3 million and $0.1
million for the year ended December 31, 2008, the three months ended December
31, 2007 and the nine months ended September 30, 2007.  Marketing
expenses also increased, to $0.8 million for the year ended December 31, 2008
from $0.1 million each for the three months ended December 31, 2007 and the nine
months ended September 30, 2007.  Travel, training and sales office
expense for our increased sales force were $0.4 million, $26 thousand and $55
thousand for the year ended December 31, 2008, the three months ended December
31, 2007 and the nine months ended September 30, 2007.  Additionally,
our worldwide marketing strategy resulted in an increase in our foreign selling
and marketing expenses, to $1.5 million for the year ended December 31, 2008
from $0.4 million for the three months ended December 31, 2007 and $0.1 million
for the nine months ended September 30, 2007.  These increases were
offset by a decrease in outside contractor expenses as we built our internal
sales and marketing teams, to $0.3 million for the year ended December 31, 2008
from $0.1 million for the three months ended December 31, 2007 and $0.5 million
for the nine months ended September 30, 2007.





General
and Administrative Expenses





General and administrative expenses
were $5.4 million for the year ended December 31, 2008, compared to $2.5 million
for the three months ended December 31, 2007 and $1.9 million for the nine
months ended September 30, 2007.  General and administrative expenses
in 2008 and the last quarter of 2007 include $0.9 million and $1.8 million,
respectively, of share-based compensation expense relating to stock awards made
to employees and non-employees under the Company’s 2007 Stock Option and
Incentive Plan.





General and administrative expenses,
excluding share-based compensation, were $4.5 million, $0.7 million and $1.9
million for the year ended December 31, 2008, the three months ended December
31, 2007 and the nine months ended September 30, 2007,
respectively.  General and administrative expenses for the three
months ended December 31, 2007 were consistent with the level of expenses for
the prior nine months of 2007, however they increased significantly in
2008.  This increase is due primarily to the increased compliance
costs associated with becoming a publicly-traded company at the end of 2007, and
included approximately $1.4 million of additional legal and accounting services,
director fees, and travel costs in 2008.  Additionally, the increase
in our staffing levels has resulted in increased costs, for office rentals and
related overhead, of over $0.3 million.





Research
and Development Expenses





Research and development expenses were
$1.0 million in 2008 compared to $0.3 million for the three months ended
December 31, 2007 and $0.9 million for the nine months ended September 30,
2007.  This represents a slight decrease in the annual level of
research and development expenses, resulting from the achievement of certain key
product enhancements.





Depreciation
and Amortization





Depreciation and amortization increased
to $0.3 million for the year ended December 31, 2008 from $25 thousand for the
three months ended December 31, 2007 and $55 thousand for the nine months ended
September 30, 2007.  This is attributable to purchases of property and
equipment of $0.9 million and $0.2 million during the year ended December 31,
2008 and the three months ended December 31, 2007, respectively, consisting
principally of computer software, computer equipment and leasehold
improvements.





18




Impairment
Loss on Note Receivable





The Company recorded a $5.8 million
valuation allowance and a corresponding charge to impairment loss in order to
write down a note receivable from LLC to its estimated net realizable value at
December 31, 2008.  The net realizable value was determined to be the
fair value of the underlying collateral securing the note of 25 million shares
of the Company’s stock.  In the absence of an active market for the
Company’s stock, or other observable inputs for similar instruments, the Company
based its valuation principally on the value of the recent issue of preferred
stock, adjusted using an assumed discount rate of 20%, which is management’s
estimate based on the value of the preferred features of the Series A Preferred
Stock..  In addition, management assumed that the LLC and/or its
members would sell a portion of the underlying collateral to meet their
quarterly interest payments, thereby reducing the amount of collateral expected
to be available when the Note matures in 2010.  These are considered
unobservable inputs falling within the definition of Level 3 inputs pursuant to
SFAS 157, Fair Value
Measurements.





Interest
Income (Expense), net





Net interest income of $0.6 million for
the year ended December 31, 2008 and $40 thousand for the three months ended
December 31, 2007 includes $0.3 million and $25 thousand, respectively, of
interest income on the Note Receivable from our affiliate, as well as interest
on the Company’s cash and cash equivalents and term deposits which were
interest-bearing.  Prior to the formation of the successor Company and
its initial public offering in December 2007, the Predecessor financed its
operations primarily through short and long-term
borrowings.  Accordingly, the interest expense of $0.4 million during
the nine months ended September 30, 2007 is attributable to the cost of these
borrowings.





Foreign
Exchange Loss





Our functional currency is the U.S.
dollar.  As a worldwide company, certain of our revenues and expenses
are denominated in foreign currencies, which are recorded at the approximate
rates of exchange in effect at the transaction dates.  Assets and
liabilities resulting from these transactions are translated at the exchange
rates in effect at the balance sheet dates, with differences recorded as foreign
exchange gains or losses in the statements of
operations.  Additionally, during 2008, the parent Company maintained
significant cash balances in foreign currencies, primarily in NZD and, to a
lesser extent, GBP.  The foreign exchange losses of $0.6 million, $0.1
million and $4 thousand for the year ended December 31, 2008, the three months
ended December 31, 2007 and the nine months ended September 30, 2007,
respectively, are a result of unfavorable movements in the rates of exchange
between the US dollar and NZD and between the US dollar and GBP.





Liquidity
and Capital Resources





As of December 31, 2008, our principal
sources of liquidity were cash and cash equivalents and term deposits totaling
approximately $1.3 million, and accounts receivable of approximately $0.4
million.  The primary source of our liquidity for the past year has
come from the proceeds of our New Zealand public offering completed in December
2007.





Historically, we have financed our
operations through operating revenues, short-term borrowings and secured and
unsecured indebtedness from related and third parties.  Since our
initial public offering on the New Zealand Stock Exchange in December 2007,
which raised $16.4 million (net) from the issuance of 24 million shares of
common stock, all pre-offering debt with the exception of certain leases, has
either been repaid or converted into our equity.  Additionally, we
used our cash to build our sales pipeline and customer base and to build a
scalable infrastructure.





19


Despite growth in net sales, our growth
rate lagged behind the projections we had set for the Company, which was
exacerbated by the global financial crisis.  Amid liquidity concerns,
we initiated plans to scale back our growth plans in order to reduce our
operating expenses.  During the fourth quarter of 2008, we
significantly reduced our sales force, reduced salaries for some of our more
highly compensated employees and reduced the number of members of the board of
directors.  The cost cutting continues into 2009, as we consolidate
our New York and New Jersey offices and look for further opportunities to reduce
overhead.  We also actively sought additional sources of
financing.





On March 11, 2009, the Company secured
$3 million of financing from Spring Street Partners, L.P. and Carroll Capital
Holdings, LLC, who collectively purchased 30 million shares of newly-created
Series A Preferred Stock for $0.10 per share.  As discussed in the
following paragraph, at the current level of reduced expenses, coupled with
current sales growth forecasts, management believes this funding will be
sufficient to support sales growth and achieve cash flow breakeven by
approximately the third quarter of 2010.





The cash receipts for the Company,
consisting of payments for recurring license fees, new license fees and
installation fees, are projected to be approximately $5.3 million for 2009 and
its operating cash expenditures are projected to be approximately $8.9
million.  Cash capital expenditures, net of operating lease proceeds,
plus financing costs, and non-operating expenses, are projected to be
approximately $300 thousand for 2009 and cash received for interest and other
income is projected to be approximately $400 thousand.  This forecast
results in a cash burn rate for 2009 of approximately $3.5 million (compared to
$12.4 million for 2008).  With the cash balances of $1.3 million at
December 31, 2008 and the financing of $2.9 million (net) secured in March 2009,
the Company’s projected cash balances at December 31, 2009 would be
approximately $700 thousand.





The Company continues to consider and
evaluate strategic growth opportunities that could result in additional capital
requirements and are not currently within the budget.  Our current
operating expenses and expected capital expenditures are fixed, predictable and
adequate to support our budgeted growth.  We anticipate our
professional fees for the year ended December 31, 2009, including fees
associated with reporting obligation compliance, and general administrative
costs to be consistent with those incurred for the year ended December 31,
2008.  The primary uncertainty concerning our capital needs pertains
to our ability to achieve the expected sales growth in a timely manner such that
recurring revenues exceed operating expenditures prior to the depletion of
capital.





Successor
                                      
                                      
                                      PredecessorYear ended
                                        December 31,
                                        2008
                                      
                                      
                                      Three Months
                                        ended
                                        December 31,
                                        2007
                                      
                                      
                                      Nine Months
                                        ended
                                        September
                                        30, 2007Cash
      flows provided by (used in):Operating
      activities
                                      
                                      $
                                      (11,298,122
                                      )
                                      
                                      $
                                      (1,303,496
                                      )
                                      
                                      $
                                      (4,007,712
                                      )Investing
      activities
                                      
                                      
                                      (782,891
                                      )
                                      
                                      
                                      (277,117
                                      )
                                      
                                      
                                      (8,958
                                      )Financing
      activities
                                      
                                      
                                      (308,675
                                      )
                                      
                                      
                                      15,255,693
                                      
                                      
                                      
                                      4,126,317





Net
Cash Flows from Operating Activities





Cash used in operations has continued
to increase as our net losses have increased.  As noted previously,
the higher losses are due to significantly higher costs incurred in the areas of
selling and marketing, and general and administrative, particularly for
compliance costs subsequent to the initial public
offering.  Additionally, at December 31, 2008 we had higher balances
in accounts receivable and prepaid expenses, and additional amounts held as
security deposits on leases.





20


Net Cash Flows from Investing
Activities





The increase in cash used in investing
activities in 2008 and the three months ended December 31, 2007 is primarily due
to the Company’s increased investment in property and equipment subsequent to
our initial public offering.  The $0.9 million and $0.2 million of
property and equipment acquired during the year ended December 31, 2008 and the
three months ended December 31, 2007, respectively, consists principally of
computer software, computer equipment and leasehold improvements.





Net Cash Flows from Financing
Activities





Prior to our initial public offering in
December 2007, we raised financing principally through loans from members and
affiliates, and to a lesser degree from short and long-term borrowings from
third parties.  The $15.3 million in cash provided by financing
activities in the three months ended December 31, 2007 consists of $16.4 million
raised in the initial public offering (net of listing costs) and $2.5 million
from a loan by a director of the Company, which was converted to equity prior to
December 31, 2007.  Offsetting these sources of cash was $3.7 million
which was loaned to the Predecessor under a Promissory Note and Security
Agreement to discharge certain debts of the Predecessor.  During the
year ended 2008, financing activities consisted of an additional $0.1 million
advanced to the Predecessor under the Promissory Note and Security Agreement, as
well as repayments of payable to affiliates and obligations under capital
leases.





Off-Balance
Sheet Arrangements





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, results of
operations, liquidity, capital expenditures or capital resources that is
material to stockholders.





ITEM
7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




Quantitative
and Qualitative Disclosures about Market Risk





Because the Company qualifies as a
smaller reporting company, as defined by §229.10(f)(1) it is not required to
provide the information required by this Item.





21




ITEM
8.  FINANCIAL STATEME NTS
AND SUPPLEMENTARY DATA


INDEX
TO FINANCIAL STATEMENTS







PAGEReport
      of Independent Registered Public Accounting Firm
                  
                  23Consolidated
      Balance Sheets as of December 31, 2008 and December 31,
    2007
                  
                  24Consolidated
      Statements of Operations for the year ended December 31, 2008 and the
      three months ended December 31, 2007 and of Predecessor for the nine
      months ended September 30, 2007
                  
                  25Consolidated
      Statements of Changes in Stockholders’/Members’ Equity (Deficit) and
      Comprehensive Loss for the year ended December 31, 2008 and the three
      months ended December 31, 2007 and of Predecessor for the nine months
      ended September 30, 2007
                  
                  26Consolidated
      Statements of Cash Flows for the year ended December 31, 2008 and the
      three months ended December 31, 2007 and of Predecessor for the nine
      months ended September 30, 2007
                  
                  27Notes
      to Consolidated Financial Statements
                  
                  29




22




Report
of Independent Registered Public Accounting Firm





To the
Board of Directors and Stockholders of


Diligent
Board Member Services, Inc.





We have
audited the accompanying consolidated balance sheets of Diligent Board Member
Services, Inc. as of December 31, 2008 and 2007, and the related consolidated
statements of operations, changes in stockholders'/members’ equity (deficit) and
comprehensive loss, and cash flows for the year ended December 31, 2008, three
months ended December 31, 2007 and nine months ended September 30, 2007
(predecessor).  Diligent Board Member Services, Inc.'s management is
responsible for these consolidated financial statements. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion.  An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements
and assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Diligent Board Member
Services, Inc. as of December 31, 2008 and 2007 and the results of their
operations and their cash flows for the year ended December 31, 2008, three
months ended December 31, 2007 and nine months ended September 30, 2007
(predecessor), in conformity with accounting principles generally accepted in
the United States of America.





/s/
      Holtz Rubenstein Reminick LLPNew
      York, New YorkMarch
      17, 2009





23




Diligent
Board Member Services, Inc.


Consolidated
Balance Sheets





December 31,
                            
                            
                            December 31,2008
                            
                            
                            2007ASSETSCurrent
      assets:Cash
      and cash equivalents
                            
                            $
                            1,265,347
                            
                            
                            $
                            13,675,080Term
      deposit
                            
                            
                            58,150
                            
                            
                            
                            76,780Accounts
      receivable, net
                            
                            
                            390,180
                            
                            
                            
                            266,976Prepaid
      expenses and other current assets
                            
                            
                            222,617
                            
                            
                            
                            87,352Total
      current assets
                            
                            
                            1,936,294
                            
                            
                            
                            14,106,188Property
      and equipment, net
                            
                            
                            1,116,007
                            
                            
                            
                            504,500Note
      receivable from affiliate, net of valuation allowance
                            
                            
                            1,361,791
                            
                            
                            
                            6,715,232Restricted
      cash - security deposits
                            
                            
                            246,685
                            
                            
                            
                            43,741Total
      assets
                            
                            $
                            4,660,777
                            
                            
                            $
                            21,369,661LIABILITIES AND STOCKHOLDERS'
      EQUITYCurrent
      liabilities:Accounts
      payable
                            
                            $
                            256,319
                            
                            
                            $
                            447,532Accrued
      expenses and other liabilities
                            
                            
                            218,541
                            
                            
                            
                            83,703Deferred
      revenue
                            
                            
                            601,408
                            
                            
                            
                            226,678Current
      portion of obligations under capital leases
                            
                            
                            114,308
                            
                            
                            
                            105,355Payables
      to affiliates
                            
                            
                            49,578
                            
                            
                            
                            152,897Total
      current liabilities
                            
                            
                            1,240,154
                            
                            
                            
                            1,016,165Non-current
      liabilities:Obligations
      under capital leases, less current portion
                            
                            
                            50,816
                            
                            
                            
                            165,125Total
      non-current liabilities
                            
                            
                            50,816
                            
                            
                            
                            165,125Total
      liabilities
                            
                            
                            1,290,970
                            
                            
                            
                            1,181,290Commitments
      and contingenciesStockholders'
      equity:Preferred
      Stock, $.001 par value 50,000,000 shares authorized, none
      issued
                            
                            
                            -
                            
                            
                            
                            -Common
      Stock, $.001 par value, 200,000,000 shares authorized, 90,440,000 and
      104,000,000 shares issued and outstanding
                            
                            
                            90,440
                            
                            
                            
                            104,000Additional
      paid-in capital
                            
                            
                            24,618,070
                            
                            
                            
                            23,754,427Accumulated
      deficit
                            
                            
                            (21,318,658
                            )
                            
                            
                            (3,670,056
                            )Accumulated
      other comprehensive loss
                            
                            
                            (20,045
                            )
                            
                            
                            -Total
      stockholders' equity
                            
                            
                            3,369,807
                            
                            
                            
                            20,188,371Total
      liabilities and stockholders' equity
                            
                            $
                            4,660,777
                            
                            
                            $
                            21,369,661







24




Diligent
Board Member Services, Inc.


Consolidated
Statements of Operations





Successor
                                          
                                          
                                          
                                          PredecessorYear
                                          
                                          
                                          Three months
                                          
                                          
                                          
                                          Nine monthsended
                                          
                                          
                                          ended
                                          
                                          
                                          
                                          endedDecember 31,
                                          
                                          
                                          December 31,
                                          
                                          
                                          
                                          September 30,2008
                                          
                                          
                                          2007
                                          
                                          
                                          
                                          2007Revenues
                                          
                                          $
                                          2,930,702
                                          
                                          
                                          $
                                          515,103
                                          
                                          
                                          
                                          $
                                          1,210,070Cost
      of revenues
                                          
                                          
                                          1,878,027
                                          
                                          
                                          
                                          324,029
                                          
                                          
                                          
                                          
                                          945,910Gross
      profit
                                          
                                          
                                          1,052,675
                                          
                                          
                                          
                                          191,074
                                          
                                          
                                          
                                          
                                          264,160Operating
      expenses:Selling
      and marketing expenses
                                          
                                          
                                          6,216,087
                                          
                                          
                                          
                                          987,043
                                          
                                          
                                          
                                          
                                          1,118,526General
      and administrative expenses
                                          
                                          
                                          5,418,747
                                          
                                          
                                          
                                          2,489,147
                                          
                                          
                                          
                                          
                                          1,895,229Research
      and development expenses
                                          
                                          
                                          955,385
                                          
                                          
                                          
                                          334,039
                                          
                                          
                                          
                                          
                                          918,782Depreciation
      and amortization
                                          
                                          
                                          278,295
                                          
                                          
                                          
                                          25,411
                                          
                                          
                                          
                                          
                                          54,800Total
      operating expenses
                                          
                                          
                                          12,868,514
                                          
                                          
                                          
                                          3,835,640
                                          
                                          
                                          
                                          
                                          3,987,337Operating
      loss
                                          
                                          
                                          (11,815,839
                                          )
                                          
                                          
                                          (3,644,566
                                          )
                                          
                                          
                                          
                                          (3,723,177
                                          )Other
      income (expenses):Impairment
      loss on note receivable from affiliate
                                          
                                          
                                          (5,800,000
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          -Interest
      income (expense), net
                                          
                                          
                                          601,280
                                          
                                          
                                          
                                          39,959
                                          
                                          
                                          
                                          
                                          (418,804
                                          )Foreign
      exchange transaction loss
                                          
                                          
                                          (601,245
                                          )
                                          
                                          
                                          (65,449
                                          )
                                          
                                          
                                          
                                          (4,372
                                          )Total
      other income (expenses)
                                          
                                          
                                          (5,799,965
                                          )
                                          
                                          
                                          (25,490
                                          )
                                          
                                          
                                          
                                          (423,176
                                          )Loss
      before provision for income taxes
                                          
                                          
                                          (17,615,804
                                          )
                                          
                                          
                                          (3,670,056
                                          )
                                          
                                          
                                          
                                          (4,146,353
                                          )Provision
      for income taxes
                                          
                                          
                                          32,798
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          -Net
      loss
                                          
                                          $
                                          (17,648,602
                                          )
                                          
                                          $
                                          (3,670,056
                                          )
                                          
                                          
                                          $
                                          (4,146,353
                                          )Net
      loss per share (basic and diluted)
                                          
                                          $
                                          (0.17
                                          )
                                          
                                          $
                                          (0.05
                                          )
                                          
                                          
                                          $
                                          (0.06
                                          )Weighted
      average shares outstanding (basic and diluted)
                                          
                                          
                                          102,397,907
                                          
                                          
                                          
                                          75,583,402
                                          
                                          
                                          
                                          
                                          68,484,611








25




Diligent
Board Member Services, Inc.


Consolidated
Statements of Changes in Stockholders’/Members’ Equity (Deficit)


and
Comprehensive Loss





PredecessorAccumulated
                                                                                        
                                                                                        
                                                                                        TotalCommon
                                                                                        
                                                                                        
                                                                                        Additional
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        Other
                                                                                        
                                                                                        
                                                                                        Stockholders'/Common
                                                                                        
                                                                                        
                                                                                        Stock
                                                                                        
                                                                                        
                                                                                        Paid-in-
                                                                                        
                                                                                        
                                                                                        Members'
                                                                                        
                                                                                        
                                                                                        Accumulated
                                                                                        
                                                                                        
                                                                                        Comprehensive
                                                                                        
                                                                                        
                                                                                        Members'Shares
                                                                                        
                                                                                        
                                                                                        $.001
      Par Value
                                                                                        
                                                                                        
                                                                                        Capital
                                                                                        
                                                                                        
                                                                                        Capital
                                                                                        
                                                                                        
                                                                                        Deficit
                                                                                        
                                                                                        
                                                                                        Income
      (Loss)
                                                                                        
                                                                                        
                                                                                        Equity/(Deficit)Balance
      atDecember
      31, 2006
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        $
                                                                                        -
                                                                                        
                                                                                        
                                                                                        $
                                                                                        -
                                                                                        
                                                                                        
                                                                                        $
                                                                                        (1,094,436
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        -
                                                                                        
                                                                                        
                                                                                        $
                                                                                        -
                                                                                        
                                                                                        
                                                                                        $
                                                                                        (1,094,436
                                                                                        )Net
      loss and comprehensive loss
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        (4,146,353
                                                                                        )
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        (4,146,353
                                                                                        )Balance
      at September 30, 2007
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        $
                                                                                        -
                                                                                        
                                                                                        
                                                                                        $
                                                                                        -
                                                                                        
                                                                                        
                                                                                        $
                                                                                        (5,240,789
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        -
                                                                                        
                                                                                        
                                                                                        $
                                                                                        -
                                                                                        
                                                                                        
                                                                                        $
                                                                                        (5,240,789
                                                                                        )SuccessorBalance
      at September 30, 2007
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        $
                                                                                        -
                                                                                        
                                                                                        
                                                                                        $
                                                                                        -
                                                                                        
                                                                                        
                                                                                        $
                                                                                        -
                                                                                        
                                                                                        
                                                                                        $
                                                                                        -
                                                                                        
                                                                                        
                                                                                        $
                                                                                        -
                                                                                        
                                                                                        
                                                                                        $
                                                                                        -Net
      loss and comprehensive loss
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        (3,670,056
                                                                                        )
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        (3,670,056
                                                                                        )Initial
      capital contribution
                                                                                        
                                                                                        
                                                                                        68,484,611
                                                                                        
                                                                                        
                                                                                        
                                                                                        68,485
                                                                                        
                                                                                        
                                                                                        
                                                                                        52,411,272
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        52,479,757Deemed
      dividend, in excess of Predecessor basis
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        (52,411,272
                                                                                        )
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        (52,411,272
                                                                                        )Initial
      public offering, net at NZD1.00 (US$0.7663) per share
                                                                                        
                                                                                        
                                                                                        24,000,000
                                                                                        
                                                                                        
                                                                                        
                                                                                        24,000
                                                                                        
                                                                                        
                                                                                        
                                                                                        16,347,180
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        16,371,180Conversion
      of debt to equity, at US$0.75 per share
                                                                                        
                                                                                        
                                                                                        7,515,389
                                                                                        
                                                                                        
                                                                                        
                                                                                        7,515
                                                                                        
                                                                                        
                                                                                        
                                                                                        5,629,028
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        5,636,543Share-based
      compensation
                                                                                        
                                                                                        
                                                                                        4,000,000
                                                                                        
                                                                                        
                                                                                        
                                                                                        4,000
                                                                                        
                                                                                        
                                                                                        
                                                                                        1,778,219
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        1,782,219BalanceatDecember
      31, 2007
                                                                                        
                                                                                        
                                                                                        104,000,000
                                                                                        
                                                                                        
                                                                                        
                                                                                        104,000
                                                                                        
                                                                                        
                                                                                        
                                                                                        23,754,427
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        (3,670,056
                                                                                        )
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        20,188,371Net
      loss
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        (17,648,602
                                                                                        )
                                                                                        
                                                                                        
                                                                                        -Foreign
      exchange translation adjustment
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        (20,045
                                                                                        )Total
      comprehensive loss
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        (17,668,647
                                                                                        )Write
      off related party receivable
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        (70,700
                                                                                        )
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        (70,700
                                                                                        )Share-based
      compensation, net of forfeitures
                                                                                        
                                                                                        
                                                                                        440,000
                                                                                        
                                                                                        
                                                                                        
                                                                                        440
                                                                                        
                                                                                        
                                                                                        
                                                                                        920,343
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        920,783Cancellation
      of shares
                                                                                        
                                                                                        
                                                                                        (14,000,000
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (14,000
                                                                                        )
                                                                                        
                                                                                        
                                                                                        14,000
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -Balance
      atDecember 31, 2008
                                                                                        
                                                                                        
                                                                                        90,440,000
                                                                                        
                                                                                        
                                                                                        $
                                                                                        90,440
                                                                                        
                                                                                        
                                                                                        $
                                                                                        24,618,070
                                                                                        
                                                                                        
                                                                                        $
                                                                                        -
                                                                                        
                                                                                        
                                                                                        $
                                                                                        (21,318,658
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (20,045
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        3,369,807








26




Diligent
Board Member Services, Inc.


Consolidated
Statements of Cash Flows





Successor
                                                
                                                
                                                
                                                PredecessorYear
                                                
                                                
                                                Three
      months
                                                
                                                
                                                
                                                Nine
      monthsended
                                                
                                                
                                                ended
                                                
                                                
                                                
                                                endedDecember
      31,
                                                
                                                
                                                December
      31,
                                                
                                                
                                                
                                                September
      30,2008
                                                
                                                
                                                2007
                                                
                                                
                                                
                                                2007Cash
      flows from operating activities:Net
      loss
                                                
                                                $
                                                (17,648,602
                                                )
                                                
                                                $
                                                (3,670,056
                                                )
                                                
                                                
                                                $
                                                (4,146,353
                                                )Adjustments
      to reconcile net loss to cash used in operating
activities:Impairment
      loss on note receivable from affiliate
                                                
                                                
                                                5,800,000
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                
                                                -Depreciation
      and amortization
                                                
                                                
                                                278,295
                                                
                                                
                                                
                                                25,411
                                                
                                                
                                                
                                                
                                                54,800Allowance
      for doubtful accounts
                                                
                                                
                                                7,125
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                
                                                -Share-based
      compensation
                                                
                                                
                                                920,783
                                                
                                                
                                                
                                                1,782,219
                                                
                                                
                                                
                                                
                                                -Accrued
      interest receivable
                                                
                                                
                                                (346,559
                                                )
                                                
                                                
                                                (25,219
                                                )
                                                
                                                
                                                
                                                -Other
      non-cash charges
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                
                                                8,915Changes
      in operating assets and liabilities:Accounts
      receivable
                                                
                                                
                                                (105,520
                                                )
                                                
                                                
                                                (96,871
                                                )
                                                
                                                
                                                
                                                (100,710
                                                )Prepaid
      expenses and other current assets
                                                
                                                
                                                (110,965
                                                )
                                                
                                                
                                                143,482
                                                
                                                
                                                
                                                
                                                (235,503
                                                )Restricted
      cash - security deposits
                                                
                                                
                                                (202,944
                                                )
                                                
                                                
                                                8,877
                                                
                                                
                                                
                                                
                                                (27,618
                                                )Accounts
      payable and accrued expenses
                                                
                                                
                                                (264,465
                                                )
                                                
                                                
                                                531,238
                                                
                                                
                                                
                                                
                                                351,018Deferred
      revenue
                                                
                                                
                                                374,730
                                                
                                                
                                                
                                                (2,577
                                                )
                                                
                                                
                                                
                                                87,739Net
      cash used in operating activities
                                                
                                                
                                                (11,298,122
                                                )
                                                
                                                
                                                (1,303,496
                                                )
                                                
                                                
                                                
                                                (4,007,712
                                                )Cash
      flows from investing activities:Redemption/(purchase)
      of term deposit, net
                                                
                                                
                                                18,630
                                                
                                                
                                                
                                                (76,780
                                                )
                                                
                                                
                                                
                                                -Cash
      acquired in acquisition, net of purchase price
                                                
                                                
                                                83,593
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                
                                                -Purchase
      of property and equipment
                                                
                                                
                                                (885,114
                                                )
                                                
                                                
                                                (200,337
                                                )
                                                
                                                
                                                
                                                (8,958
                                                )Net
      cash used in investing activities
                                                
                                                
                                                (782,891
                                                )
                                                
                                                
                                                (277,117
                                                )
                                                
                                                
                                                
                                                (8,958
                                                )Cash
      flows from financing activities:Cash
      paid for note receivable from affiliate
                                                
                                                
                                                (100,000
                                                )
                                                
                                                
                                                (3,699,290
                                                )
                                                
                                                
                                                
                                                -Repayments
      of short-term borrowings, net
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                
                                                (26,059
                                                )Proceeds
      from long-term debt, net
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                
                                                180,541(Repayments)/proceeds
      from due to affiliates
                                                
                                                
                                                (103,319
                                                )
                                                
                                                
                                                152,897
                                                
                                                
                                                
                                                
                                                3,938,141Cash
      proceeds from loan, converted to equity
                                                
                                                
                                                -
                                                
                                                
                                                
                                                2,457,555
                                                
                                                
                                                
                                                
                                                -Proceeds
      from common stock issuance, net
                                                
                                                
                                                -
                                                
                                                
                                                
                                                16,371,180
                                                
                                                
                                                
                                                
                                                -Payments
      of obligations under capital leases
                                                
                                                
                                                (105,356
                                                )
                                                
                                                
                                                (26,649
                                                )
                                                
                                                
                                                
                                                33,694Net
      cash (used in) provided by financing activities
                                                
                                                
                                                (308,675
                                                )
                                                
                                                
                                                15,255,693
                                                
                                                
                                                
                                                
                                                4,126,317Effect
      of exchange rates on cash and cash equivalents
                                                
                                                
                                                (20,045
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                
                                                -Net
      (decrease) increase in cash and cash equivalents
                                                
                                                
                                                (12,409,733
                                                )
                                                
                                                
                                                13,675,080
                                                
                                                
                                                
                                                
                                                109,647Cash
      and cash equivalents at beginning of period
                                                
                                                
                                                13,675,080
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                
                                                8,506Cash
      and cash equivalents at end of period
                                                
                                                $
                                                1,265,347
                                                
                                                
                                                $
                                                13,675,080
                                                
                                                
                                                
                                                $
                                                118,153





See
accompanying notes to consolidated financial statements





27




Diligent
Board Member Services, Inc.


Consolidated
Statements of Cash Flows (Continued)





Successor
                                          
                                          
                                          PredecessorYear
                                          
                                          
                                          Three months
                                          
                                          
                                          Nine monthsended
                                          
                                          
                                          ended
                                          
                                          
                                          endedDecember 31,
                                          
                                          
                                          December 31,
                                          
                                          
                                          September 30,2008
                                          
                                          
                                          2007
                                          
                                          
                                          2007Supplemental
      disclosure of cash flow information:Cash
      paid during the period for :Interest
                                          
                                          $
                                          38,356
                                          
                                          
                                          $
                                          10,010
                                          
                                          
                                          $
                                          355,583Income
      taxes
                                          
                                          $
                                          24,750
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -Supplemental
      disclosure of noncash investing and financing activities:Net
      book value of assets and liabilities received in exchange for common
      stock, net of demand note payable
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          68,485
                                          
                                          
                                          $
                                          -Increase
      in note receivable from affiliate in exchange for liabilities
      assumed
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          3,178,988
                                          
                                          
                                          $
                                          -Conversion
      of debt to equity
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          5,636,543
                                          
                                          
                                          $
                                          -Share-based
      compensation
                                          
                                          $
                                          920,783
                                          
                                          
                                          $
                                          1,782,219
                                          
                                          
                                          $
                                          -Property
      and equipment acquired under capital leases
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          99,313
                                          
                                          
                                          $
                                          88,317Conversion
      of interest to loan principal
                                          
                                          $
                                          346,559
                                          
                                          
                                          $
                                          25,219
                                          
                                          
                                          $
                                          -Transfer
      of net assets from entity under common control
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          745,345Cashless
      repayment of loans by officers from bonus awards
                                          
                                          $
                                          126,767
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -Write
      off of related party receivable charged to equity
                                          
                                          $
                                          70,700
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -





See
accompanying notes to consolidated financial statements





28




Diligent
Board Member Services, Inc.


Notes
to Consolidated Financial Statements





1)           Organization
and nature of the business





Diligent Board Member Services, Inc.
(“Diligent” or the “Company” or the “Successor”) provides worldwide online
management of corporate governance documents (“Boardbooks”) to corporate
clients.  Boardbooks is a web-based portal that directors and
administrative staff use to compile, update and examine board materials prior to
and during board meetings.  Each client of the Company enters into a
service agreement whereby the Company agrees to provide and support the
Boardbooks service.





The Company was incorporated in the
State of Delaware on September 27, 2007 and is listed on the New Zealand Stock
Exchange (“NZX”).  The Company’s corporate headquarters are located in
New York and New Zealand.  In April 2008, the Company filed a Form 10
registration statement with the United States Securities and Exchange
Commission, which became effective on June 30, 2008.





The Company’s predecessor entity was
Diligent Board Member Services, LLC, a Delaware limited liability company, which
changed its name to Services Share Holding, LLC, effective January 2008 (herein
referred to as “LLC” or the “Predecessor”).





On October 1, 2007, LLC contributed its
Boardbooks business to the Company. Under the terms of the Contribution
Agreement, LLC transferred to the Company assets and certain liabilities related
to the Boardbooks business with a net book value of $256,750 in exchange for
68,484,611 shares of the Company’s stock (See Note 4).  This
transaction was recorded at the net book value of LLC as the Company and LLC
were entities under common control.  On December 12, 2007 the Company
completed its initial public offering on the NZX.





The Company has a wholly-owned
subsidiary located in New Zealand, Diligent Board Member Services (NZ) Ltd
(“DBMS NZ”), which was acquired on January 1, 2008.  Prior to January
1, 2008, DBMS NZ was owned by a stockholder and officer of the
Company.  DBMS NZ provides research and development services to the
Company.





The Company also has a wholly-owned
subsidiary, Diligent Boardbooks Limited (“DBL”), an England and Wales limited
liability company which was formed on December 14, 2006, and provides European
sales and marketing services.  DBL was inactive until April
2008.





The Company’s consolidated financial
statements are presented in US dollars, rounded to the nearest dollar, which is
the Company’s functional and presentational currency.





2)           Liquidity





Despite growth in net sales during
2008, the Company’s growth rate lagged behind its projections.  Amid
liquidity concerns, the Company initiated plans to scale back its growth plans
in order to reduce operating expenses.  During the fourth quarter of
2008, the Company significantly reduced its sales force, reduced salaries for
some of its more highly compensated employees and reduced the number of members
of the board of directors.  The Company also actively sought
additional sources of financing.





In March 2009, the Company issued
30,000,000 shares of newly-created Series A Preferred Stock for US$0.10 per
share, for an aggregate of $3,000,000 in additional capital.  Expenses
relating to the share issuance were approximately $139,000.  The
Preferred Shares carry a fixed, cumulative, dividend of 11% per annum (adjusted
for stock splits, consolidation, etc).  The dividend, which is due on
the first business day of each calendar year for the prior year, may (at the
Company’s option) be paid either in cash or in kind by the issuance of
additional Preferred Shares (PIK Shares), to be issued at the same issue price
of US$0.10 per share.  The 11% annual dividend on the Preferred Shares
will have preference over the declaration or payment of any dividends on the
Company’s common stock (ordinary shares).  In addition to the 11%
preferred dividend, the holders of the Preferred Shares will also be entitled to
participate pro-rata in any dividend paid on the Company’s common
stock.  The Preferred Shares will be convertible at any time at the
option of holders into the Company’s common stock on a one-for-one basis at a
conversion price of US$0.10 per share.




29




Diligent
Board Member Services, Inc.


Notes
to Consolidated Financial Statements





At the current level of reduced
expenses, coupled with conservative sales growth forecasts, management believes
this funding will be sufficient to support the operations and obligations of the
Company through the third quarter of 2010.  The primary uncertainty
concerning the Company’s capital needs pertains to its ability to achieve the
expected sales growth in a timely manner such that recurring revenues exceed
operating expenditures prior to the depletion of capital.





The note receivable from affiliate, due
from LLC, provides for seven quarterly interest payments of approximately $90
thousand each due from April 1, 2009 through October 1, 2010, and a $7,161,791
principal payment due October 1, 2010.  This note was collateralized
with 25 million shares of Diligent common stock at December 31,
2008.  The Company believes that collection of the note receivable is
dependent upon, and limited to, the amount of cash that LLC can receive from the
sale of the underlying collateral as payments become due and has recorded an
impairment loss on the note (see Note 9).  Although management
believes a portion of the principal will be collected when due in October 2010,
with the exception of interest payments due under the note, the Company has not
included the collection of the note receivable in its liquidity
planning.





3)           Significant
accounting policies





Basis of
presentation– The Company's
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America.  The
results of operations, cash flows and changes in stockholders’/members’ equity
for 2007 are presented for the Predecessor through September 30, 2007 and for
the Company for the period from October 1, 2007 (the net asset contribution date
(see Note 4)) through December 31, 2007.





Principles
of consolidation – The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries.  All
material intercompany balances and transactions have been eliminated in
consolidation.





Use of
estimates– The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.





Cash and
cash equivalents – The Company considers all highly liquid investments
with original maturities of three months or less to be cash
equivalents.  The Company invests its excess cash primarily in a money
market fund of a major financial institution.  Accordingly, its cash
equivalents are subject to minimal credit and market risk.  At
December 31, 2008, cash equivalents include an investment in a money market fund
of $675,575, which is carried at cost which approximates fair
value.  There were no cash equivalents at December 31,
2007.





Term
deposits – Term deposits are short-term investments with banks, with
maturities greater than three months at inception.





Accounts
receivable – Accounts receivable are
recorded at estimated net realizable value.  A provision for doubtful
accounts is recorded based on management’s assessment of amounts considered
uncollectable for specific customers based on age of the receivable, history of
payments and other relevant information.  An allowance for doubtful
accounts is provided for accounts receivable which management determines will
not be collectable in full.





Property
and equipment – Property and equipment consists of computer and office
equipment, leasehold improvements and internal-use computer
software.  Property and equipment are carried at cost, less
accumulated depreciation and amortization and any impairment
losses.




30




Diligent
Board Member Services, Inc.


Notes
to Consolidated Financial Statements





Internal-use
software – The Company accounts for internal-use software in
accordance with Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed for or Obtained for Internal Use , which requires the
capitalization of certain costs incurred in connection with developing or
obtaining software for internal use.  Internal use software is
included in property and equipment.





Depreciation
and amortization – Depreciation on property and equipment is computed on
a straight line basis at rates adequate to recover the cost of the assets over
their estimated useful lives, which range from three to five
years.  Leasehold improvements are depreciated over estimated useful
lives of the assets or the term of the underlying lease, whichever is
shorter.  Amortization of computer software is computed on the
straight-line method over its estimated useful life, which is three
years.  Expenditures for repair and maintenance costs are expensed as
incurred.





Impairment
of long-lived assets–In accordance with Statement of Financial Accounting Standards (SFAS)
144, Accounting for the
Impairment or Disposal of Long-Lived Assets , the Company periodically
reviews the carrying amounts of its tangible and intangible assets to determine
whether events or changes in circumstances indicate the carrying amount of an
asset may not be fully recoverable.  The carrying amount of a
long-lived asset is not recoverable if it exceeds the sum of the undiscounted
cash flows expected to result from the use and eventual disposition of the
asset.  Measurement of an impairment loss for long-lived assets and
certain identifiable intangible assets that management expects to hold and use
is based on the fair value of the asset.  An impairment loss is
measured as the amount by which the carrying amount of the long-lived asset
exceeds its fair value.





Revenue
recognition–The Company recognizes
revenue in accordance with the provisions of the Securities and Exchange
Commission (SEC) Staff Accounting Bulletin (SAB) No. 104, Revenue Recognitionwhich
states that revenue is realized and earned when all of the following criteria
are met: (a) persuasive evidence of the arrangement exists, (b) delivery has
occurred or services have been rendered, (c) the seller’s price to the buyer is
fixed and determinable and (d) collectability is reasonably
assured.  Revenue from the Boardbooks licenses is recorded ratably
over the contract period, which is generally twelve months.  License
fees paid in advance are recorded as deferred revenue until
recognized.  The Company generally invoices its customers in annual or
quarterly installments.  Accordingly, the deferred revenue balance
does not represent the total contract value of annual or multi-year,
noncancelable subscription agreements.  The Company also earns fees
for set-up and training (“installation fees”) of the Boardbooks
system.  Through September 30, 2008, installation fees were recognized
upon completion of the installation.  Effective October 1, 2008,
installation fees are recorded ratably over the contract period. The
effect of this change is not material to the Company’s consolidated financial
condition, results of operations or cash flows.





Research
and development–
SFAS 86, Accounting for Costs
of Computer Software tobeSold, Leased, or Otherwise
Marketed, requires companies to expense software development costs as
they incur them until technological feasibility has been established, at which
time those costs are capitalized until the product is available for general
release to customers.  To date, software has been available for
general release concurrent with the establishment of technological feasibility
and, accordingly, the Company has not capitalized any development
costs.  SFAS 2, Accounting for Research and
Development Costs,establishes accounting and reporting standards for
research and development.  In accordance with SFAS 2, costs incurred
to enhance products after the general release of the service using the product
are expensed in the period they are incurred and included in research and
development costs in our consolidated statements of operations.





Operating
leases–The Company records rental
costs, including costs related to fixed rent escalation clauses and rent
holidays, on a straight-line basis over the lease term.





Income
taxes– The
parent Company files U.S. federal and state income tax
returns.  Foreign subsidiaries file income tax returns in their
respective foreign jurisdictions. The Company accounts for deferred income taxes
under the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.




31




Diligent
Board Member Services, Inc.


Notes
to Consolidated Financial Statements





In June 2006, the Financial Accounting
Standards Board (“FASB”) issued Interpretation No. 48
(FIN 48) Accounting
for Uncertainty in Income Taxes — an interpretation of FASB Statement No.
109 . FIN 48 clarifies the criteria that must be met for financial
statement recognition and measurement of tax positions taken or expected to be
taken in a tax return. This Interpretation also addresses recognition and
derecognition of related penalties and interest, classification of liabilities
and disclosures of unrecognized tax benefits. FIN 48 is effective for
fiscal years beginning after December 15, 2006. The Company adopted
FIN 48 as of October 1, 2007.  The adoption of FIN 48 did not
have a material impact on the Company.





Foreign
exchange– The Company’s wholly-owned subsidiaries, DBL and DBMS NZ,
utilize the British Pound Sterling and the New Zealand Dollar (NZD),
respectively, as their functional currencies.  Assets and liabilities
of these subsidiaries are translated to US dollars at exchange rates in effect
at the balance sheet dates, with the resulting translation adjustments directly
recorded to a separate component of accumulated other comprehensive
income.  As DBL was dormant prior to April 2008 and DBMS NZ was
acquired January 1, 2008 the Company has no translation adjustment prior to
2008.





Transactions in foreign currencies are
reported at the approximate rates of exchange at the transaction
date.  Assets and liabilities are translated at the rates of exchange
in effect at the balance sheet date.  All differences are recorded in
results of operations.  The foreign exchange loss is primarily
attributable to unfavorable movement in exchange rates on certain of the
Company’s cash accounts held in foreign currencies.





The Company does not use forward
exchange contracts to hedge exposures to foreign currency denominated
transactions.





Share-based
compensation– In
accordance with SFAS 123(R), Share-Based Payment , the
Company measures the cost of employee services received in exchange for an
equity-based award using the fair value of the award on the date of the grant,
and recognizes the cost over the period that the award recipient is required to
provide services to the Company in exchange for the award.





The Company measures the cost of
non-employee services received in exchange for an equity-based award using the
fair value method prescribed by EITF 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services. Compensation cost for awards
granted to non-employees is measured based on the fair value of the award at the
measurement date, which is the date performance is satisfied or services are
rendered by the non-employee.  Compensation costs are amortized over
the underlying awards’ vesting terms.





Fair
value of financial instruments – The Company’s financial instruments
include cash and cash equivalents, term deposits, accounts receivable, accounts
payable and accrued expenses.  The fair value of these financial
instruments approximates book value due to their short term
settlements.





Note
receivable from affiliate– The note receivable
from affiliate is recorded at estimated net realizable value, adjusted for any
valuation allowance for amounts considered uncollectable.  The
valuation allowance is reviewed for adjustment quarterly.





Segment
reporting – SFAS No. 131,Disclosure about Segments of an
Enterprise and Related Information , establishes standards for reporting
information about operating segments in annual financial statements and in
interim financial reports issued to stockholders. Operating segments are defined
as components of an enterprise about which separate financial information is
available that is evaluated on a regular basis by the chief operating
decision-maker, or decision making group, in deciding how to allocate resources
to an individual segment and in assessing performance of the segment. In light
of the Company’s current product offering, management believes that the Company
operates in one segment.





32




Diligent
Board Member Services, Inc.


Notes
to Consolidated Financial Statements





Recent
accounting pronouncements– In September 2006, the
FASB issued SFAS No. 157, Fair
Value Measurements .  This standard defines fair value,
establishes a framework for measuring fair value and expands disclosure about
fair value measurements.  SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years.  The adoption of this statement did
not have a material impact on the Company’s consolidated financial
statements.





In
February 2008, the FASB issued Staff Position
No. 157-2 (FSP 157-2), which delays the effective date of
SFAS 157 to fiscal years beginning after November 15, 2008 for
nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). The delay is intended to allow the FASB and
constituents additional time to consider the effect of various implementation
issues that have arisen, or that may arise, from the application of
SFAS 157. The Company does not expect the adoption
of FSP 157-2 to have a material impact on its consolidated
financial statements.





In
October 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for ThatAsset is Not Active .
FSP 157-3 clarifies the application of SFAS 157 in a market that
is not active and provides an example of key considerations in determining
the fair value of a financial asset when the market for that asset is not
active. FSP 157-3 was effective on October 10, 2008, including
prior periods for which financial statements have not been issued.
Revisions resulting from a change in the valuation technique or its
application should be accounted for as a change in accounting estimate
following the guidance in SFAS 154, Accounting Changes and Error
Corrections . The Company adopted
FSP 157-3 on October 10, 2008, and it did not have a
material effect on its consolidated financial statements.





In February 2007, the FASB issued SFAS
No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities - including an amendment of FASB
Statement No. 115 , which permits entities to choose to measure many
financial instruments and certain other items at fair value.  SFAS 159
is effective for fiscal years beginning after November 15, 2007.  The
adoption of this statement did not have a material impact on the Company’s
consolidated financial statements.





In June 2007, the FASB ratified EITF
Issue No. 07-3, Accounting for Nonrefundable Advance
Payments for Goods or Services Received for Use in Future Research and
Development Activities, which is effective for fiscal years beginning
after December 15, 2007, and interim periods within those fiscal years. The
EITF reached a conclusion that nonrefundable advance payments for goods or
services that will be used or rendered for future research and development
activities pursuant to an executory contractual arrangement should be deferred
and capitalized. Such amounts should be recognized as an expense as the goods
are delivered or the related services are performed. Entities should continue to
evaluate whether they expect the goods to be delivered or services to be
rendered. If an entity does not expect the goods to be delivered or services to
be rendered, the capitalized advance payment should be charged to expense. The
adoption of EITF 07-3 did not have a material impact on the Company’s
consolidated financial statements.





In December 2007, the FASB issued SFAS
No. 160, Noncontrolling
Interests in Consolidated Financial Statements, an Amendment of ARB
No. 51 .  This Statement changes the accounting for and
reporting of noncontrolling interests (formerly known as minority interests) in
consolidated financial statements. This statement is effective for financial
statements issued for fiscal years beginning on or after December 15,
2008.  The Company does not believe the adoption of this statement
will have a material impact on its consolidated financial
statements.





In December 2007, the FASB ratified
EITF Issue No. 07-1, Accounting for Collaborative
Arrangements , which is effective for fiscal years beginning after
December 15, 2008.   EITF 07-1 defines collaborative
arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement and between participants in the
arrangement and third parties.  EITF 07-1 also establishes the
appropriate income statement presentation and classification for joint operating
activities and payments between participants, as well as the sufficiency of the
disclosures related to these arrangements. The Company does not believe the
adoption of EITF 07-1 will have a material impact on its consolidated
financial statements.




33




Diligent
Board Member Services, Inc.


Notes
to Consolidated Financial Statements





In December 2007, the FASB issued SFAS
No. 141(R), Business
Combinations .  SFAS No. 141(R) retains the underlying
concepts of SFAS No. 141 in that all business combinations are still
required to be accounted for at fair value under the acquisition method of
accounting, but SFAS No. 141(R) changed the method of applying the
acquisition method in a number of significant aspects. Acquisition costs will
generally be expensed as incurred; noncontrolling interests will be valued at
fair value at the acquisition date; in-process research and development will be
recorded at fair value as an indefinite-lived intangible asset at the
acquisition date; restructuring costs associated with a business combination
will generally be expensed subsequent to the acquisition date; and changes in
deferred tax asset valuation allowances and income tax uncertainties after the
acquisition date generally will affect income tax expense. This statement does
not apply to a combination between entities or businesses under common
control.  SFAS No. 141(R) is effective on a prospective basis for
all business combinations for which the acquisition date is on or after the
beginning of the first annual period subsequent to December 15,
2008.  Early adoption is not permitted.





In April 2008, the FASB issued FASB
Staff Position (FSP) No. 142-3, Determination of the Useful Life of
Intangible Assets . The final FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible
Assets . The FSP is intended to improve the consistency between the
useful life of an intangible asset determined under SFAS 142 and the period of
expected cash flows used to measure the fair value of the asset under SFAS
141(R) and other US generally accepted accounting principles. The FSP is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. The
Company does not believe the adoption of FSP 142-3 will have a material impact
on its consolidated financial statements.





In May 2008, the FASB issued SFAS No.
162, The Hierarchy of Generally Accepted
Accounting Principles . SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. It is effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles . The Company
does not believe the adoption of SFAS 162 will have a material impact on
its consolidated financial statements.





In June 2008, the FASB issued FSP
EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities (“EITF 03-6-1”). EITF 03-6-1 defines
participating securities as those that are expected to vest and are entitled to
receive nonforfeitable dividends or dividend equivalents. Unvested share-based
payment awards that have a right to receive dividends on common stock
(restricted stock) will be considered participating securities and included in
earnings per share using the two-class method. The two-class method requires net
income to be reduced for dividends declared and paid in the period on such
shares. Remaining net income is then allocated to each class of stock
(proportionately based on unrestricted and restricted shares which pay
dividends) for calculation of basic earnings per share. Diluted earnings per
share would then be calculated based on basic shares outstanding plus any
additional potentially dilutive shares, such as options and restricted stock
that do not pay dividends or are not expected to vest. This FSP is effective in
the first quarter 2009. The Company does not believe the adoption of EITF 03-6-1
will have a material impact on its consolidated financial
statements.





In June
2008, the FASB issued EITF 07-5, Determining whether an Instrument
(or Embedded Feature) is indexed to an Entity's Own Stock (“EITF 07-5”). EITF
No. 07-5 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. Early
application is not permitted. Paragraph 11(a) of SFAS No. 133 - specifies that a
contract that would otherwise meet the definition of a derivative but is both
(a) indexed to the Company's own stock and (b) classified in stockholders'
equity in the statement of financial position would not be considered a
derivative financial instrument. EITF 07-5 provides a new two-step model to be
applied in determining whether a financial instrument or an embedded feature is
indexed to an issuer's own stock and thus able to qualify for the SFAS No. 133
paragraph 11(a) scope exception. The Company does not believe that the adoption
of EITF 07-5 will have a material impact on its consolidated financial
statements.




34




Diligent
Board Member Services, Inc.


Notes
to Consolidated Financial Statements





4)
            Contribution
      Agreement





On October 1, 2007 the Company entered
into a Contribution Agreement with LLC whereby LLC transferred to the Company
assets and certain liabilities related to the Boardbooks business including its
accounts receivable, prepaid expenses, property and equipment, security
deposits, capital lease obligations and deferred revenue, in exchange for
68,484,611 shares of the Company’s common stock.





A listing
of net assets transferred follows:





Assets
      transferredAccounts
      receivable
                        
                        $
                        170,105Prepaid
      expenses (listing costs)
                        
                        
                        230,834Property
      and equipment, net
                        
                        
                        230,262Intangible
      property
                        
                        
                        -Security
      deposits
                        
                        
                        52,618Total
      assets
                        
                        
                        683,819Liabilities
      assumedObligations
      under capital leases
                        
                        
                        197,814Deferred
      revenue
                        
                        
                        229,255Total
      liabilities
                        
                        
                        427,069Net assets transferred
                        
                        $
                        256,750





The assets and liabilities were
recorded by the Company at LLC’s carrying values.  In exchange for the
excess of assets contributed over liabilities assumed of $256,750, LLC received
68,484,611 shares of common stock in the Company, recorded at $68,485, and was
issued a demand note from the Company in the amount of $188,265.  The
demand note was subsequently netted against the Note Receivable from LLC (See
Note 9).





As part of the Contribution Agreement,
LLC also transferred all intangible property (except goodwill), customer
contracts, and all shares in LLC's dormant wholly owned subsidiary, DBL, to the
Company.  The accounts receivable transferred included a receivable
from a related party which was written off during the year ended December 31,
2008 as an adjustment to equity (See Note 7).





5)
            Acquisition
      of DBMS NZ





On January 1, 2008, the Company
acquired all the outstanding shares of DBMS NZ, for NZD 5,000
(US$3,804).  Prior to the acquisition, DBMS NZ provided research and
development services for the Company (See Note 10).  The purchase
price was allocated to the assets and liabilities as follows:





35




Diligent
Board Member Services, Inc.


Notes
to Consolidated Financial Statements





AssetsCash
                            
                            $
                            87,397Accounts
      receivable
                            
                            
                            24,809Other
      current assets
                            
                            
                            24,300Property
      and equipment, net
                            
                            
                            4,688141,194LiabilitiesAccounts
      payable
                            
                            
                            52,271Accrued
      vacation pay
                            
                            
                            85,119137,390Net
      assets acquired
                            
                            $
                            3,804





6)
            Term
      deposit





At December 31, 2008, the Company has a
term deposit with a New Zealand bank with an original term of 100
days.  The term deposit in the amount of NZD 100,000 ($58,150 at
December 31, 2008) bears interest at 6.00% and matures in March
2009.





7)
            Accounts
      receivable





Accounts
      receivable consists of the
following:





December 31,
                        
                        
                        December 31,2008
                        
                        
                        2007Trade
      receivables
                        
                        $
                        397,305
                        
                        
                        $
                        179,276Allowance
      for doubtful accounts
                        
                        
                        (7,125
                        )
                        
                        
                        -Receivable
      from affiliate
                        
                        
                        -
                        
                        
                        
                        87,700$
                        390,180
                        
                        
                        $
                        266,976





The Predecessor transferred a customer
account receivable from an affiliate to the Company on October 1, 2007 as part
of the Contribution Agreement discussed in Note 4.  Two stockholders
of the Company are also stockholders of the customer.  During the
three months ended December 31, 2007 and the nine months ended September 30,
2007, the Company and the Predecessor recorded revenues from this customer of
$17,250 and $105,696, respectively.  No additional services have been
provided to this affiliate during 2008.  At December 31, 2008,
management determined that the remaining balance of $70,700 was not collectable
and wrote it off in full as an adjustment to equity.




36




Diligent
Board Member Services, Inc.


Notes
to Consolidated Financial Statements





8)
            Property
      and equipment and obligations under capital
  leases





Property and equipment is comprised of
the following:





December 31,
                  
                  
                  December 31,2008
                  
                  
                  2007Equipment
                  
                  $
                  960,259
                  
                  
                  $
                  381,451Computer
      software
                  
                  
                  326,760
                  
                  
                  
                  148,460Leasehold
      improvements
                  
                  
                  130,553
                  
                  
                  
                  -1,417,572
                  
                  
                  
                  529,911Less:
      accumulated depreciation/amortization
                  
                  
                  301,565
                  
                  
                  
                  25,411Net
      property and equipment
                  
                  $
                  1,116,007
                  
                  
                  $
                  504,500





Obligations under capital leases
consist of various financing arrangements entered into by the Company to acquire
computer equipment and software. The leases bear interest rates ranging from
6.8% to 33.9% per annum, with monthly payments ranging from $130 to $2,439, and
maturities from September 2009 to July 2011.





Each lease is secured by the underlying
leased asset. Amortization of assets recorded under capital leases is included
in depreciation expense. The equipment relating to capital leases, included in
property and equipment on the balance sheet, is as follows:




December 31,
                      
                      
                      December 31,2008
                      
                      
                      2007Capital
      lease assets included inproperty and
    equipment
                      
                      $
                      246,679
                      
                      
                      $
                      246,679Accumulated
      depreciation
                      
                      
                      96,284
                      
                      
                      
                      16,072$
                      150,395
                      
                      
                      $
                      230,607




Successor
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        PredecessorYear
                                                                                                                        
                                                                                                                        
                                                                                                                        Three months
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        Nine monthsended
                                                                                                                        
                                                                                                                        
                                                                                                                        ended
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        endedDecember 31,
                                                                                                                        
                                                                                                                        
                                                                                                                        December 31,
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        September 30,2008
                                                                                                                        
                                                                                                                        
                                                                                                                        2007
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        2007Depreciation
      expense relating to capital lease assets
                                                                                                                        
                                                                                                                        $
                                                                                                                        80,212
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        16,072
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        33,450





The following is a schedule of future
minimum lease payments due under capital leases as of
December 31, 2008:




37




Diligent
Board Member Services, Inc.


Notes
to Consolidated Financial Statements





Year
      endingDecember 31,2009
                    
                    $
                    134,1592010
                    
                    
                    50,9212011
                    
                    
                    4,606Total
      minimum lease payments
                    
                    
                    189,686Less
      interest portion of payments
                    
                    
                    (24,562
                    )Present
      value of minimum lease payments
                    
                    $
                    165,124





9)           Note receivable from affiliate
- The note receivable from affiliate represents amounts due from LLC under a
Promissory Note and Security Agreement dated October 1, 2007 (the
“Note”).  When the Diligent Boardbooks-related assets and certain
liabilities were transferred to the Company from LLC on October 1, 2007, certain
additional liabilities incurred during the development of the Diligent
Boardbooks business remained with LLC.  The Company advanced
$3,699,290 in cash to LLC under the Note to enable LLC to satisfy the
liabilities it retained.





In addition, $3,178,988 of the
liabilities retained by LLC were satisfied by the holders of such liabilities
subscribing for shares of Diligent common stock for US$0.75 per share in a
private placement conducted on December 10, 2007, in anticipation of the
Company’s initial public offering on the New Zealand Stock Exchange (See Note
13).  Under the terms of the subscription agreements, these creditors
of LLC directed the Company to apply the cash that would otherwise have been
advanced to LLC under the Note and then paid to them to be applied to the amount
due under the subscription agreements.  As a result, $3,178,988 was
not advanced as cash under the Note and was instead accounted for as a payment
for common stock, and this noncash transaction is reflected in the Company’s
statements of cash flows as a supplemental disclosure of noncash investing and
financing activities.





The loan bears interest at 5% per
annum, which is payable in arrears on the first day of each calendar quarter,
commencing April 1, 2008.  LLC has elected, under the terms of the
Note, to defer each of the first four quarterly interest payments through
January 1, 2009, in which case they are added to the principal balance and bear
interest from the date the payment was due. The loan matures on October 1, 2010,
when the entire principal balance and all accrued interest will be due and
payable.  It is secured by 25,000,000 shares of the Company’s stock
which have been pledged as collateral by members of LLC.





At December 31, 2008 and 2007, the
contractual outstanding loan balance was $7,161,791 (including accrued interest
of $371,778) and $6,715,232 (including accrued interest of $25,219),
respectively.  In accordance with SFAS 114, Accounting by Creditors for
Impairment of a Loan , the Company has evaluated the collectability of
the loan and determined that at December 31, 2008 it is probable that the
Company will be unable to collect all amounts contractually due under the
Note.  This conclusion is principally based on the deterioration in
the value of the underlying collateral and the worsening economic
environment.





The Company recorded a $5.8 million
valuation allowance and a corresponding charge to impairment loss in order to
write down the Note to the estimated fair value of the underlying
collateral.  In the absence of an active market for the Company’s
stock, or other observable inputs for similar instruments, the Company based its
valuation principally on the value of the recent issue of preferred stock,
adjusted using an assumed discount rate of 20%, which is management’s estimate
based on the value of the preferred features of the Series A Preferred
Stock.  In addition, management assumed that the LLC and/or its
members would sell a portion of the underlying collateral to meet their
quarterly interest payments, thereby reducing the amount of collateral expected
to be available when the Note matures in 2010.  These are considered
unobservable inputs falling within the definition of Level 3 inputs pursuant to
SFAS 157, Fair Value
Measurements.





38




Diligent
Board Member Services, Inc.


Notes
to Consolidated Financial Statements





10)           Related
party transactions





Loans to
director and officer – In April 2008, the Company made loans to two
officers, one of whom was also a Director, in the amount of NZD 218,000
(US$145,843), which were non-interest bearing.  These loans were made
prior to the time that the Company was subject to the requirements of Sarbanes
Oxley §402, which prohibits such loans to officers, but were outstanding at the
time the Company filed its initial registration statement on Form 10 with the
SEC; therefore the Company was in violation of Sarbanes Oxley §402 at that
time.  These loans were repaid with officers’ bonuses in October 2008
when the Company became aware of the prohibition.





Research
and development expense – For the three months ended December 31, 2007
and the nine months ended September 30, 2007 (Predecessor), the Company and the
Predecessor incurred approximately $312,000 and $852,000, respectively, in
research and development expenses for services rendered by DBMS NZ.





At December 31, 2007, the amount owed
to DBMS NZ was approximately $39,000, which is included in payables to
affiliates on the consolidated balance sheet.





Marketing
expense–During
the year ended December 31, 2008, the three months ended December 31, 2007, and
the nine months ended September 30, 2007, the Company and the Predecessor
incurred marketing expenses of approximately $217,000, $54,000 and $162,000,
respectively, for services rendered by Yankee Hill Company, LLC, an entity owned
by a stockholder of the Company.  During the nine months ended
September 30, 2007 the Predecessor also incurred marketing expenses of
approximately $88,000 for services provided by a company owned by a member of
Diligent Partners.





Consulting
expense – During the nine months ended September 30, 2007, the
Predecessor incurred approximately $373,000 for services rendered by a company
owned by a member of Diligent Partners, which is included in general and
administrative expenses.





Consulting
agreement with Sugar International – In April 2008, the Board of
Directors approved a contract for sales training provided by a consultant from
Sugar International.  A director and stockholder of the Company is a
director and stockholder of Sugar International.  For the year ended
December 31, 2008, the Company recorded sales training expenses of approximately
$184,500 for such services, of which $38,500 is included in payables to
affiliates at December 31, 2008.





Legal
services – A director is a partner of Buddle Findlay, a law firm which
provides legal services to the Company in New Zealand.  Fees paid to
Buddle Findlay for the year ended December 31, 2008, the three months ended
December 31, 2007 and the nine months ended September 30, 2007 were
approximately $83,000, $124,000 and 0, respectively.  Payables to
affiliates include approximately $11,000 and $71,000 at December 31, 2008 and
2007, respectively, payable to Buddle Findlay.





Rent
expense – The Company subleases, on a month-to-month basis, its New
Jersey office from Diligent Partners.  The lease for the New Jersey
office, which requires a monthly rent of $4,450, expires in June 2010 and may be
canceled at any time after June 2008 with six months notice.  In
November 2008, the Company gave notice of its intent to terminate the lease for
the New Jersey office.  Additionally, the Company and the Predecessor
subleased office space in New York City from Diligent Partners through April
2008.  Rent expense paid for the year ended December 31, 2008, the
three months ended December 31, 2007, and the nine months ended September 30,
2007 (Predecessor) was approximately $77,000, $31,000, and $79,000,
respectively.





39





Diligent
Board Member Services, Inc.


Notes
to Consolidated Financial Statements





11)
            Geographic
      information





The Company’s revenue, by geographic
location of the customer, and long-lived assets located outside the United
States are as follows:





Successor
                                                            
                                                            
                                                            PredecessorYear
                                                            
                                                            
                                                            Three
      months
                                                            
                                                            
                                                            Nine
      monthsended
                                                            
                                                            
                                                            ended
                                                            
                                                            
                                                            endedDecember
      31,
                                                            
                                                            
                                                            December
      31,
                                                            
                                                            
                                                            September
      30,2008
                                                            
                                                            
                                                            2007
                                                            
                                                            
                                                            2007Revenues:United
      States
                                                            
                                                            $
                                                            2,514,790
                                                            
                                                            
                                                            $
                                                            488,464
                                                            
                                                            
                                                            $
                                                            1,177,900Foreign
                                                            
                                                            
                                                            415,912
                                                            
                                                            
                                                            
                                                            26,639
                                                            
                                                            
                                                            
                                                            32,170Total
                                                            
                                                            $
                                                            42,930,702
                                                            
                                                            
                                                            $
                                                            515,103
                                                            
                                                            
                                                            $
                                                            1,210,070December
      31,
                                                            
                                                            
                                                            December
      31,2008
                                                            
                                                            
                                                            2007Long-lived
      assets outside the United States, net
                                                            
                                                            $
                                                            278,973
                                                            
                                                            
                                                            $
                                                            149,138





12)           Net
loss and and diluted net loss per share





Successor
                                  
                                  
                                  
                                  PredecessorYear
                                  
                                  
                                  Three
      months
                                  
                                  
                                  
                                  Nine
      monthsended
                                  
                                  
                                  ended
                                  
                                  
                                  
                                  endedDecember
      31,
                                  
                                  
                                  December
      31,
                                  
                                  
                                  
                                  September
      30,2008
                                  
                                  
                                  2007
                                  
                                  
                                  
                                  2007Net
      loss
                                  
                                  $
                                  (17,648,602
                                  )
                                  
                                  $
                                  (3,670,056
                                  )
                                  
                                  
                                  $
                                  (4,146,353
                                  )Weighted
      average shares outstanding
                                  
                                  
                                  102,397,907
                                  
                                  
                                  
                                  75,583,402
                                  
                                  
                                  
                                  
                                  68,484,611Net
      loss per share (basic and diluted)
                                  
                                  $
                                  (0.17
                                  )
                                  
                                  $
                                  (0.05
                                  )
                                  
                                  
                                  $
                                  (0.06
                                  )Unvested
      restricted common stock shares
                                  
                                  
                                  2,119,000
                                  
                                  
                                  
                                  1,929,000
                                  
                                  
                                  
                                  
                                  -





In accordance with SFAS 128, Earnings Per Share , basic
net loss per share is computed by dividing the net loss attributable to common
stockholders by the weighted average number of common shares outstanding for the
period, excluding unvested restricted common shares.  Diluted net loss
per share is computed using the weighted average number of common shares
outstanding and, when dilutive, unvested restricted common
shares.  Because the Company reported a net loss for all periods
presented, all potential common shares attributable to unvested restricted stock
have been excluded from the computation of the diluted net loss per share
because the effect would have been anti-dilutive.  In accordance with
SAB 83 and SAB 98, which require that nominal issuances of common stock in
connection with an initial public offering be given retroactive treatment, the
68,484,611 shares issued to the members of LLC in connection with the
Contribution Agreement, have been treated as outstanding for all periods
presented.




40




Diligent
Board Member Services, Inc.


Notes
to Consolidated Financial Statements





13)
            Stockholders’
      equity





Initial
capital contribution - On October 1, 2007 the Company entered into a
Contribution Agreement with LLC whereby LLC transferred to the Company certain
assets and liabilities related to the Boardbooks business in exchange for
68,484,611 shares of the Company’s common stock (See Note 4).  The
assets and liabilities transferred to the Company were recorded at the
Predecessor’s net book value.  The Company recorded the issuance of
the shares to LLC at the initial public offering price of NZD1.00 (US$0.7663)
per share, offset by a deemed dividend measured as the excess of fair value of
the shares at the offering price over the Predecessor’s net book
value.





Initial
public offering, net–Pursuant to the prospectus dated November 8, 2007, the Company made its
initial public offering on the NZX and raised NZD 24,000,000 ($16,371,180
net of listing costs totaling $2,020,020), through the issuance of 24,000,000
shares of common stock to investors.  The initial public offering was
completed on December 12, 2007.





Conversion
of debt to equity - On December 10, 2007, 7,515,389 shares of common
stock were issued by the Company to various third party and related party debt
holders in exchange for their debt in the amount of $5,636,543, including
approximately $3,178,988 of debt assigned to the Company in connection with the
Note (See Note 9) and $2,457,555 of debt assumed by the Company subsequent to
its formation and in anticipation of the initial public offering.





Share-based
compensation - On December 12, 2007, the Company awarded 4,000,000 shares
of restricted common stock to selected employees, directors and consultants of
the Company and its affiliates.  During 2008, 160,000 of these shares
were forfeited.  In October 2008, the Company awarded an additional
600,000 shares of restricted stock to two officers (See Note 14).





Cancellation
of shares - Pursuant to the Company's initial public offering, LLC was
required to place 14,000,000 of the Company's common shares into escrow through
December 31, 2008, at which time these shares would be delivered to the Company
for cancellation if certain sales milestones were not met.  The
Company did not meet these sales milestones, and accordingly, the 14,000,000
shares have been cancelled.





Issuance
of preferred stock – On March 11, 2009, the Company issued 30,000,000
shares of newly created Series A preferred stock for US$0.10 per share (see Note
2).





14)
            Benefit
      plans





Stock
option and incentive plan - In November 2007, the Company adopted the
2007 Stock Option and Incentive Plan (“the Plan”) authorizing the granting of
awards to selected employees, directors and consultants of the Company, and its
affiliates in the form of incentive stock options, non-qualified stock options,
and stock awards. The Plan is administrated by the Company's Board of Directors.
The Company's Board of Directors determines the number of shares, the term, the
frequency and date, the type, the exercise periods, any performance criteria
pursuant to which awards may be granted and the restrictions and other terms and
conditions of each grant of restricted shares in accordance with the terms of
the Plan.  The Plan authorizes the issuance of up to 10,000,000 shares
of the Company’s common stock.





On November 8, 2007, the Company
granted 4,000,000 shares of common stock to selected employees (3,064,000
shares), directors (200,000 shares) and consultants (736,000 shares) of the
Company, and its affiliates. Of these shares, 2,071,000 shares were fully vested
upon issuance on December 12, 2007, 160,000 shares were forfeited during 2008
and 1,769,000 shares vested on January 1, 2009, based on continued employment
through that date. The fair value of the awards to employees was estimated to be
NZD 0.90 (US$0.69) per share, which is the closing price of the Company's stock
on December 12, 2007. The fair values of the awards to non-employees were
closing prices on various measurement dates.





41




Diligent
Board Member Services, Inc.


Notes
to Consolidated Financial Statements





On October 23, 2008, the Company
granted 600,000 shares of restricted stock to two officers in accordance with
the terms of their employment agreements, which included 250,000 shares which
vested immediately and 350,000 shares which vest at various times between
February and May 2009, based on continued employment through those
dates.  The estimated fair value of the shares at the award date was
measured using the closing price of NZD 0.25 (US$0.14) per share on the date of
grant.





During the three months ended December
31, 2007, compensation costs totaling $1,782,219 were recognized, of which,
$1,176,541 related to employees, $137,934 to directors, and the remaining
$467,744 to consultants. For the year ended December 31, 2008, $920,783 was
recognized as share-based compensation expense, net of
forfeitures.  Total unrecognized compensation cost related to
non-vested restricted stock at December 31, 2008 is $23,099 and is expected to
be recognized through May 2009.





A summary
of restricted stock activity related to the Company’s employees, directors and
consultants follows:





Weighted AverageNumber of
                  
                  
                  Grant-DateShares
                  
                  
                  Fair ValueNonvested
      Shares at October 1, 2007
                  
                  
                  -
                  
                  
                  $
                  -Granted
                  
                  
                  4,000,000
                  
                  
                  
                  0.69Vested
                  
                  
                  (2,071,000
                  )
                  
                  
                  0.69Forfeited
                  
                  
                  -
                  
                  
                  
                  -Nonvested
      Shares at December 31, 2007
                  
                  
                  1,929,000
                  
                  
                  
                  0.69Granted
                  
                  
                  600,000
                  
                  
                  
                  0.14Vested
                  
                  
                  (250,000
                  )
                  
                  
                  0.14Forfeited
                  
                  
                  (160,000
                  )
                  
                  
                  0.69Nonvested
      Shares at December 31, 2008
                  
                  
                  2,119,000





Of the
nonvested shares at December 31, 2008, 1,769,000 became fully vested on January
1, 2009.





No stock
options have been granted under the Plan.





401(k)
plan – On January 1, 2008 the Company adopted a defined contribution plan
in the form of a qualified 401(k) plan (“the 401(k) Plan”), in which
substantially all US employees are eligible to participate.  The
Company makes no matching contributions under the 401(k) Plan.





15)
            Commitments
      and contingencies





Operating
leases – In April 2008, the Company entered into an operating lease
agreement for its office space in New York City for seven years, which requires
an annual base rent of $210,000, with an escalation clause.  The
rental expense for the year ended December 31, 2008 was approximately
$189,000.





In February 2008, DBMS NZ renewed an
operating lease agreement for office space in Christchurch, New Zealand for 18
months.  The terms of the lease require an annual rent of NZD 84,453
($49,264 at December 31, 2008).  The rental expense for the year ended
December 31, 2008 was NZD 84,233 ($60,032).




42




Diligent
Board Member Services, Inc.


Notes
to Consolidated Financial Statements





The Company or its consolidated
subsidiaries have entered into several other property leases requiring annual
rentals of approximately $110,000, for terms expiring at various times through
July 2012.





The lease agreements require security
deposits in the amount of $246,685 at December 31, 2008.





The following is a schedule of future
minimum lease payments as of December 31, 2008:





Year
      ending December 31
                  2009
                  
                  $
                  312,7802010
                  
                  
                  261,3692011
                  
                  
                  268,0042012
                  
                  
                  258,0882013
                  
                  
                  241,6752014
      and thereafter
                  
                  
                  311,613$
                  1,653,529





Employment
contracts – In August 2008, the Company entered into employment contracts
with two of its officers which provide for one year contracts in the amount of
$476,000 in the aggregate.  These employment contracts also provide
for grants of stock, subject to certain vesting requirements, which were granted
in October 2008 (See Note 14).





Warranties
and indemnification – The Company’s service is warranted to perform in a
manner materially consistent with its marketing and training materials,
specifications and technical information provided to users.  The
Company’s arrangements generally include certain provisions for indemnifying
customers against liabilities if its products or services infringe a
third-party’s intellectual property rights. To date, the Company has not
incurred any material costs as a result of such indemnifications and has not
accrued any liabilities related to such obligations.





The Company has also agreed to
indemnify its directors and officers to the fullest extent allowed under
Delaware law for costs associated with any fees, expenses, judgments, fines and
settlement amounts incurred by any of these persons in any action or proceeding
to which any of those persons is, or is threatened to be, made a party by reason
of the person’s services as a director or officer of the Company, or arising as
a result of that person serving at the request of the Company as a director,
officer, employee or agent of another enterprise.  The Company
maintains director and officer insurance coverage that should enable the Company
to recover a portion of any future amounts paid.





16)
            Income
      taxes





The Predecessor operated as a
partnership under Federal, New Jersey and New York State income tax
law.  No provision or liability for income taxes has been recorded
since the members/partners are taxed on their proportionate share of income, and
the New York City Unincorporated Business Tax is not significant to the
financial statements.





No provision (benefit) for U.S. income
taxes has been recorded in the accompanying consolidated financial statements
for the periods ended December 31, 2008 and December 31, 2007 as a result of the
Company's net operating losses.  Net operating loss carryforwards of
U.S. income taxes for 2008 and 2007 are $9.9 million and $3.3 million, which
expire in 2028 and 2027, respectively.  The Company’s UK subsidiary
has net operating loss carryforwards of approximately £574 thousand, which may
be carried forward indefinitely.





43




Diligent
Board Member Services, Inc.


Notes
to Consolidated Financial Statements





The significant components of income
(loss) before income taxes and the consolidated income tax provision are as
follows:





Year
                          
                          
                          Three Monthsended
                          
                          
                          endedDecember 31,
                          
                          
                          December 31,2008
                          
                          
                          2007Income
      (loss) before income taxes:Domestic
                          
                          $
                          (16,543,217
                          )
                          
                          $
                          (3,670,056
                          )Foreign
                          
                          
                          (1,072,587
                          )
                          
                          
                          -Total
                          
                          $
                          (17,615,804
                          )
                          
                          $
                          (3,670,056
                          )Income
      tax expense (benefit)Federal
                          
                          $
                          -
                          
                          
                          $
                          -Foreign
                          
                          
                          32,798
                          
                          
                          
                          -Total
                          
                          $
                          32,798
                          
                          
                          $
                          -





The income tax provision differs from
the amount of tax determined by applying the federal statutory rate as
follows:




Year
                    
                    
                    Three Monthsended
                    
                    
                    endedDecember 31,
                    
                    
                    December 31,2008
                    
                    
                    2007Federal
      tax (benefit) at 34% statutory rate
                    
                    $
                    (5,624,694
                    )
                    
                    $
                    (1,247,819
                    )State
      income taxes, net of federal benefit
                    
                    
                    (1,819,754
                    )
                    
                    
                    (220,203
                    )Foreign
      income taxes
                    
                    
                    32,798Tax
      effect of:Meals
      and entertainment
                    
                    
                    8,310
                    
                    
                    
                    2,617Share-based
      compensation
                    
                    
                    376,554
                    
                    
                    
                    141,565Bad
      debt expense
                    
                    
                    3,206
                    
                    
                    
                    -Note
      impairment loss
                    
                    
                    2,610,000
                    
                    
                    
                    -Operating
      loss carryforwards
                    
                    
                    4,446,378
                    
                    
                    
                    1,323,840Income
      Taxes (benefit)
                    
                    $
                    32,798
                    
                    
                    $
                    -




44


Diligent
Board Member Services, Inc.
 Notes
to Consolidated Financial Statements
 
 Deferred taxes are as
follows:




Three MonthsYear Ended
                    
                    
                    EndedDecember 31,
                    
                    
                    December 31,2008
                    
                    
                    2007Deferred
      tax asset (liability), non-currentShare-based
      compensation
                    
                    $
                    72,521
                    
                    
                    $
                    141,565Bad
      debt expense
                    
                    
                    3,206
                    
                    
                    
                    -Note
      impairment loss
                    
                    
                    2,610,000
                    
                    
                    
                    -Net
      Operating Loss Carryforwards
                    
                    
                    5,292,960
                    
                    
                    
                    1,323,840Valuation
      Allowance
                    
                    
                    (7,978,687
                    )
                    
                    
                    (1,465,405
                    )Total
                    
                    $
                    -
                    
                    
                    $
                    -




Management has provided a valuation
allowance of $7,978,687 and $1,465,405 as of December 31, 2008 and 2007,
respectively, for certain deferred tax assets because they have no basis to
conclude it is more likely than not that the related deferred tax assets will be
realized.





The Company adopted the provisions of
FIN 48 on October 1, 2007 (inception).  As a result of this adoption,
the Company has evaluated its uncertain tax positions as required by FIN 48 and
determined that any required adjustments would not have a material impact on the
Company’s financial statements.





The Company and its subsidiaries are
subject to regular audits by federal, state and foreign tax
authorities.  These audits may result in additional tax
liabilities.  The Company’s federal, state and foreign income tax
returns for the tax years ended December 31, 2008 and 2007 are open for
examination by the Federal and State taxing jurisdictions.





17)
            Financial
      instruments





Interest
rate risk - Interest rate risk is the risk that market interest rates
will change and impact Diligent’s financial results by affecting the rate of
interest charged or received by the Company.  It is not expected that
changes in interest rates will materially affect the Company’s results of
operations.





Currency
rate risk - The Company is subject to currency rate risk primarily from
export sales to Canada, Europe, Australia and New Zealand, and from cash
balances maintained in foreign currencies.  The Company has not
entered into forward contracts or other currency hedges.





Liquidity
risk – The Company expects that its cash and cash equivalents, including
the $3 million received in March 2009 in exchange for 30 million shares of
preferred stock, will be adequate through approximately the third quarter of
2010.  Particularly in light of current economic conditions, the
Company intends to manage liquidity risk by continuously monitoring forecasted
and actual cash flows and matching the maturity profiles of financial assets and
liabilities.  The primary uncertainty concerning our capital needs
pertains to our ability to achieve the expected sales growth in a timely manner
such that recurring revenues exceed operating expenditures prior to the
depletion of capital.





Concentrations
of credit and other risks - The Company sells its service to a diverse
number of customers and performs ongoing credit evaluations of its customers'
financial condition as part of its accounts receivable monitoring
procedures.  Financial instruments which potentially subject the
Company to concentrations of credit risk consist primarily of trade accounts
receivable.  One customer accounted for 10.5% of the accounts
receivable balance at December 31, 2008; no single customer accounted for 10%
or  more of the accounts receivable balance at December 31,
2007.  No single customer generated more than 10% of revenue for any
period presented.




45




Diligent
Board Member Services, Inc.


Notes
to Consolidated Financial Statements





The Company maintains its cash balances
with high credit quality banking institutions in the United States, New Zealand
and Great Britain. At times the balances may be in excess of the insurance
limits at a particular bank.





46





ITEM
9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE




In
connection with our offshore offering on the New Zealand Stock Exchange, we used
KPMG, Wellington, New Zealand as our independent accountants.





On August 14, 2008 the Audit Committee
appointed Holtz Rubenstein Reminick LLP as our independent registered public
accounting firm for the financial statements presented in this Form
10-K.





We have had no disagreements with our
accountants on any financial or accounting disclosures.





ITEM
9A.  CONTROLS AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures




Our management, with the participation
of our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e)  and 15d-15(e) of the Securities Exchange Act of 1934) as of
the end of the period covered by this Form 10-K.  Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures, as of the end of the
period covered by this Form 10-K, were effective in ensuring that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized
and reported within the time periods specified in SEC’s rules and forms, and
(ii) accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.





Management’s
Report on Internal Control Over Financial Reporting





This annual report does not include a
report of management's assessment regarding internal control over financial
reporting or an attestation report of the company's registered public accounting
firm due to a transition period established by rules of the Securities and
Exchange Commission for new public companies.





Changes
in Internal Control Over Financial Reporting





There was no change in our internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of
the Securities Exchange Act of 1934) that occurred during the year ended
December 31, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.





ITEM
9B.  OTHER INFORMATION




Not
applicable




47




PART
III




ITEM
10.  DIRECTORS AND CORPORATE GOVERNANCE




The
information required by this Item is incorporated by reference from the
information to be contained in our Proxy Statement.





ITEM
11.  EXECUTIVE COMPENSATION




The
information required by this Item is incorporated by reference from the
information to be contained in our Proxy Statement.





ITEM
12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS




The
information required by this Item is incorporated by reference from the
information to be contained in our Proxy Statement.





Securities
authorized for issuance under equity compensation plans.




As of
December 31, 2008, no shares of common stock are issuable by us upon the
exercise of options, warrants and rights under any equity compensation plan,
except as follows:





Plan category
              
              Number of securities to
                be issued
                upon exercise of
                outstanding options
              
              
              Weighted-average
                exercise price of
                outstanding options
              
              
              Number of securities
                remaining available for
                future issuance under
                equity compensation
                plansEquity
      compensationplans
      approved by
              
              
              -
              
              
              
              -
              
              
              
              5,560,000security
      holders





ITEM
13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE




The
information required by this Item is incorporated by reference from the
information to be contained in our Proxy Statement.





ITEM
14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES




The
information required by this Item is incorporated by reference from the
information to be contained in our Proxy Statement.




48




PART
IV




ITEM
15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES





a.
            The
      following documents are filed as a part of this Report:





1)
            Financial Statements:The information concerning our financial statements, and Report of
      Independent Registered Public Accounting Firm required by this Item is
      incorporated by reference herein to the section of this Report in Item 8,
      entitled “Consolidated Financial Statements and Supplementary
      Data.”





2)
            Financial
      Statement Schedules:





The Financial Statement
Schedul es not listed have been omitted because they are not applicable
or are not required or the information required to be set forth herein is
included in the Consolidated Financial Statements or Notes thereto.





3)
            Exhibits:See “Index to
      Exhibits.”





b.
            Exhibits.The exhibits
      listed below in the accompanying “Index to Exhibits” are filed or
      incorporated by reference as part of this Annual Report on Form
      10-K.





c.
            Financial
      Statement Schedules.





49





SIGNATURES





Pursuant to the requirements of Section
12 of the Securities Exchange Act of 1934, the registrant has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized.





Dated:  May
      13, 2009
                      
                      DILIGENT
      BOARD MEMBER SERVICES, INC.By:
                      /s/ Hunter  CohenHunter
      Cohen, Chief Financial Officer (Principal
                        Financial
      Officer
)





50


POWER
OF ATTORNEY





KNOW ALL
MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Hunter Cohen and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
re-substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all reports of the Registrant on Form 10-K and to
sign any and all amendments to such reports and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities & Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant in the
capacities indicated on the dates indicated.




Name
            
            Title
            
            Date/s/ Alessandro Sodi
            
            Chief Executive Officer,
            
            May 13, 2009Alessandro Sodi
            
            President, Director (PrincipalExecutive Officer)/s/ Hunter Cohen
            
            Chief Financial Officer (Principal
            
            May 13, 2009Hunter Cohen
            
            Financial Officer)/s/ Donald Meisner
            
            Treasurer  (Principal Accounting
            
            May 13, 2009Donald Meisner
            
            Officer)/s/ Sharon Daniels
            
            Chief Marketing Officer, Director
            
            May 13, 2009Sharon Daniels/s/ David Liptak
            
            Director
            
            May 13, 2009David Liptak/s/ Peter Huljich
            
            Director
            
            May 13, 2009Peter Huljich/s/ Rick Bettle
            
            Director
            
            May 13, 2009Rick Bettle/s/ Mark Russell
            
            Director
            
            May 13, 2009Mark Russell





51





INDEX
TO EXHIBITS





Exhibit
                                Numbers
                              
                              Exhibits3.13
                              
                              Amended
      and Restated Certificate of Incorporation3.21
                              
                              Amended
      and Restated Bylaws4.11
                              
                              Form
      of common stock certificate10.11
                              
                              Contribution
      Agreement dated October 1, 2007 between Diligent Board Member Services,
      LLC and Diligent Board Member Services, Inc.10.21
                              
                              Shareholder
      Restriction Deed dated November 1, 2007 among Diligent Board Member
      Services, Inc., Diligent Board Member Services, LLC and McDouall Stuart
      Securities Limited10.31
                              
                              Escrow
      Agreement dated November 7, 2007 among UMB Bank, N.A., Diligent Board
      Member Services, Inc. and Diligent Board Member Services,
    LLC10.41
                              
                              Promissory
      Note and Security Agreement dated October 1, 2007 in the principal amount
      of $6,800,000 given by Diligent Board Member Services, LLC to the order of
      Diligent Board Member Services, Inc.10.5.11
                              
                              Limited
      Pledge of Collateral for Loan dated February 18, 2008 given by Services
      Share Holding, LLC (f/k/a Diligent Board Member Services, LLC) to Diligent
      Board Member Services, Inc.10.5.2
                              
                              Amendment
      to Limited Pledge of Collateral for Loan dated January 14, 2009 given by
      Services Share Holding, LLC to Diligent Board Member Services,
      Inc.10.5.3
                              
                              Limited
      Pledge of Collateral for Loan dated January 14, 2009 given by Corcoran
      Consulting, LLC to Diligent Board Member Services, Inc.10.61
                              
                              2007
      Stock Option and Incentive Plan of Diligent Board Member Services,
      Inc.10.71
                              
                              Form
      of Restricted Stock Award Agreement for restricted stock awards under the
      2007 Stock Option and Incentive Plan10.82
                              
                              Service
      Agreement dated May 29, 2008 between Diligent Board Member Services, Inc.
      and Sugar International Limited10.93
                              
                              Stock
      Purchase Agreement dated February 13, 2009 among Diligent Board Member
      Services, Inc., Spring Street Partners, L.P. and Carroll Capital Holdings,
      LLC10.103
                              
                              Investor
      Rights Agreement dated March 11, 2009 among Diligent Board Member
      Services, Inc., Spring Street Partners, L.P. and Carroll Capital Holdings,
      LLC21
                              
                              Subsidiaries25
                              
                              Powers
      of Attorney executed by all officers and directors of the Company who have
      signed this report on Form
10-K




52




31.1
            
            CEO
      Certification pursuant to Rule 13a-14(a)31.2
            
            CFO
      Certification pursuant to Rule 13a-14(a)32.1
            
            CEO
      Certification furnished pursuant to Rule 13a-14(b) and 18 U.S.C.
      135032.2
            
            CFO
      Certification furnished pursuant to Rule
  13a-14(b)




53




1 Filed
with the Original Form 10 Filing on April 30, 2008.




2 Filed
with Amendment No. 3 to Form 10 Filing on February 12, 2009.




3Filed
with Form 8-K Filing on March 13, 2009.




54